Energy Investment in Smart Cities Unlocking Financial Instruments in Europe

Energy Investment in Smart Cities Unlocking Financial Instruments in Europe

Francesca Romana Medda, Candace Partridge, Gianni Carbonaro
DOI: 10.4018/978-1-4666-8282-5.ch019
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The intense pressures being brought to bear by the increasing diversity in European urban development patterns call for innovative funding mechanisms to promote smart sustainable urban development, most notably in the energy sector. Currently in Europe, various policy initiatives support sustainable urban development through financial engineering mechanisms operating at municipal and regional scales. The objective of this chapter is to review the main financial mechanisms focusing on energy, and in particular on urban investments committed to a highly energy-efficient, and low carbon, economy. Within this framework we assert that, in order to achieve the EU sustainable urban development outcomes, specific European financial instruments will need to be considered as viable key investment options. The structure and operational features of European Financial Instruments are explored here in the case of the Urban Development Fund implemented in London. We also discuss the importance of ESCOs and crowdfunding as essential funding sources for community energy projects, and suggest that European policy should recognise their importance.
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The level of urbanisation in Europe at present is approximately 75%, and it is expected that, from 2020 onwards, Europe will stabilise at an urbanisation level of over 80%. Against this trend, a wide range of initiatives have been carried out in the EU context focussing on the pivotal role of cities and urban areas in addressing challenges associated with sustainable resource use and management of climate change impacts. However, due to continuing, and in some cases accelerating urban growth, cities are being forced to evolve in order to address the growing pressures on their infrastructures. One path within current urban development is that of the Smart City.

Smart Cities are key in the movement toward a more carbon-neutral economy because they foster the innovation necessary to invent and adapt technologies that help with resource management by reducing consumption (Caragliu et al., 2011; Manville et al., 2014). Part of their ‘smartness’ derives from the so-called spatial intelligence of cities, which arises from the combination of technology, agglomeration economics and individual and collective intelligence (Deakin & Allwinkle, 2007; Mitchell, 2007). But this new urban paradigm, which interweaves economics and environmental, cultural and social aspects with technological advances, still has hurdles to overcome, foremost of which are insufficient financial resources and appropriate business models. Smart City projects often have difficulty raising investment for their implementation because they tend to occur over long time frames and thus offer delayed returns on their investment; furthermore, such projects must often apply new and potentially unproven technologies. Furthermore, given that Smart City projects often involve interconnecting technologies, they are likely to face significant risk exposure in the form of operational and market risk. In our view, the formulation of new types of business models for attracting investment therefore still needs to take place.

Analysis of the financial resources and tools to support urban sustainable smart development is a paramount endeavour, particularly in light of the present economic slowdown, and also in emerging economies where banking and lending markets are still unfolding. Over the years, many financial tools have been designed to tackle the funding constraints within the public sector, and above all to attract private investors. However, such tools have frequently offered short time horizons for investments and a ‘silo view’ in relation to their financial returns. Whereas it is possible in Smart Cities to direct investments toward production, such as photovoltaic and thermal technologies, and consumption, such as the use of smart meters, but in both cases smart energy investments require the commitment of authorities, operators and citizens in the design and construction of effective services and infrastructures through integrated action.

Most greenhouse gas (GHG) emissions emanate from urban regions and therefore the response of city authorities to climate change and energy consumption is critical both to the achievement of climate and energy targets, and in the design and implementation of sustainable investment strategies. In particular, the increasingly popular use of Infrastructure and Energy funds for financing smart city projects is endorsed by scholars who agree that they are especially suited to support sustainable growth. Nonetheless, when we consider urban investment in smart energy, these financial tools have some limitations. For example, Infrastructure and Energy funds generally lack an integrated approach and thus do not cohere with city development strategies. Therefore, in recent years, major support and interest has been building with regard to financial instruments which can fill the gap in the market of funds dedicated to sustainable urban development. Within this framework, the objective of this chapter is to review the main financial mechanisms that have been designed to achieve highly energy-efficient, low carbon economies in cities.

