No sooner than I had published ‘A roadmap for energy efficiency financing’ outlining the different ways to finance efficiency projects then another new route on the road appears – the MEETS or Measured Energy Efficiency Transaction Structure. The MEETS relies on EnergyRM’s DeltaMeterTM which measures the difference between the baseline energy consumption and the actual consumption i.e. the energy not used – or negawatt hours – to a standard accepted by the client and the utility – in this case NEEA, the North West Energy Efficiency Alliance, which includes 140 utilities in the Pacific North West plus the Energy Trust of Oregon and the Bonneville Power Administration.

The saved energy is metered and paid for per unit saved. This provides a cash flow which can both payback investment in upgrading the building and pay a ‘rental’ to the building owner for the right to exploit the energy efficiency resource – analogous to paying a landowner rent for a wind farm or a shale gas well. Involving the utility means that the utility has a degree of control and information about its load pattern that it wouldn’t otherwise have, knowledge that has value in itself. The price paid per unit of energy saved will depend on the retail energy prices plus any incentives that are available but the base line should be the retail price as a building owner can effectively get this price by doing the project themselves.

EnergyRM is providing the meter technology, not the finance, and the investor could be the utility or a third party investor.

Energy efficiency financing has been stuck in a rut for a long while, with most people obsessing about Energy Performance Contracts – a contract form that works reasonably well in the US public sector but has a number of failings in other markets. MEETS, like the Efficiency Services Agreement from Metrus, is another innovation that offers the prospect of scaling up investment in energy efficiency.

The energy efficiency financing scene is evolving quickly, especially in the USA where three main types of financing now exist:

• PACE (Property Assessed Clean Energy – click http://pacenow.org for more information)
• traditional Energy Performance Contracting (EPC) – usually financed by leasing or municipal debt
• and the emerging Efficiency Services Agreements (ESA) and Managed Energy Services Agreements (MESA).

On-bill repayment (OBR), where the repayment of capital is added to utility bills, is also growing but this is more of a collection mechanism than a type of financing, as it can be tied to various contract forms. The UK Green Deal is a form of OBR with external financing provided through the Green Deal Finance Company.

Of course organizations also have the option to self-finance energy efficiency projects but this approach is most often single measure driven, usually in response to vendors selling specific equipment, and limited due to capital constraints and competition for scarce capital with the organization’s core business activities. Bringing in the right specialists and outside finance can lead to a more optimized set of projects designed and developed in a more holistic way that leads to greater savings.

PACE has been stopped in the residential sector because of a ruling by the Federal Housing Finance Agency (FHFA) but commercial PACE, so called C-PACE, is growing rapidly (see here for a primer). C-PACE has the potential to reach $2.5 billion to $7.5 billion by 2015 according to Pike Research, even $2.5 billion would be a great step forward.

Traditional EPC contracts have been mostly in the public sector, the MUSH market as it is known in the US, and mainly financed by issues of low cost, tax-exempt debt by the client or by leasing. The traditional ESCO/EPC approach has a number of problems in the commercial sector and as the FASB and IASB move towards harmonizing the balance sheet treatment of leases, the use of leasing to get energy efficiency projects off balance sheet is likely to be stopped. (I spoke about this issue at the recent IFC ESCO Financing conference in Johannesburg – see here)

The emergence of ESAs and MESAs is very interesting as the contract form appears to have many advantages. In the MESA the service provider takes over the relationship with the utility and the client pays the service provider what it used to pay, taking the difference resulting from energy saving projects – whereas in the ESA the client keeps paying the bills and pays the service provider a price per unit of energy saved. In both forms they are service contracts with payment for energy saved, negawatt hours, rather than equipment which helps get any associated capex off the client’s balance sheet.

The various types of energy efficiency financing can be confusing, and the pioneer of ESAs, Metrus Energy, has issued a useful and neat infographic: Which Financing Vehicle Gets You on the Road to Energy Efficiency. It is worth checking out and can be found here.

As well as its useful content I like the cartoon vehicle choices, a US style school bus and what looks to be a 1970s Cadillac for the ‘traditional’ and what looks like a VW Beetle and a Mini for MESAs and ESAs. Neat.

