The energy efficiency revolution

At whatever level you look, globally, regionally, nationally, or even locally, we are facing a complex inter-related set of energy crises including:

• an additional 3 billion people entering the global middle class in the next twenty five years who will all demand more energy using goods and services.
• domestic energy demand in oil producing countries like Saudi Arabia is growing rapidly and could possibly reach production levels by the mid-2030s.
• in the UK and many other places we have millions of people who have trouble paying their energy bills – the problem of fuel poverty caused by a combination of high energy prices and poorly performing buildings.
• the high economic cost of importing energy – the EU imports €500 bn worth of energy a year and the UK imports about £25 bn, a number which has swung from exports of £3.3 bn in 2003 and is likely to increase as UK Continental Shelf production continues to fall.
• the security risks of importing energy which have once again been brought into sharp focus by the events in Ukraine – energy dependence leads to a position of insecurity and weakness.
• the need to invest heavily in new energy infrastructure (particularly electricity) in developed countries where the basic infrastructure is thirty to fifty years old.
• the need to invest heavily in energy supply infrastructure in developing countries where demand growth often outstrips supply.
• the fact that 1.2 bn people in the world still don’t have any access to electricity.
• local and global pollution that comes from energy use – not just the threat of climate change but terrible smogs as experenced in Beijing and elsewhere with all the attendant impact on human health as well as local pollution from mining and energy extraction.

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.