I was honoured to be presented with an ACEEE Champion of Energy Efficiency Award in Denver, Colorado on 17th August.  Here are my remarks on accepting the Award at the ACEEE Industry Event.

Thank you very much for this award.  It is a great honour to be given an award by the ACEEE as most of my work is outside the US and I am a big fan of the work of ACEEE. When I flew over for this I wasn’t expecting to have to make an acceptance speech so I was very surprised when I read in the programme “presentations by award winners”. When I asked Ethan for advice, he suggested talking about how I got into energy efficiency and something about the industry.

Well, it may not surprise you that when I was asked, “what do you want to be when you grow up?” as a child I did not say, I want to go into energy efficiency. I actually wanted to be an astronaut but growing up in UK in the 1970s that didn’t seem a viable career move. Then in 1974 in the U.K. we had something called the three day week. This meant that industry only got electricity three days a week, TV finished early, households had rolling power cuts, and even the pubs closed early. This was all due to a strike by coal miners, but it came on the back of the first oil crisis and the two combined seemed to foretell some dystopian future where energy was in short supply. I decided then that energy was a really important area to work on and particularly energy efficiency and renewable energy, which back then was called alternative energy. When I left school I took one of the first ever degrees focused on energy. Then after working a year as an energy auditor I was invited to do a PhD about the potential for energy efficiency in British industry. I have to tell you I had no intention of doing a PhD, but this was a unique opportunity as it was based in industry. Furthermore one of the industries I focused on was brewing. So I spent much of my PhD in breweries and in those days workers in breweries could drink at lunch time – something long gone because of Health and Safety rules. So all in all it was a hard PhD to turn down. It is worth noting that brewing has always been central to energy efficiency and thermodynamics – John Prescott Joule who did the early work on thermodynamics was the son of a wealthy brewer and his early work was all about saving money on energy costs – only later did he work on the theory.

So that is how I got into energy efficiency. I suppose the other question is why did I stay with it so long. There is a lot of talk of barriers in energy efficiency and I suppose I have banged my head against every one of them over the years. I was probably too pig headed or too stupid to stop banging my head against barriers. There is also a more subtle and important explanation and that is about purpose. I think that improving energy and resource efficiency or productivity is the key challenge of our times and a worthy purpose to pursue. We know that we need to generate much more wealth, that is the only way to resolve problems of poverty and ignorance, here in the US, in Europe and in every corner of the world. Fundamentally we have to make everyone rich. In the past of course, and the not too distant past when I was a student, the prevailing truth was that increasing GDP meant increasing energy usage. Since the industrial revolution, wealth creation has been based on extracting more and more resources with all of the negative impacts that brings. It is clear now that despite the views of some people in Washington that model is bankrupt. Incidentally I read yesterday that in Washington the administration is following a BAY policy – Business As Yesterday.  Despite the views of the current administration it is clear that the next mega-wave of wealth creation is about increasing the efficiency of energy and resource use – decoupling GDP growth and energy and resource use – something we have started to see in energy use in Europe and the USA. Energy efficiency is clearly at the heart of that change.

What keeps energy efficiency interesting as a career is seeing how far can we go? When you have worked on the problem as long as I have you get a historical perspective. In 1976 Amory Lovins published “Energy strategy: the road not taken” in which he described “soft energy paths” and in the UK in 1979 Gerald Leach published “A low energy strategy for the UK”.  Both of these were considered wildly optimistic at the time and widely panned by analysts, the energy industry and government agencies.  History shows that they turned out to be more accurate than any official government or energy industry scenario.  As I said in the title of a blog; “Surprise, you are living in a low energy future”.  What is more, we achieved that low energy future without really trying, except perhaps for a ten year period starting in the mid-to late 1970s.

Being an optimist I think that the six powerful drivers of change; policy, economics, technology, the interest of institutional capital, new business models and market infrastructure will continue to drive advancements in energy efficiency, and over the next 30 to 40 years we will achieve a much more efficient future than we think possible.  At the end of the day our level of energy efficiency is simply a matter of choice.  Given all the global and local pressures choosing anything other than a very low energy future makes no sense.  In fact when we consider the global environment a famous phrase from the space programme comes to mind, “failure is not an option”.

