The last few weeks for me seem to have been focused on innovation.  First I spent a day in Paris with the EDF Pulse awards team pitching to a jury chaired by Henri Proglio chairman of EDF and more exciting for me, Claudie Haigneré, the first French woman in space.  (She visited the Russian Mir space station in 1991 and became the first European woman to visit the International Space Station in 2001.  Having met astronauts and cosmonauts but never a French spationaut chatting to Mme. Haigneré was a great bonus on an interesting day.)  However – back to energy matters.  EDF Pulse is a global innovation award started last year as part of EDF’s open innovation programme and the team of eight “sensors”, of which I am one, gathered more than 90 early stage companies with technologies in home, health and a mobility into the competition.  The finalists in each category will go forward to a public vote and the winners will be announced in April.  After the EDF Pulse day I spent a day teaching a module on innovation and financing at the Westminster Energy forum course for new graduates in the energy industry.  Then RBS asked me to join the panel and attend two events to launch their Innovation Gateway, an innovative programme designed to bring new innovations that can improve resource efficiency into RBS’s 2,500 building portfolio.

All this led me to summarise a few thoughts on innovation and the process of technical change, specifically in the energy world.  This isn’t designed to be a definitive article on innovation in the energy industry but rather a collection of observations that are often forgotten or discounted.

We need to start by saying that innovation is a greatly misused word.  Strictly speaking it means the first commercial use of a technology but in every day use it is often used to mean the process of change and the massive differences between a concept, a prototype, a pilot plant, a first commercial plant and a standard off the shelf, well proven piece of technology are forgotten or confused.  A glossy presentation or a graphic showing “a new technology” is not an innovation (and probably not even a technology) – it is a concept, possibly a great concept that will change the world and possibly a concept with no hope of ever making it into reality.  A small-scale prototype plant is just that, it isn’t a proven technology that can be rolled-out globally and change the world.  In reviewing a “new technology” or “innovation” always remember the hype cycle. We should also not forget that process innovations and business model innovations can be just as important, if not more important, than shiny new pieces of technology – however seductive they are.

Making innovation happen, whatever the sector, is inherently difficult. New ideas and concepts abound but only a small percentage of ideas ever make it into reality and have any significant effect on the world. This is because turning an idea into reality or bringing about change, the role of the entrepreneur, is fundamentally difficult.  As Machiavelli said in a famous quote; “There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.”  Making effective and persistent change happen requires human energy and determination, a thick skin, a range of technical, financial and managerial skills, availability of finance, good timing and a lot of luck.

Innovation in the energy system is harder than other sectors for a range of reasons.  Firstly of course energy is a massive industry, global energy sales are $6 trillion per annum and account for 7% of global GDP.  Global investment in energy is about $1.2 trillion.  Even a small energy investment in the energy sector is usually big compared to other sectors.  The rate of capital replacement is slow, energy system assets tend to last a time, typically twenty five years plus – there are plenty of power stations out there which are forty years old or more.  A 2008 survey of 500 electricity industry professionals in the USA referenced by the NorthWestern Energy Stakeholders Group  reported that more than half of electricity distribution assets are at or beyond their intended life.  The Black & Veatch 2012 Strategic Directions in the US Electric Utility Industry survey reports that aging infrastructure remains a major concern for US utility managers.  The US Department of Energy reports that the average large-power transformer in the USA is now more than 40 years old.    Another important factor is that the application of industrial energy has significant health and safety risks, it can and does kill people.  This goes some way to explaining conservatism in the industry.  Next, the energy industry is heavily regulated and in all countries there are strong links between energy supply and politics.  (I wrote about the link between electrical power and political power here.  These and other factors make change in the energy industry even more difficult than in other sectors.

