Although our main focus at ep Group is the energy transition, we recognise that climate and energy is only part of the transition we need to make to move towards, and then beyond, sustainability. The issue of biodiversity loss is as important as climate. In 2022 we did some work for Cambridge Conservation Initiative looking at the emerging area of investing in natural capital and in 2024 we are working on a natural capital transaction through Cameron Barney. This piece is a primer on natural capital.

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What is natural capital?

Capital can be defined as a resource used or available for use in the production of goods and services. Typically we think of financial capital when using the term but there are five types of capital:

– Manufactured capital e.g. machinery and buildings
– Financial capital
– Human capital e.g. knowledge and skills
– Social capital e.g. levels of trust and connections amongst people
– Natural capital – the stock of natural ‘resources’ including eco-systems, species, water, soils, minerals, the atmosphere and the oceans, as well as natural processes and functions

Natural capital underpins all other types of capital and our ability to produce actual goods and services.

Natural capital is crucial for our survival because it produces essential ‘ecosystem services’ which can be divided into five categories:

– Provisioning: material outputs from nature such as food, water, timber and energy
– Regulating: indirect benefits generated through regulation of ecosystems such as carbon sequestration, the water cycle and crop production
– Supporting: fundamental ecological processes that support the delivery of other ecosystem services such as nutrient cycling and soil formation
– Cultural: non-material benefits from nature which can be spiritual, aesthetic or recreational.

If the contributions of natural capital were to be valued in the same way as other types of capital, they would be valued at $125 trillion , equivalent to 1.25 x Global GDP in 2022.

Biodiversity, defined as the variety of life, is a critical aspect of natural capital, and one we should be deeply concerned about. According to the WWF Living Planet Report 2022 , between 1970 and 2018 wildlife populations declined 69%, while freshwater species declined by 83% and migratory fish declined by 76%. Almost everywhere we look we see declining wildlife populations and biodiversity. One particularly important part of this is the decline in insect life – sometimes known as ‘insectageddon’. Insects provide ecosystem services valued at between $235 and $577 billion per annum and are absolutely critical for food production as three quarters of the crop types grown by humans require pollination by insects. In the UK ‘wider countryside butterflies’ declined by 46% between 1977 and 2017 while habitat specialists fell by 77%. For those of us old enough to remember the 1970s the famous cartoon that shows a driver with a car windscreen covered in insects in the 1970s, or even the 1990s, and a driver with a car windscreen with no insects in 2020, accurately reflects our experience.

How much capital flows into natural capital and what is needed?

So how much financial capital flows into natural capital and what is needed. UNEP, in 2021, estimated that the flow of funds into natural capital was $133 billion, up from $52 billion in 2010, a 9.85% CAGR. Of this $133 billion only $18 billion was private finance. Deutz et, al. estimate that the financing gap between what was invested and what is needed is between $598 and $894 billion per annum. For comparison purposes the global carbon markets in 2023 were estimated at $949 billion and global investment into the power sector in 2023 was $1,200 billion .

To bridge that gap we need to do two things: reduce the flow of capital into activities that have negative impacts on biodiversity, including reforming harmful subsidies; and scale-up mechanisms to increase private and public capital flows into conservation and regeneration. Areas such as biodiversity offsets, natural infrastructure, green financial products, nature based solutions to carbon emissions, are all expected to grow rapidly.

Growing recognition of the need to invest in natural capital

There is growing recognition amongst financial investors and corporates of the need to increase the flow of capital into protection and restoration of natural capital and biodiversity – becoming ‘nature positive’. This is driven by several factors including:

• growth of ESG investing and ‘green’ or sustainable finance – driven by demand and recognition of the problem
• regulations such as the EU Taxonomy and its national equivalents
• Pillar 3 of the Basel III Accords – disclosure requirements on capital adequacy and operational risks
• disclosure guidelines and increasingly regulations e.g. the Taskforce on Nature Related Disclosures (TNFD).

Why invest in natural capital?

Why should institutions invest in natural capital? There are four main reasons:

– risk management; including: physical risk, litigation risk, transition risk and systemic risk
– market opportunity: there is a large opportunity to deploy capital at scale
– regulations such as the EU Taxonomy and national equivalents
– ESG drivers

The barriers

Despite the need and the interest in investing in natural capital there are many barriers. Surveys of investors have identified the following barriers:

• Terminology: there is no common language between project developers and the finance sector
• Multiple, diverse stakeholders: including the private sector, the public sector, NGOs, and local communities – many of which have very different view points and objectives
• Lack of awareness: failure to understand he consequences of insufficiently valuing natural capital
• Measurement tools and metrics: investors want quantifiable, standardized information
• Mindset: natural capital lies outside normal investment concerns and is seen as complex
• Valuation: no framework and legislation, and quantification of tangible value is difficult
• Stock vs. flow: natural capital is not reflected as a capital stock, but rather a flow of resources
• Cash-flow implications: evidence is lacking on how natural capital impacts on cash flows
• Timing / short-termism: conflict between short-term investment horizons and long-term nature of biodiversity projects
• Reporting: trustees and asset owners require visibility and frequency in reporting
• Policy: policy makers not currently designating value for natural capital
• Diversified global firms: natural capital risks are considered small relative to overall business activities
• Performance criteria: consequences for mismanaging natural capital are sufficiently minor as not be a disincentive, at least in the short-term
• Corporate strategy: natural capital is not linked to corporate strategy
• Perceived costs: perception that sustainability related activities are a cost and not profitable
• Diversified portfolio requirements: institutional investors obliged to take all attractive investment opportunities despite their impact on natural capital
• Lack of opportunities: a lack of credible investment targets rather than a lack of capital. Developing projects requires multiple stakeholders coming together and is complex, lengthy and expensive.
  

These key barriers can be boiled down to:

– Risks – real and perceived
– Development time and complexity
– Lack of capacity in project development as well as in project evaluation and underwriting
– Lack of standardization.

The issue of standardization is fundamental – investors like standardisation but by its very nature it is hard to standardise nature and biodiversity!

Of course, as well as specific ‘natural capital’ or biodiversity projects, we need to ensure that every-day, ‘normal’, projects address biodiversity issues. For example, we should not be funding solar farms when we can design solar farms that increase bio-diversity. Every project, whatever its core purpose, should be evaluated for its impact on biodiversity and measures incorporate to improve it.

Multiple financial instruments

There are multiple types of financial instrument for natural capital including:

– Carbon markets
– ‘Carbon +’ (i.e. incorporating biodiversity criteria into carbon markets)
– Reducing Emissions from Deforestation and Forest Degradation (REDD)
– Biodiversity offsets
– Specific species bonds e.g. Rhino Bonds
– Green Bonds

Multiple standards

Another issue is that there are multiple evolving standards and metrics for measuring biodiversity including:

– Biodiversity Metric 3.0
– Global Biodiversity Score (GBS)
– Biodiversity Footprint for Financials (BFFI)
– Species threat abatement and recovery metric (STAR)
– Net Environmental Contribution (NEC)
– ENCORE

There are several initiatives underway to standardize or align different measurement systems. Biodiversity data is location specific & unique to the asset, and therefore it is inherently difficult to aggregate data.

It seems that we are at a turning point in investing in natural capital. Research from 2024 suggested that over half of UK investors were looking at natural capital investments.

