Thursday 14 January 2021

I started an unfinished piece in January 2020 with the following.

 

At the risk of starting with a cliché the 2020s really do promise to be a momentous decade for the energy transition and the environment as two trends intersect; pressure to address environmental and sustainability problems, primarily climate change; and the falling costs of renewable energy and storage technologies as well as e-mobility.

 

Of course last January we were unaware of the massive health, economic and social disruption that would be caused by Covid-19, a disruption that realistically looks to continue at least through the first half of 2021.  The effects of the health crisis on energy and emissions has been well documented. The question now is what happens as the economy recovers?

 

The economics of renewables, storage and e-mobility are all at the point where they are, or are close to being, cheaper than the incumbent solutions. Furthermore the pressure from asset owners and institutional capital for more sustainable solutions in buildings, industry and infrastructure continues to grow. These two trends are going to drive massive upscaling in investment in more sustainable energy, transport and infrastructure solutions. Of course we will continue to see objections and barriers being put in place by incumbent industries, and governments backing dead horses, but the tide has turned and incumbents who can’t or won’t adapt fast enough will be washed away, just as surely as buggy manufacturers were wiped out by the rise of automobiles.

 

The incredible efforts to develop Covid vaccines in record time should give us further reason to be optimistic about building a more sustainable future. They show once again that given enough intention and resources, and by using the best of science and technology, we can achieve amazing things very quickly. Nothing is inevitable, however, and it all requires continued effort from millions of people around the world, but the 2020s still promise to be a momentous decade for the energy transition and the environment.

 

 

At EnergyPro we continue to develop new tools and business models; undertake research; design, plan and deliver sustainable infrastructure; and enable and make investments.  We look forward to working with like-minded people in 2021 and beyond.  If you want to find out more about how we can help you achieve your goals in these areas in 2021 please contact us

Friday 8 January 2021

It is hard to believe that it is five years since we lost David Bowie. To mark the date I am re-publishing this blog written soon after his death in 2016. I have just started to read ‘Bowie’s Piano Man. The life of Mike Garson’ by Clifford Slapper which promises to give more insight into David Bowie, Mike Garson and their creative partnership. Creativity is endlessly fascinating, especially in an area (music) where I have absolutely no ability. I can relate to, and can produce, creative writing and even some art occasionally but for music I have no frame of reference. For David Bowie to be so creative across music and other fields for so long is amazing. I never tire of listening to his work.   

 

‘Never play to the gallery…. Never work for other people in what you do. Always remember that the reason that you initially started working was that there was something inside yourself that you felt that if you could manifest in some way, you would understand more about yourself and how you co-exist with the rest of society…. I think it’s terribly dangerous for an artist to fulfil other people’s expectations.’

 

David Bowie, advice to artists, 1997.

 

(12/01/16) It would be impossible for me not to comment on the terribly sad death of David Bowie. As for many of my generation he was, and remains, a big part of my life and is by a very long way my favourite musician of all time.  His influence on music, art and culture cannot be under-estimated.  Perhaps it can only really be appreciated by those of us who were there and watched the 1972 performance of “Starman” on Top of the Pops on black and white TV, under the dis-approving parental gaze. The world changed at that moment.

 

In 1976 I was lucky enough to win tickets to see the world premier of his first film, “The Man Who Fell to Earth”.  Apart from the excitement of attending a star studded (minus Bowie) world premier I will never forget the first shot of him on the big screen in Leicester Square or the impact of the movie.  I still have the ticket and the movie poster, bought for the then not inconsiderable sum of 50p.

 

I first saw him live on the “white light” Isolar II tour in June 1978.  A friend and I managed to get to the front row centre stage, no more than a couple of metres away from Bowie.  Subsequent concerts in stadia, The Glass Spiders tour in June 1987 at Wembley, and the Sound+Vision tour in August 1990, were great but could never beat being in the front row of the New Bingley Hall County Showground in Stafford.

 

So what was/is the appeal of Bowie?  For those who know of my interest in space it will not be a surprise that the space and science-fiction nature of “Ziggy Stardust & the Spiders from Mars” was the original draw for me.  It soon went far beyond that as his lyrics always seemed to have great meaning about life, love and the universe.  As the cliché goes he always innovated and it seems hard to believe that fans, me included, who loved the sci-fi rock of “Ziggy Stardust” could also like what Bowie called the plastic soul of “Young Americans”, the indefinable “Station to Station”, the techno “Low”, and the dance music of “Let’s Dance”.  There was always that period of adjustment to the new style when a new album came out but with the exception of a few albums they all came good in the end.  Even the low points had their moments of brilliance.

