Thursday 22 December 2016

It is that time of the year when journalists and bloggers – me included – struggle to come up with a Christmas or New Year themed piece.  Having started an energy efficiency review of the year I decided instead to focus on one development that I believe will have big implications for energy efficiency and energy markets in 2017 and beyond – the Building Button.  

 

2016 brought many changes in the energy scene with the oil price, fracking, the falling cost of renewables and new nuclear all making the headlines.  In December the Investor Confidence Project unveiled its latest innovation, one that promises to change the way that energy efficiency is exploited and financed, the Building Button.

 

Essentially the Building Button allows project developers using the ICP’s Investor Ready Energy Efficiency™ project certification system to literally push a button at the end of the development process and have all the data transferred into a standard form based on the US Department of Energy’s BEDES “dictionary” of terms.  This allows project data to be collected in a standardized way which will allow market participants including investors, lenders, insurers, building owners and developers to share, aggregate and analyze project level data.  This is an important first for the energy efficiency industry which up to now has been characterized by a lack of real data – a lack that reduces project host and investor confidence, and inhibits the growth of demand for efficiency upgrades.

 

Building Button is built around three use cases: Technical Due Diligence, Financial Underwriting and Actuarial Data. It can be used across organizations or within an organization wanting to track project data including on-going project performance data.  We see applications for aggregators, utilities and large portfolio owners wanting to standardize project development and data and ultimately measure the real performance of their energy efficiency investments.

 

The Building Button label sounds strange in Europe but it is derived from other “buttons” used in the US; the green button which allows consumers to download their energy consumption data, the orange button which standardizes data collection for the solar industry, and the blue button which signifies healthcare sites where patients can download their medical records.

 

Along with the standardization of project development and documentation brought about by the Investor Confidence Project – as well as the Energy Efficiency Financial Institutions Group’s guide to value and risk appraisal in energy efficiency investing, the launch of the Building Button puts in place the basic market infrastructure which is needed to build confidence and grow the energy efficiency project market.  It also lays the foundations for pay for performance models which will really push the button on growing demand for energy efficiency, a subject I am sure I will return to in 2017.

 

To learn more about the Building Button join the ICP webinar on 9th January at 0900 PST. 

 

To all my colleagues, collaborators and customers, readers of onlyelevenpercent.com and followers on Twitter and LinkedIn, have a very merry and peaceful Christmas and a healthy and prosperous 2017. 

Tuesday 22 November 2016

I heard the Chancellor of the Exchequer Philip Hammond yesterday morning talking about the Autumn statement and the need to build resilience in the UK economy. At the same time there has been a lot talk about productivity since the change of government.  The Chancellor himself said at the Conservative conference: “to deliver that strong, prosperous, economy……requires long-term, sustainable growth. And long-term sustainable growth requires us to raise our national productivity.”

 

Given these kinds of statements, and the energy situation we have, it is time to prioritise a policy and a target that would both improve resilience (to economic shocks) and improve productivity – specifically energy productivity, and put in place policies and programmes that drive energy productivity.  In the old world energy was an input to the economy and the demand for energy was driven by growth in the economy.  Now improving energy productivity itself has been shown to be a driver of economic growth.

 

Energy productivity is defined as GDP per unit of energy, how much value we create from every unit of energy.  At the end of the day we all want increased GDP. I know it is an imperfect measure of welfare but making people richer is what drives improvement in the human condition, here in the U.K. and everywhere else.  (Yes – I know that wealth also creates problems but we are not going to get out of those problems by becoming poorer – we will only get into other deeper problems). Given the energy issues that the UK is facing – including declining domestic energy production, increase reliance on imports, very tight electricity supply margin, environmental impacts that lead to health problems (a global impact through CO2 emissions and local impacts through air pollution), and poor energy efficiency in housing that leads to fuel poverty – adopting an energy productivity target and strategy should be a priority.

