Monday 21 July 2014
As many of my readers know my other interest in life other than energy matters is space – and specifically human exploration of space. I believe that exploration is hard wired into humans – otherwise we would still be living in the trees – and space exploration (and ultimately development) is the next logical step in our drive to explore. Of course we should also continue exploring Earth, especially the oceans – the loss of MH370 reminded us how little we know about the oceans – but we need to step up our presence in space.
Forty five years ago the Apollo 11 mission landed the first men on the moon. Neil Armstrong and Buzz Aldrin touched down on the Sea of Tranquility on 20th July 1969, carried out the first moon walk and then returned to their colleague Michael Collins orbiting the moon in the Command Module. They safely splashed down in the Pacific ocean on 24 July – thus fulfilling John F. Kennedy’s vision outlined in a speech to Congress on 25 May 1961: “this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to the earth”.
I know that space exploration, and particularly now the emerging space tourism industry (which I believe will become a high-growth industry of the 2020s) can be controversial – especially amongst environmentalists but putting all that on one side, the 45th anniversary of Apollo 11 is a good time to remember just what an amazing achievement Apollo 11, and indeed the whole Apollo programme really was. It is also an excuse to remember some of the amazing facts about the Apollo technology – what NASA used to call “gee whiz data” because in the now archaic language of the 1960s it made you say “gee whiz”. I guess the modern equivalent would be “awesome” (although I am undoubtedly demonstrating that I am several generations of language behind in saying that).
The legacy of Apollo falls into several areas including technology, management and environmental consciousness.
Although the technology was (and still is) amazing the other incredible thing about Apollo was the management of such a complex, huge, high technology project. The programme employed 411,000 people at its peak (in 1965) and involved various government agencies as well as NASA, universities and the private sector. The management systems – mainly paper based in those days of course – worked well enough to bring all the people, resources, systems, components and money together and achieve the objective. In 1961 when President Kennedy set the objective (as clear and measurable an objective as there could be), many observers including many in the aerospace industry, considered that it was impossible. Even the methodology for going to the moon (Earth Orbit Rendezvous versus Lunar Orbit Rendezvous) was the subject of much debate and not finally settled until the middle of 1962. The Apollo programme truly demonstrates that humans can achieve anything we want to – if we have a clear objective and put the resources into it.
Another legacy from Apollo is its effect on the global environmental consciousness. There is little doubt that the photographs of Earth taken from the moon and enroute to the moon – particularly from Apollo 8 orbiting the moon in December 1968, gave us a new perspective on the Earth as a small, fragile “blue marble”.
American poet Archibald MacLeish wrote at the time: “To see the Earth as it truly is, small and blue and beautiful in that eternal silence where it floats, is to see ourselves as riders on the Earth together, brothers on that bright loveliness in the eternal cold, brothers who know now that they are truly brothers.”
Many astronauts and cosmonauts since then have commented on the significant impact of seeing Earth from space, albeit “only” from Earth orbit as we have not revisited the moon since 1972. Sigmund Jaehn, the first German astronaut said:
“Before I flew, I was already aware of how small and vulnerable our planet is; but only when I saw it from space, in all its ineffable beauty and fragility, did I realize that humankind’s most urgent task is to cherish and preserve it for future generations.”
Anousheh Ansari, the first female private space explorer, fourth private space participant and first astronaut of Iranian descent who flew to the International Space Station in 2006 said:
“Nothing could have prepared me for the beauty of the view. It was breathtaking – watching the Earth from above without seeing borders, wars and divisions and realising how fragile the planet is. Every world leader should make the trip. They’d start to see things differently.”
The even greater impact of seeing Earth in its entirety from the distance of the moon – and being able to cover the entire Earth with your thumb – can only be imagined.
