While the need to reduce carbon emissions and protect the environment is growing, the world’s energy demands continue to rise due to the global trends of urbanization and industrialization. Cities today already emit 80 percent of human-made greenhouse gases and are responsible for 75 percent of the world’s energy consumption.
The transition to a clean-energy future thus becomes increasingly urgent; however, all measures to drive this transition forward come with its own set of challenges – as well as massive costs. According to World Bank estimations, climate change adaptation costs will rise to $80-100 billion per year. Hence, the question to be asked is who will finance the new age of electricity?
In fact, it is estimated that one-half of the necessary reduction in emissions would have to be achieved from improved energy efficiency. Hence, we need to identify efficiency improvements in current power generation, transmission, and consumption patterns – necessitating a complete overhaul of traditional mechanisms. While green targets are increasingly finding favor within corporate agendas, a study conducted by Siemens Financial Services (SFS) highlights that an overwhelming majority of corporations find the cost of greener equipment to be the chief obstacle to green procurement policies.
Indeed, the costs to implementation of new, energy-efficient technologies are tremendous: To give you an example, figures by the US Department of Energy show that the cost of implementing Carbon Capture and Storage (CCS) at an existing power plant can increase capital costs anywhere from 25% to 80%, depending on the type of plant. The capital intensive nature of renewable energy projects poses another set of issues.
After all, there is an ever-increasing gap between investment needs in these energy efficiency-projects and the cash available to cover them. Private investments and reliable investors have thus become even more important in order to get environmental projects financed at all. In particular, a financing partner that has industry expertise, who is able to understand project developers’ needs better and can also assist in identifying and procuring the best equipment/technology is the need of the hour.
With an increasing pressure to do things more cost effectively, it becomes even more important to enable efficiency gains made from technology to be routed towards financing projects. One innovative and successful solution is the energy-saving contracting model which has been pioneered by SFS to help reduce energy consumption via green technology implementation, thereby allowing stakeholders to finance their investments in new technology with the money saved on energy.
A prime example of this successful financing model is the strategic partnership Siemens entered into with Beijing Chaoyang District Government to promote energy saving and emission reduction in public buildings and other areas. Siemens Financial Services provided the district government with a five-and-a-half
year equipment leasing solution, enabling project costs to be met wholly from the savings achieved through reduced energy consumption and better operational efficiencies. This was a “zero investment plus zero risk” from the customer perspective.
Similarly, when Siemens provided its latest LED technology to power the traffic light system in Freiburg, Germany, which helped to not only lower the city’s electricity costs but also reduce carbon emissions, we developed a special financing program for the project. Spread over a 15-year term, the highlight was that installments could be fully financed from the energy savings made from the new LED technology.
A third example of a successful energy saving contract was agreed with Florida Institute of Technology (FIT). The university was keen to build a green campus making its utilities efficient and cost effective. However, when the design of the project was complete, it was just around the time of the global financial crisis; thus a creative financial solution was necessary. SFS underwrote the project and spread the payment transaction process over a 20-year period. The key was to defer the financing payment beyond the one year construction period so that the customer didn’t have to realize any out of pocket expenses. In fact, Florida Tech realized a positive cash flow from energy savings and after deducting expenses from year one.
Certainly the world will continue on the path of industrialization and urbanization; yet, at the same time, limiting the environmental impact of this progress is crucial. With integrated technology and financing solutions, making clean energy the norm could be within reach.