On 2^nd May I was fortunate enough to present at the G20 Energy Efficiency Forum and take part in a panel discussion.  The G20 energy efficiency work has not got much attention but there are some good things happening and at the event the group, with 15 participating countries chaired by France and Mexico, launched its G20 Energy Efficiency Toolkit.

The toolkit offers a perspective on scaling up energy efficiency investments by defining and separating “core” EE investments – those stand-alone projects where energy savings are the main driver – and “integral” investments where overall asset performance is the lead driver but energy efficiency is delivered as one of multiple benefits over and above the main driver.

The global investment in energy efficiency has been identified by the IEA as $221bn with the US, EU and China representing 70% of the total.  Within the EU 80% of the total investments were in buildings, with over 90% in Germany, UK and France.  The toolkit reports that the largest “core” energy efficiency investment is in the market for Energy Performance Contracts which totalled $24 billion.  I assume this means third party investment as internal balance sheet financed projects are surely much higher.

The G20 EE Toolkit offers advice to different groups including policy makers, private sector banks, institutional investors and the insurance sector.  It also gives case studies from various countries including Mexico, France, China, Australia and others.

There are parallels with my energy productivity work for KAPSARC.  In that I distinguished between “energy efficiency” investments and “normal investments”, a definition which parallels the G20’s “core” and “integral”.  Energy efficiency investments are those where the main purpose is energy saving.  This includes much of what we usually think of as energy efficiency, retrofitting buildings or production lines for example.  While these are important at any one time hundreds of investment decisions are being taken on all kinds of infrastructure that will affect our energy consumption and emissions for the next twenty to fifty years or even beyond.  Most of these are not “energy efficiency investments” but “normal” investments where the main purpose is not energy efficiency.

Pure energy efficiency investments can be ramped up by specialised funds or facilities and public-private partnerships with public finance providing development capital and guarantees. Any programme needs to:

• Provide finance
• Build pipelines of projects
• Build capacity in end-users, energy efficiency industry and finance industry
• Standardize development process, documentation, contracts and measurement

Encouraging the growth of the ESCO-EPC market also helps drive pure energy efficiency investments.  This can be done through models like ESCO-EPC facilitation (e.g. Berlin, RE:FIT) and Super-ESCOs (e.g. Etihad).

It is also important to build market infrastructure through:

• Standardization of process (e.g. Investor Confidence Project)
• Standardization of contracts (e.g. standard EPCs)
• Standardization of Measurement & Verification
• Build evidence bases of project performance
• Build capacity within financial sector.

It is also important to continue to build demand through strong Minimum Energy Performance Standards and building capacity in energy management through standards e.g. ISO 50001

As well as ramping up pure energy efficiency or core investments we need to ensure the efficiency opportunities presented by normal investments are not being missed.  Even if you design a building to code and that makes it low energy compared to existing buildings it is not really doing anything to improve the situation – I would not count it as an energy efficiency investment. It is a normal investment and a missed opportunity to include cost-effective energy efficiency measures.  Every day, in design and investment decisions around the world, the economic potential to improve energy efficiency beyond business as usual is being missed.  We need to change that through better regulation, capacity building amongst investors, specifiers and designers and implementing better design processes such as integrated design.  Banks and investors can help this process by building in checks and questions during their investment decision making.  These processes should force borrowers to review their specifications and designs.  EBRD has been doing this for a long time.  By doing this the banks can reduce customer risks by reducing their energy bills and increase the deployment of capital into cost-effective opportunities.

To scale up energy efficiency we need to take actions to increase the rate energy efficiency investments, and actions to increase the uptake of cost-effective efficiency opportunities within normal investments.