Although people talk about the technological “spin off” of Apollo and often incorrectly cite examples such as Teflon (actually discovered in 1938). Velcro (invented 1948) and the “space pen” (developed privately and not for NASA). There have been many real spin-offs from Apollo (and the Shuttle) but probably the greatest spin-off from the cold war space programme that culminated in Apollo was the huge increase in science and engineering education and expenditure that started after the first satellite Sputnik 1 shocked America. The generation of scientists and engineers that delivered Apollo, and the generation after that which was inspired by Apollo, built the foundations for the incredible technologies we use today.
Whatever your views on space exploration it is worth taking a minute or two to remember the enormity of the achievement of Apollo and the acknowledge the incredible, almost super-human, efforts of the more than 400,000 people that worked on the programme and the 29 astronauts who flew in Apollo – 24 of whom went to the moon and 12 of whom walked on the moon.
To finish up by returning to the theme of exploration, my favourite Apollo quote of all is not the well known “that’s one small step….” from Neil Armstrong but rather a quote from Apollo 15 Commander, David R. Scott, while surveying the landing site soon after touch-down on what was the most spectacular Apollo landing site at Hadley-Apennine:
“Man must explore and this is exploration at its greatest”
Some gee whiz facts about Apollo.
You often see a quote to the effect that a digital watch has more computing power than a Saturn V or some equivalent. The Lunar Module Computer and the Apollo Guidance Computer (identical machines – one in the Lunar Module and one in the Command Module) each weighed about 70 lbs, measured about 29” x 12” x 6” and had a power usage of 70 watts. The read-only memories were made of woven wire ropes with an equivalent of 72kb memory. For a brief over-view of the Apollo computer rope memories see: https://www.youtube.com/watch?v=P12r8DKHsak.
The heat leak from the Apollo cryogenic tanks, which contain hydrogen and oxygen, was so small that if one hydrogen tank containing ice were placed in a room heated to 70 degrees F, more than 8 years would be required to melt the ice to water at just one degree above freezing. It would take approximately 4 years more for the water to reach room temperature.
When the Apollo spacecraft re-entered the atmosphere it generated energy equivalent to approximately 86,000 kWh of electricity – quoted at the time as “enough to light the city of Los Angeles for about 104 seconds; or the energy generated would lift all the people in the USA 10-3/4” off the ground”.
The Saturn V rocket itself was amazing. This was a vehicle weighing 2,700 tonnes – equivalent to a navy destroyer and 18 metres (60 feet) taller than the Statue of Liberty. The five F-1 engines of the first stage of the Saturn V produced 160,000,000 horsepower, “about double the amount of potential hydroelectric power that would be available at any given moment if all the moving waters of North America were channeled through turbines”.
The 12-foot-high Apollo Command Module contained about fifteen miles of wire.
For the best summary of the whole Apollo programme read Andrew Chaikin’s “A Man on the Moon”.
Normal energy related service will be resumed soon.
Thursday 3 July 2014
If anyone needed reminding this week about the risks around energy supply they only had to look at the satellite image below of Iraq’s largest oil refinery in flames. Recent events in Iraq as well as Ukraine have once again put energy security high on the agenda for governments and organizations.
Against this background The Crowd (http://www.thecrowd.me) held their Green Corporate Energy 2014 event on the 25th June and it was great to be a part of the team that launched a new initiative called the Energy Investment Curve.
The Energy Investment Curve
The Curve is an experiment in peer-to-peer sharing of data about energy investments made by corporates and public sector organizations. It is designed to allow people looking at energy investments to see what their peers are doing, learn from experience, help form business cases and provide a new source of data on what is happening in the market. Our vision is that it will help accelerate investment in energy demand side measures. It was designed to be easy to enter data as energy and sustainability managers are already deluged by numerous forms and data requests – the record for completing it with five investments was 14 minutes (subsequently broken after the event by a new contributor!). Anyone with an energy budget greater than £50k per annum can contribute their own data and once they do they can look at the overall results. The identity of contributing companies is protected. The data form is here: https://www.surveymonkey.com/s/thecurve.
