Tuesday 10 July 2018

On the 9th July I attended the launch of the Mayor of London’s Energy Efficiency Fund (MEEF), a £500m public-private energy efficiency fund established by the Greater London Authority and being managed by Amber Infrastructure.  I was reminded of a similar day in October 2011 when I attended the launch of the London Energy Efficiency Fund (LEEF).

 

MEEF represents the scale of the ambition in London and is a significant step-up in the level of funds specifically available to energy efficiency projects. MEEF is the largest public-private energy efficiency fund in Europe. It was an appropriate occasion to reflect on some of the significant changes in thinking and practice in energy efficiency financing in the seven years between the launches of LEEF and MEEF. (In the interest of full disclosure I have served as the independent member of the Investment Committee of LEEF since 2014).

 

First of all there is increased recognition of the importance of energy efficiency in achieving climate goals. These days the EC talks about “efficiency first” which is a significant change. Clearly there is still a long way to go to reset the balance between energy supply and energy demand but things have improved.

 

There is also much greater clarity on the real barriers to financing energy efficiency. Back in 2011 there was still a perception that the main issue was “lack of finance” and that just providing funds would lead to a flow of projects being financed.  Reality turned out to be different.  Several funds around Europe were established and had difficulties deploying funds due to a lack of well developed bankable projects.  It has become clear that there is a need for some kind of assistance to develop projects to make them investable which there will be in the case of MEEF. LEEF deployed funds successfully through consistent and significant efforts to work with project developers and owners to develop projects through to implementation.  Project development is the real gap we need to fill to turn the energy efficiency resource into productive assets generating economic and environmental returns.

 

In the last few years the importance of non-energy benefits, which are often more strategic and more valuable than energy cost savings, has been recognised through work by Catherine Cooremans and others, as well as by the International Energy Agency. Valuing and selling non-energy benefits is a critical need.  Many energy efficiency projects are incorporated into larger projects carried out for other reasons such as bringing buildings up to modern standards and any policy or financing programme must recognise this.

 

We have seen the development and introduction of several tools that support energy efficiency financing.  These include the Investor Confidence Project, originally developed for buildings and now available in Europe for industry, street lighting and district energy. (ICP in Europe has been supported by Horizon 2020).  ICP introduced the concept of standardisation for project development and documentation as well as a certification system for projects, Investor Ready Energy Efficiency™. The Energy Efficiency Financial Institutions Group’s (EEFIG) work developing a database of 10,000 projects (the Derisking Energy Efficiency Platform, DEEP) and the Underwriting Toolkit, are useful tools for people developing financing programmes or funds.

 

The last year or so has seen some significant developments including the EMF-ECBC Energy Efficient Mortgage Initiative which is bringing many financial institutions together to build a standardised pan-European mortgage mechanism that will incentivise people to improve the energy efficiency of their homes through preferential financing.  The EU-PACE project, (like the mortgage initiative supported by Horizon 2020), is working to introduce funding of energy efficiency measures through property taxes.  In the US the PACE market has taken off in the residential and commercial sectors.  Significantly the PACE market in the US has seen a number of secondary market transactions with portfolios of PACE loans being refinanced through securitisation.  Creating a secondary market large enough for the green bond market remains a holy grail.

 

A major positive change in the last two years has been the rapid rise of activity in green financing, particularly the involvement of central banks.  Ultimately action by bank regulators to address systemic risks in the finance system may have more effect on energy efficiency levels than traditional energy policies or regulations.  Energy efficiency should be a major part of the green finance movement – the danger is that it gets less attention because it is more difficult than just funding renewables.  The Energy Efficient Mortgage initiative is a great example of addressing energy efficiency and the green finance market together.

 

So in seven years the energy efficiency financing market has evolved – it has grown in understanding, capability and scale. I used to use a quote from a banker in the US who said “the problem with the energy efficiency finance market is that the ratio of conferences to deals is too high”.  There is no doubt that the ratio is getting better but of course there is still a long way to go until energy efficiency financing is main-stream.

