The application of the Investor Confidence Project (ICP) continues to grow across the USA, Europe and Canada, with growing interest from India, China, the Middle East and Africa.   It is easy to get carried away with thinking the ICP is the answer to the problem of how do we significantly accelerate investment into energy efficiency but, as I have always said, it is just one piece – albeit a very important piece – of solving that problem.  I have summarized my thinking in the “jigsaw of energy efficiency financing” which has four pieces which need to be in place in the same market at the same time for investment to flow – standardization (ICP), pipelines of projects, finance (development finance as well as project finance), and capacity building for end-users, the energy efficiency industry and the finance industry.

ICP is at its heart just about helping project developers to develop better projects, higher quality projects with a higher probability of delivering the savings that are predicted.  Within ICP we always said that by doing that it would bring reduced transaction costs and reduced performance risk.  That hypothesis has been validated by MunichRe HSB who as part of their energy efficiency performance insurance offer ICP certified projects lower costs through both removing the need for clients to pay for a separate engineering assessment, and through lower insurance premiums.  The use of energy efficiency performance insurance from a global player like MunichRe HSB can help make projects more bankable through taking on performance risks.

Another element of improving the flow of investment into energy efficiency is building better business cases.  Better business cases come about through better underlying projects and better appraisal of value and risks.  Business cases that just say this is the capex and this is the projected energy cost savings are not good enough anymore and just result in projects not proceeding and frustrated project developers.  This is where the EEFIG Underwriting Toolkit comes in.  The Toolkit is a framework that encourages financiers assessing projects to identify all sources of value including the non-energy benefits such as health, well-being and better productivity – many of which are both more valuable and more strategic than just simple energy cost savings.  The Toolkit also explore the risks of energy efficiency projects which for too long have been ignored.  We need to move from the uncertainty of not knowing the real risks of projects to fully understanding and quantifying the risks – just like the financial industry does for other asset classes.  Pretending there is no risk, or just living with uncertainty is not good enough as uncertainty is a major barrier to investment flowing at scale.

So, if you want to increase the flow of capital into energy efficiency develop better projects and build better business cases.

Growing up I loved anything to do with the future – particularly the 21st century. TV21 was the comic to read and it was full of stories about life in the 21st century, Thunderbirds, space travel etc.  In some respects reality has not lived up to those dreams, although Elon Musk is doing his best to make them come true , but in other ways we already live in a world long described by science fiction – universal communicators for all (mobile phones), and a giant computer that can answer any question (the internet).

When I started to really think about and practice energy management, it was back in the 20th century and it seems as if some of the ways of thinking about energy management remain stuck in the 20th century.  Now we are nearly 20% of the way through the 21st century, (hard to believe I know), we need to refresh our thinking and bring energy management into the 21st century.

Let’s consider some aspects of energy management and efficiency and compare 20th century thinking and 21st century thinking.

FAB.

My eye was recently drawn to an interesting headline; “How to do business with doughnuts”, which was the title of a thought provoking article by Kate Raworth of the Environmental Change Institute at Oxford University.  Kate’s work on “doughnut economics”, which I had not found before, is really worth exploring.  Soon after I saw a piece about Brian Chesky’s, the Co-founder and CEO of AirBnB, letter to stakeholders about what a 21st century company should look like. There seemed to be a connection but let’s deal with the doughnuts first.

In Kate Raworth’s model the doughnut is a ring that sets out to define boundaries set by ecology and by social conditions.  In many areas such as climate change and biodiversity we are clearly exceeding the ecological limits. On the social factors we have massive deficits as billions of people still fall short on even basic essentials.  The challenge is how to meet the social needs without exceeding the ecological limits i.e. how to live within the doughnut.

Kate Raworth lists five reactions to the diagram she has had when talking to a range of corporates about this idea over the last six years.  They are characterised as:

1. Do nothing
2. Do what pays
3. Do your fair share
4. Do mission zero
5. Be generative

Brian Chesky’s letter to stakeholders talks about building a company for the 21st century and even the 22nd century ie a long-term focus rather than a focus on short-term results.  For AirBnB this means:

1. we will have an infinite time horizon
2. we will serve all of our stakeholders

Both Kate Raworth’s work and Brian Chesky’s letter address some fundamental questions we should all to be concerned with – what are businesses for, (both on an individual enterprise level and a social level), and how should they be organized and operate to best serve their purpose?

This caused me to consider what does this kind of thinking mean in an energy context, specifically for energy consuming (i.e. all?) businesses?  Using Kate Raworth’s five responses as a guide:

Do nothing means simply that – don’t bother about energy consumption and costs at all. In the corporate world this is unusual, at least in larger companies in the developed world.  In other markets and SMEs it is still common.