It asks for information on five energy investments covering; what it is, what was the capex, what is the payback period as well as general information about energy spend and payback thresholds. You can see an overview of the information we are collecting here. Once you have entered your information you will be able to access the results – you have to share to be able to benefit from the experience of The Crowd.
We think that the Energy Investment Curve will help you to:
We had an initial 60 seed contributors who have provided data. A big thank you to them all – many leading organizations in energy and carbon management as well as the wider sustainability field. In summary the seed contributors had:
The Energy Investment Curve is designed so that the data can be looked at through three lenses:
Investments and paybacks
Figure 1 shows the total investment by technology with payback period on the y-axis and the amount of investment in each category shown by the width of the column.
Even at this level the curve shows a number of interesting things including:
Wouldn’t you like to run through this list to check you haven’t missed possible investments? Well now, you can. And imagine if instead of 160 investments there were 1,600 rather than 160. The question to ask yourselves is “how long will it take you to identify all of these possibilities through the normal ways of doing business?” This is a tool for reducing the discovery time and it is a tool for sharing knowledge between organizations working to invest in energy demand side measures.
The curve allows you to search by sector so that you can see what your sector peers are doing. Figure 2 shows the curve for the retail sector.
There are 29 investments in the retail sector. Payback periods are slightly higher than the overall sample – 3.7 years versus 3.2 average. As you might expect the investments are dominated by power, refrigeration and lighting measures – which reflects the energy breakdown in the retail sector.
Using the Energy Investment Curve, energy professionals in organizations, suppliers and government can actually see the pattern of energy investment across different sectors – really for the first time. As well as helping organizations one of the problems for the energy demand side industry and government is simply measuring it – the Curve is a tool that enables measurement of the industry size and its breakdown between categories. This is important because we have always had trouble measuring the size of energy efficiency and demand side investment. If we take the sample as representative of the industrial and commercial sector as a whole (which may not be quite right due to the fact that the sample is large firms), we might estimate that the total investment in the energy demand side is of the order of £6 to £7 billion – which should be compared to the £12 billion that was invested in energy supply in the UK in 2013.
One of the problems in the whole energy arena is confusion of terms. A few years ago a group of us started using the phrase “D3” to encompass all demand side activities – D3 is Demand Management (permanent reduction of load – more commonly called energy efficiency), Demand Response (temporary shifting of load), and Distributed Generation (generation on the distribution system such as on-site renewables and CHP). The Energy Investment Curve showed that investment was split roughly 2/3rd to demand management (energy efficiency) and 1/3rd to distributed generation with only a small amount on demand response. Given the pressure on the electricity grid and the increasing number of schemes to encourage demand response the small investment in demand response was surprising – and perhaps worrying for the grid. It will be interesting to see how this changes over the coming years.
The investment in distributed generation was split as follows:
There were 13 investments in PV with a total investment of about £10m – ranging in size from £5,000 to £3.75 million.
Given the revolution in LED lighting that is happening it was not surprising to see the level of investment in LEDs. Of 25 lighting investments, 19 specifically mentioned LEDs and of the £49m invested in lighting, about £46m of this was in LEDs.
A quick and dirty calculation suggests that the energy investments produced a levelized cost of electricity of about £30/MWh and a levelized cost of £8/MWh for gas1 – supporting the contention that energy efficiency is the cheapest way of delivering energy services. Refinement of this calculation would be helpful for making the case that efficiency is cheaper than new supply.
The second lens we can look at the Energy Investment Curve data through is co-benefits. The co-benefits of energy efficiency investments are really important and increasingly being recognized. The IEA is about to publish a big piece of work on co-benefits and some research shows that co-benefits of energy efficiency investments can actually be worth four times the energy savings, which would take a 4 year payback period project on energy alone to a 1 year payback period if those benefits are properly quantified and evaluated. That is only counting the benefits to the host – not including wider social benefits. Examples of co-benefits include better quality, removing production bottlenecks and increasing employee engagement.
