Financing savings

6th September 2013


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IEMA

A lack of capital can prevent firms installing energy efficiency equipment, but there is money available. Paul Suff takes a look at some of the funding options

Effective energy efficiency is about cutting out waste and increasing profits, announced energy minister Greg Barker, when he revealed the government’s planned energy savings opportunity scheme (ESOS).

The scheme, which is being developed to ensure the UK complies with the Energy Efficiency Directive (2012/27/EU), will require large companies (those with more than 250 employees) to assess their energy use every four years. Decc estimates that implementing the cost-effective energy-efficiency opportunities identified by the audits could save the average large business £56,400 a year on its energy bills.

The energy department also calculates that if just 6% of the potential energy savings identified through ESOS assessments are implemented, it would provide a net benefit to the economy of £1.9 billion in 2015–30. If uptake is greater, the savings could be as high as £3 billion. The potential carbon savings are also huge. Government figures suggest that if the UK were to consume only the energy it really needs, the country could save 196TWh in 2020, equivalent to 41 million tonnes of CO2 (MtCO2).

Improving energy efficiency does not necessarily require a huge investment, but a lack of affordable finance options is often a barrier to installing equipment that can significantly reduce energy bills. “Businesses can find it difficult to access finance, and some will face high interest rates that can result in energy efficiency investments no longer being cost effective,” acknowledges Decc’s energy efficiency deployment office, which was launched in 2012.

Access to funding has been further constrained by the banking crisis, which has made financial institutions more reluctant to support business investment. The green investment bank, which has made energy efficiency one of its five priority areas for financial support, says investing in such equipment “has been badly impacted by the disruption in the market for long-term debt finance”, adding that “this market remains thinly served and lacking in liquidity”. Spending cuts are having a similar impact in the public sector.

Analysis by the Carbon Trust and Siemens Financial Services, which jointly operate the energy efficiency funding (EEF) scheme, revealed in 2011 that in England alone around 400,000 companies were finding it difficult to raise bank loans to invest in energy efficiency. However, there are a number of schemes to help private companies and public sector organisations deliver projects designed to cut energy use. Here, the environmentalist looks at some of the main options.

Dealing in efficiency

The green deal scheme, which opened at the start of 2013, is available for both domestic and non-domestic properties. Under the initiative, companies registered as “providers” fund the cost of installing energy-efficiency measures recommended in a green deal advice report, following a survey of a commercial property. The 45 technologies qualifying for funding under the commercial green deal range from air-source heat pumps and duct insulation to flue-gas heat recovery and secondary glazing.

There is no upfront cost to the owner of the premises as the loan is attached to the property. A so-called “golden rule” principle ensures that the expense of installing measures is no more than the savings made on energy bills over the lifetime of the loan. Electricity suppliers collect payments through electricity bills and the repayment plan remains with the property even if ownership changes.

As the government’s flagship energy efficiency scheme, the green deal should be one of the first ports of call for companies seeking financial aid. Unfortunately, there remains a lack of funding for commercial deals. A spokesperson for the Green Deal Finance Company, which was set up to be the main source of funding for green deal providers, told the environmentalist in August: “As far as we are aware, there are no providers currently financing non-domestic green deals.”

Tim Hipperson, director of energy services at Utilitywise, says the problem is largely due to the lengthy and expensive assessment process.

“It’s a long journey from the assessment to putting a deal in place. A green deal assessment may recommend replacing T12 lamps with T8s, for example, but provide little information on how many lights need changing, where they are located or whether there are any challenges involved in installing them, such as the need for a cherry picker,” he explains.

“As a result, an additional feasibility study is necessary, which adds to the expense, before a provider can assess the cost of the project and determine whether it meets the ‘golden rule’.”

Hipperson believes Decc is banking on forthcoming changes to the rules governing energy performance certificates to kick-start the commercial green deal. From April 2018, it is likely to be illegal to rent a business property that has an energy-efficiency rating of F or G – around 18% of commercial properties in the UK – unless the landlord has carried out the maximum package of measures that can be funded under the green deal.

Hipperson also says the introduction of the ESOS could boost interest in green deals for non-domestic properties, particularly if the government decides that the audit – the first of which is due in December 2015 – will exempt buildings from the need to have a separate green deal assessment.