Some examples of natural capital investing

Mirova’s Sustainable Ocean Fund (SOF)
A public-private partnership with Conservation International and the Environmental Defense Fund (EDF), the SOF is dedicated to implementing ocean-friendly practices in developing countries and small island states. Projects include supporting fisheries to maintain sustainable levels of marine fish stocks, providing financial incentives for low-impact aquaculture, responsible seafood supply chains, and wastewater management. The SOF has pledges from EIB, AXA, IADB, and Caprock Group. USAID has committed a $50m risk-sharing guarantee to attract further investment into the fund. The SOF is expected to deploy $100m with USAID support and closed in early 2022 at $132m in capital commitments.

Agriculture Capital
Agriculture Capital is a regenerative agriculture and food investment firm that currently manages two investment funds. The Funds invest in permanent cropland and synergistic midstream assets to create a vertically integrated enterprise that grows, packs and markets high-value produce. Through an owner-operator model, the Funds employ a value-added approach to farm and food operations, focused on regenerative farm practices and the processing and sale of that produce as a means of enhancing returns. Agricultural Capital applies its regenerative agriculture model to farms, marketing, packing and nursery companies. The total portfolio covers 20,000 acres and produces table grapes, citrus, blueberries and tree nuts across California, Oregon, Washington and Australia. It has consistently reduced water and energy use, increased soil health and increased wild pollinators by a factor of 9x.

The AGRI3 Fund
The AGRI3 Fund was created by UNEP and Rabobank, together with partner IDH and supported by FMO, the Dutch development bank. It aims to catalyze private investment into forest protection and sustainable agriculture with the aim of unlocking at least $1 billion in finance towards deforestation-free, sustainable agriculture and land use. The Fund provides de-risking financial instruments and grants for technical assistance for food value chain actors, and particularly farmers.
The fund targets $150m to allow an exposure of up to $300m. It is an evergreen fund with an open architecture allowing future partnerships with commercial banks beyond Rabobank. IDH manages the AGRI3 Technical Assistance Fund which provides reimbursable grants to projects at pre- and post-investment stages to improve project quality and strengthen environmental and social impacts.
The fund has closed transactions including:

– Forest protection and renovation of degraded pastureland in Mato Grosso. $5m, 10 year project covering >2,500 hectare forest protection and replanting, and renovation of 1,200 hectare of renovation of degraded pasture land
– Sustainable pepper farming in the Chongquing region. $10m, 3 year project.
– Sustainable production of citrus fruit and sugarcane in Brazil. 10 year loan $20m from Rabobank.

Rhino bonds
Rhino bonds were issued by the World Bank in 2022 and were the world’s first wildlife conservation bond. The total issued was $150 million as five year bonds and the returns were outcomes based related to net growth in Black Rhino population. The outcomes were independently measured and the project was supported by grant funding from the Global Environmental Facility. Purchasers of the bonds included:

– Nuveen (lead)
– AllianceBernstein
– ASN Impact Investors
– BlueBay Asset Management
– Mackenizie Investments
– HNWs.

Overall population of black rhinos has increased.

Phyla

Phyla Uses high yielding Pomgania tree to restore degraded land and produce biomass, seedcake and oil which can be used to produce multiple products including synthetic aviation fuel (SAF). It aims to regenerate one million hectares of degraded land by 2030 and has projects and partnerships in multiple countries. Cameron Barney are advising Phyla.

Conclusions

The decline in natural capital is as life threatening as the worst scenarios for climate change. We have to arrest the decline in natural capital, restore it and ultimately regenerate it. This can be done by applying private financial capital – often blended with public capital, and there are now enough examples of how this can be done.

Natural capital is an emerging asset class but there are still many barriers including: development complexity; lack of clarity on revenue models; lack of understanding & know-how; lack of standardisation & competing standards. Natural capital investing shares some characteristics with infrastructure – in that it is long-term and large-scale. As well as investing in projects surrounding natural capital there is a burgeoning private equity opportunity of ‘natural capital tech’ or ‘agri-tech’ or ‘bio-diversity tech’ including: sensors; data; drones, DNA sampling, AI applied to measuring and regenerating natural capital.

Investing in natural capital, and ensuring projects of all type are nature positive, has to become the norm rather than the exception.

The recent death of astronaut Bill Anders led to a lot of the media attention on the famous photo taken by Bill during the Apollo 8 mission called ‘Earthrise’. The photo, taken on Christmas Eve 1968, is often described as being the most viewed image and one of the inspirations for the environmental movement.

Former US Vice President Al Gore used the photo in his ‘An inconvenient truth’ presentation and said:

“That one picture exploded in the consciousness of humans. It led to dramatic changes. Within 18 months of this picture the environment movement had begun.”

The story behind the mission and the photo, like much of the Apollo programme is, incredible. In 1967 and 1968 Apollo was recovering from the terrible fire of Apollo 1 which killed astronauts Gus Grissom, Ed White and Roger Chaffee on the launch pad, while trying to meet President Kennedy’s target of reaching the moon by the end of the decade, and beating the Russians in the space race. The fire required an extensive redesign of the Apollo Command Module to improve its safety which delayed the programme. The fire was in January 1967 and the first crewed Apollo flight, Apollo 7, flew in October 1968 to test the newly designed Command Module and its Service Module. During the planning of the Apollo programme it was envisaged that the next flight would test the Command Module and the Lunar Module in high earth orbit but as 1968 rolled on the incredibly complex Lunar Module was late. At the same time there were intelligence reports that Russia, having completed the uncrewed, circumlunar Zond 5, was planning a manned circumlunar flight before the end of 1968. In August 1968 George Low, then Manager of the Apollo Spacecraft Program Office, proposed that Apollo 8 leave earth orbit and orbit the moon without a Lunar Module.

The next crew in line, commanded by Jim McDivitt, was offered the flight but turned it down, preferring to stick with their planned joint test of the Command and Service Modules and the Lunar Module in earth orbit. The final decision to proceed with the lunar orbit mission was delayed until Apollo 7 flew successfully but between August and December new procedures had to be developed and the crew trained. The fact that the flight went from proposal to implementation in five months is incredible now. Obviously at some point to land on the moon there had to be a lunar orbital test but there were still a lot of unknowns at that time, and the procedures had to be developed and tested, and the crew trained in a very short time. It was an audacious decision.

Apollo 8 was the first crewed flight, and only the third ever flight, on the massive Saturn V. This in itself is incredible, especially when you see how many test launches some of the current privately financed launchers have made and know that one of the two previous un-manned Saturn V launches had not gone well at all, but NASA was confident they had solved the problems. The launch on 21st December went well, and after two and half hours in earth orbit, the Capsule Communicator (‘CapCom’) Michael Collins – later to become the first person to orbit the moon alone on Apollo 11 – quietly said the words, ‘you are go for TLI’, (trans lunar injection). With the successful firing of the Saturn’s third stage, humans left the relative safety of earth orbit for the first time.

