Continuing the retrospective of the last two and half years of onlyelevenpercent.com

Opening up data

Open performance data can be a real driver for greater energy efficiency. US cities like New York and Chicago have mandated large buildings publish their normalized performance data every year. In the 1980s the UK’s Audit Commission programme that required all Local Authorities to produce Normalized Performance Indicators (NPIs) for every building and this drove a lot of improved energy management and investment activity (having been involved in developing the NPI I was involved in a lot of the follow-up implementation). The use of NPIs can be criticized but if used properly, as a guide for management action, they can be extremely powerful.

In 2014 Knauf Insulation launched the Local Authority Energy Index which we had developed for them. The Index uses a range of quantitative and qualitative indicators to gauge local authorities’ response to the energy agenda. With Knauf we are now working with others to expand the Index to about 100 local authorities covering about 50% of UK energy use. Anyone interested in becoming a sponsor please let me know.

Working with the Crowd on another open data initiative we developed the Energy Investment Curve which sought to identify what investments companies have made in energy efficiency (and renewables) and what their expected payback periods were as well as their experience of the project. The Crowd, having raised money in a very successful (and highly appropriate) crowd funding campaign, are now developing this tool further. I can see it being developed to record actual payback periods and integrated into initiatives such as the Knauf Local Authority Index.

The Local Authority Energy Index and the Curve were featured in these blogs:

Launching the Local Authority Energy Index

Launching the Energy Investment Curve

Community Energy

One of the major trends of the last few years has been the growing trend in community energy in many forms. I have written about this several times and have supported the idea of local authorities forming municipal energy services companies, several of which have now been formed. It is important that we move community energy beyond a few subsidized small-scale wind or solar projects and re-connect energy supply with energy demand at a local level. Like other community led projects, as well as the physical and economic benefits that can be created, the benefits of real community involvement can be huge, bringing both greater understanding of the issues and an enhanced sense of involvement to the community – something that is lacking in much of modern life. The following blogs considered community energy.

Ask Not What Your Country Can Do For You

Power to the People – the Rise of the CESCo

ESCOs, EPC and energy efficiency financing

Most of my efforts of the last few years have been in the area of energy efficiency financing which naturally includes ESCOs, Energy Performance Contracts (EPCs) and other forms of shared savings contracts. I am on record as saying we need to ditch the term “ESCO” and that EPCs are not the answer to everything that some people seem to think they are, particularly some new entrants to the energy efficiency arena. This is a deliberately controversial statement and of course many EPCs are beneficial. I do think the energy efficiency industry has historically been very poor at understanding it’s markets and what the decision drivers really are. There has been, and continues to be, a belief that the fact that an energy efficiency project has a two or three year payback should automatically make it a “no brainer” whereas there may be many other non-energy considerations in an investment decision. This has been a recurring theme and one which I am sure I will return to in future.

Isn’t It Time to Ditch the Term ESCo?

A Road Map for Energy Efficiency Financing… And Free Negawatts on Offer

ESCO Obsessions

The history and future of the energy industry

The one certainty is that the future will be different to the past but having said that we can always learn from the past. Anyone with an interest in energy should read as much as possible on the history of the industry in all its forms including fossil fuels, electricity, nuclear and renewables. One of the best books I read in the last few years is “Children of Light: How Electrification Changed Britain Forever”, a history of the UK electricity industry. I highly recommend it.

Children of Light – book review

Another great read, particularly for anyone who leans to the idea that nuclear power is the answer, is “Going Critical”, Walt Patterson’s history of the UK nuclear industry. Unfortunately we don’t seem to be learning much from that particular bit of history.

Over the last few years there has been much discussion of the effects of renewables and efficiency on the future of utilities. A Citigroup report titled “Energy Darwinism” said that half of the addressable market for utilities could disappear as a result of distributed solar and efficiency – something that should be worrying the CEOs of any utility. We have recently seen E.On restructure dramatically and it is clear that restructuring utilities will be a growth industry for advisers for many years to come. The following blog looked at the future of energy companies.

Utilities: Dinosaurs Looking up as the Asteroid Impacts?

Thank you to all my readers over the last two and a half years. Expect more exploration of these themes and a few other personal diversions in the future. Please subscribe to updates from onlyelevenpercent.com and follow me on twitter @DrSteveFawkes

To mark my 100th blog I thought I would do a retrospective and summarise some old material – particularly for newer readers who haven’t been following onlyelevenpercent.com since the beginning. This is actually blog number 103 since I started blogging in February 2013.

Looking back over the last two and half years there have been a number of recurring themes, interspersed with a few personal diversions such as celebrating the 45th anniversary of Apollo 11 and the attractions of Formula 1.

