Wednesday 8 July 2020

We often talk about the performance gap in energy efficiency and there is no doubt that it, or at least perceived performance risk, is one of the barriers to greater investment into energy efficiency. I was reminded recently, however, that all energy sources have performance risk. kWh Analytics published their Solar Risk Assessment: 2020 report which looks at actual data on 20% of the US operating solar projects with the aim of informing investors. It makes for interesting reading and contains lessons for the energy efficiency industry.

The first conclusion is that in solar P90 isn’t P90 anymore. P90 production events are occurring more than 3x more frequently than the P90 definition implies and P90 downside events occur so often they have nearly become P50s. Furthermore extreme downside (‘P99’) events are occurring 1 in 6 years, an increase from 1 in 20 observed last year and far from the 1 in 100 per definition.  Given its position in the capital structure, equity capital suffers most when solar assets underperform. When a typical solar performs at the official P90, equity cash yield drops by 50%.

Other conclusions worth noting:

  • Optimistic irradiance assumptions contribute to 5% under performance. Some of this is due to “irradiance shopping” i.e. purposely using an assumed irradiance higher than the long-term average at the site
  • Sub-hourly Variability of the solar resource impacts actual production by between 1 and 4%
  • US regional irradiance is down 5 to 7% from average
  • The true cost of O&M can be 28% higher than planned
  • ‘Weather adjustment bias’ is responsible for up to 8% bias in measured underperformance. This is because the industry often measures weather impact in two different ways; relying on pyranometers for actual insolation but using Independent Engineer satellite data for expected insolation.

None of this is intended to criticize the solar industry, only to reflect that output of solar, which is often incorrectly thought to be very predictable, (‘the sun always shines’), is more error prone than is usually thought. It also shows the importance of looking at actual data and really understanding where the data going into a financial model comes from.

Also we should never forget that every type of energy project has performance risk, whether it be solar, wind, coal, nuclear or gas generation or even an oil well.  They don’t all produce exactly what was planned at the investment decision! Energy efficiency is not alone in having performance risk. Back in Enron Energy Services we started work in the area of risk assessment of energy efficiency projects and Paul Matthew, Steve Kromer, Osman Sezgen and Steve Myers, who were the pioneers, wrote about the approach in a paper that was way ahead of its time; ‘Actuarial pricing of energy efficiency projects: lessons foul and fair’[1].  It needs to be studied again.

The lesson here for energy efficiency is that we need to collect the data on performance of real projects and start to carry out these kinds of analysis to generate portfolio performance curves. Typically this is not done, even within organisations making internal investments. The EEFIG Derisking Energy Efficiency Platform (DEEP) project is a good starting point but to be really useful it needs real data from actual project performance, something that is being included in the latest EEFIG project. The work of Recurve in the USA and the use of a standardised and industry agreed ‘weights and measures’ approach to measuring a unit of energy efficiency, is the way forward as it can access smart meter data across all sites where interventions occur automatically. The old way of doing M&V cannot scale. Better data can enable project financing and insurance solutions.

Collecting real performance data in the way that kWh Analytics do for solar is the way to get better understanding, drive better performance and drive more investment into efficiency.

In God we trust, all other must bring data

W. Edwards Deming


[1] Energy Policy 33 (2005) 1319-1328

Friday 3 July 2020

I don’t often write book reviews these days but every so often a book comes along that is so important or moving that I feel the need. ‘Healthy Buildings’ is one of those and it should become the go to reference for anyone maintaining, refurbishing, designing, owning or just working in buildings – so that is just about everybody. Clearly in the light of COVID-19 it is a very timely book.

It starts with very personal introductions explaining how the authors got to where they are and the work that led to this book.  I liked this approach as it helps to frame the ‘why’, why is the subject important and why do they care enough about it to write a book, which as I know is a huge commitment on top of your day job. Throughout the book is highly informative, extensively referenced and yet easy to read. I really like the style of the book when explaining scientific concepts, captured in the phrase; “environmental media, which is the annoying public health way of saying air, water, or dust”.