I want to finish with one more space related quote. When Apollo 11 was coming back from the moon the crew held a final in-flight press conference where they talked about the meaning of the moon landing.  Michael Collins the Command Module Pilot, likened Apollo 11 to a submarine’s periscope – all you could see was the capsule and the crew but underneath that was a huge support structure that made it all possible.  I often think that our careers are like that – all you see is the individual’s achievements but in fact they are supported by many, many people, some remembered, some forgotten – family, friends, teachers, mentors, bosses, team members, clients and many, many more.  I would like to thank all those people who have contributed to my career, past, present and future.

Thank you again to the ACEEE for their great work and thank you very much for this award.

17^th August 2017

This is the first in a series of blogs based on and picking up key elements in the EEFIG Underwriting Toolkit which was published in June. The Toolkit aims to equip financing institutions to better value and assess the risks of energy efficiency projects. 

There are four reasons why financial institutions should consider deploying capital into energy efficiency:

• energy efficiency represents a large potential market. The IEA estimates that in 2015 global investment in energy efficiency was USD 221 billion with approximately USD 32 billion being financed through explicit energy efficiency mechanisms such as Energy Performance Contracts or green bonds.  To achieve our climate goals this level of investment needs to grow to circa USD 1 trillion per annum by 2050 and the provision of finance can help overcome some of the barriers to energy efficiency investment.
• reducing risks in two ways. Firstly, increasing energy efficiency improves the cash flow of clients, thus reducing their risk. Secondly there is the risk of financing assets that become stranded as energy efficiency regulations are tightened. For example, in England & Wales it will become unlawful to lease a commercial building with an Energy Performance Certificate rating below E on 1st April 2018.  This puts owners of low performing buildings, and their lenders, at risk.
• improving energy efficiency has a direct impact on reducing emissions of carbon dioxide and other environmental impacts such as local air pollution and therefore should be a key part of Corporate Social Responsibility (CSR) programmes. Energy efficiency is regarded as one of the key pathways to reducing greenhouse gas emissions.
• bank regulators are increasingly looking at climate related risks. Actions include asking banks to disclose the climate-related risks of their loan portfolios.  In France disclosing climate-related risks is already required by law.  This will allow financial institutions to be better informed about loan performance and thus the cost of risk and carry out better risk appraisal.  Possible future actions may include reducing capital reserve requirements for “green” financing.

Each of these four factors are considered in more detail below.

A large potential market

The IEA estimate that that in 2015 total global investment into demand-side energy efficiency was USD 221 billion, USD 118 billion in buildings, USD 39 billion in industry and USD 64 billion in transport.  Investment into energy efficiency was less than 14% of total energy sector investment but increased by 6% in 2015 whereas investment into energy supply fell. The US, EU and China represent nearly 70% of the total investment into efficiency.  Total investment into efficiency can be split into “core” investments, where the motivation is specifically to achieve energy savings, and “integrated” investments which are the regular transactions in which energy efficiency is not the motivation but which improve efficiency because the new product is more efficient than the one it replaces.

To date about 85%, of all energy efficiency investment has been financed with existing sources of finance or self-financing rather than specific energy efficiency products or programmes.  The global market for Energy Performance Contracts, which are most often associated with external financing, was USD 24 billion in 2015 and of this USD 2.7 billion was in Europe.  In addition, about USD 8.2 billion of green bonds were used to finance energy efficiency.

In order to achieve climate targets the level of investment in energy efficiency, and the level of energy efficiency financing, will need to increase substantially.  The IEA and IRENA estimate that to achieve their “66% 2°C” scenario cumulative, global investment in energy efficiency between 2016 and 2050 will need to reach USD 39 trillion of which USD 30 trillion would be in the G20 economies, implying a global level of c.USD 1 trillion a year compared to the current level of USD 221 billion – a five-fold increase.

