A new report from the Carbon Trust says investment to create demand for energy efficiency and reduce project risks in emerging economies will be critical to mobilising the scale of energy efficiency capital required to meet climate change targets.

The report, launched at the UN Climate Change Conference (COP22) in Marrakech, says there is an urgent need for a large increase in finance and a change of direction for investment in energy efficiency to help meet the ambitions of the Paris Agreement.

According to the Carbon Trust, despite the availability of the technology and the energy cost savings possible, energy efficiency remains an area of enormous untapped potential and is key to keeping global temperature increase at 2°C .

The International Energy Agency  estimates that to achieve a 2°C scenario, energy efficiency must account for 38% of total cumulative emissions reductions to 2050 (compared to 32% projected for renewables) and require global spending on energy efficiency to reach $550 billion a year by the 2030s.

In 2015, multi-lateral development banks (MDBs) committed just $2.9 billion to energy efficiency programmes, less than half the amount invested in renewables, at just 14% of their climate change mitigation investments.

The report says that for any energy efficiency finance programme to be effective, it is critical that:

• the target market is clearly defined and well understood;
• fundamental drivers for action are in place, and if not, efforts are made to strengthen them;
•  the supply chain to deliver energy efficiency is mapped, and if needed, action is taken to build its capacity;
• barriers across the supply chain are analysed comprehensively and prioritised;
• programmes are developed which target barriers systematically, with financial and technical solutions implemented in concert; and
• steps are taken so that once public support ends, the supply of, and demand for finance for energy efficiency continues.

According to the Carbon Trust, ultimately, to stimulate sustained private sector investment, programmes need to be designed that help create a market of projects with attractive rates of risk and return for financiers, including long-term finance to match the project payback period, structured in an accessible way, so that they invest in energy efficiency of their own accord.

The report makes three core recommendations:

1. Business cases for investment need to be strengthened by strong policy frameworks with the right economic and regulatory drivers. Influencing these needs to be a key objective.

2. More resources should be devoted to technical assistance than has historically been the case. Activities such as awareness-raising, pipeline generation and de-risking are essential to create sufficient demand and commitment.

3. Upskilling, equipping and accrediting suppliers and technical advisors is also critical to creating a sustainable, scalable and bankable pipeline, as they have the greatest inherent incentive to identify, appraise and deliver viable projects.

Energy efficiency most cost-effective way to tackle climate change

Report author Simon Retallack, Director at the Carbon Trust commented:

“The most cost effective way of tackling climate change is through energy efficiency. Yet too little is being invested in it and the programmes that are being funded are frequently not having the impact they should. Public funding from multi-lateral developments and governments has a critical role to play, but there needs to be a change in approach.”

“To succeed with energy efficiency, more needs to be invested in getting the right policies in place to drive change and in providing the technical support companies and households need to deploy energy efficient technology at scale. Making capital available for investment is not enough. Demand for it needs to be stimulated and a pipeline of projects created.”

The report outlines three recommendations which the Carbon Trust believes are critical to help get energy efficiency deployed at scale, based on a comprehensive review of ten energy efficiency financing programmes from across the world:

• Stronger government policy to increase the attractiveness of investment
• Increasing the awareness of opportunities and providing technical assistance can create a pipeline of projects for investment
• Building local skills and trust are key to building momentum and creating a self-sustaining market

Click here to download Available, attractive, too slow? How to accelerate energy efficiency by getting the financing for it right