Energy efficiency project focused funds

Europe’s goals for energy security, net zero emissions, and economic growth requires much higher levels of investment in energy efficient and sustainable technologies, particularly in buildings.
This report expands on DWS’s major EU Transformation report by focusing on energy efficiency and building renovation, which is where there is the largest green investment gap in Europe : EUR 185bn/yr.
To help avoid fossil gas shortgages in Europe in 2023 and beyond, the International Energy Agency (IEA) concludes that energy efficiency is the most important action: insulation, heat pumps and other technologies plus changing energy using behaviour in homes and businesses could meet ~56% of a fossil gas supply gap.
Energy efficiency investment of USD563bn last year, a 16% growth from 2021. Investment could reach USD840bn in 2030 under current policies or USD1.5trn in 2030 for net zero policies . In 2022 energy efficiency related investment for the first time exceeded renewable power investment of USD472bn.
Energy efficiency can create multiple benefits - energy security; improved air quality, health and wellbeing; economic stimulus and jobs; productivity; higher asset valuation; and lower financial risks.
Energy efficiency contributes to society’s energy supply. From 2016-2021, global energy final demand grew 6%. Without energy efficiency, energy demand would have been 13% higher .
Public policy changes can help ramp up investment. However, it is possible to act now to deploy capital that can contribute to Europe’s energy efficient, green and energy secure transformation.
Macro stewardship: For nearly ten years, the lead author of this paper has advised the European Commission through the Energy Efficiency Financial Institutions Group (EEFIG).
Energy efficiency is a cross-asset class opportunity. Each asset class has a different potential to contribute to Europe’s transformation: Dark green: very high; Light green: high; amber: medium. The difference is due to the need to convince others to act in some way vs. direct capital allocation. In this report we focus on project finance funds. Future reports will examine other asset classes.

1 / Energy efficiency: the first fuel

The International Energy Agency (IEA) annually publishes reports on major sources of energy, to examine trends and provide medium term forecasts. In 2013, the IEA published its first Energy Efficiency Market report^[1]. The foreword to that report stated:

“We must change the way we think about energy efficiency.

We need to start considering it a fuel, alongside oil, gas, coal, or renewable energy, even though you cannot see or transport it as you can these other energy commodities…

Investing in energy efficiency is a valuable alternative to investing in traditional supply-side fuels. By reducing or limiting energy demand, energy efficiency measures can increase resilience against a variety of risks…

The reduced energy demand stemming from energy efficiency over the past decades is larger than any other single supply-side energy source for a significant share of IEA member countries, suggesting it is not so much a “hidden fuel” but could in fact be our “first fuel”.

In 2022, the IEA found that: investment in energy demand side technologies in buildings, industry and transport reached US$563bn, larger than renewable power investment of US$472b‌^[2]n.

Reaching Europe’s climate and energy security goals will critically depend on the widespread acceleration of energy efficiency measures to green existing European buildings and infrastructure. Buildings represent 40% of Europe’s energy use.

In terms of know how there are a wide range of measures based on well-established technologies available. Whether it's LED lighting, heat pumps, waste heat recovery, combined heat and power generation based on bioenergy or energy-efficient building renovations with different types of insulation, the importance of energy efficiency on the road to climate neutrality is indisputable. And yet capital markets have largely neglected this important sector.

Investing in energy efficiency on a large scale, is a challenge due to the fragmentation of the market and the individual nature of projects. With specialized investment teams and innovative financing structures, the sector can be a highly attractive opportunity for institutional investors. Investment across multiple asset classes needs to be deployed to secure the benefits of energy efficiency for investors and society.

To advance the role of energy efficiency, in 2013, the European Commission and the United Nations Environment Programme’s Finance Initiative (UNEP FI) came together to create dialogue between financial institutions, experts and policymakers: the Energy Efficiency Financial Institutions Group (EEFIG).

The author of the report you are reading now was a founding EEFIG member and was invited to join the group’s first steering committee in 2018. In 2015, EEFIG’s first report‌^[3] “Energy Efficiency – the first fuel for the EU Economy” played a key role, in establishing energy efficiency as a key principle of Europe’s Energy Union strategy‌^[4].