A lot of the issues discussed have been known about for a long while, but either hidden away, dealt with peripherally or separately in silos, which is part of the problem we face. This book brings them all together in an integrated way and presents enough hard evidence on the value of addressing health in building design, refurbishment and operation to convince even the most hard-nosed real estate investor.  It is interesting how much evidence there is that is either not known about or has been systematically ignored, something that the authors bring out using the story of a C-suite executive from company selling air filters asking if there was any evidence of the health effects of PM2.5. There is a huge evidence base but surprisingly enough, a senior executive from a company that has an interest in being on top of that particular subject didn’t know about it. That is a sad commentary on the ‘captains of industry’ that we have in the built environment sector.

The book brings home the clear message that our collective health is not something that comes solely from random events, or is managed or influenced solely by medical professionals, but instead is highly affected by the buildings we inhabit for 90% of the time and hence by building designers, owners and operators. It also makes the overwhelming case on the effects on productivity of higher levels of ventilation. The 3/30/300 rule quoted in the book is a good ready reckoner, at least for office buildings: 3 units of cost on utilities, 30 on rent and 300 on staff, so a small gain in productivity is worth far more than the usual energy savings. All of this fits with the thinking about multiple, strategic non-energy benefits of energy efficiency which I have often talked about. The strategic (and financial) value of improved productivity far outweighs energy savings and we need to be selling productivity improvements that as a side benefit can bring energy savings. There is a twist to this, making a building healthier, for instance by increasing ventilation rates, will increase energy use but this could be very worthwhile from productivity gains. It also of course improves the returns from any energy efficiency measure e.g. heat recovery and it can improve the case for onsite-generation and/or storage, so we need to factor all these things into better business cases for holistic projects that incorporate health related benefits, productivity benefits and energy efficiency benefits.  We need to think about the energy baseline we are comparing to – the current situation or the new situation with increased ventilation.

The book once again reminds us of the importance of language. Indoor Air Quality (IAQ) is a known concept but actually IEQ, Indoor Environmental Quality, may be a better metric as it covers all aspects of the indoor environment not just air quality.  It also reminds us that design codes or building regulations are minimum performance standards and may be far from the ideal. Who really wants to perform at the minimum level? But we design and operate buildings at those levels, or even below, all the time. 

As well as a treasure trove of evidence and tools that can be used to sell healthy buildings to decision makers, as well as operationalise healthy buildings in real life situations, the book offers suggestions and tools for doing just that. As I have said before, capturing and valuing all the benefits of building upgrades is critical for making the business case stack up, and the health and productivity benefits are ones that are the largest and yet the most often ignored. Like energy efficiency there is massive potential for cost-effective improvement in the health impact of buildings and exploiting that potential is critical for addressing massive health problems in all societies, just like exploiting energy efficiency is for addressing the climate problem. This issue seems to be being neglected in a lot of the ‘build back better’ conversations which seem too focused on the real and important energy efficiency benefits. Health benefits may get better traction with governments, especially in the COVID world we now inhabit.

I am sure this is a book that I will come back to time and time again. We are now taking inspiration from it as we develop new ideas and service offerings about integrated health and energy retrofits.

Friday 26 June 2020

With the publication of the report by the Global Commission for Urgent Action on Energy Efficiency, coinciding with the IEA’s 5th annual energy efficiency conference and European Sustainable Energy Week’s session on attracting investment into energy efficiency, it seemed appropriate to comment on the Commission’s report and the state of the efficiency market. First of all it is important to say that I really welcome the work of the Commission and the report touches on several themes I laid out in my input. There is a lot to like about it.

Firstly it helps focus high-level attention on energy efficiency – something that we still need to do at every opportunity as despite lip service paid by some politicians, efficiency usually comes last in their thinking on energy.

Secondly it is global – the energy efficiency potential is global and what is more it is everywhere in every sector of the economy, in every building, every industrial facility, every device and every process when you look with the right mindset. Untapped energy efficiency is like an oil and gas reserve, it is sitting there untapped but unlike oil and gas it is super-abundant, clean and quick to exploit.

