Europe has set its sights on slashing carbon emissions 90 percent from buildings by 2050. Massive investment in buildings renovations is needed to meet this goal – an estimated €3.5 trillion according to the Building Performance Institute Europe – and it’s clear this level of finance can only come from the private sector.
On 5 November 2014, Environmental Defence Fund Europe/UK rolled out its signature energy efficiency initiative, the Investor Confidence Project Europe, to accelerate investment into energy efficiency by standardising the project development process and documentation. Providing an essential piece of the jigsaw puzzle, it is hoped that the initiative will lead to increased confidence among building owners and investors in the reliability of projected savings.
In the United States, the Investor Confidence Project, which has created a series of protocols for developing and documenting energy efficiency projects in different categories of buildings, has gained considerable traction with banks, investors, the energy efficiency industry, and city and state programmes.
In addition to protocols, the initiative has launched a credentialing system that provides third-party validation, called Investor Ready Energy Efficiency ™, as well as an open-data initiative. Building on the success of the U.S.-based programme, the Investor Confidence Project Europe is convening investors, banks, property owners, and other industry stakeholders to establish open-source protocols to standardise the development of energy efficiency projects in Europe.
Why is this important? First, financial markets can only function when products are consistent. In virtually all established markets, from car loans to timeshares, standardisation has helped to accelerate underwriting, reduce long-term liability, and spur investment.
Additionally, banks and investors can only aggregate and securitize energy efficiency projects, which tend to be too small on their own to attract investment by the capital markets, when they are streamlined. Standardisation also reduces due diligence and transaction costs, and allows for comparison of project results, which will eventually lead to an accumulation of actuarial data on project performance.
Finally, banks and investors can only hire and build out energy efficiency teams once uniform processes are in place; they simply cannot build stable businesses around the ad hoc processes that are currently common in the energy efficiency sector.
Securitization, an accumulation of project data, and established industry personnel are all necessary conditions for a thriving, established energy efficiency financing market. Unless we can get to that stage with energy efficiency finance, we can’t fund the huge amount of investment needed to achieve our climate and energy security goals.
It is important to understand that the Investor Confidence Project Europe is not focused on developing new technical standards; plenty of these exist. Rather, it aims to use available standards in a common way through the entire process of developing and documenting energy efficiency projects.
Furthermore, the Investor Confidence Project Europe does not attempt to enforce a U.S. model. The fundamental process of developing a project will be the same globally, but with different engineering standards. What will be common between the U.S. and Europe is an approach, not specific standards or protocols. This will attract institutional investors who want to invest in energy efficiency and operate on both sides of the Atlantic and globally.
The Investor Confidence Project Europe has already gained powerful support. Both the Energy Efficiency Finance Investors Group – created by the European Commission and the United National Environment Programme's Finance Initiative – and the International Energy Agency have come out in support of the initiative in recent reports (here and here). A pan-European coalition of banks, investors, property owners, energy efficiency companies, and government agencies have already signed up to be part of a steering group.
The investors have been clear: Standardise or we won’t engage in energy efficiency finance. Europe will not reach its economic or energy goals without their investment. The time to standardise and scale energy efficiency is now.
For local jurisdictions this point is particularly pertinent. Any measure of success for a city or region's efficiency and renovation programs will include growing it beyond the budget limits of its municipal finances. In order to attract in private capital, local authority-led renovation program should be designed with that view in mind from the beginning. Ensuring that building projects are developed, operated and measured in the same way will be critical for building the data sets necessary for municipalities to entice private capital markets to extend their renovation programs beyond the pilot stage. Without a standardized approach, local authorities will need to revamp their program when they are ready to expand - wasting time, money and institutional capacity.
Whether your jurisdiction runs a new or a long-standing renovation program, ICP Europe can help implement no-cost, open source tools and methodologies to produce better and more consistent results and attract and integrate private capital financing into it.
Panama Bartholomy, ICP Europe Director
Panama is Director of the Investor Confidence Project Europe, a project of the Environmental Defense Fund, where he works with a wide array of stakeholders to develop standard methodologies and protocols for energy efficiency project development and documentation. These protocols are designed to reduce transaction costs associated with energy efficiency investment, and develop actuarial data to unlock capital markets.