The business opportunity for financial institutions falls into two categories:

• creating new business lines for specific energy efficiency projects e.g. specific energy efficiency loans, mortgages or funds.
• ensuring normal lending and investing which is being used to finance projects where energy efficiency is not the primary objective, e.g. building refurbishments or production facility upgrades, is leveraged to ensure funded projects achieve the optimum cost-effective levels of energy efficiency which are usually higher than “business as usual” levels.

Energy efficiency projects often have rapid paybacks.  In EEFIG’s DEEP (Derisking Energy Efficiency Platform) database, which includes over 7,500 projects, the average reported paybacks are 5 years for buildings and 2 years for industrial projects. Despite this economic attractiveness many potential projects do not proceed because of other priorities of the other project host, lack of internal capacity to develop projects, or shortage of investment capital.  Furthermore, normal investments in building refurbishments and industrial facilities or new buildings and facilities often do not utilise all of the cost-effective potential for energy efficiency.  The provision of third party finance through business models that reduce the overall cost to the host is an important way of overcoming some of the barriers to improving energy efficiency and represents a major business opportunity for financial institutions.

Reducing risk

Energy efficiency investments can reduce risks for financial institutions in two ways:

• assisting individual clients, whether they be businesses or individuals, to reduce their energy costs improves their cash flow and profitability, as well as increasing their resilience to energy price rises. Reduced expenditure on energy translates directly to improved cash flow which improves the affordability of loans or mortgages, thus lowering risks to the lender.
• Tightening regulations around energy efficiency, particularly buildings such as Minimum Energy Efficiency Standards, mean that it will become impossible to rent or sell energy inefficient buildings. This is a stranded asset risk for the owner and lender.

Increasing levels of energy efficiency, essentially reducing the amount of energy used for any activity, is a central part of European policy to address concerns about energy security and climate change.  European policy is driving tighter energy efficiency regulations for buildings, equipment and appliances as well as vehicles.  The main EU policies are the Energy Efficiency Directive (EED) and the Energy Performance of Buildings Directive (EPBD) and in November 2016 the European Commission, in its Winter Package, “Clean Energy for all Europeans”, proposed further tightening of energy efficiency regulations.

Some member states have implemented Minimum Energy Efficiency Standards (MEES) (also known as Minimum Energy Performance Standards (MEPS)) which mean that after a certain date buildings with an energy efficiency below a set level cannot be sold or rented. These regulations mean that significant proportions of existing real estate portfolios could lose their income and asset value if they are not upgraded to a higher level of energy efficiency.  For owners of large property portfolios, or banks lending to property owners, this represents a significant risk which needs to be addressed.

The environmental impacts of energy efficiency

For many years advocates of energy efficiency have argued that it is the lowest cost source of energy services and a low-cost route to achieving significant reductions in greenhouse gas emissions. This has now been recognised both by policy makers and by many financial institutions.  The projects in EEFIG’s DEEP (Derisking Energy Efficiency Platform) database suggest that the median avoided cost of energy is 2.5 Eurocents/kWh for buildings and 1.2 Eurocents/kWh for industry, which is lower than generation costs.  Energy efficiency has been described as “the linchpin that can keep the door open to a 2°C future”.  The IEA estimates that in achieving a 2°C scenario energy efficiency must account for 38% of the total cumulative emission reduction through 2050, while renewable energy only needs to account for 32%.  For financial institutions looking to make a positive impact on resolving environmental problems as part of Corporate Social Responsibility programmes supporting energy efficiency should be a high priority.  As well as reducing emissions of carbon dioxide that drive global climate change, reducing energy consumption can also have a positive effect on local air pollution.

Energy efficiency and financial regulators

Financial regulators are taking an increased interest in systemic risks including climate change.  There is also a growing interest from regulators and governments in encouraging the growth of “green finance”.  The European Systemic Risk Board in its Scientific Advisory Committee report of February 2016, “Too little, too sudden”, warned of the risks of “contagion” and stranded assets if moves to a low carbon economy happened too late or too abruptly.  The report’s policy recommendations including increased reporting and disclosure of climate related risks and incorporating climate related prudential risks into stress testing.

