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BRIEFING PAPER APRIL 2015 MAKING THE INVESTMENT PLAN WORK FOR EUROPE MOBILISING INVESTMENT FOR EUROPE’S CLIMATE AND ENERGY UNION LUCA BERGAMASCHI, JONATHAN GAVENTA AND INGRID HOLMES SUMMARY >
The European Fund for Strategic Investments (EFSI) seeks to catalyse at least €315 billion of new investment into the European economy. This is an important opportunity to deliver not just short term growth but also long term value, by directing investment to where it is most needed. >
Major investments are required for Europe’s energy transition as set out by the new Energy Union framework. The European Commission estimates that €200 billion of annual investment in energy efficiency, renewables, networks and other clean energy investments are necessary for a European Energy Union consistent with EU climate goals. >
The EFSI is a key instrument for delivering these investments. The fund needs to be carefully designed to ensure investment flows to the highest value areas, and to avoid high-‐risk, high-‐carbon investments that are incompatible with European goals. This requires explicit project selection criteria that: 1.
Exclude the most damaging projects; 2.
Prioritise projects of particular importance for EU goals, including delivering Europe’s Energy Union; 3.
Ensure consistency with changing demand and consumption patterns as Europe decarbonises its economy; 4.
Ensure that projects are economically viable once climate impacts have been included. >
EFSI should prioritise investment in areas where underinvestment has occurred due to market failures, and focus on the aggregate total private sector capital leveraged across the pipeline – rather than just on specific projects. >
In parallel, special purpose ‘investment platforms’ should also be set up for high value sectors to ensure strong and investable project pipelines and to aggregate different sources of investment. Priority areas for investment platforms to be developed could include energy efficiency retrofits in buildings, offshore electricity infrastructure in the 1 M a k i n g t h e I n v e s t m e n t P l a n w o r k f o r E u r o p e -‐ D r a f t M a r c h 2 0 1 5 North Seas region, smart cities, and climate resilient infrastructure. INTRODUCTION In December 2014, the European Commission announced a €315 billion European Fund for Strategic Investment (EFSI) with the aim of mobilizing additional investments in the real economy. The plan focuses on creating a new pulse of investment to overcome Europe’s ongoing economic malaise. While GDP and private consumption in the EU were in the second quarter of 2014 roughly at the same level as in 2007, total investment was about 15% (€430 1
billion) below 2007 pre-‐crisis figures. In certain Member States, the decline in investment has been even more dramatic, with the shortfall ranging from 25% to over 60% in the hardest-‐hit 2
Member States. 3
Figure 1: Real investment and GDP in Europe 2004-‐2014 New research by the Commission’s DG ECFIN shows that the main causes of the current weakness in investment behavior is sluggish weakness in aggregate domestic demand and the very low level of growth in the recent past, with credit factors such as deleveraging pressures in the private sector and households playing a critical role. In their conclusions, DG ECFIN points out that “there is a need to put in place policies to support capital formation in the euro area. By boosting infrastructure spending, the European Investment Plan should play a central 4
role in ensuring a sustained rebound in investment in 2015/2016.” New investments are not only needed to energise the EU economy but also to tackle the long-‐
term challenges that threaten Europe’s welfare and prosperity. These include loss of 1
DG ECFIN (2015) Why are investment levels in the EU so weak? http://ec.europa.eu/economy_finance/publications/graphs/2015-‐03-‐30_why_investment_low_eu_en.htm 2
Special Task Force (Member States, Commission, EIB) on investment in the EU (2014) – Final Task Force Report DG ECFIN (2015) Why are investment levels in the EU so weak? http://ec.europa.eu/economy_finance/publications/graphs/2015-‐03-‐30_why_investment_low_eu_en.htm 3
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DG ECFIN (2015) Investment dynamics in the euro area since the crisis http://ec.europa.eu/economy_finance/publications/qr_euro_area/2015/pdf/qrea1_section_4_en.pdf 2 M a k i n g t h e I n v e s t m e n t P l a n w o r k f o r E u r o p e -‐ D r a f t M a r c h 2 0 1 5 competitiveness, climate change, dependency on scarce and critical natural resources from outside the Union, and the volatility and unpredictability of energy and resource prices. In particular, the European Commission estimates that “the transition towards a more secure and sustainable energy system will require major investments in generation, networks and 5