The marches for science in many cities around the world this weekend were good to see.  We often seem to be entering a world of anti-science, especially amongst the religious right in the US and the current administration.  Groups like the anti-vaccination brigade and those who want to teach creation alongside evolution are bad signs of the growing power of anti-science.  At the same time we are increasingly dependent on technology, much of which flows from a deep scientific understanding of the universe and how it works, at least in the little backwater that we inhabit.  It is weird that the anti-science people still want benefits from science including clean water, cheaper and healthier food, medical treatment (apart from the ones they disagree with), electricity, the internet and mobile phones.

The great physicist Richard Feynman wrote an essay called “The Value of Science”.  He talks about three values.  Firstly the obvious one is the technology that flows from science.  Technology is not always driven by science but the two things are increasingly inter-dependent.  Science has allowed us to develop medicines that have eliminated diseases like polio and smallpox, it helped developed anaesthesia, it enables us to understand and harness electricity, it allowed us to develop micro-processors etc. etc.  The list goes on and on.  Feynman’s second value is the inspiration and enjoyment that comes from exploring the universe. Even if we personally cannot directly take part or fully comprehend much of the science it is inspiring to read and think about.  Who cannot be at least a little inspired by scientists being able to decode DNA, or listening to the sound of radio signals received from pulsars by Jodrell Bank, or this picture of earth taken by the Cassini probe around Saturn? (The arrow mark earth).

The third value that Feynman identified is that science always deals with ignorance, doubt and uncertainty.  He said:

“Now, we scientists… take it for granted that it is perfectly consistent to be unsure, that it is possible to live and not know. But I don’t know whether everyone realizes this is true. Our freedom to doubt was born out of a struggle against authority in the early days of science. It was a very deep and strong struggle: permitting us to question – to doubt – to not be sure. I think that it is important that we do not forget this struggle and thus perhaps lose what we have gained. Herein lies a responsibility to society.”

This is subtle but important.  It is about our freedom to doubt authority. Scientists like Galileo challenged authority and science continues to do that to this day.  The element of doubt Feynman refers to is so vital because the really dangerous people in the world are the anti-science people with no doubts.

Science is amazing. It is also part of what makes us human.  Only a science based approach can make everyone wealthy and healthy and clean up the environment, which is what we need to do as quickly as possible.  We should be massively increasing spending on science and science education not cutting it.

Sign of the day.

Having written and talked about the Bullitt Center in Seattle and the Metered Energy Efficiency Transactions Structure (MEETS) which it pioneered it was great to finally visit this impressive building during my recent trip to the US.  I was lucky enough to be given a personal tour by Denis Hayes, President and CEO of the Bullitt Foundation and noted environmentalist, best known as the co-ordinator of the first Earth Day in 1970 and Head of the Solar Energy Research Institute (now NREL) during the Carter administration.

The six storey, 52,000 square feet building was designed and built for the Bullitt Foundation, which exists to “to safeguard the natural environment by promoting responsible human activities and sustainable communities in the Pacific Northwest”.  The Foundation needed new office accommodation and wanted something more appropriate to its mission than its old offices in a historic building.

The decision was taken to build a cutting edge sustainable building that would both house the foundation but also serve as a commercial building.  When talking to designers and leading green developers the foundation team were told that their aspirations of a net energy positive, sustainable building for the same (or less) cost than a normal class A building was impossible.  Having been told it was impossible the foundation persevered and achieved all their goals. After reviewing different green building standards Denis Hayes settled on using the Living Building Challenge.  To fulfill the requirements of the Living Building Challenge a building must demonstrate 12 months of operational performance according to 20 Imperatives distributed amongst seven “petals”: Site, Water, Energy, Health, Materials, Equity, and Beauty.

On energy the design called for net energy positive and an Energy Use Intensity (EUI) of 16 (measured in the quaint US units of kBtu/square feet/year), equivalent to the output of the 244 kW rooftop PV installation.  This should be compared to the following EUI benchmarks:

• average for all Seattle office buildings: 92
• Seattle energy code building: 50
• Medium Office designed to ASHRAE 90.1 – 2007 (all climates): 47.7
• LEED Platinum building: 34.