Despite these difficulties of course the energy industry has always innovated.  In electricity we moved from Faraday’s first primitive generator in 1831,  (if you haven’t seen it go straight to the Royal Institution in London and see it along with Faraday’s original lab – one of the best free exhibitions in London), through the world’s first public electricity supply in Godalming in 1881 (powered by water wheels), to Edison’s first steam powered power station in Holborn in 1882, (note this was several months ahead of the more famous Pearl Street power station in New York), to the London Power Company’s “super power station”, the 400 MW Battersea Power Station A in 1934 which included Europe’s largest generator set of 105 MW, through to Drax in 1974 with a 660 MW generating set.  In fuel we have moved from burning wood to coal to oil and then to gas, with each transition reducing carbon intensity.  The first commercial oil well was drilled in 1859 in Titusville to a depth of 69 feet and now we have remote, steerable wells drilling under the ocean floor for more than ten kilometres horizontally at a depth of more than twelve kilometres.  After the first oil crisis in 1973/74 the energy industry establishment believed that there was a shortage of natural gas in the United States and persuaded the US Congress to pass laws stopping use of gas for power generation.  Now on the back of the shale gas revolution led by entrepreneurs who, if they got any attention at all were originally considered crazy by the energy establishment, the US is heading towards exporting natural gas.

Although it is tempting to think that they had it easy we should remember that Edison and the other energy pioneers also had to raise capital to develop and deploy new technologies and had their own difficulties raising money.  The sophistication of financial models and techniques may have changed dramatically but the basic truth that the inventor or developer usually has to persuade someone else to invest in their company or project remains the same – and the fundamental risks are similar.

Venture capitalists (VCs) often talk about the valley of death for early stage companies, the period between the initial funding round and generating revenues.  In energy technology investing there are really two valleys of death.  The first is between moving from research to pilot plant and the second is between successful demonstration of a pilot plant (assuming this is actually achieved) and mass roll-out.  A lot of research projects are measured in the millions of dollars, pilot plants in the tens of millions (sometimes hundreds of millions), and roll-out is measured in hundreds of millions and billions.  Many of the venture capitalists moving from the software/IT world into energy technology development did not appreciate the difficulties, as well as timescales and expense, involved in even demonstrating a successful pilot plant.  In some cases they also forgot that utilities don’t buy mission critical equipment from small VC backed companies, they buy from the likes of GE, Siemens, ABB and Kawasaki Heavy Industries who have decades of experience in the energy sector and very large balance sheets which can guarantee performance.

Just to illustrate how hard bringing innovation is to commercialise consider the AiM market of the London Stock Exchange.  AiM was created to support growing companies and became the darling of clean tech and new energy companies.  In the period 2004 to 2007 there was a flurry of activity, a bubble really, of such companies coming to the market and raising money and at one point the highest value company on AiM was a wind turbine company.  Analysis by Adam Forsyth of Arden Partners shows that as of September 2013, of the 75 new energy and clean tech companies that came to AiM only 11 made their investors more than 20% (since their IPO), 4 made between 0 and 10%, and 60 have lost money.  12 of the companies lost 100% of the money invested and 42 have lost more than 50% of the original investment.  This means that if you had spread your portfolio and put £1,000 into each new energy and clean tech IPO on AiM by September 2013 you would have lost £38,500 so your £75,000 would have been turned into £36,500 – not a good outcome.  Of course if you had put your £75,000 into the top performing company you would have made £146,000.  Technical change and innovation comes at a real cost to investors!  The progression of the AiM market (and all other markets were the same) for new energy and clean tech exhibits all the signs of a classic investment bubble and demonstrates the hype cycle in action.

