Smart cities in Europe Enabling innovation
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Smart cities in Europe
Enabling innovation
$
Smart citiesAbout Osborne Clarke Osborne Clarke is an international legal practice. We have 1,000 employees, including 180 expert partners and 600 lawyers, working in 8 countries. Our offices are located in Amsterdam, Barcelona, Brescia, Bristol, Brussels, Cologne, Hamburg, London, Madrid, Milan, Munich, New York, Padua, Paris, Rome, San Francisco, Silicon Valley and Thames Valley. ii | Smart cities in Europe
Contents
About the research..................................................................................................................2
Foreword...................................................................................................................................3
Executive summary.................................................................................................................4
• Cities must smarten up
• Financing is the greatest challenge
• Bringing smart technology to market
• Regulation needed to create the right frameworks for smart city investments
• Collaboration is key in overcoming these obstacles
Introducing smart cities..........................................................................................................6
• What is a smart city?
• Four major components of smart cities
• Explaining the four components of smart cities explored in this report
Enabling smart cities: Understanding the obstacles and creating solutions................... 10
• Finance – the no.1 issue
• Smart technology – major challenges exist to its development and implementation
• How to incentivise smart city investments
• Case study: The role of government in accelerating automated demand response in the UK
• Engaging citizens is essential
• Stable regulatory frameworks are very important
UK............................................................................................................................................24
Germany................................................................................................................................26
Spain.......................................................................................................................................28
Italy.........................................................................................................................................30
Belgium.................................................................................................................................. 31
The Netherlands....................................................................................................................32
France.....................................................................................................................................33
Conclusion: Where next for smart cities in Europe?............................................................34
Smart cities in Europe | 1About the
research
Respondent breakdown by employer Respondent breakdown by country
5%
10% UK
Germany
15% Spain
50% 23%
Italy
10%
Belgium 17%
10%
20% The Netherlands
France 10% 10%
Corporate Other
Equity investor 10%
Consultancy 10%
Government/multilateral institution
Other
This report provides insight into the development of smart cities in Europe. Specifically, it
focuses on how the challenges cities face in becoming ‘smart’ can be overcome. The findings
are based on a survey of 300 senior executives from technology companies, investment funds,
banks, consultancies and government officials. The survey was conducted in October and
November 2014. Survey respondents were located in Belgium, Finland, France, Germany, Italy,
the Netherlands, Norway, Spain, Switzerland, Sweden and the UK. The report was written in
collaboration with The Lawyer Research Service, a division of The Lawyer.
To supplement the survey findings, interviews were conducted with the following individuals:
• Rene Savelsberg (the Netherlands), CEO, Chrysalix SET
• Carol Connolly (UK), Programme Director, Glasgow City Council
• Scott Petersen (UK), Business Development Director – Smart Grid Solutions, Europe & North Africa, Honeywell Building Solutions
• Richard Miller (UK), Deputy Director, Innovation in Industry, Innovate UK
• Allister Wood (UK), Head of Infrastructure & Energy, Morgan Sindall Investments
• John O’Donohue (UK), CEO, PowerOasis
• Mike Lewis (UK), Vice President and General Manager EMEA, Space-Time Insight
• Mark Stokes (UK), Managing Director, Utilyx Asset Management
• Jo Van Onsem (Germany), Group President – International Transportation and Government, Xerox
• Albert Fischer (the Netherlands), Managing Director, Yellow&Blue Investment Management
Interviews were also conducted with the following individuals from Osborne Clarke:
• Luis Castro (Spain), Partner, luis.castro@osborneclarke.com
• Stefan Deswert (Belgium), Partner, stefan.deswert@osborneclarke.com
• David Ferris (UK), Partner, david.ferris@osborneclarke.com
• Thomas Funke (Germany), Partner, thomas.funke@osborneclarke.com
• Matthew Germain (UK), Associate Director, matthew.germain@osborneclarke.com
• Simon Spooner (UK), Partner, simon.spooner@osborneclarke.com
• Piero Viganò (Italy), Partner, piero.vigano@osborneclarke.com
2 | Smart cities in EuropeForeword
According to various sources, the urban smart city alone. It’s going to require rallying
population surpassed the rural population expertise around some pretty big ideas
in the world in 2007. The trend towards and then collaborating to overcome the
urbanisation is expected to increase challenges, sharing best practice, which, in
dramatically in the coming years to the point turn, will enable innovation and accelerate
that by 2050, almost 70% of the world the development of smart cities. Many of the
population will be urban and many cities will elements that add up to making cities smarter
have over 10 million inhabitants, consuming are ones in which Osborne Clarke flourishes:
the vast majority of the world’s resources. We technology, finance, energy, transport,
need to build smarter cities to cope with larger infrastructure to name but a few. This report
Simon Beswick populations, who are living longer and more contains some views from established smart
CEO densely, as well as remaining economically cities leaders (to all of whom, many thanks!)
Osborne Clarke International and socially competitive in an increasingly
simon.beswick@osborneclarke.com globalised market. These challenges are Together, we believe, we can make both
faced by all cities no matter their stage of incremental improvements and step changes
development or which continent they are on. in delivering smarter cities and look forward
to working with our clients and the cities in
Equally, no single city, country, government, which we operate to make a difference.
economic bloc, or company can build a
$
Smart cities in Europe | 3Executive
summary
Cities must smarten up Financing is the greatest
European cities are not that smart. According challenge
€ £ $ € £ $ € £ $ € £ $ € £
to research by the European Parliament
$ € £ $ € £ $ € £ $ € £
By $ € margin, the biggest obstacle to the
some
released in January 2014, 51% of Europe’s
468 cities with a population over 100,000 £ $ € £ $ € £ $ € £ $ €£$
development of smarter cities is funding.
