Continuing my occasional series on interesting energy efficiency financing initiatives around the world…….. 
 
I have just returned from my first visit to Riga, the capital of Latvia, which is a very civilized city and well worth a visit.  Whilst there I continued a dialogue with a very interesting project to fund residential renovations in Soviet era panel buildings.  For anyone not familiar with these, all through the former Soviet republics in central and eastern Europe, through Russia, into central Asia and even China, the default method of building housing was highly systematized and standardized concrete panel blocks.  Even in the UK of course we experimented with this kind of technology during the sixties and seventies – usually with bad results.  The panel buildings in Latvia and throughout central and eastern Europe are extremely energy inefficient, in climates which get severe winter weather, and are often in danger of collapse through problems of “concrete cancer” and structural defects. 
 
In Latvia, Renesco (a private ESCO) has renovated 15 panel built apartment blocks with some impressive results.  Energy savings ranged from 45% to 65%,  more comfortable conditions were created, the lifetime of the blocks were extended and residents kept paying the same utility bills – all without additional subsidies.  The retrofits are deep retrofits incorporating insulation, windows and doors as well as other aspects such as structural repairs, roof repairs and upgrading elevators (with high energy savings due to the low efficiency of Soviet era elevators compared to modern high efficiency units).  The energy savings allow these other measures – which are essential to the building – to be paid for.  Residents buy into the increase in comfort.  The Renesco projects were a great example of entrepreneurial effort overcoming many social, economic and technical barriers.  Now the project is moving into a new larger and very exciting phase.  Renesco, like all Escos, was capital constrained and so now the Latvian Baltic Energy Efficiency Facility (LABEEF) – a forfaiting fund – has been established to refinance similar projects carried out by ESCOs once they have been in operation for a year.   
 
This arrangement allocates risks and rewards appropriately.  Residents take no risk and their homes increase in value 15 to 25%. Over the lifetime of the financing deal, they can expect over 30% lower costs than other financing models.  The ESCOs take the project implementation and performance risk, and the forfaiting fund takes the long-term payment risk.  (To date there have been no defaults on payment).  The ESCOs or their financing banks can recycle capital.  LABEEF has systematized the process, making application easy through an on-line portal, and completely standardized the process.  On the technical side it advocates the use of Investor Confidence Protocols as a way of ensuring best practice during project development, implementation and on-going monitoring.  Over time, once enough projects have been aggregated, the forfaiting fund should become an attractive investment for pension funds which in the Baltics currently invest mainly in the Nordics due to a shortage of investment opportunities at home.   
 
It is worth considering the potential impact of this project.  If applied to Latvia’s 50 million square metres of panel apartment blocks the reduction in gas imports – which all come from Russia – would be reduced by 50%.  This alone should mean the project should get a lot of attention on energy security grounds.  In addition there are huge non-energy benefits such as the effects on health and well-being, and improvements to the social fabric as residents become involved in the long-term future of their block and their neighborhood.  The latter kind of “soft” benefit is often forgotten but is very real.  When applied to the estimated 1 billion square meters of panel buildings across central and eastern Europe the potential gains are huge – a potential reduction in gas imports of over 10-15 billion cubic meters/year. 
 
The LABEEF forfaiting fund is a world-class example of energy efficiency financing in action and we look forward to following its development and working with it in future.

In 2001 I wrote a brief history of energy management with a UK focus which Vilnis Vesma published on his website. I thought I would try to bring it up to date. For comparison you can find the original here.

Introduction

The management of energy and improving energy efficiency has long been important for industry and commerce. In the 1790s Boulton and Watt’s steam engines produced competitive advantage because they were more fuel efficient – and indeed they charged a share of the fuel cost savings in a way similar to today’s energy performance contracts. In World War 2 fuel efficiency became vital to the war effort and the National Industrial Fuel Efficiency Service was set up to provide advice to industry on energy saving measures as fuel shortages continued in the post-war years. Energy management as a separate discipline, however, began to evolve after the first oil crisis of 1973 and really came into effect after the second oil crisis of 1979 when real energy prices rose dramatically.

