by Zoya Vassileva – Mattig-Levercom Management Partners
With the ending of EUSEW came along a number of benefits. Exchange of experience, reconciliation of opinions of the different stakeholders, announcement of innovations and other news, discussions on how to improve the attained results and to accelerate the achievement of the targets EU2030 – EU2050.
There are many accomplishments in various directions, especially in the sphere of EE products innovations.
The big question, however, is, why at such a huge event there was no participation from the private financial sector – Commercial Banks and Funds, except for the officially invited ones to share their experience and to explain how seriously they accept the necessity for sustainable investments.
The commercial banks were the big missing group. Why, if EU needs EUR 150 billion financing per year (the officially announced investment gap) and the banks suffer from abundant liquidity, they did not show interest in such a massive event.
Obviously, the private financial sector still doesn’t consider energy efficiency as an “Exciting business”, in spite of the many programs, plans, and millions in financed projects for “Mainstreaming energy efficiency finance”.
Even more, in the recent few years, the active work in this direction did not even bring more closely to each other the languages and approaches of the financiеrs, technical experts and EU decision-makers.
At the few occasional matchmaking events, the financiers talk to the financiers and the engineers with the engineers. Both groups desire business, but for one of them, this passes through energy savings and reduced emissions, while for the others are of more interest the cash-flows, bankability, and creditworthiness.
There is still no achieved mutual connection between these notions, understandable to both parties. Something more.
The spreading of the idea and stigma feeling that EE projects have a high risk was allowed, which later turned into a claim. Instead of analyzing in detail what exactly makes the financiers apprehensive, so that they proclaim that these projects have a high risk, the Energy Efficiency technical experts and consultants (again predominantly technical experts), started upholding this thesis and rushed mainly to seek instruments and mechanisms to lower the risks.
The presumption that the EE Projects have a high risk.
Why so? Because everything, whose nature and specifics are not sufficiently understood, and when money has to be given, is risky. Let us compare with projects with similar amount for a small production unit, for example, investment of EUR 300 000 and EE Project.
Both are investment projects, but EE Project is for optimization, i.e. for decreasing costs, while the other is for creating revenues.
Both of these investment projects are evaluated by all the rules of investment financing, including the evaluation of the various risks.
And what is the result - that the EEP has no market risk. No product is manufactured, there is no danger of non-acceptance by the market and poor sales of the project.
This automatically eliminates a major risk. In terms of the technical, organizational and other risks – they are carried by both types of projects.
The solutions, which are currently used to combat and decrease these risks, are only qualitative:
Databases for energy efficiency projects (EEPs) information gathering and analysis; EEPs rating systems; Narrative Algorithms and schemes for implementation of EEPs (qualitative); Platforms for matchmaking of investors and assets owners/users which need energy consumption reduction, etc. In order to finance Private Financial Institutions (PFI) should:
Evaluate the energy efficiency projects (EEPs) on a single project basis, no matter what financial mechanism is used for EE
Evaluate the creditworthiness / financial status of the project participants, related to the loan repayment.
Evaluate the post-project impact on the financial performance of the major project participants: In the direct financing scheme, this is an object owner/user. Regarding Energy Performance Contract (EPC) mechanism both, the ESCO and the owner/user.
Adequate risk analysis and financial risk management are possible again on a single project basis and after the availability of a multiple levels of the cash flow (CF) analysis and comprehensive cost-benefit analysis (CBA). This means a necessity of Quantitative solutions.
The biggest problem. The EE projects bankability determination.
The bankability of the EEP is related mainly to the return of the investment.
Its assessment is impossible without Cash-Flows (CFs) calculations and analysis from the savings. So a real bankability of the EEPs needs quantification and monetization of the energy efficiency benefits. But this is not enough.
The second important thing is how the scheme of financing affects the bankability of the project, i.e. the selection of the financial instruments and/or the mixture (combination) of financial instruments.
Demystification of the Cash-Flows from savings
The structure and the specifics of the CFs from the received saving is the main problem for the banks.
