Wednesday 4 December 2013

I come back to my theme of how to massively scale up energy efficiency with the perspective of thrity years involvement in the field – during which I have worked at the operational level designing and deploying multi-premise programmes, the strategic level developing innovative energy outsourcing and financing deals, the policy level advising UK and other governments.  First of all the good news – I am positive that energy efficiency is finally being recognised for what it is, the cheapest, cleanest and fastest energy resource we have for providing essential services.  This is true in the UK and many countries around the world – in North America, Europe, Asia, Africa and the Middle East the importance of efficiency is now being recognised. The problem is however, to use the language of fossil fuels, recognising a resource, turning it into a usable reserve and then exploiting that reserve profitably are all very different things.


It is not widely recognised that over the last thirty to forty years, improved efficiency has provided more energy services than all other energy resources put together and we did that without really trying except for a period between roughly 1975 and 1985.  The rest of the time we forgot about energy efficiency and yet it still provided more energy services than any other resource.  Just imagine what we can do if we really put our mind to it.  We live in a global society which only manages to turn eleven per cent of all the primary energy resources we use, the coal, the oil, the gas, the nuclear, the solar, the hydro, the wind and the biomass, into usable energy services that we need and want, the warmth, the process heat, the cold, the motive power, the light and the sound.  Eight nine per cent is wasted.  Even allowing for the fundamental limits set by thermodynamics this is pretty pathetic for a so-called advanced technological society.


Everywhere we look we are seeing concerted efforts to improve energy efficiency in new products, in industry, in the home, in electrical devices, in cars, in IT, in lighting, in ships and in aeroplanes – as well as to develop retrofit solutions.  Whereas energy efficiency has never been a design criteria in the past it is increasingly so and all the millions of improvements in efficiency that come from devices as diverse as mobile phone chargers to giant ship engines will have an increasing effect on overall efficiency levels as they become adopted, normalised and regulated in to the economy.  I am sure that most long-run energy forecasts don’t take sufficient account of these developments which for the first time, in developed countries at least, are starting to decouple growth in income (GDP) and growth in energy use.


However, even now senior managements in many organisations (and most governments and political parties) are still not taking energy efficiency seriously enough and we are not making enough progress in the short-term.  The message needs to go out that investing in energy efficiency is a low risk, high return deal that brings with it numerous quantifiable benefits over and above just cost saving.  On a national level it could bring huge benefits in terms of increased security of supply – helping to reduce the UK’s £24 billion (and growing) trade deficit in energy.  The strategic importance of energy, and the risks associated with it in a world facing increasing supply constraints as demand rises from a larger and wealthier global population, need to be recognised and acted upon at board level in all organisations, big and small, whatever their energy intensity or energy spend as a proportion of total costs.  We know from decades of experience amongst the global leading organisations that when top management lead on this issue, and appropriate management systems are set up, the energy efficiency reserves can be profitably mined for year after year, decade after decade.  We know how to do this.


We are seeing increased interest and investment in energy efficiency but what we are not doing at the moment is making large-scale investments in energy efficiency across large portfolios of existing buildings and facilities – despite the fact that are massive economic opportunities.  Many organisations with hundreds or even thousands of sites and large energy bills are making pilot investments, saving twenty to twenty five per cent or more on their energy spend, rolling out the technologies to ten or twenty sites and then stopping.  This is down to several factors on the demand side including the fact that we don’t have enough senior leaders (private sector, public sector and national politicians) who are demanding – and I do mean demanding – large-scale programmes.  We need more informed leaders who understand the opportunity and can “bang the table” to demand mass roll-out, large scale programmes using integrated design techniques and state-of-the-art technologies to maximize savings.  To get there we need more and better communication and capacity building at the top level.  Energy – despite its strategic importance – is still often dealt with at an operational level and constrained by capital budgets which of course favour offensive spending on new products, processes or markets.  On the supply side there is a shortage of project developers that use state-of-the-art technologies and integrated design and perhaps more importantly, can develop large-scale multi-site, and even multi-customer projects.  There is both a skills gap and a serious equity gap in the project development stage of the process.