In December 2016, the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD) published its recommendations which included disclosure of organisations’ forward looking climate related risks.

In July 2015, France strengthened mandatory climate disclosure requirements for listed companies and introduced the first mandatory requirements for institutional investors as part of Article 173 of the Law for the Energy Transition and Green Growth.  These provisions require listed companies to disclose in the annual report “the financial risks related to the effects of climate change and the measures adopted by the company to reduce them, by implementing a low-carbon strategy in every component of its activities.”  Institutional investors will also be required to “mention in their annual report, and make available to their beneficiaries, information on how their investment decision-making process takes social, environmental and governance criteria into consideration, and the means implemented to contribute to the energy and ecological transition.”  The law also requires the government to implement stress testing reflecting the risks associated with climate change.

This trend towards greater disclosure and open assessment of climate-related risks is likely to continue across Europe.

These four reasons suggest that energy efficiency should be on the board room agenda of financial institutions.  Whatever the markets they operate in there are growth opportunities as well as opportunities to reduce risks.

A recent article entitled “All Lenders must be green lenders” by friend and EnergyPro collaborator in the US Sean Neil emphasised an important aspect of green and energy efficiency financing that often seems to be forgotten and which we have been writing about for a while.  This is how do we ensure that all lending is green, or in the specific case of energy efficiency, how do we all ensure all financing achieves the optimum levels of energy efficiency.  This text draws upon the EEFIG Underwriting Toolkit and work I carried out for KAPSARC on financing energy productivity.

Every working day loans, mortgages, leases and investments are made into new buildings, building refurbishments and modernisation as well as upgrade and replacement of industrial processes and production plants.  In nearly all cases, energy efficiency is not the primary purpose of the investment being financed but the future levels of energy efficiency are effectively being decided and “locked in”, in some cases because of the long life of major assets for many decades.  Although new buildings, refurbishments or new production plants generally achieve higher levels of efficiency than the units that they replace due to a) improved technologies and b) tighter regulations and codes of practice, many cost-effective opportunities to improve energy efficiency are missed.  This occurs due to a number of reasons including; lack of knowledge on the part of project hosts, time pressure, the conservative nature of engineering design, and treating regulations as a target that have to be achieved rather than a minimum level of performance.  Banks and financial institutions can play an active role in ensuring financed projects of all types achieve optimum levels of efficiency over and above business as usual by adjusting the lending/investing process to include queries about energy efficiency and the provision of assistance to identify viable projects.  By doing this they can both reduce risks, by financing measures that improve customers’ cash flows, and potentially increase lending.

The EBRD has long been a pioneer in exploiting the opportunities provided by everyday, non-energy efficiency lending activities.  As well as specialised efficiency projects the EBRD checks all industrial or commercial loan applications to assess potential for energy efficiency improvements.  The bank then works with the client organisation to develop the priority projects and these are incorporated into the loan application.  This process ensures that all commercially and financially viable improvements are incorporated, improves the client’s cash flow (which reduces the lending risk) and increases the capital deployed.

In commercial real estate funding for the acquisition or refinancing of a building an investor or lender will typically review the building’s financials, rent roll and history and require a Physical Needs Assessment (PNA) or comparable review. It can be a relatively simple matter to make energy efficiency assessments and ratings such as Energy Performance Certificates part of that PNA, and even to make performance standards part of a lender’s requirements.  Some banks including ING and ABN Amro have implemented these kinds of programmes and are going further by providing tools to assist owners to identify energy efficiency measures.

ING Real Estate Finance (ING REF) set an ambition of reducing CO₂ emissions from its Dutch portfolio by 15-20% with a target of energy cost savings of EUR 50 million per year.  This entailed targeting 3,000 Dutch clients with 28,000 buildings.  ING paid for the development of an app which was offered to all clients – the app provides an analysis of the clients energy use across their portfolio and identifies potential energy savings.  If the potential energy savings exceed EUR 15,000 the client is offered a free site energy survey.