energy efficiency, estimated at some €200 billion annually in the next decade”. In this context, it is essential that the economic sectors that are built up through the investment package become the foundations of Europe’s future economic prosperity, rather than inflating temporary bubbles of activity or subsidising sectors in structural decline. The energy and transport infrastructure investments made over the next few years will still be with us in 2050, by which time Europe’s economy will need to have been transitioned away from fossil fuels. The EFSI will need to bring new investment into Europe’s energy transition rather than pushing more funding into high risk, high carbon infrastructure that could ultimately become stranded as the EU meets its climate and energy goals. This briefing note sets out how the EFSI can be designed to deliver maximum benefit to Europe over both the short and the long term. EUROPE’S TRACK RECORD The recent track record of investment and stimulus spending demonstrates the importance of prioritising climate and energy objectives into investment programmes. Following the financial crisis (2008-‐2010) investment packages amounting to 3.25% of global GDP were implemented by countries around the world. Around 23% of this stimulus was allocated to low-‐carbon investment, with direct spending on improved efficiency, low-‐carbon energy, transport and R&D accounting for only $140 billion, or 8% of the total. This is almost half of the $272 billion allocated to road-‐building in the same stimulus packages. These averages also mask strong differences between countries: in Europe, only France and Germany 6
focused over 10% of their spending on low-‐carbon investment. This was a missed opportunity: five years have passed and the International Monetary Fund continues to warn that the global economy is still fragile. Europe’s recent history of public investment in infrastructure through funding instruments such as structural funds is also mixed. A consistent problem is that project valuations are based on unrealistic demand scenarios that do not take changing consumption patterns for energy and transport into account. As an example, the European Court of Auditors found that only half of 20 airports in Estonia, Greece, Italy, Poland and Spain that received EU money 7
needed EU funding, and much of the infrastructure, once built and paid for, was underused. Similarly, concerns have been raised over unrealistic demand assumptions being utilised to evaluate projects in the energy sector supported through the EU budget. The gas demand assumptions for 2030, which were used to evaluate projects under the Connecting Europe Facility, are over 70% higher than the European Commission’s projections for EU gas demand, if EU energy efficiency goals are met. This could lead to underutilised gas pipelines or liquefied 5
European Commission (2015) Framework Strategy for a Resilient Energy Union with a Forward-‐Looking Climate Change Policy E3G (2009), Delivering a Sustainable Low-‐carbon Recovery 7
European Court of Auditors (2014) EU-‐funded investments in airports provide poor value for money 6
3 M a k i n g t h e I n v e s t m e n t P l a n w o r k f o r E u r o p e -‐ D r a f t M a r c h 2 0 1 5 natural gas (LNG) terminals as Europe’s gas demand falls and therefore result in stranded 8
assets. As Europe moves to stimulate growth again through the EFSI, efforts need to be targeted to ensure long-‐term sustainable growth is delivered. ‘Growth at any cost’ is not acceptable given the environmental and societal challenges Europe faces. There needs to be a deliberate focus on financing projects with long-‐term, high socio-‐economic value if a sustained recovery is to be delivered. THE PROJECT PIPELINE Following the announcement of the EFSI, Member States have proposed a total of 2,028 projects with a total value of €1,409 billion. Other projects have been put forward by the European Commission and the European Investment Bank (EIB), and further projects may be submitted in future by private sector promoters. Analysis of the project list put forward by member states illustrates the choices at stake for Europe in the operation of the EFSI: >
The project list demonstrates a strong pipeline of projects from the low-‐carbon sector (e.g. renewables and clean transport such as rail) – and therefore no growth rationale for high carbon investments. Member States put forward €624 billion of low-‐carbon investment projects (excluding nuclear) – nearly twice the €315 billion of investment that can be supported via the EFSI. Of that, €222 billion of the proposed low-‐carbon projects can be delivered by 2017, which is double the amount of ‘shovel-‐ready’ high-‐carbon projects that have been proposed. >
However many of the projects are inconsistent with Europe’s energy transition, as they are both high risk and low public value. 20% of the project pipeline is high carbon transport and energy projects, with a further 6% focused on nuclear power. Many of these projects are exposed to the risk of becoming a stranded asset due to uncertain future demand. For example, Member States have put forward €26 billion of gas and oil infrastructure investments -‐ despite European gas demand falling by 9% over the last decade and being projected to fall even further as energy efficiency measures are delivered. Similarly, high-‐carbon transport, mainly roads and airports, makes up 75% of the proposed high-‐carbon projects put forward by Member States. However, passenger 9
transport demand has been flat over the last decade. These projects risk adding unnecessary capacity to the transport system in Europe. In addition, roads and airports have the lowest leverage potential, yet these proposed projects would require the most public money (over €200 billion) but have often delivered the least public value from past European investments. >