Wednesday 20 June 2018

A few weeks ago I wrote about the need for better business cases for energy efficiency projects.  More and more it seems that one of the most effective ways of building better business cases is to identify and value non-energy benefits (NEBs).  NEBs are all those benefits that come from an efficiency project that are not energy related, they can include (amongst many others); improved health, reduced absenteeism, better learning outcomes, increased productivity, increased production, and increased asset value. All of these benefits have been identified in specific situations and in most if not all cases have been measured.

 

The first useful thing about NEBs is that they are usually much more strategic and interesting to decision makers (at all levels from consumers to CFOs) than simple energy cost savings (or even reduction in emissions).  This is important because the classical capital allocation model which says that companies should invest in any project that has an IRR greater than the cost of capital just is not how it works in practice.  Capital is limited and projects that are considered strategic have higher priority than non-strategic projects.  If something is strategic it would be unusual to hear “what is the payback?”.  It is strategic because it supports the primary mission of the organisation whatever that is and it is something that usually “has to be done”.

 

The second thing about NEBs is that they really do have financial value and once they are identified their value can be measured or at least estimated.  It has been said that they are hard to measure and sometimes that is true but the reality is that data that can be used to estimate benefits often exists already e.g. absenteeism records. It is just that traditionally energy managers or energy efficiency engineers have not considered the NEBs and their value in their business cases, or gathered data to support the business case. Valuing NEBs is not an exact science but that applies to many things in business, the point is to recognise that they exist and to come up with an agreed estimate of value – however approximate.  Once you do that you can often find that the value of the NEBs is far more than the value of the energy cost savings.

 

So to make better business cases:

  • Step 1: identify EE project and energy cost savings
  • Step 2: identify NEBs
  • Step 3: link the NEBs to strategic direction i.e. create strategic value
  • Step 4: appraise financial value of NEBs and include in financial evaluation alongside energy cost savings
  • Step 5: capture strategic & financial value and include in the business case

 

To sum up:

 

Financial value of EE + Strategic value of NEBs + Financial value of NEBs = Better Business Cases = More Capital Flow

 

Thursday 31 May 2018

My favourite author Arthur C. Clarke once said that “any sufficiently advanced technology is indistinguishable from magic” and today I want to write about some technology that fits that description, and more importantly about the person who created that magic.  Of course Arthur meant that technology is only magic to those who don’t understand it, not that it cannot be explained. The huge array of “magical” technology we have available today is due to humanity’s creativity and genius at deciphering the universe and working out how to apply that knowledge.

 

On 10th May Nature published a paper with the title: “Rapid energy-efficient manufacturing of polymers and composites via frontal polymerization” by a team from the Beckman Institute at the University of Illinois.  Unless you have an extremely good understanding of advanced chemistry and materials science I don’t recommend reading the paper itself but the technology described is incredible.  Essentially it concerns a new way of curing polymers that only requires a quick touch from a small heat source to send a wave of polymerisation through the material.  The significance of this in the real world is in the manufacturing of high performance polymers and composites, materials that are finding growing use in aircraft, automobiles and other applications due to their excellent mechanical and thermal performance and low weight, a characteristic that helps reduce fuel use.

 

In our normal world of energy efficiency we are used to talking about savings of 10-30%, maybe 50-70+% in really impressive cases.  Manufacturing composites is energy intensive and uses large ovens, one US producer reports that curing just one component of a commercial airliner can use 96,000 kWh, equivalent to the annual usage of nine average US homes.  The new technique uses 10 orders of magnitude less energy and can cut production time by two orders of magnitude.  That is what you call real energy savings.

 

The reason I am writing about something that is far outside my expertise is that the lead researcher of this technology was my best friend for many years, Scott White.  Scott passed away on 28th May, taken tragically young by a rare cancer.  Scott accomplished many amazing things in his career – he was the driving force behind the first ever self-healing materials back in 2001, an advance that was reported in the press globally and led to creating a company to exploit the technology, Autonomic Materials Inc.  Essentially the whole field of self-healing materials sprung from his research.

 

I first met Scott in 1979 when I was a student working in the US for a summer selling ice cream.  We were brought together “by chance” because I spotted his parent’s Morris Minor on their drive.  For anyone who does not know a Morris Minor is a classic 1950s British car and needless to say they are very rare in the US, back then I owned one in the UK.  As a result of that car I struck up a conversation with Scott and his parents and that was the start of a rare and life-long friendship.  In the words of another favourite author of mine and Scott’s,  Richard Bach, there is “nothing by chance”.