After more than forty years it seems appropriate to look back at the evolution of modern energy management and energy efficiency. In looking back four distinct phases can be identified:

• Phase 1: 1973 – 1981 – “energy conservation phase”
• Phase 2: 1981 – 1993 – “energy management phase”
• Phase 3: 1993 – 2000 – “energy procurement phase”
• Phase 4: 2000 – 2010 – “carbon reduction phase”

In looking at the present time and projecting forward two additional phases are identifiable or foreseen.

• Phase 5: 2010 –2020 – “energy efficiency phase”
• Phase 6: 2020 – 2030 – “efficiency as a resource phase”

Each of these will be described in turn. All dates are approximate and of course there has been a natural evolution of techniques and approaches, rather than a sudden transition between phases.

Phase 1: Energy conservation focus – 1973 – 1981

Phase 1, between 1973 and 1981, was characterised by the “save it” mentality and a crisis response to sudden increases in energy prices and problems with energy supplies caused by the oil shocks, a result of geopolitical drivers. Energy conservation was the usual description of the activity. In this phase there was usually a shallow approach with wide variation in approach between practitioners and few common techniques. Much effort was put into exhorting staff to “switch off” through the use of stickers over light switches and posters – probably with limited effect. Many companies appointed Energy Managers who typically were engineers, often an engineering manager took on the energy role in addition to their normal job. A few organizations appointed accountants or purchasing staff as energy managers but this was unusual.

Few organizations had any form of energy Monitoring and Targeting and when they did there was no commonality of approach. Most systems were manual and did not take into account variances due to factors such as weather, production output or product mix.

Engineering based energy managers started to invest in energy saving technologies but with little in the way of investment analysis beyond simple payback period. There was generally a gulf of understanding between energy mangers seeking investment funds and financial managers in charge of capital budgeting and many seminars and courses sought to fill the gap. On the technical front new technologies emerged and were often adopted before they were fully developed e.g. industrial heat pumps – leading to sub-optimal investment and many failures. There was also a number of “black boxes” introduced that purported to save energy but which were of dubious value (some of which resurface every now and again).

Energy supplies were almost totally from the nationalised utilities, British Gas, British Coal and the Electricity Supply Industry in the form of the CEGB and the tweve regional distribution companies. There was little or no scope to negotiate prices even for large users. A few large, sophisticated users, generated their own electricity in Combined Heat and Power schemes with no export of power.

Government activity in this phase concentrated on “propaganda” and exhortation in the form of TV advertisements, posters, and “Switch off” stickers, and subsidising energy surveys which led to the rise of energy consultancy, much of it carried out by people with little or no experience. Towards the end of the period the UK Government started the Energy Conservation Demonstration Projects Scheme which subsidised early adopters of new technologies in return for the right to disseminate information about the results. In an early work the author observed that the scheme was not market orientated and ignored the fundamentals of successful innovation and diffusion.

1973 – 1981: Major energy events and headlines:

• 1973: OPEC quadruples price of oil
• 1979: Iranian revolution leads to second oil price rise

Phase 2: Energy management focus – 1981-1993

This period saw the development of energy management as a separate recognised discipline and the rise of full time Energy Managers. The UK Government through the Department of Energy supported regional Energy Managers groups which were an excellent way of spreading information, sharing resources and improving standards. The term energy management started to replace energy conservation. Models of effective energy management were developed and widely implemented. A consensus on what energy management was started to emerge.

In this period Monitoring and Targeting (M&T) began to be used much more widely. This was aided by the introduction of personal computers (then called “micro-computers”) in the early 1980s and the beginnings of the PC or IT as we know it today, (albeit with floppy disks, state of the art 10Mb hard drives and very noisy dot matrix printers). Monitoring and Targeting software was introduced and linked to bill analysis software derived from the discipline of utility bill analysis. Computerised M&T systems could take into account relevant factors such as Degree Days for space heating and production levels. M&T was subsidised and promoted by the Government with good effect through sector Trade Associations.

Another approach that emerged in this period was the use of Performance Indicators for focusing management attention. This was particularly effective in local authorities in the form of Normalised Performance Indicators (NPIs) developed by the Audit Commission and implemented as a national system, as well as being replicated in Scotland by the Accounts Commission.

In this period a key technology that emerged was Building Energy Management Systems (BEMS now more often called BMS). These were widely adopted by owners of large portfolios such as local authorities and undoubtedly bought benefits in terms of central alarm handling and control of building services. There is considerable evidence that the cost effectiveness of these investments was not always as expected. Early systems used mini computers as central stations and were extremely expensive to install but costs fell as PCs were introduced and more “intelligence” was added to outstations, thus reducing field wiring costs.

