Financing of EE projects

Most of EE investments are required in the buildings sector (60%), followed by transport (30%) and then the corporate/industrial sector (10%).

Depending on the sector and its segment (for example, commercial/residential/public segments of buildings or large/energy-intensive companies/SMEs among corporates), EE investment needs and project characteristics may vary significantly. This diversity adds complexity to the development of bankable EE projects, standardisation, aggregation and up-scaling of their financing volumes.

Primary financial instruments and support tools used in financing of EE projects are:

• Dedicated credit line is a line of credit (a commitment to fund specific assets), issued by a financial institution to be disbursed as a set of individual loans for a defined use – in this case EE – usually in a specific sector (e.g. residential buildings, SMEs etc).
• Energy performance contracts and ESCOs. Energy performance contracting is a practice whereby a counterparty (often an energy service company (ESCO)) commits through an energy performance contract (EPC) to install necessary equipment and guarantees its specific energy savings performance. In addition, EPC establishes the terms of any upfront or ongoing payments, which are intended to be less than the financial savings realised by the project, to ensure that the project host is making net savings from day one. The two most common types of EPCs are referred to as a (1) shared (between ESCO and its client) savings model or (2) guaranteed savings model (ESCO guarantees certain savings).
• Energy efficiency investment funds are specific investment vehicles created to invest only in EE projects targeting both buildings and industry segments usually seeking a return based on savings achieved.

Other emerging, innovative and scalable instruments to finance EE investments are:

• On-tax financing involves a specific tax being a repayment vehicle. Property Assessed Clean Energy (PACE) is EE on-tax financing program which provides loans for EE home improvements through specific contractors and is treated as tax assessment against the property, secured by property tax lien.
• Green (or EE) mortgage aims to incentivise borrowers to improve the EE of their buildings and/or acquiring highly energy efficient properties. The incentives for borrowers may be favourable mortgage financing conditions and/or increased loan amount for financing of EE improvement of the property and enhancing its energy performance level.
• On-bill repayment is a method of financing EE using utility bill as the repayment vehicle. Within this arrangement, borrowers pay back the cost of efficiency improvements on their utility bill which is both convenient and familiar and reduces credit risks and collection issues.

There is a significant investment gap in energy efficiency worldwide. EU experience shows that simple provision of capital is insufficient to build a well-functioning EE financing market and a range of de-risking tools, transaction enablers and mechanisms also have to be used. These include specific EE financing vehicles (such as ESCOs, Super ESCOs, local authority formed vehicles and funds), energy service contracts and procurement frameworks, combined with project development assistance, continuous education and technical assistance.

The value of energy savings is still the basis for evaluation of EE investments. However, increasingly project initiators, owners and financiers are paying greater attention to the multiple other benefits that EE brings beyond these energy-only returns:

• GHG emissions reductions
• increased energy security
• higher industrial productivity
• property value uplift
• increases in international competitiveness of countries
• new jobs
• reduction in energy poverty
• improvements in resilience, health and wellbeing of end-users.