ING REF also provides advice to clients on what subsides are available (through a specialist third party) and ING REF offers 100% finance for energy efficiency improvements from ING Groenbank with a 0.5% discount on normal interest rates.  Within the first two years, the app was used to scan 18,000 buildings with a total floor area of 10 million m² (65% of ING REF’s portfolio).  ING aims to roll out the app to other European countries.

The important thing here is that, as Sean says in his article, just by making small adjustments to existing processes for lending and investing, banks and investors could have a significant effect on future levels of energy efficiency, as well as identifying additional opportunities to lend and to reduce risks.  Banks and investors need to ensure all projects they back, in whatever sector they are, real estate, industry, infrastructure, transport or energy supply, incorporate all cost-effective energy efficiency measures.  If they don’t they are aiding and abetting developers and operators to lock in unnecessarily high levels of energy waste for the foreseeable future, sometimes even for decades.

The 22^nd June sees the launch of the EEFIG Underwriting Toolkit – a major new publication aimed at assisting financial institutions build capacity in financing energy efficiency, particularly in regard to understanding and appraising the value and risk of energy efficiency projects.  As its primary author, assisted by a great Consortium and input from many EEFIG members and others, it will be good to get the Toolkit into the market place after a year of work on it.  Although primarily aimed at financial institutions looking to deploy capital into energy efficiency it should also be of use to project developers who can use it to develop projects more in line with the needs of financiers, and CFOs reviewing possible corporate energy efficiency investments who often face the same issues as external providers of capital.

With growing interest from financial institutions in financing energy efficiency projects, and increased recognition that investment and financing of energy efficiency has to grow by a factor of five by 2050 for us to have any chance of meeting our climate goals, it is time to address the elephant in the room on energy efficiency – performance risk.  Recent articles in the UK press have highlighted the inadequacies of energy modelling, the performance gap between what a project is supposed to save and what it actually saves. Similarly in the US there has been disquiet about a number of PACE funded projects not performing.

The energy efficiency industry needs to come clean about performance risk and banks and investors contemplating scaling up capital deployment into efficiency need to understand the issue.  This does not mean don’t invest in efficiency, or that it is high risk, it just means we need to really understand and where possible mitigate the risks.

So far most financial institutions have studiously ignored performance risk for the apparently rational reason that they are not taking it, or at least they think they are not taking it.   Most energy efficiency financing at the moment is straight forward consumer or commercial lending, just and just like any other loan the borrower is on the hook for the payments come what may.  The next largest area of efficiency financing is funding investments made under an Energy Performance Contract (EPC) where an Energy Service Company (ESCO) provides a guarantee that the predicted level of savings will be achieved and if they are not, pays the difference.  So assuming the ESCO is experienced and credit worthy all is well for the bank, the project fails to deliver, the ESCO pays the client and the client pays back the bank.

However, things are really not that simple and even when financial institutions are not explicitly and contractually taking the performance risk they should be concerned about it for six good reasons:

• depending on jurisdiction consumer credit law it may make a lender responsible for equipment performance over its lifetime.
• under-performance can lead to customer dis-satisfaction which leads to disputes which put repayment at risk. They also consume time and energy on both sides and create a negative customer experience which these days can be quickly communicated and can cause reputational damage.
• some financial institutions count the improved cash flow resulting from the projected energy savings in their credit risk assessment. Even though they do not contractually take credit risk this means that they are implicitly taking performance risk, if the savings are not delivered the customer’s credit risk is higher than the assessed number.
• failures of project performance at scale in residential financed projects may lead to reputational loss, even a mis-selling scandal. In the US and UK there has been negative press about the performance of energy efficiency retrofits. Imagine if a bank financed millions of retrofits on the promise of savings being greater than repayments and they were not delivered, the reputational risks and the cost to rectify would be huge.
• a better understanding of performance risk will allow development of new products which take some performance risk for higher returns. This has started to happen in wind power for instance where lenders who previously would take no performance risk are now taking some for higher returns.  Done right energy efficiency can be highly profitable and secure so there is an opportunity for a funder who really understands the risks.
• re-financing markets, specifically the green bond market, will require assurance that underlying projects are performing and having a genuine environmental impact. The green bond market is imposing more stringent standards on what qualifies as green.  In order to attract the most investors at the best rates it is important to be able to prove that the underlying projects are actually performing as they were supposed to.