Survey respondents identified a lack of
are smart cities.1 While this may sound like a € £ $ € £ $ € £ $ € £ $ €£
investment as the greatest obstacle to the
sizeable proportion, cities only need to have $ € £ $ € £ $ € £ $ € £ $ €of intelligent transport systems, the
roll-out
developed a strategy or plan to implement
£ $ second most important obstacle to the wider
a single smart city initiative to qualify as “The overarching use of energy storage and the third most
‘smart’. The reality is that, of this group, only
28% have actually fully launched at least one message from important obstacle to greater adoption of
building control systems.
smart city initiative. The remainder are still at the survey
piloting stage, or in some cases even earlier. The best way to address this funding gap is
This report outlines why progress thus far
data is that the public private partnerships – almost three-
has been so slow and what can be done to challenges to quarters of survey respondents stated that
accelerate the development of smart cities. developing public private partnerships will be the most
effective way to fund smart infrastructure
Urbanisation is making smart cities more smarter cities are programmes in the next three years. However,
important. Globally, 54% of the world’s large but there the majority of survey respondents (69%)
population live in cities, a figure the United
is willingness believe that government institutions alone
Nations predicts will rise to 66% by 2050.2 In will be the most active investors in smart city
Europe, the proportion of the population that among the infrastructure during the next three years.
live in cities (73%) is already much higher
than the global average. For cities to manage
private sector There is a clear disconnect. To bridge the
gap, the private and public sectors, banks,
an ever-increasing influx of people, they must and at the investment funds, technology companies
adopt new smart technologies and processes government and the advisory community need to work
to remain attractive places to live and work.
level to find together to develop funding models that
But, first, what is a smart city? The answer is not satisfy all parties.
solutions.”
that obvious. In essence, smart cities are ones Project finance structures may have a
that deploy innovative technology, create more role to play – over two thirds (69%) of
innovative ways of delivering public services survey respondents believe project finance
and make better use of data with the ultimate structures will be used to fund the roll-out
objective of becoming more prosperous, of smart technology in the next three years.
sustainable and a better place to live. The types However, as discussed in greater depth later
of smart technology and the smart processes in this report, structuring project finance
that help achieve this goal are numerous. This deals for smart technology infrastructure is
report focuses on four of the key components – difficult.
smart grids, energy storage, building efficiency
and intelligent transport systems.
1
European Parliament Policy Department (January 2014), “Mapping Smart Cities in the EU”
2
United Nations (July 2014), “World Urbanization Prospects”
4 | Smart cities in EuropeExecutive summary
Bringing smart frameworks as the third and fourth most
important obstacles to the roll-out of smart
technology to market meters and energy storage respectively.
Our survey data reveals a number of more Progress is being made at the European
fundamental challenges to realising smart cities. level on establishing regulations governing
A lack of proven and adequate technology the use of smart technology. Changes to
was the most frequently cited obstacle to the EU Data Protection legislation are expected
roll-out of energy storage technology and the to be agreed in 2015, while the ‘Connected
fourth most frequently cited obstacle to the Continent’ package of proposals designed
implementation of intelligent transport systems. to create a single European market for
Once again, one of the main challenges electronic communications is presently
companies face in bringing viable smart passing through the European Parliament.
technology to market is funding. Regulatory changes represent both
Even when smart technology is developed challenges and opportunities for producers
and proven, significant obstacles remain to its and consumers of smart technology, so any
implementation. For a start, while many smart changes need to be communicated clearly.
technologies have significant benefits to cities Our survey data highlights some additional
as a whole, benefits for an individual are often regulations that would help accelerate
perceived to be small and unclear, limiting smart cities. Over 95% of respondents
consumer demand. In fact, a lack of consumer believe regulations should be introduced
demand for solutions was the most frequently supporting the interoperability of technologies
cited obstacle to the roll-out of smart meters across different markets. In addition, 79%
and building control systems by our survey of respondents believe there should be a
respondents. Privacy and security concerns minimum standard for sustainable construction
were the second most frequently cited obstacle. of new and refurbished buildings.
Private companies, therefore, must not just
focus on creating technology that works, but
also business models that create a compelling Collaboration is key
proposition for consumers.
in overcoming these
obstacles
Regulation needed to
The overarching message from the survey data
create the right frameworks is that the challenges to developing smarter
for smart city investments cities are large but there is willingness among
the private sector and at government level to
Governments need to establish adequate find solutions. The answer lies in collaboration
regulatory frameworks to ensure smart between central government, local government,
technologies are installed across cities at scale. the private sector and financial investors. That is
Unfortunately, this is currently not the case. the greatest challenge.
