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ECEEE SUMMER STUDY PROCEEDINGS 359
Reorienting finance towards energy
eciency in the UK
Noam Bergman
SPRU – Science Policy Research Unit
University of Sussex
Brighton, BN1 9SL
UK
Tim Foxon
SPRU – Science Policy Research Unit
University of Sussex
Brighton, BN1 9SL
UK
Keywords
nancing, green investments, institutions, transition, demand
side management (DSM), institutional economics
Abstract
is paper examines the challenges associated with stimulating
large-scale investment in energy eciency and demand man-
agement measures. We focus on institutional changes necessary
for mainstream nancial institutions, such as pension funds
and insurance companies, to seriously address eciency and
demand side issues. is draws on recent literature on green
nance to examine the role of nancial institutions in trans-
forming energy systems. Recent policy-oriented research has
proposed framing energy eciency as a core part of infrastruc-
ture investment. is could enable appraising multiple social
and environmental benets of energy eciency, and overcom-
ing accounting rules which hinder fair treatment of energy ef-
ciency investments. We explore how this could be applied in
the UK context to ll the policy vacuum le by the failure of
the Green Deal. We examine the potential for this to deliver
comparable benets to other major infrastructure investments,
with the added benet of reducing supply-side investment
needs and thereby the risk of stranded assets.
However, this type of reorientation of energy eciency poli-
cies would require commitment from the mainstream invest-
ment community, which faces structural as well as behavioural
constraints on investing in low carbon options. We examine the
roles of potential funding vehicles including the Green Invest-
ment Bank and green bonds, learn from a large scale publicly
funded domestic energy eciency project, and consider new
proposed models, such as revolving funds nanced by private
investment. We draw interim conclusions and outline how fu-
ture research will draw on interviews with members of the in-
vestment community, in order to examine what further meas-
ures may be needed to overcome structural and behavioural
constraints to large-scale investment in energy eciency and
demand management measures.
Introduction
e global question of sustainable development has in recent
years shone a light on the question of nance. e United Na-
tions Environment Programme (UNEP) reports on aligning
the global nancial system with sustainable development goals
(UNEP 2015), suggesting there is a need to harness the full
potential of the nancial system in order to deliver a transi-
tion to sustainable development. is includes ‘harnessing the
public balance sheet’ through measures such as scal incentives
for investors, combining public and private nance, and more.
Further, there is growing recognition that the nance system
needs to be shaped to be better connected to the real economy.
e Global Commission on the Economy and Climate state
that the nancial system has to be transformed if it is to deliver
the scale and quality of investment needed in order to ‘green’
the system (New Climate Economy 2016), including signi-
cant investments in energy eciency in buildings, energy and
transportation. Another perspective is that large nancial in-
stitutions are enablers in energy transitions (Hall et al. 2016),
making their role vital in the pursuit of a global shi to a low
carbon energy system.
A related challenge is that the global nancial system is unsta-
ble with long-term issues like sustainability sidelined due to ex-
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360 ECEEE 2017 SUMMER STUDY – CONSUMPTION, EFFICIENCY & LIMITS
2. POLICY: GOVERNANCE, DESIGN, IMPLEMENTATION AND …
cessive leverage and short-termism (UNEP 2015). e increasing
short-termism in nance means venture capital (private nance
invested in early stage rms, with high risk but potentially high
rewards) can only play a limited role in this transition, but given
the huge investment required, public investment cannot bridge
the gap on its own (Mazzucato & Perez 2015). Overall, there is
widespread agreement that nancing sustainable development
requires reorienting the nance system, including redirecting
capital ows towards ‘critical priorities’ and away from ‘assets
that deplete natural capital’, i.e. the stock of natural resources
(UNEP 2015). However, there may now be an historic window
of opportunity to develop a more sustainable system, following
the global nancial crisis and the stronger calls for sustainable
development and international agreement on combating climate
change. Among other things, changes in the nance system, in-
cluding new nancial models and tools, are needed to achieve a
sustainable green transformation (Naidoo, 2016).
e degree of change needed to the nancial system, and the
wider economy, is itself a matter of debate. In the UK (and else-
where), there are suggestions that decarbonising the economy
is an opportunity for economic growth (Carney 2016; Black-
rock 2016; Holmes & Mabey 2009). Some reports conserva-
tively suggest that investors can gradually introduce climate
change considerations into their portfolios, as “Climate-aware
investing is possible without compromising on traditional goals
of maximizing investment returns” (Blackrock 2016), or that
the UK government should focus on maximising opportunities
in the global transition from high to low carbon economies by
creating a ‘level playing eld’ (Amon & Holmes 2016) where
energy eciency and demand response can compete with the
supply side (Holmes & Mabey 2009). However, Mazzucato and
Perez (2015) argue that the challenge is not merely to ‘x’ the
nance system, but to change the real economy to allow inclu-
sive, green growth, and that markets on their own cannot de-
liver prosperity. ey argue for ‘mission-oriented’ investment,
and drawing on parallels with the 1930s, push for a policy
focus on stimulating reluctant businesses’ desire and courage
to invest, not just making it ‘easier’ to invest. ey stress that
markets can’t nd a green direction on their own because there
is no ‘ready-made route’; the variety of green technological in-
novations, policy directives and incentives are not coherent
enough to yield certainty and growth, and therefore to attract
nance. “e problem is that there is still a somewhat funda-
mentalist understanding of the nature of the free market as
neutral and unregulated, when in fact markets would be much
more dynamic and protable if the playing eld were clearly
and intelligently tilted” (Mazzucato 2015a, p.245).
