The worldwide energy efficiency market is valued in the hundreds of billions of dollars (IEA 2014) yet most of that opportunity has yet to be tapped despite decades of policy and private sector efforts. Public interest in energy efficiency has increased worldwide of late as countries attempt to improve productivity and achieve low-cost carbon emissions reductions; however, a set of investment barriers and the global financial crisis have restricted the available public support, preventing money saving energy efficiency investments (CPI 2013).
Experience shows that financing arrangements can help overcome some of these barriers. For instance, in light of scarce public finance, public institutions in a growing number of countries are managing to reduce the energy costs and carbon emissions of public buildings without any budget outlay through energy service companies (ESCOs). ESCOs have successfully carried out public sector energy efficiency programs in countries such as the United States, Canada, Germany, Finland, and Denmark (Shonder et al., 2010) by facilitating financing arrangements known as energy performance contracting (EPC). Under the EPC model, ESCOs perform energy efficiency projects, take on the performance risk of energy-saving improvements, guarantee cost savings to the end user, and use the energy bill savings resulting from the projects to pay off the initial investment at no up-front cost to the building owner.
A lack of capital, knowledge gaps, and institutional barriers have deterred other countries from implementing similar initiatives. In Italy, ESCOs generally supply bundled energy services contracts to the public sector, including both energy-saving services and fuel supplies. This discourages the diffusion of non-bundled, “pure” EPC. Pure EPC is a more effective formula for energy efficiency; however, it is less advantageous for Italian ESCOs, who earn more money through bundled service arrangements and therefore do not offer pure EPC services. As a result, their clients miss out on energy efficiency opportunities (Zabot and Di Santo, 2013).
This CPI Brief introduces the “Energy Efficiency Milan Covenant of Mayors” program implemented by the Province of Milan and supported by a Technical Assistance grant from the European Commission’s European Local ENergy Assistance (ELENA) program and a loan from the European Investment Bank (EIB). The program is designed to facilitate and finance energy efficiency retrofits for public school buildings in municipalities participating in the Covenant of Mayors initiative. ESCOs perform the work and guarantee savings using standardized energy performance contracts with third-party financing. The program is the first in Italy covering energy savings alone and introducing pure EPC on a regional scale. No projects have yet been implemented, so the ultimate energy, cost, and emissions impacts of the program cannot be evaluated. Still, we can learn lessons from the program implementation experience to date.
We conclude that the EPC model helped the Province by 1) moving energy efficiency investment off municipal balance sheets; 2) testing a new system of incentives and contract structures in support of “efficient energy efficiency projects”; and 3) inducing participation by one local bank, partially unlocking the energy efficiency lending market. From the implementation of the program we learn that:
- Grant-based support from the ELENA facility (funded from the Intelligent Energy Programme II, managed by the EIB) and a private banking foundation was critical to enabling the Province’s initiative.
- The program successfully tested standard energy performance contracts (EPC) in the Italian ESCO market for public retrofits, mobilizing local banks and improving the governance of energy-related investments through the involvement of the Province. However, program startup costs have been higher than expected.
- The program still faces barriers from existing ESCO business models in Italy, while banks’ uncertainties with regards to the energy efficiency sector make it hard to guarantee the cost reductions and transparency needed to foster market transformation.