Survey respondents identified unfit regulatory
Smart cities in Europe | 5Introducing
smart cities
What is a smart city? business models; use data with the intention
“It is very of being more efficient and transparent; and
Ask a hundred government officials, senior increase citizen engagement to improve the
corporate executives or investors what a
important for prosperity and sustainability of cities.
smart city is and you will probably get a city planners
Cities need to become smarter. The United
different answer each time. For some, a smart to have clear Nations estimates that 54% of the world’s
city is one that adopts innovative technologies
capable of improving the life of its citizens. objectives population currently live in urban areas. By
This technology might include energy- about what 2050 this figure will rise to 66%. In Europe
efficient systems that reduce energy use and the proportion is even higher – according
they want smart to the United Nations, 73% of Europe’s
reliance on fossil fuels, intelligent transport
systems that enable citizens to travel more cities to deliver population currently live in urban areas, a
figure that is expected to rise to 80% by
efficiently, be that in private vehicles or using before selecting 2050.3 It is, therefore, more important than
public transport, or new communication
technologies that improve public safety and
which smart ever to ensure that cities are sustainable and
emergency response services. city initiatives are structured to accommodate ever larger
numbers of people.
For others, the concept of a smart city means to pursue and
empowering citizens to improve their lives prioritise.”
through better access to data and public
services. This might include easier access to
job vacancies or travel information, or a more
efficient way to book doctors’ appointments.
The possibilities are endless.
The reality is that smart cities encompass all
these things and more – broadly speaking,
smart cities are those that: adopt and promote
innovative technology, processes and
3
United Nations (July 2014), “World Urbanization Prospects”
6 | Smart cities in EuropeIntroducing smart cities
Which components of a smart city are most likely to: Four major components
of smart cities
4%
11% This report focuses on four major
Intelligent transport systems
components of smart cities – smart grids,
improve
energy storage, building efficiency and
citizen Building efficiency/control systems
well-being intelligent transport systems. Smart cities
27% in your 58% obviously include a wide range of other
country? Smart grids (including smart meters)
important components but these are excluded
Energy storage from the scope of this report.
In considering these four components
we have looked at the challenges of
implementing each one, why certain
components are preferred to others and how
8% 6% the impact of their adoption is very different.
Intelligent transport systems For example, our survey data shows that the
25%
aspect of smart cities most likely to improve
reduce energy Building efficiency/control systems
citizen well-being is intelligent transport
consumption in
your country? systems. However, only 6% of survey
Smart grids (including smart meters)
respondents believe intelligent transport
61% systems are the component of smart cities
Energy storage
most likely to reduce energy consumption.
Instead, the majority of survey respondents
(61%) believes building efficiency and
control systems are the component of smart
cities most likely to deliver reduced energy
consumption. Meanwhile, survey respondents
22%
Intelligent transport systems believe that all four components of smart
30%
cities we are exploring are likely to contribute
increase
Building efficiency/control systems in almost equal measure to economic growth.
economic
growth in your In short, the survey data shows that it is very
country? Smart grids (including smart meters) important for city planners to have clear
23%
objectives about what they want smart cities
Energy storage
25% to deliver before selecting which smart city
initiatives to pursue and prioritise.
Smart cities in Europe | 7Explaining the four components of
smart cities explored in this report
Smart grids
A smart grid uses advanced technology and software to obtain, analyse and act on information
relating to energy generation, transmission, distribution and consumption, to improve the
reliability, efficiency and sustainability of the entire network. Discussion about smart grids is often
dominated by smart meters, which monitor energy usage of individual homes or any building that
consumes energy in real time. However, smart grids also involve the use of intelligent software
to collect, analyse, visualise and then control components of the grid and appliances (such as
fridges and lighting) connected to the grid to, in effect, create a virtual power plant.
Smart grids offer multiple benefits. Customers can benefit from more accurate and timely
billing, as well as new time-of-use tariff options. Electricity retailers can save significant costs
by undertaking meter readings automatically, rather than getting them checked manually. Most
importantly, smart grids enable transmission and distribution network operators to perform more
accurate load forecasting and obtain better insights into potential faults on the grid, enabling
them to prioritise investment.
EU legislation requires smart meters to reach an 80% market penetration by 2020 in all
EU Member States, subject to a positive outcome of a cost-benefit analysis. The European
Commission estimates that around 72% of European electricity consumers will have electricity
smart meters by 2020.4
Energy storage
Energy storage includes a wide range of electrical, chemical, mechanical and thermal
technologies that store electricity for multiple applications. These include frequency and
voltage control, peak shaving and continuity of energy supply. Due to its intermittency, energy
storage is also an essential enabler for the greater adoption of renewable energy on the grid,
as well as distributed generation.
Energy storage is an important component of smart cities because it enables local generation
to supply local buildings directly, thereby bypassing the national grid. John O’Donohue, CEO of
PowerOasis, explains the advantages of this approach. “Matching local generation with
local demand using storage is very beneficial,” he said. “Consumers should see a
30-40% saving on their electricity bills. At a macro level, there is around 10-15% of
losses during the transmission and distribution of electricity. This capability, which
we hope to demonstrate at our project in Swindon powering 4,000 homes, will be
applicable in lots of different cities.”
4
European Commission (June 2014), “Benchmarking smart metering deployment in the EU-27 with a focus on electricity”
8 | Smart cities in EuropeExplaining the four components of
smart cities explored in this report
Intelligent transport systems
Intelligent transport systems include a range of technology, software and physical
infrastructure that makes travelling around cities more efficient. Intelligent transport
systems can include new methods of travel, such as electric vehicles, new electronic
payment systems and new business models, such as car-sharing.
Intelligent transport systems are important given the increasing economic impact of
congestion. A report released in October 2014 by INRIX and the Centre for Economics
and Business Research concluded that traffic congestion will cost the UK economy
US$33 billion annually by 2030, a 63% increase on the cost in 2013. The cost to the
German economy is estimated to reach US$44 billion by 2030, a 31% increase on 2013. 5
A wide range of intelligent transport systems has been implemented across Europe,
from the central London congestion charging zone and Oyster cards in the UK, to smart
parking networks in Barcelona and smart cycling networks in Copenhagen. However, a
lack of funding and technology standards have hindered the more widespread roll-out of
intelligent transport systems throughout Europe.