There are significant gaps in the project pipeline, particularly in energy efficiency and networks. Only 5% (€75 billion) of the projects listed by Member States include energy efficiency measures, smart cities or demand side management. Some countries, such as 8
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E3G (2014) Energy Security and the Connecting Europe Facility. EEA (2014) Passenger transport demand assessment 4 M a k i n g t h e I n v e s t m e n t P l a n w o r k f o r E u r o p e -‐ D r a f t M a r c h 2 0 1 5 Germany, have not put forward any single energy efficiency project. Only 3% (€39 billion) of the projects put forward include electricity networks. Yet the European Commission listed efficiency and networks as priority areas for investment when the Investment Plan for Europe was launched. Additional efforts to build a stronger investment pipeline in these areas will be needed. Figure 2: Projects proposed by Member States to the EFSI, by category HOW THE EFSI WILL WORK The EFSI works by pooling funding from the EU’s budget (mainly reallocated from the Horizon 2020 research budget and the Connecting Europe Facility infrastructure budget) with funding from the EIB and further contributions from national investment banks (such as KfW Bankengruppe, which has committed €8 billion). This fund will act as a guarantee to support both long term investments and investments by SMEs and mid-‐cap firms. The estimated leverage ratio is 1:15, leading to a total of at least €315 billion in the first instance. No proposals for earmarking or ring fencing funds for specific sectors have been put forward by the European Commission. Instead, Commission Vice President Jyrki Katainen has insisted that projects will be selected on the basis of ‘quality’. In contrast to that, the European Parliament’s Industry, Research and Energy (ITRE) Committee voted in favour of ring-‐fencing €5 billion of risk guarantees for energy efficiency projects and Germany and France agreed in a joint declaration that a sub-‐fund for energy efficiency investment for industry should be set 5 M a k i n g t h e I n v e s t m e n t P l a n w o r k f o r E u r o p e -‐ D r a f t M a r c h 2 0 1 5 10
within the EFSI and that the EFSI should prioritise efficiency renovations of public buildings. To assess the investment pipeline, the EFSI Steering Board (made up of the European Commission, the EIB and other donor institutions) will draw up a set of ‘investment guidelines’ to steer project selection. 11
The proposed EFSI regulation, as adopted by ECOFIN on 10 March 2015 , stipulates that the EFSI should support projects which: >
are consistent with Union policies, >
are economically and technically viable, >
provide additionality, and >
maximise where possible the mobilisation of private sector capital. 12
Figure 1: Structure of the European Fund for Strategic Investment 10
Conseil des ministres franco-‐allemand (2015) Déclaration commune sur l’intégration économiqu 11
ECOFIN (2015) Investment Plan for Europe Figure reproduced from European Commission EFSI website. 12
6 M a k i n g t h e I n v e s t m e n t P l a n w o r k f o r E u r o p e -‐ D r a f t M a r c h 2 0 1 5 PROJECT SELECTION The project selection criteria are not purely technical issues to resolve. How these criteria are defined and evaluated will be critical to whether investment flows into high-‐value, low-‐carbon projects. Key considerations are set out below on how the criteria put forward in the proposed EFSI regulation should be operationalised. Projects should be consistent with Union Policies Consistency with European Union climate and energy policies should be a clear requirement for the EFSI, to be reflected both through each project individually and in the balance of the overall portfolio. To ensure this, selection criteria should include: >
Negative screening to avoid investment clearly at odds with EU objectives on climate Projects demonstrably at odds with EU climate goals should be excluded from consideration for support under the EFSI. For fossil-‐fuel electricity generation, existing EIB lending criteria 13
use an Emissions Performance Standard (EPS) of 550 gCO2/kWh. This level excludes coal and lignite generation unless used in conjunction with biomass co-‐firing or carbon capture and storage (CCS), but does not limit gas-‐fired generation. The level of the EPS was calculated based on the current EU Emissions Trading Scheme (ETS) trajectory which aims at a 70% reduction in greenhouse gas (GHG) emissions in 2050 compared to 1990 levels. However, the European Council has agreed to an at least 40% reduction in GHG emissions in 2030 and has repeatedly stressed its commitment to delivering 80-‐95% economy-‐wide GHG emission reductions by 2050, which implies a near zero-‐carbon power sector. This suggests that a tighter EPS, at a level of 350 gCO2/kWh or lower, would be needed for the EFSI to stay in line 14
with EU climate objectives. >
Prioritisation of projects that add most value, including to Europe’s Energy Union In addition to negative screening of projects in contradiction with EU objectives, positive prioritisation is needed for projects that contribute the most to meeting European policy objectives. The Lisbon treaty sets out the following EU objectives in the field of energy: a)