 

Scott was many things, a true magician in many ways;  the advances in materials science he pioneered have already and will continue to change the world for the better, he was an excellent cook, guitarist, teacher, athlete, parent and friend amongst many other things.  His impact will live on but he will be sorely missed.

 

For a very brief description of Scott’s career see here.

 

For more information on frontal polymerization see here.

 

Tuesday 8 May 2018

We know that there is a massive potential for cost effective energy efficiency in nearly all, well all in fact, sectors and situations. Study after study in many countries and many regions have repeatedly shown this as has case study after case study. We know the efficiency resource is available, now we have to turn it into reserves and use it – we need to get it out of the buildings, out of the factories, out of the power systems and out of transportation.  To use the oil and gas resource analogy we are in the position of a small exploration company who have found massive reserves of oil but lack the means or the know-how to exploit it.

 

So what do we need to really scale up utilisation of the efficiency resource, the cheapest, cleanest and fastest to deploy energy resource we have?

 

Well here are (six) things that we need in any country, situation or sector.

 

  1. First of all we need to see that the resource is there. Wallace Everett Pratt, a pioneer petroleum geologist said; “where oil fields are really found is in the minds of men” and it is the same for efficiency. It is only there when you recognise it as being there.  The scale of the resource, as in oil and gas, can also be limited by imagination or technical know-how.  Applying integrated design will generally lead to a larger, more economic reserve than using conventional incremental engineering. It opens up bigger reserves in the same way that conceiving of and then implementing horizontal drilling increased oil reserves.
  2. Someone, and preferably someone with some authority and power needs to believe that it is a) viable and b) economic to spend the time and money needed to identify and then access the reserves. Viability is in the eyes of the beholder and there is a need for entrepreneurs (in both the private and public sectors) to lead. Such people are often “unreasonable”.  An example is the Empire State Building renovation that used integrated design and reduced energy use by 38%.  Without a forceful, informed client in the shape of Tony Malkin that project would not have happened in the way that it did and at best there would have been smaller, less financially attractive savings, and at worst no efficiency at all.
  3. There needs to be a good business case. Traditionally energy efficiency business cases have been of the form, invest £x and save £y on energy costs.  The world is more complex than that and it has never really been that attractive because just saving money is rarely strategic.  That is why there are so many stories of frustrated energy managers or consultants with dozens of “two year payback projects” that have been turned down by CFOs.  In the last few years we have started to recognise the multiple non-energy benefits that efficiency improvements can bring, including greater productivity, better health, better learning outcomes and many more. These tend to be much more interesting and strategic to decision makers and with strategic investments there is much less focus on the payback.  Energy efficiency advocates need to learn to make better business cases that identify and value all the benefits. It is not easy to value them but then again it is not easy to value the effect of advertising and PR spend.
  4. There is a need to spend some money developing the opportunity, taking it from an idea to an investable proposition and that is risk money. Development requires some level of engineering work, which can be very simple adaptation work for a simple measure based on a single product like high efficiency motors where you can almost replace like for like, (although that may not be the optimum solution of course) through to complex engineering to modify existing systems or structures and calculate interactions between them.  As in oil and gas exploration advanced software tools can be useful here but we have to recognise that there is often still a performance gap between what models say and what actually happens. We need better, and standardised tools.  Development of all kinds can be complex and iterative but at the end of the day there is no certainty that a real project will happen as a result of development work.  The development process is one that combines engineering, financial work, legal work, and what I call contextual work, looking at how the proposed development interacts with other factors inside and outside the host organisation.  It is essentially a process of risk reduction but at the end of the day all development work, whether it is for energy efficiency, a new building, a new product or a new rocket, is high risk, the kind of risk that has to be taken by equity or equity type funding, aided where possible by grants.  Equity funding is very different than debt type funding typically used for project implementation.  One of the issues in the market is confusion between development and contracting, particularly around Energy Service Companies (ESCOs) and Energy Performance Contracts (EPCs).  ESCos are typically contractors and not developers, they respond to Request for Quotations from clients and don’t go out and develop pipelines at risk.  So called super-ESCos such as the Etihad Super ESCo do this kind of multiple project development which is essential for scaling up the market.
  5. There is a need for project implementation finance. This can come from inside the host organisation or outside.  There is much focus on external funding but the reality is for something like 90-95% of energy efficiency projects the funding is internal.  There is little point developing a project if there is no project implementation finance available.  External finance will usually be some form of debt.
  6. The ability to procure, contract and manage the safe, on-time and on-budget implementation of projects. Although there is much focus on Energy Performance Contracts they are only one way of contracting for energy efficiency projects and are best suited to large, high value capital projects involving infrastructure upgrades.  Most projects are implemented through industry standard contracts used for all kinds of mechanical, electrical and building works or through standard procurement terms.