Building efficiency
Building efficiency involves the integration of a broad set of technologies, software and
materials into the built environment to improve buildings’ energy efficiency. The EU has
set a target to reduce energy demand by 20% by 2020. Much of this reduction will be
achieved by reducing energy consumption by buildings.
Building efficiency does not just save costs. Through initiatives such as demand response,
it also enables building owners to generate revenues intelligently from their assets. For
example, by installing monitoring and control technologies, building owners can generate
revenues by turning energy consuming equipment off or down during times of peak
demand.
5
INRIX and the Centre for Economics and Business Research (October 2014), “Economic &
Environmental Impact of Traffic Congestion in Europe & the US”
Smart cities in Europe | 9Enabling smart cities
Understanding the obstacles and
creating solutions
Although a large number of successful smart Finance – the no.1 issue
city initiatives already exists in Europe, to “Many local
date their development has been slow, small A lack of funding is the major obstacle to the
scale and often restricted to the largest
authorities must realisation of smart cities in Europe. Survey
cities. A report by the European Parliament focus all their respondents identified it as the number-
released in January 2014 found that only resources on one obstacle to the roll-out of intelligent
51% (240 cities) of the 468 cities with a transport systems, the second most
population of over 100,000 in the EU-28
providing basic important obstacle to the implementation of
have implemented, proposed or have a public services energy storage and the third most important
obstacle to the wider use of building control
strategy for at least one smart city initiative. rather than systems.
However, within this group, only 28% have
actually fully launched at least one smart city new, innovative
Both private-sector companies and local
initiative, with the rest still at the planning or and sometimes government authorities that might want
piloting stage.6
untested smart to invest in the roll-out of smart city
infrastructure are facing financial difficulty.
Our survey data reveals a number of city initiatives
obstacles that need to be overcome for Local authorities across much of Europe are
smart city initiatives to be implemented where the more focused on balancing budgets than
faster and more widely. Perhaps the most net benefit is making sizeable investments. In this context,
significant finding was that obstacles vary many local authorities must focus all their
sometimes hard resources on providing basic public services
depending on the type of smart initiative. For
smart meters, survey respondents identified to measure.” rather than new, innovative and sometimes
social obstacles – the lack of consumer untested smart city initiatives where the net
demand for solutions and concerns over benefit is sometimes hard to measure.
security and privacy – as the two most
“In the public sector, the reality is
important obstacles to their more rapid and
that significant year-on-year cost cuts
widespread roll-out. However, for energy
of up to 20% to 30% are necessary,
storage, survey respondents identified a
so there is limited capital budget
lack of proven and/or adequate technology
available for smart investments such
as the most significant obstacle. A lack of
as energy efficiency,” explained Mark
consumer demand was highlighted as the
Stokes, Managing Director at Utilyx Asset
greatest obstacle to the adoption of building
Management. “However, what the
control systems, while a lack of finance,
public sector really needs is support
government incentives and outdated legacy
doing the due diligence in the first
urban infrastructure were selected as
place, identifying how and whether
equally important obstacles to the adoption
investments in energy efficiency are
of intelligent transport systems.
feasible.”
6
European Parliament Policy Department (January 2014), “Mapping Smart Cities in the EU”
10 | Smart cities in EuropeEnabling smart cities
Understanding the obstacles and
creating solutions
What are the greatest obstacles to the roll-out of smart technology in the country where
you are located?
Lack of consumer demand for solutions
Smart meters 24%
Energy storage 9%
Building control systems 23%
Intelligent transport systems 8%
Lack of investment/finance
Smart meters 7%
Energy storage 20%
Building control systems 14%
Intelligent transport systems 21%
Lack of incentives to encourage investment
Smart meters 7%
Energy storage 19%
Building control systems 16%
Intelligent transport systems 20%
Regulatory framework not fit for purpose
Smart meters 16%
Energy storage 10%
Building control systems 9%
Intelligent transport systems 10%
Lack of proven/adequate technology
Smart meters 1%
Energy storage 31%
Building control systems 1%
Intelligent transport systems 10%
The lack of Creates security/privacy issues
Smart meters 23%
investment/ Energy storage
Building control systems
1%
11%
finance is the Intelligent transport systems 1%
no.1
barrier to the
Outdated legacy urban infrastructure
Smart meters
Energy storage
Building control systems
Intelligent transport systems
3%
2%
10%
19%
roll-out of Lack of conversation and agreement between local government departments
intelligent Smart meters
Energy storage 5%
8%
transport Building control systems
Intelligent transport systems 6%
6%
systems. Lack of technology standards
Smart meters 7%
Energy storage 2%
Building control systems 7%
Intelligent transport systems 6%
Smart cities in Europe | 11Enabling smart cities
Understanding the obstacles and
creating solutions
So where could funding come from? Survey Where is investment in smart infrastructure programmes most likely to
respondents identify government institutions come from in your country in the next three years?
as essential in unlocking investment in smart Please select the top three investment sources with one being the biggest
infrastructure programmes — over 70% of source of finance.
survey respondents predict that government
Government (through direct procurement or publicly-owned institutions)
institutions will be the most active investors
64%
in smart city infrastructure programmes in
the next three years. Half of respondents Institutional/infrastructure funds
expect direct procurement of smart solutions 50%
to be the most common source of investment Government (through government-backed funds, i.e. Low Carbon Networks Fund,
in smart infrastructure programmes, 16% European Investment Bank)
expect government-backed funds to be the 50%
most common source of investment, while Government (through direct grants/tax breaks)
6% expect government grants to be the 46%
biggest source of funding.