ensure the functioning of the energy market; b)
ensure security of energy supply in the Union; and c)
promote energy efficiency and energy saving and the development of new and renewable forms of energy; and d)
promote the interconnection of energy networks. 15
Specific weighting should be applied to prioritise the projects that contribute to Europe’s energy aims, with particular priority given to projects that contribute to both energy and climate objectives. 13
EIB (2013) EIB and Energy: Delivering Growth, Security and Sustainability -‐ EIB’s Screening and Assessment Criteria for Energy Projects CER and E3G (2013) Briefing on the EIB’s new screening and assessment criteria for energy projects. 15
EU (2012) Treaty on the Functioning of the European Union 14
7 M a k i n g t h e I n v e s t m e n t P l a n w o r k f o r E u r o p e -‐ D r a f t M a r c h 2 0 1 5 >
Ring-‐fencing funds for critical areas of investment As set out above, the Commission has currently proposed no ring-‐fencing in the EFSI. The recent Energy Union Strategy Framework made it clear that a major increase in clean energy investment is needed to meet Europe’s energy and climate goals – with €200 billion per year required until 2020. Within this, it is estimated that a fivefold increase in the current rate of investment in energy efficient refurbishment just in buildings is needed to deliver the EU’s 16
2030 targets. Yet in the proposed list put forward by Member States, energy efficiency investment made up only 5% of the total pipeline. While technical assistance will be made available to help develop project proposals, the project pipeline for energy efficiency may take time to construct. This creates the risk that the EFSI could be fully allocated before a suitable project pipeline for efficiency is ready. As a result, some form of earmarking may need to be considered to ensure enough of the EFSI remains available for efficiency projects. MEP Claude Turmes and MEP Kathleen Van Brempt have successfully won the vote of the European Parliament’s ITRE Committee to pass an amendment to ring-‐fence up to €5 billion risk guarantees for energy efficiency projects 17
under the EFSI. Projects should be economically and technically viable Assessments of economic and technical viability are needed to ensure that projects are viable not only at the outset but throughout their economic life. This requires utilising demand projections that are in line with Europe delivering its energy and climate objectives. The economic life of major transport and energy infrastructure can be as long as 30-‐50 years – by which time Europe will have moved to a largely decarbonised economy. In order to assess consistency with Union policies, each project should be assessed against future demand scenarios to determine whether it is in line with the delivery of key policy objectives. Specifically: >
Projects should be viable in the context of changing demand patterns as Europe moves to a low-‐carbon economy. To create real value through the EFSI, supported projects should be viable not just in the short-‐
term, but throughout their full potential economic life. Infrastructure projects can have a productive lifespan of up to 50 years. Given that EU high level EU climate policy goals indicate – as set out above – the need to move to a near-‐zero carbon energy system by 2050 at the latest, infrastructure projects must be resilient to tightening GHG ‘budgets’ to avoid early retirement (asset stranding). To assess the risk of early retirement of assets, the economic and social profitability of projects should be evaluated against short-‐, mid-‐, and long-‐term demand scenarios in line with agreed policy objectives (including GHG, renewable energy and efficiency targets and 16
EEFIG (2015) Energy efficiency -‐ the first fuel for the EU economy: how to drive new finance for energy efficiency investments. 17
Euractiv (2015) MEPs back ringfencing Juncker Plan money by a single vote See also: ITRE Committee (2015) Draft opinion on the proposal for a regulation of the European Parliament and of the Council on the EFSI and amending Regulations 8 M a k i n g t h e I n v e s t m e n t P l a n w o r k f o r E u r o p e -‐ D r a f t M a r c h 2 0 1 5 goals for 2030 and 2050). Projects that risk being retired early due to any or all of these drivers represent poor value investments for Europe and should not be included in the EFSI. >
Projects should be economically viable in the context of volatile fossil fuel prices. Recent history has shown major volatility in oil and commodity prices: Brent crude is currently trading just above $50/barrel despite averaging above $100/barrel between 2009 and 2014. Assuming a single, stable price for oil and other commodities when evaluating the economic viability of projects would mis-‐represent the real world risks that projects are facing. Projects should be tested against a wide range of oil and commodity prices (e.g. $50-‐200/barrel for oil) and must be economically resilient to price shocks. >