Energy efficiency is working – but we need to accelerate it

One of my big themes is that energy efficiency is working and we have successfully (at least in mature economies) decoupled energy use from growth of GDP. Despite the evidence this does not seem to be generally recognized and we still often hear the refrain “energy use is rising inexorably” or something like that. The fact is that it is not increasing in mature economies – but of course it is still rising in developing countries – once income per head reaches about $1,000 per year energy use ticks up sharply as more and more people buy more energy using stuff from light bulbs to cars. Decoupling of GDP and energy use is good (even great) news – although I think we achieved it without really trying through general technological improvement and some regulation. Now, the realities of the global energy situation mean we should make a more conscious effort to accelerate that reduction in energy intensity to achieve all the economic, environmental and security benefits that would come from having a larger economy with less energy use. If we achieved decoupling without really trying just imagine what we could achieve if we really try and implement tighter performance regulations and work to make energy efficiency just as investable as energy supply options. We know the economic potential is still huge.

Blogs that explored this theme include:

Asking the right questions

Surprise! You are living in a low energy future… (almost)

Consumers see the light – more evidence that energy efficiency is happening 

The energy efficiency revolution

Conscious uncoupling? 

Non-energy benefits & selling energy efficiency better

One of the major changes in the energy efficiency scene over the last few years has been the increasing recognition of the importance of, and real value of, non-energy benefits (NEBs) or co-benefits. Great work by the IEA and RAP in the US, as well as others such as Greg Kats have highlighted the real value of the NEBs. I now say that every-time we mention energy efficiency we should talk about the NEBs. Most of them such as greater productivity, increased sales in the commercial world, or improved health and well-being and economic development in the public sector, are always going to be better motivators for decision makers to take real concerted action than just energy savings, which I realized after 30 years working in the field is just really boring to most people (see my presentation launching the energy efficiency cool wall). NEBs were featured in these blogs:

How do we make energy efficiency stickier? 

The layer cake of energy efficiency 

The Association of Decentralised Energy (ADE) in the UK also did a great piece of work on highlighting both the success of energy efficiency and the value of non-energy benefits which I contributed to. The ADE work was described here:

Shining a light on Invisible Energy

Energy security

The issue of energy security suddenly came back on everyone’s radar with Russia’s actions in the Crimea and the Ukraine, as well as their increased military spending and aggression – for example flying close to UK (and that of other countries) airspace without turning on their transponders. The combination of the Russian factor and the deteriorating situation in the Middle East with the rise of the so-called Islamic State has made me more worried about energy security, and our increasing dependence on imports, than ever before. UK energy imports continue to rise and the EU imports c.€400 billion of energy a year, much of it from Russia. Even if there was no potential military threat, the growing domestic oil demand in oil producing countries, most notably Saudi Arabia, suggests that a future in which their oil exports are severely constrained is getting closer.

In all the discussion of the threat of being dependent on Russian gas supplies there was little or no mention of Russian coal which supplied 45% of UK steam coal and therefore generated 16% of our electricity supplies (admittedly an improvement from 2012). We really should look at all the factors – not just the headlines about gas. As well as coal imports the UK became a net importer of petroleum products for the first time in 2013.

The reality is that dependence on any other country or region for energy supplies seriously reduces the dependent country’s degrees of freedom in response to any geopolitical situation. Independence of energy supplies gives true independence of action – which we clearly don’t have at the moment. On top of those concerns it cannot make sense to export about €1 billion a day out of Europe and for the US to spend $0.75 billion per day keeping the US Navy in the Gulf. In addition to security concerns, in a world where we increasingly pay attention to where and how goods are made – sourcing and supply chains – surely we should be asking the same questions about our basic fuel supplies.

An energy security story that didn’t get much attention in Europe was the Metcalf sniper attack on an electrical sub-station near San Jose, California. The perpetrators of this “sophisticated” attack by a team of snipers, which damaged 17 transformers and resulted in $15 million of repair work, have still not been apprehended. However, as a result security on the electrical infrastructure is being upgraded across the US (and one would hope the UK and Europe).

I am interested in how language shapes our thoughts and actions, at both an individual and corporate or national level. We always talk about energy security but as we know, no-one actually wants to buy energy they want the services that come from the use of energy, whether it be warmth, coolth, motive power, light or sound. In talking about energy security all the time we remain focused on the physical security of the flows of energy commodities. We should be talking about the security of energy services and when you do that it focuses the attention more on where the services are needed (close to home) and on improving energy efficiency. Retrofitting just the Soviet era housing in Central & Eastern Europe would significantly reduce Europe’s import dependence – perhaps we should put it on the defense budget?

The following blogs looked at energy security issues.

Energy Security for the UK and and Europe

More on US energy security

Don’t mention energy security again

Making a real market for energy efficiency

One of the problems with energy efficiency is that somehow it is regarded as “special” – and at one level it is because of the fundamental nature of energy. However the view that energy efficiency is something that can only be regulated or implemented through some kind of government programme or subsidized utility programme (still prevalent in Europe and even the US) is a hangover from the 1970s. Energy efficiency is a resource for meeting demands for energy services, like any other energy resource whether it be coal, oil, gas, nuclear or renewables. In fact, it is the resource that has provided more energy services than any other over the last forty years – this is still not widely recognized by policy makers and analysts.