On its flight to the moon and its first three lunar orbits orientated in a way that meant the crew couldn’t see the earth, and so the earth rise was a surprise. As the spacecraft came round the moon Bill Anders saw the earth come up. The first few photos were in black & white but Anders quickly asked for a colour film and got the famous shot. Frank Borman, the Commander, and always a stickler for following the flight plan, said, jokingly: ‘Hey, don’t take that, it is not scheduled’. The photo is usually reproduced with the lunar horizon horizontal but in reality as the spacecraft orbited the lunar equator the moon was orientated 90 degrees to how you normally see it. Bill Anders famously hung a copy in his office in the ‘correct’ orientation (as shown here).

The Apollo 8 crew stayed around the moon for ten orbits and in one of the most famous, and most moving TV transmissions of all time, read from the book of Genesis. Exactly on schedule, and behind the moon, they fired the Service Module’s engine and as they rounded the moon and re-established radio contact with Mission Control, Command Module Pilot Jim Lovell, later to go on and command the ill-fated Apollo 13 mission in 1970, radioed, ‘Please be advised there is a Santa Claus’. On 27th December the crew safely splashed down in the Pacific and were recovered by the USS Yorktown.

There is no doubt that the photo had a huge impact on our view of the earth, and it did help jump start the environmental movement. It has been reproduced so many times we tend to take it for granted but seeing the earth as ‘the grand oasis in the big vastness of space’, as Jim Lovell called it, has to make you think about the fragility of earth and our place in the universe. Many people might argue that the space race, and indeed any space exploration, is a waste of money. I would argue that it is built into our DNA to explore, and that images like Earthrise which help change our perspective and help us realise our true place in the universe make it worth every penny. Bill Anders once said: “We came all this way to explore the moon, and the most important thing is that we discovered the Earth.”

After Apollo 8 the programme proceeded at an amazing pace. In March 1969 Apollo 9 tested the Lunar Module in earth orbit and included a spacewalk using the lunar spacesuit. Two months later, in May 1969, Apollo 10 flew to the moon in a dress rehearsal for the landing and flew the Lunar Module down to 50,000 feet. Then in July 1969 Apollo 11 made the first landing, only seven months after Apollo 8.

With the passing of Bill Anders, there are now only 6 of the 24 men who visited the moon between December 1968 and December 1972 left alive, and the youngest, is 88. Most of the managers and engineers who made it all happen have also left us. The Apollo programme was an incredible and inspirational achievement and the men and women who made it happen, some 400,000 in total, were truly legends who walked amongst us.

The spectacular aurorae that were recently seen by millions of people in parts of the world they don’t usually appear in were truly incredible, and a reminder of the beauty and the wonder of the universe. However they also brought to mind another threat to the global energy system, and society, that we really ought to think about – the threat of electromagnetic pulse disrupting the power and communication grids. I know we have more than enough to worry about, what with the worsening effects of climate change, Gaza, the Russian invasion of Ukraine, Russian and Chinese aggression in several parts of the world, and the rise of authoritarianism and last bit not least the risk of Trump being elected President of the US. But the threat of a major electromagnetic pulse also needs to be on the worry list.

The effects of electromagnetic pulse (EMP)
All electrical and electronic systems can be affected by an electromagnetic pulse (EMP), also referred to a transient electromagnetic disturbance, which is a brief burst of electromagnetic energy which can either occur naturally, such as from solar storms, or be created by the use of a nuclear (1), or specialised non-nuclear (2), weapon. An EMP can occur as an electromagnetic field, as an electric field, as a magnetic field, or as a conducted electric current – all forms of electromagnetic interference (EMI). The electromagnetic interference caused by an EMP can disrupt communications and damage electronic equipment and power grids and many such instances have occurred, including the following.

In 1972 there was major disruption of telephone lines in the US Mid-west.
In March 1989, a solar storm over Quebec caused a province-wide power cut which lasted nine hours.
A 2003 storm temporarily disrupted satellite services, and in one case permanently damaged space borne infrastructure.
In 2017 a geomagnetic storm affected radio frequency and satellite communications around the world, as well as Position, Navigation and Timing satellites.

Although there haven’t been that many reports of damage by the May 2024 solar storm some did occur. The broadband internet connection provided by Starlink reported some temporary degradation in the quality of its signals, and radio and GPS systems experienced some problems. In anticipation of the extreme solar activity, New Zealand’s electrical grid operators took protective measures and temporarily turned off some circuits around the country to prevent equipment damage. Although not damaged, some satellites did stop making scientific observations during the storm.

Solar storms
The recent aurora were the result of an extreme solar storm. Solar storms, which result from disturbances on the Sun can affect the entire solar system, including the Earth and its magnetosphere and the frequency and severity of solar storms is related to the eleven-year solar cycle which reaches its next peak in 2025. Solar storms are caused by sun spots, disturbances in the sun caused by concentrations of magnetic flux that inhibit convention. The cluster of sun spots that caused the recent electromagnetic pulse responsible for the aurora is around 17 times as wide as Earth. Around 8 May, this active region sent at least seven coronal mass ejections, (blasts of magnetized plasma), towards Earth at speeds of up to 1,800 kilometres per second. These waves of charged plasma swamped space-weather detectors. On the scale of one to five that describes geomagnetic storms, this one ranked a five and according to an index of changes in Earth’s magnetic field it was a ‘super storm’.

Scientists expect the current solar cycle to peak in July 2025 and the biggest storms typically happen months to years after the peak. As the solar cycle progresses, sunspots tend to appear closer to the Sun’s equator, increasing the chances of coronal mass ejections that will head directly for Earth rather than out into space,

The Carrington Event, in September 1859 is usually known as the most intense solar storm in recorded history, and created aurora as far south as Havana and bright enough to read by as far south as Missouri. Similar scale events also occurred in 1879 and 1921. On 23 July 2012, a coronal mass ejection, (on the same scale as the Carrington event), narrowly missed Earth (3).

With our dependence on electrical devices and electronic systems increasing as we electrify our energy and transport systems, our vulnerability to the threat of EMI is growing. The scale of the economic damage that could result from a major solar storm was highlighted by joint research at Lloyds of London and Atmospheric and Environmental Research (4) in the US in 2013 which estimated that a Carrington Event scale solar storm today could result in between 20 and 40 million people being at risk of extended blackouts lasting between days and months, and a total economic cost of between $600 billion to $2.6 trillion. Electrical distribution systems, communications systems, all electronic devices and modern vehicles would be taken out of operation by such an event. The delays in restoring power would primarily be driven by the long-lead times on major equipment such as grid-scale transformers. Although the probability of a Carrington scale storm may be small, the impacts would clearly be very large.

Of course EMP can also be caused by nuclear weapons. A limited nuclear exchange using EMP weapons would be devastating and are very well described in ‘One Second After’, a novel by William Forschten (5), which was cited in the US Congress.

We need to increase resilience

The need to increase the resilience of critical infrastructure in response to a whole range of threats including EMP, is recognised by the National Preparedness Commission in the UK (6) and the Cyber Security and Infrastructure Security Agency in the US.

In summary, EMP is a major risk for the power grid and for critical systems and infrastructure such as solar farms and data centres, which are increasingly dependent on electronics and computers, a risk that will grow as the world continues to electrify at exponential pace. There is a technology that can reduce the vulnerability of such systems, High Frequency Alternating Current (HFAC). HFAC, in which AC fluctuates in kilohertz or megahertz rather than the conventional 50 to 60 hertz, was first promoted by Nikola Tesla and after several false starts over more than 100 years it is now finally being commercialized together with some breakthrough EMP technology by a UK company, Energy Research Lab. Widespread use of HFAC would mitigate the risk of EMF as well as bring considerable benefits in terms of energy and material savings. As we increasingly electrify the global economy, we need to consider the risks from EMP and adopt technologies to mitigate the risk.

