Energy efficiency and Germany’s energy transition
An ambitious shift in energy policy, such as the “Energiewende” in Germany, poses great challenges.
On the one hand, a rapid phasing-out of nuclear power requires large investment in renewables as well as grid and storage infrastructure. On the other, the energy transition will not be successful without boosting energy efficiency. Both pillars create business potential for Deutsche Bank that we are positioned to capture.
At their meeting in May 2012 the members of the Deutsche Bank Climate Change Advisory Board (CCAB) concluded that the mass financing of energy efficiency building upgrades is a key opportunity for Deutsche Bank.
Energy efficiency – Germany’s approach is currently insufficient
The German government aims to double the annual rate of renovation of buildings from 1 percent to 2 percent, but only a small percentage of residential buildings have undertaken comprehensive ‘deep retrofits’, and multi-family housing and commercial buildings are not addressed by current programmes.
Germany’s primary policy approach to energy efficiency is low-interest loans with tax incentives or grants helping to overcome the barriers people and companies face to upgrade their homes and buildings. Deutsche Bank’s retail branches work with the state-owned development bank KfW to help deliver KfW’s and our own low-interest energy efficiency loans to homes and businesses. Germany is a leader in low-cost mortgage provision.
Legislation to increase the level of tax incentives for retrofitting residential buildings is currently stuck in political deadlock between the Bundestag (lower legislative body) and Bundesrat (upper legislative body representing the 16 federal states) over concerns about cost. This is the only legislation published alongside the Government’s announcement to phase-out nuclear power that has not become law.
Analysis by Deutsche Bank Climate Change Advisors (DBCCA) concludes that low-interest loans and tax incentives do not address some of the key barriers to investment in energy efficiency. Loans require owners to take on debt that may not be possible in the current economic environment. Research also shows that markets, such as Germany, that offer low or zero cost financing for energy efficiency do not have significantly higher rates of building retrofitting.
Germany is also Europe’s largest and most mature energy services company (ESCO) market. This 1.7-2.4 billion euro market exists for ESCO companies like Siemens to accept some financial risk in delivering energy services and/or other energy efficiency improvements in exchange for payments based wholly or in part on the achievement of efficiency improvements or other performance criteria. Despite the maturity of the market, a survey of ESCOs found that this business model still faces significant barriers to growth.
Emerging financing models and Deutsche Bank’s expertise can help Germany and other countries to reduce energy use
Emerging financing models could help to overcome the political deadlock on energy efficiency financing in Germany (and elsewhere), stimulate greater investments and address concerns about the sufficiency of public resources to provide grants and low-interest loans. The emerging finance models include on-bill financing where the existing utility bill is used to provide additional security to investors (such as the UK’s ‘Green Deal’ that will launch in October), property linked finance (known as PACE in the US) and the Energy Services Agreement structure.
DBCCA research concludes that the Energy Service Agreement is the best structure (also known as an energy efficiency power purchase agreement) that offers significant near term potential to scale quickly and meet the needs of both real estate owners and capital providers in the commercial sector. ESA is a bilateral contract between a property owner and a company that develops, arranges and finances the energy efficiency retrofits. ESAs offer a clearly defined structure for outside capital to invest in the energy savings potential of a building and earn a risk adjusted return via the energy savings of a retrofit project, while addressing the barriers and structures of commercial real estate owners. The major benefit to this model is that a property owner does not have to provide up front capital an effective tool for property owners who are encumbered by existing on-book debt and it addresses the split incentive of landlords paying for CapEx but not benefitting from OpEx reductions. Some issues with this model do need to be resolved such as standardisation of project underwriting and design, clarification of investor change of contract rights and simplified processes for ESA providers to bid on government procurement contracts. The market is evolving as other markets have done and there is strong demonstrated institutional investor interest from both equity and debt providers.
Deutsche Bank has very strong expertise in energy efficiency. For instance, the bank has developed carbon accounting and assurance systems to support our own energy efficiency efforts that have resulted in ongoing energy cost savings of nearly 17 million US-Dollar and represent a 20 percent return on investment. This expertise was critical to the bank winning mandates to be the investment manager for the European Energy Efficiency Fund and the KfW Global Climate Partnership Fund. DB Climate Change Advisors have published research examining energy efficiency financing models.
Investment in renewables and infrastructure
A rapid phasing-out of nuclear power requires investment in flexible baseload power stations (gas), renewable energy, supply networks and energy storage. A large proportion of the projects in question were already on the agenda prior to Fukushima; however, they now need to be frontloaded. Until early 2011, many investments have failed because of insufficient economic/state incentives or the lack of political approval. Currently, a number of initiatives are underway to improve the framework conditions for investment. However, improving coordination and speeding up the planning and investment process even further is urgently required to meet the government’s ambitious targets.
A recent study by DLR, Fraunhofer IWES and IfnE estimates that the total investment volume for renewables will average at 17-19 billion euro per year in the next two decades. By 2050 the investment volume is expected to rise to about 22 billion euro per year. This assumes a substantial reduction of the share of photovoltaics and a significant rise of the share of wind power chart.
Flexible power stations must be built quickly in order to boost grid stability and security of supply. However, against the backdrop of the limited operating time of these power stations it is still an open question whether investors will be willing to support these kinds of projects. Governmental incentives might be necessary and the creation of a capacity market is being debated in Germany as well as in the UK.
One Herculean task is matching the increasing volumes of solar and wind energy that is produced intermittently, with consumption in order to ensure a stable power supply and avoid blackouts. Storing electrical energy is a proven means of absorbing any immediate surplus power and then making it available when required. Deutsche Bank Research analysis shows that by 2025, the requirement for short-term power storage could well double at the very least and increase still further thereafter. In the next two decades alone, the capital investment required for new energy storage systems in Germany will total around 30 billion euro.
An efficient grid infrastructure is a prerequisite for speeding up the integration of renewable energy into the electricity grid. In this context the government has decided to speed up planning processes and the expansion of the grid infrastructure in general. The ultimate goal is the Europe-wide optimisation of power generation and consumption. One condition for cross-border optimisation is the establishment and expansion of a truly European supergrid for long-distance transmission of electricity. New high-capacity transmission grids will enable more new wind capacity to be installed in future primarily in northern Europe, particularly in the North Sea region, but also in the Baltic region. The second condition is the construction of smart grids based on modern information and communications technology will enable demand-side load management in which electricity demand is adjusted more closely to supply. For the German distribution and transmission electricity networks additional investments of 40 billion euro should be necessary by 2030, while across Europe estimates of investment needs are in the range of 400-600 billion euro.
As long as the investment framework is transparent, long-term and certain, the energy transition whether in Germany or elsewhere, presents business opportunities that Deutsche Bank has the expertise to seize.