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How in Practice to Scale-up Energy Efficiency Projects` Private Finance

Updated: Feb 24, 2021


Why has FINforGREEN been conceived?


Whatever we talk about, when it comes to private investments, no matter what financial mechanisms we want to use (traditional or innovative), it always comes to a fundamental and unavoidable principle. Private funding takes place only in projects with an acceptable risk-return profile, guaranteeing to bring profit. This rule is also valid for energy efficiency projects. Is this possible for these types of projects, and how?



Let us open the door for green finance more widely! Here you can find our concept and tools for doing this.



Despite the damages that Covid 19 inflicted on the world in 2020 and its continuing consequences in 2021, along with the recovery of the economy, we will inevitably have to look for more effective and quick solutions to achieve climate goals. This will help and speed up the recovery from the crisis. It can also give an even greater impetus to development, combining economic and green goals through practical solutions with substantial and fast scalability potential.


It is becoming increasingly clear that Greening the economy is the new global trend. More and more people, businesses, and institutions will have to start looking and working in this direction. The two critical points of this transition are:


1. How to finance this decades-long process of necessary future huge investments?

2. How to realize climate transition smart without jeopardizing the economy, chasing CO2 cuts.... in-time?


At first glance, the two issues are far from each other. But it's actually about both sides of the same coin. Both are subordinate to the triad: Nature & The Time & The Money

It is about enough and timely money, but not only. More importantly, how to use funds wisely by maximizing the projects` effects sought by stakeholders in the process of preparation, funding, and realization of green projects.



What resources can we use to fund a project apart from our own contribution?



Public Funds: No matter how actively we work on securing public funds, they are limited. Apart from being insufficient, they are used inefficiently. In the EU, for example, the report of the EU Court of auditors says:

Cost-effectiveness does not guide EU spending on energy efficiency in buildings! -

Court of European Auditors – 2020 Report


Private finance goes primarily to large projects because their cost-effectiveness is adequately assessed, and the large transaction costs are justified. However, most of the projects are medium, small, and smaller. Private investment, as a mass phenomenon, with accessibility wherever it is needed, is a chimera. Attempts to stimulate them are not subject to a long-term vision of results with steadily growing trends and have weak or local effects. And there can be no question of achieving a scale, much less a large scale.

Until private financial institutions find a valid business reason to finance green projects, making a profit, the green funding scalability will not happen. On the one hand, this means overcoming the prejudice that green projects are very high risk and social, not projects that can generate profit.


The European taxonomy regulations will force banks to pay attention to green projects because they have to consider the achieved CO2 emissions reduction. But the taxonomy does not seek an economic effect from the emission reduction itself, i.e., it will not motivate financiers to look for economic and financial reasons to finance such projects.


The two critical points of the green transition presented above are inextricably linked and are based on one fundamental principle - the green project's cost-efficiency and funding scheme adequacy. If a project is in this category, there is no problem to be funded privately. Firstly because its risk is measurable and can be mitigated, and secondly because finding many such projects with low transaction costs means opening a new business niche for banks.


It is evident that without the active participation of commercial banks, which are everywhere, even in the smallest town, a successful, massive, and timely green transition is doomed. Green investments are needed everywhere - for buildings, for business, in cities and villages.




By searching for bankable projects to open the banks` doors widely


The problem is whether and how the stakeholders can adequately measure the project's cost-efficiency, determine its risk/return profile adequately, how this is done, and how much it costs to avoid sunk costs and be profitable.


What is a bankable green project, and what is its risk/return profile? At the moment, this is a complicated question, and its answer is difficult and expensive if everyone interested does it for themselves. It also depends on what type of climate mitigation projects we talk about.


What is the foundation of the energy efficiency project? This is the energy audit/engineering solution. The big question is how to convert the project engineering concept into a bankable project to get private funding.



Public funds as a bankability provider



Let us assume that a quantitative solution, measuring green project's cost-efficiency / CO2 cut, exists. Then, what to do if, after examination/determination of the bankability of a project, it turns out that its risk/return profile is not good enough for private finance or it is entirely financially unviable. Then we have several options to change the project's profile, but talking about funding structure and terms, there is an inevitable one:


Public funds should go only to not enough or fully financially unviable projects - as grants or/and as financial instruments… on a single project base. Each project must be given precisely as much grant as it needs to become financially viable and interesting to banks. Neither less, nor more!


It doesn't seem very easy, but it is not if we formulate and understand the basic principles of such an approach correctly. How can this be done in practice?



The Answer: Digital tools for green finance. And this is FFG:



FINforGREEN: Web-based Software (SaaS). It analyses and supports financial planning for energy efficiency and small-scale RES projects, but its principles are applicable to all green businesses.

In a series of materials, we will introduce those interested in how FFG works, who can use it, how and why.



Key takeaways:

· Without massive funding by commercial banks, climate neutrality will not happen in time

· Bankability determination of the green projects (easy, fast, and at low transaction costs) is a crucial factor for private investments surge

· Public funds – to be used only for support of the bankability of the projects, respectively for private funding rise



Next:


Major Ecosystem Stakeholders - Common Practices and Challenges

The EEPs Bankability Demystification



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