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I rarely, if ever, quote Shakespeare, (probably due to bad memories of school days having to read several plays), but here is the whole quotation the title of this piece comes from.

And yonder shines Aurora’s harbinger,
At whose approach, ghosts, wondering here and there,
Troop home to churchyards. Damned spirits all.
A Midsummer’s Night Dream, Act 3, Scene 2

References

(1) EMP from a nuclear weapon is abbreviated as NEMP, Nuclear Electromagnetic Pulse, when it is necessary to distinguish it from a naturally occurring EMP. (2) For a discussion of non-nuclear EMP weapons see:
https://science.howstuffworks.com/e-bomb3.htm
(3) Near Miss: The Solar Superstorm of July 2012. NASA. 2014.
https://science.nasa.gov/science-research/planetary-science/23jul_superstorm/
(4) Solar storm risk to the North American electric grid. Lloyds. 2013
https://assets.lloyds.com/assets/pdf-solar-storm-risk-to-the-north-american-electric-grid/1/pdf-Solar-Storm-Risk-to-the-North-American-Electric-Grid.pdf
(5) One Second After.
https://www.onesecondafter.com
(6) UK Severe Space Weather Preparedness Strategy. September 2021.
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1020551/uk-severe-space-weather-preparedness-strategy.pdf

At the end of November 2023 I was fortunate enough to be invited to make the keynote speech at WTW’s European Renewables Conference in Budapest. It was great to get an insight into what the latest trends are in the renewables industry, and given that WTW is a leading global renewable energy risk advisor and broker, look at the sector from the perspective of risks and how we manage them. The text below is an edited, and slightly longer version of my remarks. The intention was to consider the journey to net zero and provide an overall perspective on the opportunities, challenges and risks. It starts with my personal story of how I got to work on the energy transition and looks at what we can learn about the present and the future from history.


Well good morning. It is a great pleasure to be here in Budapest and to be addressing the WTW European Renewables Conference. It is great to see such a large event as when I was first working in renewables, back in the late 1980s and early 1990s, we could literally have the entire UK wind industry, which was most of the renewable industry at the time, meet in an average sized meeting room – and we did meet like that a few times. The growth of the renewables industry in the nearly 40 years since then has been amazing to watch and is a real illustration of a major energy transition in action. Back then most people in the energy industry still thought of wind as ‘alternative’ and a niche that would never become significant in scale. In fact it reminds me of something my favourite science-fiction writer Arthur C. Clarke once said:

“Every revolutionary idea seems to evoke three stages of reaction. They may be summed up by the phrases: first people say ,‘It’s completely impossible’, then they say ‘It’s possible, but it’s not worth doing’. And then they say ‘I said it was a good idea all along’.”

When the renewables revolution started the electricity industry establishment was firmly in the ‘it is impossible’ camp – grid operators around the world said if you have more than a few per cent of renewables on the grid it will cause massive instability. Now we have many countries where levels above 50% are common and there have been many days where levels of nearly 100% have been achieved in various markets. There can no longer be any doubt that very high levels of variable renewables are possible. In renewables we seem to be firmly moving to stage 3 – ‘I told you it was a good idea’, even though there is a vocal minority still saying 2 – ‘its not worth doing’, or even 1, ‘it will never work’.

Anyway, first of all a brief personal introduction. I’m a child of the 1960s, I grew up entranced by the Apollo moon landings and wanted to be an astronaut.

Well, in Britain in the 1970s that wasn’t really a viable career plan and when it came time to go to University the whole aerospace industry was in deep recession. So that, plus the fact that I didn’t want to end up building missiles led me to my second choice of degree subject and I took a unique inter-disciplinary degree focused on energy. So where did my interest in energy come from? Well there are several strands. Firstly, when I was about ten we went on a family holiday to Wales and we visited the Ffestiniog pumped storage hydroelectric plant which made a big impression on me.

As an aside this year I took my 13 year old grandson to the Cruachan pumped storage hydro-electric plant.

It will be interesting to see if that visit influences his career choice. I would just like to emphasise that we do do other things on holiday than visit energy infrastructure. If you haven’t ever visited a pumped storage hydroelectric plant do it – they are seriously cool big stuff. So back to the influences that made me study energy. A big one of course was that we had the 1973 oil crisis and in the UK, because of the miners strike we had the three day week, when industry was only allowed to work 3 days a week and homes had rolling powercuts. I remember being upset because the power cuts always seemed to come in the middle of my favourite TV shows and then having to do homework by candle light. There’s nothing like power cuts to make you realise how dependent on modern energy supply we are, and of course much more so today than in the 1970s.

Finally, the 1970s were the time when the modern environmental movement emerged. The first ever Earth Day was held on 22 April 1970, and in 1972 the influential book ‘Limits to growth’ came out summarising work supported by the Club of Rome that used computer modelling that showed that given exponential economic growth and finite resources we would run out of resources and society would break down. We were convinced that energy resources, which back then meant coal, oil and gas, would physically run out and run out soon. As I am still an aspiring astronaut I am always pleased that the environmental movement was influenced by the amazing Earth from the Apollo missions, like Earthrise taken on Apollo 8.

Anyway, those factors led me to a career in energy. After my first degree I focused on energy efficiency, energy services and distributed energy as they seemed to be the future and I think that turned out to be a sound decision as they have kept me busy, and employed ever since, and allowed me to work all over the world and provided the privilege of being able to invest in SME’s participating in the transition through my business ep Group which I started in 2012.

So that’s a little bit about my personal journey through the energy transition but what about the European and global journey to net zero? To understand the present and the future it is really important to understand history. It is not that history repeats itself exactly but we can certainly learn a lot from history and understanding the history of energy transitions is useful.

In my degree we studied previous energy transitions but energy transition was not a phrase widely used, even within the energy industry. President Jimmy Carter in his ‘Address to the nation on energy’ in April 1977 did say:

“Twice in the last several hundred years, there has been a transition in the way people use energy”

and then went on to describe the transition from wood to coal in the 1700s which led to the industrial revolution, and the transition in the 1900s to oil and gas.

But as a phrase ‘energy transition’ didn’t catch on back then but now it is recognised by most people, except perhaps a few right wing political and media figures, that we are firmly in the middle of an energy transition. And I say the middle deliberately. It is hard to define exactly when an energy transition starts or ends, but this one probably started in that post-1973/74 oil crisis decade of 1975-1985 so about 40 years ago, and we probably have about another 40 years to go on this one. It is the fourth energy transition.

The first energy transition was the transition from biomass and muscle power to coal. Before the Industrial Revolution, people burned wood and dried manure to heat homes and cook food, while relying on muscle power, wind, and water mills to grind grains. Transportation was aided by using carts driven by horses or other animals. In the 16th and 17th centuries, the prices of firewood and charcoal skyrocketed due to shortages. These were driven by increased consumption from both households and industries as economies grew and became more sophisticated.