When the building was commissioned the EUI was certified as 12.3, a 74.2% saving from the ASHRAE Medium Office benchmark.  With the building 85% occupied the actual EUI is 10.

Much effort was put into the glazing and lighting design with the aim of maximizing the use of daylight.  On average the building is 40% glazed with the main daylighting facades having 60% glazing.  The triple paned argon filled, low-E glass windows are in vertical strips to maximize daylight.  External shades keep out excessive solar gain and at night the windows can open to allow warm air out.  A ground source heat pump system delivers heat and occasional additional cooling on the rare hot days in Seattle.

On water the target was simple – net zero water.  Despite Seattle’s reputation as being the wettest place in the US it’s average-annual rainfall is less than several other major cities.  Beneath the PV array a membrane roof takes rain water to drains that flow into a 56,000 gallon cistern in the basement.

Rainwater from the cistern is pumped through several increasingly fine filters and then exposed to UV light before passing to showers and taps.  Interestingly, beyond the technical difficulties, the water system faced bureaucratic and legal issues.   The building had to be established and regulated as an independent water system separate from, but surrounded by the City of Seattle’s municipal water system.  Grey water is treated by filters and a green roof.  Perhaps the most challenging aspect of the water system is the use of composting toilets with on-site black water treatment.

The health petal was addressed by avoiding paints with Volatile Organic Compounds, including biophilic elements, and utilizing radiant floor slabs for heating and cooling.

The materials petal started with wanting to avoid the Red List, a listing of fourteen categories of materials that the International Living Future Institute prohibits in any Living Building.  To help meet this goal the number of materials to be used was minimized but it still took two years to research, co-ordinate and source materials.  The building sits on a concrete base but above the third floor all framing is from heavy timber 100% certified by the Forest Stewardship Council, (as is all wood in the building). Concrete formwork used salvaged plywood and plastic tree fencing, which is used to protect trees during construction, utilized fencing used on other nearby projects rather than new plastic netting shipped from China. The Living Building Challenge imposes strict requirements on the distance different materials are allowed to travel to get to the project site, requirements that the Bullitt Center met.

The Bullitt Center integrated approach to addressing the Living Building Challenge is both technically and aesthetically attractive.  It is nearly fully leased to a range of tenants including an engineering firm, a technology company amongst others – proving the economic argument as well as the environmental arguments.  It is a truly a landmark project and a great example of what can be done with a highly motivated client and a design team truly prepared to truly push the envelope.

Thanks to Rob Harmon of the MEETS Coalition and Denis Hayes of the Bullitt Foundation for taking the time to show me the building.  You can check out the performance of the Bullitt Center at: http://buildingdashboard.com/clients/bullittcenter/

The level of investment in energy efficiency required to meet climate and energy security targets is significantly higher than both the current levels, and the levels that can be financed by public capital.  In order to scale up energy efficiency to the levels that we know are possible, and we know are needed, we need to change the game and make energy efficiency into something that people want to buy, and something that can be easily financed by institutional capital at scale.

The barriers to scaling up investment into energy efficiency are now well documented.  To name just a few: projects are small, the methods of developing and documenting project development are not standardised, capacity within the financial sector to understand value and risks of energy efficiency is limited, and traditional business models such as Energy Performance Contracts are not attractive in many segments of the market.  As Michael Eckhart of Citi said; “energy efficiency does not meet the needs of the capital markets”.

There are signs, however, that the foundations of a functioning energy efficiency financing market are now being put in place.  The Investor Confidence Project is rolling out its Investor Ready Energy Efficiency™ project certification system in the US and Europe, with growing interest from India, China and Australia and New Zealand.  The EU’s Energy Efficiency Financial Institutions Group (EEGIG) is soon to launch its “Value and risk appraisal framework for energy efficiency finance and investments”, a guide to under-writing energy efficiency projects in buildings and industry. Investors and lenders are expressing more interest in developing energy efficiency related products. In the US Property Assessed Clean Energy (PACE) continues to grow and PACE loans are now regularly being securitised.

