Government support for green innovation should look beyond technology to finance

Nov 27, 2020

With speculation about a big announcement on green initiatives from the Prime Minister, Boris Johnson, it’s a good time to take a look at what developments in policy we would like to see supported by the government. Innovation is about more than just new technology, with innovation in process design and finance also a key area needed for scaling up solutions to cut carbon emissions.

SME energy efficiency has been a long-forgotten area of decarbonisation, with focus more on the big end of manufacturing and energy use, and to a lesser extent, household emissions. In part, this is due to the disparate nature of SMEs – they can be anything from home-based micro-businesses to businesses employing up to 250 people with a turnover of €50 million per year. And these businesses may undertake almost any activity you can think of!

This has made it hard to design a one-size-fits-all support programme for improving energy efficiency in the SME sector. But SME support is now on the radar of BEIS, and we are keen to share some ideas to start a policy discussion.

As part of the Smarter Choices project, with funding from BEIS, we are working with manufacturing SMEs to improve the energy efficiency of their buildings through installation of measures such as LED lighting, solar PV and smart heating/cooling controls. The cornerstone of the project is the auditing process, innovative financing and monitoring and verification of energy savings.

An integral part of Smarter Choices is the financing of energy efficiency improvements for SMEs, largely utilising the ESCO model. The ESCO model, or Energy Services Company, uses private finance and guaranteed energy savings to fund the costs of having measures installed. So, as an SME owner/manager, you do not have an upfront cost and the energy saving measures should payback within the period of the finance agreement. Newer models are also off-balance sheet.

This is an attractive finance mechanism for SMEs to improve their energy efficiency. However, there is a challenge for ESCOs in reducing the cost of capital to SMEs, thus making some measures more difficult to finance through the process.

This is not necessarily a barrier unique to only SME energy efficiency, but also in other sectors, particularly home energy efficiency. But the barrier of risk and subsequent higher cost of capital is problematic and an area in which government could usefully intervene.

An option, which has been trialled in some other countries, is to use public funding to provide guarantee funds and underwrite the risk, thus bringing down the cost of capital and unlocking private finance for energy efficiency in able-to-pay sectors – SMEs and homes.

While this is a little more challenging to implement than a direct grant scheme, it does have the benefit of a much higher leverage factor for public funding. It also has the added benefit of developing private finance for energy efficiency – an area that is still very limited despite many years of discussion.

And if we are going to achieve our ambitious and necessary targets to decarbonise the economy, increasing leverage and private finance and investment will be essential as public funding is just not enough.

About author, Brooke Flanagan

Brooke Flanagan is a founding Director of Future Climate. She works on policy, research and practice in energy efficiency, carbon emissions reduction and energy poverty. Brooke has been working in the environmental, energy, waste and local government sectors in the UK, Europe and Australia , for government, industry and charities, for over 20 years. Brooke has undertaken research, campaigned and delivered projects on a range of issues including consumer behaviour on energy and climate change, smart city solutions, sustainable energy finance, waste and recycling, and nature conservation.