The more we can create a real market in which energy efficiency actually competes with energy supply the more efficiency will be purchased – it really is cheaper, quicker and cleaner. In energy supply we have standardized ways of developing projects, an ecosystem of developers, constructors and operators of projects and multiple sources of finance. We don’t see that in energy efficiency but rather the idea that government, either directly or indirectly through utility programmes, should organize large-scale, top-down programmes to implement energy efficiency projects. This always results in higher costs and bureaucracy, however much energy efficiency is improved. We need to get away from this 1970s, statist thinking and move towards creating a true market in which efficiency. The Investor Confidence Project which I am involved in seeks to make efficiency a more investable asset class. The following blogs touched on this theme.

Making a market for energy efficiency

Moving energy efficiency from a public good to a market commodity

Thank you to all my readers over the last two and a half years. Part 2 of the retrospective will follow next time. Please subscribe to updates from onlyelevenpercent.com and follow me on Twitter @DrSteveFawkes

As regular readers will know I have a great interest in space exploration but today I am writing about another passion that many people may think doesn’t fit with my commitment to energy efficiency and some may not approve of – Formula 1.

Formula 1 is fascinating for a number of reasons. First of all it is still a sporting competition in which you are reminded that you never know what is going to happen next in life. Despite predictions that the new rules in 2014 would remove excitement the opposite was true and the Lewis Hamilton versus Nico Rosberg story had it all, excitement, rivalry and skullduggery   Secondly F1 is based on cutting edge, innovative technology (more of which later) and demonstrates what we can do when we try hard. Like space exploration, it demands the highest standards and attention to detail in everything from design and construction through to the all important execution from the whole team, not just the driver. And of course as we were reminded of in October 2014 with the Jules Bianchi crash there is still, despite great improvements in safety, the ever-present element of danger. Anyway I am an avowed F1 fan and a big fan of the 2014 World Drivers’ Champion Lewis Hamilton who is an incredibly talented driver and exhibited great skill and fortitude in coming from behind many times during the 2014 season.

What are the links between Formula 1 and energy efficiency?

It may be surprising to some but there are some links between Formula 1 and energy efficiency. First of all in 2014 the sport, driven by the large car manufacturers, adopted strict fuel efficiency requirements – a reduction of fuel use of 35% over the previous V8 engines, a maximum fuel load of 100kg and a maximum fuel flow rate of 100 kg/hour. The resulting hybrid power units – they can no longer be called engines – combine 1.6 litre V6 turbo-charged internal combustion engines (ICE), two Energy Recovery Systems (ERS) and an Energy Storage (ES) unit i.e. a battery. The ERS consists of a Motor Generator Unit-Kinetic (MGU-K) which harvests energy that would normally be wasted in braking and a Motor Generator Unit-Heat (MGU-H) which collects energy from the exhaust. The ICE produces 600 hp (485 kW) and the ERS can produce an additional 150 hp (112 kW), giving a total output similar to the old V8 engines.  The integration of the ICE, the ERS and ES is a complex task that can affect strategy. Various other rule changes reduced the all important down force from the car’s aerodynamics and banned actively using the exhaust to improve aerodynamics, making the cars harder to drive.

The new power units brought with them a highly controversial change in the noise levels and tone of F1 cars at full throttle, instead of the piercing high pitch scream the new sound has been described as like a sewing machine (probably not the best description as the noise level is still 138 dB) – judge for yourself here. The positive view is that spectators can now hear other sounds. At the end of the day all noise, and heat, from any process represents energy being wasted.

The Mercedes team and the W05 Hybrid car (both the car and engine were designed and manufactured in the UK) dominated the Championship in 2014 and a major factor in their success seems to have been the use of integrated design principles. I have written before about the principles of integrated design and the significant advantages that true integrated design can bring in terms of energy and material efficiency. Examples abound – from the Empire State Building retrofit to the excellent work carried out in Ireland by the Sustainable Energy Authority of Ireland (SEAI) in applying integrated design in industry.  We need to further promote integrated design in buildings and other areas such as vehicles and there are several examples of integrated design in the 2014 Mercedes F1 car and its 2015 successor.

The compressor and the turbo of the MGU-H are packaged at opposite ends of the internal combustion with the compressor at the cooler front, and the turbo at the hotter back. This meant having a shaft, spinning at c.120,000 rpm between the two passing through the V of the engine – it is a very demanding engineering task to design and build such a shaft without flexing and apparently it took two years to perfect. One consequence of the layout was that the compressor could be larger. The resulting reduction in pipework reduces turbo-lag. Another consequence was lower cooling requirements for the inter-cooler which meant smaller radiators and hence smaller side pods – less frontal area means less drag. Other teams had rear mounted compressors which had to be smaller to fit within the overall packaging of the car.

Another example of integrated design was that even the fuel and lubricants were developed by PETRONAS in conjunction with the development of the power unit. Never before have fuel and lubricants been developed in such close co-operation with the design of the power unit.

One of the regulation changes affecting down force was a reduction in the width of the front wings – which in 2014 could only reach half away across the tyre instead of right across as in previous years. Mercedes used an innovative solution, instead of a conventional V shape for the suspension lower wishbone they used a single arm with a forked arm. This acts as a wing and generates downforce which allowed a bigger gap between the nose and the wing, which allows more airflow through the underfloor and to the rear.  In order to do this, however, meant designing one arm that could do the work of two – a clear example of integrated design.

