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June 24, 2011updated 12 Apr 2017 4:13pm

Asset finance and the Green Economy

Deals have to be properly structured so that energy cost savings can pay for the investment in technology, says Simon Corbett of Siemens Financial Services. It appears UK financiers and government alike have woken up to the practical challenges of boosting transition to a low carbon economy and how to afford it The Finance and Leasing Association is bringing leading financiers together to share experience and develop the market

By Simon Corbett

Deals have to be properly structured so that energy cost savings can pay for the investment in technology, says Simon Corbett of Siemens Financial Services.

It appears UK financiers and government alike have woken up to the practical challenges of boosting transition to a low carbon economy and how to afford it. The Finance and Leasing Association is bringing leading financiers together to share experience and develop the market. The Carbon Trust has partnered with private finance to extend and expand its small business financing scheme. The Green Investment Bank, which will co-fund low carbon infrastructure projects, seems to be going ahead. And so it goes on.

In truth, there is nothing sudden about this phenomenon. Cooperative Financial Services have been financing low carbon projects for many years. Siemens has been publishing its Environmental Portfolio record on its annual report dating back to 2008. The important cusp point reached today, however, is the realisation by government, public sector and private sector, that the bulk of funding for converting to energy efficient and low-carbon technologies will come from the private sector. Business people make considered and long-term decisions on financial arrangements which tend to be stable and sustainable over time. That is where the transparency afforded by asset finance becomes so interesting for financial directors and financiers.

Siemens’ recent research shows a clear picture of pent-up demand, held back only by corporate concerns about the affordability of energy efficient upgrades. 44% of UK firms say half their equipment is already energy-efficient, but 65% say further investments are being held back because of affordability concerns. Using private sector capital and liquidity, many energy-efficient projects can be structured so that the technology investment is totally, or largely, paid for through the energy cost savings or earnings gained through the new installation. In the manufacturing context, industrial motors have vast potential for saving energy. Motor and drive technology accounts for two-thirds of industrial energy consumption.

The potential is there – especially for auxiliary processes that do not serve production directly. Such processes include, for example, the preparation and transport of auxiliary materials, air conditioning and waste removal, as well as pumps for heating, ventilation and air conditioning. The technology for saving exists – but high acquisition costs for energy-efficient industrial drives can put off many managers – yet the purchase price accounts for less than 3% of total costs over the equipment’s lifetime. Energy costs, by contrast, account for more than 95%.

Input tariffs have changed several times in the last decade. Since this factor directly affects the rate of payback from on site power generation projects, the finance community really would like to see a long-term tariff mechanism put in place, along with risk sharing, incentives and regulations – then kept consistent over a period of many years.

In short, private sector finance, and asset finance in particular, are playing a key role in enabling conversion to a low-carbon economy – with some government encouragement. However, structuring the terms of these deals requires real experience, to accurately model reliable risk, technology performance, and rewards for end-user and financier alike.

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