A lot of the smarter energy management programmes are incorporating added benefits into their business cases. Tim Brooks of Lego (my all time favourite toy and inspirer of engineers everywhere) talked about this in his excellent presentation at GCE14. I can’t resist saying that Lego build up their investment case block by block incorporating co-benefits where they can. The uncertainty of some co-benefits is recognized in the process.
Other organizations are just recognizing the existence of benefits in their business case. For many years I have argued that energy and energy efficiency is a strategic matter – a matter of competitive advantage – and not just about cost savings. Catherine Cooremans, a business academic in Switzerland, has written extensively about the need to recognize the strategic value of energy efficiency investments (source 1 and source 2. Competitive advantage has three dimensions – COST, VALUE and RISK. Energy efficiency addresses all these three but my contention is that the energy efficiency industry has not been good at making this case – it has always focused on energy costs alone. We need to stress the existence of co-benefits and always include them in business cases. A rejoinder to this is that they are hard to measure – and that can be true – but business cases for other things like increased advertising are also often based on hard to measure variables. Co-benefits need to be valued wherever possible but at least recognized.
The Energy Savings Opportunities Scheme (ESOS) is coming into force soon in the UK and will mandate large organizations to have an energy survey every four years to identify energy saving opportunities. A good feature of ESOS introduced by DECC is that the survey has to be signed off by a board director. One of my concerns, however, is that energy surveys are done by energy efficiency specialists – who have also written the standards for doing energy audits such as EN16247. Standards for things like energy audits are good but traditionally audits only look for energy benefits and that is now enshrined in a standard. Energy efficiency industry and energy managers need to raise their game – particularly around ESOS otherwise we are in danger of repeating history and producing energy audit reports that identify opportunities but sit on shelves – unused because they don’t recognize co-benefits and the strategic value of energy efficiency. Back in the 1980s and 1990s we had to teach energy managers about investment appraisal techniques like IRR and NPV – now we need to teach them to look for and value co-benefits. It is no good complaining that the board does not recognize the co- benefits if no one identifies and evaluates them.
We looked at 13 co-benefits in the Energy Investment Curve including the obvious reduction in carbon emissions through to brand enhancement, employee engagement and reduction in supply risk. Figure 3 shows the results from the seed contributors for co-benefits – the size of the dot reflects how many times the benefit was mentioned. The most often mentioned co-benefit – no big surprise – is reduced carbon emissions. The second biggest is employee engagement, particularly in renewables and lighting, which are perhaps the most visible energy investments.
Interestingly renewables produced the largest employee engagement benefit as well as the largest carbon emission reduction benefit. Presumably this is to do with the very visible nature of many renewable investments such as PV and the ability to show data on energy production.
An example of co-benefits is given by the following example. A £1.75m resource conservation programme was rolled out across the west European sites of a Manufacturing / Industrial company. It paid back in around 18 months, and the company described it as “an excellent opportunity to engage with employees about what they can do to reduce energy & water usage” and gave it 5 stars.
Investment star ratings
The third lens that you can use to look at the data from the Curve is star ratings of investments. Generally ratings were high but of course that can be expected as people are more likely to submit their good investments – the ones that went well – rather than the ones that went badly. Renewables had the widest range of star ratings – all the way from 1 to 5. This may reflect the fact that the renewables boom has attracted many new entrants, not all of whom may be high quality organizations, or perhaps more charitably it reflects the fact that this is a new area in which we are all learning. Figure 4 shows the ratings in the seed contributors’ data.
In the data you’ll find a 3rd party financed PV array by a retailer with a comment: “The third party funded nature of the array limits financial gain to our organisation but provides a visible carbon reduction and energy efficiency story to our customers, team members and stakeholders.” if you’re thinking about making a similar investment, you’ll be reassured by the comment and note the co-benefits but you’ll wonder why they only gave it a 3 star rating. If you do then you can use the Curve to request an introduction and find out more.
