Navigant Research Blog

Financiers Unearthing Energy Efficiency Opportunities

Eric Bloom — May 21, 2012

There are dozens of financial instruments specifically designed to help address the initial capex challenges posed by energy efficiency investments. Research by Rod Janssen, a board member of the European Council for an Energy Efficient Economy, has shown that nearly every country in the European Union has a national energy efficiency financing scheme.  And revenue for energy service companies, who specialize in using financial tools to pay for the installation of energy efficient systems, are nearly $35 billion worldwide, as we found in the research for our recent report, “Energy Efficient Buildings: Global Outlook.”

Still, we can all agree that the building stock could be much more efficient than it is. Much of this energy efficiency opportunity can be achieved through energy conservation measures that meet even the most stringent investment criteria of building owners worldwide, according to speakers at the recent Hannover Messe in Hannover, Germany, who represented from leading global financiers such as Siemens Financial Services, Commerzbank, and the European Investment Bank, the world’s largest investment bank.  However, the capex requirements of energy efficiency discourage many building owners from considering energy efficiency upgrades.

Financing energy efficiency, in other words, remains a perennial challenge.

The challenge of breaking through these first-cost barriers sits, in large part, with the firms that install energy efficient systems.  In Hannover, Roland Chalons-Browne, CEO of Siemens Financial Services, discussed his role as a financier within a firm traditionally focused on hardware sales and engineering services.  On the technology side, Siemens knows that its efficiency solutions have a high net-present value (NPV), but the capex requirements deter many customers from paying for efficiency improvements.  Siemens Financial Services’ financing toolbox, which includes a wide range of instruments ranging from traditional energy performance contracting (EPC) to power-purchase agreements (PPA), to straight lending-lease solutions and bespoke financing arrangements for specific customers.  Leveraging its top credit rating and strong cash position, Siemens can effectively create business for itself without any cash obligation from customers by handling all aspects of energy efficiency financing.

Financiers themselves, however, are also being opportunistic about the growing energy efficiency financing opportunity. Simone Loefgen, a vice president at Commerzbank, the second largest bank in Germany, described how energy efficiency financing today in Europe is where renewable energy financing was six years ago: a niche area with a rapidly transforming regulatory and market environment that could dramatically accelerate investment.  Specialist firms such as Sustainable Development Capital, a London-based private equity firm, are opportunistically creating investment portfolios based largely on energy efficiency projects.

One of the most challenging areas is the small and medium enterprise (SME) opportunity.  Current energy efficiency financing arrangements tend to focus on large facilities and multi-site building portfolios, in which the profitability of energy efficiency improvements more than justify the transaction and implementation costs. However, Gil Levy, a partner at Sustainable Development Capital, indicated that his firm aims to aggregate energy efficiency opportunity across many sites, including many smaller-scale facilities and organizations, to create an overall attractive energy efficiency portfolio for institutional investors. Other organizations such as the Berlin Energy Agency, a public-private energy service company based in Berlin, have already found success in aggregating smaller sites.

As suppliers and financiers play a more proactive role in offering attractive financing schemes to potential adopters, , they will help customers access the latent value locked up in their inefficient buildings.

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