If you want more information on the ESA structure Metrus are hosting a free webinar on 27th June at 11am PST, details can be found here . In what must be a world first Metrus is offering 100,000 free negawatts to one customer who signs up for the webinar and then implements a project in 2013.

My recent first ever trip to South Africa was too short (36 hours) but exciting and fascinating. The African sun and energy of the people I met was truly invigorating, especially after a long cold and wet winter in the UK. The commitment to energy efficiency, which of course is vitally important to the country, was also good to see.

As is well known South Africa has a power supply crisis and on the 23rd May this year ESKOM’s (the power supplier) supply margin was a frighteningly tight 0.4%. Any additional failures or a small amount of extra load would have led to demand exceeding supply capacity. Because of this supply situation, increasing the uptake of the energy efficiency resource has a critical role to play in South Africa’s energy future. Much good work has been done and many initiatives have been taken or are planned.

Chief amongst these are ESKOMs IDM (Integrated Demand Management) programme which since 2004 has removed 3.5 GW from the system. IDM has several elements including:

• Energy Efficiency Demand Side Management (EEDSM) – to identify and promote more efficient electricity use through technology enhancements and behavioural change.
• Energy Management Programme (EMP) – assisting Corporate Customers to enhance energy efficiency.
• Solar Water Heating Programme – providing financial incentives for consumers to switch to solar water heating.
• Power awareness and communications campaigns.
• Coordinated internal energy efficiency programme.
• Energy conservation scheme (ECS) – to achieve a 10% energy reduction amongst consumers using more than 25GWh per annum.
• Demand Response (DR) – system operator pays customers to reduce load on instruction to balance demand and supply.
• A Standard Offer programme in which ESKOM pays for verified savings between 50kW and 5MW.  The project host, or an ESCO, is paid a standard price per kWh for three years.

In addition ESKOM has an Internal energy efficiency programme which has a target of a 15% energy reduction for non-essential consumption (Eskom buildings and substations).

The Industrial Development Corporation (IDC), in conjunction with KFW, has established a ZAR 500 million (c.GBP 32m) Green Energy Efficiency Fund (GEEF). GEEF focuses on private sector companies and provides loans ranging from ZAR1 million to ZAR50 million at a concessionary rate of prime less 2%. GEEF allows for loan repayments of up to 15 years, depending on the energy efficiency or renewable energy technology.  To date, 17 companies have been financed utilizing ZAR 174 million with 95% committed to SMEs.

I was in Johannesburg speaking and taking part in a panel discussion at the IFC’s inaugural ESCO financing conference (see http://www.escoconference.co.za/index.html for details).  I was given the task of speaking on the thorny issue of on-off balance sheet financing and the implications of accounting rule changes. Perhaps not the easiest or most exciting subject but one that will become globally more important as the IASB and FASB harmonize on issues such as leasing and ‘balance sheet window dressing’. As someone who was at Enron at the end I particularly like Sir David Tweedie’s quote when he was Chairman of IASB, ‘the purpose of accounting is to keep capitalism honest’.  We need more honest capitalism.  Despite the lobbying of the leasing industry it looks like these changes will come into effect in 2015/16.

South Africa is doing some excellent work on energy efficiency but like most countries has a long way to go to fully exploit the huge and cost-effective energy resource we know to be out there. As I have found on my trips to other countries, it is clear that the major issues of energy efficiency financing – namely: creating demand, picking the right contract form, standardization, the need for aggregation, and access to the right kind of long term low cost finance, are the same all over the world and there is a global market for the right solutions.

A big thank you to the IFC, the organizers, the driver, the staff of the Intercontinental Sandton Towers hotel, and as always British Airways for a safe flight and excellent service.

As my friends know one of my other big interests in life other than energy is space exploration and although I don’t read as much as I used to I am still a fan of ‘hard science fiction (‘a category of science fiction characterized by an emphasis on scientific or technical detail, or on scientific accuracy, or on both’ according to Wikipedia). We can learn a lot from science fiction and of course many of the technologies and gadgets we take for granted today actually first appeared in yesterday’s science fiction by Arthur C. Clarke, Robert Heinlein and many others.

