Ambitious energy efficiency targets will require significant investment from the private sector. Public authorities are learning fast from innovative financing mechanisms the EU is putting in place to achieve this.
Energy efficiency has traditionally been viewed as a public good financed by public sector grants. But the public purse can only do so much and the pressure is mounting.
Now, with rising energy prices and an increasingly urgent climate agenda, European energy legislation is driving ambitious targets including: renovation of public buildings; energy efficiency obligations for energy suppliers; and overall demand-side reduction.
Growing investment opportunity
Across all sectors, global energy efficiency investments totalled $300 billion in 2011 – a substantial and growing market opportunity for investors.
It is estimated that urban areas are responsible for 70% – 80% of energy consumption and carbon dioxide emissions in Europe. For this reason, various EU initiatives are encouraging towns and cities to take the lead in the fight against climate change.
To reach the EU’s 20:20:20 target (20% of EU energy consumption to come from renewable sources by 2020; a 20% improvement in energy efficiency; and a 20% reduction in greenhouse gas emissions compared with 1990), the required annual investment in the buildings sector alone is estimated at €65-100 billion ($89-136 billion) between 2011 and 2020.
Public authorities are generally called upon to lead investments. Across Europe, over 300 regions and 150,000 municipalities account for two-thirds (€178.9 billion in 2011) of the total public investment expenditure and have major powers in key sectors such as education, the environment, transport and economic development.
Grant support for public authorities in any Member State seeking to launch sustainable energy investments is available under the Intelligent Energy Europe programme (launched in 2003 and now subsumed into the EU’s €80 billion research and innovation programme Horizon 2020).
Ambitious leverage goals
Grants amounting to €148 million are disbursed via the European Local Energy Assistance (ELENA) facility (administered by the European Investment Bank, Germany’s KfW, the European Bank for Reconstruction and Development and the Council of Europe Development Bank) and the Mobilising Local Energy Investments (MLEI) facility –administered by the European Commission’s agency for small and medium-sized enterprises (EASME).
This grant support is conditional on projects achieving a minimum leverage (EU grant to total investment) of 1:20 and 1:15, respectively. So far, €81.2 million has been provided to 56 projects.
Achieving this leverage requires local and regional authorities to negotiate a steep learning curve. New kinds of partnerships with financial institutions will be crucial to scaling up sustainable energy investment programmes, and combining public and private funding.
Building renovation is essential
Thorough renovation of buildings involves long payback periods but is essential to achieve the maximum savings potential – and reach the EU objective of reducing buildings’ energy consumption by 80 % by 2050. In support of this goal, the Commission is designing new ‘off the shelf’ financial instruments, including renovation loans, aimed at combining public and private money to finance investment in energy efficiency or renewables.
“It’s going to take a historic level of public-private cooperation to meet the EU’s 2020 targets,” said a recent report from the Energy Efficiency Financial Institutions Group (EEFIG), which includes high level representatives of the European Commission’s DG Energy, UNEP Finance Initiative, financial institutions and investment funds.
In its first report released in April, the group concluded that, in order to attract private capital such as pension funds, insurance or real estate trust funds, the energy efficiency investment market “needs to transform” – to become more predictable, well-understood and standardised.
According to Paul Hodson, head of the energy efficiency unit at DG Energy: “Energy efficiency is today at the crossroads. Either it will become a mainstream investment area, or we risk losing the vast potential to invest into measures that not only contribute to the fight against climate change, but also bring economic benefits.”
The Commission is now undertaking a review of energy efficiency policy, he notes. “We are convinced that this will help to transform the market as needed – and as called for by market participants.”
From 2014 to 2020, another pot of EU public money – upwards of €37 billion earmarked for the ‘transition to a low-carbon economy’ – is available through the European Structural and Investment funds. The Commission is pushing Member States to replace grants with revolving loans or guarantee funds (for residential retrofit) and energy performance contracts for public and commercial buildings.
Optimal strategies for developing the energy efficiency investment market are under discussion within EEFIG but, as coordinator Peter Sweatman points out: “We’re working with 51 people representing 30 institutions to deliver a consensus view on financing energy efficiency. We have our work cut out for us.”