 

As well as the changes in style he was always at the cutting edge of musical experimentation and technology, and then later video and the internet.  In a 2000 interview with Jeremy Paxman he talked about the power of the internet to disintermediate and break down the barrier between the artist and the consumer.  It is hard to remember the primitive nature of the internet in 2000 but Paxman’s reaction and look of skepticism expresses it well.  Now of course, 16 years later, we take disintermediation and “prosuming” as the norm, and the kind of music and video technology that used to cost a fortune is now available in apps that cost pennies or are even free – meaning anyone can create professional quality music, video and art.

 

Without a doubt David Bowie was a creative genius, but perhaps more importantly one who was able to channel that creativity into action without worrying about the barriers or what people will think.  We are not all musical, (I know I am not) but we are all more creative than we think, but we allow lots of barriers to get in the way of creating so Bowie’s life should inspire us to always act on the creative drive.  His music, film, art and effect on culture will live on forever.  As he said in “Quicksand”:

 

“I’m not a prophet or a stone age man

Just a mortal with the potential of a superman.”

 

Tuesday 17 November 2020

Conventionally energy efficiency projects have been evaluated in terms of payback or IRR, using capex and projected savings – basically spend £x and save £y on energy.  Although strictly financial criteria are important, and should be a determinant of capital allocation for organisations and governments, the simplistic way of arriving at those financial assessments is no longer valid. The paradigm has to change from simply assessing energy saving to assessing value – and that means all value streams and all types of impact.  Doing so will unlock the massive potential for improving efficiency and the attendant multiple co-benefits.

 

As an example, an LED lighting project can bring significant energy savings. But it can also bring additional value streams in addition to energy savings such as reduced maintenance costs and demand response capabilities that can generate income, it can also bring non-energy benefits such as better flexibility of lighting that contributes to employee satisfaction and comfort, higher productivity, reduced absenteeism, better learning outcomes in schools and better health outcomes in hospitals.  All these value streams need to be identified and valued in project assessment.

 

Another example we are involved in is the use of distributed solar and efficiency combined in new ‘Convergence’ business models in India. These projects reduce energy costs, reduce emissions, increase health and safety, reduce the need for women to gather fuel, improve indoor air quality and can contribute to increased agricultural outputs.  Identifying, valuing and measuring all these impacts is important. In development terms energy access is critical, but energy is not the be all and end all – it is all about development, improving the life of people.

 

The way to do this is to consider them at the design and evaluation stage using an approach similar to the impact management project’s impact measurement system. Valuing some of the impacts may be difficult, but if they are identified and some methodology used to estimate them, then in project evaluation a debate can be had about the accuracy of the estimate. Importantly, as in the impact management project’s approach sets out, it is important at the design stage to consider and build in post-investment impact measurement.

 

Considering value and impact in energy efficiency investments has several effects:

 

  • It can help to improve financial returns and hence the probability of investment by identifying value streams that would have occurred anyway but traditionally would not have been counted in the evaluation.
  • It can make the proposed investment more strategic, again increasing the probability of investment.
  • It means investments can become impact investments, something that makes them interesting to impact investors.
  • As companies and others increasingly track their ‘green’ investment, as required by the EU Taxonomy and other planned regulations, it can put efficiency firmly in the green, impact category.

 

Let’s design, evaluate and measure energy efficiency projects from a total value and impact perspective rather than just an energy saving perspective.  Doing so will increase investment flows and hence the uptake of the economic potential, and help achieve our climate and other environmental goals.

 

EnergyPro can assist with the design, evaluation and measurement of all value streams and impacts when designing and assessing projects.

 

 

Monday 5 October 2020

On the 30th September I moderated a webinar on energy efficiency, Powering an Energy Efficient Future, for the IPFA as part of their energy transition series. 

We had three great panelists who are all involved directly in energy efficiency and investing in energy efficiency:

Murray Birt, Senior ESG Strategist for DWS based in London. Murray is involved in all aspects of sustainability in DWS but has a particular interest in energy efficiency and worked with several groups on energy efficiency including the Energy Efficiency Financial Institutions Group, EEFIG, and the Green Finance Institute.

