Tackling the Government on energy issues: How should we view security of supply, energy efficiency and fairer bills

ESTA invited me to make a keynote address at their UMR Conference in Birmingham on 10^th October 2017.  Thanks to ESTA and the attendees for the opportunity and the questions.  As usual this written version represents a tidied up and more coherent version of what I actually said on the day. 

First of all I am always pleased to be back in Birmingham because it is where I took my undergraduate degree and first studied energy matters.  Secondly I am pleased to be in Birmingham as last week I was supposed to be presenting in Barcelona but I don’t like going into cities with civil unrest, fortunately Birmingham is not quite ready to declare independence but given the crazy world we live in now let’s give it a few years and see what happens.

I was given this title and my first reaction was that it was very different to what I normally talk about – the Investor Confidence Project, energy efficiency financing and making efficiency more investable.  And then I realised that those topics are very much related to addressing the issues of energy security, energy efficiency and fairer bills and I should use the opportunity as if I was giving advice to government.  I should start out by saying – with apologies to any government representatives in the room – I often find giving advice to governments, and I am not just singling out the UK here, a case of banging your head against a brick wall, I can only do it for so long and then I have to stop for a while.

I know we live in a “post-factual” world but let’s start by looking at some facts, many of which are still shocking and which demand a strong response.  These are facts that will impact on the global, European and UK energy situation over the coming years and decades, facts that need to be considered when formulating policy.

• The EU spends more than €1 billion a day importing energy. It was up to €500 billion a year but the fall in oil prices has helped a bit.
• Fossil fuels are still dominant globally. Despite rapid gains for renewables, fossil fuels still account for 80% of global primary energy use.
• The US spends about $280 billion a year on US Navy power in the Gulf region, essentially protecting the flow of oil. That works out at about $83 a barrel and yet only 20% of the total flow goes to the US, a percentage that is declining as the US becomes more self-sufficient. In a world with an isolationist US government (if it is isolationist today according to the latest tweets), you have to question how long that may continue.
• In 2016 the Kingdom of Saudi Arabia, a country I have been fortunate enough to get to know over the last few years, produced c. 10.5 million barrels of oil a day and exported c.7.6 million barrels a day. Some projections show that by 2035 domestic demand in Saudi Arabia could equal production.  Needless to say if this ever happened it would have very significant effects on the oil market and Saudi Arabia. This is undoubtedly being taken very seriously within the Kingdom.
• Russia supplies 34% of gas used in the EU, a situation that the EU expects to continue for “at least 2 more decades”. That is a major geo-political strategic risk.
• When we look globally we see huge economic growth, particularly in China, India and S.E. Asia with projections that there will be an additional 3 billion middle class by 2030. That will be a huge achievement and very welcome, but we know that when people become middle class their demand for energy kicks up dramatically as they start to buy all the energy using devices we take for granted.
• There are an estimated 2 million premature deaths a year globally, a result of burning fossil fuels. In the EU the number is estimated at 300,000 and in the UK 50,000.  This problem is not being addressed effectively, I think all parts of London now exceed “safe” limits on particulates so we have gone backwards, mainly because of the promotion of diesel cars.
• Globally 1.3 billion people are without electricity. There are great strides being made on this, again India stands out as a good example.  We need to get everyone using electricity, the benefits in education and health are huge.
• On the issue of climate change, the IEA and IRENA estimate that to achieve their “66%, 2°C” scenario the investment into energy efficiency has to be increased to an average of > $1 trillion a year, a five-fold increase on current levels.

Jumping back to the UK:

• the UK imports just under 40% of its energy supplies and at the peak in 2012 the financial cost was £24 billion – more than £460 million a week. Perhaps we should put that on the side of a bus.  Although things are now moving in a better direction this is still very concerning.
• We know the UK electricity system is facing “unprecedented challenges” in terms of supply margin.
• We have Hinkley Point C which is an unproven technology which is already late – no surprise there. Also apparently we need the Chinese to finance reactors. I was bemused to read a report this morning that government officials testified to a committee that the decision to build it was “the best value option”.
• We still have not resolved fuel poverty after years of talking about it. We have 4 million people including 1.5 million children living in fuel poverty which costs the NHS £850 million per year.
• We know that there is a massive, cost-effective energy efficiency potential, equivalent to 22 power stations according to the government. However, despite many successes, we still only scratch the surface of the economic potential.  We all know of projects that don’t proceed despite great paybacks, paybacks that we would all be happy with in our own investments.
• On the positive side, solar is rapidly becoming economic without subsidy, not just in the UK but globally.
• We are also seeing great reductions in the price of storage, particularly batteries, that will dramatically change the energy scene. Projects like the famous Tesla giga-factory are starting to have an impact.
• In transport EVs are making an impact much faster than many, including myself, would have predicted. Next month will see the launch of Tesla’s electric “semi” truck and electrification can offer rapid paybacks in selected freight transport segments. I recently heard of a company working on marine electrification for ferries. That is a great application I would never have thought of, there is a predictable duty cycle and there are less space constraints and technical issues than in cars.
• As well as the falling price of solar and batteries we are seeing a fall in the price of energy efficiency. The most obvious example, but not the only one, is the price of LEDs.  This slide was shown by the Indian Prime Minister last week and it highlights the work of Energy Efficiency Service Ltd (EESL) who have aggregated demand and bought the cost of an LED lamp in India down from c.$7 to c.70 cents in a very short time by aggregating demand.  EESL is now applying that experience to other technologies and other countries including the UK, and I am proud to say that my company EnergyPro is their JV partner here.
• All of this change has had a massive effect on traditional utilities. There have been massive financial losses – €0.5 trillion (yes trillion) according to the Economist in 2013 (and more since then) – and big restructurings.  All utilities are looking for new business models, if they are not then they are finished.
• The effect of solar on the grid is the same everywhere. The arrival of what the Americans call “the duck curve” is being felt in all electricity systems where solar is being deployed i.e. all systems.  The duck curve is a rapid reduction in net load during the day as solar output climbs coupled with a steepening of the load curve in the evening as solar output falls away, a steepening that is increasingly hard to match with conventional generation technology.