In the UK context, the Governor of the Bank of England
(Carney 2016) suggests that there is a growing (macroeconom-
ic) case for action, but also highlights ‘transition risks’ in the
shi to a low-carbon economy. is includes a lack of infor-
mation in the nance/investment world about climate-related
risk (and opportunity), where companies don’t know how to
report these risks – or even what to report – and investors, in
turn, cannot access information to assess climate-related risks
in their portfolios. Furthermore, the uncertainty around scale
and timing of (market) adjustments needed highlights the im-
portance of information for a resilient nancial system. ere
has also been an increased interest over the past several years of
the need to tackle demand, rather than ‘decarbonis[e] an ever-
increasing energy supply’ (Holmes 2010). ese observations
strengthen the case that new methods and models are needed
to tackle the risk and uncertainty around low-carbon invest-
ments, if mainstream nance is to be harnessed.
One area which requires long-term thinking (and investment)
is infrastructure. Markets alone cannot provide eective infra-
structure investments, let alone reorient nance towards sustain-
able infrastructure markets, and there is therefore a role for pub-
lic policy and public nances, with government playing a leading
role in shaping and directing action, while the private sector will
have a signicant part in infrastructure investments (Mazzucato
& Perez 2015; New Climate Economy 2016). More generally,
public policy could be best oriented towards (green) transfor-
mation by moving away from focusing on market (and govern-
ment) failures towards a framework focused on “maximising the
transformative impact of policy that can shape and create mar-
kets” (Mazzucato 2015a, p.636). is suggests focusing on the
how public policy can aect the direction of change, including
shaping and creating markets and socialising risk and rewards.
Governments’ role could be seen as establishing the frameworks,
with the private sector making the investments, with nancial
policymakers’ role helping to develop the frameworks (Carney
2016). Others highlight the importance of alliances between gov-
ernment, business and civil society actors (e.g., Schmitz 2015),
and the emerging ‘civic energy sectors’, i.e., local government
and civil society institutions and structures involved in energy
services provision, which could be a focus for such partnerships
(Hall et al. 2016). We suggest there is a gap in the literature on the
role of nancial institutions in transforming energy systems. Our
work aims to contribute to lling that gap.
is paper is part of ongoing research into the possibility of
harnessing mainstream nance in the UK to address energy
eciency and energy demand, as part of a systemic transition
towards a low-carbon energy system. e project considers the
context of a necessary shi towards sustainable development,
and the diculty in orienting large-scale nance towards low-
carbon development due to uncertainty and lack of supportive
institutions and policies. Here we focus on how nance can be
reoriented towards improving energy eciency in the UK do-
mestic sector as a salient example, considering recent initiatives
such as the Green Deal and large scale retrotting. We consider
future policies and approaches to accessing nance. ese in-
clude existing institutions and tools, such as the Green Invest-
ment Bank and green bonds, and newer ideas and initiatives
such as the European Commission’s Eciency First initiatives,
reframing energy eciency as (green) infrastructure for policy
and investment purposes, utilising revolving funds for nanc-
ing large scale domestic retrots, and developing a civic energy
sector in the UK. e paper turns to previous experience in
domestic energy eciency policy and initiatives, before mov-
ing on to consider the role of green nance and a look at how
energy eciency is framed. We then look at some new tools
and methods before a discussion of our work so far.
Domestic energy eciency
In Europe the case for improving energy eciency in buildings
is compelling due to their large share of overall energy demand,
and high potential for energy performance improvements – as
well as European Commission targets of reducing energy con-
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ECEEE SUMMER STUDY PROCEEDINGS 361
2-120-17 BERGMAN, FOXON
sumption (European commission 2011). In the UK, specically
in the domestic sector, retrotting is signicant in considering
energy eciency and greenhouse gas emissions due to the ma-
jority of residential buildings being constructed before 1980
with a slow turnover rate (Sweatman & Managan 2010). An
estimated 25% of UK carbon emissions come from domestic
energy usage, predominantly space and water heating, despite
overall trends of reducing energy use from 1990 onwards (Palm-
er & Cooper 2013). Below we describe two large scale interven-
tions in recent years: the Green Deal, a agship policy of the
previous government aimed at large scale refurbishment of UK
homes, and generally considered a failure, and the regional Kir-
klees Warm Zone scheme, largely considered a success.
THE GREEN DEAL
e Green Deal was an ambitious initiative launched in 2013
by the UK Government to encourage able-to-pay households
(i.e., households that are nancially sound) to invest in energy
eciency improvements. By using a ‘pay-as-you-save’ nance
mechanism (i.e., repaying a loan through energy bills), it aimed
to deliver large scale retrots without public subsidies in an age
of austerity (Rosenow & Eyre 2016; Hall & Caldecott 2016).