Do what pays means reduce energy costs by investing in cost-effective projects.  This could be characterised as “standard energy management” which most corporates have.  Even where there is energy management many very cost-effective projects are not implemented for a number of reasons including; uncertainty about the outcomes and competing and more strategic demands on capital.  A lot of work on energy management, including my own, has been about improving the do what pays model to maximize the uptake of the huge economic potential that we know exists, and maximizing the returns.

Do your fair share means committing to science based targets for reducing emissions.  Adopting science based targets appears to be growing, at least amongst large corporates. A recent example is TH Real Estate, one of the largest real estate investment managers in the world, with equity investments in nearly 900 office, retail, industrial and residential assets globally.

Do mission zero means committing to a goal like net zero energy or net zero emissions. A net zero energy building or facility would put back as much energy as it uses into the system or grid.  Of course there are deeper questions here, generating on-site energy in a way that has higher emissions per kWh than the grid may be net zero energy but not net zero emissions. IKEA has committed to use 100% renewables by 2020.

Be generative means going beyond zero energy or zero emissions and building a business that is net positive in energy and emissions.  This may include supporting energy production in excess of usage, something that Unilever is targeting for 2030, or a business that removes carbon dioxide from the environment, either through a production process making something, such as cement production that absorbs CO₂, or whose main revenue generating activity is removing CO₂ from the atmosphere, (which of course would require a value to be ascribed to a tonne of CO₂).

To build a 21st century enterprise (or for that matter a 22nd century enterprise), we need to consider many factors – both technical, financial, social and human.  It seems, however, that such an enterprise would at least be working to improve its position on the doughnut in relation to energy and the environment.  That means moving energy management beyond the “do what pays” model – what we may call a 20th century model – into at the very least a “do your fair share” model, and ultimately into a “mission zero” and “generative” model.  The doughnut gives us a new model for categorising the response of companies to energy problems.

It has been a while since I have had a chance to write a blog because I have been very busy working with our JV partner EESL as well as on other projects.  In November I made my first ever visit to India to speak at the INSPIRE event, so it seemed appropriate to write about energy efficiency in India.

First of all when you look at India you have to get used to the big numbers, starting with 1.3 billion people, installed electrical capacity of 331 GW, and economic growth rates of 7 to 8%.  When you project current trends forward you quickly realise that energy efficiency in India is a matter that should concern the whole world.  If India gets it right the world has some chance of meeting climate related targets.  A clear example of this is air conditioning which is vital in most parts of India, and is a market set to grow dramatically.  At the moment the market penetration of room air conditioners (RACs) is only 4-5%, roughly where it was in China in 1995 (compared to a c.53% market penetration in China today).  The projected growth of RAC in India as incomes increase could result in additional peak loads of 143 GW (about twice the total UK installed capacity!), requiring 300 additional 500 MW power stations.  Work is currently under way on a national cooling strategy which aims to mitigate the growth in power demand from cooling and will include measures such as enhanced efficiency regulations on RACs, driving innovation in cooling, promotion of passive cooling, and district cooling using trigeneration.

Energy Efficiency Services Ltd (EESL) is a central player in the Indian energy efficiency market.  EESL was established in 2009 by the Ministry of Power as a JV of four utilities, the National Thermal Power Corporation (NTPC), Rural Electrification Corporation (REC), Power Finance Corporation (PFC) and Power Grid Corporation (PGICL).  The vision behind EESL is to unlock the $11 billion market for energy efficiency, amounting to 15% of present consumption.  EESL works closely with the Bureau of Energy Efficiency and leads the market related activities of the National Mission for Enhanced Energy Efficiency.  From 2009 to 2013 little progress was made and then there was a change of leadership that led to amazing results, including growing revenues 46 times.

EESL is best known for its LED programme, UJALA, which has distributed more than 270 million LEDs across India.  EESL’s model of aggregating demand and large scale procurement has driven the price of LEDs down by a factor of ten.  Critically the UJALA programme does not rely on any subsidies, it is a commercial model in which consumers and utilities pay as they save.  The savings have been around $338 million.  Another effect of the growth of the LED market has been a surge in domestic manufacturing.  LED production in India has grown from 5 million units in 2013 to 600 million units in 2017, creating 185,000 jobs in 2016/17.  The UJALA programme aims to replace 770 million LEDs by 2019.

A similar aggregation approach has been applied by EESL to replacing street lighting. As well as using LEDs EESL has implemented a Centralised Control and Monitoring System (CCMS) for street lighting that provides remote monitoring 24×7.  Globally we have started to recognise the importance of non-energy strategic benefits of energy efficiency and EESL has taken steps to measure these through social audits which show that citizens are a lot more satisfied with the LED lighting and feel an enhanced sense of safety and security.

EESL has also moved into several other key areas including agricultural pumps, domestic appliances, smart meters and electric vehicles (EVs). Towards the end of 2017 EESL procured 10,000 EVs to lease to government departments (which have a huge fleet of cars for the use of officials).  The procurement brought the price of the EVs down by 25%. EESL will lease the EVs and charging infrastructure to departments for less than they currently pay for petrol driven cars. A further procurement of EVs will follow.

