Stijn Santen, Director CO2-Net: How do we use capital to realize energy transition?
Mario Draghi, the president of the European Central Bank, has announced the bank is initiating the purchase of a total of 1,140 billion Euros of government bonds this month, analogous to the successful ‘quantitative easing' in the US. It is close to the amount of 1,000 billion Euros which, in the view of the European Commission, should be invested in the European energy infrastructure to realize the EU's energy and climate targets. However, many economists are sceptical about the impact of the ECB operation with respect to economic growth and investments. They have good reason to be sceptic.
SMEs, the engine of job creation and innovation, is highly dependent on bank debt financing for investments. And this financing is thin on the ground. Banks are required to hold a bigger capital buffer and take fewer risks. If Draghi's 1140 billion won't make a change, economic growth and investment will also fall short.
On the other hand, the large industrial energy-intensive multinationals are sitting on a historically high mountain of cash. They can also borrow money virtually for free in the bond market. Still, the level of investment by these multinationals has been low for years, both in the Netherlands and the rest of Europe. Strategic uncertainty and, in some areas, global overcapacity play a role.
'Investment opportunities for energy-saving measures with a higher return than 15% are currently not implemented.'
It's tempting to try to match these two groups of companies and see what the impact is on energy efficiency. This is the most important and cost-effective factor when it comes to reducing CO2 emission, improving competitiveness of companies and, as a result, the export position and trade balance of the Netherlands. This issue specifically applies to the Netherlands, which has a very large share in the energy- and capital-intensive industry. In terms of sales, our chemical industry is the number 2 in Europe, with a higher turnover than the German chemical sector.
On average, there is a potential to save approximately 10% on energy in energy-intensive industries, yielding a return on capital of 15%. This is a significant number, as energy costs are an important part of production costs. However, investment opportunities for energy-saving measures with a higher return than 15% are currently not implemented. Financial data by Reuters show that companies from this sector rarely achieve a five-year average return on capital of 15%. Ergo, investments in energy savings increase the average return on capital. This would please shareholders and bring us closer to the social targets of energy efficiency and CO2 reduction.
Part of these investments will end up with SMEs that provide energy efficient solutions. With orders by this great solvent industries, SMEs can offer more security for bank debt financing, and as a result become the new champions in their industry.
Stijn Santen, Director CO2-Net: View his TedX speech ‘How to reach global sustainability via energy efficiency in industry' or Follow Stijn Santen on Twitter.