The power of seven

Most corporate energy management programmes operate on an investment criteria of two to three years.  Yet energy supply investments typically are made on much longer payback periods, typically seven to ten years.  This fundamental mis-match is one of the reasons we have over investment in energy supply and under-investment in energy demand reduction.  If we could move towards rebalancing this differential we would reap huge benefits in terms of energy cost savings, emissions reduction, improved energy security, economic development and job creation.  So how do we get to exploit “the power of seven”?

First of all we do need to include all the benefits of energy efficiency in our analysis.  All too often we just look at energy savings, even the famous Marginal Abatement Cost curve analysis just looks at energy saved or carbon abated – not at all the benefits.  By using this analysis tool we are doing down the benefits of energy efficiency.  As well as pure energy and hence cost savings, energy efficiency projects can bring many different types of benefits, all of which can have monetary value.  These include:

Reduced exposure to energy price volatility

By reducing energy spend through energy efficiency, organisations and individuals reduce their exposure to the effects of energy price volatility on profits or budgets.

Reduced emissions of carbon dioxide

Reducing energy use reduces carbon emissions. The value of this benefit depends on the local regulatory regime, for example the applicability of schemes such as the EU Emissions Trading Scheme, but even in jurisdictions where reducing carbon emissions carries no direct financial benefit some organizations will still value this benefit because of perceived reputational benefit.

Reduced need to invest in energy supply infrastructure e.g. electrical grid connections  

An example would be a situation where increasing production in a factory requires investing in a larger grid connection due to increased peak electricity demand.  Implementing energy efficiency measures can reduce, or even totally remove the need for this investment.

Improved quality of production

Improving energy efficiency can also bring with it improved quality control.  Examples include:

• better temperature control of furnaces and ovens

• better temperature controls in refrigeration in brewing and other processes

• better control of compressed air pressure leading to less down-time and the associated loss of quality due to plant stoppages as well as reduced equipment lifetime

• new welding techniques that reduce sputter and improve weld quality

• air drying of paper compared to infra-red drying.

Higher productivity, health and well-being of employees

Many studies have shown that lighting upgrades, which bring with them an improvement in energy efficiency, also result in higher employee productivity. Improved control of space temperatures have also been shown to bring higher productivity.  A number of studies have shown that energy efficient offices are more productive, perhaps by as much as 15 to 25 per cent, and that they can also improve worker morale, reduce sickness, reduce employee turn-over and ease recruitment.   Other studies have shown that green, energy efficient schools can reduce levels of asthma, colds, flu and absenteeism.

Improved comfort and associated health effects

Improving energy efficiency, notably through the application of additional insulation to buildings in cold climates, brings with it improved comfort for the occupants. Improved comfort conditions can bring with it improved health, particularly in the case of the very young and the elderly.

Increased property values  

There is evidence that in some markets at least, energy efficient offices and homes can command a higher value and sell faster than equivalent, less efficient properties, although this has not yet been widely accepted – particularly in the UK. Building occupiers assign value to many different characteristics of buildings including location, a sense of well-being, health, and employee productivity.  Energy is very low on the priority list when organizations are looking to move to a new building, and in many cases is not on the list at all but it should be.

Regulations around building energy performance can clearly drive value that needs to be accounted for in investment decisions.  In the UK, the Energy Act of 2011 prohibits selling or leasing a residential or commercial building with an energy rating of less than ‘F’ after 2018.  This kind of regulation will clearly affect property values directly if fully implemented and enforced.

Reduced local pollution

An improvement in energy efficiency can reduce local air pollution, both indoors and outdoors.   Although the value of this effect is hard to quantify there is a benefit which may come through improved local perceptions, improved health and well-being and being a “good neighbour”.

Benefits outside the system boundary of the host

Energy efficiency investments also bring benefits to the energy supply system such as the electricity distribution and transmission infrastructure.  Experience in the USA has demonstrated that investment in energy efficiency measures can result in avoiding the need to invest in the distribution system.  Regulators need to design systems that ensure these choices are examined and where viable the investment is made in efficiency rather than supply upgrades.  This also requires the sharing of some of the benefits with the host.

At the wider level, outside the domain of individual energy users, improving energy efficiency helps us address the stresses and strains on the global energy system.  The International Energy Agency’s World Energy Outlook 2012 feature on energy efficiency highlighted the huge macro benefits that could result from improved efficiency.  It’s Efficient World Scenario, in which all economic efficiency measures are realised would, when compared to its central New Policies Scenario:

• reduce world primary energy demand in 2035 by 14 per cent

• reduce the rate of demand growth from 1.2 per cent to 0.6 per cent per annum

• increase the rate of reduction of energy intensity from 0.8 percent per annum to 2.4 per cent per annum

• boost global GDP by $18 trillion in the period up to 2035

• result in global carbon dioxide emissions peaking in 2020 at 32.4 gigatonnes with a reduction to 30.5 gigatonnes by 2035

• this reduction in carbon dioxide emissions is consistent with stabilising atmospheric carbon dioxide at 550 ppm, which is consistent with a fifty per cent probability of staying below a temperature increase of 3oC.

Job creation

An additional benefit to the economy of improving energy efficiency is job creation.  Some controversy about the impact of energy efficiency programmes on job creation still lingers on but on the whole the case seems to have been proven. Given the urgent need to create growth and jobs, particularly in developed countries affected by the global financial crisis, this aspect of energy efficiency policy still has not received the attention it deserves in most countries.

So, In any decision on investments affecting energy use, it is critical that all of the system benefits, (and of course costs), need to be identified, valued and included in the investment case.

Having ensured we value all the benefits of energy efficiency what else do we need to do?

Most importantly we need to develop new structures of energy services supply that make it viable for third parties, who can accept a longer payback period than the hosts, participate in the benefits.  Here the model for exploiting shale gas, or indeed any other physical energy resource, contains an important lesson.

In the case of shale gas (at least in the US regulatory regime), a land owner who may have shale gas deposits under their land does not have the technical knowledge or the capital needed to access the resource.  A third party, typically a specialized exploration and production company, pays an access fee to the land owner for the right to tap the asset.  The third party uses its capital and technical resources to develop the project and unlock the value of the resource.  Typically the third party pays a royalty payment or profit share over an extended period of time.

Businesses need to think of energy efficiency in these terms.  In all of their buildings and facilities there is a level of available energy efficiency which is largely untapped but which has potential value – this is the energy efficiency resource.  The building owner or host typically does not have the capital or the technical skills needed to exploit this resource.  They would rather, and should of course, allocate their capital to their core business whether it is selling groceries or making widgets.  Building owners need to license their energy efficiency resource to third parties for mutual benefits.  Large and high profile hosts could auction their efficiency resource to the highest bidder.

Taking this approach, coupled with emerging energy services models, would increase the investment in energy efficiency – help bring the benefit of scale to specialist third party investors, and benefit the hosts and society at large.