While I was with EDF I was reminded that in January EDF issued 100 year bonds with a 6% coupon and that the proposed reactor at Hinkley Point is designed to have a 65 year lifetime.  Just think how much even the conservative energy world has changed in 100 years.  Any energy executive in 1914, no doubt thinking that the “safe” Edwardian world would continue pretty much as it was, lived in an energy system dominated by coal and by gas lighting.  The Royal Navy had experimented with burning oil from 1903 (with the first tests failing miserably) and at the behest of First Lord of the Admiralty Winston Churchill was building the new Queen Elizabeth class dreadnoughts powered by oil, although most of the fleet remained coal fired.  The British government established Anglo Persian Oil (the forerunner of BP) in 1914 in order to exploit newly discovered oil in Persia and fuel the Royal Navy.  Although the Wright brothers had first demonstrated controllable flight in 1903 the aeroplane was still a new and exciting technology, Bleriot had only accomplished the first flight across the English Channel in 1909 and in 1914 the world’s first commercial airline, the St. Petersburg-Tampa Airboat Line, was launched in Florida with one fare paying customer.  Now 8 million people fly commercially every day.  Although radioactivity had been discovered at the end of the 1800s (Mme. Curie received the Nobel Prize in 1903) it was still widely regarded as a curiosity with little or no application.  It wasn’t until the late 1930s that the idea of using nuclear energy to generate electricity was proposed.  In 1913 UK coal production peaked at 300 million tonnes with the coal industry employing 1 million men.  In 2013 the UK produced 16 million tonnes (and used 64 million tonnes) and employed about 6,000 people.  In 1914 gas lighting accounted for about 90% of all lighting systems.  Telephones were still reserved for the rich and it was not until 1915 that the first transcontinental telephone call was made in the US.  This year we are going to see the number of active mobile phones, at 7.3 billion, exceed the human population.  On the road Henry Ford launched the Model T, the car that brought motoring to the masses, in 1908 but its effect was only just starting by 1914 and motoring was still largely reserved for the rich.  In 1909 143,000 private vehicles (53,000 cars) were registered in the UK, compared to 34.5 million private vehicles (28.7 m cars) today – of which 1.4 million were Ford Focus and 1.3 million Ford Fiestas.

Whatever your views on the direction of progress and economic development, or on specific technologies, the last 100 years of innovation really is amazing.  It was of course driven by “cheap” fossil fuels, mainly coal and then oil – as well as two world wars.  The next hundred years may be defined by greatly improving resource efficiency by focusing on end-use rather than energy supply, the deployment of “smart” technology into dumb systems, and possibly the supply of unconventional gas and truly cost-effective renewables using technologies that are not commercial yet (and I don’t mean silicon based PV or wind turbines). The only certainty about the energy system of 2114 is that it won’t look like that of today.

To finish, some quotes on innovation that are worth remembering.

“Drill for oil? You mean drill into the ground to try and find oil? You’re crazy.”

Workers whom Edwin L. Drake tried to enlist to his project to drill for oil in 1859.

“Electric lighting is a completely idiotic idea”

Chief Engineer, Post Office, 1881

“The substitution of oil for coal is impossible, because oil does not exist in this world in sufficient quantities.”

Lord Selbourne, First Lord of the Admiralty, 1904

“Any sufficiently advanced technology is indistinguishable from magic.”

Arthur C. Clarke, science-fiction and science writer

“We over-estimate what we can achieve in the short-term and under-estimate what we can achieve in the long-term.”

Arthur C. Clarke

“For a successful technology, reality must take precedence over public relations, for Nature cannot be fooled.”

Richard Feynman, Nobel Prize winning physicist

“..as we know, there are known knowns; there are things we know that we know. There are known unknowns; that is to say, there are things that we now know we don’t know. But there are also unknown unknowns – there are things we do not know we don’t know.”

Donald Rumsfield, US Secretary of Defense

After the last post on the attack on a US sub-station and Jon Wellinghoff’s warnings I was alerted to another development.  Firstly there is still no news on who perpetrated the attack.  Secondly FERC has issued an order to the “North American Electric Reliability Corporation (NERC) to develop reliability standards requiring owners and operators of the Bulk-Power System to address risks due to physical security threats and vulnerabilities.”

I had to remind myself that NERC is “a not-for-profit entity whose mission is to ensure the reliability of the bulk power system in North America” and that “entities under NERC’s jurisdiction are the users, owners and operators of the bulk power system, which serves more than 334 million people” across the US, Canada and the northern portion of Baja California, Mexico.  A big job indeed when the system covers 400,000 circuit miles and 55,000 transmission sub-stations.

To quote from the FERC press release; “The reliability standards directed by today’s order require owners and operators of the Bulk-Power System to take at least three steps to protect physical security. First, owners and operators must perform a risk assessment of their system to identify facilities that, if rendered inoperable or damaged, could have a critical impact on the operation of the interconnection through instability, uncontrolled separation, or cascading failures of the Bulk-Power System. Second, owners and operators of critical facilities must evaluate potential threats and vulnerabilities to those facilities. Finally, owners and operators must develop and implement a security plan to address potential threats and vulnerabilities. NERC has 90 days to submit the proposed standards.”

