The SEAF H2020 – the Sustainable Energy Asset Framework made waves in Europe’s energy efficiency sector as a first mover in the effort to bridge the gap between finance and energy efficiency projects.
This 6-partner EU funded project, led by Joule Assets Europe, began in 2016 and closed at the end of May 2018. The eQuad platform, created under SEAF, is a marketplace for ESCOs and investors to meet and make transactions based on trust. Since commercialisation at the beginning of 2018, the platform has already successfully matched over €9m worth of small projects to deployable finance.
Despite this early success, when SEAF arrived on the scene, we were faced with persistent technical barriers that were crippling the growth of the energy efficiency market, namely the mismatched criteria of financial players and the real financing needs of the companies creating the energy efficiency projects. We are happy to say that we have seen improvements during the past two years of developing eQuad.
Mismatched fund criteria
Beyond the slow uptake of energy efficiency measures themselves, leading to a long and difficult sales cycle for project developers, a critical barrier to market growth has been the mismatch in expectations and needs between financing sources and the project developers.
At the outset of SEAF, Joule Assets Europe participated in the first of what became a series of events, Investor Days, in Brussels. This event featured some of the most prominent financial fund managers in Europe who offered energy efficiency project finance. We continued our stakeholder outreach and spoke with upwards of 25 investors that year, representing a mix of public-private funds, private equity firms, and green and commercial banks.
The outlook for realistic project finance was underwhelming. The most prominent funds’ minimum requirements were all a large ticket size, above one million per project and often above two million, with some exclusively looking at much larger projects, from five million and above. Concerning technology, these funds focused on the “low hanging fruits” – in other words, easy, tried and tested technologies such as LED lighting and HVAC.
This was a real issue – with over 40% of all potential European projects belonging to buildings from the SME sector, the average project size is well below one million euros. A sampling from the pipeline in eQuad attests to this: of 31 active projects across 7 different European countries, all input between 2017 and 2018, the median project size is at €600,000, with the smallest projects in the €18,000 to €40,000 range. These projects also look beyond lighting alone and include more complex measures such as Combined Heat Power (CHP), Waste Heat Recovery, PV, and battery storage.
However, since our first discussions with funds and after numerous stakeholder events, follow-ups, and early project-investor matchmaking, we have noticed that funds are beginning to change and adjust their criteria to meet the market’s need. Several investment firms now offer the possibility of umbrella contracts for numerous smaller projects. We have also seen efforts made at the Public-Private level – backed by the EIB, PF4EE (Private Finance 4 Energy Efficiency Fund), for example, has very recently extended its mandate to Greece and Cyprus and is looking to investing in more complex measures at the industrial scale.
More dedicated public funding for smaller energy efficiency projects also exists, such as Ireland’s Energy Efficiency Fund. We are also working with a small handful of private individuals who are currently raising funds that intend to be member state agnostic and offer flexible, off-balance sheet solutions for a wide range of technologies. This is an exciting development for the industry, and numerous other private investment firms are willing to take more financial risk in order to generate bigger returns. While funds across the EU are moving at different paces and will continue to have their own niche, it would appear that, slowly but surely, the investment community is moving toward the needs of the market.
The financial world is clearly looking to better meet the needs of project developers, such as ESCOs. However, project developers also must become more aware of how to structure projects to meet the needs of funds. ESCOs tend to focus (for a good reason) on producing technically solid projects and getting them sold. However, for funds this alone is inadequate. They need the developer to have financeable contracts, performance insurance and creditworthy clients. If the project owner does not fully consider these factors early, technically strong projects may remain unfinanceable. The effort needs to continue to be from both sides.
From both a technical and cultural perspective, therefore, (the cultural gap between the engineering and finance world is vast!), the eQuad process generates more deal flow in energy efficiency and renewables projects. The platform itself streamlines standardization, due diligence, and insurance into one simple process, ultimately creating trust between Energy Service Companies (ESCOs) and financiers, and matches bankable projects to appropriate investment. The recent launch of eQuad is a huge step forward for Europe in terms of eliminating much of the upfront technical work of prepping projects for investment on the side of the ESCO and cutting down the upfront time spent on due diligence by investors, establishing trust between both parties early on.
However, eQuad is not the full story – it does not directly influence how regulation is implemented across member states, nor does it directly propose investment criteria to investors, although we have seen a marked shift take place on both fronts. Increasingly flexible investment criteria, and improved knowledge of financing requirements on the ESCO side, means that more funds are positioned to invest in energy efficiency projects and the market continues to move in the right direction. Support, such as the eQuad platform, only becomes more effective in this context.