Problems with the data and improvements
The Energy Investment Curve we launched at Green Corporate Energy 2014 was a prototype – an experiment in co-creation – and can undoubtedly be improved. Amongst other things we have identified the following issues:
In the spirit of The Crowd we want to improve the Energy Investment Curve and expand its reach collaboratively. We are looking to form a small group to help improve it and steer its direction. We also want to expand its reach across the UK – and ultimately beyond – and will keep it open to new data. Please encourage other energy users to complete the data form.
We know that there is still a massive opportunity for profitable investment in the energy demand side (D3) – in demand management (energy efficiency), demand response and of course distributed generation. Increasing the level of investment in these areas would bring great benefits to organizations – financial and other benefits – as well as to the country as a whole and the environment. D3 is the cheapest, cleanest and fastest energy resource that we have but it is not often thought about as a resource which sits alongside oil, gas, coal, renewables and nuclear. Many leading organizations over many years have shown that the energy efficiency resource just keeps giving. Companies like Dow Chemicals and 3M have consistently improved their energy efficiency and reduced consumption year after year and indeed decade after decade. Here in the UK BT has reduced its energy use year on year for five years, knocking £131m off its annual energy spend and reduced carbon emission by over 80% compared to 1996 baseline.
We hope that the Energy Investment Curve will grow and be used by many other organizations, helping them to increase investment in energy demand side measures and improve the returns from that investment, both from energy savings and the very valuable co-benefits. If we can do that we will be contributing to greater use of the demand side resource and helping to address the energy related problems we face – corporately, nationally and globally.
28 June 2014
Wednesday 18 June 2014
I just finished reading “Edison Inventing the Century” by Neil Baldwin, an excellent biography of one of the most prolific inventors and entrepreneurs ever – one who still shapes our lives today. Edison’s most important innovation was not the light bulb, the phonograph (the one he was proudest of), the electric voting machine, the moving picture camera, the iron ore separator, the electricity meter, or the electrical distribution system, but the “invention of invention” – meaning the invention of systematic research and development to find solutions to technical problems and then improve upon them.
I have written before of the hype cycle in innovation and there is no doubt that Edison was also a master of hype – often announcing inventions were ready well before they actually were. He did, however, end up with 1,093 US patents (2,332 world-wide) – a number not surpassed by anyone until 2003 – making him one of the most prolific inventors ever. Another interesting part of the book covers Edison’s development of batteries for electric cars – a story with lots of resonance today.
Already by 1896 people were worrying about pollution from gasoline engine cars. Pedro Salom, a chemist, wrote in the Journal of the Franklin Institute; “all the gasoline motors which we have seen, belch forth from their exhaust pipe a continuous stream of partially unconsumed hydrocarbons in the form of a thick smoke with a highly noxious odour”. Obviously the control of combustion and fuel quality was not what it is today – and as well as pollution people worried about frightening the horses. Salom was not without a vested interest here as he co-founded the Electric Carriage and Wagon Company Inc. at the start of 1896. By 1900 Edison had decided electric cars were the way forward – they were outselling steam cars and gasoline cars at the time – and wanted to replace the heavy lead acid battery. He spent three years testing different alkaline batteries looking for longer life, durability, safety and a much better weight to energy ratio – all those parameters we continue to seek in battery technology today. He settled on using a positive pole of iron and a negative pole of superoxide of nickel with an aqueous solution of potassium hydroxide as an electrolyte – what we call a nickel-iron battery. He crash tested them by having them thrown from a third floor balcony – a great image.