To build upon these foundations we need to ensure that four components are brought together in the same place at the same time by entrepreneurial individuals and organisations.  The four components are; finance (for projects and development), standardisation, large-scale pipelines, and capacity building on the demand side, the supply side and within the financial sector.  Project finance is abundantly available and much of it is seeking environmentally conscious or green homes – the issue right now is a lack of projects.  Many failed energy efficiency finance schemes prove that project finance alone is not enough.

There is a need to finance the development of projects, that risky stage between “here is a good project idea” and “here is a fully developed bankable project”.  Development capital is always high risk and there is an argument for using public capital to support this stage, although of course this does not generally happen in other sectors like property or power generation so it is questionable why it should in energy efficiency.  The efficiency sector generally lacks a development mentality and eco-system and so public capital could be used to kick-start the development market using low cost convertible loans or grants such as the EU’s Project Development Assistance.

Standardisation in the development and documentation of projects is now available through the Investor Confidence Project.  Currently available for buildings in the US, Canada and across all countries of Europe, the Investor Ready Energy Efficiency™ project certification system is there to be used.  As it brings reduced due diligence costs and greater certainty of outcome, project developers, clients and financiers will increasingly require its use.

There is a lack of large-scale pipelines that can attract institutional capital. Energy efficiency projects tend to be developed on a building by building or site by site basis rather than across portfolios.  In the 1980s and early 1990s large scale energy management programmes were implemented across many public and private sector portfolios but that skill and activity seems to have been lost. We are still in the pilot project mentality all too often.  To develop large pipelines requires several things.  Firstly it needs entrepreneurial efforts to acquire and build pipelines.  Secondly, it needs attractive and simple business models that really make sense for clients.  Existing models such as Energy Performance Contracts do not make sense for large parts of the market. Emerging models such as Efficiency Services Agreements, metered efficiency and Pay for Performance are more attractive and need to be developed and deployed.  Finally, it needs strong leadership from client organisations and those that convene portfolio holders such as central, city and local governments to demand effective action at scale.

Capacity building amongst clients – the demand side – needs to focus on the energy and non-energy benefits of improved energy efficiency and the availability of financed solutions.  Non-energy benefits such as increased asset value or improved health and well-being need to be stressed above just energy costs savings as they are usually much more interesting and strategic to most organisations.  On the supply side capacity building needs to focus on developing standardised and bankable projects with consistent results.  Within the financial industry capacity building needs to be focused on understanding the nature of efficiency, understanding the sources of value and the risks, as well as on the different ways that energy efficiency can be made into a financeable asset – all subjects covered in the EEFIG under-writing guide.

Pulling these four components together requires entrepreneurial effort – effort that can come from the public and/or private sectors – and can manifest itself in different organisational forms.  Successful organisational forms include, but are not limited to, procurement frameworks, super ESCOs and retrofit accelerators.  Successful procurement frameworks that can be used as models include the UK’s Carbon and Energy Fund which develops and helps finance large scale projects within the National Health Service. Through its framework it delivers finance, the pipeline, capacity building and standardisation (based on the Investor Confidence Project’s system).  In the US there are several retrofit accelerators which bring together the different elements.  In Dubai and India there are Super-ESCos, Etihad in Dubai and EESL in India.  Both have successfully brought the four components together to deliver large-scale energy efficiency programmes and are good models for Europe and the US.

Massively scaling up investment into energy efficiency remains one of the biggest financial opportunities on the planet as well as the best opportunity to improve environmental conditions and reduce the threat from climate change.  Even at current low energy prices the world spends some USD 5-6 trillion a year on energy. Entrepreneurs need to work to deliver new localised and national organisational forms that bring together the four components and deliver investment projects that significantly reduce energy spend, and bring multiple other benefits.