This period saw the peak of the energy management consultancy market with many large organizations bringing in consultancy teams to establish M&T systems, carry out audits, implement projects and deliver communication and awareness schemes. The latter became more sophisticated with greater user involvement and in some cases incentive payments (for local establishments or individual user groups).

Another major development in this period was the introduction of Contract Energy Management (CEM) which initially went under various names including “third party financing”, “performance contracting” and “Energy Service contracting”. Early schemes were extremely difficult and expensive to negotiate and implement, particularly in the public sector where external finance was most needed and where arcane Treasury guidelines on local authority expenditure meant that even capital expended by a CEM company counted against the authority’s capital budget, thus introducing a no-win situation. These rules were finally changed in 1986 following a concerted effort from the nascent CEM industry and potential customers (including the author).

1981 – 1993: Major energy events and headlines:

• 1981: first micro-CHP technology introduced
• 1984/85: Coal miners strike
• 1984: launch of EMSTAR, Shell’s energy efficiency subsidiary
• 1986: Energy Efficiency Year led by Secretary of State Peter Walker
• 1986: privatisation of British Gas
• 1990: privatisation of electricity supply industry, competition for > 1 MW users
• 1992: competition for > 2,500 therm gas users

Phase 3: Energy procurement focus – 1993 – 2000

In this period energy management as a discipline entered a decline which came about as a result of two factors, the reduction in real prices bought about by privatisation of the utilities, and general corporate down sizing. As energy prices declined in real terms, and opportunities for effective purchasing strategies were opened up by market liberalisation, most of the attention on energy shifted purely to purchasing. Greater savings with less risk could be made through more effective purchasing than through implementing energy efficiency projects. Many energy managers were made redundant or transferred into other jobs and many large organizations which had been pioneers of energy management started to lose ground.

In this period the energy consultancy market declined dramatically except in the area of purchasing. In Government activity there was a shift away from subsidies and towards encouraging management approaches through voluntary agreements and management tools such as the Making A Corporate Commitment and the energy management matrix.

The environment started to emerge as an issue in this period and many companies incorporated energy management into wider environmental initiatives. This did not, however, do as much for energy efficiency as some enthusiasts had hoped. Investments still had to meet the required Internal Rates of Return and often corporate downsizing meant that organizations did not have the staff to identify, evaluate and implement viable energy efficiency opportunities. Even at the reduced energy prices bought about by more effective purchasing much potential for improved efficiency remained untapped (and still does).

1993 – 2000: Major energy events and headlines:

• 1994: competition for < 100kW electricity market
• 1998: domestic gas liberalisation and competition for < 100 kW electricity market

Phase 4: Carbon reduction focus – 2000 – 2010

In this period in the UK the climate change agenda became a major focus for individuals and organizations. In the UK the Climate Change Levy (CCL) and the various Negotiated Agreements came into effect. CCL made energy a high level issue again as energy prices rose and many companies make clear commitments to reduce consumption, and faced penalties for failure to do so.

Government activity in energy efficiency was outsourced (or some would say given away) to programmes run by the Carbon Trust. The UK government introduced feed-in tariffs for renewable energy sources. In 2008, before the full effects of the financial crisis became clear and amidst a rash of concern about oil peaking and resource pressures, the oil price hit a record $147/barrel.

2000 – 2010: Major energy events and headlines:

• 2001: Climate Change Levy introduced
• 2001: New Electricity Trading Arrangements introduced
• 2001: Carbon Trust founded
• 2005: EU Emissions Trading Scheme introduced
• 2008: Department of Energy and Climate Change created
• 2008: Feed-in tariffs introduced
• 2008: Oil price exceeds $147/barrel

Phase 5: Energy efficiency focus – 2010 – 2020

From about 2010 policy interest in energy efficiency started to grow globally. There was increasing recognition of the role that energy efficiency could play in meeting climate targets as well as the scale of the economic opportunity efficiency presents. The IEA said that efficiency is the first fuel, whereas back in the 1980s it was the fifth fuel.