 

Energy productivity goes beyond the traditional perspective of energy efficiency and is more than a simple reframing of the energy efficiency agenda. Ultimately the trajectory of energy productivity in an economy is driven by three factors; the energy productivity of existing capital stock, the energy productivity of new capital stock, and the structure of the economy.

 

Increasing energy productivity of the existing stock, (which is normally the province of energy efficiency and energy management), all other things being held equal will increase the energy productivity of the economy.  The methods to do this at the macro level are the subject of energy efficiency policy – which we know how to do and is well documented.

 

Increasing energy productivity of new stock entails ensuring that new stock, across all sectors, is as efficient as possible within the definition of economic.  Although new stock, new buildings for example, will tend to be more efficient than old stock due to advances in technology and tightening regulations, many cost-effective energy efficiency opportunities are missed due to many factors.  This lever of energy productivity can be effected by regulations that are normally considered part of energy efficiency policy e.g. building codes, but importantly, and largely neglected to date, it can also be changed by finance and investment policies – areas outside conventional energy efficiency policy.  For example public infrastructure funds could have a policy of only investing in high energy productivity stock, (for instance top quartile performance) and working with project sponsors to identify cost-effective energy efficiency opportunities – as has been practiced by the EBRD for many years.  Investing in new stock that has an energy productivity higher than the average (for the economy or the sector) will increase overall energy productivity.  Other finance and investment policies that would drive improvements in energy productivity include requiring banks to assess the energy productivity of their loan portfolio, facilitating the growth of the green bond market for high energy productivity assets, and reducing capital reserve requirements for high energy productivity assets.

 

The third driver of energy productivity is diversification within the economy e.g. a move towards higher energy productivity activities. This is the province of economic development and industrial strategy policies.  Energy productivity can be applied to all sectors of the economy and it is an integrating policy.

 

At a corporate level adopting an energy productivity target also drives activity in the three areas; retro-fit, refurbishment and new build – and helps to balance them within a coherent, and strategic policy.  Strategic issues always get more attention than non-strategic things and are not subject to the same short payback criteria normally applied to retrofit.  Energy management is usually only concerned with retrofit and is consigned to the boiler room rather than the board room – making it part of a strategic policy keeps it in the board room.

 

Adopting an energy productivity target would put the UK at the forefront of energy policy. It would drive growth in the economy and innovation in policy and programmes, it would really start to address our mounting energy problems, and it would greatly contribute to the Chancellor’s goals of increasing resilence and creating sustainable growth.

Wednesday 9 November 2016

As a life-long Americaphile I can’t let the election of Donald Trump as President of the USA go by without comment.  Before I do that it is worth explaining that my affection for America came originally from following the space programme, (landing a man on the moon was America at its best), but soon grew into something much wider.  The bottom line is that America was founded on some great principles and ideals, admittedly principles and ideals that are often not lived up to, but nevertheless they are important and have had global significance.  They were formed in the 18th century by giants like Thomas Jefferson, Benjamin Franklin and James Madison.  These men were people of their age and need to be viewed as such, but that was an age that welcomed rationality and knowledge – the Age of Enlightenment – a world we now seem to be rapidly moving away from.  I have long followed American politics with all its craziness closely, I stayed up to the early hours of the morning to watch Nixon’s resignation speech in August 1974 – I don’t think many British 15 year old school boys did that.  I have always argued that whatever dimension you look at, people, culture, technology, science, geography, whatever you want, America has the best and the worst in the world, and everything in-between.  It is the land of extremes.  The US often gets criticized because of the worst end of the spectrum.  Unfortunately we now seem to be entering an era when some of the worst elements have the upper hand.