Jessica Luk, Director of Development NYCEEC in New York which was the US’s first local green bank. Jessica has wide experience in sustainability, policy and finance including in the NYC Mayors Office of Sustainability during Mayor Bloomberg’s administration, and she was one of the founders of NYCEEC.

Andy Holzhauser, from Donovan Energy based in Ohio. Donovan Energy develops and delivers energy efficiency projects for a wide range of commercial clients and Andy is an expert on PACE financing which is a major way of funding efficiency in the US. He has drafted PACE legislation in two states and sits on the board of PACE Nation – the association for PACE in the US.

Below is an edited version of my introductory remarks.

Welcome to this webinar which is looking at energy efficiency which as we will hear is an essential part of the energy transition but has long been neglected compared to cooler things like solar, wind and storage.  Thanks to the IPFA for inviting me to moderate the discussion. This may be the last in the series but believe me, this is the most important element of the energy transition.

I should start off by defining energy efficiency. Essentially it is all about reducing the energy input for any particular activity. As an energy efficiency specialist I tend towards a fundamental position that excludes generation technologies, and this means things like insulation or better controls, but more and more when we say ‘energy efficiency’ it is about the whole range of demand side energy measures, including local generation and demand response coming together to reduce primary energy input for any given activity. I actually like the less common term, energy productivity, but let’s stick with energy efficiency.  

Energy efficiency has long been the cinderella of energy policy. It has usually been last in importance for policy makers and energy specialists, partly because by definition it is ‘the absence of something’, partly because it is made up of hundreds and thousands small projects which are hard to see, and partly because it is boring. In the words on a poster I once saw in the office of a UK Energy Minister there is a sense that ‘real men build power stations”, they don’t do energy efficiency.  Power stations, wind turbines and even solar panels are photogenic and can be used as backdrops by politicians, things like insulation can’t and so efficiency is often literally an after thought in energy policy – politicians often finish energy policy speeches by saying “and finally we must not forget energy efficiency”, even though they then promptly forget it.

But having said all that when you look at it properly the reality is very different. Energy efficiency is the largest, cheapest and quickest energy resource that we have and after many years and decades of neglect this is being recognised by governments and investors around the world and that is why we are here today. I just want to go through some of the important characteristics of energy efficiency.

Let’s start with a fundamental truth, users of energy, whether they be industrial, commercial or domestic, do not want or need electricity or fuel per se, they want or need the services that energy delivers. In the words of the energy efficiency guru Amory Lovins, people don’t want energy, they want ‘warm showers, cold beer, comfort, mobility and illumination’. Shifting the focus onto the services required and the total cost and total energy input to provide them, opens up the scope for far greater levels of energy efficiency as well as new energy service based business models.

Energy efficiency projects often have rapid paybacks. In the Energy Efficiency Financial Institutions Group’s (EEFIG) Derisking Energy Efficiency Platform (DEEP)[i], database, which includes over 10,000 projects, the average reported paybacks are 5 years for buildings and 2 years for industrial projects.

Despite this economic attractiveness many potential projects do not proceed because of other priorities of the project host, lack of internal capacity to develop projects, or shortage of investment capital. Furthermore, normal investments in building refurbishments and industrial facilities or new buildings and facilities often do not utilise all of the cost-effective potential for energy efficiency.

Many studies have shown that energy efficiency is the cheapest way of providing energy services. A UK study in 2012 based on real projects demonstrated that the Levelised Cost of Energy (LCOE) for energy efficiency was £4.34/MWh compared to £44/MWh for off-shore wind and £95/MWh for nuclear. The projects in EEFIG’s DEEP database showed an even lower LCOE.  Energy efficiency really is the cheapest energy option.

The potential for improved energy efficiency is massive. It has been extensively studied, across many sectors and many geographies. Research at the University of Cambridge[ii] concluded that globally we use 475 Exajoules of primary energy resources to provide 55 Exajoules of useful energy services (motion, heat, cooling, light and sound), which means that for all of our technology we have an overall global energy efficiency of only 11%, which is why my blog is called onlyelevenpercent.com.  Although this number does not take into account economic considerations it shows that there is a huge potential resource in untapped energy efficiency opportunities, a resource that is technically feasible but not necessarily economic, analogous to an oil or gas resource estimate. The most interesting part of this resource is the economic potential, potential that is both technically and economically feasible but not yet exploited, which can be considered similar to proven reserves in oil and gas – typically 30-40% reductions in energy use. 

