On the 14^th September I was very pleased to be able to present to the Association of Environment Conscious Building (AECB) Convention. It was a great event, based in a Passive House standard community centre and it was excellent to meet some old friends, as well as make new interesting contacts.  It was also an excellent opportunity to visit two amazing passive houses.

The following is based on my slides and presentation:

Thank you for the opportunity to speak today. I have a long standing interest in low energy housing and in fact helped build some low energy self-build houses in the 1980s including a house at Energy World in Milton Keynes.  I am here to talk today about how to shift capital away from energy supply to energy efficiency, and this is the topic I spend much of my time working on. I am going to try to paint the big picture, tell you about some things that are going on in this area, and hopefully leave you with some grounds for optimism.

I always start with this picture of the £50 and say “there is big money in energy efficiency”. I really hope they don’t withdraw the £50 note because I think it is the only bank note in the world that celebrates energy efficiency.  If you travel around the world you see bank notes that celebrate oil and gas and even electricity but this one of course shows Matthew Boulton and James Watt.  Contrary to what you may have learnt in school James Watt did not invent the steam engine but he did invent a more efficient steam engine, and Matthew Boulton was the entrepreneur who teamed up with him and turned that invention into a successful business.  They did that by offering shared savings energy contracts, taking a share of the savings in coal that the new engine produced when pumping water out of mines.  This is perhaps another example of a UK innovation that we have never really exploited properly, and even 250 years after this we still don’t really know how to exploit the massive potential for economic, cost-effective energy efficiency which is all around us.

So just how big is this potential?  Over the decades there have been many, many studies of potential across many, many geographies and sectors.  All of them show that there is massive potential that is not being exploited.  Just to give one example, in 2012 the IEA published several scenarios including its Efficient Worlds Scenario. This estimated the potential for energy efficiency as 40% in buildings, 23% in industry and 21% in transport.  Implementing this scenario would halve the rate of growth of energy demand and result in emissions peaking in 2020.  Significantly the economic impact would be $18 trillion, which is more than the combined GDP of the US, Canada, Mexico and Chile in 2011.  That is a lot of money.

If we are going to shift investment from energy supply to energy efficiency we need to consider the starting point so that we can measure progress.  It is not easy to measure the global investment into energy efficiency but the IEA now does this on an annual basis. The IEA estimate that total global investment into energy efficiency in 2016 was $231 billion and the good news is that this is increasing.  That is the good news.  The bad news is that the IEA and IRENA estimate that to achieve their “66% 2°C” scenario would need to ramp up to almost $3 trillion a year in the 2040s, more than a factor of ten higher than the current level.

It is worth putting these big numbers into context.  Total investment into the energy system was estimated at $1.8 trillion in 2017. A few highlights:

• investment in coal was $79 billion which was 13% down – and nothing Donald Trump does will stop that going down
• investment in electrical networks was $303 billion and this is expected to grow in the next few years as it includes storage
• investment in fossil fuel generation was $132 billion, down 9%
• investment in renewable generation was $298 billion which was down 7%. It is important to note, however, that the capacity installed in the year actually went up due to the falling costs of wind and solar generation.
• Oil and gas investment went up – probably in line with the oil price and because of the growth of investment in fracking. I will say, however, that the other day I was talking to a very experienced oil and gas investment banker and he said that it was now really difficult to raise money for new oil exploration and production companies in London, which traditionally has been one of the global centres for oil and gas funding.

Next it is important to be very clear that there is not a shortage of capital. Traditional energy efficiency people have tended to say “there is no money for our projects” but there is no absolute shortage of capital.  Fitch Ratings reported that there is approximately $9 trillion of global government debt that trades at negative interest rates, i.e. the investors are paying to hold that debt. There is a wall of capital looking for good investments and an increasing share of that capital wants to invest in green projects.  As there is an over-supply of funds the yield a project needs to generate to attract investment has come down.

So how to tip the balance of investment more in favour of energy efficiency?  I am going to talk about two areas; changing the way we think about energy efficiency and making it more investable.

