Attracting energy efficiency investors: standardising the process

How do we make energy efficiency projects attractive for investment funds?
Published: Tue 24 Jul 2018

The EU Commission estimates that an extra €177bn needs to be mobilised from public and private investment in energy efficiency every year to reach the 2030 climate and energy targets.

Historically, the connection between energy service companies (ESCOs) and investors, however, has been strained. Financiers have typically found understanding and justifying investing in energy efficiency projects difficult, and the engineering-focussed ESCOs haven’t been able to communicate the benefits and needs.

With increased pressure from the EU Commission, however, this is set to change.

In alignment with ambitious energy efficiency targets, Joule Assets Europe frontiered the Sustainable Energy Asset Evaluation and Optimisation Framework (SEAF) Project, which, after two years of development under Horizon 2020, has now gone live as the commercial platform, eQuad, for energy efficiency funding.

Benedetta Friso Bellemo, Director of Sales at Joule Assets, describes the difficulties from Joule Assets’ perspective: “What we found was on one side fund managers struggling to find viable standardised projects, thus only funding 5-10% of the projects they were looking at, and on the other side we had ESCOs, with a lot of valid, small projects, unable to access funds and ending up either financing projects themselves or accepting bank loans with high-interest rates, impeding their growth.”

In our webinar, “Energy efficiency investment funds: How ESCOs can tap into €ms” with Bellemo and Stefano Fissolo, Vice President at SUSI Partners, we explored how energy efficiency financing can empower ESCO energy efficiency projects. We present below the key takeaways from their joint expertise.

Making energy efficiency attractive for investors.

SUSI Partners, specialists in financing sustainable energy infrastructure, and its energy efficiency fund have to date invested around €200m across Europe.

In the webinar, Fissolo presented his key learnings from the three years working in the field.

The first key element for investors is the size of the project, so as to maximise returns and validate the effort of the process.

The best way to do this within energy efficiency is through creating portfolios of projects. Fissolo says: “An attractive project has to be big. Not size in terms of standalone projects - what we look at is portfolios of projects. We need to find clusters of projects which in total reach a significant size that justifies the effort.”

So what is the desired scale of a project portfolio? Fissolo says of SUSI Partners: “The projects we look at should be at least €2m in value. The more we advance with our investments, the higher we set the bar - that €2m could become €5m in two years from now.”

However, the difficulty of the task is not lost on Fissolo. He says: “Reaching €2m can be quite complicated in the energy efficiency space. We know the market is fragmented and small, so we try to band those small projects into larger portfolios, then we try to strike deals with framework agreements where we can basically take on portfolios on a rolling basis.”

The next important element for investors is standardisation - ensuring that everything from the portfolios to the contracts follows a set of predefined rules.

Fissolo says: “If we look at portfolios of projects in order to reach critical mass, we need to make sure projects are consistent and standard and similar to reduce the efforts.”

“Then,” he continues, “we need projects around for a certain lifetime, between five and ten years, and with the right allocations of risk.”

In the webinar, Stefano Fissolo, Vice President at SUSI Partners explains the fundamentals of energy efficiency investment contracts.

Standardising and fine-tuning energy efficiency investment

This leads to the next key element of energy efficiency portfolios for investors - the allocation of risk. Fissolo says: “Each investor has its own perception of risk, and they also have the ambition to represent something that is not only valid for us but could also be a benchmark for the market.”

Fissolo explains the structure of this as one of three parts: the originator (the ESCO), the beneficiary (the customer/end-user) and the financiers.

Tied into this structure is the allocation of risk, which Fissolo shed light on: “What we like to take is the credit risk of the customer. We continue to pay its bills, not relocate them, and continue to use the energy efficiency measures. What we don’t like to take is the performance risk, which is what the ESCO takes on. What the customer takes on board is the market risk.”

The final important element for the investors is the contract. Fissolo says: “All the risks of an energy efficiency project lie in the contract signed between the end-customer and the contractor. That has to be very well designed.”

Stefano explains that SUSI’s approach to contracts focusses around the inclusion of six crucial elements: Repayment of the investment, drawdown conditions, credit/contract transfer, penalty interest for delayed payments, guarantees and penalties and the termination and withdrawal consideration.

In the webinar, Benedetta Friso Bellemo discussed some of the successful projects funded through eQuad.

eQuad enabling energy efficiency growth

eQuad serves as a crucial part of aggregating, encouraging and enabling these partnerships to take place.

Bellemo explains the origins of the platform: “What we asked ourselves at Joule when we started was ‘how much closer can we get to achieving that goal if all the existing viable energy efficiency projects were able to access appropriate third party finance?’”

To solve this issue, Joule Assets Europe created eQuad, which acts as a bridge between projects and finance. Bellemo says: “What happens in practice is this: The ESCO enters the platform as a user and inserts all of their available projects. Joule then checks the projects and their related documents and performs preliminary due diligence.”

She continues: “They are then sent to representatives from the Investor Confidence Project, who then complete the technical due diligence on the projects. This is then automatically sent through the platform to HSB Engineering Insurance, which issues a quote for an issuance of the full performance of the project.”

Then, finally, the projects are sent to the investors in Joule Assets Europe’s’ network. When an investor enters eQuad, what they find is only standardised projects that have been cleared by Joule Assets. Bellemo says: “In eQuad, there’s also a strong document management system that puts everything together for the investors”

Watch the webinar on demand

To learn more from Bellemo and Fissolo’s experience, watch our webinar “Energy efficiency investment funds: How ESCOs can tap into €ms” on demand today.