Along with the Energy Company Obligation (ECO), the Green
Deal was intended to improve residential energy eciency, re-
placing two previous policies for household emissions reduc-
tion, the Carbon Emissions Reduction Target (CERT) and the
Community Energy Saving Programme (CESP), as well as the
fuel poverty reduction programme Warm Front (Rosenow &
Eyre 2013; Marchand et al. 2015). It is widely regarded as a fail-
ure, with original intentions of refurbishing millions of homes
by 2020 failing to materialise, as only around 20,000home en-
ergy improvements were funded 2013–2015 (Hall & Caldecott
2016). Rosenow & Eyre go so far as to say, “In our view, the
Green Deal is probably the biggest failure in the history of UK
energy eciency policy” (p.141), and its introduction “resulted
in a collapse of the domestic energy eciency market” (p.144).
e failure of the Green Deal to attract householders is at-
tributed to a variety of aws in its planning and execution. For
example, Rosenow & Eyre (2016) identify three areas in which
the Green Deal met pitfalls. First, it suered from poor policy
design, with no guarantee of level of energy savings and ex-
clusion of more expensive measures, such as major refurbish-
ments. Second, it had limited nancial appeal, with interest
rates above mortgage rates or high street secured loans. Draw-
ing on surveys in one local authority, Marchand et al. (2015)
also point out high interest rates were a barrier, and in addi-
tion highlight that the upfront assessment costs, the Green
Deal Advice Reports (GDARs), were priced higher than many
households were willing to pay, increasing the upfront cost bar-
rier. And third, there was narrow engagement with consumers,
looking solely at nancial savings, when eective engagement
would consider home aspirations such as comfort, well-being
and health. is suggests that households were viewed as ra-
tional economic actors whose major barrier to refurbishment
was lack of capital, although evidence from research and energy
eciency practitioners did not support this view. Marchand et
al. (2015) also point to the lack of awareness among consumers,
but argue that saving money was the primary motivation for in-
volvement, not increasing comfort levels, suggesting a nancial
based engagement might not have been entirely mistaken. So,
while some of the reasons for failure are disputed, there seems
to be agreement that the Green Deal did not pay enough atten-
tion to successfully engaging with consumers, so as to deliver
an attractive package for widespread take-up.
In addition to the above, the Green Deal failed to leverage
private investment, resulting in a high cost to the taxpayer,
when in fact the political attraction of the Green Deal was pri-
vate nance without government support (Rosenow & Eyre
2016; Hall & Caldecott 2016). Hall & Caldecott (2016) sug-
gest the Green Deal already established an innovative nanc-
ing mechanism, but failed to achieve demand to make it work.
ey oer new policy recommendations addressing the short-
comings of the Green Deal, but still following the principles
of scal constraints on the government and leveraging private
investments. ese include creating a new home improvement
scheme, which would oer loans at lower interest rates pro-
vided by high-street banks, underwritten by the government
(‘Help to Improve’ modelled aer the ‘Help to Buy’ policy, a
UK government programme that aims to help rst time home
buyers). ey further recommend allowing households to in-
tegrate revenue from decentralised renewable energy schemes
into the home improvement loans. For example, if households
chose to nance the cost of installing renewables with a home
improvement loan, the revenue they would qualify for would
be discounted from their payments. is has the advantage of
funding feed-in taris (FITs) and the renewable heat incentive
(RHI), as domestic renewable deployment subsidies are phased
out. It is, however, worth considering whether these sugges-
tions do enough to address the failings of the Green Deal, both
as a potential policy and with regards to palatability to policy-
makers.
KIRKLEES WARM ZONE SCHEME
A variety of retrot schemes have been proposed and some
implemented with the goal of improving domestic energy e-
ciency, thereby tackling fuel poverty and reducing carbon emis-
sions. One of the largest, and arguably most successful, was the
Kirklees Warm Zone scheme (KWZ), which retrotted insula-
tion in 51,000homes in the Kirklees area in West Yorkshire in
2007–2010 (Webber et al. 2015). Webber et al. report from an
extensive research of KWZ with data from (2007) before and
aer (2011) the scheme.
KWZ was the initiative of the local authority (Kirklees Coun-
cil) and was managed by a not-for-prot local energy company
(Yorkshire Energy Services) (Webber et al. 2015). It oered
free assessments and surveys – in contrast to the Green Deal
(Marchand et al. 2015) – and where feasible, free lo and cavity
wall insulation, installed by the private sector (Webber et al.
2015). Of 176,000households, 51,000had measures installed.
e high uptake, which was similar in low, middle and higher
income areas, was ensured through sustained marketing and
household visits; quality of installations and customer engage-
ment were emphasised (ibid.).
e results of the Webber et al. study suggest the KWZ
scheme was more successful than standard methodologies
would suggest; specically, it was more eective in energy
demand reduction in middle and higher income areas than
predictions would suggest. ey attribute this to lower per-
formance gaps and rebound eects than commonly predict
-
ed. e scheme cost £20.9m, £11.7m provided by Kirklees
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Council, and the rest by power company Scottish Power (But-
terworth et al. 2011). Webber et al. (2015) estimate direct an-
nual savings of £6.2m, projecting a total 25year savings of
£148–218million, and a 14.8% saving in energy use across
participating households. Additional signicant savings de-
rive from health related benets, local economic stimulation
and a rise in house price value (Butterworth et al. 2011; Web-
ber et al. 2015).
e lessons learned from this scheme match the conclu-
sions (Frontier Economics 2015) that a coordinated, area-
based approach could help realise potential of energy ef-
ciency programmes, through supporting local markets
and overcoming behavioural barriers. Frontier Economics
highlight how direct funding from government for domes-
tic energy eciency as infrastructure adds value, for example
through use of local (authority) knowledge on fuel poor and
vulnerable households which would benet most by direct
delivery of an infrastructure programme. Attempts to repli-
cate the success of KWZ in other schemes should consider
that it was cost eective, but that it cost money, requiring an
investment of public nances, which might be more dicult
to access with austerity measures and the end of the CERT
and CESP policies.