Projects should be economically viable once climate impacts have been included. Negative externalities including the cost of damages due to GHG emissions should be directly taken into account when assessing the economic viability of projects. EU-‐ETS allowance prices are not a suitable measure of this, as over-‐allocation of allowances due to poor policy design has led to artificially low prices. Instead, a “social cost of carbon” (SCC) should be used. The EIB approach would be suitable starting point – through setting a shadow carbon price for project evaluation that reflects the social costs of carbon and is set at €30/tCO2 in 2015, 18
rising by €1 per year to €45/tCO2 in 2030. Projects should provide additionality The proposed EFSI regulation defines ‘additionality’ as: The support by the EFSI of operations which address market failures or sub-‐optimal investment situations and which could not have been carried out in that period under normal EIB instruments without EFSI support or to the same extent during that period under EIF and EU 19
instruments. The criteria on additionality means that the EFSI should prioritise investment in areas where underinvestment has occurred due to market failures. Such market failures are well-‐
documented in the low-‐carbon sector and include: >
For energy efficiency in buildings, market failures include split incentives between owners and beneficiaries, and frequently a failure to internalise the full range of efficiency 20
benefits >
Electricity grid projects passing through more than one jurisdiction face higher regulatory 21
barriers and transaction costs >
Renewables projects (e.g. solar PV) face a wide range of financing costs according to market location due to uncertainties on support schemes and the regulatory 22
environment 18
EIB (2014) The Economic Appraisal of Investment Projects at the EIB . of regulatory action since 2010. ECOFIN (2015) Investment Plan for Europe 20
IEA (2014) Capturing the multiple benefits of energy efficiency 21
ENTSO-‐E (2013) Incentivising European Investments in Transmission Networks 22
Agora Energiewende (2015) Current and future costs for photovoltaics 19
9 M a k i n g t h e I n v e s t m e n t P l a n w o r k f o r E u r o p e -‐ D r a f t M a r c h 2 0 1 5 >
Innovative technologies that face barriers to financing due to risk related to demonstration and deployment; and innovative products and services that face barriers to financing due to risk related to market demand and operational performance. Projects should maximise where possible the mobilisation of private sector capital The EFSI offers an important opportunity to attract underutilised sources of capital -‐ notably in the capital markets (e.g. insurers and pension funds) -‐ into new sectors including low-‐carbon energy, transport and buildings. These sectors offer high potential for mobilisation of private sector capital: in some cases, up to 85% of the investment needed for the low-‐carbon 23
transition could come from the private sector. However ensuring this investment comes forward will require a suitable investment environment, and an appropriate blend of public and private funds to ensure effective risk-‐
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sharing – which is critically important for bringing in capital markets finance. Projects of the highest social or strategic value (e.g. energy efficiency and North Seas Grid) are often the hardest to finance and will require higher levels of public financing to attract in private sector cofinancing compared to more business as usual investment in power generation or roads. As such when applying this criterion the focus should be on the aggregate total private sector capital leveraged across the pipeline – rather than an assessment of specific projects. INVESTMENT PLATFORMS In addition to ensuring project evaluation criteria are in line with Europe’s energy and climate transition, a focus is also needed on building strong and viable project pipelines in strategic sectors, such as building renovation, large scale renewables, energy networks, smart cities and climate resilient infrastructure. The proposed regulation on the EFSI (as amended by ECOFIN) includes provisions for investment platforms to be created to promote cross-‐border projects and to aggregate projects of similar types: In order to reach the target of EUR 315 billion within the shortest possible time, national promotional banks or institutions and investment platforms and funds, with support of the EFSI guarantee, should play a prominent role in identifying viable projects, developing and, where appropriate, bundling projects, and attracting potential investors. In that context, it should be possible to establish multi-‐country platforms to promote cross-‐border projects or a 25
group of projects across Member States. The development of investment platforms in key areas will be an important tool for increasing the visibility of the project pipeline, attracting potential investors, and enabling a lower cost of 23
Institutional Investors Group on Climate Change (2014) Shifting Private Capital to Low-‐carbon Investment E3G (2012) Financing the decarbonisation of European infrastructure 25
ECOFIN (2015) Investment Plan for Europe 24
