Political goal to reduce greenhouse gas emissions
The role of energy costs in industrial production is disproportionately high and primarily determined by two factors: energy prices and energy intensity. Energy costs are an important element impacting industrial competitiveness and have therefore become a crucial factor in the policy making of the European Union. The share of energy costs has generally risen as a result of overall increasing and often volatile energy prices. Against this background, the EU's climate and energy targets aim at making Europe's economy system not only more sustainable but also more competitive. Therefore, European leaders agreed in October 2014 new climate and energy targets for 2030. According to this policy framework, greenhouse gas emissions should be cut by 40% compared to 1990. Energy efficiency is currently the biggest lever to achieve that goal.
Financial potential of energy efficiency improvements
Energy efficiency improvements lower energy costs and increase industrial efficiency. Households and industry receive net benefits of €240 billion annually by 2030 and of about €500 billion by 2050 in lower energy bills[1]. The energy saving potential in the European manufacturing industry amounts to 106 million tons of oil equivalent (Mtoe) by 2030. The scale of investment needed to realize these savings is estimated at around €320 billion[2]. Despite the clear financial benefits, energy efficiency is either still underestimated in many industrial businesses or a variety of barriers stand in the way to implement these potential savings.
Barriers to implementing energy efficiency measures
Different factors prevent widespread investment in energy efficiency measures. Below is a brief overview of the key barriers.
Lack of expertise and information: The implementation of energy efficiency improvements is often prevented due to the lack of expertise and information. Non-sufficient information and its highly technical aspect make it difficult for non-experts to understand the significant potential of such measures. Information obstacles exist particularly because of poorly synthesized information introducing financial options. These information barriers lead to a lack of industrial companies' awareness of the significant financial benefits of energy efficiency projects.
Low priority of energy efficiency projects: Energy efficiency is mostly not part of the core business of the majority of manufacturing companies. As a result, the company's core business activities are prioritized when determining annual budgets. Having comparably long payback periods (> 3 years) many companies prefer other internal investments generating rather short-term profits - even though cost reductions from lower energy intensity are significant and predictable.
Size of energy saving projects: The size of energy saving projects is relatively small in comparison to other investments. Therefore, the improvement of the energy efficiency in an industrial facility is associated with high transaction costs and corporates prefer to finance other projects with a better replicability.
Access to capital: Access to capital is cited as the most important barrier to the deployment of energy efficient technologies[3]. Energetic retrofits require often high upfront investment. As already mentioned, the industrial corporate's budget prioritizes rather core business activities and short-term projects with rapid returns (despite lower long-term savings potential) than energy efficiency improvements. Accessing external capital for energy savings can be very difficult. Industrial building/facility owners often cannot take any additional debt for these kind or projects as they do not contribute to secure the corporate's debt ratio. Besides, only a limited number of financial products is available for the improvement of energy efficiency performances. Today, primarily Energy Service Companies (ESCO) have financed energy efficiency measures via contracting solutions. Since the financial crisis though, ESCOs are frequently not able - and willing - any more to meet the financial needs of their clients. Leasing companies provide an alternative financing solution but are only financing measures that have leasable-good character and they do not finance 100% of holistic energy efficiency projects.
Solution to finance energy efficiency projects
Due to the generation of stable and predictable cost savings, energy efficiency projects can be an attractive investment opportunity for institutional investors seeking a fixed-income alternative in a low-interest environment. SUSI Partners AG, a Swiss investment advisor, identifies projects improving energy efficiency in existing industrial facilities. These projects are then financed through a fund designed for institutional investors. The innovative business model for financing energy efficiency projects is based on a traditional energy saving contracting model in combination with an external source of financing. This model leads to a win-win situation for all three involved parties: The industrial facility owner obtains a balance sheet-neutral upgrade of his facilities (without using own capital) and receives a share of the savings; the ESCO is able to expand its services and the financing partner generates attractive and predictable returns for its investors. The energy saving model allocates the risk of an energy efficiency project evenly between the involved parties: (a) The ESCO guarantees the energy saving performance of the technical solution; (b) the facility owner covers the usage risk and (c) the financing partner provides capital and assumes the credit risk of the facility owner. The investors benefit from regular distributions and no exit risk as projects are fully amortized during the fund lifetime.
SUSI Partners AG analyzes projects with an investment size of EUR 1 to 60m and life duration of 4 to 12 years. Only proven technologies, such as waste heat recovery or LED lighting, are applied to secure the predictability of the energy savings. The industrial partner profits in several ways from the energy saving contracting model with external financing:
- Off-balance financing: The financing partner is taking the installed assets onto its own balance sheet and, thus, allows for an off-balance and budget neutral implementation of energy efficiency retrofits for the customer.
- 100% financing: The financing partner does not only finance measures with short paybacks and leasable-good character; it finances 100% of the overall energy efficiency retrofit.
- Flexible structure: The financing partner structures savings contracts tailor made (e.g. adaptations regarding duration, savings depending on production volume, etc.).
- Multi-Country/Multi-Site: Manufacturing facilities in multiple countries or sites can be financed with a single contractual solution.
- Speed: Projects can be financed in a very short time.
- No technology risk: The energy savings are guaranteed by the ESCO and therefore there is no technology risk for the industrial facility owner.
With this innovative financing approach overcoming the above mentioned barriers the implementation of energy efficiency measures of industrial corporations are making sense and can be implemented without burdening the company's budget.
By Dr. Tobias Reichmuth, CEO of Susi Partners AG
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[1] Fraunhofer ISI (2012): Concrete Paths of the European Union to the 2ºC Scenario.
[2] European Commission (2015): Data Base on Energy Saving Potentials; SUSI Analytics.
[3] Prognos (2009): Role and meaning of energy efficiency and energy performances in KMU.