In the last couple of years the value of non-energy benefits such as increased sales, increased health and well-being, as well as macro-benefits such as job creation have been recognized but have only just started to be valued. The value and importance of non-energy benefits need to be further recognized by energy efficiency professionals, as well as the added value they can bring to an investment things like increased sales or increased health and well being of employees and customers are far more strategic to organizations than just energy saving – and therefore far more likely to get a project approved than the payback on energy savings alone.

In the last few years interest in financing energy efficiency has been growing, and particularly the use of private finance. The market is still nascent in most countries but the signs are positive. There is increasing commitment to energy efficiency from institutional investors, even though most of the commitments have not yet been put into action. The necessary infrastructure of standardization through the Investor Confidence Project has been built. Projects are underway to build capacity within banks and financial institutions. The first attempts to put all the pieces of the energy efficiency financing jigsaw together rather than just establish specialized funds or use public funds are now being established.

In the UK, contrary to much of the rest of the world, government commitment to energy efficiency waned with changes to the ECO scheme and subsequent further budget cuts, along with cuts to feed-in tariffs for renewables.

2010 – 2020: Major energy events and headlines:

• 2012: Green Deal on bill financing scheme launched in the UK
• 2013: Regulatory Assistance Project in the US launches “Recognizing the full value of energy efficiency” report
• 2013: UK government makes changes to ECO in response to Labour leader’s promise to freeze energy prices
• 2014: Environmental Defense Fund launches the Investor Confidence Project in the US
• 2014: The International Energy Agency labels energy efficiency “first fuel”
• 2014: The IEA launches “Capturing the multiple benefits of energy efficiency”
• 2015: Energy Efficiency Financial Institutions Group report published
• 2015: First Buildings Day at a COP – focusing on energy efficiency in buildings
• 2015: End of the Green Deal
• 2016: Investor Confidence Project rolls out Investor Ready Energy Efficiency

Phase 6: Efficiency as a resource and energy productivity – 2020 – 2030

In this period efficiency will be seen increasingly as a reliable resource that can be both accessed by utilities and others, as well as valued and traded. This will be based on an increased acceptance of the idea of metered energy efficiency, as pioneered in California. It will also be a period where we learn to scale up energy efficiency activity and investment by putting together four elements; development and project finance, developing a robust pipeline of projects, building capacity amongst the energy efficiency community, building owners and the financial world, and standardization of project development, documentation, contracting and measurement and verification. The value of non-energy benefits of energy efficiency will be increasingly recognized and valued, both for their financial value but also their strategic value.

On the policy level there will be a switch more towards focusing on energy productivity, getting the most economic value out of each unit of energy, rather than “energy efficiency”. Productivity is hard to argue against and is the basis of a much more positive policy narrative. It is possible that this period will be a period of energy abundance globally, with oil, gas, renewables and efficiency all being available, rather than the 1970s dystopian view of energy shortage. Even if we move into energy abundance the advantages of improved efficiency in terms of costs, speed to deliver and lack of environmental impact, will help to make it the first choice rather than the last.

Forecasting is dangerous, especially about the future, but in this period there may well be major technological advances that change energy markets even more than we expect at the moment. There will undoubtedly be more intelligence applied to the energy system which will bring energy savings and greater flexibility. We may see storage becoming really cost-effective and a mass market, and we will see greater use of electric vehicles.

Conclusions

Our current ways of thinking about energy started to emerge in the 1970s in response to the oil crises. It is interesting to look at energy scenarios from back then and compare them to how the world really turned out. Almost all scenarios back then, apart from Amory Lovins’ “Soft energy paths” and Gerald Leach’s “A Low Energy Scenario for the UK”, assumed greatly increased energy demand – demand that has not materialized. Our current energy consumption in the UK and the US is at the low end of a range considered crazy by official energy forecasters in the 1970s – energy efficiency delivered and decoupling of energy use and GDP has happened and will continue to happen. Official forecasts back then also assumed:

• increasing centralization of power generation
• increased use of coal in power generation
• use of coal through synthetic fuel conversion technologies
• renewables would not be economically viable
• nuclear power would grow and we would utilize fast breeder rector technology, and even fusion by now
• “running out” of fossil fuels and ever increasing real prices.

Obviously the future turned out differently to the forecasts and scenarios, in the words of Arthur C Clarke – “the future isn’t what it used to be”. Geo-political or technological wild cards could radically change the energy scene at any time but what seems certain, however, is that there will be a continuing trend towards improved energy efficiency and the use of cleaner technologies.

