Smart financing drives smaller energy-efficiency projects, explains Oliver Finkill, Head of Specialist Finance, Commercial Finance UK, Siemens Financial Services (SFS)
Energy transition – the state of play
The UK has a legally binding target to reach net zero by 2050 and aims to decarbonise the energy grid by 2030, with a mission to become a ‘clean energy superpower’[i].
However, meeting these targets will require significant capital investment in energy efficiency and the clean energy transition.
Around five years ago, the Government’s independent climate advisers, the Climate Change Committee, estimated that additional annual investment of over £40 billion would be needed by 2025, combining private and public investment – increasing to around £50 billion between 2030 and 2050[ii]. These financial requirements still stand.
Capitalising energy transition
In a climate of economic volatility, many organisations feel uncertain about major capital spending commitments.This uncertainty is reflected in a recent survey by Deloitte[iii]; around 60% of respondents are confident that the UK will be net zero by 2050 but many are not confident in some of the interim targets.
The answer is to raise third-party capital, leaving liquid funds free for day-to-day operations. A piece published by the London School of Economics echoes this, noting the need to “Leverage private sector investment through a clear and predictable policy framework based on a national growth, innovation and skills strategy[iv].”
The demands of smaller scale projects
In the energy transition market, we see a clear differentiation between massive infrastructure projects, and smaller energy-efficiency and clean energy initiatives.
The huge projects, such as industrial hydrogen hubs[v], usually require equity or project finance participation. They are, however, not enough on their own.
We also need investment in smaller scale, local, even portable energy-efficiency projects. Together, they will accelerate the transition.
Yet smaller companies and organisations and their energy solutions suppliers do not have the deep pockets available to fund projects. Finding financiers willing to back these smaller projects is also an issue.
Business credit conditions have tightened since the pandemic, but the story is more complex. Energy-efficiency suppliers don’t want to finance sales and tie up their own capital either.
This is where companies such as Siemens Financial Services (SFS) partner with clean technology providers to provide capital and help projects move forward.
‘Behind the meter’ drives growth as ‘pay per kWh’
A significant proportion of energy efficiency investment is ‘behind the meter’ – where organisations invest in reducing the cost of the energy they themselves consume. This applies across sectors, from business campuses, to retailers, hospitals, manufacturers and universities.
Reducing on-site consumption and/or price-per-unit provides a highly reliable demand stream; peak loads may still be topped up from the Grid. This also helps the financier to make the financing scheme affordable and cash-flow friendly. The risk profile is reliable and therefore more risk friendly. It also contrasts with small energy suppliers into the open market, who may experience volatility and unpredictability in their flow of demand.
In more sophisticated models, these projects can be delivered on a price-per-unit basis. The supplier is not selling equipment, they are selling savings, and for energy generation equipment suppliers, a guaranteed price per kWh over the financing period.
The financier must have a knowledge of the industry, its technology and how projects pay back. They must conduct due diligence to structure financing that is affordable yet mitigates risk – so it works for all parties. The ideal structure is simple to administer, but has balanced the technical financing issues (title, guarantees, collections, VAT, etc) so that risk is well managed.
Power Purchase Agreements (PPAs)
A Power Purchase Agreement (PPA) is a long-term contract between a clean energy provider and a customer. The customer agrees to purchase electricity generated by a renewable energy system at a fixed rate per kilowatt-hour (kWh), over a fixed term.
For installers of solar, wind, battery storage, and other clean technologies, PPAs are a powerful tool for business growth. By removing the budgetary barrier for customers, and the associated concerns around operation & maintenance and other risks of ownership, installers can close more deals, open the door to long-term revenue, take on larger projects, and differentiate their offering.
From an end customer’s perspective, PPAs are a practical and low-risk way to adopt clean energy without the burden of upfront capital investment. This makes clean energy immediately accessible. As adoption scales, this model plays a crucial role in accelerating the shift to a cleaner, more resilient energy system.
To give an idea of the energy-efficiency savings involved, an SFS analysis of case studies (solar, CHP, etc) found that, where installations generated no grid revenue, savings over the financing period ranged from 8% to 25% (the range varies as a result of supporting works required to integrate the solution into the existing infrastructure).
For example, a commercial solar installer partnered with SFS to deliver a 150kW rooftop system to a logistics company. With no upfront payment, the client agreed to a 20-year Power Purchase Agreement at a fixed rate below their existing utility bill – securing immediate savings. The installer was paid for the installation and secured a long-term Operation & Maintenance (O&M) contract.
Moving the dial
In conclusion, the UK’s energy efficiency and clean energy transition is well under way. Mega-projects are, however, not enough on their own to truly move the dial.
A combination of large and small energy transition projects is required to drive towards the UK’s ambitious climate targets. For the smaller initiative, expect to see more cost per kWh arrangements on the market as the technique takes off over the next few years.
Learn more about clean technology finance at Siemens Financial Services here.
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| Ollie Finkill is Head of Specialist Finance at Siemens Financial Services UK. He is a senior professional in the B2B finance world, having occupied a number of business roles in the industry, covering marketing, product development, market strategy and commercial leadership. Ollie has been with Siemens Financial Services (SFS) for over ten years and has developed an in-depth specialism in sustainability and energy efficiency markets. In his current role, he is leading the company’s development of specialised financing structures for the marine sector and clean technology, expanding SFS’s financing remit into areas such as renewable fuels from waste, resource-efficient technologies, renewable power generation, combined heat and power, and various other segments. The progress of specialist financing organisations such as SFS in offering such tailored finance is fundamentally enabling the sector to grow in step with accelerating demand. Connect with Ollie on LinkedIn. |