Consequently, economies like the UK needed a new, cheaper source of energy. They turned to coal, marking the beginning of the first major energy transition. The industrial revolution was built on coal and really started in Coalbrookdale in 1708 when Abraham Darby started using coke rather than charcoal to make iron pots. If you want to see the very spot where the industrial revolution started go to Coalbrookdale in Shropshire. That is ground zero for the industrial revolution. If you really want to understand that coal industry with all of its obscenities like child labour and worker exploitation read Jeremy Paxman’s book ‘Black Gold: The History of How Coal Made Britain”.

In 1859, Edwin L. Drake built the first commercial oil well in Pennsylvania, but it was nearly a century before oil became the major energy source. Before the mass production of automobiles, oil was mainly used for lamps. Oil demand from internal combustion engine vehicles started climbing after the introduction of assembly lines, and it took off after World War II as vehicle purchases soared.
Similarly, the invention of the Bunsen burner opened up new opportunities to use gas in households, originally towns gas. The discovery of large quantities of ‘natural gas’ in the 1960s/70s – particularly off-shore, led to gas became a major source of energy for home heating, cooking, water heaters, and other appliances, and then ultimately power generation.

Then there is the fourth energy transition, the one we are living in today, witnessing, and helping make happen, the transition to a low or zero carbon energy system.

The scale of the current transition is unprecedented. It is a massive challenge – nothing less than changing out all of energy generating and using infrastructure which of course means all of our infrastructure – every fossil fuel power station, every building, every factory, every car and truck, every ship, every aeroplane.

But before becoming too discouraged it is important to understand the nature of transitions. Energy transitions tend to happen in S curves and this has only been recently recognised. S curves are reason for optimism.

S curves are by their nature disruptive – but they don’t feel rapid in the early years and then things accelerate rapidly. As the adage goes: ‘under an S curve things change gradually, and then suddenly’. S curves have five stages:

• Solution search
• Proof of concept
• Early adopters
• System integration
• Market expansion

If I were to characterise where we are in the current energy transition I’d say that we are just moving out of early adopters towards system integration. That may seem strange but when you look at the curves, and the continuing cost down curves – particular for solar – that is the inevitable conclusion. What that really means is that for all the massive growth in renewables we have seen in the last 20 years – you ain’t seen nothing yet. When people get the impression that we are a long way off course that is often driven by implicit linear forecasting rather than using S curves. When you look at S curves the growth in renewables can still be on target for achieving a net zero power system by 2050.

This transition is different in a way because it is the first one that we started consciously, or at least semi-consciously, because we were thinking about questions around sustainability, oil and gas running out one day. The other transitions happened because the new source of energy was cheaper and more convenient than the old.

There are three well known drivers of the current transition and they came in a specific order: first we had sustainability – which ironically in itself is not sustainable as people won’t pay a green premium – or at least not for long, then a few years ago we moved into cost savings as solar and wind fell below the cost of fossil fuel generation, and in the last two years energy security has re-emerged as an important driver. Since the invasion of Ukraine all three drivers have been aligned and that has accelerated the change. Now we have a less well known but very important fourth driver which is emerging – and that is the finance industry becoming proactive and driving change rather than just financing whatever comes along. The finance sector is radically changing, and driven by regulation and demand from asset owners it will push decarbonisation through its loans and its investments. But that’s a lot of green wash I hear you say, true there is green wash but the whole finance sector is shifting dramatically and that is a really powerful force. If you have to meet certain decarbonisation criteria to get investment or a loan or a mortgage on a house you will do it. So, sustainability, cost, security and the finance industry becoming proactive are now all pushing in the same direction and that is a reason for optimism.

We tend to focus on renewable power when talking about the transition but there are of course two other aspects of the journey to net zero which have to be considered, the electrification of heat and the electrification of transport.

Heat is vital for lots of things from keeping us warm in winter, which requires an internal temperature of 20oC, through to making glass which requires temperatures of about 1,300oC, and making specialist ceramics which requires temperatures up to 2,800oC. Over 44% of total UK energy demand is heat, and that accounts for 37% of emissions. Peak heat load is 3 to 4x peak electricity load. Compared to decarbonising power, decarbonising heat is really hard.

For low temperatures such as domestic heating, the way forward is a combination of heat pumps and energy efficiency. The gas industry wants you to think the future is hydrogen in the gas network but that is a classic case of an incumbent lobbying for something that is nonsense technically and economically in order to maintain their position. For medium temperatures, the biggest proportion of heat in industry, we are starting to see higher temperature heat pumps come in. For high temperatures, then the answer is not so clear. Direct electric heating is possible in some cases, in others the answer will probably be synthetic fuels and hydrogen.

We are also seeing the rapid electrification of road transport. This and the electrification of heat means demand for electricity will go up – but so will the opportunities for demand flexibility. We already have heat pumps with thermal stores that can provide grid flexibility, and we are moving towards grid integrated buildings which generate more power than they use, at least at certain times, and soon we will have vehicle to grid storage. Some people of course say things like: ‘we can’t possibly electrify heat and transport because we would need to double the amount of electricity we need’. Demand growth is a factor but you have to remember that electricity demand in most mature markets is falling due to improved energy efficiency of appliances and lighting, as well as the integration of devices. All of those developments are based on digitisation. And that brings me to my specialist subject, energy efficiency.
It may surprise you but when you do the analysis, improved energy efficiency has delivered more energy services over the last few decades than any other source of energy, roughly three times as much as renewables. The problems with energy efficiency are:

• is it largely invisible, although we are working on some projects that will meter energy efficiency and help to change that
• it is in very small units – as small as individual LEDs as opposed to large power generation stations, and that makes it hard to invest in.

However, we should never forget that the cost-effective potential for energy efficiency is still huge and that every day, in every investment decision, we are missing opportunities for improved efficiency that lock us in to higher than needed energy use and emissions, and lock us into higher than needed investment in energy supply. Don’t forget as well that with a high proportion of renewable generation every electrification decision, whether it is for heating or for cars, leads to a big reduction in primary energy use and emissions. We really need to really think ‘energy efficiency first’ and energy efficiency is the smartest way to manage risk. I think we are about to get serious about energy efficiency and that the next phase of the energy transition will be focused as much on the demand side as the supply side.
It is clear that the end game of the transition in the power sector is a world where renewables make up the majority of power generation, with solar everywhere, and a lot more wind power. That of course means we need flexibility and that will come from two sources, storage and demand flexibility. As you know, storage is taking off. In the UK there is something like 40 GW of storage in planning, which is half the entire capacity of the grid. Now we all know that won’t all be built but even so, it is amazing given it is only a few years since we saw the first battery energy storage system. It is clear that lithium ion batteries have become the core technology for stationary short-term storage but of course we also need long duration energy storage, and we need it at big scale. I talked about pumped storage hydro at the beginning and of course that is a useful technology but sites are inherently limited. It is interesting that there are a number of private sector investments in new pumped storage hydro, including the £500m 600 MW expansion project at Cruachan. As well as pumped hydro storage there are a couple of other technologies that look scalable, liquid air storage, and compressed air energy storage (CAES) in salt caverns. The latter is an old idea where after a forty year gap there is now a lot of development from companies like Corre Energy. The emergence of large quantities of offshore wind has made CAES attractive and each site can be 300 MW. CAES of course can be Long Duration and that is critical. Other technologies like lifting heavy weights up and down look less serious.

