Report on the Cost of Capital Estimation of Energy Efficiency Projects across Member State Countries

In the field of Energy Efficiency (EE) investments, plenty project ideas exist of which only a fraction is being financed, mainly either because project developers are not experienced enough in the respective procedures or they do not have the capacity or resources to persuade investors. Investors, on the other hand, lack a set of reliable EE-based criteria for the assessment and identification of the most attractive EE projects.

Cost of capital is a key indicator affecting investment decisions, signifying the investors’ desired rate of return at different risk levels. A high cost of capital indicates a high risk associated with a firm's operations, and, thus, investors tend to require an additional return to neutralise the additional risk. This is the case especially during an economic crisis, such as the current one triggered by the COVID-19 pandemic, with investors asking for higher returns to be compensated for the additional uncertainty.

The current report aims to estimate the cost of capital of EE investments from the investor’s point of view, overcoming the difficulties in estimating the cost of capital from the project’s side due to the shortage of information on critical parameters and subjectivity. It also aims to identify the project types at case study countries that serve the investors’ preferences.

EE projects performance presents a turning point related to the entailed EE technology, from which it starts to improve at a slow rate for every additional year of investment, where investors could regard this point as their optimal holding period. Moreover, the macroeconomic risk has a significant influence on the total risk of an EE project. The investor profiles analysed in the context of the current report present different preferences at each risk class, as well as a different attitude towards taking higher risk, something that can be observed from the project IRR acceptance curves constructed per investor profile in the presented report. EE project types of the Industrial sector financially outperform the Building sector's corresponding ones, producing greater profitability for investors.

The findings of this report will be enhanced by the ongoing stakeholder’s consultation and incorporated in the Triple-A methodology. In particular, they will be incorporated into the Triple-A Tools[1] for benchmarking the performance of the examined EE projects, as well as reported by the Triple-A Web-based Database.