I was honored to speak on a panel at the Berlin Energy Transition 2016 on the 18th March 2016.

Here is an edited and improved version of my speaking notes from the event. It is what I would have said given more time and more eloquence. The event made me think of an additional law of energy efficiency (see my others here) – “while Amory Lovins shows that energy efficiency has produced 30x as much energy services as renewables over the last forty years, energy conference organizers only give energy efficiency 1/30th of the time they give to renewables”. Seriously though, a big thank you to the German Federal Foreign Office and Federal Ministry of Economic Affairs and Energy for the invitation to speak at such a prestigious and well attended event, and thank you to my fellow panelists, the panel chair Sylvia Kreibiehl and of course the audience.

I am very pleased and honored to be invited to speak to you today about energy efficiency financing. This is a very interesting time for energy efficiency and energy efficiency financing around the world and we are starting to see real understanding and progress emerge – slowly but surely.

It is good to start by putting some scale on the problem and the opportunity. The IEA estimate that investment in energy efficiency must multiply by a factor of 3x by 2035 to achieve the 450ppm scenario. The EU estimate that investment in building retrofits need to increase by a factor of 5x to achieve climate goals. Various estimates of the potential market exist but a round trillion dollars is a good number to use – big enough to excite even institutional investors.

Today I will give a overview of where we are on developing the energy efficiency financing market 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. So I am going to talk about the current status, some of the problems, some of the solutions and then a brief look to the future.

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

• The massive economic potential for energy efficiency has nw been largely recognized. Those of us like Amory Lovins and myself who have been working on energy efficiency and talking about the potential for energy efficiency for decades it is surprising how long it has taken but it is a step forward. Recognizing the potential is the 1st step.
• Following some good work from the IEA and others the non-energy 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 and starting to be valued. We still have a way to go on this important issue but things are improving.
• We now have strong and growing interest in investing in energy efficiency from institutional investors. This is a new development over the last few years.
• However, despite these positive developments the growth of the energy efficiency financing market has been slower than we would like and slower than we need. Not just in Europe, but in North America and Asia there is a sense of frustration that things are not happening as fast as they need to. As one of the US bankers involved in energy efficiency financing said: “the trouble with this energy efficiency business is that the ratio of conferences to deals is too high”.

If we dream for a minute about what a healthy, growing and dynamic energy efficiency finance market would look like, it would have:

• strong demand from building owners and investors
• 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.

In fact it would look like the markets for financing conventional energy infrastructure, and by conventional I mean oil and gas and solar and wind power. In fact it would like any other financial market. At the moment it does not look like that anywhere – it is nascent, very niche and very hard to invest in. Only the real enthusiasts – the pioneers, the early adopters – are investing at the moment.

To sum up, when I look at the whole area of energy financing this is what I see. For oil and gas projects, if you happen to own an oil field, the ways of developing, documenting and valuing the project are standardized, and there is a large volume of money available for such projects from a wide range of sources across the value chain.

Twenty five years when I did some early wind farm projects in the UK the same was not true for wind power, we made it up as we went along and there was only one bank in London we could go to who I suspect were also making it up as they went along. Nowadays of course funding renewables is fairly standardized, and almost as mainstream as oil and gas and you can go to multiple sources for money across the value chain.

However, when we look at energy efficiency projects, 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. Investing in energy efficiency is hard, even when you want to.

So how do we make the vitally important energy efficiency financing market grow and look more like other financial markets? Looking at this problem I see a jigsaw and it has four main pieces:

• product offerings
• bridging the development gap
• capacity building

standardization.

We need to put all the pieces together if we want to grow this market – and not just make perfectly formed single pieces. I want to say something about each of these pieces in turn.

Product offerings

Let’s talk briefly about product offerings from the energy efficiency industry. Whenever energy efficiency financing is brought up people say “Energy Performance Contracts” – usually followed by some cliché about how they are the solution.

Let me only say that Energy Performance Contracts (EPCs) 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 (the US public sector) and was exported around the world but has always been a source of frustration for its boosters and others. The EPC model has never grown to the extent that people think it should for a number of reasons:

• 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.

For too long the energy efficiency industry, and some policy makers have pushed EPCs as if they are the answer to everything – they are not.

