Figure 1 graphically summarizes our view of risk perception as the principal barrier to private EE investments. Key factors contributing to the perception that EE investments are riskier than other investments include:
- the intangible nature of energy efficiency, as its ‘output’ cannot be directly measured;
- the added complexity that energy efficiency sometimes brings to operations in buildings or factories; and
- costs associated with additional details of preparation and implementation, plus the scale of EE projects relative to other investments.
The elusiveness of EE benefits seems to be a significant drawback to potential investors. Contrary to other investments, energy efficiency cannot be directly measured in terms of incremental physical production. Rather, it is measured as a savings or decrement against a baseline of consumption or expense. The result is perceived complexity, which manifests itself through requirements for monitoring and verification (M&V) to confirm the savings.
Another factor contributing to the perception of energy efficiency as complex is the need for more advanced systems, processes, and even work practices embedded within EE solutions. For example, industrial managers often express concern about production down-times to install EE solutions. Some energy efficient devices (e.g., variable speed drives) may be more susceptible to voltage or frequency fluctuations on the grid. Energy efficient devices, moreover, often involve new technology with low operating experience. The highly technical realities underlying such investments result in investors demanding an implicitly higher rate of return to offset the perceived higher risk of energy efficiency projects.
Finally, a perception of high transaction costs can emerge because of the small size of EE projects relative to other projects. These factors often have a reinforcing effect; the extra requirements for M&V or complicated shared savings contracts give rise to the perception of high preparation costs relative to savings.
Case studies and data gathered for this study suggest that policies, both financial and non-financial, exist to overcome the perceived higher risk associated with EE investments. Three policies in particular – risk guarantees, training and education, and increased public-private sector collaboration – have proven both effective and complementary. Contingency financing, for instance, provides an additional amount of cash to be spent, if necessary. It can take many forms and most commonly that of a safety cushion or a direct cash injection as an equity stake. Increased public/private collaboration can also contribute to investment risk-hedging and confidence-building in investors. Training and education, including data and information sharing, serves to increase capacity building among investors and lenders, especially in emerging economies. Evidence similarly suggests that EE stakeholders are looking for increased guidance from government before scaling-up private investment in energy efficiency.
Based on this evidence, the study makes four recommendations:
- Governments should increase data gathering, information sharing and training, including a platform for continuous public-private dialogue. The study calls for the creation of an Energy Efficiency Action Network (EEFAN);[4] an international platform to enable regular co-operation and information sharing between the public and private sectors.
- Policy makers should focus on tools that reduce the perceived risk of EE projects. Financial instruments that guarantee EE projects address such risk perception. In the short term, this calls for the adequate disbursement of guarantee resources by the public sector through loan guarantee programmes (LGPs). Evidence from the case studies in China show that this form of contingency financing can help leverage private money up to four times the amount of public money invested.
- Governments should pursue the implementation of an international monitoring and evaluation protocol. Governments should continue their efforts to harmonize international M&V protocol in an attempt to decrease risk perception and actual risks of EE projects. Maintaining a contingent financing facility is administratively costly even if the facility never disburses. In the longer term, the need for increased certainty through financial instruments could be replaced by the establishment of an international M&V protocol which would create firm expectations for end-use energy efficient technologies. Provided such a framework is backed up by relevant stakeholders, it would allow the safe translation of uncertain technological potentials into certain investment streams of benefits.
