Making a market for energy efficiency

On the 17th March I was on a panel at a meeting of PRAESEG (Parliamentary Renewable and Sustainable Energy Group). The question being addressed was “Ahead of the Election in May, what should incoming government’s priorities be for energy efficiency?”. The other speakers were Dr. Nick Eyre, Dr. Joanne Wade, Simon Roberts and Catrin Maby, all of whom made great contributions with a lot of cross-over. Here are the notes for my remarks – which of course probably ended up somewhat different in practice.

First of all I should start by saying that we should never say or believe that energy efficiency is not working – the evidence is now firmly in and what it shows is that we have decoupled energy use from GDP and that over the last 30 years improved energy efficiency has provided more energy services than any other source of energy. We need to say that loudly and often so that decision makers really get it and move away from the near total domination of the energy debate by the energy supply network. The thing is, however, is that we have achieved all that without really trying and now we need to start trying harder.

What we need to talk about now is how to accelerate the improvement in energy efficiency – at the risk of using an inappropriate analogy it is like we are still in 2nd gear doing 10 mph on a B road and now we need to get into top gear and get moving on the motorway. The end result we want is an acceleration in the reduction in energy intensity (energy/GDP) as we all want a growing economy – having that growing economy with falling energy use is starting to happen and accelerating that decoupling of energy and GDP would help us achieve our energy goals of increased security, reducing environmental impact and having lower energy costs. And as we now know – but has not yet been widely recognized – improving energy efficiency brings with it many valuable co-benefits such as improved health, productivity or customer satisfaction. In fact the co-benefits are often worth more than the energy benefits – they just don’t get recognized, measured or recorded. As well as standing up and shouting that energy efficiency is working we should always talk about co-benefits whenever anyone mentions energy efficiency. Indeed, in many situations the co-benefits will be more attractive to the decision maker than the energy and cost savings.

Governments over the past 40 years have been conducting a grand experiment with the energy efficiency industry in the belief that energy efficiency is something special that needs government action and that it can only be helped by public expenditure, some kind of grant or some kind of government designed programmme. We have had government exhortation campaigns, additional taxes, cumbersome reporting schemes, energy company obligations and clumsily government designed programmes like the Green Deal. These approaches smack of 1970s – or even 1950s – state intervention and just impose a cost – they don’t create a real market for energy efficiency. They are all top down approaches and they will always be limited in their effectiveness.

At this point, we can say that the programme-centric approach to energy efficiency does not appear to be working fast enough, nor can it scale sufficiently. Furthermore, it is highly vulnerable to cyclical political changes, as we saw with the knee-jerk changes to ECO in response to Ed Milliband’s announcement on freezing energy prices and the “green crap” comment. Even if the top down approach worked effectively it can never scale to the level needed given limits on public expenditure and sensitivity to energy price supplements. Even moderately successful scenarios will require an investment in energy efficiency that that vastly exceeds even the most optimistic assessment of available public funds but is easily within the bounds of the debt capital markets. The BPIE estimate that for Europe the required capital just to renovate buildings is €3.5 trillion across Europe, €90 billion per year. We have to design things to mobilize private capital. It is time to move away from the top down programme approach and try something different.

Energy efficiency is a resource just like any other energy resource. It delivers clear public benefits (in addition to enormous private benefits such as improved comfort and lower bills). It creates local jobs, reduces the need for new power plants, improves health, and moves us closer to meeting our emissions goals. We need to think about efficiency just like any resource. Getting paid for the value that efficiency resource creates is not charity; instead, monetizing these unrealized benefits simply aligns interests and pays for this distributed negawatt power plant by rewarding the homeowners and companies making the actual investments energy efficiency — just as if they were building new generation capacity.

Energy efficiency is the cheapest way of meeting energy services but in most cases – if not all cases – there is not a market for energy efficiency in the way that there is a market for energy. Energy generators can forward sell their projected output to get project finance – we need to make a market for efficiency that works like the market for energy. By creating a more transparent marketplace for energy efficiency, we can increase private funding, increase flexibility in delivery, and truly add efficiency to the pool of resources that will make up the future more dynamic energy system.

We have the elements now in terms of smart metering, low cost communications, low cost sensors and M&V protocols, to have energy efficiency meters. Energy efficiency meters are in development and we need to get these regulated just like energy meters and turn them into fiscal meters.

An essential part of building the market for energy efficiency is to standardize the process of developing and documenting energy efficiency projects – at the moment every developer does it differently – this is the aim of the Investor Confidence Project Europe which I chair. As well as project development we need to develop tools for measuring performance of efficiency projects – we have the basics – we need to measure the performance of projects in a standardized way and keep open data so that investors can see the results. At the moment there is an act of faith that it works.