The financing of energy services, energy performance contracts (EPC) and shared savings is often seen as the holy grail of energy efficiency.  This area is witnessing a boom but it is more a boom of interest rather than deals. As a speaker said at an energy efficiency financing conference, the ratio of conferences to deals is getting better but it is too high.  Many new entrants to the energy efficiency arena have suddenly discovered “shared savings” as a panacea without really understanding the issues.  Why should this apparent win-win proposition be so hard to make happen?  Firstly there is a lack of demand which is caused by a combination of ignorance, fear that savings won’t be produced, very high transaction costs and the fundamental truth that the traditional EPC is not that good a deal, and not even viable in much of the private sector.  A lot of complexity, a long-term deal and a small slice of savings over many years is not that attractive.  Furthermore EPCs don’t really work in the private sector – particularly commercial offices.  Secondly there are supply issues, many project developers (Energy Service Companies – ESCOs) are still developing projects in the old way with relatively small savings instead of holistic, high savings projects.  We need more innovation on the supply side.


On the supply of money, most of the money trying to finance these deals at the moment is high cost money seeking almost private equity returns.  Massively scaling up energy efficiency investment won’t be done by the kind of funding that is currently available.  We need to get the right structures to provide customers with real up-front benefits and secure cash flow streams that can provide sufficient scale and be attractive to the debt capital markets.  Traditional EPCs are not the answer to every problem.  Appropriate investors are keen to move into energy efficiency but their confidence in the processes and savings need to be built, something that is being helped by the wider adoption of Measurement and Verification (M&V) through the International Performance Measurement and Verification Protocol (IPMVP), standards such as ISO50001, and standardized protocols through the Investor Confidence Project (ICP) in the United States.  All of these need to be encouraged in the UK and indeed in all markets.


At the policy level energy efficiency is still the poor cousin, the Cinderella of energy policy.  This is true in the UK despite sterling efforts from some individual ministers. In February we had David Cameron launching the “energy efficiency mission” and extolling the virtues of improved efficiency (in a speech that in an Orwellian manoeuvre never made it to the Number 10 or DECC websites) and in December we have seen the ECO programme disrupted – effectively at the behest of the energy suppliers – and most of this short-term, politically driven change is occurring because another politician made an undeliverable, economically illiterate promise for his short-term gain.  Energy is an industry that demands long-term vision and leadership to find it’s way through the massive, structural changes it is facing.  In all the noise about energy prices the real potential of the energy efficiency resource, and how we move it from a resource to a reserve to exploitation, has scarcely been mentioned.  The furore over prices was (and still is) an opportunity to reform the energy supply market, make it more transparent, recognise the huge impacts of distributed generation, and once and for all put efficiency at the centre of policy.


We need a regulatory regime that fosters innovation in the energy supply and services models rather than just encourages more investment in energy supply, both in generation and distribution.  We also need to move energy efficiency out of the regulation, compliance mentality where it has always sat.  We need to radically overhaul the plethora of programmes such as CRC, EU ETS, DECs, EPCs and the forthcoming ESOS (Energy Savings Opportunity Scheme – a.k.a. mandatory surveys) to ensure that energy managers can spend their time really developing and implementing projects and not just reporting on their energy use in several different formats.  We need to make energy efficiency a market commodity just like coal, oil or gas by standardising procedures, measurement of savings and financing structures.  Again, we know how to do this through programmes like ISO50001, IPMVP and the Investor Confidence Project.  We just need to apply them and this needs leadership.


If we can develop and finance the large scale energy efficiency programmes we know are possible, and sort out the policy mess, we can move efficiency from being a resource – the equivalent of the resources of the North Sea of the early 1960s – into an energy reserve that can be exploited to provide massive economic benefits on the scale of the North Sea and larger – only unlike the North Sea the benefits from massive investment in energy efficiency will be permanent.


This post also appears on 2Degrees Network


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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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