Changing the way we think about efficiency starts with thinking about it as an energy resource in exactly the same we think about other energy resources.  Wallace Everett Pratt, a famous petroleum geologist said that “where oil fields are really found is in the minds of men”.  When you think about it is true.  When Edwin Drake first drilled for oil in Pennsylvania in 1859 people thought he was mad.  The physical material was there all the time, in fact oil seeped to the surface and was collected, but sub-surface oil became realisable when someone thought it was there and assembled the technology and the resources to prove it.  It is the same in energy efficiency.  If you think about it there is an energy efficiency resource in every building, industrial plant and transport facility (except of course this passive building) but the resource is only there when you think about it, if you look at a building in a certain way you can see energy (and money) flying out through the roof, the walls, the doors and the windows.

In the oil and gas industry there is something called the Petroleum Resources Management System which sets out the different types of oil and gas resources and reserves.  This has been standardised by the industry and is the basis of fund raising. If you have a prospective resource you can raise money on the back of it, it will be high risk money because you still have to drill holes and test it and even if oil is there you still need to work out a viable, financeable way of getting the oil out to market.  We need to think about efficiency in these terms.  A potential study is like a prospective resource.  The output of an energy audit moves that resource into a contingent resource.  Then some of the projects identified will be developed and ultimately move into production, that is production of savings of negawatt hours.  Imagine if we could get the market to think about efficiency in this way.  Building owners could lease their buildings open to efficiency exploration and production companies in exactly the same way that the owner of a field in Pennsylvania or Texas may choose to lease it to an oil and gas company.  Owners of buildings could even hold auctions based on selling the right to explore the building for efficiency resources.

Energy efficiency has many barriers.  There is a whole genre of research on barriers to energy efficiency. All of that is important work but there is one fundamental problem that energy efficiency has that the books don’t mention…….it is really, really boring.  For most people, nearly everyone, it is tedious beyond belief.  People just don’t care about it.  Unless we recognise this we are kidding ourselves. So how do we overcome this?

The answer I believe is non-energy benefits.  We only really started thinking about the multiple non-energy benefits of energy efficiency a few years back. Non-energy benefits include, amongst many others:

• better comfort
• better health outcomes
• better employee productivity / reduced absenteeism
• better plant productivity
• increased asset value
• reduced need for capex in energy supply
• poverty alleviation
• improved local air quality
• and many more.

We need to consider the impact of non-energy benefits and how people make decisions.  Even in the corporate and investment world, where economics are critical, it has been found that profitability is not the main driver of investment decisions and that financial evaluation tools only play a secondary role in decision making.  The strategic nature of a project or investment carries a heavier weight than just the economics.  If an action is considered strategic there is much less consideration of the investment return.  Therefore we need to make energy efficiency more strategic.  Non-energy benefits such as comfort, productivity, increased resilience etc. are the way to do this as they are much more strategic and therefore much more interesting than simple energy cost savings.  Nowadays I always say to people developing efficiency projects, work out what is strategic to the decision maker and stress those strategic benefits, only as an addition say “by the way you will also save some energy costs”.

There is an increasing amount of work going on around the world to value these non-energy benefits including several projects funded by the European Commission.  Some are difficult to value but many have real and measurable value.  Studies by the World Green Building Council and Rocky Mountain Institute have shown the value of benefits such as a reduction in sick days, higher asset values and reduced capex and build times.

To build better business cases we need to assess the value of energy savings, as we have always done, assess the financial value of non-energy benefits, and assess the strategic effect of the proposed investment. Putting these three elements together will make better business cases and better business cases help more capital will flow.

Of course I have been talking about capital investment in organisations. Individuals choosing houses exhibit some of the same characteristics.  Evidence shows that people, and here we are talking about “ordinary” customers, not energy geeks or specialists, are sold on passive houses because they increase the overall quality of life by providing a quieter environment, better air quality, greater comfort and longevity.

Now I am going to turn to making efficiency more investable.  Energy efficiency is hard to invest in for lots of reasons including:

• there is a lack of standardisation
• the outcomes rarely measured
• there is uncertainty i.e. the risks are unknown
• projects are small compared to needs of institutional investors
• there is a lack of capacity in financial institutions and CFOs – but also in the supply chain and amongst decision makers
• traditional contracting models like Energy Performance Contracts don’t actually work well – especially in the real estate, industry and residential sectors

Several groups and analysts including the Energy Efficiency Financial Institutions Group identified that lack of standardisation in the way that energy efficiency retrofit projects are developed and documented is a barrier to investment.  Michael Eckhart of Citi, one of the world’s top “green bankers” said:

“Energy efficiency projects do not yet meet the requirements of capital markets. No two projects or contracts are alike.”

