For those of us who have worked in energy efficiency a long time it sometimes seems as if the moment has come, the moment when the world has finally recognized the value of improving efficiency, the fact that there is huge potential which is economic today using today’s technologies with no subsidies, and that improving energy efficiency brings with it massive non-energy benefits such as job creation, productivity and improved health and well being.  All, and I say all lightly as it is no small task, we need to do now is work out how take advantage of that huge economic potential that we know is out there.  We are advancing quickly on that journey with projects like the Investor Confidence Project, the continuation of the work of the Energy Efficiency Financial Institutions Group (EEFIG) on establishing a common under-writing framework for energy efficiency (supported by the EU), and new business models.  An increasing amount of capital is committed to finding ways of investing into efficiency – now we just need to make it possible for that investment to flow by breaking down the institutional and cultural barriers.

In the UK the energy policy reset has dealt with supply options (mainly promoting new nuclear and shale gas) but remains silent on efficiency.  For the record I am against new nuclear (especially with unproven French or Chinese technology) because of cost and security concerns.  I am in favour of shale gas on energy security grounds assuming we can exploit it cheaply.  In any event, these supply options will take at least a decade (almost certainly more in the case of new nuclear) to take effect.  Meanwhile we are sitting on a huge reserve of very cost-effective energy efficiency potential that is not being exploited and which could be unlocked very quickly.  Almost every day we see cases of buildings, in some cases very new buildings, making savings of 10 to 30%, often with little or no investment.  Everyone talks about the declining cost of solar but we also need to recognize the declining cost of delivering efficiency.  We need to build on that base of activity and accelerate demand, supply and financing of efficiency and hence rebalance the emphasis on supply options.

One way of doing that may be to stop using the term energy efficiency all together. Having worked in the field for so long, and finally having the subject get more recognition, this may seem like a strange proposal but energy efficiency has all kinds of problems as a label.  It is a confusing technical term, it is boring to most people, it still has negative connotations of saving and getting by on less, it threatens energy suppliers, it is invisible, it does not lend itself to photo opportunities and big political announcements, and it leads to all kinds of pointless, endlessly resurfacing, debates based on the Jevons paradox.

We need to truly reset energy policy and focus on energy productivity –the amount of value we create out of a given amount of energy (GDP/energy input).  Productivity is positive.  Improving productivity generates wealth.  No-one can be against improving productivity.  Of course for any particular country energy productivity is made up of two elements, the overall structure of industry and the economy, and the level of actual energy efficiency.

In the UK tackling the country’s poor productivity record is core to the Chancellor’s economic strategy – we need to make sure energy productivity is part of that discussion and so far it clearly isn’t.

In July the Treasury published a document, “Fixing the Foundations: Creating a More Prosperous Nation”.  Chapter 6 is called “Reliable and low-carbon energy at a price we can afford”.  This does start by talking about “improving productivity in energy generation, production, supply and usage” (a good start).  It then goes on to talk about more competitive markets and introducing the ability to switch suppliers within 24 hours.  Competitive markets are generally good but the problem we have is that energy efficiency cannot compete with energy supply – there is no market for efficiency, only markets for stuff that results in efficiency.  We now have the technology to meter efficiency and California is moving towards a market where efficiency can be measured, metered and truly compete in the energy market.  We are developing new business models based on this idea.  Personally I fail to see how 24 hour switching contributes to productivity.   The rest of the points in this chapter mention supply, oil and gas, shale, new nuclear, and the EU’s Energy Union.  In a strange final bullet point printed in red the now on-going review of business energy tax was flagged.  It is almost as if they ran out of ideas and this chapter wasn’t quite finished.

So, apart from the statement “improving productivity in energy generation, production, supply and usage” there is no mention of productivity and no linkage to overall energy productivity – and no mention of energy efficiency.  Efficiency is mentioned in the chapter on Planning and housing – flagging the decision not to proceed with zero carbon homes and saying they will keep energy efficiency standards under review.  The energy chapter is the old 1970s style supply side dominated model in new clothes – “the economy will grow and we will provide whatever energy we need” – rather than focusing on improving energy productivity.