The rapid rate of technological development in Formula 1 is illustrated by the progress made on the KERS. In 2007 the first development system weighed 107 kg and achieved an energy efficiency of 39 per cent. By 2009 the weight had been brought down to 25.3 kg and the efficiency increased to 70 per cent. By 2012 the weight was less than 24 kg and the efficiency up to 80 per cent. The technological advances of Formula 1 do impact on ordinary vehicles and the MGU-H technology may yet appear in road cars, helping to further improve fuel efficiency.

Another link between Formula 1 and energy efficiency is the importance of large amounts of data, and real time data collection. Modern F1 cars have more than 150 sensors on-board that are feeding information back to the garage and the technical team at headquarters in real time. The telemetry is used to optimize strategy, run simulations and provide feedback to the driver. It is also used to help optimize the car’s on-going development programme. The increasing availability of real time data from buildings allows us to manage energy more effectively as well as model their performance and design better buildings.

The data collection feeds into an enormous effort to understand the interaction of numerous variables including; those which can be influenced by the design and the set-up of the car e.g. down force, brake balance etc; external physical factors such as track conditions – temperature and surface type – wind speed and direction, the effects of following other cars (which disrupts the air flow); and human factors – how the car is driven and how fast pit stops are for example. In building and industrial process energy use we are dealing with a similar interaction of design/set-up, external factors and human factors and just beginning to have the data and the computing power to create a better understanding of how to optimize energy use in real-time.

At the end of the day we are all utterly dependent on engineering and Formula 1 is an example of engineering at its best. We need to celebrate great engineering more.

I mentioned the high performance and quality standards of F1 at the beginning. The constant striving for improvement and the highest standards required from all team members is an example all organizations should learn from, whether they are involved in energy efficiency or not. All too often in many areas of life and business we put up with sloppy performance (I may return to this subject in future posts – the sloppy performance of banks is particularly driving me crazy at the moment). We need more absolute, “unreasonable” insistence on high standards in all areas of business from the board room down to the shop floor.

To sum up, Formula 1 – like it not – is an expression of much of what makes us human, our basic competitiveness which is a positive force (but of course can turn negative), our incredible technological ingenuity, the power of team-work and the importance of demanding high standards. The 2015 F1 season has started well for Lewis Hamilton and Mercedes, although Ferrari seem to have narrowed the performance gap and remain a real threat for the rest of the year, as does Lewis Hamilton’s team mate Nico Rosberg. I look forward to watching the rest of the season and particularly seeing my first-ever live Formula 1 race, the Monaco Grand Prix at the end of May.

I have written before about ESCO (Energy Service Company) obsessions (read here) and how the Energy Performance Contract (EPC) may be part of the problem and not the catch-all solution that some people seem to think it is.

At a recent meeting organized by EASME (the Executive Agency for Small and Medium Enterprises of the European Commission) on the topic of energy efficiency financing, I was reminded once again about the difficulties of communication, both in general and specifically on the subject of EPCs and ESCOs. At the meeting there were representatives from several projects receiving both EC and European Investment Bank support, and many of these are involved in EPCs in some way, either in buildings or street lighting. It seems as if there are many different interpretations of EPC across Europe (and the rest of the world).

Energy Performance Contracts

Personally I tend to use EPC to mean the classical North American model which developed in the 1980s and was successfully exported around the world by USAID funded trade missions in the 1990s. In this the contractor (normally called an ESCO but we will come onto that term) provides a guarantee of energy savings. EPCs are most often talked about, and most often implemented, using external financing and in the US most of the market (80% plus) is public sector and is financed by municipal bonds or federal funds. We should not forget of course that the client can fund an EPC themselves – the best example being the Empire State Building retrofit in which the energy efficiency components were carried out under an EPC but financed by the owners of the building. To my mind the classical EPC has a number of problems including the fact that the contractor is motivated to maximize capex, the contract is complex and it is often a black box to the customer.

ESCOs

The term ESCO is also a minefield of confusion. I am on record as saying we should abolish the term. It is generally taken to mean a developer of energy efficiency projects which provides some form of guarantee of their performance. It is also often used to denote a company that both develops projects and provides, or more likely facilitates, financing for the projects from a third party.

We need to be more precise in our language – in my book “Energy Efficiency” I argued for distinguishing between the concept of shared saving, the entity and the contract form.

The concept – shared savings

The concept of shared savings is straightforward. It is what it says on the tin. Financial savings resulting from some form of energy efficiency improvement are shared over a period of time between the host and the party responsible for producing the savings. The energy efficiency improvement itself could be an investment in technology such as high efficiency lighting, new boilers and controls or a behavioural programme with no investment (less common). However, the implementation of this simple concept is fraught with difficulties in practice and can be effected by a range of different business models, contract forms and financial arrangements. This has led to the confusion around the ESCO and EPC/ESPC concept amongst policy makers, suppliers and customers.