Lack of standardisation creates several problems for investors.  It:

• increases performance risk
• increases transaction costs
• makes it hard to aggregate projects – aggregation is essential because energy efficiency projects are so small compared to the “cheque size” of financial institutions
• makes it difficult for a financial institution to build capacity – if a bank wants to deploy capital into energy efficiency it is hard to build human capacity and scale without standardisation.

An important response to the lack of standardisation is the Investor Confidence Project (ICP) which has a project certification system, Investor Ready Energy Efficiency™ (IREE™), which is based on best practice, is transparent and has independent certification by quality assurance professionals.  We introduced ICP and IREE™ to Europe from the US a few years back with the assistance of the European Commission’s Horizon 2020 programme. The system is now up and running across Europe for energy efficiency projects in buildings, industry, street lighting and district energy.  Its impact has been confirmed by Munich Re HSB who offer energy efficiency performance insurance.  If you take them an IREE™ certified project they will offer a lower insurance premium and not require an independent engineering analysis (which the customer pays for), thus proving the thesis that IREE™ reduces risk and transaction costs.

I want to turning now to the role of banks and investors.  There are four reasons why financial institutions should consider deploying capital into energy efficiency:

• it is a large potential market
• it can reducing risks in two ways:
  • improving the cash flow of clients
  • avoiding financing stranded assets
• it helps Corporate Social Responsibility
• banking regulations are increasingly looking at climate risks through bodies such as the Financial Stability Board Task Force on Climate-related Financial Disclosures (FSB TCFD)

The impact of risk reduction and the banking regulations will become more significant. If as seems likely banks will need to measure and declare their climate related risks it will drive banking behaviour.  Having a mortgage portfolio dominated by high energy consuming houses will be higher risk than having a portfolio dominated by low energy houses and that could affect regulatory capital and the stress testing that you hear about nowadays.

Banks and investors are paying attention to this.  The International Investors Group on Climate Change, which represents investors with more than €21 trillion of assets under management supports energy efficiency. In Europe, as well as the work of the Energy Efficiency Financial Institutions Group we have a number of financial institutions that are leading the way. ING Real Estate, which has c.€50 billion lending to commercial real estate, has developed an app to help its borrowers assess the potential for improvement and offers higher Loan to Values for high efficiency portfolios as well as cheaper money for efficiency improvements.  They see this as a) good business and b) reducing the risk of stranded assets as the Minimum Energy Efficiency Standards in the Netherlands progressively tighten.

Another important European initiative is the European Energy Efficient Mortgages Plan which is backed by the European Mortgage Federation, the European Covered Bonds Council and Horizon 2020.  It is developing a standard energy efficiency mortgage for Europe.  This is a challenge but will enable scaling which ultimately will allow refinancing through issuing green bonds, an asset class that is much in demand by institutional investors.

Finally I want to talk about creating a level playing field and a real market for energy efficiency.   The market for energy is clear and functional, like all markets it is based on standard units, known risks, standardised contracts and liquidity.  We often talk about the market for energy efficiency but I can tell you categorically there isn’t one – there are only markets for stuff like boilers or insulation. I can call an energy broker or sit at a Bloomberg terminal and buy some energy in the energy market but I can’t buy energy efficiency. That is a major barrier.

Now, with the advent of smart meters, cloud computing and big data we are starting to see the emergence of tools and regulatory systems that can create a real market for energy efficiency. In California now, and increasingly in other states, utility regulators are introducing metered efficiency and ‘pay for performance’ models where payments are based on actual metered results and not just on the basis of installing a piece of kit. We are now working with OpenEE, the pioneer of this approach, to bring it to the UK and Europe.  We believe that it has the potential to transform the energy efficiency world by making efficiency a reliable, contractable, distributed energy resource that utilities can rely upon and easily invest in.

So, finally, looking to the future, I see that we are moving:

• from justifying energy efficiency on cost savings alone to justifying energy efficiency on the basis of its strategic non-energy benefits
• from a world where energy efficiency was considered to be “no risk” to a world where we understand the real risks of efficiency projects
• from a situation where basically efficiency is a pain to utilities to one in which it is a reliable, contractable distributed energy resource
• from a world where it is hard to invest in energy efficiency to one where it is easy to invest in
• from a global annual investment in energy efficiency of c.$250 billion to more than $1 trillion a year.

