Increasing energy efficiency is an essential element of the low-carbon economy and is crucial for achieving global greenhouse gas (GHG) emissions reductions required by the Paris Agreement. In addition to being a highly effective way to reduce such emissions, energy efficiency reduces operational costs for companies and, as a “green investment”, can spark sustainable economic recovery. Yet, despite such benefits, some investors remain reluctant to enter the market.
While energy consumption accounts for a substantial share of operating costs for small- and medium-sized enterprises (SMEs), many continue to stay clear of investments in energy efficiency measures that could positively impact their bottom lines. Overall, there is a trend to perceive investments in energy efficiency as risky, focusing instead on improvements to their core businesses, where they feel they can better gauge risks and returns, though preventing new technologies from entering the market. Others argue lack of funding in adequate terms to cover the high upfront costs of acquiring energy-efficient equipment.
How to help SMEs: The Energy Savings Insurance
The Inter-American Development Bank (IDB) is helping remove such obstacles to increase private sector investments and engagement in energy efficiency projects by SMEs. In 2014, the IDB partnered with the Danish Government to mitigate the risk perception of projects through the development of the Energy Savings Insurance (ESI) Model. Under the ESI Model, the project’s energy savings are guaranteed by an insurance policy. Distributed generation projects, mainly for photovoltaic solar energy generation, are likewise eligible. In this case, the insurance guarantees the power generated. ESI is applicable to projects for replacement of outdated equipment (brownfield projects) as well brand-new facilities (greenfield projects).
The ESI Model has been undergoing successful development in Colombia and is being replicated across the region through an alliance with National Development Banks (NDBs). ESI has been recognized by the Global Innovation Lab for Climate Finance as one of the most innovative sustainable investment solutions. The IDB’s intervention includes the development of the ESI Model’s components: mobilization of market actors, support for the development of demonstration projects, and the scaling up of the program. Since reaching the proof of concept more than 80 projects have used the ESI Model mobilizing investments of more than $18 million in less than two years.
Moreover, a series of key stakeholders have benefited from the IDB-Danish supported technical assistance, including technology providers, insurance companies, SMEs, financial institutions and validating entities. The initiative has also contributed to enhance the quality of projects by creating an ISO 50001 based protocol to estimate, monitor and evaluate energy savings or energy generation in projects. A recent publication elaborates in details of ESI and its potential market in Chile. In 2021 a series of online events to disseminate the lesson learnt are being scheduled and can be found in the Greenfinancelac portal.
The Risk Reduction Elements in Energy Efficiency Investments
This ESI Model is composed of four key elements:
- Standardized contract: A simple and clear framework for negotiations between SMEs and technology providers, in which energy savings or energy generated by the projects are guaranteed by the provider.
- Insurance: Covers potential underperformance of the project through a contract compliance guarantee granted by an insurance company. If at any time the project underperforms, the insurance will cover the shortfall for the client.
- Validation: An independent technical entity conducts a quality control review to certify that the promised energy savings or energy generation will be realized.
- Financing structure: Link green financing and projects that adopt the ESI Model. As the model brings certainty, it guarantees cash flow to projects and reduces the risks of credit repayment default, resulting in more favorable loan conditions.
The ESI model goes global
After its creation and successful implementation in Latin America, interest in the ESI Model has expanded worldwide. In 2018, the first phase of the ESI Europe project was born. BASE, who supported IDB in the outset of implementation of ESI, identified a potential investment market for energy efficiency projects estimated at EUR 1.2 billion. With funding provided by the European Commission’s Horizon 2020 Research and Innovation Programme, BASE started providing technical support in the instrument’s deployment in Italy, Portugal, and Spain, adapting ESI elements to European markets, and engaging necessary stakeholders, such as insurance companies and financial institutions.
The ESI Europe project relies on a management information system developed using blockchain technology. This technology guarantees the traceability and reliability of energy efficiency projects during the time in which the insurance is in place, which is typically five years. A commercial brand, known as “GoSafe with ESI”, was created to put a marketing strategy and promotion for the model into action.
ESI, the way forward
The creation and implementation of an innovative market instrument in Latin America and its expansion to Europe to promote investment in energy efficiency and clean energy technologies is a positive result of the international cooperation. ESI is receiving recognition and has been referenced in various international publications from USAID, Climate Policy Initiative and Swiss Sustainable Finance as an important instrument to scale up climate finance. There is plenty of room for further rolling out the model and removing some of the barriers that are holding back much-needed investments in energy efficiency and distributed generation across the world which, in turn, will contribute to the sustainable development efforts.