They do not understand it and do not count it as an income, respectively into the CF. Because this is very “technical” the banks don’t calculate these cash flows and assess only the general creditworthiness of the borrower, i.e. the CFs from their major activities.
And what happens if the borrower is an ESCO (third party financing). This become a mission impossible.
This way the banks reverse to the starting point, evaluating the CF of the major activities, nothing in common with the Investment-Saving- Investment repayment and assessment of the financial risks of the projects on this base.
This is missing in the overall picture. If the banks can adequately calculate the Cash-Flow from savings they will consider the investment repayment and the ability the project investment to be repaid by the saving.
This totally eliminates the business activity risks of borrower (operations risk). With one exception – the ESCOs.
But what happens when the saving cannot repay the investment at an appropriate time, acceptable to them (very long payback period or high level of normalization of the consumption).
The project is not bankable enough or not bankable at all. This problem can be solved with blending of appropriate financial instruments. Not with aggregation of projects with similar parameters, but on a single project basis.
Because no one bank will finance any project only because it is part of any group of projects in some database, despite that the group shows good performance or because the project has a good rating.
Each EE Project should be funded with such financial instruments/blending of financial instruments, which are most appropriate for its specifics, level of bankability and risk profile. And this should be done at very low transaction costs
Translation of the technical parameters into financial, easy understandable, effective, and….not expensive.
The problem with the high transactions costs for financing of EEPs should be drastically reduced because at the moment this consumes a lot of time, staff and technical outsourcing. Despite EBRD, EIB, National Development Banks and donor programs support the outsourced technical expertise, this is much less than the necessary.
This approach cannot give large scale of the private financing. Without this scale, the achievement of EU 2030 goals is impossible.
The way in which currently we all are trying to solve the issue of lack of financing for ЕЕ is proving modest results, and hence the approach should be drastically changed.
The innovative mechanisms for financing are something positive and useful, but cannot generate the necessary scale. In order to have a large scale effect, there should be a similar scale approach to this problem.
Without massive participation of the banking sector in the financing of ЕЕ, there is no way to attain the adopted aims, because there is a bank in every European town.
In order to have a large scale participation of the banks, each bank has to have the capacity to evaluate the bankability and to finance such projects, fast, easily and with low costs. But, most of all, the banking sector should understand that EE projects could be profitable and create business.
For scaling up the private financing for energy efficiency, the financial sector needs a standardized methodology and tool for faster identification of good projects, effectively and at lower transaction costs (less staff, less time, less outsourced technical experts).
Due to the problem with these high costs, the banks are interested only in large projects, whilst the majority of the building stock in Europe consists of small and medium-sized buildings. These costs increase significantly with evaluations of projects which don’t have the necessary bankability, and it turns into a big loss for the banks.
The solution for evaluation of EE Projects for financing, which quantitatively describes the business models for EEPs preparation, financing and implementation, should complement the underwriting toolkit of Energy Efficiency Financial Institutions Group (EEFIG).
This Know-How for the Financial Institutions will facilitate the EE projects underwriting process with a parallel significant transactions cost reduction.
Additional necessary options of the tool: fast projections scenarios calculation and evaluation, automatic scenarios comparison, sensitivity analysis, automatic final report generation for decision making and last, but not least – an automatic database generation after each EEP evaluation with technical and financial parameters.
For many years it has been expressed that energy efficiency should bring social effects and benefits to society but has not been cited as a source of business.
In order EU to record more significant progress for attraction of private financing for EE on a market base, the efforts should be addressed to motivation of the banks to finance, seeing the benefits of EE projects and the potential for business and growth for the Private Financial Institutions (PFIs) in this niche.
The private sector finances only cost-effective projects, which generate enough cash flows for repayment of the interest-bearing financing and profit for equity-based financial instruments.
For understanding the business potential of EEPs by the commercial banks, focused, constant and purposeful work should be done with them. But, this is currently not being done, not even started.
Europe dramatically lags behind achievement of the EE targets and the major reason for this is lack of enough private financing. In order to really scale up it, new, game-changing approaches and measures are necessary in this direction.