Energy efficiency financing in Europe on test

A year ago, adelphi and its partner started to support local banks across the EU through capacity building measures within the scope of the Private Finance for Energy Efficiency programme. Now it's time for the project team to share experiences made and to reflect on the challenges of energy efficiency finance in Europe.

Initiated by the European Investment Bank, this programme aims to incentivize local private banks to address the energy efficiency sector in a sustainable manner. In this way, it contributes to the implementation of the National Energy Efficiency Action Plans that have been set by the EU member states for the period 2014-2020. In order to achieve these objectives, the scheme combines three main components, i.e. (i) a loan facility provided to participating local banks to be on-lent to energy efficiency investments, (ii) a risk sharing mechanism covering part of potential losses incurred in the portfolio, and (iii) consultancy services to assist local banks in creating energy-efficient lending programmes and products.

In the first 365 days of the programme, three local banks in Czech Republic (Komerční Banka), Spain (Banco Santander) and France (Crédit Coopératif) received assistance in developing their capacity to implement and monitor energy efficiency lending. Training workshops were held to present the characteristics of this special type of finance and introduce the participants to the incentive scheme. In addition, tailored activities such as sector analysis, investment manuals, E-learning modules and many others have been implemented to address the individual needs of the banks.

Another specific focus of this technical assistance is to provide support in the compliance check of potential energy efficiency projects. All projects have to fulfill certain technical and economic criteria in order to receive financial support. In this way, it is ensured that only cost-effective projects that actually generate energy savings are financed. As the criteria are very comprehensive, an Excel-based tool has been designed that guides the banking staff through the eligibility checking process and indicates whether a project is suitable or not. With the help of these advisory and technical assistance activities, the local banks have already made progress in developing their energy efficiency lending capacities and started to finance initial projects.

Main challenges for banks in implementing sustainable energy loan schemes

This one-year of technical assistance helped banks to gain valuable impressions and experiences on the implementation of energy efficiency financing in the EU. One of the main reasons why banks face challenges to implement energy efficiency credit lines revolves around the complex and technical components of this specific type of finance. Energy efficiency finance requires technical procedures and working steps, in addition to ordinary banking processes. This in turn puts additional workload on banks, which is often underestimated - (not only) by bank officers. For instance, detailed eligibility criteria are provided by the donors of energy efficiency credit lines on how to define check and identify suitable projects. This ensures high environmental impact of investments. The “downside” of the criteria is that due to the technical complexity of such criteria, banks often struggle with their daily operations. That is why adequate tools, such as the above-mentioned Excel tool, need to be developed to facilitate and guide the loan officers through the eligibility checking process.

Another hurdle in this process is the identification of appropriate technical documents to prove that a project can be considered as an energy efficiency project. This can be circumvented by combining energy efficiency financing products with existing national schemes, where adequate frameworks such as marketing activities and technical documents for eligibility checking are already available.

The third important point to consider/note lessons learned is that the complexity of evaluating energy efficiency projects is significantly influenced by the decision on the sectors that need to be addressed/sectors in question. For instance, due to increasing standardised measures, energy efficiency projects in the building sector are easier to assess than projects in the industrial sector. In turn, already existing energy efficiency evaluation documents such as energy audits can be used for eligibility checking in the latter sector. Thus, as per the sector, different aspects have to be taken into consideration.

Similar challenges - no matter where

It is interesting to note that European local banks experienced similar challenges in addressing energy efficiency lending as their counterparts in emerging economies, where several energy efficiency financing projects have been implemented in the past. For banks, regardless of their geographical locations, technical complexity remains the main issue that they face when setting up energy efficiency finance structures.

In the context of developing countries, particularly the monitoring and collection of reliable post-implementation data, turned out to be a challenging task. It remains to be seen how this issue can be resolved under the Private Finance for Energy Efficiency scheme, where an ambitious monitoring and verification approach is to be implemented in the next phase of the programme.

It would be interesting to observe how European banks will further develop their energy efficiency finance capacities in the upcoming years. The good news is that even though establishing framework conditions is sometimes tough, once the right tools, procedures and workflows are in place, banks are able to benefit from a new and sustainable market segment - be it in Europe or in other regions of the globe.