1 0 M a k i n g t h e I n v e s t m e n t P l a n w o r k f o r E u r o p e -‐ D r a f t M a r c h 2 0 1 5 capital. High priority areas of focus for the creation of specific investment platforms are outlined below. The proposed EFSI regulation state investment platforms can include: “special purpose vehicles, managed accounts, contract-‐based co-‐financing or risk sharing arrangements or arrangements established by any other means via which entities channel a financial contribution in order to finance a number of investment projects”. Building renovation and retrofitting The first priority area where there is a strong opportunity to develop investment platforms to drive low-‐carbon projects is building renovation and energy efficiency. It is estimated that by delivering all the cost-‐effective energy savings in the EU, the EU could collectively save between €1 and €2 trillion, reducing gas imports by the equivalent of 80% current imports 26
from Russia and lowering prices, making this a high value area for the EFSI to focus on. Given that around €70 billion per year needs to be mobilised to 2030, there needs to be a stronger support on developing a pipeline of projects to finance. In their recent report the EU’s leading financial institutions noted that it is not so much the supply of finance but demand for finance that is holding this sector back. They also note the buildings sector will require an unprecedented level of collaboration between the public and private sectors to build the 27
investment pipeline. While some larger scale energy efficiency projects are emerging – for example the recent NAPE proposal by the German Government to tender for large-‐scale 28
refurbishment schemes and the Dutch multibillion Energiesprong for zero net energy 29
consumption social housing – this is far from the norm. Further effort to catalyse the market across the EU is needed and should be a key focus of emergent multi-‐country investment platforms. The European Investment Advisory Hub will be critical for building out capacity and 30
supporting cities and regions to bring forward financeable projects. Examples of multi-‐country investment platforms could include: >
Investment platform for the renovation of public buildings. The platform would help bundle together projects across Member States with the stated goals of refurbishing public building such as schools, kindergardens, universities, and hospitals. An EU-‐wide, €120 billion programme to make public buildings energy efficient through public-‐private partnerships, including local authorities, has been proposed by France in order to drive economic recovery through local jobs and economic sustainability for the long-‐term through creating European energy efficiency markets. This could form the cornerstone of a multi-‐country initiative to make EU’s public buildings the most energy efficient buildings in the world. In a similar way, Italy has proposed three investment projects worth over €5 26
E3G (2014), Energy efficiency as Europe’s first response to energy security EEFIG (2015) Energy Efficiency – the first fuel for the EU economy 28
BMWi (2014), Nationaler Aktionsplan Energieeffizienz 29
Transition Zero (2014), Energiesprong 30
According to the EFSI legislative proposal, “building on existing EIB and Commission advisory services, the EIAH shall provide advisory support for investment project identification, preparation and development and act as a single technical advisory hub (including on legal issues) for project financing within the EU. This shall include support on the use of technical assistance for project structuring, use of innovative financial instruments, and use of public-‐private partnerships.” European Commission (2013). 27
1 1 M a k i n g t h e I n v e s t m e n t P l a n w o r k f o r E u r o p e -‐ D r a f t M a r c h 2 0 1 5 billion to dedicate exclusively to the refurbishing of public buildings (half of it through the National Fund for Energy Efficiency launched in 2014) and the UK has proposed a project worth €500 million for upgrading the energy efficiency of its public sector buildings. In Germany, a programme for renovating all 52,000 day care facilities for children (Kindertageseinrichtungen) would help local councils and cities save on expensive energy costs and secure the health of the over 2.6 million children under 6 years old currently 31
attending German kindergardens. >
Investment platform for renovation of low income homes. High energy bills and economic hardship are causing increasing difficulties in Europe, with over 50 million of 32
people unable to properly heat or power their homes. One of the biggest causes of the energy poverty crisis is the poor condition of the housing stock. This platform could help bundle together those projects aimed at improving energy efficiency of social housing and low income homes. There are already a number of projects proposed by Member States with this specific goal. France has put forward one project worth €1.45 billion and Italy one project worth €2.25 billion. The potential is enormous especially in those Member States with the greatest exposure to Russian gas imports, such as the Central and Eastern European countries, and those with the worst housing stock, such as the UK. Analysis shows that in the UK alone upgrading all low income homes to Band C on an Energy Performance Certificate by 2025 would, in addition to eradicating fuel poverty and improving health conditions, increase employment by up to 108,000 net jobs per annum between 2020 and 2030, reduce imports of natural gas by about one third, and cut 23.6 33