The entity

The entity developing the projects is called a developer in any other field, and could be an ESCO, a Facilities Management (FM) company, a construction company, a consultant or a community group. The term ESCO is usually reserved for companies offering some kind of performance guarantee.

The contract form

The contract form can be one of several variants such as EPC, Energy Savings Performance Contract (ESPC), Managed Energy Services Agreement (MESA), Efficiency Services Agreement (ESA), or some other variant. All these types of contract encapsulate some form of energy services. In addition there is the form traditionally used in France and other parts of Europe, called ‘chauffage’ which involves the sale of heat at an all-in price which covers the capital costs of the boiler and distribution system, operations and maintenance costs, and fuel costs. Chauffage contracts, in their original form at least, do not inherently produce energy savings and in fact during the length of the contract the supplier is actually incentivized to sell the customer more heat, not less. It is true of course that the upfront installation of new heat generating plant, either a boiler or Combined Heat and Power (CHP), can result in an energy saving when it replaces an old inefficient boiler plant and distribution system. In this case the contracts can be said to be shared savings (in some cases) because the total outgoings including repayment of the capital costs during the contract were less than the total outgoings on energy and maintenance prior to the investment. In some cases however, total costs go up in order to pay for the capital expenditure, but these costs are transferred to operational expenditure. Much of the EPC business being done in the public sector such as the UK’s National Health Service involve this kind of infrastructure upgrade and catching up with maintenance backlogs.

Large providers of chauffage contracts in their home markets such as EDF and GDF-Suez in France traditionally used their large cash flows and balance sheets to finance projects, as well as start or acquire operations in new markets, although this is becoming more difficult for them. In the UK these operators entered the energy service market in the 1980s and dominated the market for many years, predominantly selling outsourced operations and maintenance of boiler houses and making savings mainly through automation and demanning. In the 1980s in the UK uniquely, this became known as Contract Energy Management (CEM).

As well as chauffage, selling heat, some energy service companies also expanded into the provision of multiple utilities including cooling, compressed air, treated water, effluent treatment and industrial gases. A leading example of this contract form is the series of Utility Alliance Agreements (UUAs) signed between Diageo and RWE Solutions UK (latter RWE npower) between 2002 and 2003 which were 15 year multi-utility agreements. Like some chauffage contracts, these multi-utility contracts produced large upfront energy and maintenance savings, which were split between the client and the contractor, with the contractor recovering all costs including capital expenditure over the lifetime of the contract. These UAAs are yet another contractual variation of the shared savings concept.

Increased confidence in performance will reduce the need for EPCs

The Investor Confidence Project is working to improve confidence in the performance of energy efficiency by standardizing the development process and documentation. As confidence in the performance of energy efficiency increases, the need for an ESCO to offer a guarantee is reduced – there is no point in a client paying for a guarantee – and they always pay for the guarantee somewhere – if they have confidence in the outcome. The advent of energy efficiency project insurance as offered by companies like Huber Dixon also reduces the need for performance guarantees and the Energy Performance Contract. In time we should move to a more “normal” market where developers develop projects, insurance companies underwrite them, delivery companies implement them and finance companies finance them – just like in the rest of the energy or construction sector.

Anyway in summary we all need to be careful when discussing EPCs and ESCOs. We always need to “mind our language” as it shapes our thinking. ¹ Also, never forget communication is hard – in any language.

As an aside on ESCOs we should not forget of course that as in many things the UK was the pioneer in sharing energy services – although not necessarily the best at exploiting the early lead. Boulton and Watt, using the more efficient Watt steam engine, made a lot of money from the 1770s by replacing the inefficient engines in tin mines and taking one third of the savings in fuel over a period of 25 years. For that they truly deserve their place on the £50 note. Although the “no cure, no pay” option offered by Boulton and Watt was successful even they encountered problems we would recognize today – specifically those of Measurement and Verification and baselining.

“There was some local resistance in Cornwall, where the new engines were certain to save costs in pumping out water from the tin mines, ….., the ‘no cure, no pay’ terms offered by Boulton and Watt – based on one third of the savings in fuel over a period of twenty-five years – saved the day.”

Thomas Crump, The Age of Steam, p58, London, Constable and Robinson, 2007

Keynote address at DENEFF EFFIN event 25th March 2015.

On 25th March I made the keynote address at DENEFF’s (the German energy efficiency trade association) event launching the report on energy efficiency financing resulting from their EFFIN project. Here are the notes of my presentation – the slides can be found here.

Introduction and status report

Good Afternoon everybody.

I am very pleased and honoured to be invited to speak to you all at this critical time for energy efficiency and energy efficiency financing in Germany and in fact across Europe and the rest of the world.

Today I want to give a wide ranging view of where we are on developing the energy efficiency financing market – globally -and my own views on what we need to do to grow that market to the levels that we know are needed to achieve our medium term energy goals around energy security and the environment.

As I will be speaking about the Investor Confidence Project Europe, which is supported by a €1.9m grant from the Horizon 2020 programme I am obliged to show this disclaimer slide – I will take it that you have all read it.

