Efficiency as a catalyst: unleashing energy transformation in SMEs through servitisation

A year ago in Dubai, at COP28,  EIB Vice President Ambroise Fayolle and our chairman Bertrand Piccard came together to discuss efficiency - or rather the lack thereof - in current energy frameworks. Today, just a year after that first discussion, once again brought together at COP29, the Solar Impulse Foundation (SIF)  and the European Investment Bank (EIB), with the support of the European Commission, are unveiling new instruments to unleash energy efficiency for growth within SMEs.

Improvements in energy and resource efficiency are key in tackling the environmental crisis. A central figure in the EC’s initiatives such as the novel Clean Industrial deal, energy efficiency could notably account for more than 40% of the GHG emissions reductions needed to meet global climate goals by 2040. It is clear however that we are not moving fast enough towards actionable change in the energy sector.

This worrying delay in energy efficiency progress can be explained by both the prohibitive cost to deploy energy-efficient technologies and the fact that opportunities for investment are not equal across all businesses. This was a key point of alignment between the EIB and the Foundation, and the reason why this strategic partnership is focused on improving access to energy efficiency in SMEs in particular. In fact, 99% of European businesses are SMEs, contributing up to 63% of all industrial emissions, but as of 2022 only about a quarter of European SMEs have a concrete plan in place to reduce their carbon footprint.

“Priority areas to be addressed include [...]  capturing the industrial opportunities presented by the green transition, ranging from remaining at the forefront of cleantech innovation to manufacturing clean tech at scale to leveraging the opportunities from circularity.” wrote former ECB Chief Mario Draghi in his report The Future of European Competitiveness, highlighting the strategic nature of a move towards energy efficiency.

Firstly, and perhaps most importantly, SMEs interested in increasing their energy efficiency face hurdles in accessing financing solutions for these projects, notably linked to their :

• High upfront costs tied to renovations or retrofitting
• Small and scattered nature
• High perceived risk
• Lengthy return horizons

Secondly, there is a knowledge and expertise gap that negatively affects SMEs, which often lack :

• Manpower needed to diversify investments

• Insight into energy efficiency opportunities

Together, these obstacles slow progress in the promising field of energy efficiency. This is where the pivotal partnership between the EIB and SIF comes in: it will move to break down these barriers, by mobilising private and public finance along with political advocacy and strategic communications to enhance energy efficiency in European SMEs.

Today, we are unveiling the first pillar of this partnership, which revolves around “servitization”. This concept, dubbed so for the first time in 1988 by researchers Vandermerwe and Rada, has seen growing success in recent decades. Servitization is the process, or transformation, through which a company pivots from selling a product towards an integrated product service system, selling results instead of ownership. Several industries have influential examples of servitization strategies, for example Michelin in the early 2000s which sold kilometres instead of tyres, or Signify - formerly Philips Lighting - selling a subscription to light instead of lightbulbs.

Such “as a service” models present several advantages, and are particularly adapted for the energy sector. When providers retain ownership of the physical product and sell results or a subscription service, the consumer sees their upfront cost fall dramatically.This opens the door to investments in energy efficiency, as well as the added benefit of increased reliability of the underlying product. Indeed, the producer is incentivised to ensure the quality and efficiency of their product, as any fault in delivering the promised outcomes would result in a loss for them.

“No significant transformation will be possible without companies and entrepreneurs who, in any case, in the long term have no other choice but to integrate sustainability into their performance equation.” - PACCT for Sustainability White Paper, Business Innovation for Sustainable Impact in Europe.

As with any paradigm shift, the transition to servitization is complex and delicate to navigate. As ambassadors of “Efficiency as a Service” as a key instrument in boosting efficiency in SMEs, the EIB and SIF aim to facilitate the implementation of these models through the development of bespoke financial tools and advisory services.

In the coming months, this partnership will bear its fruit in the form of concrete pilots and expanded strategies. Debt strategies and the power of public guarantees will be explored, attracting stable, long-term revenues for investors such as pension funds and insurance companies. Effectively, this pilot will serve as a proof of concept, enabling future exploration into alternative funding strategies including co-investments and equity funds.

In the coming years, these strategies could be scaled beyond SMEs, to tackle energy efficiency across the European industrial landscape and within municipalities.

We will be sharing more insights into Efficiency as a Service and how to make these models land during Building Bridges on December 10th in Geneva. We look forward to further developing this initiative with the EIBG and key stakeholders, to achieve #EfficiencyNow.