Green finance
As noted in the previous section, nancing large scale do-
mestic energy eciency is a policy conundrum, especially in
an era of spending cuts and austerity policies. Cost-eective
opportunities to improve household energy eciency are not
being taken, with large-scale investment opportunities lim-
ited (Holmes 2010). Before the Green Deal, Holmes describes
the barriers as poor opportunities to purchase retrot pack-
ages and limited access to capital for households; insucient
capital to invest in demand reduction for energy service pro-
viders; and a perceived limited consumer demand for energy
eciency products and services among investors, reecting
the fragmented market. While the KWZ scheme successfully
addressed several of these barriers, it has not been repeated,
partly due to policy preference for market-based solutions
and limited public investment as subsidies, as seen in the
Green Deal.
e search for a way forward includes recent work on green
nance, which can be seen as allocating investment towards
sustainable technologies and energy ecient products and
services, along with developing appropriate institutions and
policies. ere are calls for international action to make green
nance more than a niche in the medium term, with green
investment seen as “a major opportunity for both long-term
investors and macroeconomic policymakers seeking to jump-
start growth” (Carney 2016, p.13).
In the UK context, the turmoil in the nance world and the
continuing lack of condence in the banks on the one hand,
and the lack of a coherent strategy for delivering decarbonisa-
tion of the economy on the other, has resulted in a short-term
lack of private capital available for investment (Holmes & Ma-
bey 2009). A green nance strategy could “combine targeted
interventions in the short term stimulus period with new poli-
cies and mechanisms to support rapid medium term expan-
sion”, but it would have to “provide a credible and transparent
investment narrative for private actors” (p.3). ey suggested
a green stimulus package could aid the UK’s recovery from the
recession, but stress that the complexity of the transition would
require changing demands and necessitate government (nan-
cial) support beyond the short term (sic) needs of the economic
crisis. However, Mazzucato and Perez (2015) argue that policies
shouldn’t be based on the ‘false assumption of the existence of
a shortage of nance’, rather the quality, not quantity, of nance
is important. Either way, public nance has an important role
to play, at least as a catalyser to attract private nance (New
Climate Economy 2016).
Two proposed tools for stimulating investment and signal-
ling policy directions are a green investment bank and green
bonds, both of which are already playing a part in UK green
nance.
GREEN INVESTMENT BANK
Following the global recession of 2008, there were suggestions
in the UK that a ‘Green Infrastructure Bank’ could catalyse pri-
vate sector investment through careful use of public nance, in
order to secure private investment in low carbon infrastructure
(Holmes & Mabey 2009). Specically in the context of domestic
refurbishment for energy eciency, Holmes (2010) considers a
Green Infrastructure Bank as a vehicle that could provide up-
front capital for householders and an aggregation of investment
opportunity for investors.
e plans for the UK’s Green Investment Bank (GIB) were
announced in March 2011 by then Chancellor George Os-
borne, amid controversy with and beyond the government
over its role and powers (Harvey 2011). It was launched in
2012 with the UK government as its sole shareholder, and its
investments are used to fund green infrastructure in the UK,
taking on ‘more dicult’ infrastructure projects and help-
ing lower the cost of capital for green projects (GIB 2017).
In a speech in June 2015 then Business Secretary Sajid Javid
announced the intentions to privatise the GIB (Javid 2015),
partly in order to attract new investors and private sector
funds. Despite assurances that the ‘green purpose’ of the
bank was being safeguarded (GIB 2017), concerns have been
raised that its fundamental role of providing ‘patient capital’
(see Mazzucato 2015b) would be lost; this concern is all the
more salient as a government green paper (HMG 2017) sug-
gests that a lack of patient capital might be reducing the UK’s
successful conversion of start-ups to successful businesses.
At time of writing, the preferred bidder chosen by the gov-
ernment is Australian investment bank Macquarie, leading
to fears of the GIB being stripped of its assets and losing its
environmental purpose (Vaughn 2017).
e GIB has so far lent almost exclusively to utility scale pro-
jects, including private power provision or large scale public
sector projects (Hall et al. 2016), in contrast, for example, to
the German public development bank KfW, which uses pro-
motional energy lending to fund many smaller scale loans (Hall
et al. 2016; KfW Bankengruppe 2012). Its contribution to the
demand side appears to be through energy eciency meas-
ures to large scale consumers, such as National Health Service
(NHS) energy eciency programmes, council street lighting
upgrades, and commercial or public retrots (GIB 2017). It has
so far not played a major role in domestic energy eciency
initiatives.
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GREEN BONDS
One of the new green nance tools suggested for sustainability
related investments are green bonds (e.g., New Climate Economy
2016). ese are bonds with proceeds that are “ring-fenced to
fund eligible climate change mitigation projects, with a focus on
renewables, energy eciency and transport” (Blackrock 2016,
p.13). ey are considered an example of a stable, long-term
investment as part of green nance (Carney 2016), a growing
investment opportunity, and a tool for xed income investors
to support climate change mitigation (Blackrock 2016). Inter-
nationally, there are calls for governments and investors to set
common standards for green bonds and scale them up in order
to unlock capital for investment and enhance liquidity need-
ed for sustainable infrastructure (e.g., New Climate Economy
2016). Holmes & Mabey (2009) also consider green bonds as
a way to raise nance for low carbon infrastructure, with “new
products for both institutional and retail investors”, and as a way
of engaging both the public and the investment community in
decarbonising the UK economy. Green bonds raised from pri-
vate investors and issued by the Green Investment Bank have
been suggested for domestic energy eciency programmes
(Holmes 2010).