Given these facts (and many others we could talk about) we need to take a new perspective on energy and energy efficiency.  If we don’t we will continue to bang our collective heads against the same brick wall over and over again, and energy efficiency will continue to under-perform.

So, what is the “traditional” view of energy efficiency? I would summarise it as follows:

• efficiency is something that is tacked onto the end of energy policy. Politicians talk about energy, finish by saying “don’t forget about energy efficiency” and then promptly forget about it.
• it is “good for you” in the same way that cold showers are good for you.
• it has uncertain outcomes – one of the reasons people don’t invest in so-called “low hanging fruit” is that they are not convinced they will get the promised results.
• it needs to be encouraged by mandates or subsidies.
• it is hard to invest in.
• it is somehow different to other markets – there are “market failures”.
• it is often a “calling”, a “campaign” or a “crusade”.
• for most people, most of the time, it is really, really boring.

The new and emerging view of energy efficiency is one in which:

• it is central to energy policy.
• it is a Distributed Energy Resource (DERs) like other DERs such as local generation & demand response.
• it can be reliably dispatched with quantified and known risks.
• it can be aggregated.
• it can be contracted for using standard contracts that look like Power Purchase Agreements.
• it can easily be invested in.
• it can be priced per kWh like any other energy resource.

So how do we actually make this view mainstream?  We have to create a true market for energy efficiency.  At the moment we talk a lot about “the market for energy efficiency” but there is no market for energy efficiency, there are only markets for stuff such as LEDs, boilers, controls, heat recovery etc.  You can pick up the phone or go on-line and buy energy, but you can’t buy energy efficiency, only stuff and stuff with uncertain outcomes.

To make a market, any market, we need several things; a system of weights and measures, standardization of product, and standard contracts with penalties for non-delivery.  If you look at any market, whether it be apples, or sophisticated financial derivatives, these factors are present.  The good news is we now have the technologies to make a true market for energy efficiency.

This is now starting to happen in California and spreading to other US states. In California it was driven by new legislation that increased renewable and energy efficiency targets and required a switch from deemed savings to metered savings, combined with pay for performance models.   Once you make that change it enables a number of things including:

• contractors can pick their business model and technology. If a contractor can save energy through awareness campaigns then they can be rewarded just as if they had invested in LEDs.
• contractors have to perform, or they go out of business.
• a programme administrator or a procurer of energy efficiency can compare the performance of different contractors.
• multiple small projects can be aggregated and demand capacity sold into the grid.
• the grid operators can enforce the same kind of non-performance penalties on energy efficiency they can on energy supply options.
• a market can be established by utilities setting a resource curve and procuring efficiency in the same way they procure energy supply, with metering, a high degree of certainty in the outcome and penalties for non-performance.
• reverse auctions can be held that set the price for the various energy efficiency resources. For those that are not economic, e.g. fuel poverty programmes or encouraging deep retrofits, governments can add a payment on a price per kWh basis to drive the real outcome they want.
• energy efficiency projects can be financed through project cash flows rather than on the balance sheets of project sponsors, therefore becoming just like every energy generation project.

So if government, any government, should ever ask my advice in future this is what I would say:

• avoid chasing the latest shiny bright thing (this months being Small Modular Reactors).
• treat energy efficiency as a resource like any other.
• support the establishment of energy efficiency weights and measures.
• require that energy efficiency is metered not
• support Pay for Performance models – don’t pay for stuff, pay for results.
• add programme support for situations that are not economic but desirable g. fuel poverty & NZEBs but pay for performance and not stuff.
• encourage innovation only by paying for performance – don’t worry about the technology – only the performance.