These six reasons mean that financial institutions active in, or contemplating entering the energy efficiency market really do need to understand and manage performance risk.

The Investor Confidence Project (ICP) is an international project to reduce performance risks and due diligence cost through the standardisation of energy efficiency project development.  Under the ICP’s Investor Ready Energy Efficiency™ system, accredited project developers, who have to be highly qualified and experienced, develop projects following the ICP’s Protocols which are then independently reviewed by an ICP Quality Assurance professional.  Projects that receive the Investor Ready Energy Efficiency™ certification have followed international, transparent best practice and therefore will have lower performance risk and financial institutions can spend less on due diligence – lenders and investors, as well as CFOs, can have more confidence in them.  They also have on-going Operations & Maintenance and Measurement & Verification plans both of which help to maintain savings through the life of the project.  Standardisation through the ICP will also enable aggregation which is necessary in order to utilise the debt capital markets.

ICP has Protocols available to use in the buildings sector, both tertiary buildings and apartment blocks in the US and Europe.  Protocols for industrial efficiency projects, street lighting and district energy are under development in Europe with the support of the European Commission’s Horizon 2020 programme.  Project Developers can get training and become accredited – helping to give customers more confidence in their projects.

Financial institutions looking to deploy capital into energy efficiency should engage with the Investor Confidence Project and require its adoption from their project developers and project hosts.

More details on the ICP: europe.eeperformance.org

The ICPEU and I3CP projects have received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 649836 and 754056. The sole responsibility for the content of this document lies with the authors. It does not necessarily reflect the opinion of the European Union.  Neither the EASME nor the European Commission are responsible for any use that may be made of the information contained therein.

On 9^th May I presented at the Flame Conference, Europe’s leading natural gas and LNG conference.  This was a different audience for me as I don’t often present to the massed ranks of the energy supply industry.  As I said during my introduction, my good news is usually their bad news.  Here is a version of my presentation.

We are at the beginning of the perfect storm for energy efficiency with six major drivers all coming together.  The drivers are:

• Policy
• Economics
• Finance
• Technology
• Business models
• Market infrastructure

My argument is that these drivers coming together will significantly accelerate the uptake of the energy efficiency potential and seriously dent future energy demand.

In Europe the EC released its winter package late last year which was entitled “Clean Energy for all Europeans”.  Amongst its thousands of pages there were some significant proposals for energy efficiency including adopting a 30% binding energy efficiency target for 2030, a revised Energy Efficiency Directive, and a revised Directive on the Energy Performance of Buildings.  We already have policies on Near Zero Energy buildings, Minimum Energy Efficiency Standards, and mandated energy audits for large organisations every four years.  On top of these policies we have significant public funding going into energy efficiency as Project Development Assistance, loans and guarantees.  Outside Europe, despite the best efforts of the current administration, many cities and states in the US are ramping up their energy efficiency programmes as a way of reducing environmental impacts and creating employment.

On economics, those of us who have been long-term advocates of energy efficiency have always argued that improving energy efficiency is the cheapest, (as well as quickest and cleanest) way of meeting demand for energy services.  Now we have the evidence on this.  The Derisking Energy Efficiency Platform (DEEP), created by the Energy Efficiency Financial Institutions Group Derisking project, has data on more than 7,500 projects across industry and buildings.  The mean cost of energy efficiency for buildings is 2.5 euro cent per kWh while for industry it is 1.2 euro cent per kWh.  On top of the financial benefits from energy cost savings, it is increasingly recognised that energy efficiency brings with it many non-energy benefits including amongst others; improved health and well-being, increased productivity, and increased asset value.  These non-energy benefits can be much more valuable and much more strategic to decision makers than simple energy cost savings, and therefore projects sold in this way are more likely to proceed.  Energy efficiency projects should and are increasingly sold on these strategic non-energy benefits.

