The energy efficiency first principle, which is embedded in the EU’s Energy Efficiency Directive, aims to ensure that only energy that’s needed is produced and that energy demand is reduced and managed cost-effectively, avoiding investments in stranded assets. Energy efficiency is a relatively new asset class that is often seen as technically complex.

Despite forming a key pillar in the EU’s energy strategy, the principle remains relatively invisible, with infrastructural projects often being financed with little regard to what the principle strives to achieve. The European Investment Bank (EIB) believes that energy efficiency remains a largely untapped opportunity to reach climate goals while ensuring competitiveness and energy security.

“The EIB has integrated the energy efficiency first principle into its Energy Lending Policy,” an EIB spokesperson told Euractiv. Specifically, it identifies three tiers of economic benefits.

The first tier considers energy savings, including externalities such as carbon dioxide emissions and airborne pollutants. The second focuses on the extension of the economic life of building elements, reduction in maintenance costs and increases in property value through energy efficiency projects.

The third is arguably the hardest to quantify but is about improvements in comfort and quality of living and working environments, enhanced industrial productivity, and poverty alleviation.

The EIB’s cost-benefit analysis for energy-efficiency projects incorporates Tier 1 benefits and, when applicable, those from Tier 2. Tier 3 benefits are excluded. This results in a lower-bound estimate of the project’s true economic return, the spokesperson said.

The energy-efficiency gap

A 2023 report by the Energy Efficiency Financial Institutions Group (EEFIG), a group established by the European Commission to address barriers to energy efficiency financing, concluded that the level of awareness and focus on energy efficiency is surprisingly limited in the financial sector.

“The low uptake of energy efficiency, especially in buildings, is a longstanding paradox often referred to as ‘the energy-efficiency gap’. This gap arises from incomplete information, price volatility, and factors like unpredictable weather that might influence energy consumption and, therefore, the planning of energy efficiency measures,” said the EIB spokesperson.

The EIB explained that challenges such as asymmetric information – specifically, moral hazard and price discrimination – are exacerbated by high upfront costs and the involvement of multiple stakeholders in energy efficiency investments. Fragmentation across many small beneficiaries further penalises individual investments, as energy efficiency projects often benefit from economies of scale.

Scaling up investment projects

At Aquila Capital, a clean energy-focused asset manager overseeing around €15 billion in assets, expansions of renewable energies and decreases in primary energy consumption through energy efficiency measures are referred to as behind-the-meter investments.

“However, behind-the-meter projects tend to be smaller in size and thus, financing parties face the challenge of scaling these investments,” Markus Wandt, Aquila Capital Chief Investment Officer, told Euractiv. “Therefore, it is pivotal to achieve sizable project sizes by investing in portfolios and managing complexities through standardised contracts between all parties.”

However, Aquila views energy efficiency investments as key prerequisites for achieving climate targets. Furthermore, while companies may be hesitant to invest in energy-saving measures as their focus is on the core business, Aquila says this provides financing opportunities for the financial sector.

Wandt said that from a company viewpoint, the associated cost savings by implementing energy-saving measures are usually sufficient to repay the financing partner and still leave a cost saving to the company.

Wandt added that investments in behind-the-meter projects generate returns that are usually fixed payments over a project’s lifetime that are uncorrelated to the power market. These could include efficient lighting, efficient cooling, heating and building renovation.

Such projects conserve energy, valued at opportunity cost, but also decrease negative externalities – such as pollution and health impacts –  benefiting society as a whole, a spokesperson for the EIB said.

In 2023, the EIB provided more than €21.3 billion for energy-related projects, of which €8.3 billion were for energy efficiency. This figure is up from €2.1bn in 2014.

‘Time for investing in sustainable energy is now’

“Aquila Capital has been successfully investing in behind-the-meter investments since 2019,” Wandt said. The main risks are counterparty credit risks, which need to be carefully assessed.

“However, as these projects tend to be highly profitable and these profits are shared between the counterparty and the investor, returns are usually significantly above respective listed company bond returns while additionally being senior secured with the underlying asset,” Wandt added.

Companies like Aquila Capital are convinced about the potential of sustainable investments. For the unconvinced, the EIB engages with banks and financial intermediaries through the EEFIG and a variety of tailored initiatives to address the financial sector’s perspective of energy efficiency.

However, a recent analysis by Bloomberg showed that hedge funds are betting against a green future, going long on fossil fuels while shorting batteries and solar. Wandt still believes that “the fundamentals for investment in sustainable energy and related infrastructure have rarely been better”.

He said they are anticipating a paradigm shift as the electrification of transportation and industry combined with the growth of data centres fuels interest in supplying enough energy to meet the demand over the next decade.

“Here, sustainable energy technologies such as wind and solar provide compelling and favourable marginal costs in comparison to gas and coal irrespective of regulatory support mechanisms. Thus, there is a strong case for ongoing investment in the sector,” Wandt said.

According to euractiv.com