The other part of flexibility that is widely under-appreciated is demand response. All the trials around the world show that you can induce significant reductions in demand with the right mix of technology and incentives. In the California heat waves it was companies like Ohm Connect who offer demand response that kept the grid operating.

So that’s the energy transition handled. The optimistic vision is: lots of renewables, lots of storage, lots of flexibility, lots of energy efficiency, electrification and digitisation. Yes, the scale is huge, but all the drivers are pushing in the right direction, and we are only just entering the real growth curve of the S curve. So what are the risks? What are the headwinds?

Of course in energy transitions, things never go smoothly and again looking at history is informative. If we look back at the industrial revolution, and this transition will be just as significant and as impactful as the industrial revolution, we see things didn’t go smoothly. The innovators often don’t survive.

Marc Brunel, the father of Isambard Kingdom Brunel, went to debtors prison for £5,000. His Thames Tunnel, which was the first ever tunnel under water and was called ‘the 8th wonder of the world’, ran out of money half-way through and was never a financial success. However, it is still there and used every day by London Transport. Incidentally if you haven’t visited Brunel’s Thames Tunnel make sure you do it, it is amazing.

Marc Brunel’s son, Isambard Kingdom Brunel of course is famous because of his work building the Great Western Railway and the great steam ships the Great Britain and the Great Eastern which were the technological marvels of their day.

But even Brunel got it wrong. He backed broad gauge railways and then had to rip them up and rebuild with standard gauge, even though it was much more comfortable and enabled much faster locomotives. He also built the atmospheric railway which was powered by vacuum – but that wasn’t economically viable. It was the Elon Musk Boring Company of its day. The great steam ships never really made money but they did lay the foundations for transoceanic shipping.

In Victorian Britain there was a massive boom in railway building, licences were granted and companies were formed, money raised, speculators bid up land, and there was a massive stock market bubble in railway companies. And of course, inevitably there was a massive bust and lost of people lost money. Much of the infrastructure was built however, and much of it we are still using today, 150 years later.

In something very similar to railway mania in 1990s we had ‘telecom mania’, then we had ‘internet mania’ in the shape of the dot com boom and bust, Then In 2003 to 2008 we had ‘clean tech mania’, now we are seeing ‘hydrogen mania’. There is something about markets and the way that they operate!
If we look at road transport there were other examples of how transitions don’t go smoothly. As early as 1896 no less people were worrying about pollution from gasoline engine cars.
Pedro Salom, a chemist, wrote;

“all the gasoline motors which we have seen, belch forth from their exhaust pipe a continuous stream of partially unconsumed hydrocarbons in the form of a thick smoke with a highly noxious odour”.

Obviously the control of combustion and fuel quality was not what it is today – and as well as pollution people worried about frightening the horses. Salom was not without a vested interest here as he co-founded the Electric Carriage and Wagon Company Inc. at the start of 1896. By 1900 the great Thomas Edison had decided electric cars were the way forward – they were outselling steam cars and gasoline cars at the time – and he wanted to replace the heavy lead acid battery. He spent three years testing different alkaline batteries looking for longer life, durability, safety and a much better weight to energy ratio – all those parameters we continue to seek in battery technology today. He settled on using a positive pole of iron and a negative pole of superoxide of nickel with an aqueous solution of potassium hydroxide as an electrolyte – what we call today a nickel-iron battery. By the way his method of crash testing them was having a random sample thrown from a third floor balcony – a great image. I suppose he didn’t have to worry so much about health and safety or consult his insurance company.

In May 1901 Harper’s Magazine said:

“the famous inventor considers his new storage battery the most valuable of all his inventions, and believes it will revolutionise the whole system of transportation“.

Edison built an assembly plant which opened in May 1901 to produce “500 cells daily” with a target cost of $10 and sales price of $15 – an early example of a ‘giga-factory’. The plant produced different designs optimised for different vehicles including cars and delivery wagons plus illuminating train carriages. Edison’s fame and great ability to get publicity led to a good start with strong sales for a year or so before technical issues were discovered. Cells leaked and power losses of 30 per cent occurred under repeated charging and discharging. Edison continued to innovate – adding nickel flake within the positive plate increased watt hour capacity per pound by 40 per cent – but in the end the market rejected electric vehicles as the gasoline engine improved and the problems with batteries were recognised. The business – The Edison Storage Battery Company – carried on making batteries for other applications and was sold to Exide in 1972 who then stopped making nickel-iron batteries in 1975.

In the early days of the electricity industry Thomas Edison of course was also one of the protagonists in the ‘war of the currents’. He was convinced DC was the answer whereas Westinghouse and Nikola Tesla favoured, correctly as it turned out, AC. The current wars went on for about a decade and involved lots of dirty tricks until Edison eventually accepted AC was the way forward, and of course he wrote the history books. The movie, ‘Current Wars’ is a god dramatization of these events.
Let’s talk about technology development risk.

There is a view, what can be characterised as the Bill Gates view, that we need to develop new technologies to get to a net zero energy system – it is all about innovation. Bill says you really need to innovate new technologies. The alternative view, which can be called the Jigar Shah view, and is the one I subscribe to, is that we need to deploy, deploy and deploy. The trouble with innovation of course is that a) it is risky and b) the innovator rarely makes money.

Of course the picture is more complicated than ‘innovate, innovate, innovate’ versus ‘deploy, deploy, deploy’ and we will always innovate as it is in our DNA. I think the nuance is that the innovate approach depends on big transformative innovations which are high profile, things like Direct Air Capture, Small Modular Reactors, or even fusion power. These are the kinds of things that journalists and politicians like – the bright shiny toys, and all things Bill Gates has invested in. The deploy, deploy, deploy model in reality is based on stuff that we already know works but with constant, incremental innovations that make deployment cheaper, particularly with scale. Incremental innovation in small things, things like an easier, cheaper way of mounting solar panels is at least as powerful, if not more so than big disruptive innovation. It is just not so sexy to work on or for journalists to write about, and not so good for politicians to have their photos taken alongside.

Taking technology development risk is clearly an equity risk – not an insurance risk. Those kinds of risks have to be taken by equity investors, either big corporates or VCs, and by governments funding R, D & D. There is scope, and a good argument, for the public sector to address these risks through mechanisms such as guarantees – and we have seen some of that in the Inflation Reduction Act, and there are likely to be similar mechanisms within the EU’s Net Zero Industry Act. That is a good use of public money that national and regional green banks or infrastructure banks should be doing much more of but they rarely do – they more often seem to end up investing in things that the market likes anyway, which is a crowding out private investment not crowding it in.

Of course there is always political risk. As some of you may realise I have an unusual but very well known surname, at least well known in the UK, Fawkes. I am related to Guy Fawkes, who in 1605 tried to blow up the Houses of Parliament, an event we still commemorate every 5th November with bonfires and fireworks. My name always makes visiting Parliament particularly interesting and as I often say he was the only man to go to Parliament with totally honest intentions. So, not surprising I am interested in politics and policy.

A real risk to achieving net zero is a lack of political leadership. We hear lots of talk about commitment but at the same time we have seen: subsidies coming and going – often with little or no notice in several countries and in some case retroactive changes: the resultant law suits about subsidies change; and more recently in the UK a real step back from net zero targets.