As the world’s largest publicly owned super-ESCO EESL has been remarkably successful.  It has been highlighted by the International Energy Agency and the World Bank as a model for deploying energy efficiency at scale and it is certainly a model that all countries can learn from, North as well as South.  At EnergyPro we are proud to be working with EESL to combine both sets of experience to build a portfolio of projects in Europe and beyond.

The data in this blog has mainly been taken from the EESL coffee table book: “UJALA. I LED the way.”  With thanks to EESL and AEEE for the opportunity to present at the INSPIRE event in Jaipur. 

For further information regarding INSPIRE 2017: INSPIRE 2017 papers can be found here and the INSPIRE 2017 Report can be found here.

At the recent Green Bonds conference at which I chaired a panel, Sean Kidney of the Climate Bonds Initiative challenged the audience in his inimitable way with the questions – “how do we scale-up all this (meaning investment into green infrastructure) rapidly?”

It won’t be a surprise but my response starts with the absolute need to focus on the massive economic potential offered by energy efficiency.  Improving energy efficiency will bring cheaper, cleaner, faster reductions in emissions, and greater economic impact than investing in generation options – and it has been proven many times there is massive potential that is economic right now.

It also won’t surprise anyone when I say scaling-up requires standardization in the way that projects are developed and documented and for energy efficiency this means through systems such as the Investor Confidence Project (ICP).  Failure to require standards like ICP will lead to a lot of under-performance, both financially and environmentally.  If green bond investors only rely on ex ante assessments of energy saving, or rely on inaccurate indicators like Energy Performance Certificates, and don’t require standardized projects with independent Quality Assurance and enforced Measurement and Verification of results we may end up with a gross misallocation of investment into “green” energy saving projects that really are not performing, financially or environmentally.

The really big problem is that there is not a culture or eco-system for developing large, multi-premise investment programmes.  Project developers and owners tend to work on one project at a time, developers like ESCOs are passive and only respond to RFQs, they don’t go out there and create demand at a portfolio level. We need a new type of developer – let’s call them a “super developer”, that only develops large scale projects, aggregating smaller projects and acts like an infrastructure or property developer. Developing anything is high risk and there is a need for risk equity capital to drive the development of project investment opportunities at scale. Super developers could be private sector or public sector. Governments have huge portfolios of property and vehicles and should provide a ready channel to aggregate demand through super developers but they are not really doing it.

To learn how to scale-up investment into energy efficiency we need to look around the world to places where efficiency investment is actually happening at scale and I see four case studies of super developers in action that have global significance and everyone needs to examine:

• PACE in the US which was discussed earlier in the conference
• The Carbon & Energy Fund (CEF) that is a framework for procuring Energy Performance Contracts in the UK’s National Health Service (NHS)
• The Dubai Super ESCo
• Energy Efficiency Services Ltd (EESL) in India.

At the green bond conference we heard from David Gabrielson of PACE Nation and Craig Brown of Renovate America about how PACE has really started to scale in the US.  In Europe the good news is that the EuroPACE Project has been awarded €2.4 million of Horizon 2020 funding to introduce PACE type models to Europe. I am pleased that we at EnergyPro Ltd are advisers to that important project.  In the PACE eco-system there are large players like Renovate America and Renew Financial who aggregate demand, ensure contractors meet appropriate standards and access large pools of capital through bond issues.

The Carbon & Energy Fund, which is not actually a fund but rather a procurement framework, engages with NHS hospitals to develop and deliver EPCs.  Hospitals join the framework and commit to implement an EPC which CEF develops in conjunction with an ESCO selected by a competitive process between the ESCOs on the CEF framework.  CEF sources finance and charges a fee based on capital expenditure and an on-going fee for contract management and measurement and verification.  CEF has developed about 40 EPCs.

The Dubai Super ESCo – the Etihad Energy Services Company is doing great work in the UAE and it only works with portfolios of buildings.  I wrote about it here and since then they have announced new deals including; retrofitting controls and installing PV in 243 buildings owned by a leading property company, and 650 facilities, (mosques, offices and residences), under the jurisdiction of the Islamic Affairs and Charitable Activities Department (IACAD).

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EESL in India has done and is continuing to do amazing things, operating a commercial model that has aggregation of demand at its heart. They have deployed 270 million LEDS and through aggregation of demand reduced the price of an LED by a factor of ten. The approach is now being applied to other technologies like high efficiency motors, pumps and fans and smart meters. EESL also recently procured 10,000 EVs for government departments in the largest ever procurement for EVs and reduced the price of EVs significantly.  The 10,000 EVs are seen as a pilot and next year EV procurement will be ramped up many fold.

Whatever the choice of structure, whether it is a framework, a super-ESCO, a corporate aggregating demand and accessing finance, or some other form we haven’t seen yet, it is clear that we need more super developers.