In the context of (green) infrastructure, “[t]here is a strong
consensus in the investment community around the theoretical
merits of raising green bonds and that the Government should
step in with public funds to rescue failing project nance deals.”
(Holmes & Mabey 2009, p.4). ey argue that post-economic
downturn, green bonds could help long-term recovery, in crea-
tion of jobs for the future – rather than part of a cyclical scal
programme. is could instil condence in policy direction.
Further, they argue that government-backed instruments like
green bonds could help address the investment gap in green
infrastructure, by capturing investors’ attention both in the UK
and worldwide. is would help raise funds from the private
sector and consumers, rather than taxation.
Green bonds are a small but fast growing part of the xed in-
come market. ey could be issued by governments, but also by
“banks, property companies, car makers, food producers, con-
glomerates and cleantech companies” (Blackrock 2016, p.13).
Among the rst governments to act, France launched its rst
green bond in January 2017, which – unlike other government-
issued bonds – is committed to identifying and monitoring
expenditures supporting an energy and ecological transition
(Robert 2017). Indeed, these are not normal investments, and
Holmes & Mabey (2009) compare green bonds to war bonds,
as ‘cause-motivated capital’. is might be an example of ‘mis-
sion-related’ (public) investments (Mazzucato & Perez 2015),
used to drive innovation and investments in a desired direc-
tion. While the potential is there, so far green bonds, like the
Green Investment Bank, have failed to play an important role
in domestic energy eciency.
Framing energy eciency
Financing large-scale (domestic) energy eciency suers vari-
ous setbacks. In this section, we consider how a change of per-
spective might help attract investment. Evidence shows that
building energy eciency improvements are not always taken
up, even when they are cost-eective measures, both in the
domestic sector (Holmes 2010) and more broadly (IEA 2012).
Webber et al. (2015) review the many non-technical barriers
to uptake, including lack of awareness and a variety of house-
holds’ concerns around upfront cost and access to nance, but
also around risk, disruption, and a lack of trust in informa-
tion sources, suppliers and technologies. While this is partly
a demand-side issue, reframing energy eciency as a viable
investment might not only provide more nance opportunities
and help address the investment gap, but could shi help the
discourse on energy investment, which is currently largely sup-
ply side-oriented, and start to address households’ concerns.
Reframing energy eciency as an infrastructure investment,
and comparing supply and demand side investments, is one
possibility.
ENERGY EFFICIENCY AS INFRASTRUCTURE
One option to harness the nancial sector towards the demand
side of energy systems is considering aggregated energy de-
mand measures as infrastructure. For example, there is a strong
case to see home energy eciency not only as an infrastructure
issue, but as one with investment priority (UKGBC 2014; Fron-
tier Economics 2015; Amon & Holmes 2016). Frontier Eco-
nomics suggest domestic energy eciency investments (such
as insulation and draught proong and ecient boilers) t the
broad denition of infrastructure characteristics as capital in-
vestments in physical structures, as well as the broad denition
of infrastructure functions of input to the production of goods
and services, by freeing up capacity in the energy system. e
fact that this is done via demand rather than supply does not
change the economic (or energy savings) outcome. ey con-
clude that if energy eciency is seen as infrastructure, then
government intervention is required both in order to maximise
the social good of investments, and in order to overcome bar-
riers to uptake.
e role of government would be both to supply an overarch-
ing strategy and to provide capital spending where an invest-
ment gap now exists; this would help instil condence in the
markets, overcome barriers to delivery, and address market fail-
ures of previous programmes (UKGBC 2014; Frontier Econom-
ics 2015; Amon & Holmes 2016). It also has strong support from
business and local authorities (Frontier Economics 2015). e
infrastructure approach could help poorer households, create
jobs and stimulate the economy all around the UK, in addition
to energy benets of security and emissions reduction (UKGB C
2014). ere is also a nance-related logic: Frontier Econom-
ics (2015) suggest an energy eciency programme would make
a sound investment with comparable benets to other major
infrastructure investments, estimating it would bring £8.7 bn
benets to the UK (plus indirect benets such as health im-
provements), whereas approved and considered large transport
projects (London’s Crossrail, phase1 of high-speed rail connec-
tion HS2, and new roads) have estimated benets in the range
of £7.2bn–£9.9bn. An energy eciency programme under the
right policies could therefore attract investors who currently
invest in infrastructure projects. Moreover, treating energy e-
ciency projects as infrastructure means they would be subjected
to economic appraisals – these would highlight their benets,
not only their costs, and could help raise their prole, ultimately
contributing to economic growth (Amon & Holmes 2016).
From a policy perspective, State Aid regulations from the
European Commission constrains aid energy eciency meas-
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ures to 30–50% – the lowest of all environmental aid measures,
while energy infrastructure is allowed aid of a full 100% of
eligible costs (Amon & Holmes 2016). ere is also a lack of
guidance on how energy eciency measures could enter com-
petitive bidding processes to be eligible for high State Aid. Clar-
ifying the rules and dening energy eciency as infrastructure
could therefore unleash both the potential of public-private
partnerships and the power of local and regional authorities
to deliver energy eciency and demand reduction measures.
Finally, Amon & Holmes (2016) suggest shiing energy e-
ciency to the capital expenditure budget in order to signify it
is not a short-term measure, and should compete with infra-
structure expenses such as rail, road, and power supply rather
than health or education needs. e multiple benets of energy
eciency would make it competitive on these terms. In sum,
this reframing could help nance and deliver energy eciency
with multiple benets to the energy system as a whole.