Thirdly it is about urgent action.  Now is the time for urgent and radical action rather than just incremental change.  We can’t sit around talking about it any longer, we know how to implement policies and programmes that lead to greater efficiency levels, we just need more leadership and real commitment.

Several points in the report are ones we have long argued for, including:

  • design programmes to take advantage of, and overcome barriers faced during specific renovation ‘triggers’, such as change of use, of ownership or a reconfiguration/renovation project.
  • using government procurement to lead the way and create scale. India’s Energy Efficiency Services Ltd (EESL) is the world leader in this approach and all countries need to learn from India and EESL. Government procurement programmes by focusing on least cost first generally don’t drive energy efficiency measures.  The scale of government demand can also drive down costs as dramatically shown by EESL.
  • shifting away from direct grants and loans by offering derisking support to attract private capital into energy efficiency. The work of the Energy Efficiency Financial Institutions Group (EEFIG) is a good example of this.

On a personal and professional note it was good to see reference in the report to two of the projects we have been very closely involved in over the last five years or so. The work of EEFIG and the Investor Confidence Project both get a mention in the finance section. Both projects are helping to scale up investment into energy efficiency which is the purpose of EnergyPro. Also of course we work closely with EESL through our JV with them, EPAL, which has deployed more than £60m into UK energy efficiency companies.

The frustrating thing, not with the Commission so much but with the field in general, is that in some ways little of this is new. We have known that the cost-effective potential for improved efficiency, the equivalent of an oil and gas reserve just waiting to be drilled, is probably 20-30% of current energy consumption for a very long time, and that with proven design techniques the cost-effective potential could be much higher. The uneconomic but technically possible, the equivalent of an oil and gas resource, is even larger – probably 75% of total energy consumption. Many analysts including Amory Lovins, Skip Laitner and the author included, have written about this potential for decades. (My PhD was titled ‘the potential for energy conserving capital equipment in UK industries’). On the policy and programme side we have many, many examples from around the world of effective policies on energy efficiency, we just need to increase the rate of adoption of these models and not try to re-invent the wheel.  We also need to give regulations more bite, for instance, through tightening building regulations and minimum energy efficiency standards for buildings, despite the lobbying efforts of developers and construction owners.

So what else would we have liked to see in the report that needs to be picked up in future work?

First of all there was little mention of the importance of flexibility and the grid edge. The grid edge is the new frontier, and energy efficiency needs to be viewed as a major distributed energy resource just like generation or demand response options. We need to use data to understand the effect of various efficiency measures on load curves so that they can be properly valued in the electricity distribution system. The old fixed border between supplier and user, the energy meter, is becoming semi-permeable, as users can also produce and sell energy and ancillary services to the grid. The grid is shifting from a Command and Control centralised system to a highly decentralised system which will use data, AI and machine learning to react locally in real-time.

Data from smart meters coupled with standardised ways of defining what is, and what is not an energy saving, has made it possible for the first time to create a true market for energy efficiency. There is a lot of talk about ‘the market for energy efficiency’ but the truth is there is not, and never has been, a market for energy efficiency, there are just a lot of intersecting markets for stuff and services that may, or may not, deliver energy savings. With metered savings we can create contract forms equivalent to Power Purchase Agreements that can be financed and we can value savings in time and location.

The rise in importance of the grid edge leads onto the problem of defining energy efficiency. Energy efficiency is about reducing the energy input for any given activity – improving energy productivity. The focus has mainly been on end users becoming more efficient and fundamentalists – myself included – like to use the term only for activities that reduce energy end use – but what we really care about is the overall energy efficiency or productivity of the entire economy. The meaning of the term ‘energy efficiency’ is now shifting to incorporate all demand side assets and projects, rather than just referring to pure energy saving projects. It now covers a wide range of technologies and business models including: demand response, distributed generation, behind-the-meter energy storage, virtual power plants, micro-grids, building-to-grid, industry-to-grid, vehicle-to-grid, as well as local generation and utilisation of heat in efficient and flexible systems. All of these contribute to system wide efficiency gains, and in talking about efficiency we need to recognise this convergence and recognise it as being positive. Doing so also helps move efficiency from its old emphasis on ‘savings’, ‘conservation’ and being a ‘cause’ to a revenue producing and profit making opportunity. What we are seeing is nothing less than a shift in the balance of energy system investment from the supply side to demand side.