We must engage private capital to invest in this emerging new market that will value energy efficiency as a reliable resource, and we must pay for these investments in the same way we finance power plants — through project finance that monetizes cash flows from savings, rather than the balance sheets of the building owner.

It is also important to talk about demand generation – we hear all the time about “low hanging fruit” – it is time to drop that analogy. A better analogy used by my colleague Matt Golden in the Investor Confidence Project is that the potential is more like wild strawberries, or perhaps in the UK case blackberries – it takes lots of people on their hands and knees a long time to fill a basket. Just relying on the inherent cost-effectiveness of EE is not sufficient – it is not working – there is very low demand despite the fact that it energy efficiency is cost-effective. Just relying on programmes does not work either.

To help drive demand we need to reward people for what we want – reduction in energy use and increase in comfort in fuel poverty and not reward people for creating bureaucratic processes. These processes in top down programmes have to be defined centrally and end up imposing huge costs. In California for example the house retrofit business used to have a customer acquisition cost of a few hundred dollars, then when they introduced a Green Deal type of programme the average acquisition cost went to $14,000 while the average project capital expenditure was $14,000 – which is totally crazy.

The coming paradigm shift would not the eliminate the need for public and funding – particularly in the early days – and regulations to ensure a fair and transparent market, but it will require a different, simplified regulatory role – a role that looks essentially like the public sector involvement in every established market.

• Is the Government at risk of missing the full potential that energy efficiency can play in helping achieve its energy policy goals? There is a real danger around energy security at the moment. The UK’s (and Europe’s) energy dependency is getting worse which has geopolitical as well as economic costs. The UK government has been complacent on this issue, citing the fact that we don’t buy any gas from Russia while ignoring the Russian coal imports and Gazprom’s strategic investments in gas suppliers and pipelines. Energy security is another area where the use of traditional language limits our thinking on the subject. We don’t actually need energy security, security over the physical flow of energy, but we definitely do need security of energy services. Thinking about the subject in this language expands the options and helps to bring energy efficiency into the equation.

• Does Government need to set out a more ambitious, coherent strategy to make the UK more energy efficient? Yes – we need to put energy efficiency truly at the heart of energy policy and make sure efficiency is truly considered as an alternative. One issue here is the historical reality that DECC (and all equivalents like the US Department of Energy) have a very strong historical link to nuclear power (50% plus of DECC budget spent on nuclear issues) and of course are subject to very strong continuous lobbying from the energy supply industry. It was only last year that the demand-side industry managed to get one person seconded into DECC for the first time. Maybe the demand side and energy planning should be entirely separated from DECC or its equivalent in order that modelling and decision making can be made entirely based on demand side modelling rather than supply side modelling.

• Are sectoral energy efficiency targets needed? Yes – we need to have an overall energy per GDP target broken down into sectors, then bring in the sectors to ensure they own the targets and develop sector specific and appropriate plans. The overall targets should be driven by reducing energy dependency.

• Is there a need to link energy efficiency policy with other demand side action, such as decentralised energy, demand side response, smart grids etc? A few years ago, with the CHPA (now the ADE) we coined the term D3 which stood for Demand Management (EE), Demand Response (DR) and Distributed Generation (DG). They are all demand side resources which need to be encouraged. Smart grid is a widely mis-used term – smart distribution systems and end use are tools to enable demand side resources but unless D3 is encouraged then smart grid is just a piece of technology, or lots of technologies, without much application and therefore once public money disappears the initiatives will disappear.

• Does the Government need to set in place longer term energy efficiency strategies for the business and public sectors? Long term stable strategies are always good for investors and industry players. We need a 5 and 10 year target and frequent reporting against the target. Given the energy security situation in relation to Russia and the Middle East we may not have 5 to 10 years but we need to get on with it. Importing >50% of our energy limits our degrees of freedom and is building in problems down the track. We need to use this period of low oil prices to increase investment in energy efficiency. Relying on government programmes or supplier obligations means that they can’t be stable.

• What might a revamped Green Deal and supplier obligation look like? Just pay for what we want which is a) reduction in energy use b) reduction in fuel poverty c) whole house approach – let the market innovate and decide. Don’t favour any particular technology. On the supplier obligation just get rid of it altogether and replace it with payments for results. Charge a tax on energy suppliers, ring fence it and spend it on buying efficiency. Or require every supplier to always review demand side options ahead of supply side options.

These remarks were significantly based on a series of articles by Matt Golden.
Let’s Get Real: The Energy Efficiency Industry Can Do Better
Why Top-Down Efficiency Programs Are So Expensive and What We Can Do About it