Utilities
Some governments are further ahead than 39%
others in investing in smart city infrastructure. Corporate investment (through private or publicly owned companies)
For example, the UK Government is investing 25%
directly in building energy efficiency through
Sovereign wealth funds
the Green Deal initiative. Through the
11%
initiative the Government provides loans
to homeowners to fund the purchase and Private equity/venture capital funds
installation of energy efficiency systems such 8%
as efficient boilers, cavity wall insulation or Bonds
double glazing. Importantly for homeowners, 7%
the loan is repaid from the savings generated
Crowd funding
from lower energy bills. The sum of loan
1% Rank 1 Rank 2 Rank 3
repayments and the new lower energy bills are
capped at the level of previous energy bills,
meaning there is no net cost to homeowners.
The predicted reliance on government “Finance organisations and companies
funding during the next three years makes across the world are very interested
sense given the lack of smart infrastructure and they would like to invest in the
programmes that have been rolled out in transformation of the city landscape, but
Europe. The shortage of successful examples they don’t have numbers that make them
means that private-sector investors are still feel comfortable yet,” explained Richard
uncomfortable with committing capital to Miller, Deputy Director, Innovation in Industry
the sector. As more smart city infrastructure at Innovate UK (formerly the Technology
programmes are rolled out, interest from the Strategy Board). “It will come down to
private sector should change. analysing the risk and potentially how
12 | Smart cities in EuropeEnabling smart cities
Understanding the obstacles and
creating solutions
What is the most effective financing source available for investment risk can be split up between different
in single large-scale infrastructure projects (e.g. large-scale energy classes of investors. In terms of what
storage projects such as battery arrays)?
central government can do, we believe
Please select the top three investment sources with one being the biggest that the funding we are allocating is
source of finance. helping to provide examples of smart
technology performing well in cities.
Public-sector financing (e.g. grants, tax breaks, European investment, national
These enable small companies and
investment)
65%
investors to assume more risk and test a
new solution.”
EU structural funds
61% While government funding is expected to
Project finance be the largest source of funding during the
48% next three years, survey respondents indicate
that some of the most effective funding
Public/private JVs
structures involve the private sector. The most
48%
effective type of financing used to fund smart
Private-sector resources (e.g. cash, corporate bonds, banking) infrastructure programmes varies depending
39%
on the type of infrastructure being financed.
Project bonds For single large-scale smart city infrastructure,
23% such as an energy storage facility or a
Municipal bonds
distributed renewable energy generation
14% Rank 1 Rank 2 Rank 3 project, survey respondents identified public-
sector financing, EU structural funds and
project finance as the most effective sources
of financing. However, for smart infrastructure
programmes involving the roll-out of hundreds
of thousands of small smart city components,
such as smart meters, building control systems
or vehicle to infrastructure sensors, survey
respondents identified public-sector financing
and private-sector resources as the most
effective financing sources.
5654322 5654322 5654322
598323251 598323251 598323251
250143211 250143211 250143211
65678739045 65678739045 65678739045
59211 59211 59211
Smart cities in Europe | 13Enabling smart cities
Understanding the obstacles and
creating solutions
What is the most effective financing source available for investment in Project finance can attract private
the roll-out of hundreds of thousands of small smart city components investment, but it’s challenging
(smart meters, building control systems, vehicle to infrastructure
sensors)?
To entice investment from the private sector
into smart city infrastructure, infrastructure
Please select the top three investment sources with one being the biggest developers and building owners must offer
source of finance. financing structures that provide an adequate
Public-sector financing (e.g. grants, tax breaks, European investment, national risk-reward proposition. Survey respondents
investment) believe project finance structures, where
74% the procurement, installation or construction
Private-sector resources (e.g. cash, corporate bonds, banking) of smart infrastructure is funded using a
55% combination of debt and equity on a non-
recourse basis, are most likely to provide this
EU structural funds
– the majority (70%) of survey respondents
54%
expect project finance structures will be used
Public/private JVs to fund the roll-out of smart technology in the
48% next three years.
Project finance
40%
While project finance structures have been
used extensively to fund construction of
Municipal bonds
infrastructure such as renewable energy
15%
projects for many years, thus far it has not
Project bonds been used widely to fund the roll-out of smart
9% Rank 1 Rank 2 Rank 3 infrastructure such as energy efficiency
equipment. If providers of energy efficiency
solutions can guarantee that the installation
of efficiency equipment will result in energy
savings through energy performance
To what extent do you agree that project finance structures will be used contracts, then investors may be able to
to fund the roll-out of smart technology in the next three years? commit to funding the installation of such
equipment with a contract in place that
obliges the building owner to repay investors
11% with a portion of the savings generated from
Strongly agree lower energy bills.
27% 3%
Agree However, as David Ferris, Partner at
Osborne Clarke, explains, there are inherent
Disagree difficulties in using project finance for energy
efficiency infrastructure. “The thing banks
Strongly disagree like so much about project finance
59%
in renewables projects is the income
stream from the subsidy and revenue
from the sale of the energy,” he said.
