Energy efficiency: The missing link

Improving energy efficiency in Europe was meant to be easy — and affordable.

In order to meet its ambitious energy goals, the European Union has pinned a lot of its hopes on companies making thousands of small-scale improvements — like installing efficient lighting, improved furnaces and smart heating. These upgrades, the theory goes, should ultimately pay for themselves, in the form of lower heating and electricity bills.

The trouble is that somebody needs to put up the initial investment, and the small energy service companies — known in the trade as ESCOs — are struggling to get the loans they need to do the work.

That’s threatening the EU’s 2030 clean energy goals, under which Brussels aims to increase energy savings by at least 30 percent by 2030.

“We keep hearing from banks: ‘You are too small, how can we trust you?’” — Anastasios Vasilopoulos

“It’s been very frustrating,” said Anastasios Vasilopoulos, the CEO of Engineering Solutions, a Greek energy service company. “We thought about giving up several times.”

His business is figuring out how to boost the energy efficiency of industrial food processing plants by reusing heat that would otherwise be wasted. His company spent “a huge amount of hours” auditing one plant’s potential energy savings, but never actually carried out the project.

“We’ve done a lot of work, unfortunately, pro bono,” he said.

That’s because he has not been able to convince investors to give him the capital needed to do the work.

Vasilopoulos needs to borrow cash ahead of time because clients will only gradually pay him back once the project is completed and the energy savings start coming in. It’s a standard model called energy performance contracting used by most ESCOs that is supposed to make energy efficiency projects more affordable for end customers because they don’t need to pay anything upfront.

“We keep hearing from banks: ‘You are too small, how can we trust you?’” he said.

This message is a frustrating reality for ESCOs across the EU, said Jessica Stromback, senior vice president and chair of investment advisory group Joule Assets Europe.

Stromback has been overseeing the development of a Commission-backed online platform called eQuad meant to better match financial institutions and ESCOs. Engineering Solutions is part of the platform.

“Even a bank that is supposed to do small environmentally friendly investments, when it gets to [the bank’s] lower-level management, they say, ‘OK, maybe two, three years from now,’” she said. “It happens all the time.”

Under current rules in the Energy Efficiency Directive, countries are supposed to promote the ESCO sector, including its access to cash.

But banks and other private investors often lack the knowledge to understand how ESCOs do business, especially since this is still a young market. At the same time, ESCOs don’t have the expertise or resources to make a convincing case for themselves.

The eQuad project brought together ESCO-driven energy efficiency and renewables projects worth more than €122 million, and about €18 million worth of projects are currently under review by investors, Stromback said.

The overall market for ESCOs across the EU was €2.4 billion in 2015, with a forecast to grow to €3.1 billion in 2024, according to a policy report from the Commission’s Joint Research Center.

Big differences

The EU market is quite diverse. Germany is the leader with about 500 ESCOs focused on energy performance contracting, according to the report. France, the United Kingdom, Italy and Austria also have well-developed markets. On the other hand, there are only around a dozen ESCOs in Belgium, a number that hasn’t changed for more than 10 years. The Estonian and Maltese markets are non-existent.

In terms of size, some ESCOs can be big, as is the case in Belgium, which means they face fewer funding issues. But many smaller firms struggle with financing.

In Italy, for example, 95 percent of them are small businesses and 60 percent have less than 10 workers. Vasilopoulos’ company in Greece has less than a dozen permanent employees.

“There is absolutely, categorically zero way they will meet this next round of targets if they don’t deal with this issue of financing for small ESCOs and spur energy efficiency projects” — Jessica Stromback

Size is an issue for many banks, which don’t see the financial return in dealing with such small businesses. ESCO projects are usually worth less than €500,000, Stromback said.

“If you are a financial institution, you want to deploy as much capital as possible,” said Sebastian Carneiro, a sustainable finance expert. “That’s why it’s difficult with energy efficiency, because projects are small.”

But add all these small projects together and you get big energy efficiency gains across the bloc, said Stromback. That’s crucial if the EU wants to meet an energy efficiency target of at least 30 percent by 2030. The Parliament wants the goal to be 35 percent and talks with the Council are expected to be tough.

“There is absolutely, categorically zero way they will meet this next round of targets if they don’t deal with this issue of financing for small ESCOs and spur energy efficiency projects,” Stromback said. “The potential for meeting the future targets lies here.”

She said the EU’s main energy savings during the current decade came mostly from improving the efficiency of household items such as dishwashers and fridges through ecodesign requirements. Even with those steps, the bloc is currently on track to miss its 20 percent energy efficiency target for 2020 by a couple of percentage points.

The EU can catch up and meet its goals for the next decades only if the bloc focuses on small-level energy efficiency measures, Carneiro said.

“The potential to save is divided in relatively small measures and the gains come from adding up all these small measures,” he said. “That’s why it is important to incentivize ESCOs.”

Changing times

Things are slowly starting to change, said Antonio Ciccarelli, the CEO of Italian ESCO Servizi Energia Ambiente, which is part of the eQuad platform.

Ciccarelli, who has about a dozen employees, founded the company in 2005 and is focused on energy efficiency in the industrial sector. His company has completed 11 such projects over the last decade.

Ciccarelli did get some funding from regular banks in the past, but said financing was a struggle. He’s now in touch with four investment funds interested in financing smaller projects.

“When we started, I could not find a fund in Europe that would look at projects below €500,000,” Stromback said. “I was worried we would totally fail.”

Other companies are making similar inroads.

Add all these small projects together and you get big energy efficiency gains across the bloc, says Stromback | Larry W. Smith/EPA

Private investment funds “have figured out they are missing out on an important size of the market,” she added.

In one example, Eiffel Investment Group, a Paris-based private equity firm, launched an energy transition fund last April that focuses on energy efficiency, renewables and sustainable development.

The fund, sponsored by the European Investment Bank, teamed up in October with a Spanish ESCO to upgrade street lighting in the municipality of Illora. Today, it’s “in advanced discussions for dozens of millions of euros worth of projects,” said Pierre-Antoine Machelon, fund manager of Eiffel Investment’s energy transition fund.

Before making a decision, the fund assesses an ESCO’s track record, its assets, and any risks associated with the technology or the end client. Once the work is done for one project, the fund can leverage that experience to tackle similar ventures.

“It’s very likely the company will come back to you for another project, and [then] you don’t have to reinvent documentation,” Machelon said. “The company will become bigger and ask for more financing.”

This article is part of Raw Power, a series on Europe’s clean energy revolution.

Original Article

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