Key Terms in this Chapter

Community Energy Projects: Are projects that are built through local engagement and collectivism, where the community benefits from energy and revenues generated by the projects. These projects involve collective action to reduce energy consumption and encourage decentralised generation of energy, often with the aims of decarbonising local economies and democratising energy governance.

Integrated Planning: An approach to urban planning aimed at designing a sustainable and socially cohesive urban environment, which takes into account the linkages between a broad range of variables and stakeholders in order to achieve an optimal and community-shared outcome.

Energy Action Plans (EAPs): Are documents where a national or local entity sets out energy targets and explains the mix of technologies they plan to use along with any measures they will undertake in order to overcome encourage the development of renewable energy.

Energy Performance Contract (EPC): The UK Energy Efficiency (Encouragement, Assessment and Information) Regulations act of 2014 gives the meaning of “energy performance contract” as “a contract under which energy efficiency measures are: a) provided; b) verified and monitored during the whole term of the contract; and c) paid for by reference to a contractually agreed level of energy efficiency improvement or other agreed criterion such as financial savings.”

ESCO: An energy service company or energy savings company is a commercial or non-profit service provider that facilitates a wide range of energy savings projects, including retrofitting, energy conservation, power generation, and risk management, usually by Energy Performance Contracting (see below). Directive 2006/32/EC of the European Parliament and of the Council of 5 April 2006 on Energy End-use Efficiency and Energy Services (Energy Services Directive) defines an ESCO as “a natural or legal person that delivers energy services and/or other energy efficiency improvement measures in a user’s facility or premises, and accepts some degree of financial risk in so doing. The payment for the services delivered is based (either wholly or in part) on the achievement of energy efficiency improvements and on the meeting of the other agreed performance criteria.”

Urban Development Fund (UDF): An Urban Development Fund (UDF) invests in public-private partnerships and other projects included in an integrated plan for sustainable urban development. A UDF can be a separate legal entity or be established as a “separate block of finance” within an existing financial institution. UDFs can be established at either a national, regional or local/city level in response to integrated urban development plans, project pipelines and investor interests.” .

Sustainable Energy Action Plans (SEAP): Developed by many cities in the context of the Covenant of Mayors, are “the key document in which the Covenant signatory outlines how it intends to reach its CO 2 reduction target by 2020. It defines the activities and measures set up to achieve the targets, together with time frames and assigned responsibilities.”,50-+.html .

JESSICA (Joint European Support for Sustainable Investment in City Areas): Is a range of financial tools that are used including equity investments, loans, and guarantees that offer new opportunities for the use of EU Structural Funds. Investments are delivered to projects via urban development funds or holding funds, and must be in accordance with Structural Fund operational programmes agreed for the current programming period. JESSICA is a policy initiative of the European Commission (EC), developed jointly with the EIB and in collaboration with the Council of Europe Development Bank (CEB).

Smart Cities: Are the cities that use embedded digital technology to enhance quality of life and foster sustainable economic growth through improved management of resources and participatory governance. The term “smart” stems from enhanced IT systems which can be applied to energy, transport, water, waste, and other aspects of urban infrastructure.

Structural Funds: “The Structural Funds and the Cohesion Fund are the financial instruments of European Union (EU) regional policy, which is intended to narrow the development disparities among regions and Member States. The Funds participate fully, therefore, in pursuing the goal of economic, social and territorial cohesion. There are two Structural Funds: the European Regional Development Fund (ERDF) and the European Social Fund (ESF).” AU57: The URL has been redirected to Please verify the URL.

Renewable Energy (RE): Comes from “resources which are naturally replenished on a human timescale such as sunlight, wind, rain, tides, waves and geothermal heat.” These sources of energy are inherently low-carbon.

Energy Efficiency (EE): Is a way of managing and restraining the growth in energy consumption. Something is more energy efficient if it delivers more services for the same energy input, or the same services for less energy input. This can be accomplished through many means, including renovating building stock to improve insulation and installation of more efficient lighting, heating, and cooling systems. The end objective is decreased energy consumption. Both of these terms are included in the concept of Smart Energy, which encompasses RE/EE along efficient distribution via Smart Grids and optimised consumption with smart metering and energy storage.

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