25.08.20 A different incentive for energy efficiency Thomas Schmidt • 7 min.

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German companies have already plucked most of the long-hanging fruit of energy-efficiency improvements along with the government subsidies that encourage them. Offering them still more subsidies is having little effect. That’s because companies are reluctant to make big investments in energy efficiency unless the risks are lower.

By 2050, Germany aims to halve its consumption of primary energy relative to a 2008 baseline. One of its key policy mechanisms is subsidies. “The return on investment of energy efficiency,” trumpets the German Federal Ministry of Economic Affairs, “is usually higher than on investments in the capital market." Experts like Eberhard Jochem of the Fraunhofer Institute ISI concur: energy-efficiency investments frequently generate double-digit returns.

The problem is that the hefty return can take four to seven years to materialize, whereas companies typically want an investment to pay for itself within two or three years. Energy prices are another imponderable: if they decline, reducing consumption doesn’t yield a meaningful competitive advantage. Consequently, despite lavish government subsidies, German companies’ interest in further enhancing their energy efficiency has so far been tepid.

Minimizing risk

Michael Schmidt, an energy-efficiency project manager at Düsseldorf-based energy company Uniper, has an idea for enhancing companies’ savings cravings. “If companies need faster returns and less risk, the government should meet them halfway. I propose the establishment of a government-financed fund managed by Germany’s KfW Development Bank that would indemnify companies for taking the risk of investing in energy efficiency.”

The fund would work like insurance: everyone pays in, but compensation is only made to firms whose energy-efficiency investments don’t pay off. Take, for example, a company that invests €1 million to make a factory more energy efficient. It expects this investment to pay for itself within five years. If, after three years, the factory suspends operations, the fund steps in and repays the company the remaining €400,000.

To quality for this risk protection, the company must pay an upfront fee of, say, 3 percent of the total investment. Presumably only a fraction of companies will actually need to avail themselves of the risk fund.“ The fund would probably have to repay the entire investment only in very exceptional circumstances”, Schmidt says. He estimates that the fund could cope with a 10-percent default rate.

Making money instead of giving it away

The advantage for the German treasury, according to Schmidt: instead of dispensing money, the fund would likely see its assets grow, encouraging more companies to take energy efficiency seriously. The fund would also create a sense of solidarity, since all companies that use it would support and safeguard one another.

“So far, Germany’s approach has been counterproductive,” Schmidt says. In his opinion, there are two options. Germany can either abandon the goal of halving its primary-energy consumption by 2050. Or it can consider new, unconventional ideas.


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