LINKING SUPPLY AND DEMAND
A further consequence of the infrastructure approach is linking
energy demand and supply, as “[t]reating energy eciency as
infrastructure and integrating it into wider national infrastruc-
ture planning means supply side investment needs will fall as
projected demand falls, thus reducing the risk of asset strand-
ing and reducing costs to society” (Amon & Holmes 2016,
p.2). is approach could be extended to energy security. For
example, considering gas security, E3G (Gaventa et al. 2016)
suggest demand-side investments should be treated as energy
security infrastructure and given parity with other forms. In
other words, investments in new gas infrastructure should be
tested against other alternatives including electrication, but
also demand reduction and demand response: “demand reduc-
tion should be seen as a policy option and infrastructure invest-
ment that can be actively deployed to address energy security
problems” (p.28).
is could be achieved by least cost investment requirements
assessing both supply and demand side possibilities (Gaventa
et al. 2016). RAP (Cowart 2014) gives examples of least cost
requirements succeeding in the US, where many states require
supply-side investments to be tested against demand-side op-
tions before permits (e.g., for power plants or transmission
lines) could be issued. California’s Loading Order policy re-
quires investments in energy resources to be directed rst at
eciency and demand response. is has succeeded and “Cali-
fornia utilities and government agencies now invest well over
$1.5 billion per year in end-use eciency, leveraging much
greater investments from businesses and households” (Cowart
2014, p.2). is and other experience in North America shows
that aggregation work with customers, delivering energy e-
ciency and demand response in large quantities, can lower cost
to customers for the same level of reliability. ere is a case for
allowing demand side measures to compete against supply side
measure both in the short-term energy markets, e.g. electricity
supply, and in the longer-term capacity markets, e.g., bidding
to supply electricity in terms of megawatts of reduced power
from eciency or demand response, rather than in megawatts
of produced power (Cowart 2014). In addition to enabling an-
other route of investment in energy eciency, this linking of
supply and demand can help achieve least cost or eciency rst
goals for energy capacity and security.
New tools and models
We turn next to several current initiatives. ese are new or
existing models which have more recently been suggested as
appropriate tools for energy eciency nance, and could po-
tentially be combined with, or benet from, ideas discussed
above around reframing energy eciency and green nance
policies and institutions. ese include the European Com-
mission Energy First initiative, the revolving fund model for
nancing domestic energy eciency, and the proposed civic
energy sector institutions.
EFFICIENCY FIRST
‘Eciency First’ is the principle of considering the potential
value of investing in energy eciency in decisions about energy
system development. It was formally endorsed by the European
Commission in 2015. In practice, it means, “giving energy e-
ciency a fair chance in the models and impact assessments that
policy-makers use to make decisions, strengthening those laws
that already target eciency, and integrating it into all other
Energy Union policies” (European Climate Foundation 2016a,
p.2). Energy eciency in this context is dened as demand
management, including both energy savings, i.e., reducing the
amount of energy used in delivering energy services, and de-
mand response, i.e., shiing consumption patterns – but not
necessarily volume (European Climate Foundation 2016a).
e ECF suggests various tools and methods for nancing
energy eciency investments (European Climate Foundation
2016b). ese include: prioritising energy eciency in lending
and other criteria of redistributive policies; redening national
eciency funds as “economically sound entities pursuing a
goal of economic viability and cost recovery rather than prot
making” (European Climate Foundation 2016b, p.5); classica-
tion of energy eciency as ‘productive debt’ (i.e., the benets of
the activity being nanced are greater than the cost of the debt);
and revising the EU Emissions Trading System (ETS) revenue
recycling rules to ensure spending on end-use eciency. Amon
& Holmes (2016) are critical of the Commission, suggesting the
EU has to walk the walk of Energy Eciency First, not just talk
the talk, for example by linking energy eciency more explic-
itly to energy infrastructure planning.
A German Green Paper (BMWi 2016) considers Eciency
First in a “National Action Plan on Energy Eciency”. e aim
is “reducing energy consumption by raising energy eciency”
(p.4), specically reducing demand by investing in eciency
technologies, with remaining emissions cuts coming from re-
newables. Behaviour change is discussed primarily in the con-
text of rebound eects. eir modelling exercises suggest that
the eciency policies will increase investments in Germany, a
large part of which would be in the construction sector. Howev-
er, funding is largely expected to come from traditional instru-
ments, including direct subsidies and low-interest loans, which
might limit the appeal of this model to UK policymakers. e
paper sets out ways to further develop market solutions for en-
ergy eciency services, focusing again on traditional solutions:
technological innovations assessed by market players, market
transparency and standardisation. In the UK context at least,
our review suggests alternative ways to develop markets and
engage consumers are needed in addition to this eciency fo-
cus, two of which we present here.
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REVOLVING FUNDS
e basic principal of a revolving fund is that capital raised
can be made available more than once, as money circulates be-
tween the users and the fund. Repayment of loans with interest
replenishes the fund to make further loans. Revolving funds
are established with the intention of being self-sucient for
long periods, with initial capital coming from public sector or
private sector loans (Akvopedia 2015).