A trusted alternative

Between 2001 and March 2012, the Carbon Trust provided more than 4,500 businesses with a total of £185 million in loans for investment in energy efficiency measures, saving UK firms over 4.7MtCO2 and £550 million on energy bills. Initially, the money was largely government-backed, interest-free loans, but, since April 2011, as the coalition sought to reduce its expenditure, financial support has mostly been through a partnership with Siemens Financial Services.

Under the arrangement, consultants from the trust assess the potential for energy savings at an organisation or provide advice on whether a planned project will deliver an adequate reduction in energy costs. Like the green deal, the financing package is designed to pay for itself through energy savings, resulting in no net cost to the borrower. “We need to know whether the figures stack up,” explains Bruno Gardner, director of energy efficiency ventures at the Carbon Trust.

The £550 million EEF scheme with Siemens offers finance to organisations that have been trading for more than 36 months and are seeking to reduce their energy use. “We fund projects costing £1,000 upwards,” confirms Gardner. “The scheme is designed so that anticipated energy savings match or exceed payments. It’s similar to the green deal’s golden rule, though I’d describe our approach, which includes expert assessment, as ‘green deal+’,” says Gardner.

Payments, which are fixed, can be spread over one to seven years, possibly longer. Gardner explains that finance is designed to be both tax efficient (payments are generally deducted from taxable profits) and to leave existing lines of credit, with banks for example, intact.

Accredited suppliers of energy-efficient lighting, heating, ventilation, air conditioning and industrial process technologies, such as compressed air, refrigeration or specialist production equipment, will arrange finance with Siemens or a customer can apply directly.

In July, the trust revamped its list of recognised suppliers – which now number 48 – and published a supplier directory online that enables users to search by technology, location and finance package. According to Gardner, only companies demonstrating high levels of technical proficiency, evidence of consistent delivery of low-energy solutions and first-class customer care are accredited.

Organisations in Wales and Northern Ireland continue to have access to government-backed financial support through the Carbon Trust, as the devolved administrations have maintained funding.

In 2011/12, the trust provided interest-free loans totalling more than £1.4 million to small and medium-sized enterprises (SMEs) in Wales for the installation of energy-efficient equipment, while SMEs in Northern Ireland received £2.3 million.

In Scotland, the trust provides advice and support to businesses and the public sector on energy efficiency through its advice line, online technical content and web tools.

Banking on capital

The green investment bank (GIB), which was launched in November 2012, has set aside £100 million of its £3.8 billion in seed funding from the government to invest in non-domestic energy efficiency (NDEE) initiatives.

While direct funding from the bank is mainly targeted at large deals – generally single or portfolio deals worth more than £30 million in total transaction size – it has contracted two fund management companies to assist in financing smaller NDEE projects.

Gregor Paterson-Jones, managing director at the GIB’s energy efficiency arm, explains: “We have to aggregate energy efficiency projects to reach scale, as even owners with large property portfolios and who are proactive in improving the efficiency of their buildings will not invest enough each year to qualify directly for GIB funding. Placing capital with specialist funds helps to overcome this.”

The GIB has committed £50 million each to the energy-efficiency funds established by Sustainable Development Capital, a specialist financial and investment advisory firm, and Equitix, a company with experience of delivering and managing infrastructure projects. The funds will typically provide 100% of the upfront costs for installing energy-efficiency measures in return for a share of the energy savings achieved.

The GIB is subject to a “double bottom line”, which means its investments must achieve a significant green impact, as well as a financial return on investment. The green impact measure focuses on: reducing greenhouse-gas emissions; advancing efficiency in the use of natural resources; protecting and enhancing the natural environment and biodiversity; and promoting environmental sustainability.

Energy-efficiency investment opportunities for the GIB are spread mainly across renewable heat, combined heat and power (CHP), outdoor lighting, industrial processes and smart meter technologies. “CHP is the most established sector,” says Paterson-Jones. “The framework for investment is well understood and there is scope for considerable investment in this sector.”

He says the bank is interested in partnering with public sector bodies to develop funding programmes, as the GIB believes that some of the most concentrated opportunities for NDEE investment can be found in the NHS and across local authorities.

Paterson-Jones singles out upgrading street lighting for significant investment growth over the next two years. “Competively priced LED technology has come of age and can now deliver significant energy savings and carbon reduction,” he says, adding that “it opens up the opportunities to integrate street lighting into smart cities initiatives.”