I want to start with a status report on energy efficiency financing:

– Those of us who have been working on energy efficiency for a long time have known that the potential for energy efficiency is huge. It is a massive untapped energy resource. Those of us on the inside have known that for decades but it is true to say that the scale of the potential has now been generally recognized. That is a step forward.
– The co-benefits of energy efficiency – and by that I mean all the other benefits that come with energy efficiency other than just energy and cost savings – are now increasingly recognized. There was some great work by the IEA on multiple or co-benefits last year which I highly recommend. We still have a way to go on recognizing and valuing co-benefits but things are improving in that respect.
– We have growing interest in investing in energy efficiency from institutional investors. This is good news.
– However, despite these positive developments the growth of the energy efficiency financing market has been slow. Not just in Europe, but in North America, Asia and everywhere else that I go I encounter the same sense of frustration that things are not happening as fast as they need to.

As one of the bankers in the USA trying to do stuff in this market said: “the trouble with this energy efficiency business is that the ratio of conferences to deals is too high”.

If we think for a minute about what a healthy European energy efficiency market would look like – if everything was rosy – it would have the following characteristics:

– strong demand from building owners and investors for energy efficiency retrofits
– a highly skilled and accredited workforce
– a mix of financing products at different rates
– standardized tools for tracking and quantifying savings
– and finally a secondary market that the primary investor can sell onto – ultimately the debt capital markets.

Right now we don’t have those characteristics – and in fact I don’t think we have them in any market anywhere in the world.

The jigsaw of energy efficiency financing

Now, this is not one of my holiday photos that slipped into my presentation. Last year I went to Neuschwanstein Castle for the first time ever and I really enjoyed it – although on the day I visited there was so much cloud that we could not see the Castle from the ground.

My mother who is 82 likes doing jigsaws and so when I was at Neuschwanstein I bought her a jigsaw puzzle and this is as far as she has got (up until last Sunday at least).

Looking at the energy efficiency market makes me think of a jigsaw and it has at least six pieces – it is just as well it does not have 1,000 pieces:

– product offerings from the energy efficiency industry
– standardization
– the development gap
– supply side capacity building
– demand side capacity building
– and capacity building in the financial institutions.

I want to say something about each of these but I will start with standardization because that is the area that the Investor Confidence Project is active in.

Now we all know that standardization is essential if you are making cars in a factory or washing machines or in fact any other manufactured product.

Of course people forget that banks are also factories – banks and other financial institutions cannot operate at scale without standardization. Every financial market, whether it be mortgages, car loans or credit cards, needs standardization.

It is not just me saying this. I know that some of you are very familiar with the EEFIG report and indeed some of you contributed to it.

The EEFIG report concluded that standardization was a key factor affecting both the demand and supply of energy efficiency financing.

The Joint Research Centre of the Commission also came to similar conclusions and also highlighted:

– high transaction costs
– the difficulty of predicting savings
– the lack of standardization.

Michael Eckhart, the head of Finance & Sustainability at Citi said it very well when he said:

– “energy efficiency projects do not yet meet the requirements of capital markets”
– “no two projects or contracts are alike”
– “Say you have 1,000 energy efficiency projects, Standard & Poor’s would have to read 1,000 documents to assess the risk. Fees won’t pay for that level of review.”

And finally the IEA concluded that standardization was important and that the Investor Confidence Project could “facilitate a global market for financing by institutional markets that look to rely on standardized products”.

Energy efficiency financing compared to energy financing

To sum up let’s look at the whole area of energy financing – and I mean energy financing not just energy efficiency. This is what I see.

For oil and gas projects, if you happen to own an oil or gas field, the ways of developing and documenting the project are standardized. You have to hire a Competent Person who will be a geologist and who will follow strict guidelines set down by groups like the Society of Petroleum Engineers and if you have an oil and gas company floated on a stock exchange then the use of certain standards is required by the exchange itself. Oil and gas financing is entirely mainstream. There is a large volume of money available for oil and gas projects from a wide range of sources – although of course this may reduce with the divestment movement.

Now let’s look at renewables, solar and wind. Twenty five years ago when I did some early wind farm projects in the UK the same was not true of renewables, we made it up as we went along and there was only one bank in London we could go to – and they pretty much made it up as they went along. Nowadays of course funding renewables is as standardized, and almost as mainstream as oil and gas and you can go to multiple sources for money.

However, when we look at energy efficiency projects, here represented by the Empire State Building retrofit project, we see something completely different. Processes and documentation are NOT standardized, it is NOT mainstream, there is only a small amount of lending/investing going on and there are only a few sources you can go to.

The Investor Confidence Project

So let’s consider the Investor Confidence Project which is a direct response to the lack of standardization. I want to give you a flavor of the Investor Confidence Project, what it is and what has been achieved in the US, and then talk about the Investor Confidence Project Europe project. Our German representative, Dr. Frederic Brodach of Plus Ultra, is here today and he will be able to talk to you about the project in German and give you more details today or in future.

As we have seen there is currently a lack of standardization on the way that energy efficiency projects are developed and documented. Here we see three different projects that use three different routes through what we call the alphabet soup of different standards and practices.

