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New markets evolve to support SME transition

Small businesses face a hard time decarbonising due to financial constraints, a lack of expertise and time, and technological hurdles. The rise of new business and financing models, plus a helping hand from larger companies, are helping them on the path to carbon neutrality

The small and medium enterprise (SME) sector makes up 13% of the world’s energy consumption but the high upfront costs of accessing clean energy solutions are stopping these businesses from decarbonising their activities

ENERGY COMMUNITIES
Smaller local businesses are accessing renewable energy by clubbing together in regional projects SUPPLY CHAIN
Customer-facing companies are helping their supply chain—largely made up of SMEs—to decarbonise but still require support and advice KEY QUOTE
Even though the return on investments in renewable energy and energy efficiency is widely recognised, the upfront investment may be a barrier preventing certain customers from investing Since July 2018, the five-megawatt (MW) Seaton Road solar farm has been providing power to businesses just a few miles up the road in Leicester, UK, that signed up for a 100% renewable business power tariff from innovative UK utility Octopus Energy. The small and medium enterprises (SMEs) who buy the green power also give back to the community through a payment Octopus makes to support projects to help local people in need and regenerate woodlands and wildlife in old mining areas across the UKs Midlands. It’s a bite-sized idea of a corporate PPA (power purchase agreement),” explains Zoisa North-Bond at Octopus, who previously worked on wind and solar PPAs for large corporate clients as the head of the UK arm of Eneco, a Dutch energy provider. Companies can advertise that they are supporting both the local economy and green energy while doing so at competitively priced tariffs. Octopus says it has been relatively easy to gain new clients, although the covid-19 pandemic has limited opportunities for community engagement and promotion of the tariff. A total of 425 businesses, including Leicester’s National Space Centre and the King Richard III visitor centre, have signed up for the tariff. Following the strong reception in the city, Octopus last year began offering a tariff for businesses in Brighton, also powered by a local solar farm. Under North-Bond, Octopus is now looking at expanding the model to other communities in the UK. In Leicester, some SMEs, which sign up for one- or two-year contracts for the power, are now asking to extend this to five years—an indication of the growing appetite among smaller firms to be involved in decarbonisation efforts but had so far been priced out of the PPA and clean energy markets. However, there are now several projects springing up across Europe that are making it easier for smaller firms to reap the benefits the shift to clean energy provides.

LOCAL AND GREEN

Local renewable energy is expected to play a greater role in enabling SMEs to decarbonise following the emergence of community energy projects in the wake of the European Union’s December 2018 revised renewable energy directive, expects Claudia Carani at Energy and Sustainable Development Agency (AESS), Modena-based non-profit. The directive, also known as RED II, aims to strengthen the role of renewable energy self-consumers and renewable energy communities. AESS is participating in the Green Energy Community (GECO) demonstrator project, backed by EU innovation partnership EIT Climate-KIC, in the Pilastro and Roveri neighbourhoods of Bologna, northern Italy. The pilot plans to establish a renewable energy community involving both local businesses and households powered by five 200 kilowatt (kW) solar photovoltaic (PV) plants backed up by battery storage capacity and a 50 kW biogas plant. In Italy, energy communities are awarded an incentive of €0.11/kWh for 20 years for all self-consumed electricity used by its members from renewable plants of up to 200 kW and a reduction of €0.009/kWh in electricity system charges due to the fact the power is produced and consumed locally. Renewable energy communities may also take advantage of tax benefits for small-scale renewable plants and battery storage. While the energy community model is established in places like Denmark and Germany, new projects are now springing up through Europe, including France, Spain, Portugal, Sweden and Belgium. Joining forces to provide services that may be too costly for one small business alone could offer another opportunity for sustainability, adds Carani. An example of this is a project supported by the European City Facility (EUCF) in the towns of Castel Guelfo and Casale San Pietro Terme, near Bologna. Local companies are being surveyed to understand their transport needs ahead of a planned tender to identify a company that could manage bike sharing, car sharing and other sustainable transport services. The service provider would be paid an annual fee, with the cost shared between companies.