The impact of energy efficiency in the energy transition has been neglected compared to fossil fuel and renewables. Without energy efficiency improvements since 2000, global energy use would have been 13% higher in 2018, and energy related carbon emissions would have been 14% higher[iii]. In one US analysis energy efficiency was shown to have ‘fuelled’ three quarters of the demand growth for energy related services since 1970 and the UK story has been similar. People loosely talk about energy use going up but in the UK, the US and other countries it is actually going down – mainly because of improved efficiency. Once we start to electrify transport and heat with more and more renewable power it will go down even more as we cut out thermal generation, which is incredibly wasteful, and use electric motors that are far more efficient than internal combustion engines.

Energy efficiency has been described as ‘the linchpin that can keep the door open to a 2°C future’. The IEA estimates that to achieve a 2°C scenario energy efficiency must account for 38% of the total cumulative emission reduction through 2050, while renewable energy only needs to account for 32%.

So, we have this massive, very cheap and under-exploited energy efficiency resource that is an essential part of the global energy transition and critical to achieving our carbon targets.  We are surrounded by a giant reserve of cheap, clean and exploitable energy in the form of energy efficiency potential everywhere you look, but we have historically under-invested in it and continue to under-invest.  The essential challenge is how to shift investment into energy efficiency to even up the imbalance between investment into energy supply and improving energy efficiency.

I just want to wrap up by talking about the many reasons why financial institutions should consider deploying more capital into energy efficiency which include:

  • Energy efficiency represents a large potential market. The IEA estimates that in 2018 global investment in energy efficiency was USD 240 billion. To achieve Paris aligned goals this level of investment needs to grow to circa USD 1 trillion per annum by 2050 and the provision of finance can help overcome some of the barriers to energy efficiency investment.
  • Energy efficiency can produce long-term, stable cash flows, which can provide yield based products including green bonds if sufficient scale is achieved.
  • Improved energy efficiency reduces risks in two ways. Firstly, increasing energy efficiency improves the cash flow of project hosts. Secondly there is the risk of financing assets that become stranded as energy efficiency regulations are tightened. For example, in England & Wales the Minimum Energy Efficiency Standards regulations make it unlawful to lease a commercial building with an Energy Performance Certificate rating below E, and the minimum standard will be tightened over time. Failure to upgrade poorly performing buildings puts owners of low performing buildings, and their lenders, at risk.
  • Energy efficiency is one of the key pathways to reducing greenhouse gas emissions. It is strongly supportive of net zero commitments and the Paris Agreement.
  • Investing in improving energy efficiency is in line with Sustainable Development Goal 7, ‘Ensure access to affordable, reliable, sustainable and modern energy for all’, and particularly Target 7.3: ‘Double the global rate of improvement in energy efficiency by 2030’. It is also supportive of SDG 9, ‘Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation’, SDG 11 ‘Make cities and human settlements inclusive, safe, resilient and sustainable’, and SDG 12 ‘Ensure sustainable consumption and production patterns’.
  • Energy efficiency is an impact investment. As well as reducing energy use, efficiency projects can have a positive impact on factors such as local air pollution, job creation, improved health and learning outcomes. Therefore it should be a key part of any impact investing programme or CSR/ESG programme.
  • Regulators are increasingly looking at climate related risks. Actions include asking banks to disclose the climate-related risks of their loan portfolios which will allow financial institutions to be better informed about loan performance and thus the cost of risk and carry out better risk appraisal. Possible future actions may include reducing capital reserve requirements for ‘green’ financing. Investing in energy efficiency reduces climate related risks.

We believe that these reasons mean that energy efficiency investment should increasingly be on the board room agenda of all financial institutions. Whatever markets they operate in there are growth opportunities, opportunities for risk reduction and opportunities to achieve wider impact aims.

It appears that the scale and attractiveness of the energy efficiency resource is finally being recognised and a new asset class is emerging.

Thanks to IPFA for hosting the webinar and including efficiency in the energy transition series. https://www.ipfa.org


[i] EEFIG Derisking Energy Efficiency Platform. https://deep.eefig.eu

[ii] Reducing Energy Demand: What are the Practical Limits? Jonathan M. Cullen, Julian M. Allwood, and Edward H. Borgstein. Environmental Science & Technology. 2011.

[iii] Recommendations of the Global Commission. Global Commission for Urgent Action on Energy Efficiency. June 2020.

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 others must bring data

W. Edwards Deming


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

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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