We are now seeing innovation in contract forms and business models appearing around the world, these include acronyms such as ESA (Efficiency Services Agreement), MESA (Managed Energy Services Agreement) and MEETS (Measured Energy Efficiency Transaction Structure). We need, and I am sure will see, much more innovation in different sectors. By the way, one of the problems with the energy efficiency industry is that like the space industry it likes acronyms too much.Bridging the development gap

The development gap is the gap between what we know is a massive potential for viable projects and actual, bankable, actionable projects.

To overcome the development gap requires:

• vision and knowledge about what is possible
• technical and financial skills
• finance – developing projects, especially big projects, costs money and this is risk money like all development whether it be energy efficiency, energy projects or property development
• standards – we need to develop multi-building projects in portfolios using the same standards and document sets.

We need to learn how to finance the development process at scale. We have an established way of doing that in energy supply projects but not for large-scale, multi-building energy efficiency projects – although there are a few good examples out there like the Etihad Super ESCO in Dubai.

Capacity building

Now let’s look at capacity building which has to happen on the demand side, the supply side and the in the financial sector. On the demand side we have to acknowledge that lack of demand for energy efficiency projects is a problem that we have to address.

We also have to acknowledge something that is hard for those of us who have spent our lives in energy efficiency to accept. Energy efficiency is just simply boring – for most people most of the time it is extremely dull. Only when we recognize that can we move forward.

One the most promising ways of making energy efficiency a lot less boring is to talk about the non-energy benefits that come from energy efficiency. Those 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 amongst others: improved productivity, increased retail sales, increased quality and reduction in hours lost at work. These are increasingly being recognized and they are starting to be measured. Often the value of these benefits will be much larger than the value of the energy savings alone – the IEA estimate 4x more valuable in some industrial cases. Also they are much more strategic and the more strategic an investment proposition the more likely a management decision to invest. For example, if a retailer recognizes that LED lighting retrofits, or better still natural lighting, leads to an increase in sales (as some have done) and starts to value that benefit, you can be sure that energy efficiency becomes strategic and rises up the management agenda.

Capacity building on the demand side – that is the customer side – should also include tools like ISO50001 and integrated design as well as knowledge of outsourced energy services that bring with them expertise and finance. Companies frequently finance or outsource assets of all types, particularly those that are non-core business, but rarely energy assets or efficiency.

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 a project, not just at the end. We need to learn how to develop projects at scale, understand financial markets better and sell non-energy benefits and not just energy savings. Traditionally the energy efficiency industry has been very bad at understanding its markets and tended to assume that because a project has a two or three year payback on energy grounds alone it is “no brainer”. Often when you look at other factors it is not.

Within financial institutions we need to build capacity around:

• non-energy benefits
• the risks of energy efficiency investment – and there are definitely risks – it is not the “no risk” investment some have described in the past
• the proven energy efficiency technologies
• the various contract types
• tools for standardization
• available support for development and project work.

The EIB and others are doing good work in this area but we are starting from a low base.

Standardization

Finally the last piece of the jigsaw – and what I and many others think is the key piece – standardization.

We all know that standardization is essential if you are making cars in a factory or in fact any other manufactured product. Standardization was the key to the industrial revolution.

Of course people forget that banks and financial institutions are also factories – they cannot operate at scale without standardization. Every financial market, whether it be mortgages, car loans, commodity trading, stock exchanges, bonds or credit cards, is based on standardization. Lack of standardization is the major barrier to growing the energy efficiency financing market.

It is not just me saying this. Various institutions, groups, banks and individuals have said it. The Energy Efficiency Financial Institutions Group, a group of 100 banks and financial institutions set up by the European Commission and the UNEP Finance Initiative, concluded that lack of standardization was a key factor in impeding both the demand and supply of energy efficiency financing.

The Joint Research Committee of the European Commission also came to similar conclusions.

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

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

He also highlighted the high transaction costs that come with lack of standardization.

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

The current lack of standardization in the way that energy efficiency projects are developed and documented has several consequences:

• greater performance risk
• higher transaction costs
• financial institutions cannot build capacity even if they want to invest in this area
• institutions cannot aggregate projects – which is essential because we know that energy efficiency projects are small compared to the needs of the institutional investors.