Of course the potential cost of beefing up physical security is enormous and there needs to be prioritization.  There also needs to be action on cyber security and using intelligent grid concepts to improve resilience.  No doubt this story will run and run – and of course the European grid system has the same issues.

Following my blog on energy security I was sent a link to a US news story on energy security I had missed.  Jon Wellinghoff, a former Chair of the Federal Energy Regulatory Commission (FERC) and therefore a very reliable witness, drew national headlines when he reported a potential terrorist attack on the US power grid.  Apparently last April there was a military style assault on a Californian sub-station feeding Silicon Valley.  Jon Wellinghoff decided to go public because of his concerns that not enough is being done to protect the grid.  It seems that snipers opened fire on the sub-station and over 19 minutes took out 17 transformers.  The shooters disappeared when police arrived and no arrests have yet been made.  Military experts regard it as a professional job.  Jon Wellinghoff said “what keeps me awake at night is a physical attack that could take down the grid”. Worrying indeed.

The current events in the Ukraine have once again raised the important issue of energy security for the UK and Europe.  Most attention is paid to Russian gas but most UK gas comes from Norway and Qatar (as LNG) and the real hidden issue for the UK is coal.  In Q3 2013 Russia provided c.50% of steam coal consumption – the coal that in provides about 39% of our electricity.  Energy security is often cited as a driver for energy policy, and specifically energy efficiency policy, but it is a term that is not often unpacked or thought about too deeply.  What do we really mean by energy security? In my mind energy security is a measure of the vulnerability of maintaining the flow of fuel and electricity into, and within, a country or region. Energy security should, of course, be a major concern for politicians, whose jobs would become very insecure very rapidly if the industrial scale flows of energy we have become dependent on were to be interrupted. It should also be a concern for business leaders and community leaders, as well as ordinary citizens, because even the perceived threat to energy supplies can lead to business and social disruption and ultimately social breakdown.

In March 2012, the perceived threat of a disruption to UK fuel supplies due to threatened strike action by tanker drivers caused widespread panic. Francis Maude, a government Minister, suggested people should keep a jerry can of petrol in their garage, which exacerbated the situation and led to long lines for fuel and petrol stations running out of supplies. In this case and surprisingly the politician kept his job and a strike was averted but it does illustrate the sensitive nature of keeping energy supplies flowing.

Energy security is most often highlighted at the macro level and, in particular, in relation to oil supplies. Twenty per cent of the world’s oil output – and 35 per cent of tankered oil – is shipped through the Straits of Hormuz. Any disruption of oil traffic through the Straits of Hormuz, either by a country or a terrorist group, would disrupt oil supplies to many countries and have a major impact on the oil price in the short term. Although in the US and Europe oil demand is relatively flat or declining, these countries, along with the rest of the world, remain almost entirely dependent on oil for transportation of all kinds, road, rail, air and maritime.

The threat of supply disruption by energy supplying nations is always going to be a risk for energy-importing nations. In 2011, in response to an EU embargo on Iranian oil imposed as part of the international effort to limit their nuclear programme, Iran threatened to disrupt oil supplies through the Straits of Hormuz. The threat helped drive oil prices higher. This was not the first time the threat had been made and despite some diplomatic progress Iran remains a significant risk.  The significant US and international navy presence in the area, however necessary, makes the risk of a deliberate or accidental clash quite high. The events and aftermath of the Arab Spring could still threaten the security of oil and gas production in several countries and could of course still spread to other oil exporting nations.

Russia provides about one quarter of the gas consumed in the European Union, and about 80 per cent of this flows through Ukraine. Due to a dispute over gas sales, Russia cut gas supplies to the Ukraine completely in January 2006. After four cold days the dispute was settled. Supplies were also reduced in 2008 and 2009, directly affecting gas supplies in some EU countries and leading to price spikes.  Action on energy supplies remains an obvious option for Russia in trying to force its will on the current events in Ukraine.

Despite success against terrorist movements such as Al Qaeda in some parts of the world, all countries remain vulnerable to terrorist attacks on energy supplies. Choke points such as the Straits of Hormuz or major gas and electricity transmission and distribution centres make enticing targets. Destroying, disrupting or damaging them would lead to high levels of disruption, economic damage – and global publicity. The tragic events in Algeria in January 2013 when terrorists targeted the Amenas gas production facility and killed more than 35 hostages highlighted this vulnerability once again.