In May 1901 Harper’s Magazine said: “the famous inventor considers his new storage battery the most valuable of all his inventions, and believes it will revolutionise the whole system of transportation“. He built an assembly plant which opened in May 1901 to produce “500 cells daily” with a target cost of $10 and sales price of $15. The plant produced different designs optimised for different vehicles including cars and delivery wagons plus illuminating train carriages. Edison’s fame and ability to get publicity led to a good start with strong sales for a year or so before technical issues were discovered. Cells leaked and power losses of 30 per cent occurred under repeated charging and discharging. Edison continued to innovate – adding nickel flake within the positive plate increased watt hour capacity per pound by 40 per cent – but in the end the market rejected electric vehicles as the gasoline engine improved and the problems with batteries were recognised. The business – The Edison Storage Battery Company – carried on making batteries for other applications and was sold to Exide in 1972 who then stopped making nickel-iron batteries in 1975.
Interestingly a 2012 Nature Communications article reported that Stanford University researchers had applied nano-technology to the nickel-iron battery with promising lab results – so perh
aps Edison’s technology will make a comeback.
Edison’s friend and collaborator on electric cars, Henry Ford once famously said “history is more or less bunk” but history can be helpful for understanding the present. “Edison Inventing the Century” has plenty of insight into the development of the modern electricity system as well as the (timeless?) issues around innovation.
Wednesday 4 June 2014
At whatever level you look, globally, regionally, nationally, or even locally, we are facing a complex inter-related set of energy crises including:
The most cost effective way of addressing these problems is to accelerate the improvement in energy efficiency or productivity. Improving energy efficiency is a good investment simply in terms of the energy cost savings to capital invested ratio but it often also brings many co-benefits including increased productivity, increased comfort, improved energy security, reduced need to invest in energy supply infrastructure as well as job creation and many others.
We have known for a long while that the potential for energy efficiency is huge and in fact we have always used energy efficiency as a resource without noticing it or thinking about in those terms. Without any great effort, except between the mid-1970s and the mid-1980s, improved energy efficiency effectively delivered more energy services in the US and the UK than any other source of energy – but it is hardly ever mentioned as an energy resource. Just imagine what we can do if we really focus on it. The challenge now is to turn much more of the huge economic potential into actual, usable and used energy services which as well as direct economic benefits would bring many co-benefits in health, productivity and job creation. The signs are that we are at the beginning of a revolution in energy efficiency which could be just as important, if not more so, than the revolution in shale gas. That revolution has three fronts, technology, design and finance.
In technology we are seeing the rapid development of smart technologies that bring intelligence to dumb systems such as heating and air conditioning as well as electricity distribution and manufacturing. Intelligence can greatly improve efficiency by making sure equipment only operates when it is really necessary and operates to a set condition more accurately. In the home examples of “the internet of things” like the NEST thermostat (it is much more than a thermostat of course) have demonstrated the potential both for energy saving and to make efficiency “cool” and attractive to the consumer, helping to drive Googles $3.5 bn acquisition of NEST. As well as smart systems there is also a wealth of new and smart materials coming out such as glass from companies like VIEW that change their thermal and optical characteristics in response to changes in the environment and can cut energy demand by 20% as well as peak air conditioning load by 20% – which can enable smaller electrical feeds into buildings and reduces capital costs for the building owner and the network operator.
In design leading edge companies have demonstrated the benefits of using integrative design techniques. Proper integrative – or holistic – design can lead to capital cost savings as well as energy savings. The example of the Empire State Building retrofit shows the value of integrated design, the incremental capital on a normal refurbishment had a three year payback and the savings were 38% on a very difficult building to retrofit. A conventional approach to design would not have achieved either the savings or the return on investment – and therefore almost certainly the opportunity to make savinsg in energy use would have been lost for another twenty or thirty years. Many examples of using integrative design have shown savings of more than 70% compared to the baseline. New building designed to Passivhaus standards can run on only 10% of the energy use of a normal house. Why are we still designing houses the old fashioned way? The design profession needs to do more to promote integrated design and regulators and customers need to be better aware of what is possible and what the advantages of using integrated design are. Integrated design also applies in industry and The Sustainable Energy Authority of Ireland (SEAI) has done some very good work in promoting Energy Efficient Design (EED) which uses an integrative design approach and has been proven to result in lower energy costs, lower operational costs and capital costs and can be integrated into existing design processes.