14 | Smart cities in EuropeEnabling smart cities
Understanding the obstacles and
creating solutions
“One of the current problems with the
use of project finance as a funding
“Investors have a huge appetite to fund solution for building efficiency projects
energy efficiency projects but there are is that there is a disconnect between
funders’ requirements and the risks,
more complicated hurdles to get to financial which must remain with the customer
close than, for example, a renewable under this model. However, as certainty
energy project. This is because investors of energy supply and cost rise up the
boardroom agenda we anticipate a
can’t see a clear delineation between the greater willingness to look at the risk
capital going in and the revenues coming profile associated with project finance
transactions and a shift away from the
out. These deals have worked in the public
market selling this sort of deal under the
sector such as the NHS in the UK because banner of ‘energy saving guarantees’.
there is more certainty that the building Once this happens we anticipate a
significant rise in the use of project
occupiers will still be there in 20-30 years.” finance for building efficiency schemes.”
Despite the challenges, this structure is
Matthew Germain
increasingly being utilised across Europe. For
Associate Director, Osborne Clarke
example, in July 2014, the London Energy
Efficiency Fund reached financial close on a
£12 million loan for St George’s Hospital in
London. The loan will finance the installation
of energy efficiency technology at the
hospital, which is expected to reduce energy
costs by 25% while cutting 6,000 tonnes
of carbon emissions annually. Equipment
installed includes combined heat and power
boilers, solar panels and absorption chillers.
A number of modifications to the set-up of
the heating, ventilation and air-conditioning
systems have also been made. Underpinning
the loan is an energy performance contract
provided by British Gas guaranteeing a
certain level of energy savings. The energy
performance contract is expected to deliver
net savings of over £1 million per annum.
This transaction demonstrates how a well-
structured energy performance guarantee
can create an investable proposition.
Smart cities in Europe | 15Enabling smart cities
Understanding the obstacles and
creating solutions
71%
A new model is needed for intelligent transport systems and
Aside from project finance, survey respondents infrastructure,” explained Jo Van Onsem,
have little confidence that alternative funding Group President – International Transportation
structures such bonds will be effective in and Government, at Xerox. “For example, the
attracting capital to smart city infrastructure Grande Paris initiative, which is building
projects. Given the inherent difficulties in out transport connections in Paris in a of survey
smart way, is looking for investments
structuring project finance transactions for
from the private sector to complement
respondents
smart city infrastructure, city planners, fund
managers, banks and technology companies public-sector financing. The European believe PPP
need to work together to identify new development banks are aware of this (public/private)
funding models that create an adequate type of initiative and are getting more
risk-reward proposition for investors. As David prepared to invest in good projects.”
JV structures are
Ferris, Partner at Osborne Clarke explains, likely to be the
One way to encourage the public sector to invest
collaboration is essential to create new
in smart city infrastructure is to demonstrate the most efficient
financing structures.
return on investment (beyond the benefits of way to fund
the initiative itself) by exporting local knowledge
“The smart city financing challenge can
and technological expertise to other cities,
national smart
only be solved through collaboration,”
he said. “This doesn’t just mean both domestically and internationally. Thus far technology
collaboration between businesses, France is leading the way through exports to infrastructure
but also within them. Often investment India – in October 2014 the French Ambassador
funds will have different teams investing to India announced that the French Government programmes
in real estate and energy projects. is in discussions with the north Indian state over the next
of Himachal Pradesh to provide investment
Investors, with input from people like three years.
us and input from those who can install and expertise to assist in the development of
the technology with performance smart cities across the state.
guarantees, will need to come up with
these structures. That’s the group that
To what extent do you agree that PPP (public/private) JV structures
needs to come together.” are likely to be the most efficient way to fund smart technology
national infrastructure programmes?
Public-private joint ventures are crucial
Whatever financing structure is used, our
survey data reveals it is vital for the public and 7%
22%
private sectors to collaborate on financing Strongly agree
smart infrastructure – 71% of survey 22%
respondents believe PPP (public/private) JV Agree
structures are likely to be the most efficient
way to fund smart technology infrastructure Disagree
programmes over the next three years.
Strongly disagree
“There is good collaboration between the 49%
private and public sectors when rolling
out smart city initiatives, particularly
16 | Smart cities in EuropeEnabling smart cities
Understanding the obstacles and
creating solutions
Smart technology – Where is investment in smart technology companies most likely to
come from in your country in the next three years?
major challenges exist
Please select the top three investment sources with one being the biggest
to its development and source of finance.
implementation Private equity/venture capital funds
70%
For cities to implement smart initiatives,
technology that meets their needs and is proven Corporate investment (through private or publicly owned companies)
at scale must be readily available. For some 67%
components of smart cities this is currently not
the case. Indeed, survey respondents identified Government (through government-backed funds, i.e. Low Carbon Networks Fund,
European Investment Bank)
a lack of proven and adequate technology as
36%
the most important obstacle to the roll-out of
energy storage in cities. Government (through direct grants/tax breaks)
30%
Funding the next wave of smart city
technology innovation Utilities
To overcome this obstacle, financing needs to 28%
flow into early-stage technology companies
Government (through direct procurement or publicly owned institutions)
to ensure that new software and technologies 23%
are developed, tested and brought to market.
Potential investors in innovative smart Institutional/infrastructure funds
technology companies are very different 20%
from those that might invest in smart city
Crowd funding
infrastructure. Survey data indicates that
15%
venture capital and private equity funds will be
the most active investors in smart technology Sovereign wealth funds
companies – 34% of respondents forecast that 4%
venture capital and private equity funds will be
the most active investors in smart technology Bonds
4% Rank 1 Rank 2 Rank 3
companies during the next three years, followed
by corporates (28%), and then governments via
government-backed funds (11%).