On 1^st February I made a keynote address at COWI, the Danish engineering company, at an event to launch their new tool to help value the multiple benefits of energy efficiency and other projects.

Good afternoon.  I am going to start by saying we are in the midst of a revolution – and I don’t mean the revolution going on in Washington DC.  The revolution I am talking about is an energy revolution.  The old model was the large centralised energy plant sending energy out over a network to consumers.  The new model is one which has two chief characteristics.  Firstly there is a diversity of technologies including renewables, distributed generation, energy efficiency technologies, storage, and smart controls.  Secondly there is a multi-directional model in which there are no longer producers and consumers but rather prosumers.

This revolution has already had a major impact on traditional utilities.  In 2013 the Economist had a story headline on utilities, “How to lose half a trillion euros”.  The number has gotten bigger since then.  The good news is that there is big money in energy efficiency.  The World Business Council on Sustainable Development estimated that the energy efficiency in buildings opportunity is worth $0.9 to $1.3 trillion – yes trillion.  So this is a massive opportunity.  However, everywhere I go in the world I find a sense of frustration, frustration that the market for energy efficiency investment is not growing fast enough.  Why is that?

There is a massive gap between on the one hand the huge potential for cost-effective projects to improve efficiency, a potential that only needs proven technologies, and the massive amount of capital that is looking for profitable investments, especially investments with a green aspect.  This is the gap we have to bridge.  Just in case anyone is unconvinced about the availability of capital, a report from PIMCO stated that there is $12 trillion of institutional capital in global investment grade bonds trading with negative yields and that 15% of bonds within the Barclays Global Aggregate, (a widely used benchmark), was trading with negative yields to maturity.  This huge amount of capital could be usefully deployed into energy efficiency and other green projects.  The demand for green investments is growing rapidly as witnessed by the rise of green bonds.

So how do we start to deploy more capital into energy efficiency?  My view is that there is a jigsaw of energy efficiency financing with four pieces; finance, building pipeline, standardisation and building capacity.  Any project or programme, whether it is funded by public or private funds, needs to address all four parts of the jigsaw.

Let me start with standardisation.  Many studies and market observers have highlighted the lack of standardisation in energy efficiency to be a major barrier to scaling up investment.  The Energy Efficiency Financial Institutions Group (EEFIG) identified this and Michael Eckhart of Citibank has identified it by saying “energy efficiency does not yet meet the needs of the capital markets.   No two projects or contracts are alike”.  The importance of standardisation was brought home to me by a quote from D.E. Purcell who said: “Standards are like DNA.  They are the basic building blocks for all technology and economic systems.”   We could not have had the industrial revolution without standardisation and we could not have any financial market without it.

So why do we need to standardise?

Lack of standardisation introduces a number of problems:

• it increases performance risk
• it introduces uncertainty which in itself reduces demand
• it increases transaction costs as investors and lenders have to spend more money on due diligence
• it makes it difficult for financial institutions to build human capacity – you can’t build teams around ad hoc processes
• it makes it difficult to aggregate projects – and aggregation is vital in energy efficiency because individual projects are small compared to the need of institutional investors

And what do we need to standardise?

Firstly we need to standardise project development and documentation.  This is the province of the Investor Confidence Project and its Investor Ready Energy Efficiency™ system.

Secondly we need to standardise the understanding of risks and value.  This is the subject of the EEFIG “Value and Risk Appraisal Framework for Energy Efficiency Finance and Investments” which we have written with COWI for DG ENERGY and will be published in the summer.

Thirdly we need to standardise contracts.  There have been several European and UK projects to standardise contracts for Energy Performance Contracting but they are still not widely used and different project developers use their own contracts.

