The term ESCo, or Energy Service Company is widely used to describe companies that develop energy efficiency projects in clients facilities and then either invest themselves, less and less common by the way as balance sheets are constrained, or bring a third party source of finance to fund the projects. In a classic Energy Performance Contract, EPC, the ESCo provides a guarantee that savings will exceed a certain level and the savings should exceed the repayments such that the client is cash flow positive from day one.

The ESCO EPC concept grew out of work in the US public sector, and even today 75 to 80 % of the total market in the US is in the MUSH, Municipal, Universities, Schools and Hospitals market. The US government did a great job of exporting the idea around the world with USAID and other agencies promoting it widely. The concept was enthusiastically picked up throughout the world but the truth is it has never taken off to the extent that people expected. Why?

Fundamentally the US only exported half of the idea, the contract form. They didn’t export the low cost municipal bond market or central budgets that most users of ESCo EPCs in the USA take advantage of. Secondly a major problem is that the real incentive for the ESCo is not the shared savings they use to promote the idea, rather the real incentive is on the ESCo to maximise capex. They make their margin on capex not the savings. Interestingly there seems to be growing dissatisfaction with the EPC model even in the US public sector. When ESCOs have tried to expand into the private sector they have met resistance due to the complexities of contracts, the split incentive, lack of transparency and perceived excessive margins.

The ESCo term is widely used but there are many different understandings of the word. Is it a company that developers EPC contracts, or does it deliver energy services in the form of heat and power, or does it deliver warmth, light and motive power directly? Even at the recent ESCO Europe conference there were many different definitions.

It may sound radical but the time is right to ditch the term ESCo altogether and just talk about project developers, project delivery companies, financiers and underwriters. Project developers, just like in renewable or conventional energy can be a variety of types of organisations from small, independent entrepreneurial companies, to large multi national energy companies or equipment vendors. They can also be, and increasingly are, community groups., This is no different to the renewable industry. Being brave enough to ditch the term ESCo and adopting the standard language of energy projects would be a sign of maturity of the energy efficiency industry and be a useful step towards scaling the energy efficiency markets.

In February 2002 the then US Secretary of Defense Donald Rumsfield made a very famous speech in which he said: ‘There are known knowns; there are things we know we know.  We also know there are known unknowns; that is to say, we know there some things we do not know.  But there are also unknown unknowns – the ones we don’t know we don’t know’.  He was roundly criticized for this but somewhat unfairly.  Geoffrey Pullum, who is a Professor of Linguistics at both Edinburgh University and Browns University disagreed, saying the quotation was ‘completely straightforward’ and ‘impeccable, syntactically, semantically, logically, and rhetorically’.

It is a statement that we can usefully apply to energy efficiency.  First of all let’s think about the known knowns.  The biggest one is surely the huge economic potential for energy efficiency to improve productivity, reduce costs, improve energy security, create jobs and reduce carbon emissions.  For 30 years there have been so many reports from credible bodies that no-one can realistically challenge the potential.  Likewise the generic barriers to achieving the potential have been studied to death.

If we want to scale up energy efficiency we need to scale up three things: demand, supply and the flow of finance into efficiency investments of all types.  A big known unknown is how do we increase demand, particularly in the residential sector.  Schemes like the Green Deal and equivalents have to face the facts that sometimes even when insulation and other measures are free people don’t take them up and – however much we may like them to do – the average consumer does not wake up in the morning and say, ‘I want to buy some efficiency today’.  It is not sexy, cool and desirable – however much we complain about our energy bills.   For every market segment we need to understand the enabling conditions that do make people buy energy efficiency in whatever form – the industry is a long way from that right now.

On the supply side there are a number of known unknowns, one being how do we standardize evaluation techniques and models.  Models that produce building energy use or Energy Performance Certificates (EPCs) can give widely differing answers for very similar buildings.  In California residential evaluation models have been found to be 50 per cent out 25 per cent of the time.  One major supermarket in the UK questioned the widely differing results for Energy Performance Certificates for sets of similarly sized, designed and constructed buildings.  On investigation much of the variation came down to the different software models being used and of course the parameters being fed into the models.  Standardizing models and input parameters greatly reduced the variation.

On the finance side the big known unknown is how do we get long-term low cost third party finance into energy efficiency.  Again a lot of this is around standardization of evaluations, contracts and documentation.  The money is there, it wants to invest, the industry needs to give investors the structures and the assurances that they needs and that comes from standardization.

So, that is just a few of the known unknowns.  As for the unknown unknowns – well who knows?  One thing is guaranteed – there will be surprises out there.

I am a (sceptical) fan of the current governments policies on energy efficiency and as I said in a recent Energy World article we have built some reasonable foundations for an energy efficiency policy. The launch of the Energy Efficiency Mission in February, hosted by Greg Barker, which included a letter of support from Bill Clinton, a video message from Arnold Schwarzenegger and appearances by Secretary of State Ed Davey and most importantly the Prime Minister David Cameron marked a new and significant step forward to UK energy efficiency policy. Any energy efficiency programme needs top level support and the PM demonstrated that support.