Aside from the GIB, the Royal Bank of Scotland (RBS) launched its carbon reduction fund in December 2012. The £200 million fund aims to help businesses reduce their energy costs by financing projects, such as retrofitting buildings with more energy efficient heating and lighting. The initiative is backed by the government’s “funding for lending” scheme, which enables RBS to offer lower interest rates to companies, and will provide finance to firms with an annual turnover of £25 million.

Public finances

Salix Finance is one of several providers of finance for public sector organisations requiring capital to invest in energy efficiency. The not-for-profit company is funded by Decc and the devolved governments in Scotland and Wales.

Its energy-efficiency loans scheme offers interest-free finance. It also operates matched funding arrangements, which are placed in a “ringfenced” sustainable fund to be spent on proven energy-saving projects with a payback of less than five years.

The company, which offers finance for more than 120 types of energy-efficiency technology, reports that projects typically pay for themselves within 3.5 years and have a lifespan of 13.5 years, providing 10 years of energy savings at no cost.

To date, Salix has funded more than 9,000 projects with 662 public sector bodies, including schools, local authorities, NHS trusts and higher education institutions. The total value of these projects is £194 million, and they are estimated to be saving the public sector £56 million each year and £750 million over their lifetimes. Annual carbon reductions will total 340,000 tonnes and almost 4.5 million tonnes over the lifetime of the projects.

To be funded, energy-efficiency projects must meet lending criteria, including maximum payback periods and maximum costs per tonne of carbon saved. In Wales, for example, where the scheme is administered by the Carbon Trust, a project must pay for itself in energy savings within eight years and the cost of CO2 must be less than £200 per tonne. In addition, there is a minimum £500 value for any single project and a minimum application and loan value of £5,000.

Local authorities with statutory powers to borrow may also be able to access finance for energy efficiency from the Public Works Loan Board, which is part of the UK Debt Management Office (DMO). It will lend eligible authorities up to the available capacity in a council’s legal borrowing limit, with loans secured against the revenues of the authority. The board offers both fixed- and variable-rate loans, with rates determined by the DMO.

A number of national and local funding programmes have been established to finance public sector energy-efficiency projects. The London energy-efficiency fund is one example. The £100 million scheme, financed by the European Regional Development Fund (ERDF), is available to public and private sector organisations for projects requiring between £1 million and £20 million to refurbish or retrofit buildings in the capital before the end of 2015. In July, £80 million remained in the fund.

The Cambridge Retrofit Programme is another example, and will see £1 billion of public and private finance invested across the city in energy-saving measures, initially in non-domestic properties.

The devolved governments in Northern Ireland, Scotland and Wales each operate funding mechanisms for public sector. The Scottish government’s central energy efficiency fund, for example, helps finance efficiency and small-scale renewable energy measures.

Aside from the ERDF, other European funds can provide a further source of finance. The Joint European Support for Sustainable Investment in City Areas (JESSICA), for example, supports urban development projects, including energy efficiency improvements. JESSICA is a European Commission initiative, in cooperation with the European Investment Bank and the Council of Europe Development Bank, and investments can take the form of equity, loans or guarantees.

Targeted funding is also available for some parts of the public sector. The health department, for example, helps hospitals and NHS facilities to finance energy efficiency. In 2013/14, it is spending £50 million funding innovative projects to improve energy efficiency and reduce the carbon footprint of the NHS in England. The department says the investment should save the health service £12.5 million a year on energy costs.

Hedging your bets

Energy-efficiency projects represent an investment opportunity: the returns tend to be substantially higher than those achievable through holding cash on short-term deposit. Gardner at the Carbon Trust says that payback from installing LED lights, for example, averages just two years.

Decc energy price forecasts for 2020 estimate that electricity prices in the services sector are likely to increase by 22% above inflation, while gas prices will go up by 15%. So, as energy prices continue their upward trajectory, the business case for investing in energy efficiency measures gets stronger and stronger.


Tax breaks

The enhanced capital allowance (ECA) energy scheme aims to encourage businesses to invest in certain energy-saving equipment by providing tax allowances.

Companies investing in a range of qualifying technologies – such as energy-efficient boilers, lighting, refrigeration equipment and energy metering and monitoring systems – can offset the entire cost in the first year against taxable profits in the year of purchase.

Only new equipment is eligible for an ECA and a list of qualifying technologies is published annually – several technologies are also eligible even though they are not on the list.


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