The beginning of a New Year is always a good time to take stock of where we are in achieving our objectives in life and what we need to change to make greater progress. The same is true for energy efficiency and building renovation, so let’s begin by looking at where we are.
The good news from the International Energy Agency’s 2018 Energy Efficiency Market Report is that global investment in energy efficiency grew by 3% to reach USD 236 billion in 2017, although the rate of investment growth slowed in all sectors, which is a concern. Europe remained the largest source of investment, rising by 1%. Buildings accounted for 59% of total investment.
The challenge is that we have to do much better and greatly increase the investment into efficiency. To realise the IEA’s Efficient World Scenario (EWS), one in which carbon emissions fall, we need to double the average rate of investment between 2017 and 2025 to USD 584 billion a year, and then double the average rate again between 2025 and 2040 to USD 1,284 billion a year. The cumulative investment between now and 2040 in the EWS is USD 24,514 billion. Table 1 summarizes the investment levels required in the EWS.
Table 1: Investment into energy efficiency required in the IEA Efficient World Scenario
|Annual average 2017-2025
|Annual average 2025-2040
According to the IEA, 30% of the total investment will have to go into buildings and 30% of that will be in the EU, suggesting some USD 2.2 trillion would need to be invested in EU buildings between 2017 and 2040. Various EU studies show the size of the potential and the problem in Europe. With 35% of the EU’s buildings over 50 years old and the slow replacement rates, the renovation potential in the EU is huge; some 110 million buildings could be in need of renovation. The total costs could be in excess of EUR 1 trillion. So we know what the target is, but current levels of investment are much lower than where they need to be.
Another positive development in recent years is that financial institutions are beginning to recognise the value and potential of energy efficiency. For many years it was ignored, but the pioneering 2015 report of the Energy Efficiency Financial Institutions Group (EEFIG), convened by the EC and the UNEP Financial Initiative, as well as work by G20 and others have increased interest – over 100 banks and financial institutions from more than 40 countries signed up to a statement acknowledging the unaddressed financing opportunities, and agreeing to contribute to scaling up energy efficiency financing, and further embedding energy efficiency principles into the way they engage with clients.
In more good news, green banks around the world have increased their annual allocations for energy efficiency. In the expanding green bond market, worth USD 161 billion in 2017, energy efficiency’s share of the disclosed uses of funds increased from 18% to 29%. In the US, the use of Property Assessed Clean Energy (PACE) financing is also growing and by mid-2018 nearly USD 5.9 billion in energy efficiency measures had been financed by PACE programmes in the US, covering both residential and commercial buildings (C-PACE) but with 90% in the residential sector. PACE is being introduced to Europe by the Euro-PACE project .
As energy efficiency specialists and advocates, we must pull all the levers we can to increase the levels of investment to those in the Efficient World Scenario, as it is clear that the outcome will be a much better world, with falling carbon emissions, reduced air pollution, less fuel poverty, improved health and many other benefits. Increasing the levels of investment into energy efficiency on this scale is undoubtedly a challenge, but I believe that we are now beginning to understand the barriers and the levers that we can pull to achieve it. We need to really acknowledge the problems with efficiency as an investment and address them.
Those of us who advocate for improved levels of energy efficiency regard it as special for several reasons; it is the cleanest and often cheapest way of providing energy services, it offers high return, rapid payback projects which are often not implemented for a variety of organisational and structural reasons. However, we need to recognize a fundamental truth and that is for the rest of the world energy efficiency is not special at all – in fact it is boring. Energy is usually a small cost line for most building owners and operators. Also for senior managers making investment decisions there are many other more pressing decisions which are linked to the organisation’s core business, energy efficiency will always be lower priority than basic maintenance, production or marketing.
We do know that there are massive opportunities to improve energy efficiency in all areas, especially buildings. Many, many examples from Europe and the rest of the world show that buildings can be retrofitted in ways that can reduce energy use by 30%, 50% or even 80%. Net zero energy use is the ultimate goal and is achievable but at significant cost. The European Buildings Performance Directive requires all new building to be Near Zero Energy Buildings (NZEB) by 2020. For existing buildings we need to recognize that the energy savings alone will not pay for the investment needed to get to anywhere near NZEB performance. We also need to recognize that building refurbishments happen at certain points in the building life-cycle, refurbishing on energy grounds, other than as part of a major refurbishment, is not likely to be optimal or even viable. We also need to learn how to build and present better business cases to decision makers.
For a financial institution looking to invest in energy efficiency projects, there are a number of barriers, including:
- The fact that the economic benefit is a saving – a counter-factual compared to what would have happened without the investment.
- Energy savings are hard to measure – unlike energy production projects where you can meter output and charge a client accordingly.
- A lack of data on the outcomes of projects.
- Projects are usually very small and need to be aggregated.
- Balance sheet treatment of assets, which are integrated into buildings, can be an issue.
- There is a lack of standardization in the way that projects are developed and documented – financial institutions require standardization.
- Financial institutions lack capacity to assess energy efficiency projects – despite the high level commitments from many financial institutions at the operational level, there is a lack of understanding and knowledge about energy efficiency.
These barriers within organisations and within financial institutions help explain why there is such a big gap between the potential and what we are achieving. These problems are beginning to be addressed in a number of ways.
Standardization is addressed by the Investor Confidence Project with its project Protocols and independent quality assurance system which certifies projects as Investor Ready Energy EfficiencyTM. Standardization also helps aggregate projects.
The lack of data on projects is being addressed by the EEFIG database DEEP which contains data on over 10,000 projects across Europe. Financial institutions can now review projects by sector, type and geography and subsequently build their confidence in the sector.
The lack of capacity in the financial sector is addressed by the EEFIG Underwriting Toolkit which provides a common approach to assess the value and risk of energy efficiency projects. It also provides a common language that project owners, project developers and financial institutions can use, something that has been sorely lacking. The newly reconvened EEFIG will be doing more work to spread the use of the Toolkit and build upon it as a training tool.
Better business cases need to be built, but they need to go far beyond just energy savings. We now know that energy efficiency projects bring multiple non-energy benefits including things like increased productivity, increased occupant satisfaction, improved health outcomes and increased asset values. We need to recognise that all of these are much more interesting to decision makers than some energy cost savings and value them in our investment decisions. Valuing multiple benefits is the focus of Horizon 2020 funded project Multiple Benefits .
The ABRACADABRA project is a specific case of utilising multiple benefits to build better business cases. It is focused on utilising volumetric additions such as façade additions, or rooftop extensions, which can add value to tenants and building owners and help finance near zero energy refurbishments. Having more space and amenities, such as sun rooms, is a real benefit to tenants and owners that is highly attractive, and the real added value they bring to the property can be used for financing improvements.
Although we have only recently started on the journey of increasing investment into energy efficiency, we are already seeing the pieces of the jigsaw emerge. To reach the investment levels in the Efficient World Scenario and reap all the economic, environmental and social benefits that would bring, we need to put all the jigsaw pieces together into platforms that develop and implement projects, that meet the needs of financial institutions, and enable investment at scale i.e. in the billions rather than the millions. There are grounds to be optimistic.