 

So what is going on in the US (and I am afraid in many other countries)?  There is clearly anger and backlash at the mainstream politicians for not addressing problems that worry many people.  Globalisation has brought enormous benefits but the problems of adjustment to de-industrialisation have not been properly addressed.  Over the last ten to twenty years most of the increase in wealth has been concentrated in the hands of a few, whereas from WW2 on until the 1980s most of it benefited the working and middle class.  Immigration, or rather mass migration, has caused and will continue to cause massive social, ethical and practical problems in the US and Europe.  The perception (real or not) that immigration is uncontrolled is a huge issue and leads to xenophobia which can be exploited.

 

“Making America Great Again” is code for all these things as well as extreme views harking back to some imagined past when America really was the top dog and there were no problems in America.  (Dumbest quote of the campaign: “there was no racism in America before Obama”). The reality is that America is still great but the world has changed and like everywhere it has a number of significant problems on the home front and internationally.  The likelihood of a Trump presidency really solving these problems is extremely unlikely – the very few policies promoted during the campaign show little understanding of the issues.

 

The scariest aspects of a Trump presidency, and current trends in general, include:

  • The rise of fact free debate and belief in crazy conspiracy theories.
  • The rise of being able to repeat a lie multiple times and have it become a “truth” – despite evidence to the contrary.
  • The rise of not trusting experts – “I know more about ISIS than the generals”. Really – how can that be?
  • The links to Russia and comments about NATO are really worrying. I hope we never see it happen but the Baltics are really at risk.
  • The rise of a bullying and misogynistic culture – remember that culture in any organization comes from the top.
  • The rise of the idea that business is an “I win – you lose” game.
  • The idea that Mike Pence may become President.

 

Hillary Clinton was clearly not a good candidate.  Given her well known long-standing ambition to be President you would have thought she would have been more careful over things like emails.  Using a home server was a seriously bad decision even though the actual security implications were probably very small.  It shows a high degree of arrogance.  It was interesting that we never got to see RNC emails or Trump’s tax returns – and now probably we never will.  We will see what comes out of the Trump University case and other actions.  The reality of a woman President will have to wait – probably for a long time.  President Obama has done a good job in most areas but I don’t agree with all of his foreign policy shifts.  He took office in the middle of the worst financial crisis since the 1930s but somehow that has been forgotten.  The healthcare reform, for all of its problems, was a great achievement and if (when) it is rolled back people may look back fondly on the benefits they had for a few years.

 

In a number of his science fiction books set in the 2050s or beyond Arthur C. Clarke referred back to a global “time of troubles” between the 2010s and the 2040s before a return to rationality and global prosperity and peace.  It seems as if he may have been right.

 

The expression “You can always count on Americans to do the right thing – after they’ve tried everything else” is attributed to Winston Churchill, although as with many sayings there is doubt he actually said it. Anyway it seems as if we may have to wait a long time while they are trying everything else – and hope the consequences aren’t catastrophic.

Wednesday 26 October 2016

Between the 18th and 20th October I was fortunate to attend the 7th Forum on Energy for Sustainable Development in Baku and to present a short summary of the work at KAPSARC on financing the transition to high energy productivity growth.  It was great to visit Baku which is one of the real birthplaces of the oil industry.  The first oil derrick was built there in 1871 – only 12 years after Drake struck oil in Pennsylvania – although there is evidence that Baku’s oil was used in the 3rd and 4th centuries and it was referred to by Marco Polo (1254 – 1324).  It is a very interesting city, particularly the old town.

 

As usual when I report my presentation this is the ideal, cleaned up text of my speaking remarks and may not reflect my actual words on the day. 

 

Good afternoon everybody. I wear several hats, all to do with financing energy efficiency and as you heard earlier from Panama one of those hats is the Investor Confidence Project.  Today though I am wearing a KAPSARC hat.

 

Yesterday Nick Howarth introduced the KAPSARC work on energy productivity.  In the interests of time I am not going to rehearse the arguments for using energy productivity as an indicator but I will stress one thing on this slide: “significant capital investment is needed to transition to higher energy productivity growth”.  Everyone can agree that we need to accelerate the rate of improvement in energy productivity (or efficiency) to achieve climate goals, we heard earlier someone say we need to accelerate the rate of improvement to 4% per annum from current levels of 1 to 1.5%.  This acceleration requires significant increases in the investment going into improving energy productivity.