We really need to step up our policy commitments and politicians need to take a longer-term view. They also need to focus on the benefits of decarbonisation, not only reductions in carbon, but also cost savings, wider economic benefits, increased energy security, as well as improvement in health. A real issue is that politicians still seem to view net zero as a cost and a burden, and something that is optional.
We need to see the kind of leadership that John F Kennedy showed when he declared:

“We choose to go to the moon. We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too.”

In the same speech JFK said:

“These are extraordinary times. And we face an extraordinary challenge.”

“No role in history could be more difficult or more important.”

“There is no single simple policy which meets this challenge.”

“I believe we possess all the resources and talents necessary. But the facts of the matter are that we have never made the national decisions or marshalled the national resources required for such leadership. We have never specified long-range goals on an urgent time schedule, or managed our resources and our time so as to insure their fulfillment.”

We need leadership like that to address climate change in the same kind of language. I’d vote for a politician who talked like that about climate change.

Some of the decisions to roll back policy promises, notably Prime Minister Richi Sunak’s recent change on net zero are clearly putting net zero and renewables firmly in the culture wars, relating renewables and EVs to ‘wokeism’. This is similar to what we see in the US with the former President’s crazy ranting about ‘windmills’ and it is very dangerous – dangerous to democracy.

It really signals a political threat outside the obvious ones about policy change – populism and authoritarianism seem to be on the rise nearly everywhere and represents a real and present danger to democracy. Right now, on the whole, the authoritarian wing seems to be anti-renewables, probably as they are in part funded by oil and gas interests. As they always say ‘follow the money’. However, we can also see a scenario where the effects of climate change get worse and an authoritarian government uses that as an excuse to over-ride personal and corporate freedoms. If you are interested in what that could look like read some of the latter science fiction works of Ben Bova.

On top of that we are now living in a much more dangerous world than even a few years ago, with shifting geopolitical balance. Look at what the Chinese are doing in the Spratly Islands – those artificial islands are not for renewable energy. Then of course we have Russia, which is persecuting a war in Europe. And of course we have the tragic events in Israel and Gaza that could escalate much wider at any moment. In the 1970s we saw energy being used as a geopolitical weapon and we could see that again, in fact we already have. We have seen the explosions that destroyed the Nord Stream 2 pipeline that seem to have been sabotage. We also have seen reports of Russian submarines and ‘underwater research vessels’ spending a lot of time around offshore wind farms and transmission cables. There were even reports that some of the Russian oligarch’s superyachts had submersibles on-board and that weren’t just for fun.
Of course COP 28 is upon us. The fact that it is COP 28 ie the 28th meeting – could be regarded as dispiriting and personally I can’t think of a worse place to go to than a COP, but seriously we have made progress over those 28 meetings. The fact that COP 28 is in the UAE could certainly be considered optimistic given the role of oil in the UAE economy – we will see what comes out of it. But that aside, the joint statement between the US and China announced a couple of weeks ago really is significant. It said triple renewables capacity and cut power sector emissions by 2030, as well as commitments to reduce methane emissions. This is a ground for optimism, especially when you think of the difficulties of negotiating that statement given the wider issues with the US-China relationship I mentioned earlier. Every noun, verb and comma would have been carefully negotiated.

Another risk that I have become more concerned about recently could either be political or what insurers calls ‘nat cat’ risk. I mean EMP – electromagnetic pulse. Increasing electrification and digitisation – both of which we really need – make us more vulnerable to EMP every day. If there was a significant EMP, natural or man-made, the power system across large areas would be down for months because of the long lead time on large transformers. Even with power restored many systems would be fried. If you want a great sense of what the effects of an EMP could be read the novel ‘One Second After’ by William Forschten. One of the counters to EMP could be what is called High Frequency AC (HFAC), which is an emerging power distribution technology that can be applied to Power Supply Units for computers, servers and other electronics, as well as to power distribution buses. It brings a wide range of benefits but also protection from EMP. It is one of the technologies that I think could be a positive surprise, a known unknown if you like.

Another key risk for the renewables industry of course is the issue of grid connections. Basically we’ve grown the decentralised, variable renewable supply side technology by bolting it onto the old grid that was designed for one way power flows from large centralised fossil fuel power stations. Now the costs of that are starting to become visible. We need to rebuild the grid and the distribution system to make it fit for purpose. As well as rebuilding it technologically, there’s a need to redesign how energy markets operate and are regulated. Of course we need to rebuild that particular aeroplane while it is in flight – we can’t turn it off or build another grid alongside the existing one.

Supply chains are talked about a lot nowadays and there are of course risks in expanding supply chains. There are a lot of dimensions to this, including the technology development issues we have seen with scaling up off-shore wind. In some ways however the biggest problem is growing a skilled, technical workforce. In Europe we have a demographic time bomb which means an ageing workforce. At the same time we have a real issue in attracting young people into technical jobs, especially technician level jobs.
The recent IEA energy jobs report showed that clean energy now accounts for more jobs than fossil fuels and highlighted the shortages of skilled technicians.

How do we address that? Industry, government and educators need to come together to set up things let net zero industry academies, and we have to associate these jobs in the minds of young people with positive change and making an impact, we have to make those kind of jobs cool. Maybe we can’t make them as cool as being an astronaut but we can try. Being an off-shore wind technician helicoptering out to a 15 MW offshore turbine may not be quite as cool as being an astronaut, but it is pretty cool and the pay is probably better.

Also we need to have a global workforce working globally – which isn’t helped if we impose excessive visa restrictions. When the cell phone systems were first built out they were often installed by Indian engineers travelling from country to country. I know we are seeing some of this in renewables – but we will need to ramp it up otherwise we just won’t have enough technicians. Even with investment in automation, remote monitoring and control, and AI you can tell your kids to be renewable energy technicians and installers if they want a good job.

Two other types of risk to think about relate to the E, the S and the G in ESG. Firstly there is the need to recognise and address the other environmental risks other than simply climate change, and in particular that means biodiversity. There is no point solving the energy problem or even the climate problem if we have destroyed bio-diversity. Every project, and I mean every project, really does have to be nature positive – and soon the finance world will be demanding it. There are some really interesting concepts out there such as growing oysters around the foundations of offshore wind farms to increase bio-diversity, create food and reduce foundation erosion.

Then of course there is something that the engineers amongst us were not trained to think about and that is the need for a just transition, one that gives everyone modern, affordable energy, and results in an energy system that is fairer and empowers people rather then disempowers them. Failure to do that really adds to social and political risk.

So to try and sum up:
There are real grounds for optimism that we can get to a net zero power system. There are no fundamental technical problems. The power of ‘deploy, deploy, deploy’, S curves and the overlapping drivers of sustainability, cost, energy security and now the direction of the finance sector, all suggest that it is possible. Yes, it may seem that we are a long way off target, and there is no doubt that the task is huge, but then so were previous transitions, we just didn’t think about those as much. Clearly political commitment is important, both national and international – and we do need better policy support. But I think the economics of the situation will counteract even a luke-warm political environment. Politicians are generally followers rather than leaders. Yes of course, there are headwinds and barriers that we all need to work together to resolve, Yes, companies will come and go. Yes, there will be errors and losses of course technical failures and even dead-ends. That is the nature of change. But at the same time we have greater clarity about the end game, greater transparency, more resources, and digital technology.
Having witnessed the first half of this energy transition, and made some small contributions to it, I am looking forward to witnessing as much of the second half of it as I can. I think it will be exciting and even if we don’t quite get to net zero, we will get a long way towards it. There is no doubt the world of 2050 will be very different to the world of 1950, just as the world of 1950 was very different to the world of 1850. It will be better in many ways and in large part that will be down to efforts of everyone in this room and in the renewables industry.