EED has been proven to be highly productive. In the case of Lakeland Diaries, analysis of heat and cooling processes led to avoiding capital investment for additional cooling plant, reduced cooling and heating loads, reduced peak electrical loads, and to the development of a heat recovery project with an estimated payback period of six months. Energy savings achieved by applying EED have reached 50 per cent. Despite the advantages of integrative design the architectural and engineering professions are slow to change and more needs to be done to educate them as well as clients in what is possible and how to achieve it.
The final front of the efficiency revolution is finance. Energy efficiency is now beginning to be recognised an as investment opportunity, in venture capital, private equity and project finance. In 2013 VC investment in energy efficiency reached $1.3bn in 2013, about 20% of all clean tech VC investment, and the acquisiton of NEST by Google for $3.5 bn and the IPO of Opower in 2014 – both successful exits – have helped build interest. In the UK the sale of Matrix Sustainable Energy was a success for its PE backer LDC who have gone onto invest in another energy efficiency company. In the world of energy efficiency projects interest in various forms of sharing savings is growing. Traditionally this has been mainly through Energy Serivce Companies (ESCOs) and Energy Performance Contracts (EPCs) but the EPC model doesn’t really address many of the problems such as the split incentive and the fact that many building owners often can’t take on more debt. In the USA a wave of innovation has introduced new contract forms such as ESA and MEETs which promise to be much more successful than EPCs as they address the real issues of clients and of course investors. A lot of institutional money is drawn to energy efficiency because of its safe returns and the fact that unlike renewable energy it does not rely on subsidies.
We know the scale of the investment needed to significantly accelerate energy efficiency and it is roughly equivalent to the amount invested in renewables ($213 bn in 2013) and so the quantum of investment is very achievable. Whatever the subsidies or lack of them large investors could only invest institutional funds into renewables once standardised ways of developing and documenting projects had been developed. This happened in wind power in the 1990s. In conventional oil and gas it evolved before that. In energy efficiency there have been many technical and energy management standards but until now they have not been put together into a coherent protocol for developing and documenting projects. The Investor Confidence Project (ICP) (www.eeperformance.org) addresses that problem directly by working with stakeholders from the energy efficiency and finance industries to develop protocols for developing and doucmenting projects in different categories of buildings. After a few years of development the ICP has great traction in the US with more developers, investors and government agencies specifying it’s use and work will start on a European version soon. Moving towards a common approach will, just like in the renewables business and the oil and gas business, reduce transaction costs, reduce project performance risk, allow banks and investors to build human capacity to process transactions, and reduce the cost of capital by facilitating access to a secondary market and securitisation. Energy efficiency is well suited to the bond markets except for the fact that the projects are too small and there is no standardisation. Development of standards through the Investor Confidence Project will allow aggregation of projects and ultimately once the scale is there, access to the bond markets.
So progress is being made on all three fronts of the energy efficiency revolution, technology, design and finance. Continued progress and the combination of all three together promise a more efficient future with major positive impacts for the economy, companies, society, industry, individuals and the environment – but regions, countries or energy suppliers who don’t see it coming and adapt accordingly will face ever growing energy and business problems.
Sunday 25 May 2014
Some thoughts from ACEEE Finance Forum in Washington DC, 12th-13th May 2014
For the third year running I attended the American Council for an Energy Efficient Economy’s Finance Forum (ACEEE FF) which is the leading conference on financing energy efficiency. It is a great place to get up to speed on the latest developments in the rapidly changing US market for efficiency finance and this year I chaired an international panel to bring a wider global perspective. The following are some thoughts inspired by the event.