 

So how do we do that?  Firstly we need to understand the different types of investment that drive improvements in energy productivity.  There are four types.

 

Energy efficiency retrofits – these are the investments in things like LEDS or new Building Management Systems that are added to an existing building, industrial facility, transport system or energy facility with the purpose of improving energy efficiency.  It is these investments that much of the energy efficiency industry and most energy managers are most concerned with.  They are important but they are only one small part of the big picture.

 

Next we have investments that refurbish buildings or industrial facilities[1] where the main purpose is not energy efficiency.  It is something else like bringing a building up to date to make it more attractive to tenants.  One of the best known energy efficiency case studies of recent years was the Empire State Building project but this was widely mis-understood.  The main project was a $500m refurbishment to bring the building into the 21st century and combat declining rental income.  The energy efficiency parts were an add-on, and a very good example of what can be done and opportunities that are being missed every day of the week as building and industrial facilities are refurbished with no real attention being paid to energy efficiency.  It is true of course that refurbished buildings tend to be more efficient than unrefurbished – although this is not automatically true – they may use more energy as improved services and comfort levels are achieved.

 

Next we have new build, buildings, industrial facilities, transport systems or energy systems. Again new facilities tend to be more efficient than old ones – especially as building codes and Minimum Energy Performance Standards on things like electric motors come into force, and technologies just get better.  However, as in refurbishment projects many, many cost-effective energy efficiency opportunities are being missed every day.  Project owners have other objectives, speed, minimum capital cost etc – and often a lack of knowledge of what can be done with just a little more thought and effort at the design stage.  On the supply side engineers and designers tend to repeat the conventional designs even though they are not optimum in terms of energy efficiency.

 

Finally we have those investments that change the structure of an economy towards a less energy intensive mix of activities.  Examples would be a Middle Eastern country investing in a car assembly plant, or a shift towards financial services.

 

The first type, energy efficiency retrofits, I call “energy efficiency investments”, the others I call “normal investments”.  These are investments that are happening every day of the week – as we speak investment committees and boards are making decisions to invest in these kinds of things all over the world.  And in many, if not nearly all, of these cases, the potential for cost-effective energy investment is not being taken up and therefore we are locking in a higher energy future than we need to.  We need to maximize the use of all these cost-effective opportunities – so how do we do that?

 

At KAPSARC we have summarized some of the possible tools to increase investment in both energy efficiency and normal investments.  So let’s start with the energy efficiency investments category.

 

For energy efficiency investments for many years the energy efficiency industry has complained that the problem is a lack of investment and in response to that, in many countries, specialized energy efficiency funds have been set up – mainly with public money but increasingly private capital.  What we have learnt is that providing money for projects is not enough – you need four elements in what I call the jigsaw of energy efficiency finance:

 

  • finance – project finance but also development finance, the really risky money that is used to develop projects to the stage at which project investors can invest
  • a pipeline of well developed bankable projects. We all know the potential for energy efficiency is huge but there is a massive gulf between potential and real, well developed bankable projects.
  • capacity building – especially in the financial sector which is new to all this stuff, but also in the supply side (the efficiency industry so they know how to deliver bankable projects), and the project hosts so they know what is possible.
  • The lack of standardization has been identified as one of the major barriers to more capital flowing into energy efficiency.  Standardization means standardization of the development and evaluation process (that is where the Investor Confidence Project comes in), standardization of contracts, and standardization of Measurement and Verification.  Without standardization you cannot have functioning markets.