Finally we need to standardise performance measurement and reporting.  This is the area of Measurement and Verification (M&V) but it goes beyond M&V and the International Performance Measurement and Verification Protocol (IPMVP).  We need to collect and make available information on project and investment performance.  Several initiatives are working on this including EEFIG’s De-risking Energy Efficiency Platform (DEEP) developed by COWI for DG ENERGY, the Investor Confidence Project’s Building Button, and the Curve.  None of these to date have much in the way of actual performance data – one of the problems with time-series data is that it takes time to collect.

To develop sizable pipelines of projects, which are necessary to attract lower cost institutional capital, two things are needed.  Firstly it is necessary to have a proposition that sells – you have to sell something that is compelling to customers and many existing energy efficiency projects and contracts are simply not compelling. Secondly there is no point taking a building-by-building approach – you have to take a portfolio approach whether that portfolio be owned by a single owner like a company or a city, or whether it is a portfolio made up of buildings with different owners.

One aspect of solving this problem is building better business cases based on selling benefits that are strategic to decision makers.  Energy efficiency projects have multiple non-energy benefits which are increasingly recognised such as; increased asset value, improved health and well-being, reduced staff turn-over or higher productivity.  These benefits are much more strategic, and hence attractive to decision makers, than simple boring old energy savings.  With strategic decisions people don’t question the payback so much.

So to sell energy efficiency better, sell the non-energy benefits that are most likely to be strategic for your organisation – and then when you have the attention of the board, add the fact that this project will save x amount of energy and carbon with a payback period of y.  Don’t start with energy savings and payback – that is a good way to get a “no” when we all want a “yes”.

We also need to understand and be honest about the risks of energy efficiency.  It used to be said that energy efficiency was low risk or even no risk. This simply is not true.  Energy efficiency investments have all kinds of risk, especially performance risk which results from the performance gap – the difference between how much energy the project is designed to save and how much it actually saves.  The limited amount of data on this is pretty worrying if you are an investor.  Then there are other risks like weather risk, change of use risk etc. as well of course the normal credit and counterparty risks.

To better understand risks we need data.  In many areas of investing and lending there are decades of data.  In energy efficiency there is very little data but new data platforms are emerging such as the De-risking Energy Efficiency Platform (DEEP) developed for EEFIG, Building Button developed by the Investor Confidence Project, and the Curve developed by The Crowd.  These data platforms are new and to date have very little actual performance data.  Accessing data is hard, the lack of a common language with which to compare projects is a barrier, and of course collecting time series data takes time.

So to really scale up investment into energy efficiency to the levels we need to – we require new structures and organisations that put together the four pieces of the energy efficiency financing jigsaw: finance, building pipelines, standardisation and building capacity.  A few examples of these organisations exist but we need more models and more innovation.  Good examples include: The Etihad Super ESCO in Dubai, the Carbon & Energy Fund in the UK, and Retrofit Accelerators in the US.

So what of the future?  The real future that is just starting to emerge is about moving from paying for stuff to paying for performance.  All energy efficiency programmes rely on predictive models (many of which don’t work very well), incentives or mandates with no accountability for savings, and high-level performance measurement based on samples.  In Pay for Performance models actual savings would be quantified and paid for on a per unit basis.  This would align risks, innovation and project finance and allow energy efficiency to become a truly scalable, and reliable, resource.  Pay for Performance models are now being used in California which is putting much store on them working, and are being used in pilots in Germany too.

One interesting thought is to take Pay for Performance beyond just energy efficiency.  What do we really want from a building for instance?  Clearly we want a pleasant environment but we also want good indoor air quality (IAQ), and the link between IAQ and productivity and well-being is increasingly being proven.  Why not pay a building provider on a pay for performance contract for maintaining a set level of IAQ?

To sum up:

• we need to standardise:
  • project development and documentation
  • understanding of value and risk
  • contracts
  • performance measurement and reporting
• we need to work on building large pipelines of viable projects which will require both developing new, more compelling business models, and taking a portfolio approach
• we need to consider pay for performance models and using new data and analysis techniques to measure energy efficiency and make it a reliable resource that can truly compete with energy supply options.

Thank you.