Thank you.

On the 13^th September I was asked to give some thoughts on the energy transition to a gathering at Opus Energy.  Here is an edited version of my remarks.

Thank you to Opus for giving me the opportunity to give some of my views on the energy transition. I started work in energy efficiency in 1980 and although we didn’t use the term back then I have been actively involved in the energy transition ever since.  We say energy transition these days as short-hand to cover the shift away from centralised, primarily fossil fuel energy sources to more decentralised, cleaner and more flexible energy sources, and all the other things associated with that.  We should always remember that there have been other energy transitions; from wood & biomass to coal, from coal to oil, from oil to gas.  Those transitions were always driven fundamentally by economics but in the early stages of this transition the driver was perhaps more environmental in nature. Now however we have reached the point where economics are taking over, and that is accelerating the rate of change.

Energy transitions take place over long timescales, fifty to a hundred years. An example of that is electrification.  A good pub quiz question is where was the world’s first public electricity system? Perhaps surprisingly it was in Godalming in 1881 and it used hydro power from the river Wey driving a Siemens alternator to provide lighting.  That was 50 years after Faraday, in the Royal Institution on Albermarle St, carried out his experiments on electricity. (If you have never been go to the Royal Institution and see Faraday’s actual lab).  Fifty years from scientific breakthrough to first commercial innovation is not good for VC funds but in the energy sector it is not unusual.  As an aside, interestingly enough the Godalming station shut down in 1894 because it couldn’t compete with gas lighting – I am sure at that point many people wrote off electricity as a wacky, expensive, unreliable, alternative energy source that would never compete.

As fifty years is too long to think about, and as you probably saw on the news it is the tenth anniversary of the collapse of Lehmans it is worth reminding ourselves what has happened in the last ten years of the UK’s energy transition.  Ten years ago in the UK there were no solar feed-in tariffs and 22 MW of solar PV, feed-in tariffs were introduced in 2010, and now we have 12.8 GW of solar generating capacity – almost a 90% CAGR.  That is an amazing change in the context of energy transitions.  Ten years ago the total renewable capacity was about 2.4 GW and now it is 18.3 GW.  Ten years ago there was no storage industry other than pumped storage, now people are talking about a possible 8 to 12 GW in the next few years.  Ten years ago the Tesla Roadster had just come out and other than that your choice of EV was limited to a G-Wiz which quite frankly wasn’t much of a choice.

If we have to date the start of this energy transition in the UK it would be the introduction of the Non-Fossil Fuel Obligation in 1990 which led to the first wave of wind farms being installed. Back then you could have held a meeting of the entire UK wind industry in the back room of a pub.  Since then we have gone from a 4 MW installation at Delabole to 8.5 GW of capacity and wind supplying c.15%+ of electricity with the latest off-shore wind farm having 659 MW capacity alone. We have seen costs of wind and solar fall dramatically, even in off-shore wind where they have fallen further and faster than many of us believed possible even five years ago.  The output of renewables has trebled since 2010 and fossil fuel use for generation has fallen by 44%.  In 1990 coal was still generating 72% of UK electricity and now we celebrate days without coal.

One of the constant factors of energy transitions is that the establishment and the energy sector itself consistently gets it wrong – in the same year as the Godalming electricity system was installed, 1881, the Chief Engineer of the Post Office, one of the top technical brains in the country, said “Electric lighting is a completely idiotic idea”. I suspect he had shares in some coal gas lighting company – they were an important element of the stock exchange of the day and shares fell sharply once electricity started to take market share.

When in 1911, Winston Churchill, as First Lord of the Admiralty, began to switch the navy’s battleships from coal to oil power, he did so in the face of withering scepticism from the establishment. One of his predecessors had stated that “the substitution of oil for coal is impossible, because oil does not exist in this world in sufficient quantities”.  Government and energy industry forecasts in the UK and globally have been proven to be unreliable, in fact worse than unreliable, they have been terrible.

Of course talking about the government making mistakes inevitably leads us to nuclear power.  Political power and electrical power have always been closely linked and there is no closer link than in nuclear power.  Politicians are like magpies, they are drawn to bright shiny objects and the latest one is Small Modular Reactors, SMRs.  To anyone promoting SMRs I always quote Admiral Rickover, the pioneer of nuclear power in the US Navy who said:

“An academic reactor plant almost always has the following basic characteristics: (1) It is simple. (2) It is small. (3) It is cheap. (4) It is light. (5) It can be built very quickly. (6) It is very flexible in purpose. (7) Very little development will be required. It will use off-the-shelf components. (8) The reactor is in the study phase. It is not being built now.