million tCO2 per year by 2030. In Germany, the German Energy Agency estimates that at 34
least €5 billion per year are needed to deliver the Government objectives. However, 35
existing KfW support amounted to only €1.5 billion per year between 2012 and 2014 , leaving low income households highly exposed to rising energy prices. EFSI’s guarantees could be used to triple existing KfW support and be directed towards low income households that spend more than 10% of their income on heating costs. North Seas Offshore Grid A second area where multi-‐country investment platforms would be highly beneficial is offshore electricity infrastructure (offshore wind parks and offshore networks) in the North Seas region. Regional cooperation in this area is vital to access large-‐scale renewables at the 36
lowest cost possible and integrate the electricity markets of the 10 North Seas countries in a cost-‐effective way. It is estimated that if the current national approach continues, i.e. each country build its own renewable power and networks in isolation from their neighbours, operation and network investment costs could be between €25 and €75 billion more 37
expensive than through regional integration. 31
Statistisches Bundesamt (2012) Kindertagesbetreuung in Deutschland 2012 and Statistische Ämter des Bundes und der Länder (2015) Kindertagesbetreuung regional 2014 32
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European Commission (2015) A New Deal for Europe's Energy Consumers Cambridge Econometrics (2014) Building the Future: The economic and fiscal impacts of making homes energy efficient DENA (2012) Energetische Sanierung führt nicht zu höheren Mieten 35
M. Kopatz, Wuppertal Institut (2013) Energiewende aber fair! Wie sich die Energiezukunft sozial tragfähig gestalten lässt 36
Germany, Denmark, Sweden, the UK, Ireland, France, Belgium, the Netherlands, Luxemburg and Norway. E3G (2014), Securing Options Through Strategic Development of North Seas Grid Infrastructure 37
1 2 M a k i n g t h e I n v e s t m e n t P l a n w o r k f o r E u r o p e -‐ D r a f t M a r c h 2 0 1 5 Offshore electricity infrastructures are critical for fully decarbonising the EU’s power sector by 38
mid-‐century as well as a major driver of socio-‐economic and environmental benefits: 300,000 of high-‐skilled jobs would be created by 2030 (mainly in a wide variety of ports and cities along the North Sea’s coasts which have suffered the most from the long term decline of European shipbuilding and other traditional heavy industries), 8 GW to 19 GW of new onshore installed capacity would be saved compared to the current national approach, and 315 million tonnes 39
of CO2 emissions would be avoided by 2030. In addition, regional integration through strategic grid planning would significantly reduce the total grid lines and expensive transformer stations required along some sensitive areas of the North Sea coastlines. >
Through the creation of a Special Purpose Vehicle for the North Seas Grid it would be possible to maximize the mobilization of private sector capital on a regional basis. Over €100 billion is due to be invested in offshore infrastructure by 2030 (with the ability of 40
paying back its initial investment cost within 1 to 3 years ) and Member States and the Commission have already proposed 55 offshore wind, 30 offshore grid and 3 storage projects for a total investment value of at least €90 billion, €30 billion of which deployable 41
between 2015-‐2017. However, the current lack of coordination on infrastructure development is holding investors back from investing in the region. >
In order to coordinate regional network and offshore wind planning and thus vastly reduce investment costs, a Joint Ministerial platform should be established in charged with defining and agreeing on a clear North Sea development strategy. This could be a new regional institution or a development of the existing North Seas’ Countries Offshore Grid Initiative with an enhanced mandate. The strategy should include targets and objectives for the exploitation of resources in the North Seas linked to EU 2030 climate and energy framework and associated governance mechanisms. It will also need to include a process for driving the necessary convergence in policy and regulatory design. For example, it will be necessary to develop common approaches for accessing 42
renewables support schemes and mechanisms for allocating the associated costs. Urban networks and smart cities Cities are Europe’s social, economic, and cultural centres. With 78% of Europeans living in urban areas and nearly 85% of the EU’s total GDP being generated in cities, competitiveness hinges on the productivity and innovation capacity of cities as their ability to use available 43
inputs efficiently to drive sustainable economic growth and prosperity. Establishing an investment platform for urban networks and smart cities would help develop a critical pipeline of smart, innovative projects and increase their visibility. A number of projects have already been proposed. For example, Italy has proposed a €8.4 billion project in order to: 38
European Commission (2011) Energy Roadmap 2050 See: Norstec (2013), Capturing the long term opportunity in Europe’s Northern Seas; European Commission (2014), Study of the benefits of a meshed offshore grid in Northern Seas region 40