(US$76 million) and a 26% increase on the
Investment statistics confirm the survey data. average quarterly sum of investment in 2012
On average, venture capital and private equity (US$74 million).7 Although energy efficiency
funds invested US$93 million in European and energy storage technology only represent
energy efficiency and energy storage a proportion of the technologies that might
companies per quarter in the first three be deployed in smart cities, these statistics
quarters of 2014, a 22% increase on the highlight investors’ appetite in companies
average quarterly sum of investment in 2013 developing ‘smart’ technology.
7
Source: Clean Energy Pipeline (www.cleanenergypipeline.com)
Smart cities in Europe | 17Enabling smart cities
Understanding the obstacles and
creating solutions
One of the reasons why smart technologies community of companies we work with
are attractive to venture capital and private “When there is and give them the challenge and define
equity funds is because there is still a strong the market opportunity.”
need for new solutions – 82% of survey
collaboration
respondents disagree with the statement between the This dialogue between city planners and
the private sector is essential. As Carol
that ‘there are few opportunities for venture public, private Connolly, Director of Future City Glasgow, the
capital investment in this sector because
most smart technology (for example, smart
and academic organisation responsible for implementing
ticketing and smart meters) is mature’. sectors, you smart city initiatives in Glasgow following
the securing of £24 million grant funding
Technology companies must collaborate develop in January 2013, explains, engagement
with city planners an iterative between the city and the private sector is a
Resolving the funding gap is not the only major part of its smart city initiatives.
solution where
challenge that needs to be overcome
to ensure cities have a wide range of everybody is “Our programmes enable us to provide
feedback to the private sector as to what
applicable proven technologies at their contributing we want technology to do and how it
disposal. Using their smart city goals as
a blueprint, city planners should engage
to the can work better,” she said. “When there
development is collaboration in this way between the
proactively with technology companies to
public, private and the academic sectors,
develop solutions that meet a real need. of new you develop an iterative solution
In the UK, Innovate UK runs a series of technology.” where everybody is contributing to the
competitions aimed at addressing this issue. understanding and development of a
For example, it is currently running a £6 new technology. Instead of the private
million competition to encourage companies sector developing in silos, we enable
to develop prototypes that demonstrate how them to develop technology that we can
their solutions can integrate infrastructure use and actually benefits citizens.”
and services across cities more easily.
However, smart technology can pose
Richard Miller, Deputy Director, Innovation in
problems for city infrastructure owners
Industry at Innovate UK, explains the benefits
of these competitions. Aside from a lack of funding, two frequently
cited obstacles to the proliferation of smart
“We run competitions designed from technology were: the technology would
feedback from cities regarding what
they need to fix their problems,” he said.
“We turn this feedback into challenges
for business. For example, one of our
competitions asked 30 of the UK cities
involved in the early stages of our
Future Cities Demonstrator competition
what solutions they want to buy that
they can’t find in the marketplace. We
were then able to contact the innovative
18 | Smart cities in EuropeEnabling smart cities
Understanding the obstacles and
creating solutions
have a disruptive impact on the business How to incentivise smart
models of the companies most likely to
city investments “The speed of
purchase it; and smart technologies might
introduce vulnerabilities to the operations
growth of the
The benefits of smart city initiatives are often
of critical city infrastructure, such as public felt well beyond the individual, building or
smart grid
transport or electricity grids. organisation that has implemented them. For market is
These obstacles are relevant for a variety instance, the installation of building control ultimately
of smart technologies but are most systems not only cuts energy bills, they
associated with smart grid and smart also reduce dirty emissions and, as such, driven by the
meter technology. For example, utilities have a wider, positive environmental impact. speed at which
Likewise, intelligent transport systems not
could be impacted financially if the roll-
only benefit individual users, they also have
utilities are
out of smart meters results in energy
consumers using less energy. In addition, a positive impact on the economy of a city willing to adopt
utilities are unlikely to integrate new smart through reducing congestion. and implement
grid technology into electricity grids until The multiple benefits of many smart initiatives this technology.”
it has been extensively tested to ensure should encourage government incentives.
there is no chance it will cause disruption. However, survey data reveals a severe lack
“The speed of growth of the smart of government incentives in Europe – survey
grid market is ultimately driven by the respondents ranked a lack of government
speed at which utilities are willing to incentives as the second most important
adopt and implement this technology,” obstacle to the roll-out of building control
explained Albert Fischer, Managing Director, systems and intelligent transport systems
Yellow&Blue Investment Management. and the third most important obstacle to the
“Many utilities oppose the adoption of roll-out of energy storage.
smart meters because current meters So what can governments do to incentivise
are designed for 30 years and only cost investments in smart city initiatives? Our
€60 per unit. The old meters are a cash survey data finds broad support for a variety of
cow for utilities and they are reluctant initiatives ranging from tax breaks for individuals
to change them. Even if they decide who adopt smart technologies or for investors
that technology such as smart meters that invest to creating enterprise zones and
makes good business sense, they will innovation hubs for smart technologies. The
usually begin with a small pilot, before provision of direct funding to communities and
rolling the technology out gradually. regions to invest in smart cities received the
Implementation will also be slow most support from survey respondents.
because the impact of a poorly managed
roll-out is significant on the utility and
its customers.”