On finance we need to recognise that there is growing interest from investors in energy efficiency as well as the barriers to investment and do more work to overcome them and help investors along the journey to deploying more capital into efficiency. There is still a need for ‘derisking’ strategies for consumers and investors, and the EEFIG work has implemented some of these, including the DEEP database and the Underwriting Toolkit. We should not forget that every day banks and investors are making decisions that impact on energy efficiency, normal decisions to support new buildings, renovations of buildings, new industrial facilities etc which often (nearly always) ignore even the cost-effective energy efficiency potential that if utilised would reduce costs for the end-user and reduce risks for the bank or investor.  We are missing thousands of cost-effective investment opportunities for better energy efficiency every day. Organisations like EBRD and ING recognise this and have built efficiency reviews into normal lending practices. The advent of the sustainable finance taxonomy regulations should drive more of this type of behaviour as financial institutions have to report the climate risks of their portfolios.

The Commission does talk about the need for a cross-cutting, all of government approach and the COVID-19 crisis has made that even more important. There needs to be a new emphasis on healthy buildings and efficiency is at the centre of this. The health impacts of greater levels of efficiency, both direct and indirect and both indoor and outdoor air quality, are clear. We have an opportunity now to re-design and re-evaluate renovation projects to address both health and energy issues.  When assessing programmes governments need to assess all the benefits including health impacts, as well as the many other non-energy benefits that efficiency brings. I often think that the energy efficiency industry misses this aspect because of its focus on the pure energy benefits, ‘the cause’. Even much of the talk of the COVID-19 recovery plans to invest in building renovation seem to miss this critical factor that can make building renovation a strategic necessity rather than just about energy saving.  

As the Commission points out there is a need to further strengthen international collaboration. We continue to work internationally, both with European partners and our JV partner EESL through EnergyPro Asset Management Ltd (EPAM). EPAM is now working with EESL and other partners to transfer UK technologies and know-how in areas such as trigeneration, e-mobility and cooling, to India and find opportunities for Indian businesses in Europe. International collaboration brings it with new insights and numerous benefits far outside the immediate energy benefits.     

To sum up, it is good to see the IEA further increase its focus on energy efficiency and the work of the Commission but there is always more to do. We need to continue to stress the size of the energy efficiency ‘reserves’ and highlight the results that efficiency has already produced, something that has long been neglected – particularly when supply options are being promoted. The process we are all engaged in is shifting the balance of energy investment from the supply side to the demand side. The IEA’s annual energy efficiency reports show that investment into efficiency has increased but it needs to quadruple by 2050 to bring it on a par with energy supply investment so there is much to do.

We look forward to future international collaboration and continuing to drive greater investment into energy efficiency.

Tuesday 9 June 2020

EPAL, our JV with EESL, was recently named the fastest-growing Indian business in the UK which was a moment to enjoy our success and revisit our purpose and resolve.  EPAL was formed when EESL, the world leader in scaling up energy efficiency and the world’s largest publicly owned ESCO, approached us in 2016 for help entering the UK market with a dual objective of building a sustainable business in the UK and acquiring experience in systems and technologies which could impact in India.

The two sides of the JV are very different in nature, EESL is a large organisation under the Indian Ministry of Power and a JV of four of the largest power companies in India. EESL operates all over India and has deployed more than 350m LEDs, and more than 10m LED street lights, and is now scaling up many other energy efficiency projects, including efficient air conditioners, smart meters, and EVs and charging infrastructure.

