[LONDON] For energy investors, saving energy has never never been as profitable as producing it. That's starting to change, with institutions from Deutsche Bank AG to Societe Generale SA making it bankable to squeeze more out of electricity and fossil fuels.
Their efforts have the potential to channel more money into energy-saving beyond the US$45 billion reaped in 2014, blunting demand for fossil fuels and the global-warming pollution they create, according to data compiled by Bloomberg.
It's already starting to add a profitable line of lending, supported by state-backed groups such as the European Investment Bank and KfW of Germany.
By 2030, efficiency may reduce the bills of energy consumers by US$86 billion, eliminating the need for hundreds of power plants around the world, according to the International Energy Agency.
"Energy efficiency has had difficulty getting finance from banks because they're used to financing something they can see," said Jessica Stromback, chairman of Joule Assets Europe AB. "It's is about a reduction, a gap. They can't really grasp the concept of paying for something that isn't there."
For Joule Assets, investments include refitting a building in Barcelona with energy-sipping lights, heating and cooling. SocGen is considering projects that switch out incandescent light bulbs with LEDs.
Deutsche Bank expects a job it underwrote at the Polytechnic University of Madrid to cut energy use 27 per cent through replacing oil-burning boilers with natural gas and installing thermal solar.
Energy efficiency is a niche of the clean-energy business, which drew US$310 billion of investment in 2015, according to Bloomberg New Energy Finance.
Neither the London-based research arm of Bloomberg LP nor the IEA in Paris has a handle on what went into the industry last year, since it's difficult to pin down exactly what qualifies and which companies completed them.
Unlike wind farms or solar-power stations, efficiency projects don't produce anything valuable to sell like fuels. That means the profit they generate comes in saving energy that isn't used - a big challenge for accountants trying to figure out who to pay and when, as well as how to assess credit risks, according to a report by S&P Global Inc.
Barriers to investment include diversity in the structure of projects, long payback periods, small transaction sizes and a lack of a visible cash flows for debt repayment.
If the efforts work, it may have an enormous impact on energy demand. The Paris-based group estimates advancements in efficiency may suppress global oil demand growth by 23 million barrels of oil a day by 2040, more than the daily production of Saudi Arabia and Russia combined.
Investment in efficiency is growing, up 2.3 per cent in 2014, according to BNEF. The European Union has set a target to reduce energy consumption by 20 per cent by 2020. The banks starting to act include Societe Generale, putting projects into bigger chunks that investors can more easily evaluate, according to Allan Baker, global head of power. It's looking at how green bonds can finance efficiency along with debt and equity.
"Energy efficiency projects can vary enormously, from less than £1 million to £20 million (less than S$2 million to S$40.32 million). It gets a bit more interesting for banks when projects are aggregated to the size of about £30 million."
Deutsche Bank manages the 265-million euro (S$411 million) European Energy Efficiency Fund, which was set up by the European Commission with participation of European Investment Bank and Italian bank Cassa Depositi e Prestiti SpA in 2011.
It has loaned to 10 efficiency projects in six EU countries, seeking to reduce power use by at least 20 per cent. Its projects are larger than 5 million euros, but occasionally lower for those that are quick to implement and replicate, said its director, Lada Strelnikova.
The German government is offering home and factory owners at least 13 billion euros in loans and subsidies over the next four years to reduce carbon emissions, more than half of which will flow through the KfW development bank in Frankfurt.
"The cleanest and cheapest energy is the one you don't use at all," Economy Minister Sigmar Gabriel told reporters in Berlin on May 12.
Joule Assets Europe is developing a platform to standardize measures of value and assess risks in partnership with HSB Engineering Insurance Ltd. It's also building a 6.5 million-euro pipeline of efficiency projects, with the renovation of a residential bloc in Barcelona as a test case.
"Unlike other products where you're buying something tangible, you're buying the savings," said Ms Stromback.
There's still lots of lot of work before the industry finds a durable solution to making efficiency bankable, according to Thomas Rowlands-Rees, analyst at Bloomberg New Energy Finance.
"Projects are all very different from one another, physically and in terms of ownership structure," he said. "Many ideas for project aggregation don't change the fundamental problems. The industry is still searching for a well-suited mechanism."
Ms Strelnikova of Deutsche Bank was optimistic that banks can reduce the complexity of the investments they're backing. "The projects usually have different technologies, which leads to difficulty with due diligence," she said. "The market will mature and standardise at some point."