So let’s consider an important and significant response to the lack of standardization – the Investor Confidence Project. This was a US project that I brought over to Europe and secured Horizon 2020 funding for. I want to give you a flavor of the Investor Confidence Project, what it is and what has been achieved in the US and Europe and where we are going.

Working with the finance and energy efficiency industries the Investor Confidence Project has developed open source Protocols that organize the process of developing and documenting a project and for each stage of a project define the standard or combination of standards and best practices that should be used – as well as the format of the output. It is not about writing new standards but rather about standardizing the process.

In both the US and Europe six Protocols – each matched to local needs – have been launched and are now being applied in real projects and programmes. They cover different types of projects in commercial and residential buildings. As well as Protocols the Investor Confidence Project has also developed accreditation for project developers and software.

The Protocols and the accreditation come together in a label; “Investor Ready Energy Efficiency”. When we talk to investors, including some of Europe’s largest real estate investors and lenders they say that is what they want – a label that gives them confidence that best practice process has been followed. Underneath the label the process reduces transaction costs, facilitates aggregation and ensures on-going measurement of savings, something that will become more important as secondary markets such as green bonds emerge.

The Investor Confidence Project is supported by some 200 Allies in the US and Europe – anyone who supports the ideal can sign up on the website:

eeperformance.org (for the US) or Europe.eeperformance.org (for Europe)

So having created the tools – the Protocols and the Investor Ready Energy Efficiency label – to standardize the development and documentation of energy efficiency projects in buildings the Investor Confidence Project is now applying those tools to a wide range of projects and programmes across Europe and the US, working with leading property companies, energy efficiency developers, financial institutions and frameworks. We have a network of the most active investors and work to link them to projects, as well as with developers to make projects more bankable.

So that is my jigsaw of energy efficiency financing.

What would it look like if we finished the jigsaw? We would have a dynamic and rapidly growing energy efficiency financing industry with the characteristics I described at the start:

• strong demand from building owners and investors
• 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.

I think we have identified the jigsaw pieces and in few cases we have put them together, now we need to replicate those cases widely. If we do that I believe we will be surprised by how big the energy efficiency financing market becomes and just how much demand we can take out of the system through economically and financially attractive efficiency investments.

That is the future the Investor Confidence Project is helping to build and we would welcome working with anyone else who shares that vision.

Thank you.

Dr. Steven Fawkes

Senior Adviser, Investor Confidence

Project

18th March 2016

The video of the talk can be found here:

https://www.energiewende2016.com/view-the-conference/

See Session 7: Access to Finance – starting at 1:09.

I have written before about the threat of physical and cyber attacks on critical energy infrastructure (here) and so my eye was caught by an article highlighting the US Department of Homeland Security’s report into the power outages in Ukraine in December.

The background is that on 23 December 2015 three Ukrainian regional power distribution companies experienced power outages that affected 225,000 customers. A US team with representatives from the National Cybersecurity and Communications Integration Center (NCCIC), the Industrial Systems Cyber Emergency Response Team (ICS-CERT), the US Computer Emergency Readiness Team (US-CERT), Department of Energy, Federal Bureau of Investigation and the North American Electric Reliability Corporation travelled to Ukraine and investigated with the full co-operation of the Ukrainian authorities. Although the team were not able to independently review technical evidence, based on their interviews with those with first hand experience of the attacks, they concluded that the outages were caused by “synchronized and coordinated external cyber-attacks”.

Apparently the attack wiped some systems after the attack using KillDisk, a utility for wiping hard drives. The perpetrators also corrupted the firmware of devices at sub-stations and scheduled disconnects in Uninterruptible Power Supplies, actions designed to interfere with efforts to restore power. Each company also reported that they had been infected with BlackEnergy malware. Apparently there have also similar cyber attacks on a mining company and a train company in Ukraine.

The US Department of Homeland Security has reported that cyber attacks on pipelines and electric power infrastructure have been occurring at an “alarming rate”. In 2015 the former Director of the National Security Agency, General Keith Alexander, warned that the US and their allies were facing a growing cyber security threat and that energy infrastructure was the most likely target. The current NSA chief Michael Rogers has testified that China is capable of cyber-attacks that could cause ‘catastrophic failures’ of the water system or the electricity grid. In January Israel’s Electric Authority was hit by an “extreme cyber attack”. This paralyzed many computers but did not seem to affect power supplies.