Now we have to build something on those foundations. There are some things where we clearly need government action, mainly to help rebalance the influence of the supply side industry most notably around Electricity Market Reform (EMR). In other areas we need more entrepreneurial action and leadership. The efficiency market is growing rapidly. Finance is beginning to flow into the sector, both into technologies and projects, although not yet at the scale we need. Where we really need action is at the local level, we need more people to take responsibility for their energy. Up until a few years ago this would have seemed a crazy thing to advocate. Energy is the preserve of mega companies and very technical (and even dangerous when mis-handled). What can local people do? Probably a lot more than you think.

A few weeks ago there was a brilliant good news story on the BBC about a community that had financed and built (literally) their own high speed fibre optic internet connection, an amazing achievement that came about simply through people power. If a community can do that in a highly regulated, highly technical area why not the highly regulated technical area of energy supply?

Now the whole idea of community energy is clearly growing but many of the projects to date are limited in scope, mainly installing small scale renewables and taking advantage of Feed-in tariffs. A community owned energy supply company, providing electricity (and maybe gas) as well as a range of energy efficiency services should be possible. A community owned energy company could keep money in the local economy, create local jobs, make energy more transparent and increase people’s sense of engagement. The whole idea can also be linked to the growing area of community finance with a return to the old idea of utilities providing safe secure income.

Prior to the formation of the CEGB there were over 500 local electricity companies, mostly owned by local authorities. Although 100% ownership is no longer possible, or even desirable, maybe we should aim to get back to having 500 suppliers instead of a big six and some small players. As John F. Kennedy said, ‘Ask not what your country can do for you, ask what you can do for your country’.

When comparing wind farms with conventional power stations we need to be clear about what is being compared, power or energy.  A large wind farm could have a capacity (maximum power rating) of 100 MW and this would be equivalent to a 100 MW conventional power station when both are running at full output.  (100MW would be a small conventional unit but units of this size do exist.)  The maximum energy output of the wind farm over a year, however, is driven by the variable wind speeds and is typically between 20 and 30 per cent of the maximum theoretical amount (maybe more for off-shore wind farms where the wind speed is more constant).

In practice a 100 MW wind farm with a capacity factor of 30 per cent will produce 30% x 100 x 24 x 7 x 365 MWh a year (1,839,600 MWh). A conventional power station, however, could produce 100 x 24 x 7 x 365 x 90 per cent i.e. 6,132,000 MWh, assuming the maintenance can keep it going for 90 per cent of the time and the plant is kept running.  So a 100 MW wind farm can only ever produce about 1/3^rd of the energy of a 100MW conventional power plant.  This difference is just a result of the physics of wind turbines.

Now there is another interesting piece of analysis on wind turbine performance.  In 2012 the Renewable Energy Foundation published a report that showed that the output of individual turbines drops off with age.  This could be to increased wear and tear on the mechanical components and factors such as erosion of the turbine blades, or due more frequent breakdowns and operators taking more time to bring the turbines back into service.

This has implications for wind investors, particularly if they have not factored any performance degradation into their financial models.

Of course conventional power stations are also subject to degradation of output and many plants are down rated for their nameplate rating.  The difference is that operators and investors understand this but the REF report seems to be the first time the phenomenon has been studied in wind power.  The interesting question now is, does the same occur to solar installations?

Having just read ‘Made to Stick’ by Chip and Dan Heath I have been pondering how to make energy efficiency a stickier idea. We all know that efficiency suffers from being very dull as well as being too technical a concept for the person in the street and that ‘improving its image’ is essential. The term efficiency itself is abstract and as I say in my new book (gratuitous plug – out in October published by Gower – details on their web site) causes confusion even amongst professionals. Chip and Dan, like all good management writers, come up with a check list based around a mnemonic (SUCCES):

• Simple – find the core of any idea
• Unexpected – grab people’s attention by surprising them
• Concrete – make sure an idea can be grasped and remembered later
• Credible – give an idea believability
• Emotional – help people see the importance of an idea
• Stories – empower people to use an idea through narrative.

So here is my first pass on making efficiency stickier.

Simple – efficiency is about eliminating energy waste.

Unexpected – despite all of our advanced technology we waste 89% of the total energy that we use.

Concrete – this one is harder as it should really be situation specific, something like:

• ‘if we save 20% through improved efficiency (eliminating waste) we will add £x to your profit’
• ‘if you save 20% of your energy use you will be able to buy that foreign holiday/new whatever it is you want’.
• ‘if we save 20% of the country’s energy use we could save £20 billion a year, equivalent to the total cost of the war in Afghanistan from beginning to end’. (This one could be improved as £20 billion is still totally abstract and the Afghan war comparison is still hard to grasp).

Credible – this is all about who says it.

Emotional – it should be straight forward to find emotional stories about the effects of fuel poverty (unnecessary illness or death), the effects of going without electricity in a developing country, or the number of deaths a year caused by atmospheric pollution. To be really emotional, however, they should focus on individuals rather than macro numbers.

Stories – leaders tell stories rather than spout facts in order to inspire, lead and educate.

I am sure other people can do better so let’s hear any ideas about how to make the importance and imperative of improving energy efficiency a stickier idea.