There are lots of investors and lenders now who want to deploy capital into energy efficiency. But the lack of standardisation, which causes uncertainty, is a barrier, Steven Fawkes told EURACTIV Czech Republic in an exclusive interview.
Dr. Steven Fawkes is a globally recognized expert in energy efficiency and energy efficiency finance, with over 30 years of experience in the sector.
Fawkes spoke to EURACTIV Czech Republic’s Adéla Denková on the occasion of Central and Eastern European Energy Efficiency Forum in Bulgaria.
You are involved in the Investor Confidence Project (ICP), which was launched in Europe one and a half years ago and gets funding from the Horizon 2020 programme. What is the idea behind the project? What does “confidence” precisely mean in this case?
The Investor Confidence Project was originally launched in the US about five years ago by the Environmental Defence Fund (a United States–based non-profit environmental advocacy group). I realized it would be useful to bring the ICP to Europe and build a coalition, and then formed a consortium which received Horizon 2020 funding.
The basic idea behind the ICP is to standardise the development and documentation of energy efficiency projects. The lack of standardisation is one of the big barriers to financial institutions deploying more capital into energy efficiency. Every project that you look at is developed and documented in a different way, which brings very high transaction costs and greater performance risks. It also makes aggregating small projects, and energy efficiency projects are generally small, into larger portfolios difficult. Also, if you are a bank or financial institution, you need to standardise processes if you want to build teams and deploy capital.
This is what the ICP focuses on. It does not invent new technical standards, as there are already plenty of them. We are standardising the process of developing and documenting a project. So far, our work has focused on buildings and it covers both tertiary buildings and apartment blocks. After about 18 months of our activities in Europe, we have six protocols for different types of building and sizes of projects, and a number of real projects in process across Europe using the protocols. There are more than 140 organisations supporting us all around the EU and we have assembled an investor network with more than a € billion that they would like to deploy into energy efficiency.
About what types of investors are we talking about? Does the ICP for example primarily help foreign investors who want to invest in a particular EU country and have to face specific conditions there?
The ICP is suitable for all investors – both domestic and international ones, and it applies whatever the source of finance is, be it an internally funded project, external investment or a public expenditure. There are lots of investors and lenders now who want to deploy capital into energy efficiency, but the lack of standardisation, which causes uncertainty, is a barrier. Perceived risks and transaction costs are the main barriers we are addressing.
So you basically share best practise.
Yes, it is very much about standardising best practise. The best project developers are probably capable of doing 90% of what we ask for in the protocols. But what we try to do is to bring everybody up to the best practise. If banks and financial institutions see the advantages of this approach, they will start to demand it as a minimum. It is already happening in some cases and some financial institutions are now favouring project developers who bring them projects that fit our set of protocols and standards.
What are the standards that you work with? Are you focused just on saving energy, or do you also follow other aspects like whether the building offers a healthy indoor environment?
The protocols cover the technical development and the energy aspects of energy efficiency projects. The non-energy benefits that you are talking about are another associated issue and they are incredibly important. We need to recognize and value them much more, which has started to happen in the last few years. One of the ways to increase demand for energy efficiency is actually to focus on these non-energy benefits, because factors such as improved productivity, employee satisfaction or improved health, are usually much more important to decision makers than just energy savings. No matter how important we think energy savings are, they are not strategic and not very exciting. Non-energy benefits are often strategic and so emphasising non-energy benefits is a really important piece.
You said there were lots of investors willing to deploy capital into energy efficiency. Was it always like this or do you see the interest growing?
Several years ago there was very little if any interest from financial institutions in energy efficiency, because they did not appreciate its advantages and there were so many opportunities in renewables which everybody was focused on. I spent a lot of time talking to investors and lenders about energy savings and now lots of them are coming back saying “you were absolutely right, the energy efficiency market is really interesting, as it brings low risks and reasonable return” and they are looking for projects. The problem we are now facing is that we know there are a lot of economic opportunities, but we need to turn them into investable opportunities. Something can be economic but not investable, and ICP is very much about making efficiency more investable.
What are your plans for the future? You aim for an EU-wide system – when will it be ready?
We have actually launched an EU-wide system already. The protocols, reference and technical standards cover all of the EU28. Within our Horizon 2020 budget we focus resources on five countries, but the intention has always been to go EU-wide and today, there is an EU-wide system that anybody in Europe can use.
At the moment, we are rolling out an accreditation system that goes with the protocols. It is called Investor Ready Energy Efficiency (IREE) and it is a system of accrediting project developers who can subsequently use our process and protocols. We have already had a first training of project developers with about 100 people and also a first training of quality-assurance professionals who can assess the projects independently, which gives the financial institutions more comfort and less costs.
Together with the Energy Efficiency Financial Institutions Group (EEFIG), we are also developing standardised underwriting procedures for banks and financial institutions. That will help them to standardise the way they look at energy efficiency risks and value all the benefits from projects.
In the future, we would like to expand the ICP into industry and infrastructure and we have a lot of support for that move. It would include things like district heating, street lighting and industrial measures like motors and drives, heat recovery, chilling, combined heat and power and so on.
Why have you focused on buildings first? Is it more difficult in industry?
We mainly focused on buildings because there is still lots of potential in this sector. Industry has a lot of potential too but it is more difficult, particularly as you get closer to the production process. There are many opportunities in peripheral systems like lighting, motors, drives or compressors, which are mainly common across industries. Once you get into the process, it becomes more difficult as it is a more sensitive issue for the industrial company because they have to share their know-how with you. The energy consumption is also determined by production level or production mix which is harder to account for.
Do you see some differences between the “old” and “new” EU member states in terms of the investment environment and other things?
There is a strong interest in energy efficiency everywhere, but we can see differences in terms of the financial sector’s maturity and willingness to take some kinds of risks. So there are differences. There are of course differences in energy prices and underlying efficiencies.
How do you look at subsidies used for supporting energy efficiency?
We need to move away from the “subsidy world” towards a more market- and private-financed one. It is good to use public money for catalysing the market and for mechanisms that take care of some of the risks that the investors cannot, particularly in the early days of market development. Around the world there are various examples of guarantee schemes and other instruments where certain risks are covered by the public money, but the private money take the risks that it can bear to take. Therefore, I would say that blending of public resources with the private ones is a good way forward in the early days. But for the structural and other public funds already focused on this agenda, we have to insist on standardisation, open data and achieving high levels of efficiency – deep retrofits – if we are using public money in energy savings. The principles behind ICP apply equally to public money as to private money ,and public money should be used to show what can be done.