Speeding project deployment and unlocking finance at scale
In Europe, buildings are responsible for the largest share of final energy consumption (40%). Despite buildings presenting significant potential for CO2 reduction, change isn’t happening fast enough to meet our 2030 climate targets. Building renovation rates must triple, increasing from 1% of GDP a year today to 3%. Investment of an additional €100bn/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.
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 thousand. 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.
LAUNCH H2020: Securitization, standardization, and sustainable pipeline growth
The good news is that the money and the will to invest are present. Moreover, understanding the problem means we can find a solution. In May 2019, LAUNCH H2020, 2.5-year EU funded project that will develop and pilot standardized processes required by both investors and project contractors to evaluate projects as investment opportunity, in effort to enable the aggregation and securitization of small projects and the creation of more robust pipelines.
Joule Assets Europe, seeking to facilitate financial investment in smaller sustainability projects, leads the consortium of those working on LAUNCH H2020. The consortium includes research institution TNO (Netherlands), BNP Paribas (France/Belgium), New Energy Group (Ireland), and EnerSave Capital (Luxembourg). In addition, twenty financial firms that will review and pilot the tools being developed, have agreed to join the LAUNCH Board.
Expected project outcomes include:
Standardized, investment-grade Energy Performance Contracts (EPCs) and Power Purchase Agreements (PPAs) to enable large scale securitization of projects
Standardised risk assessment protocols to expedite investor due diligence
A toolkit for contractors seeking growth capital
Development of robust value propositions and sales support for contractors to take to market
This combination of standard investor-grade contracts and risk assessment protocols will expedite the administrative process behind project deployment by securitizing the projects themselves. Investment opportunities can be easily compared and, when necessary, projects can be sold and resold as tradeable securities, regardless of any individual firm’s investment criteria. Finally, supporting contractors in their search for growth capital and in sales development will result in the robust project pipelines that are key to qualification for project finance.
The consortium is keen to deliver on the vision of scaling project deployment through LAUNCH and encourages contractors seeking support (in either accessing project finance or growth capital) to connect. Investors (both private and public institutions) are also strongly encouraged to make contact and contribute. Real scaling of the market for sustainable energy projects requires active participation of all market players - We need all hands on deck.
Director of Marketing and Communications
Joule Assets Europe