Considering revolving funds for domestic energy eciency
programmes, Gouldson et al. (2015) start from the assump-
tions that the social case for ghting climate change doesn’t
translate into a case for private investment, as businesses and
investors have short-term nancial return criteria; and that in
an age of austerity public funds are limited. erefore, nding
ways of mobilising private and public sector nance is critical.
ey therefore suggest a revolving fund model for household
energy eciency programmes, where initial funding – prob-
ably from private investors – is lent to a ‘special purpose vehi-
cle’ (SPV), which in turn in invests funds in energy eciency
measures. Households are encouraged to participate by being
oered a share of the savings generated as costs are being repaid
(and all savings once investment costs are repaid in full). e
regular payments from households to the SPV allow it to pay
installers, whilst repaying investors over a long period. e ag-
gregation from individual households to large numbers oers
both a scale of investment attractive to nance, and economies
of scale to reduce costs. e basic structure of the proposed
revolving fund is shown in Figure1.
eir modelling exercise suggests that full realistic potential
of home energy improvements would require an overall invest-
ment of £33.7billion, at £1.5 billion a month; the ‘recycled’
funds could save an estimated £8.9billion – more than 25%
– over several decades. e scheme is estimated to result in a
6.7% drop in domestic emissions – actually a fairly small sav-
ing. Importantly, they claim this type of revolving fund model
shows a large scale domestic retrot scheme (or other public
interest programmes) could essentially be made cost neutral
over time.
e model also raises important questions (Gouldson et al.
2015). For example, it requires the government to underwrite
loans to households, in order to mitigate the risk to investors;
on the one hand, this could be seen as a reasonable incentive, a
low-risk low-return investment; on the other, it could be seen
as a subsidy to the private sector through reducing risk. Also, it
limits action to economically attractive measures, which might
not be enough to meet climate change commitments. Finally,
local government and community groups could lose autonomy
in deciding local priorities and concerns.
CIVIC ENERGY SECTOR
Hall et al. (2016) focus on the role of a ‘Civic Energy Sector’
in nancing a low carbon energy transition. e civic energy
sector involves local government and civil society structures
involved in energy services provision. ese are energy systems
owned by citizens, communities, co-operatives and local au-
thorities. In contrasting the UK and Germany, Hall et al. show
that the UK frames the transition to a low carbon energy sys-
tem in terms of state creation of competitive markets, due to its
more neoliberal political economy which saw privatisation of a
national, centralised electricity system, compared to Germany’s
federalist politics and infrastructure and its co-ordinated mar-
ket economy.
In Germany, the civic energy sector is more developed than
in the UK. is is partly due to the more developed local bank-
ing system, for example, savings banks and the cooperative
banking group provide both capital and developmental support
to civic energy, including civil ownership of energy assets (Hall
et al. 2016). e public development bank KfW is a key player:
it has a strong credit rating which it uses to source capital and
oer renancing options for energy eciency loans and renew-
able energy projects, enabling the local energy sector to grow.
In the UK, energy project nance comes largely from banks
and the balance sheets of the utility companies themselves,
both relying on centralised, international sources of capital
(Hall et al. 2016). is can increase exposure to volatility, and
also limits availability to fund small or medium scale projects.
is makes it dicult for civil society energy schemes to source
investments, meaning there is a ‘nance gap’ for projects be-
low city level (ibid.). While the Green Investment Bank could
have at least partially addressed this, it predominantly invests
in larger private sector or public projects. us, while in the
UK the market based nance is structurally unsuited for sup-
porting small scale energy projects, German state policies have
allowed a network of smaller scale nancial arrangements.
Figure 1. Basic structure of a revolving fund for financing household energy eciency measures, adapted from Gouldson et al. (2015).
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Despite the remaining nance gap, the UK has a small but
growing civic energy sector, with a potential to play an impor-
tant role in nancing and supporting energy eciency and
demand side management activities. e recent government
Industrial Strategy Green Paper (HMG 2017) suggests strong-
er, better developed sectoral and local institutions are good for
economic competition. e description includes local nancial
institutions and local enterprise partnerships, compatible with
the idea of a strong civic energy sector, although the emphasis
is on the private sector, for example, giving businesses “direct
role in shaping the future of their local communities” (HMG
2017, p.120).
Discussion
ere is currently a global appetite for investment in energy ef-
ciency measures as part of sustainable development. Massive
investment is required if energy eciency is to make a real dif-
ference to reducing energy demand and mitigating greenhouse
gas emissions. One of the challenges is harnessing large scale
nance for these measures, especially in the wake of the global
recession where many countries, including the UK, are cutting
spending and implementing austerity measures. Using the ex-
ample of the UK residential sector, we consider what policies,
institutions and models might encourage mainstream invest-
ment in the demand side of the energy system. is example
is especially poignant following the closure of the UK’s main
support mechanism, the Green Deal, without a clear successor
policy in place.
e role of government is central to this discussion. is in-
cludes policies and leadership, as well as public spending. While
most of the papers reviewed here do not question the austerity
paradigm, Mazzucato & Perez (2015) state that weaker Euro-
zone countries have had too little spending in areas that create
new markets and opportunities, including R&D. Further, their
analysis shows that across Europe, privatisations in the 1990s
have caused a fall in private R&D, undermining the claims that
Europe’s nancial problems result from too much debt; in fact,
a better diagnosis is too little mission-oriented strategic spend-
ing. is puts into question the emphasis in some models on
subsidy-free policies, and highlights the need for leadership.