EnergyPro is a UK SME, albeit with international experience dating back many years in various aspects of energy efficiency and energy services, and a senior team who developed and managed some of the largest cleantech funds and energy services companies in the UK.

What unites the two organisations is the common purpose of making a better world through increasing investment into energy efficiency.

To date EPAL has deployed more than £60m through EPAL, acquiring UK energy efficiency companies, a stake in a Canadian battery project and Manchester-based Edina, a leading CHP provider. These acquisitions represent more than just business opportunities – they can all help India achieve its ambitious energy efficiency objectives.

One of the huge problems that India faces, and one that will affect us all, is how to provide sustainable cooling solutions as demand for cooling grows as the country becomes wealthier. This global issue requires multiple solutions, one of which is trigeneration. Edina’s expertise in trigeneration is now being used in cooling projects for large buildings and industry in India.

Trigeneration and storage will also play a big part in providing much needed flexibility in the power system as India expands its renewable generation from the current level of c.86 GW to the targeted 225 GW by 2022 and beyond to more than 450 GW.

By bridging the Indian and UK energy transitions, EPAL is helping transfer knowledge and best practice in both directions. The UK can benefit from EESL’s experience in truly scaling up energy efficiency, experience that is now being applied in other countries around the world.

India has massive emerging markets, particularly in smart meters, sustainable cooling and electric vehicles, as well as storage and the market structures needed to enable rapid growth in flexibility services, all areas where the UK has technology and business model know-how.

EPAM is now working with a growing number of UK companies with technologies relevant to India, our partners, and key stakeholders such as the UKIBC, to facilitate access to India and investment. Likewise we see opportunities for other innovative Indian energy transition companies to enter the UK market.

The UK-India corridor has assumed even greater importance since Brexit but even without that factor we believe that by helping to forge India-UK collaborations we can accelerate the global energy transition and positively impact the energy sectors in both countries, emissions, job creation and international understanding.

Bandra Worli Sea Link (officially called Rajiv Gandhi Sea Link), Mumbai

Thursday 28 May 2020

The limits of my language mean the limits of my world.

Ludwig Wittgenstein

I have been in the energy efficiency business long enough to witness several waves of interest and activity around energy efficiency.  Right now we are definitely in an up-wave which is good for business and good for the environment.  As part of a recent assignment to research global energy efficiency as a service markets I found myself having a discussion about the definitions and language around energy efficiency – which is always a good start to improving thinking and communication. 

In 2015 I suggested that perhaps we should ditch the phrase energy efficiency and switch to using energy productivity.  That suggestion was mis-understood in some quarters as some people thought I meant stop doing energy efficiency. In fact it was quite the opposite – it was about using a different term to help increase activity and investment that would improve overall efficiency. I still think this is a good idea but perhaps the moment has passed and here’s why.

The meaning of energy efficiency is changing. In fundamental terms it is still about getting more from less i.e. reducing the input of energy, but increasingly it is being used to cover a whole range of technologies and business models including: demand response, distributed generation, behind-the-meter energy storage, virtual power plants, micro-grids, building-to-grid, industry-to-grid, vehicle-to-grid etc. At one level I object to this slippage in the meaning of the phrase, but I think we are stuck with it and I think it is positive for two reasons. 

Firstly, all of these areas do increase overall energy efficiency somewhere in the system.  Generating power locally through CHP reduces primary energy use, using solar eliminates it altogether. Transmission and distribution losses are also reduced. They all contribute to reducing the input of primary energy to produce a given level of services or output.  

Secondly, the term ‘energy efficiency’ is now being adopted by investors to mean all the things mentioned above, even if many are still coming to grips with the subject.  A decade or so ago some of us started talking about how to make energy efficiency an asset class, thinking it was about pure efficiency. Now it is an emerging asset class with growing interest from investors looking for investments that have a positive impact on the environment. That is something to celebrate.

Now all we need to do is ensure there is a flow of high quality projects at scale to satisfy investor demand.

The Great Wave off the Coast of Kanagawa, Hokusai 1831

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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