On the other hand a practical reactor can be distinguished by the following characteristics: (1) It is being built now. (2) It is behind schedule. (3) It requires an immense amount of development on apparently trivial items. (4) It is very expensive. (5) It takes a long time to build because of its engineering development problems. (6) It is large. (7) It is heavy. (8) It is complicated.”

SMRs fit firmly into the category of academic reactors and are just the latest bright shiny thing that has attracted the interests of politicians but won’t deliver on the promise.  Hinckley Point fits the description of a practical reactor.

Especially given Brexit we should not forget that this is a global transition and that in emerging economies the problems and opportunities are on a scale that dwarf the UK’s.  My company, EnergyPro, has a JV with EESL, the Indian publicly owned ESCO and we have deployed £60m of capital in the UK over the last year.  But this week I have had meetings with an Indian delegation accompanying the Minister of Power discussing various programmes in India including the national plan to install 250 million smart meters, all pre-pay and all payable by mobile phone, in the next few years using the Meter Asset Provider model.  This is a huge opportunity for providers and funders of meters.  India also faces a massive issue in meeting demand for cooling. If Room Air Conditioners are adopted at the same rate as they were adopted in China India would need 300 500MW power stations just to meet the incremental demand of the Room Air Conditioners.  That clearly cannot happen, so India has a national cooling strategy and we are using UK expertise and technology to provide trigeneration solutions.  Other innovative UK cooling technology providers such as Dearman are active in India. Wearing a UK export hat the opportunity to provide technical and financial expertise is huge.

To finish up, let’s look forward ten years, out to say 2020.  Some of the key trends which I expect to accelerate include:

• At the macro level the decoupling between GDP and energy use will accelerate. The firm link between GDP and energy use used to be axiomatic but in the UK, the US and elsewhere a decoupling is occurring.
• Demand for energy will be cut faster than expected, and demand for fuel will start to be impacted by EVs. We will see peak oil, but that means a peak in demand and not the old idea of a supply constraint.
• Renewables will be cheaper than fossil fuels in most situations – and subsidy free models will make money.
• The old model for running a grid that there is Base load and then you add in more flexible sources as demand increases is dead. You will have a situation where the really valuable element is flexibility is flexibility itself which can be provided through, storage, demand response, local generation and energy efficiency.
• All that means adding intelligence to dumb assets to make them better performing, more profitable and greener. This merging of infrastructure and technology – Infratech – is behind a lot of the energy transition and still has so much more potential. There are a lot of dumb assets out there – and I don’t mean the one in the White House.
• Prosuming – the idea of both consuming and producing energy will spread further in the industrial, commercial and residential sectors. It will be harder and harder to draw a line between the electricity industry and buildings, industry and homes.  It will be one inter-connected system, multi-directional and increasingly distributed.
• There will be a move away from single technology solutions – end users just want service and actually don’t care about energy itself so we will see hybrid solutions – CHP, batteries, solar etc. coming together in new energy as a service business models.
• Digitisation will enable new services and business models, and allow energy companies and regulators to really measure the effects of energy efficiency and demand response programmes in time and location. We are working with a US company called OpenEE which is enabling pay for performance models for energy efficiency programmes and making efficiency a reliable, distributed energy resource just like a generator. This, along with standardisation of projects and performance insurance, will transform energy efficiency from being the forgotten sister of energy policy and investment into a major growth sector.
• Finally electrification of ground based transport is inevitable – it is just a matter of how quickly it happens, twenty five years or fifty years. In the meantime easily available technologies like higher efficiency engines and CNG for trucks will have an interim role to play but ultimately electrification will beat all other solutions.

In conclusion; the energy transition has now entered its major growth and consolidation phase, everything that has happened over the last two to three decades has just been the appetiser.  The pressures from end users and capital wanting better, more efficient, greener solutions, plus technological change, are now all acting to accelerate the transition even further into the mainstream. These developments will challenge all of the fundamental assumptions behind our energy institutions, markets, business models, regulators, and industrial structures and we will have to change them all.