 

As I said earlier, traditionally energy efficiency has been thought of as something that is the province of public finance but there is increasing interest from institutional investors in energy efficiency.  It produces safe yield and can work without subsidies.  In countries like the GCC where energy prices are low the split of benefits between governments and end-users is different than that in countries with high energy prices – this suggests Public Private Partnerships may be appropriate mechanisms.

 

Everywhere there is growing private investor interest in energy efficiency but everywhere, even in the US and Europe it is a nascent market.

 

So to maximize investment into cost-effective energy efficiency opportunities we need:

 

Specialised funds – which recognize the need to have all the pieces of the jigsaw I referred to above.  There are good examples of funds all around the world now, albeit mainly using public funds.

 

ESCO-EPC facilitation – ESCos and EPCs were referred to by an earlier speaker.  They are an important component but as I have said many times they are not the be all and end all solution some people seem to think.  They work well in certain situations – particularly in the public sector.  We do need to facilitate and grow the ESCO-EPC market and again there are great examples of how to do this around the world including: RE:FIT in the UK, the Berlin Energy Agency’s work over many years, and in the GCC the Etihad Super-ESCO which is a world class example.

 

Then we need to put in place the market infrastructure, the standardization I described above but also evidence bases to help derisk energy efficiency for the financial sector, and capacity building at many levels.

 

By the way, all of these tools are of course supported by “normal” energy efficiency policies like strong building codes and MEPS, and building energy management capacity through ISO50001.

 

Now let us look at “normal investments”.

 

One of the easiest measures is to adjust the investment criteria of existing public investment infrastructure funds.  Many countries have public investment funds that invest in new buildings, factories and infrastructure of all types.  They are often deploying billions of dollars.  By incorporating energy productivity into their investment criteria of these funds we could capture more of those cost-effective opportunities that are currently being missed and have a big impact.  As well as changes to investment rules, for example including the requirement for a new building or facility to be in the top quartile, or even top decile, of energy productivity, technical assistance can be provided to help project hosts identity and develop cost-effective improvements to their base designs.  These base designs are usually more efficient than existing buildings or factories because of tightening codes and better technology, but they almost always miss cost-effective opportunities to go beyond Business As Usual – something that we really need to do.  This is the approach used successfully for many years by the EBRD to incorporate energy efficiency into all investments.  It has two effects, it helps improve cash flows for the project host, thus reducing risks, and it increases loan amounts for the fund – helping capital deployment.

 

As well as using existing funding mechanisms it is of course also possible to create new funding vehicles specifically aimed at improving energy productivity. These can be financed through green bonds (although this requires scale and standardization), or Sharia’ complaint funding.  A green bond or green sukuk financed umbrella fund could be created as part of sovereign wealth funds with pockets aimed at different types of projects.  Creating a new fund or vehicles though is always more difficult that adjusting those you have already. On the plus side they have a clear focus.

 

A more radical idea we are working on is the negabarrel market.  For oil producing countries a barrel of oil saved domestically has several positive economic effects, it reduces government spending on energy subsidies (where these are still in place) and it frees up a barrel for export or for higher added value purposes such as petrochemical production.  The monetary value of these benefits to the government can be calculated and a price per negabarrel set.  If negabarrels can be delivered by project developers at less than that price – either through energy efficiency investments or through high energy productivity normal investments – it is worth the government buying negabarrels from the market.  This incentive will encourage the development of high energy productivity projects and provide extra revenue to project hosts to offset any additional capital costs (although additional capital is not always required). There are issues of measurement and verification but these can be overcome with clear transparent standards and modern M&V techniques.

 

At KAPSARC we have assessed the likely impact and the difficulty of implementing all these tools.  The easiest, large impact measure would undoubtedly be changing the investment criteria of existing funds to include energy productivity targets and providing technical assistance to identify opportunities for improvement within normal projects.    At the other end of the scale in terms of ease of implementation is the negabarrel market concept.

 

You can read much more detail in the KAPSARC paper.