We need to start talking about energy productivity at the macro and the micro level, recognize the economic benefits that come from improved energy productivity (arising from energy cost savings, improved energy security, improved health, reduced need to invest in new supply options etc etc), and set national targets for energy productivity.  To support that we need to aggressively promote energy efficiency (that is to say energy productivity at plant and building level) and really start to exploit the massive cost-effective energy reserve the efficiency potential represents, a reserve which is cheaper than any supply-side option, faster to bring on-stream, and by far cleaner than any other option.  

So maybe we shouldn’t forget about energy efficiency all together, just rename it energy productivity.

Fixing the Foundations can be found at:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/443897/Productivity_Plan_print.pdf

Information on the Investor Confidence Project:

europe.eeperformance.org

The EEFIG report can be found at:

http://www.unepfi.org/fileadmin/documents/EnergyEfficiency-Buildings_Industry_SMEs.pdf

An edited version of my panel presentation at the Building Energy Symposium, Lisbon, Portugal, 24-25 November 2015.

I have always been a student of the future. I grew up in the 1960s in the midst of the space race and started a life long passion for space and science fiction.  When you read science fiction long enough you realize that it has a habit of coming true – just think about the mobile phone or video calls, not so long ago they were the realm of science fiction and now they are part of everyday life.

My favorite science fiction writer Arthur C. Clarke once said that we tend to over-estimate what we can achieve in the short-term and under-estimate what we can achieve in the long-term.  Nowadays it seems as if the long-term has been dramatically shortened – it is only eight years since the launch of the iPhone and in that time smart phones have become the norm.  Arthur C. Clarke also said “the future isn’t what it used to be” – which I now take to mean that we have become pessimistic about the future with dystopian scenarios of over-population, resource depletion and environmental degradation becoming prominent.  Personally I am an optimist and think we can and will solve those problems – and energy efficient building renovation is the one of the best ways of addressing the energy related problems we face.

The focus of this panel is the future and that always starts people thinking about new technologies.  It is important to be crystal clear that we can make significant (20 to 40% or more) energy savings in our buildings cost-effectively without any new technology.  Today we have seen several case studies that demonstrate this, including the impressive results achieved by Sonae Sierra in shopping malls. And there are many more out there.  Accelerating the rate of energy efficient renovation, something we must do to resolve our energy problems of costs, security and environmental impact, is not a technology problem it is a management and institutional problem.  Don’t mis-understand me, we will always have new technologies emerging and they will help to make energy efficiency easier and cheaper, expanding the massive cost-effective resource that energy efficiency represents.  Innovations like factory made retrofit kits will have a massive impact.  But where we really need innovation is in processes, management, institutions and finance.

A lot of investors and lenders want to deploy money into energy efficiency as they have realized it is profitable, a big potential market and not dependent on subsidies.  At the moment many of them are working out how to deploy capital and several existing funds have had problems getting money out of the door.

In order to scale up investment into energy efficiency we need to think about the problem like a jigsaw, to complete a jigsaw you need all the pieces not just one or two.  The key piece in this jigsaw is standardization of the development and documentation of energy efficiency projects – and this is where the Investor Confidence Project comes in.  If you develop a wind farm project you have to follow standard processes and produce standardized documents whereas in energy efficiency everyone does it differently.  This causes a number of problems for banks and investors, namely: increased risks due to uncertain project performance, higher due diligence costs, inability to aggregate projects, and inability to build teams around standard processes.  The lack of standardization has been identified as a major barrier by the Energy Efficiency Financial Institutions Group (EEFIG) and others including the IEA and Citibank.

The Investor Confidence Project (ICP) is a way of addressing this problem. It started in the US and we brought it to Europe with the help of Horizon 2020.  Working with investors and lenders and the energy efficiency industry, the ICP has developed a set of Protocols that set out how to develop and document EE projects in buildings.  The Protocols cover apartment buildings & tertiary buildings.  It is important to understand that the Protocols are not about inventing new standards, we have lots of technical standards, but rather about standardizing the process and the document set.  The Protocols are now available on the website – europe.eeperformance.org – and we are now working with pilot projects across Europe including Porto Viva (the city wide renovation programme in Porto), to embed the Protocols into project development .

If you have projects that would benefit from ICP and becoming more attractive to private capital we would happily discuss how we can help you.  Please join as an Ally or join the Technical Forum that is overseeing the development of the Protocols – it is free.

Another important part of the jigsaw is capacity building and this has to be in three areas.

–          in financial institutions.  The EIB has an on-going project to train banks in energy efficiency projects and the EU has a new project to help develop standardized under-writing procedures using the ICP as a foundation.