The threat of cyber attacks on energy infrastructure is becoming more alarming. It seems to be another argument for aggressively driving demand down through energy efficiency and decentralized power, as long as the various bits of decentralized infrastructure are suitably protected against cyber attacks. A decentralized “smart” energy system sounds attractive but a highly connected system could be just as vulnerable although of course with suitable protection it may be easier to contain problems and any particular problem is likely to have smaller consequences. It also seems to be another argument against large, massively complex systems like nuclear power plants that contain millions of lines of software and potentially massive consequences of failure. We need to design new energy systems that are robust and resilient against cyber attack, as well as physical attack, and rapidly improve the cyber security of existing infrastructure.

As some of my readers know I have been spending some time in Saudi Arabia working on an energy productivity and energy efficiency financing project. This has allowed me to look at the various energy efficiency initiatives in the Gulf Co-operation Council countries. It may surprise some people but the GCC countries, including Saudi Arabia, are paying increasing attention to energy efficiency, driven by various factors including the need to reduce the rate of increase in domestic energy demand and national commitments to sustainability. Clearly there is a long way to go and many issues to face, including the low retail price of energy, but there are some very positive developments. One of the most interesting developments is the Etihad Super ESCO.

The Etihad Super ESCO was established as a 100% owned subsidiary of the Dubai Electricity and Water Authority (DEWA) in 2013. It is a commercial organization with the mission of creating a market for energy performance contracting in Dubai. It has the following targets to be achieved by 2030:

• To retrofit 30,000 buildings
• To reduce energy consumption by 1.7 TWh
• To reduce CO2 emissions by 1 million tonnes

It is targeting to catalyze USD 540 million of capital deployed by 2030. The business model of the Etihad Super ESCO is to develop projects, bundle projects, contract with Energy Service Companies to undertake the work on a guaranteed performance contract, and to source and arrange the capital. It targets government and other organisations with large property portfolios.

To date the Etihad Super ESCO has undertaken several projects including:

• A 16 m AED (USD 4.36 m) project for DEWA in seven buildings including 55 energy efficiency measures covering lighting, cooling and ventilation. The reduction in energy consumption is 31%, 5GWh per year with a saving of 2.6 m AED (USD 0.71 m). A significant improvement in comfort in the HQ building was also achieved. Contract length is six years. Project execution is by MAF Dalkia Middle East.
• A 21 m AED (USD 5.7 m) project to replace lighting in power stations with LED lighting. Reduction in energy consumption for lighting of 68% with savings of 6 m AED (USD 1.6 m) a year. The new lighting also produced better working conditions. Implementation was by Philips Lighting. This is part of an overall 37 m AED (USD 10 m) investment across the DEWA estate including power stations and offices.

It has also signed a number of MoUs that will lead to projects in due course including with the Dubai International Finance Centre, the Dubai Airport Free zone Authority and the Wasl Asset Management Group.

In November 2015 Etihad Super ESCO announced a significant first, the world’s first building retrofit project funded through a Shari’a compliant structure. The project host is the Jebel Ali Free Zone and this will be the largest retrofit to date in the Middle East, covering 157 buildings. It is projected to save 26 GWh of electricity a year and 200 m imperial gallons of water resulting in a 22m AED ($6 m) saving. Capital cost is 64 AED ($17.4 M). The funding is coming from the National Bonds Corporation.

The use of Shari’a compliant funding is interesting as the match between infrastructure investments, including in energy efficiency, and the requirements of Shari’a funding have been discussed before but this is the first application to building retrofit projects. The super ESCO seems to be addressing the various parts of the jigsaw of energy efficiency financing I have described before including:

• using a “captive” portfolio to achieve scale (in this case DEWA buildings and power stations and government buildings)
• creating demand at scale through targeting property owners with large portfolio owners rather than single buildings
• taking on development risk for large portfolios of projects
• building capacity amongst customers and suppliers
• arranging finance at scale

The fact that the super ESCO is part of DEWA is also interesting as it indicates a degree of integration between energy supply planning and energy efficiency.

Dubai, with its rapid growth over the last few decades and famous excesses is perhaps not the first place we think of when we think about energy efficiency but the Etihad Super ESCO seems to be a world class initiative. Other countries in the GCC and beyond, should study the DEWA model carefully.