 

So to conclude:

  • we need to massively ramp up investment into energy productivity,
  • to do that we need to increase investment into pure energy efficiency projects and ensure “normal” projects go beyond Business As Usual in their energy productivity.
  • there is growing interest in investing in energy efficiency from institutional investors which can be tapped into, ultimately through the green bond or green sukuk markets.
  • governments can take a range of measures to maximize investment into increasing energy productivity ranging from the simple adjustment of investment criteria for existing infrastructure funds through to creating a negabarrel market.

If we can implement some or all of these ideas I think we will be surprised how fast we can accelerate the improvement in energy productivity.

 

Thank you.

 


 

[1] or transport systems or energy systems

 


 

Tuesday 11 October 2016

I saw from the news a few weeks back that Rolls Royce is growing its team working on Small Modular Reactors (SMRs) in response to the government’s competition for SMRs. The government has committed to invest £250 million into SMRs.

 

The basic idea is to be able to put reactors with output of about 250MW “on the back of a truck” and distribute them widely across the grid. The government’s aspiration is to have SMRs available in the 2020s. I won’t go into the many competing designs (for that see an excellent piece by Andy Dawson on Euan Mearn’s website). I am not inherently against nuclear, just against using a form of the technology that was essentially optimized for military applications, is not inherently safe and rely on extremely long-term safeguards. It would appear that many of the 33 (!!) candidates for the SMR funding are proposing Light Water Reactors although there are some pebble bed and molten salt designs. There is clearly scope (and the need) to develop new types of inherently safe reactors as well as using the thorium cycle which has advantages over the uranium cycle – but these are R&D projects, not things that will deliver reliable power in the 2020s or even the 2030s. Adopting existing LWR designs used in submarines does not really seem much of a development. Even if a) SMRs work and b) they are remotely economic, think of the NIMBY protests – the anti-SMR brigade would make anti-frackers look like beginners.

 

Andy Dawson includes a great quote from Admiral Rickover, the father of U.S. Navy nuclear propulsion – a quote that should be hung on the wall of every energy Minister:

 

“An academic reactor or reactor plant almost always has the following basic characteristics: (1) It is simple. (2) It is small. (3) It is cheap. (4) It is light. (5) It can be built very quickly. (6) It is very flexible in purpose. (7) Very little development will be required. It will use off-the-shelf components. (8) The reactor is in the study phase. It is not being built now.

 

On the other hand a practical reactor can be distinguished by the following characteristics: (1) It is being built now. (2) It is behind schedule. (3) It requires an immense amount of development on apparently trivial items. (4) It is very expensive. (5) It takes a long time to build because of its engineering development problems. (6) It is large. (7) It is heavy. (8) It is complicated.”

 

This quote could also be applied to all new energy technology concepts.

 

The SMR competition seems to be another symptom of the “magpie syndrome” that seems to affect politicians looking at energy – settle on a bright shiny thing and assume that it will solve all our problems. We have seen this with offshore wind power (and renewables in general), biomass, heat pumps, new nuclear, fracking and now SMRs. This particular bright shiny object was one of George Osborne’s ideas – he does seem to have had a particularly bad case of magpie syndrome.

 

Don’t get me wrong – I am not against R&D and developing new technology – far from it – we need to increase spending on R&D in lots of areas – but we have a whole set of technologies that we know work, which are economic and can deliver results in short order. These include: LED lighting, building insulation, Building Management Systems, integrated design tools, Combined Heat and Power, trigeneration, combined cycle gas turbines (CCGTs), CCGTs combined with Rankine cycle turbines. Let’s focus on maximizing the application of the technologies that a) we know will work b) are economic c) improve energy efficiency and productivity d) reduce energy and technology imports and e) create jobs – rather than the latest shiny bright thing.

Dr Steven Fawkes

Welcome to my blog on energy efficiency and energy efficiency financing. The first question people ask is why my blog is called 'only eleven percent' - the answer is here. I look forward to engaging with you!

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