Transforming to a greener economy, including energy ecien-
cy, can be seen as an innovation challenge; Mazzucato (2015a)
suggests focusing on how public policy can aect the direction
of change, including shaping and creating markets and social-
ising both risk and rewards. UK government policy, however,
highlights the role of markets and suggests that while there is a
clear role for government, “[i]t is the private sector that will ul-
timately be the driving force behind our low carbon economy”
(HMG 2017, p.89).
Various analyses suggest subsidies, zero or low interest loans,
and government underwriting of loans could play a key part
in mitigating the risk for investment in energy eciency (e.g.,
Holmes 2010; Gouldson et al. 2015). e failure of the Green
Deal supports this analysis, as lack of low interest loans and
subsidies were implicated (Rosenow & Eyre 2016). By contrast,
the high uptake of the Kirklees Warm Zone retrot scheme is
partly due to public funds which allowed free assessments and
insulation measures (Webber et al. 2015). Underwriting loans
to households could be seen as a win-win policy, for example, if
most of the returns of a revolving fund were reinvested into the
fund itself; but it can also be seen as an eective subsidy to the
private sector (Gouldson et al. 2015), through socialising risks,
but not rewards, in Mazzuacto’s terms.
A variety of models and institutions for attracting invest-
ment and enabling large scale energy eciency initiatives
are available. e use of traditional instruments for nanc-
ing energy eciency in the Eciency First initiative, includ-
ing direct subsidies and low-interest loans, appeal to German
policymakers, but might make it more dicult to sell to UK
policymakers. e Green Investment Bank and green bonds
are already playing a role in green nance. ey have shown
some success in attracting private nance, but have so far had
limited eect on smaller scale demand side measures, such as
domestic retrots for energy eciency. e potential privatisa-
tion of the GIB might make it more dicult for it to fund less
proven, non-traditional investments. One of the possibilities
to increase the appeal of the residential energy eciency mar-
kets is aggregation of many small projects, potentially viewed
as infrastructure. e infrastructure approach is a powerful
one, as it shows how large scale investment could make a real
dierence in energy eciency, while lowering the cost per
household through economies of scale. If this were combined
with initiatives which take advantage of local knowledge, like
Kirklees Warm Zone, this could potentially oer an attractive
package.
A well-developed civic energy sector (Hall et al. 2016) could
help develop vehicles for future schemes. However, the pub-
lic subsidy nature of Kirklees Warm Zone is less appealing in
the current economic and policy climate, and perhaps is also
dicult to duplicate due to the centralised nature of power
and nance in the UK. Various tools which could reduce the
cost to the public purse have been suggested, including revolv-
ing fund models and funding sub-city scale projects from the
Green Investment Bank. In addition, large, centralised schemes
could lead to local government and community groups losing
autonomy in deciding local priorities and concerns (Gouldson
et al. 2015). Still, the various cases and models reviewed here
suggest that large scale energy eciency improvements which
are completely free of public subsidy might be an unrealistic
goal. In addition, this focus limits action to economically at-
tractive measures, which might not be enough to meet climate
change commitments (Gouldson et al. 2015).
Finally, the role of households and behaviour also need to
be considered. e failure of the Green Deal to engage with
consumers, compared to the door-to-door approach of Kir-
klees Warm Zone, which made use of local trusted actors,
highlights the need for engagement and the advantage of lo-
cal schemes. Further, while there is evidence that the pay-as-
you-save model is attractive to many households, the question
of those not able to pay – who are oen fuel poor and might
benet most from home retrots – needs addressing as well.
Holmes (2010) suggests sliding scales of subsidy according
to household ability to pay, although this might add layers of
bureaucracy which Kirklees Warm Zone avoided. Webber et
al. (2015) highlight how many discussions of retrot schemes
focus on technical, nancial and economic barriers to uptake
of energy eciency measures, but do not address deeply em-
bedded behaviours and practices which determine energy
use in homes (and other buildings), and ignore impacts of
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participation on behaviours and practices, beyond relying on
new technologies to change behaviour. To put it more broadly,
there is little attempt in most of the work reviewed here to
rethink energy (services) demand as such, rather a reliance
on energy eciency, i.e., new technologies and physical build-
ings. If we are serious about energy demand reduction, this
too should be considered.
ONGOING RESEARCH
In our ongoing research, we aim to continue our analysis of
these dierent models and approaches and examine what
further measures may be needed to overcome structural and
behavioural constraints to large-scale investment in energy ef-
ciency and demand management measures. Our central re-
search question in this context is therefore: How can investment
ows be reoriented towards widespread domestic energy ecien-
cy improvement and energy demand reduction? We will con-
sider the potential mismatch between policy framings around
costs and benets of interventions to households, where people
are oen portrayed as rational economic actors; and nancial
(community) framings of risks and rewards, where there is
more recognition that people are not rational actors. If the in-
vestment community is not convinced of the viability of the
policies, they will not invest in them; following the failure of the
Green Deal, new proposed policies might not be an easy sell.
We therefore see the central twin challenges as policies which
can scale up domestic energy eciency initiatives, successfully
engaging households to participate, and nding business mod-
els which can attract nance to such projects.
Our work so far suggests several interesting avenues of re-
search that could help to address the above research question.
ese include considering what challenges and risks are asso-
ciated with energy eciency investments; what market, policy
and other barriers are driving and obstructing such investment;
what innovative business models could make such investments
more viable; what policies can best support and encourage
these new models; and how can policy make public spend-
ing most eective in reorienting investment. We will draw on
interviews with members of the investment community and
policymakers to ground our research in current thinking and
attitudes, to assess the relative merits and attractiveness of the
various approaches we have begun to outline here.
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