The lack of standardization imposes several negative things:

– greater performance risk
– higher transaction costs
– financial institutions cannot build capacity around ad hoc processes even if they do want to invest in this area
– financial institutions cannot aggregate projects, aggregation is essential because we know that energy efficiency projects are small compared to the needs of the institutional investors. To get to the debt capital markets and access cheap money we need to aggregate projects.

The Investor Confidence Project Energy Performance Protocols organize the process into the different stages of developing and implementing a project and for each stage define the standard or combination of standards and best practices that should be used. It is not about writing new standards but rather about standardizing the process – organizing the alphabet soup to give more uniformity.

The Protocols are developed working with financiers, building owners, project developers, government agencies and utilities. It is an open source project co-created by the contributers.

In the US six Protocols have been launched and are now being applied in real projects and programmes. They cover different sizes and types of projects in commercial and residential buildings.

As well as Protocols the Investor Confidence Project is also developing accreditation for Project Developers, and they now the first eight accredited developers. There is also a programme of accrediting software, that is project development software that automatically follows the Protocols. In the US they have six accredited software providers and I can tell you that we already have two European software providers working on software that will be ICP Europe compliant. Finally there is a Quality Assurance programe and very soon the ICP will announce its first QA providers in the US.

All of these components come together to make a project “Investor Ready Energy EfficiencyTM”. The final output is a badge, a seal of approval. When we talk to investors, including some of Europe’s largest real estate investors and lenders they say that is what they want – a stamp that gives them confidence that a set process has been followed every time.

So let’s look at the Investor Confidence Project Europe. In our project, which is supported by Horizon 2020, we are focused on getting early adoption of European Protocols in five countries: Germany, the UK, Portugal, Austria and Bulgaria. We will go beyond those countries – and already are – but they are our immediate priorities under the grant.

We have an Investor Confidence Project Europe Steering Group which provides direction and oversight and includes some of Europe’s largest energy and efficiency companies, major lenders and investors, important trade associations representing the energy efficiency industry, and government agencies.

We also have a network of nearly 50 allies already. Please sign up on the website – www.eeperformance.org/europe

It does not cost you anything and gets you in the conversation.

Note these two red boxes – this is an example of how the Investor Confidence Project has already helped put projects in touch with an investor. SEA, an Italian ESCO, was looking for an investor in residential projects and we put them in touch with Joule Assets, a US investor now active in Europe.

The Investor Confidence Project Europe is in three phases:

– creating the tools
o protocols
o accreditation
o labels
o open data

– take the tools to market
o private investors
o public programmes
o developers
o property owners
o utilities
o associations

– be a catalyst for change by:
o inspiring action
o connecting projects to capital
o create working examples of functioning markets for energy efficiency finance

Capacity building on the demand side

Now let’s go back and look at the other parts of the jigsaw – starting with capacity building on the demand side. We have to acknowledge that lack of demand for energy efficiency retrofits is a problem that we have to address. Generally people do not wake up in the morning and say they want to buy some energy efficiency.

We also have to acknowledge something that is hard to accept for those of us who have spent our lives in energy efficiency. Energy efficiency is just boring – for most people most of the time it is extremely dull. People are not interested in energy efficiency or if they are it is only for a fleeting moment now and again. Only when we recognize that can we move forward.

One the most promising ways of making energy efficiency less boring is to talk about the layer cake of benefits that come from energy efficiency. It is always good to talk about cake – especially in Germany. Those co-benefits, or non-energy benefits, occur at different levels; in the energy supply system, in the participant or host, and in society at large. Here I am only concerned with the benefits to the host, the project owner.

These benefits include things such as; improved productivity, increased retail sales, increased quality and reduction in hours lost at work, and they are increasingly being recognized and they are just starting to be measured in a few leading edge organizations. The important thing here is that often the value of these benefits will be much larger than the value of the energy savings alone. Also they are often more likely to lead to a management decision to invest in energy efficiency. For example, when a retailer recognizes that LED lighting retrofits lead to an increase in sales (as some have done) and starts to value that benefit, you can be sure that energy efficiency rises up the management agenda. That subject will be on the board agenda, things will happen.

Capacity building on the demand side should include ISO50001 – which is great for putting in place an energy management system, the importance of valuing the co-benefits, the massive benefits that can come from true integrated design, and consideration and evaluation of outsourced energy services that bring with them external expertise and finance.

Mind the development gap

Let’s talk about the development gap. Anyone familiar with the London Underground will know – we have an expression “mind the gap” – which means don’t fall down the gap between the train and the platform. The gap I am talking about is the gap between potential projects and bankable, actionable projects. We know the potential is huge but still there is a lack of high quality bankable projects, particularly at large scale.

To overcome the development gap requires:

– vision about what is possible at the top level
– technical and financial skills – particularly around the issues of portfolio optimsiation and sub-project interactions
– finance – developing projects, especially big projects, costs money, money that is at risk
– standards – we need to develop multi-building projects all using the same standards which is where the Investor Confidence Project comes in.