Finance is the next driver of change.  For many years energy efficiency professionals said “there is no money for efficiency”.  This is no longer true.  There is a wall of capital looking to invest in energy efficiency because it is low risk and offers the most impactful way to influence emissions and climate change.  Groups like the Institutional Investors Group on Climate Change, which has 130 members with €18 trillion in assets, are pushing to increase the deployment of capital into energy efficiency.  More than 140 banks have signed commitments to increase their deployments into efficiency.  Finally the massive scale of the opportunity, perhaps the biggest money making opportunity on the planet, has been recognised.  There is more money available than there are well developed projects.  The issues now are all about practical ways to scale up the development and funding of energy efficiency investments.

Energy efficiency technology is moving rapidly and getting cheaper, and it is not all about LED lighting.  New smart control technologies, artificial intelligence and retrofit prefabrication technologies are all getting cheaper.  Innovations like Energiesprong offer rapid retrofits which can greatly improve living conditions, speed up retrofits to a week or less, and result in financed solutions that end up in a net zero energy house – something that will be deeply attractive to many consumers, particularly in markets like the UK where energy companies are deeply unpopular.  The number of efficiency start-ups has increased and at the other end of the scale large companies are adapting and developing new technologies.

Along with technology and finance another important driver is business models.  When people start talking about energy efficiency it does not take long for the conversation to shift to Energy Performance Contracts or EPCs.  EPCs have been around a long time but remain a small market, the reason why they remain small is they don’t work in most sectors.  They work in the US public sector and to a limited degree the EU public sector, but they don’t work in commercial real estate or in industry.  New contract and business models are emerging such as Efficiency Service Agreements and Managed Energy Efficiency Agreements.  In California and other US states there is real innovation in which energy efficiency is actually being metered just like any other energy supply.  This allows several things; for the first time we can actually pay for performance rather than just pay for stuff like insulation and new boilers and hope it works, secondly efficiency can become a metered commodity and a reliable energy source like any others – something it has never been before.

On top of all these drivers we have a number of what I call market infrastructure developments.  Chief amongst these is the Investor Confidence Project (ICP) which addresses one of the major barriers to scaling up investment into energy efficiency.  This lack of standardisation increases performance risk, increase due diligence costs, prevents aggregation of multiple small projects and prevents banks and investors building teams around standard processes.  The ICP through its Investor Ready Energy Efficiency™ provides a way of standardising through best practice, transparency and independent quality assurance.

So how far can we go in decoupling energy growth and economic growth?  When I first became a student of energy in the late 1970s it was accepted that energy use and GDP were firmly coupled.  All forecasts of demand were based on that idea.  Then we moved to “relative decoupling” in which energy use grew less rapidly than economic output. After that came “absolute decoupling” in which energy use declines while economic output continues to grow.  Since 2007/08 we seem to have entered absolute decoupling in Europe and the US.

We need to learn a lesson from history when thinking about future energy demand.  In the 1970s two significant low energy scenarios were published.  In 1976 Amory Lovins published “Energy strategy: the road not taken” in which he described “soft energy paths” and in 1979 Gerald Leach et.al. published “A low energy strategy for the UK”.  Both of these were considered wildly optimistic at the time and widely panned by analysts, the energy industry and government agencies.  History shows that they turned out to be more accurate than any official government or energy industry scenario.  As I said in the title of a blog a while back; “Surprise, you are living in a low energy future”.  What is more, we achieved that low energy future without really trying, except perhaps for a ten year period starting in the mid-to late 1970s.

So to answer an expanded version of the question in the title, “How much will technology / policy / economics / finance / business models and emerging market infrastructure reduce energy demand?”, a lot more than you think!