Smart cities in Europe | 19Enabling smart cities
Understanding the obstacles and
creating solutions
There are already many examples of this What should your government do to incentivise investment in smart
taking place across Europe. For example, in technologies?
January 2013, the Future Cities Demonstrator Provide matching funding to communities/regions that invest in smart cities
competition, managed by Innovate UK, 34% 53% 11%
awarded £24 million to the city of Glasgow to
invest in smart city initiatives. Develop a series of tax breaks to encourage individuals to become early adopters of
smart technologies
While there are numerous examples of 35% 47% 16%
governments incentivising investment through Create a dedicated smart technologies investment fund to invest alongside
providing direct funding themselves, either institutional investors
in the form of a direct grant or a low-cost 37% 41% 19%
loan, there are few examples of governments
Develop a series of tax breaks to encourage corporates to invest in smart
establishing incentive programmes for technologies
the private sector to invest in smart city 30% 46% 21%
infrastructure, similar to, for example, the
feed-in tariffs that most European countries Establish smart technology enterprise zones to create innovation hubs in smart
technologies
have used to encourage renewable energy
28% 47% 22%
generation. A notable exception is in Italy
where a white certificate scheme, also Develop a series of tax breaks to incentivise institutional investors to invest
known as the energy efficiency certificate 24% 49% 25%
(EEC) scheme, was established in 2004. The
certificates are tradable instruments that Strongly agree Agree Disagree Strongly disagree
provide proof of energy savings. The scheme
requires natural gas and electricity distributors
to achieve annual energy efficiency savings. Sindall Investments, notes: “There is lots
Companies can either meet their obligations of uncertainty around subsidies in the
by implementing energy efficiency projects UK and if you are putting financing
themselves or by purchasing certificates from together for a project with a 15 to
qualifying projects. 20 year duration you need certainty.
There have been numerous changes in
It is also vital that any government incentives UK legislation in the past few years. If
designed to encourage investment in smart a large biomass plant gets permission
cities are long term. Furthermore, if these and uses a significant amount of the
incentives are altered, the changes must capacity then the volume of subsidies
be clearly communicated to the investor available can impact on later projects.
community well before the changes take You don’t get formal sign-off on the
place. It is also important that investors have subsidy until you finish construction/
certainty that smart city projects are able first spark so there is a leap of faith
to access specific subsidies before a final for waste-to-energy facilities because
investment decision is made. As Allister you don’t have certainty during
Wood, Head of Infrastructure at Morgan construction.”
20 | Smart cities in EuropeCase study
The role of Government
in accelerating
automated demand
response in the UK
Demand-side automated demand response (ADR) pays energy users to Engaging citizens is
turn down or switch off energy-consuming equipment at times of high
energy demand, thereby reducing the volume of generation capacity that essential
must be switched on to maintain grid frequency. The development of Survey respondents identified social issues
demand-side ADR thus far and the obstacles to its wider use provide a as a major obstacle to the roll-out of smart
clear example of the role governments can play in promoting smart city cities – a lack of consumer demand for
initiatives. solutions and concerns over security/privacy
At the EU level, the EU Energy Efficiency Directive emphasises the use issues were the top two obstacles to the
of demand response, but does not mandate usage. That is pushed at the roll-out of smart meters, while a lack of
national government level. In the UK, a number of initiatives have been consumer demand was the main obstacle to
implemented to accelerate the use of demand response. the more widespread use of building control
systems. These two obstacles are linked. A
• Low Carbon Network Fund (LNCF): OFGEM has developed lack of consumer demand will to an extent be
the LNCF, a £500 million fund that provides DNOs with capital to underpinned by privacy concerns. To address
pilot new technology or commercial and operating arrangements to this obstacle, governments and the private
explore how networks can facilitate the take-up of renewable energy sector must work together to educate citizens
and energy efficiency. The programme runs between 2010 and about the benefits of smart technology.
2015.
With respect to smart meters, there is
• Phased minimum capacities: In order to participate in demand a significant difference in the level of
response with the National Grid, aggregators must compile at least understanding of the benefits of the
3 MW of capacity. This is quite a challenge given that individual technology across Europe. Almost half of
buildings may be able to provide adjustable load in the region of French and Italian respondents believe
100-500 KW. The National Grid, therefore, has launched a new energy consumers in their country are
service that enables aggregators to build up their capacity in steps. convinced by the benefits of smart
meters. This compares with under 20% of
While these initiatives have accelerated the use of demand response, German respondents and only 22% of UK
much more can be done in the UK. “Lack of support by the respondents.
Government is the main reason this market might not fulfil
its potential,” explained Scott Petersen, Business Development This is directly correlated to the level
Director – Smart Grid Solutions, Europe & North Africa at Honeywell of deployment in each country. Italy is
Building Solutions. “We are pushing for the carbon impact to furthest ahead, where state utility Enel has
be taken into account as it’s not at the moment. The national installed smart meters for over 90% of all
grid selects resources on the basis of economic merit for grid Italian households. However, in Germany,
balancing, so will just take the cheapest option, which is often a cost-benefit analysis for the roll-out of
provided by fossil-fuelled power stations. But these generate smart meters found that the programme is
carbon emissions. We believe that the carbon impact should only economically justifiable for particular
be taken into account and low-carbon resources should be consumers, and will, therefore, not hit the EU
prioritised over dirty demand response resources.” target of replacing 80% of existing meters
with smart versions by 2020.
Smart cities in Europe | 21You can also read
