Mark Lister, Head of the Copenhagen Centre on Energy Efficiency, explains why more innovation and investment is needed if the barriers to scaling up energy efficiency are to be successfully dismantled.
Energy efficiency at a global level is an essential response to climate change and fundamental to achieving the goals of the 2015 Paris climate agreement. But energy efficiency is not only about saving our climate. Multiple benefits arise from energy efficiency actions, including improved health and well-being, cleaner air, greater economic productivity and employment creation. Of all the potential clean energy solutions, it is the cheapest, most geographically dispersed, most quickly deployed and most widely available energy resource. This is why most studies estimate that energy efficiency will need to contribute roughly half of the emissions reductions required to meet our climate objectives between now and 2030.
It is too often the case that energy efficiency actions in practice don’t live up to this potential due to a number of well-known barriers. A lack of innovation is one of them. For energy efficiency to accelerate, innovation is needed not just in terms of technological hardware, where significant progress is happening, but also in ‘org-ware,’ the organisational structures and business models that enable energy efficiency and create aligned incentives for energy efficiency players through better ways of working together.
The increasing digitalisation of energy systems and distributed ledger technologies such as blockchain, which are starting to be applied to energy efficiency business models, also offer new opportunities for innovation. They can help reduce transaction costs by streamlining the aggregation of savings and the allocation of monetary values to energy savings streams.
A second barrier is a significant shortfall in investment. The World Bank estimates that investment in energy efficiency globally needs to increase by a factor of at least six to meet the UN Sustainable Development Goal of doubling the rate of improvement in global energy efficiency by 2030. In 2016, this investment totalled $231 billion. The EU, which accounts for the largest share of this spending, believes that an amount close to this global spend ($212 billion per year) will be necessary for Europe alone to meet its own 2030 energy and climate objectives.
Such order-of-magnitude increases in the scale of investment cannot only be provided by climate and development funds. The entire global financial system, private sector banks, institutional investors and purchasing decisions by citizens all need to pivot towards greater lending for energy efficiency infrastructure.
This is being hampered, though, because many potential investors lack an understanding of energy efficiency projects. Instead of looking at the cash flow generated by energy savings, investors tend to want traditional lending security in the form of a fixed or floating charge over assets or assurances from creditworthy guarantors. These are not always available from project proponents. The result is a sub-optimal level of finance flowing to profitable energy efficiency projects.
To reduce this perception of risk, we need to standardise energy efficient projects, raise greater awareness about the sector and make energy efficiency an inherent part of the finance sector’s culture. Consider how easy and fast it is to apply for and secure a loan for a car or a house from any bank. This is because, from the lender’s point of view, the risks are understood, the recourse is clear and there are institutionalised practices relating to the asset class. We need to build structures that will allow energy efficiency investments to be as easily understood and just as commonplace for a wide range of potential investors.
The efforts by the US non-profit Efficiency Valuation Organization to disseminate standard protocols to measure and verify energy savings and to train certified energy savings professionals are good steps in the right direction. We need to be able to demonstrate the impact and progress of energy efficiency initiatives to prove their importance in meeting greenhouse gas emission reduction targets and to inspire others.
The Copenhagen Centre on Energy Efficiency acts as a coordinator for a range of global public-private energy efficiency partnerships, known as “Accelerators” under the Sustainable Energy for All initiative, aiming to scale up efforts and impacts in various high energy use sectors including buildings, transport, district heating and cooling, lighting and appliances, and industry.
We are developing, in conjunction with various cities, a project aggregation model based on the common challenges and opportunities cities face to improve energy efficiency in, for instance, street lighting, municipal buildings or public transport. We are also working to bundle individual initiatives into single projects to reduce costs and hopefully attract larger scale investors. This approach is garnering strong interest and is vital to give isolated local successes global impact.
Source: FORESIGHT Climate & Energy