So, having participated in the first thirty years of this energy transition, I am hoping to see the next thirty years and in thirty years I think we will look back and be amazed how far we have come.  I hope to work with some or all of you soon to help make some of that future happen.

Thank you.

The start of Autumn seems like a good time to update you on EnergyPro, what we are doing and where we are going.

It has been an eventful summer, with exceptional weather events globally starting to look more and more like the climate change predictions that seemed like scare mongering only a few years ago. In the US the Trump saga continues to play out to its inevitable end, the important question is how much permanent damage is being done both to institutions and social discourse. The attempts by the Trump Administration to freeze Corporate Average Fuel Economy standards and support the coal industry can only ever be (tiny) fingers in the dam slowing the advance towards a cleaner, more distributed, more flexible and more equitable energy system.

On a personal front, I lost my best friend to the scourge of cancer and feel very strongly that we should be greatly increasing spending on medical research (and other R&D) rather than succumbing to the pseudo-science and anti-science of the conspiracy theorists and their fellow travellers that seem to be on the increase.  In 1957 Sputnik shocked the US into ramping up spending on scientific and technical education – and the world continues to reap the benefits 60 years later.  Now we need to do something similar in health, climate and energy.

On the business front, EnergyPro continues to develop the two sides of its business; a consultancy practice with a strong focus on energy productivity, energy efficiency finance and energy services, and an investment and asset management business.  Our commitment to accelerating the energy transition remains as strong as ever, as does our commitment to transparency, integrity and creating solutions that are equitable.

In the Autumn, the consultancy will be continuing to support the work of the Energy Efficiency Financial Institutions Group (EEFIG) through our participation in the consortium selected by DG Energy to take the work forward. We also continue our work on the Investor Confidence Project which is now available for industrial, street lighting and district energy projects. Earlier in the year we assisted a major transport undertaking to develop a new strategy for its multiple energy assets and Plymouth Council in its preparations to create a sustainable energy fund.  We believe that both these projects will move forward to create interesting assignments and real impact.

We are also working with OpenEE to introduce metered efficiency and pay for performance models to Europe.  We believe this approach is transformative for efficiency and are happy to discuss the possibilities with market players.

In the investment business we continue to develop our JV with EESL, the world’s leading publicly owned ESCO, and are looking at several new investment opportunities. We are also considering opportunities which may not be suitable for the JV and are looking to work much closer with a leading merchant bank to raise funds for companies in our sector.

If you see an opportunity where our expertise and experience could help resolve an energy problem that you have, see an investment opportunity, or would like to work with us, please reach out to me, Mike or Matt (details below).

Steve Fawkes
steven.fawkes@energyproltd.com

Matt Pumfrey
matt.pumfrey@energyproltd.com

Mike Tivey
mike.tivey@energyproltd.com

We look forward to continuing the conversation.

Those who know me will know of my life long-love of aviation. I wanted to be a test pilot even before wanting to be an astronaut but ended up getting into energy.  My under-graduate dissertation combined my two interests as it was on the use of hydrogen as an aviation fuel, an idea that was being heavily promoted in the late 1970s by Lockheed and others with a proposal to build hydrogen fuelled Tristars ferrying between the US, Europe and the Middle East.  (This document is now online here).  I gave up flying myself a few years ago and still miss it.  As everyone knows aviation is a major problem in terms of emissions, with 500 million tonnes CO₂ a year expected to triple by 2050, and I do sometimes struggle to square the desire to minimise emissions and environmental impact and the need and desire to travel, especially with the amount of air travel I have done in the last five years.

To start with I don’t think we can ever (or should try) suppress the basic human desire to travel. I actually think this is a reflection of the exploration drive, without which we would still be the arboreal primates or even the ocean dwelling mammals we are descended from.  Likewise we should not constrain space exploration, in fact we should be doing more, it is just a fundamental human drive.  Given that, plus all the conventional economic trends (i.e. increasing wealth leads to increasing travel), we will continue to see a growth in air travel with an increased environmental impact – if we don’t change the technology.  The question is how to change the technology and how quickly can we do it, especially in the safety driven culture and regulatory environment of aviation.