We need to learn how to develop these kinds of projects, how to finance the development process and how to increase the rate of project development. In energy supply projects there are established ways of developing and financing the development process but we don’t have that for large scale energy efficiency projects. There is real potential here in cities for instance, which can bring scale quickly, but financing the development process is difficult for cities with tightly constrained budgets.

Product offerings

Let’s talk about the product offerings from the energy efficiency industry.

Let me say that Energy Performance Contracts are not the answer that some people seem to think they are. It is a model that evolved to meet the needs of a particular market segment (public sector) and originally to exploit certain sources of finance that are available in the US – Federal money or municipal bonds. The EPC model has never grown to the extent that people thought it should but when you analyze it there are good reasons including:

– debt is on the balance sheet of the host
– debt is constrained by mortgage covenants or finance structure
– the guarantee is not a credit enhancement
– transaction costs are high
– they don’t address the split incentive

In summary they may work in the public sector but they don’t work in the commercial sector. For too long the energy efficiency industry, new entrants and some policy makers have pushed EPCs as if they are the answer to everything – let me tell you that they are NOT.

Innovation is appearing around the world in the form of services agreements such as ESA, MESA and MEETS and we need more innovation like that.

Building capacity on the supply side

On the supply side we need to build capacity in different ways. The energy efficiency industry needs to learn to work with the finance industry right at the start of the project, not just at the end. As I have said we need to learn how to develop projects at scale and be innovative. Most importantly the energy efficiency needs to understand markets better and sell co-benefits. Traditionally the energy efficiency industry has been very bad at understanding the market’s real needs and motivators and has relied on the rationality theory; “it is a two year payback period project and therefore you should do it – it is a no brainer – it is low hanging fruit”. Well, as the real marketing experts know, people are not rational.

Building capacity within financial institutions

Within financial institutions we need standardization and capacity building on:

– the co-benefits – what they are and how to value them
– technologies
– contract types
– standards
– available support for development and project work such as EC or national programmes.

Assembling the jigsaw

So now we have considered each of the pieces in turn we have to put the whole jigsaw together.

By the way, you can use a laser cutter like this one to make very precise jigsaw pieces but if you don’t have all the pieces you can’t finish the jigsaw. Work on all the pieces together. I think many of the programmes around the world have focused on making one or two very precise pieces but not thought about the other pieces of the puzzle, and then they have problems deploying money.

A few words on policy

I was asked to comment on policy in this area. I am always reticent to talk about policy in other countries but I have some general views that apply everywhere. They are as follows:

– reward all the value streams i.e. all the value that is created by energy efficiency projects, not just the energy component
– design the energy market to value and pay for all the benefits
– consider benefits that cut across normal Ministry or departmental boundaries e.g. spending money on energy efficiency can save money in health budgets. In the UK we are experimenting with doctors prescribing insulation or new boilers to people who are in fuel poverty and as a result have lots of heath problems. It actually works, spending health budgets on insulation actually saves money because after the works are done, the people visit the doctor or the hospital less frequently. Institutionally this is difficult to do but policy makers need to make it happen.
– Ensure that supply-demand decisions are balanced e.g. network operator regulations. In the UK the DNOs acknowledge that in some cases investing in demand side measures like energy efficiency and demand response is more cost-effective than investing in supply side infrastructure upgrade projects such as putting in bigger cables. However, the regulations have not caught up with this and the DNOs are still only incentivized to invest in supply side assets. If we can change that it will have a large effect.
– We need to move away from top down programmes towards creating a real market for energy efficiency. For forty years governments have been carrying out a big experiment in energy efficiency based on the notion that it is somehow special and needs exhortation, public subsidies, energy company obligations or top-down bureaucratic programmes. We need to move towards creating a real market for energy efficiency and we are starting to see the tools for that appear such as Measurement & Verification, new contract forms and the Investor Confidence Project.
– Stable policies or clear policy trajectories are always good. In the UK we have had examples of policies being changed at short notice for short term political expediency. That does not work.

The future

So what about the future? This by the way is a German cigarette card from the 1920s or 1930s which shows two ladies who appear to be using Skype on an early form of iPads! Amazing. If anyone can get me an original set of those cards I would be grateful.

So back to my jigsaw. I am positive and I think we can complete assembling this jigsaw.

What would it look like when we finish the jigsaw? We talked earlier what would a healthy energy efficiency market would look like and how we don’t have that now – clearly if we do build the jigsaw we will have those things in place and there we can focus on other problems.

At that point energy efficiency financing will look just like energy supply financing – it would be:

– standardized
– mainstream
– large volume
– and be available from multiple sources.

In short there would be more deals than conferences and that is a future I would like to live in.

Thank you very much. I look forward to talking to you further and working with you in future on the Investor Confidence Project Europe and putting together the other parts of the jigsaw.

Dr. Steven Fawkes
DENEFF event to launch the EFFIN project report, Berlin, 25th March 2015

Disclaimer

The Investor Confidence Project Europe has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 649836. The sole responsibility for the content of this presentation lies with the authors. It does not necessarily reflect the opinion of the European Union. Neither the EASME nor the European Commission are responsible for any use that may be made of the information contained therein.