Tractabel Engineering, GDF Suez, Ecofys and PWC (2014) Study of the benefits of a meshed offshore grid in the Northern Seas Region. 41
E3G analysis 42
For more details see E3G (2014), Securing Options Through Strategic Development of North Seas Grid Infrastructure 43
E3G (2015) Cities at Risk 39
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realize large-‐scale urban smart grids in order to integrate renewable production, promote demand side management and diffuse electric vehicles; >
diffuse smart home technologies; >
modernize public lighting and traffic lighting; >
diffuse district heating from renewables. Climate resilient infrastructure Over the past three decades, Europe has seen a 60% increase in extreme weather events including flooding, drought and heat waves. Even if global GHG emissions are rapidly reduced in line with global goals, the trend of increasing extreme weather will accelerate over the coming decades as the impact of current increased concentrations of greenhouse gasses feeds through into the climate system. Estimates suggest climate-‐related damages in the EU might 44
rise to more than €190 billion per year in the last 3 decades of this century. Urban vulnerability to climate change is a major challenge for Europe. Cities, as interdependent, interconnected networks of people, transport, energy and communication systems are at risk from a failure in one system that causes a set of cascading system failures. Securing investment to build the kind of infrastructure that prepares European citizens for an increased occurrence of extreme whether events is therefore a key precondition of future prosperity. Local authorities will need financial support from national governments and the EU to do climate risk assessments in collaboration with local partners. They will also need capacity support to ensure that best practice approaches are employed, shared and that they are joined up to regional and cross-‐border resilience planning. The EFSI could be used in this context to establish an Adaptation Investment Platform at the EU level to finance capacity building programmes for cities and regions. Some Member States have already proposed innovative projects that would fit well with the profile of the platform and eligibility criteria. For example, Denmark put forward a €60 million project to establish a “Climate Change Adaptation Fund” that provides guaranties for loans to private real estate owners for implementing innovative sewage pipe systems to increase capacity to handle extreme rain. It is estimated that the fund could provide guarantees for activities worth €200 million and generate employment in the construction sector for approximately 1,500 people. For the coastal regions, Denmark has proposed a coastal protection project worth €40 million per year. The project should fund a “Costal Protection Analysis” to estimate the needs, risk and values of actions towards coastal protection. It is necessary for the EU’s 66,000 kilometres coastline to build resilient infrastructure that protect the environment and help develop growth and tourism. The Danish initiative would be set up in a way to include everything from new wetlands to the reopening of urban streams with surrounding buffer capacity, the relocation of residences and technical assistant to enable new sustainable buildings and flood protection. 44
Idem 1 4 M a k i n g t h e I n v e s t m e n t P l a n w o r k f o r E u r o p e -‐ D r a f t M a r c h 2 0 1 5 CONCLUSIONS The EFSI is an important opportunity to address Europe’s current economic challenges through mobilising new investment into the European economy. It is also a critical opportunity for mobilising new sources of capital towards the considerable investments required as Europe transitions its energy system and economy away from fossil fuels. It therefore has the potential to deliver value over both the short and long term. However, much will depend on the detailed design of the EFSI, including the criteria used to evaluate and prioritise projects, and the investment platforms created to aggregate multiple projects. If the wrong criteria are adopted or poor evaluations are made, there is a risk of not only missing the opportunity to integrate Europe’s investment and low-‐carbon Energy Union agendas, there is also a risk of directing EU taxpayers funds towards high-‐risk, high-‐carbon projects at risk of becoming stranded assets in future or even undermining Europe’s energy transition. To avoid this, there needs to be a deliberate focus on financing projects with long-‐term, high socio-‐economic value if a sustained recovery is to be delivered. This paper has set out the key considerations for the design of EFSI, including explicit project selection criteria that: exclude the most damaging projects; prioritise projects most aligned with EU goals; and ensure consistency with changing demand and consumption patterns. A proactive approach is also needed to developing project pipelines, and special purpose investment platforms for high value areas including energy efficiency retrofits in buildings, offshore electricity infrastructure in the North Sea’s region, smart cities, and climate resilient infrastructure. 1 5 M a k i n g t h e I n v e s t m e n t P l a n w o r k f o r E u r o p e -‐ D r a f t M a r c h 2 0 1 5