Firstly it is clear that 2014 is an inflection point in energy efficiency finance and as Marshall Salant of Citi said in the opening session the ratio of deals to conferences is finally getting better. This year we have seen several landmark transactions including the securitisation of WHEEL (Warehouse for Energy Efficiency Loans) residential energy efficiency loans and $100 m funds for Joule assets and Kilowatt Financial. It now seems that until recently the challenge was bringing finance to the market but now it seems that the real problem may be creating sufficient demand to utilise the available finance. I have been saying for a long while that to massively expand the energy efficiency market and start to take up the massive potential we know exists, we need to scale up demand for energy efficiency goods and services, expand the supply of energy efficient goods and services, and expand the supply of finance flowing into energy efficiency from all sources, both internal money (I.e. Internal to the host organisation with the efficiency opportunity) and third party money. The provision of finance alone is insufficient to solve the problem. The analogy is that the fact that car manufacturers offer easy to arrange and often very cheap finance does not make people want to buy a car, we want to buy a car because we need a car to go work or whatever, or we lust after a particular car because we like the brand or in some hard to define way it meets some basic desire we have. The fact that finance does not mean people want to buy energy efficiency is reflected by the fact that several specialised funds that have been established in the UK and elsewhere are having trouble deploying money.
So an important issue is how to increase demand for energy efficiency. This requires a real understanding of markets and market segments. As one speaker at ACEEE FF said, the energy efficiency industry has always been woefully bad at marketing i.e. really understanding market segments and how purchase decisions are made. To build energy efficiency demand we need to really understand market segments, and that means segments way below the normal, residential, commercial, public sector split that most energy efficiency presentations talk about. Within each segment we need to really understand decision points and when interventions can be made. For instance there is little or no point trying to sell a major commercial building retrofit at any other point in the building life cycle than the point of major refurbishment. Property owners are extremely unlikely to undertake energy efficiency retrofits at any other point and so we need to focus on making sure these opportunities are maximised which requires capacity building in clients as well as property managers and architects and engineers. These critical decision points can also be influenced of course by regulation, if major refurbishments have to meet certain energy performance standards it will help drive demand but alongside regulation capacity building is needed. Likewise in the domestic/residential sector we need to understand and influence moments of intervention such as re-roofing or boiler/HVAC replacements in order to maximise the uptake of opportunities for improving energy efficiency.
Anyone contemplating design of energy efficiency finance programmes has to address demand and not just the supply of finance.
For several years people have talked about the bond market and securitisation for energy efficiency loans. With the first WHEEL deal we have now moved from theory to initial practice. There is, however, an awful long way to go before securitisation of energy efficiency loans is normal. Jack Bernard of Renewable Finance, who has had a long career in securitisation, forcefully made the point that the industry has to recognise the requirements of the securitisation industry and make products that look like products that serve other markets like auto loans or credit cards. An interesting emerging securitisation market, worth some $5 billion in 2014, is the single family home rental market. This is now growing but faces some of the same data issues as energy efficiency, the market just does not have the years of loan performance data that other markets have. In the US market there is some 150 years of loan performance data and auto loans have been offered for nearly 100 years and so there is a lot of data covering the full range of economic cycles.
Securitisation clearly needs standardisation and that is where initiatives such as the Investor Confidence Project (www.eeperformance.org) come in. The Investor Confidence Project is a US initiative of the Environmental Defense Fund and we are now close to launching a European version. It has developed a number of protocols which cover the development and documentation of energy efficiency projects in different types of buildings. Standardising processes and documentation will improve investor confidence in the performance of projects and reduce transaction costs. The ICP is increasingly being specified by large energy efficiency programmes such as the Texas PACE programme and a growing number of investors and insurers.
So, we now seem to be at the initial stages of solving the finance problems. The shortage now seems to be the ability to develop large scale, multi-premise, energy efficiency programmes that are standardised and designed to take advantage of the available finance.
Dr Steven Fawkes
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