A decade ago the emphasis was on bio-fuels and much capital was invested in biofuel production and trialling them in aircraft.  Safety is of course critical in aviation and I always said I would rather not fly in a bio-fuelled aircraft for the first five years of its use (the same would apply to electric planes) – although that would have been different if I had become a test pilot!  Clearly bio- and synthetic fuels will have a major role but the ultimate dream is electric power. Even a decade ago the idea of electric aircraft was science fiction but since then the advances in battery technology, coupled with the work of entrepreneurs and larger companies, has made the dream of electric aviation seem much closer.

A recent article in AirSpaceMag.com described some of the developments including Eviation’s nine passenger regional commuter plane that is supposed to fly in 2019 (which has the odd name of Alice).  It shouldn’t be a surprise, as we have seen the same thing in electric cars, but the choice of electric propulsion leads to significant changes in the way the rest of the aircraft is designed, both in terms of structure and layout.  A lot of the structure of aircraft is designed to cope with the stresses of relatively heavy, vibrating engines. Electric motors are lighter but of course there is the huge weight of batteries which will account for 60% of Alices’s total weight.  For comparison fuel makes up c.48% of the weight of a fully laden Boeing 747.  The range of the Alice is estimated at 650 miles at 275mph.

Interestingly enough the projected operating costs are low enough that the cost to passengers could be reduced by 30-60% compared to a conventional aircraft, savings being made in fuel and maintenance.  Bonny Simi, President of JetBlue Technology Ventures, is quoted in the article as saying on short trips regional turboprops have an Available Seat Mile (ASM) cost of $0.15 to $0.20 with spikes above $0.40.  Larger capacity, long haul jets have ASMs in the range of $0.08 to $0.12 as they fly higher where jets are more efficient and proportionately less time is spent in take-offs and climb.  Simi goes onto say “Forecasts for electric aircraft [flying] 300 to 700 miles estimate 10 to 12 cents” ($0.10 to $0.12 per ASM).  If that sort of cost advantage can actually be delivered the economic driver is clear.

As everyone knows battery technology is improving rapidly and costs are falling. There is, however, a long way to go before larger aircraft could be electric.  The “magic number” where long-distance flight can become viable is cited at 1,000 Wh/kg of battery weight whereas existing batteries are in the range of 270-300 Wh/kg.  The battery in a Tesla S stores 85 kWh and weighs 540 kg – a specific energy of 157 Wh/kg.  The target 1,000 Wh/kg for viable aircraft does not seem to take into account possible improvements in drag reduction (and possibly further advances in light weight structures).  Professor Viswanathan from Carnegie Mellon University asserts that a battery producing 400-500 Wh/kg could propel an airplane 200 to 400 miles on a single charge.

EasyJet has set a target to begin operating electric routes within 10 years and Norway has proposed making all flights less than 1.5 hours all electric by 2040.  EasyJet has partnered with Wright Electric who are working on an aircraft that could carry 120 people on flights of 300 miles or less. Although these targets are exciting we should never forget both the hype cycle and the length of time (& huge amount of money) it takes to get new aircraft certified for public operations.  There is a long way, and lots of capital, between announcements and glossy websites and computer generated images and a flying, certified aircraft.  As I highlighted in my under-graduate dissertation, it is not only the aircraft where you need to innovate and invest, the ground infrastructure would need to change considerably.  When Terminal 5 was constructed it was designed with higher capacity ground power connections as the A-380 was coming into service, imagine the extra power capacity needed at airports for electric aircraft re-charging, as well as the operations impact because of the required charging time.

At the larger, long-range end of the spectrum the direction of travel is towards hybrids.  In 2008 Boeing introduced the concept SUGAR (Subsonic Ultra-Green Aircraft Research) Volt which has not been built. NASA is also working on hybrid concepts. At the Glenn Research Center the focus is on concepts that could carry 150 people long distances.  As well as propulsion systems designs concepts include the highly efficient blended wing designs, a big departure from the tube designs we are familiar with. (I think it was low cost aviation pioneer Freddy Laker who said he was in the “aluminium tubes” business.) Blended wing designs can save 50% of fuel usage and NASA is moving towards funding a flying large-scale X-plane by 2021.  In July 2018 at the Farnborough Air Show the UK Business Secretary Greg Clark announced a £343 million government and industry R&D drive including £58m for electric flight.