Saudi Arabia holds 25 per cent of the world’s proven oil reserves, produces 12.5 per cent of the world’s oil production, exports 16 per cent of the world’s total oil exports, and has the largest surplus oil production – approximately 1.1 to 1.8 million barrels a day, so the security of Saudi oil facilities should be a particular concern to everyone. In 2004, an attack on oil facilities in Yanbu was thwarted by the authorities with no damage, and in February 2006 terrorists attacked the Saudi Aramco Abqaiq facility. This plant includes one of the largest oil fields in the world, with reserves greater than those of Mexico or Canada, and a processing facility with a capacity of seven million barrels a day – about 70 per cent of Saudi oil production – which stabilizes oil for shipment by controlling dissolved gas, natural gas liquids and hydrogen sulphide contents. The attack led to oil prices rising by $2/barrel to around $62/barrel. In 2007 the Saudi authorities arrested 700 alleged terrorists suspected of plotting to attack oil installations. As well as oil fields, processing facilities and export terminals, Saudi Arabia has about 11,000 miles of pipelines which are vulnerable to attack.

The total budget for security of oil facilities in Saudi Arabia was estimated at $1.5 billion in 2005 (Al-Rodhan 2006). This does not include the cost to the US and other countries of securing the Straits of Hormuz, which for the US has been estimated by Stern (2010) at $6.8 trillion between 1976 and 2007, an average of $227 billion per annum. This is roughly $83/barrel of Saudi exports, of which only about 20 per cent go to the US, raising serious questions over the real value of this expenditure to the US and what may happen in future when the US becomes less dependent on imported energy due to the unconventional oil and gas boom.  Sheikh Yamani, the Saudi Arabian Oil Minister famously said in 1988 “… America will be forced to rely on the Persian Gulf, which is a part of the world, I assure you, that you do not want to allow yourselves to rely upon.”  With shale gas and unconventional oil the end of that reliance on the Persian Gulf may be in sight for the USA but certainly is not for Europe and much of the rest of the world.

With continued terrorist activity, particularly in nearby Yemen, and political and religious turmoil throughout the Middle East, the threat of oil disruption in Saudi Arabia remains a major concern. But it is by no means the only area for concern. In Nigeria, rebel groups have repeatedly attacked oil installations and kidnapped oil workers. These attacks led to oil production being reduced by 40 per cent in 2009 and, despite an amnesty, production in 2012 was still one million barrels a day (26 per cent) below capacity.

Nowadays it is not only the threat of damage from explosives and other physical weapons that security professionals have to worry about – cyber warfare is a very real danger. The Stuxnet virus was targeted at the controllers of the uranium enrichment centrifuges in Iran’s nuclear programme and sent the centrifuges into an unstable condition that destroyed them. In October 2012 it was reported that in August cyber terrorists attacked the computers of Saudi Aramco with a virus that wiped the memories of 30,000 computers (Perlroth 2012). The IT network, which in this case was not linked to the production control systems, was disabled for some time and fortunately the attack did not directly impact on operations. Two weeks after this attack a similar attack was made on RasGas, the Qatari natural gas company.

As well as these obvious energy security risks other risks exist including industrial action by key energy workers including power station employees or fuel tanker drivers.  In 2000 a series of protests against high fuel prices led to a petrol supply crisis and a contributory factor that was not anticipated by the authorities, was that tanker drivers were intimidated into not driving through the protests, partly because of the risk of having their photos taken by camera phones and used on web sites, a threat that did not exist before the advent of camera phones and the web.

Energy security is an issue that has both short-term and long-term time horizons. In the short term even a small, short-lived disruption on any day can cause major economic and social disruption. In the longer term, given the projected increase in global population to about 9 billion by 2050 and the likely entry of 2.5 to 3 billion into the middle class by 2030, energy demand is set to increase dramatically – particularly in rapidly developing economies such as China, India, Brazil and SE Asia. In the future, these countries will compete to buy energy resources and act to ensure the supply of energy to their own economies, putting upward pressure on prices.