FINANCING HURDLES

Even before the covid-19 pandemic, one big hurdle for small companies has been access to bank financing for renewable energy and efficiency improvements to make operations more climate-friendly. Guido Lena, from SMEunited a European business association, says that local banks that typically loan to small businesses in Europe are often unprepared to evaluate the business cases of these investments and are thus reluctant to provide financing. [The banks] need to be trained in how to support these green investments,” he says. Boston Consulting Group (BCG), a US-based consultancy, is working with banks to help them understand the decarbonisation needs of larger companies in sectors like steel and cement and the sorts of projects they could finance, helping them to tailor their products to the needs of these firms, says BCGs Jens Burchardt. While SMEs are not a large part of this discussion right now, this whole area of green financing is set to develop. There’s a huge investment need” for both large and small companies, he says. Burchardt says it is logical that financial institutions would start with more visible financing initiatives and larger corporations, which are also more exposed to pressure from the public and from investors to decarbonise, before moving on to smaller companies. He expects the Energy Service Company (ESCO) model—which is used in some countries, most frequently for heat but also for efficiency upgrades—to gain ground. There are quite a few SME ESCOs that go to energy-intensive firms in sectors like paper or glass or to commercial customers like bakers, replace the heat generation system with a more efficient, lower-carbon one and sell the company heat.” In the ESCO model, cost savings from the upgrade are used to pay off the capital investment and customers can decarbonise at little or no upfront cost. A similar business model known as decarbonisation as a service” is becoming more popular for companies seeking to meet emission reduction targets.

CROWDFUNDING CARBON REDUCTION

Adding to its array of financing options for SMEs, Enel X—the advanced energy solutions arm of the Italian utility giant Enel—partnered with French fintech firm October to utilise crowdfunding for energy efficiency and renewable energy investments. According to the agreement, funding requests from small and medium Italian companies that are clients of Enel X are assessed by October on the basis of credit risk merit and, once their projects are cleared and published on October’s platform, can raise funds from private lenders and institutional investors. Even though the return on investments in renewable energy and energy efficiency is widely recognised, the upfront investment may be a barrier preventing certain customers from investing,” says Marco Gazzino at Enel X. External funding becomes key for those customers and crowdfunding is one of the options that is becoming more popular, due to low barriers to credit and fast access.”

TECHNOLOGY FOR BUSINESS

For some smaller businesses, technology can also help smooth the energy transition. Spanish startup Solatom produces concentrated solar heat plants for industrial heating up to about 300°C that are designed with SMEs in mind. Its systems are up and running at nine sites in Spain, while the company is eyeing growth in the likes of Kenya, South Africa and Mexico. Solatom’s Raul Villalba van Dijk says its plants are made up of easily transportable modules that are assembled, calibrated and tested in a central factory, helping to bring down costs and making smaller projects economically feasible. The target investment payback period for projects is five years. Our goal is not only to reduce the client’s emissions but also to cut their energy bills,” he says.

CUSTOMER FACING

To help combat the crippling effects of climate change, customer-facing companies are attempting to both clean up their operations and those of their suppliers. A January 2021 report co-authored by The World Economic Forum and BCG highlights the opportunity for larger firms to engage their supply chains, including SMEs, in decarbonisation especially in customer-facing sectors where a company’s direct emission footprint is relatively low, companies can address significantly larger emission volumes through their supply chains.” Consumer-facing industries often have greater financial means than companies in their supply chains, the report notes. It lists offtake agreements, co-investments, joint decarbonisation initiatives and technical advice among the forms of direct support larger companies may provide to their suppliers. Big companies have an important role to play supporting SMEs in decarbonisation, but their attitude isn’t always positive,” says SMEunited’s Lena. There are also frequent examples of big companies that say, Here’s the 400-page manual, do things this way or you’re out of the market.’” Instead, the smaller the company, the more they need targeted information, technical assistance and to be coached and accompanied,” he says, rather than being left to their own devices by the bigger firm.

PURCHASE CRITERIA

One sign of a growing awareness of the need to decarbonise supply chains was the launch in September 2020 of the SME Climate Hub, a platform of tools and resources to help smaller firms cut emissions backed by the International Chamber of Commerce, non-profits the Exponential Roadmap Initiative and the We Mean Business coalition, and the United Nations Race to Zero Campaign. Multinationals like Ericsson, IKEA, Telia, BT Group and Unilever have committed to support the new project, pledging to make climate-related targets and performance a key supplier purchasing criteria and to provide tools, share knowledge and exchange best practices for climate strategies through the new platform. One major multinational that has set ambitious goals is US technology firm Apple, which aims for 100% renewable energy in its supply chain by 2030. To date, Apple has secured commitments for about eight gigawatts (GW) of renewable energy. The US tech giant has directly supported its supply chain by helping to develop wind and solar projects in Japan, invest in renewable generation in China alongside suppliers and aggregate demand for clean energy across its supply base. What is apparent is that SMEs will find it difficult to decarbonise alone. However, by clubbing together—with the help of governments or larger firms—SMEs could find a way to a cleaner future.


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Heather O’Brian