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Launching the Market for Sustainable Energy Assets

Caroline Milne, Director of Marketing and Communications, Joule Assets Europe

Feature 24 July 2019

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Speeding-up project deployment and unlocking finance at scale, faster and further, is necessary to accelerate the retrofitting of buildings to meet Europe’s climate goals.

In Europe, buildings are responsible for the largest share of final energy consumption (40%). Despite buildings presenting significant potential for carbon emission reductions, change is not happening fast enough to meet the EU 2030 climate targets. Building renovation rates must triple, increasing from 1% of GDP per year today to 3%. Investments of an additional €100 bn/year is required annually, cumulatively amounting to over €1 trillion.

Meeting these targets is a substantial undertaking, and project deployment remains slow – too slow considering the existential urgency to decarbonize. Investor/contractor deal closure can easily take up to more than six months, undermining the contractor/end-client sales process (typically a 12-18 month process). This is unacceptable. Closing the investment transaction more quickly is crucial and speeding-up the process is urgently needed to retrofit Europe’s building sector at scale.

Closing the investment transaction more quickly is crucial to retrofit Europe’s building sector at scale.

Process and pipeline matter

A major roadblock to investment is the average size and complexity of Sustainable Energy Assets (SEA) projects themselves. Small-to-Medium Enterprises (SMEs), accounting for more than 80% of necessary renovations and technology upgrades, require an investment of less than €500,000 – an amount far too small to attract investors. Investors, due to the high upfront costs of due diligence and risk assessment, typically seek to invest in project pipelines requiring a minimum of €1 million. Fortunately, understanding the small size of SEA building projects, most investors are willing to aggregate smaller projects into umbrella contracts provided that the total pipeline meets their minimum investment threshold.

However, the fact is that no standardized due diligence or risk assessment process exists that matches real projects, considering their relatively small size and the typical profile of project owners (SMEs and non-profit entities). Moreover, because financial firms tend to perform their own due diligence using their own processes, cross-fertilization of knowledge and best practices for analysing this type of investment are non-existent.

The consequences of this lack of process are significant. While six months of due diligence may be reasonable for a €50 million infrastructure project, it is unacceptable for an energy efficiency retrofit project of €50,000. Many projects fail simply because the financing deal took too long – the clients walks away, perceiving the lag to be a reflection of project credibility (or lack thereof). Moreover, when contractors (who themselves are often SMEs) dedicate so much time to financing one deal, they sacrifice resources that could otherwise be generating more sales pipeline. Thus, a vicious cycle: Slow deal closure requires resources needed to create a sufficient pipeline to attract investment. Discussions drag because of lack of pipeline, and pipeline suffers due to the lengthy discussions.

Slow deal closure and deployment can therefore be attributed both to a lack of process for investment analyses by financial institutions and to a lack of project pipeline for contractors.

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