I hope that some of what I have said has been interesting. I am sure that you will have a productive and enjoyable day talking about some of these issues in more detail and I look forward to talking to some of you later in the day.

Photo credit: Nico Hogg, Creative Commons Attribution 2.0 Generic

It is now becoming widely accepted that increasing the flow of investment into energy efficiency is essential for hitting climate targets, as well as addressing issues including fuel poverty and energy security. Much of that investment will have to come from the private sector, from institutional investors. So how do institutional investors view energy efficiency and how could metered efficiency help increase the flow of investment into efficiency?

It has to be said that for many, (if not most), institutional investors, energy efficiency remains a bit of a mystery. When questioned about efficiency, many investors will say something like, ‘oh you mean solar panels and stuff’, which is not what we fundamentally mean by energy efficiency i.e. doing the same (or more) with less energy input. Back in the early 1990s the wind industry was in a similar position, early wind farm developers, (the author included), could only find one bank in London that knew anything about wind power and that was a US bank that had financed wind farms in California. Now there is a plethora of banks and financial institutions who understand every detail of the multi-billion pound wind business.

This lack of knowledge about efficiency amongst financial institutions is changing as they come under increasing regulatory and customer pressure to disclose climate related risks and directly address climate change through their investments and lending. Institutions that either own or lend to property portfolios, whether they be houses or large commercial buildings, in particular are increasingly recognising the potential for energy efficiency improvements as a way of mitigating climate risk.

There are four reasons why financial institutions are getting more interested in energy efficiency:

• energy efficiency represents a large potential market.
• Improving efficiency reduces risks in two ways:
  • firstly, increasing energy efficiency improves the cash flow of clients, thus reducing their risk.
  • secondly there is the risk of financing assets that become stranded as energy efficiency regulations are tightened. For example, tightening Minimum Energy Performance Standards exposes owners to the risk of owning an asset that cannot be sold or rented in future.
• improving energy efficiency has a direct impact on reducing emissions of carbon dioxide and other environmental impacts such as local air pollution and therefore can be a key part of Environmental, Social and Governance (ESG) programmes.
• finally, and probably most importantly, bank regulators are increasingly requiring institutions to estimate and disclose climate related risks and energy efficiency can reduce risks.

The barriers to investing in energy efficiency are well documented in thousands of papers and articles. For financial institutions the main barriers include, as well as the lack of understanding and capacity referred to above: the small scale of most energy efficiency projects, their heterogenous nature, lack of data, and performance risk – the risk that projects do not deliver the energy savings projected during the design process. Importantly as well, energy savings are the absence of something, a counterfactual, and invisible which is harder to deal with than for instance the production of energy. All these factors combine often to put energy efficiency into the more difficult box. If you control £100 million, and that is generally considered a small fund, it is easier to buy a couple of wind or solar farms than it is to originate, develop and deploy capital into hundreds of LED lighting installations or new heat pumps for example.

The lack of data and performance risk are major barriers to financial institutions. It is not so much that energy efficiency projects have risks, contrary to some opinions of course they do have risks – like all investments, it is more that the lack of data, (past, present and future), means that they are uncertain. Risks can be understood and mitigated, uncertainties are much harder to deal with. The lack of data on what actually happens when energy efficiency measures are installed would also inhibit Distribution Network Operators even considering energy efficiency measures as an alternative to network upgrades, even if they were enabled and motivated to do so by regulations, (which at the moment they are not).

For most of its history the energy efficiency industry has survived on ‘deemed’ savings – the level of savings that an engineering assessment says the projects will produce. Even with the advent of Measurement and Verification, (M&V), and the International Performance Measurement and Verification Protocol (IPMVP), very few energy efficiency projects were measured to see what the actual savings were.

Metered efficiency, the idea of establishing a common system of ‘weights and measures’ for measuring energy saved, emerged out of California about ten years ago. It is now being used widely across the US, allowing utilities and regulators to measure the effectiveness of energy efficiency programmes as well as the utilities to better understand and manage the changes in their load curves brought about by the adoption of roof top solar. For investors, (of all types from institutions to households), it offers the possibility of only paying for what you get, ‘pay for performance’, which is much better than paying for stuff and hoping that some energy savings result. It also opens up the possibility of having contracts that resemble Power Purchase Agreements (PPAs). PPAs are well understood and are a very bankable proposition, you can raise capital on the back of a PPA from a good counterparty. We could have EEPAs, Energy Efficiency Purchase Agreements, which define the amount of energy efficiency to be delivered, within some boundaries, and how much will be paid per unit delivered. They would look very similar to PPAs. Pay for performance contracts such as EEPAs would also serve to greatly improve the quality of energy efficiency projects being sold, if the supplier was only being paid on what was delivered they would have a bigger interest in delivering quality projects and maintaining savings over time. Suppliers delivering bad projects would rapidly go out of business. Pay for performance contracts would also avoid the need for costly and complex Energy Performance Contracts, (EPCs), from Energy Service Companies (ESCOs), which are used to put performance risk onto the contractor but in which they take a hefty margin to offset the risk of non-performance. With metered energy savings and pay for performance you simply pay for what is delivered, just like when you buy energy.

For utilities and regulators metered energy savings offers the possibility of really understanding the effect of energy efficiency and flexibility measures on an hourly (or less) basis. Targeting the reduction of energy use at times when grid generation is high carbon, could have a major impact on reducing overall emissions. There is not a lot of point saving energy in the middle of the day if all the load is capable of being met by roof top solar, you want to save energy when the gas (or other fossil fuelled) generators are on. Such precise targeting requires understanding the time aspect of energy efficiency, energy savings are not as we often implicitly assume, spread equally over 24 hours a day. In the right regulatory environment, which we don’t yet have in the UK, distribution companies could use metered energy savings to invest in energy efficiency projects with a better economic, and social, return than investing in network upgrades such as new wires and sub-stations.

In conclusion, metered energy savings can make energy efficiency more like energy supply, and therefore make it more investable for financial institutions, energy distribution companies, and end customers. The RetroMeter project, supported by Ofgem’s Strategic Innovation Fund and delivered by a consortium consisting of: Electricity North West; Energy Systems Catapult; Carbon CoOp; Manchester City Council; and ep Consultancy; is developing an approach to metered efficiency savings and applying it to a residential retrofit project in Manchester with a focus on heating energy. As well as testing different approaches to metering energy saving, it is looking at the benefits for different stakeholders from the householder, to the Distribution Network Operators, to the health service, as well as developing business models that could help bring in more investment into energy efficiency through mechanisms such as pay for performance.

Details on the RetroMeter project can be found on the Electricity North West website

https://www.enwl.co.uk/future-energy/innovation/strategic-innovation-fund/retrometer/retrometer-discovery-phase/