The issue of energy security is usually talked about in terms of national energy security but it is – and should be – increasingly viewed as a regional or local issue.  Even within a country there may be technological or social issues that constrain the flow of energy, for example the design of and ageing electrical grid may no longer be appropriate for the spatial distribution of growth. In cities such as London and New York physical constraints such as the space available for underground cables may constrain maximum loads in new buildings whereas in rapidly growing economies such as the Middle East or India new developments may outstrip the availability of reliable power supplies.  Improving energy efficiency can improve energy security by reducing the need to import energy sources at a regional, national or local level.

The bottom line is that importing energy remains a high-risk strategy for any country and puts a country in a position of weakness compared to the supplier country.  In colonial days major powers such as the UK were able to secure oil fields by occupation and military power – but this is not a moral or even practical option in the modern world.  The right choice is to reduce import dependence through a range of policies, not least of which is aggressive action to improve energy efficiency across all sectors.

References

Al-Rodhan, K.R. 2006. The Impact of the Abqaiq Attack on Saudi Energy Security. [Online]. Available at: http://csis.org/files/media/csis/pubs/060227_abqaiqattack.pdf [accessed 1 March 2014].

Stern, R.J. 2010. ‘United States Cost of Military Force Protection in the Persian Gulf, 1976–2007. Energy Policy, 2010. [Online]. Available at: http://timemilitary.files.wordpress.com/2011/04/us-miiltary-cost-of-persian-gulf-force-projection.pdf [accessed 1 March 2014].

Perlroth, N. 2012. ‘In Cyberattack on Saudi Firm, U.S. Sees Iran Firing Back’. The New York Times, 23 October 2012. [Online]. Available at: http://www.nytimes.com/2012/10/24/business/global/cyberattack-on-saudi-oil-firm-disquiets-us.html?pagewanted=all&_r=0 [accessed 1 March 2014].

There is a tangible sense of frustration at the slow progress being made in scaling up the European energy efficiency market. But traditional players need to learn from the more dynamic markets in the US or risk being overtaken by rivals with new business models.

The science fiction writer Arthur C Clarke once said: “New ideas pass through three periods: 1) It can’t be done; 2) It probably can be done, but it’s not worth doing; 3) I knew it was a good idea all along!”

The idea that energy efficiency can be a major factor in addressing environmental and economic problems, and benefit from its own major financing market seems to be somewhere in stage two – at least for those outside the space.

Now efficiency is rising up the policy agenda as practical cost and technical problems with low-carbon energy sources, both renewables and nuclear, become more obvious.  There has also been increasing commitment from financial institutions to find ways to deploy money into energy efficiency. But at the same time the market remains small and the early participants report problems finding good projects, even in the US.

Right at the centre of this problem/opportunity is the Esco industry which met in January for the 10^th annual Esco Europe conference, in Barcelona.

One of the problems with energy efficiency is the plethora of acronyms, and the first one to address is ‘Esco’, the definition of which remains a mystery to many, including many in the industry. Different definitions abound but fundamentally an Esco (energy service company) offers EPCs – energy performance contracts. EPCs guarantee a set level of energy savings, sufficient for the client to pay back any finance taken out to fund the capital cost of the energy efficiency projects, which are still often called ECMs – energy conservation measures.

The Esco/EPC combination grew up in the US in the 1980s, and in Europe and elsewhere is often seen as a model to be replicated. Yet the EPC model in the US has largely been in the Mush (Municipal, University, Schools and Hospital) and Federal government markets. Although it is growing, it is only worth $5 billion a year, with most financing being through municipal bonds and direct from federal budgets.

Attempts to transfer the Esco/EPC model to the commercial sector have not been successful due to its complexity and high transaction costs as well as problems such as the split incentive.  The current level of activity needs to be compared with a potential investment opportunity of $100 billion in the US Mush market, (as estimated by the Lawrence Berkeley Laboratory) and what Deutsche Bank estimates to be a $280 billion investment opportunity across all real estate in the US.  According to the International Energy Agency’s first Energy Efficiency Market Report there was £300 billion of energy efficiency investment in 2011 and, given the potential still to be exploited (‘the efficiency gap’), this could grow significantly. The World Business Council for Sustainable Development estimates that energy efficiency could become a trillion dollar market.