Aviation has always been incredibly innovative.  Thirty three years separated the Wright Flyer and the DC-3, the first really effective air transport aircraft, thirty seven years separated the DC-3 and the Boeing 747 which significantly reduced cost and enabled the boom in international travel, forty years separate the Boeing 747 and the Boeing 787 which has a c.50% lower fuel burn.   With all the research on innovations in aircraft design, engine design, electric propulsion and batteries it is clear that aircraft can continue to become much more efficient and ultimately much cleaner for the environment than they are today.  The race is on between reducing emissions through higher efficiency and new propulsion technologies and increasing demand for air travel.

On the 9^th July I attended the launch of the Mayor of London’s Energy Efficiency Fund (MEEF), a £500m public-private energy efficiency fund established by the Greater London Authority and being managed by Amber Infrastructure.  I was reminded of a similar day in October 2011 when I attended the launch of the London Energy Efficiency Fund (LEEF).

MEEF represents the scale of the ambition in London and is a significant step-up in the level of funds specifically available to energy efficiency projects. MEEF is the largest public-private energy efficiency fund in Europe. It was an appropriate occasion to reflect on some of the significant changes in thinking and practice in energy efficiency financing in the seven years between the launches of LEEF and MEEF. (In the interest of full disclosure I have served as the independent member of the Investment Committee of LEEF since 2014).

First of all there is increased recognition of the importance of energy efficiency in achieving climate goals. These days the EC talks about “efficiency first” which is a significant change. Clearly there is still a long way to go to reset the balance between energy supply and energy demand but things have improved.

There is also much greater clarity on the real barriers to financing energy efficiency. Back in 2011 there was still a perception that the main issue was “lack of finance” and that just providing funds would lead to a flow of projects being financed.  Reality turned out to be different.  Several funds around Europe were established and had difficulties deploying funds due to a lack of well developed bankable projects.  It has become clear that there is a need for some kind of assistance to develop projects to make them investable which there will be in the case of MEEF. LEEF deployed funds successfully through consistent and significant efforts to work with project developers and owners to develop projects through to implementation.  Project development is the real gap we need to fill to turn the energy efficiency resource into productive assets generating economic and environmental returns.

In the last few years the importance of non-energy benefits, which are often more strategic and more valuable than energy cost savings, has been recognised through work by Catherine Cooremans and others, as well as by the International Energy Agency. Valuing and selling non-energy benefits is a critical need.  Many energy efficiency projects are incorporated into larger projects carried out for other reasons such as bringing buildings up to modern standards and any policy or financing programme must recognise this.

We have seen the development and introduction of several tools that support energy efficiency financing.  These include the Investor Confidence Project, originally developed for buildings and now available in Europe for industry, street lighting and district energy. (ICP in Europe has been supported by Horizon 2020).  ICP introduced the concept of standardisation for project development and documentation as well as a certification system for projects, Investor Ready Energy Efficiency™. The Energy Efficiency Financial Institutions Group’s (EEFIG) work developing a database of 10,000 projects (the Derisking Energy Efficiency Platform, DEEP) and the Underwriting Toolkit, are useful tools for people developing financing programmes or funds.

The last year or so has seen some significant developments including the EMF-ECBC Energy Efficient Mortgage Initiative which is bringing many financial institutions together to build a standardised pan-European mortgage mechanism that will incentivise people to improve the energy efficiency of their homes through preferential financing.  The EU-PACE project, (like the mortgage initiative supported by Horizon 2020), is working to introduce funding of energy efficiency measures through property taxes.  In the US the PACE market has taken off in the residential and commercial sectors.  Significantly the PACE market in the US has seen a number of secondary market transactions with portfolios of PACE loans being refinanced through securitisation.  Creating a secondary market large enough for the green bond market remains a holy grail.

A major positive change in the last two years has been the rapid rise of activity in green financing, particularly the involvement of central banks.  Ultimately action by bank regulators to address systemic risks in the finance system may have more effect on energy efficiency levels than traditional energy policies or regulations.  Energy efficiency should be a major part of the green finance movement – the danger is that it gets less attention because it is more difficult than just funding renewables.  The Energy Efficient Mortgage initiative is a great example of addressing energy efficiency and the green finance market together.

So in seven years the energy efficiency financing market has evolved – it has grown in understanding, capability and scale. I used to use a quote from a banker in the US who said “the problem with the energy efficiency finance market is that the ratio of conferences to deals is too high”.  There is no doubt that the ratio is getting better but of course there is still a long way to go until energy efficiency financing is main-stream.