 

That is pretty much it.  Other things to note;

 

  • We need developers who can aggregate demand such as Etihad Super ESCo, EESL, the Saudi Super ESCo and the Carbon & Energy Fund. The super ESCos (or super developers as I prefer to call them) contract the work to ESCos.
  • We do need performance measurement and verification.
  • We do need project development standardisation as provided by the Investor Confidence Project’s Investor Ready Energy Efficiency™.
  • What legal or organisational form is chosen for the super ESCo / super developer is completely irrelevant – there is no right and wrong here – as long as the activities are taken care of. We see successful examples from the public and private sectors.
  • Developers seem to perform best when they focus on a sector or segment of the market. A developer of hospital projects is not likely to fare well in the residential sector or even the commercial office sector – the norms, the customers, the experience and the skill sets are too different.
  • Where you fund the projects from, and how you fund them i.e. what mechanism is used to recover the investment is irrelevant, different situations will demand different solutions such as simple loans, on-bill recovery or property tax supplements.
  • The hard part of funding is the development piece.

 

That is all for today.  More to follow on this – but in the meantime “just do it”.

Wednesday 18 April 2018

Fifty years ago, on 2nd April 1968, Stanley Kubrick’s film “2001 A Space Odyssey” was released in cinemas. Although I didn’t get to see the movie for another 5 years or so I first heard about it at about that time from my primary school teacher Mrs. Wright who told our class all about it, (she was an unusual and exceptional teacher).  A year later I purchased an Arrow paperback edition from our schools paperback book club, a copy I still have, and was hooked.

 

As regular readers will know one of my great interests is space exploration and “2001” helped cement that interest which was originally sparked by the regular space flights of the late sixties culminating in the moon landings between 1969 and 1972.  The screenplay of “2001” was developed by Arthur C. Clarke and based on one of his short stories called “The Sentinel”.  It explores powerful themes of exploration, evolution, human existence, life in the universe, and the rise of artificial intelligence. It remains for me the ultimate science fiction film (and book).

 

Deeply controversial on release, “2001” broke with convention with little dialogue. It shows a future where space travel is routine and run by familiar corporations such as Pan Am, (a once successful and pioneering US airline for younger readers), and Hilton – a future we may yet get to through the efforts of Elon Musk, Jeff Bezos and other space tourism pioneers. It is often said that HAL 9000, the AI running the Discovery spaceship on its mission to Jupiter, is the most human character. HAL is programmed with incompatible objectives and finally commits an insane act of murder to resolve his inner conflict.  Although talked about as a warning of the dangers of AI, HAL also represents the danger of contradictory programming in the human brain.

 

Astronaut Dave Bowman’s journey through the star gate is a wild trip, apparently often enjoyed under the effect of hallucinogenic drugs in the 1960s & 70s, and ends with his intelligence effectively being downloaded into the universe itself.

 

The visual effects required new technologies to be developed and of course all were shot on film without any aid of computers. The sets and the spacecraft are amazing and the use of classical music, particularly Richard Strauss’s “Thus Spake Zarathusa” is awe inspiring. “2001” which truly is the master piece of two geniuses, Stanley Kubrick and Arthur C. Clarke, remains as inspiring and relevant as it was fifty years ago.

 

 

Normal energy related service will be resumed soon.

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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