So, we have increasing policy attention on energy efficiency everywhere, we have more money being committed to energy efficiency, we know the potential is huge, and more deals are slowly being done. But there is an overwhelming sense of frustration that not enough is happening, and in the European Esco industry that frustration is palpable.

Several sessions at Esco Europe focused on how to transform the Esco market, with presentations from across Europe.  From these, and experiences in North America and Asia, it is clear that the issues are the same everywhere: small project size, insufficient volume to access the bond market, high project development costs, lack of capacity in both the customer base and financial institutions, and insufficient confidence in energy savings.

Measurement of savings has always been an issue for many, but we have had the solution for years in the shape of the IPMVP (International Performance Measurement and Verification Protocol), which is in use globally.  A good Esco contract will have a Measurement & Verification (M&V) plan audited by an independent M&V professional.  The availability of near real-time measurement enabled by reduced cost of sensors and IT is reducing M&V costs.  Organisations with good energy efficiency programmes should be measuring the results of their own efforts anyway.

The traditional Esco/EPC model can work well in specific segments of the market and above a certain project size, notably the public sector, and it can bring many advantages other than energy efficiency, including infrastructure upgrades, catching up with maintenance backlogs, and reduced operations costs. In other market segments, such as multi-tenant commercial offices it does not work, and the Esco industry and finance industry need to acknowledge this and innovate new models.

There are signs that a wave of innovation and growth in efficiency financing is starting to build, mainly in the US where the use of financing models such as PACE (a charge on property tax), Efficiency Services Agreements (ESAs) and Measured Energy Efficiency Transaction Structure (Meets) are growing. The European Esco industry and finance industry needs to learn from this rather than just focusing on the traditional Esco/EPC model.  If the incumbents don’t recognise this they will be overtaken by new entrants with new business models.

One of the problems of energy efficiency financing is that the efficiency industry does not speak the same language as the finance industry.  It was good that Esco Europe brought in more sources of finance than ever before.  From the public sector there was the EIB – which has made a big commitment to efficiency – the EBRD, which has always pushed the agenda in its area of operation, and the EU, which is supporting efficiency financing through its Horizon 2020 programme.

From the private sector it was good to hear from SUSI, a Swiss efficiency fund that recently closed a €65 million fund aimed at large building projects, and Joule Assets, a US company with a different model of financing residential retrofits, which recently announced a $100 million fund.  We need to make more effort to bring together the efficiency and finance industries and evolve a common language, and that requires “mashing” them together.

Markets cannot operate without standardisation. A presentation by Matt Golden of the Investor Confidence Project (ICP), which is supported in the US by NGO the Environmental Defense Fund, explained how the ICP is developing protocols for different building types that set out standards for developing and documenting efficiency projects.  It does not set out to design new technical standards – that task lies with the technical standards organisations – but rather to provide a common approach that investors can recognise and have confidence in.  It reduces transaction costs, facilitates a portfolio approach, and allows different actors, project developers, insurance companies, investors, M&V specialists, to do what they do best rather than trying to address the whole problem.  The Environmental Defense Fund is working with European partners to develop an ICP equivalent in Europe – a common approach would facilitate a global market and enable global investors to address efficiency.

It is clear from Esco Europe that activity in efficiency financing is gearing up but many barriers remain.  It is also clear that much of the energy efficiency and financing discussion focuses on what the public sector can do, and implies that increasing efficiency requires increased regulation and complex centralised programmes.  We need to move the focus to be much more about creating real markets that reward exploiting the efficiency resource by actually delivering megawatt-hours saved, rather than programmes in which governments specify expensive processes.  This is the real problem with programmes such as the Green Deal and, its equivalent in California which was recently reported as costing $15,000 per customer who then made an average investment of $18,000 – such high costs are clearly uneconomic and unsustainable.

Financial markets are made by buyers and sellers coming together and agreeing standards and protocols.  This happened in the energy supply industry many decades ago, in renewables from the 1990s, but is yet to happen in efficiency.  If we can do that over the next few years we will create a trillion dollar market and have a major impact on environmental problems.

This piece was originally published in Environmental Finance on 30th January