On my recent trip to the USA I read’ Power Play’ by Ben Bova. I am a huge fan of Ben Bova whose ‘Grand Tour’ series describes an exciting future where we explore the solar system and find life in surprisingly many places. Anyway, ‘Power Play’ is extremely unusual – probably even unique – a science fiction story about the problems of commercializing a new energy efficiency technology. The technology in question is Magneto-Hydro Dynamics, MHD, which is actually a more efficient way of generating electricity rather than an end-use efficiency technology, but we know there are large efficiency opportunities in the power generation system just as there are in end use applications such as buildings, industry and transport and we need to focus on improving efficiency in all areas.

Anyway. ‘Power Play’ deals with the interaction of the power industry with power politics and paints a dismal, (but probably realistic), view of US (and not just the US) politics, with one character saying, ‘It’s the old game, tell the voters you’re giving them what they want, when in reality you’re giving the special interests what they want’. Needless to say the bad guys try to stop the development of MHD, a technology which can improve the efficiency of generation by 50% and, in what one character admits is an exaggeration, offers the potential to cut electricity prices in half. The plot moves with the usual Bova pace and attention to detail and without giving it away, of course the good guys triumph in the end.

MHD is an intriguing technology that has links to rocket technology and in theory could offer high efficiency with no moving parts. The principle is that a when a high temperature, fast moving, (supersonic) plasma passes through a magnetic field it a generates an induced voltage. This is exactly the same as in a normal mechanical dynamo except the stream of plasma, which results from combustion, replaces the metal rotating conductor.

MHD is not a new idea, it first emerged in the late 1930s, resurfaced in the 1960s and then gained widespread publicity and a lot of government funding in various countries in the late 1970s and 1980s, as a response to the energy crises. It was seen as a way of burning coal, including high-sulphur coals, efficiently and cleanly although it was also considered as a way of generating power from nuclear power. Numerous experimental systems were built and in the 1970s Russian MHD systems actually delivered power to the grid.

Like many other technologies, especially in the energy field, the promise and predictions turned out to be optimistic and today we see nothing about MHD. In practice the technological problems are very tough in a number of areas. Firstly there is the problem of containing a high temperature plasma, akin to that in a rocket engine or found during re-entry from space. Chamber walls and electrodes are prone to extreme erosion due to the high temperature and nature of the plasma.

Secondly there is a need to seed the plasma, typically with potassium, to increase its charge, and the seed material needs to be recovered and re-used or disposed of. For maximum efficiency the magnetic coils should be super-conducting to reduce parasitic loads so as in Tokamak fusion reactor designs you end up with very high temperatures close to a containment vessel close to very cold temperatures – not impossible of course- just difficult from a materials perspective. To achieve the high efficiencies talked about by Ben Bova, probably as high as 60%, the MHD generator needs to be combined with a steam turbine system utilizing the heat of the MHD exhaust, effectively a combined cycle. Without that the maximum achieved efficiency of MHD alone is about 22%. The other problem in a carbon constrained world of course is CO2 emissions. Ben Bova – who has included the effects of climate change in several novels – skips over this with a quick reference to Carbon Capture & Storage.

The other factor that inhibits any development of MHD is that conventional generators are getting much more efficient. The average efficiency of all coal fired power stations in the world is c.33% but modern stations can reach an efficiency of 45%, with a target of 50% in sight in the next decade (http://www.iea.org/publications/freepublications/publication/name,32869,en.html). With these efficiencies the relative advantage of MHD, which is far more complex and risky, is greatly reduced even if it could achieve 60% efficiency. The extra cost and complexity just isn’t worth it.

So, MHD remains a technology that has never been fully developed and one for which both the technology and the economics would seem to be challenging at best. It seems set to remain in the realms of science fiction – but don’t let that put you off ‘Power Play’ and the many other fine Ben Bova stories.

Having spent the last few weeks proof reading I am glad to report that work on my new book, ‘Energy Efficiency. The Definitive Guide to the Cheapest, Cleanest, Fastest Source of Energy’, is nearly complete (at least from my side). Publication is expected in September. When I finished the manuscript in January I said ‘never again’ but I suspect there may be some more books in me yet as the energy efficiency scene continues to evolve and develop. Meanwhile readers of this blog can take advantage of a 35% pre-publication discount on the book’ – click here for details on how to order.