–          on the supply side i.e. the energy efficiency industry.  We need to develop better skills in integrated design and build supply chains that can deliver whole building retrofits.

–          on the demand side i.e. the building owners.  We need to make owners more aware of the benefits of energy efficiency and particularly non-energy benefits (NEBs).  NEBs are growing in importance and are much more exciting that energy saving. Energy efficiency is boring, they include things like health, welfare, additional revenue and economic development.  Much work is now going on to value these non-energy benefits.  They are much more strategic and exciting to decision makers than energy efficiency and cost savings.  We need to talk about the NEBs every time energy efficiency is mentioned.

Another important part of the jigsaw is product offerings – the propositions offered by the energy efficiency industry.  For many years people have talked about Energy Performance Contracts (EPCs) but they have never really taken off except perhaps in the public sector. We need to accept the limitations of the EPC product and start to innovate new models.  In general, at corporate and policy levels, we need to switch to a “pay for performance” model where contractors get rewarded for actual delivered energy savings relative to the baseline consumption.  At the moment we have business models and policies that reward buying stuff with no regard to the actual savings achieved by the investment.  We now have the technology to measure these savings or negawatt hours.  Switching from a “pay for stuff” to a “pay for performance” model allows all kinds of interesting new business models where producing energy efficiency suddenly becomes a revenue stream, and revenues are always more interesting than cost savings.  California has embarked on this switch, if we in Europe can do the same my prediction for the future is that we will be amazed at the results.   We can cut building energy consumption, cut costs for owners, reduce local and global environmental impacts, and reduce Europe’s massive energy import bill which is over €1 billion a day.

Thank you.

Thanks to VIDA IMOBILIÁRIA for the invitation to speak and revisit a great city.

California has long been regarded as a leader in energy efficiency – although as in many things in California and in life – the grass often looks greener on the other side and not everything in the Golden State on efficiency that glitters is real gold.  However now it seems as if California is making changes that once implemented will truly lead the world in energy efficiency and probably transform the state and ultimately global market.  Everyone with an interest in energy should be watching these changes.

Like most things in US politics the changes are wrapped up in acronyms, in this case the laws AB 802 and SB 350.  SB 350 will increase building energy efficiency targets in the state by 50 percent by 2030. It will also boost the amount of renewable energy utilities are mandated to buy to 50 percent by 2030.  According to the California Public Utilities Commission’s fourth quarter 2014 report the three investor owned utilities in the state are well on their way to meeting the current 2020 goal of 33% renewables so SB 350 will keep up the pressure.  AB 802 mandates state-wide energy benchmarking and access to building performance data for commercial buildings.  Benchmarking and open data are critical tools in driving action in commercial real estate.

The real game changer in SB 350 lies is the way that energy efficiency will be counted in future.  Up until now the state incentive schemes run by the utilities have only been able to reward energy savings over and above Title 24 – the rigorous building code.  What this means is that you can only get an incentive to improve your existing building to a level over and above the high level of efficiency required for new buildings.  Given that it is often impossible to do this, lesser but still valuable improvements were not being rewarded by incentives and what is more, the code is heading to net zero buildings leading to an existential problem.  Furthermore incentives were paid out in advance either based on deemed savings, or the results of engineering models  (which we know don’t work very well).  SB 350 turns this system around completely – it requires measurement of savings and actually defines savings as “reducing the quantity of baseline energy services demanded” and includes both the adoption of efficiency measures and practices such as behavioural change – another important innovation.  The law says that savings “shall be measured taking into consideration the overall reduction in normalized metered electricity and natural gas consumption”.

The model will switch to something we have never had in energy efficiency – pay for performance.  The system won’t care what measures are implemented – leave that up to the market, it will just pay for actual savings delivered.  We will move from deeming savings and hoping or praying the result will be OK to measuring actual results and paying for performance.

Watch this space – but the switch from deemed savings to metered savings enables all kinds of new business models.  We are actively developing these in Europe and will be happy to discuss them with interested parties.

NB Thanks to Terry Egnor for the title.

At the recent 2 Degrees Energy Performance in Property[1] event in London, the theme was “How to Make a Compelling Business Case for Energy Efficiency.”  Not a topic likely to be turned into a Hollywood film but one of vital importance.  I was asked to give my views.

There is a massive gap between the potential for economically attractive, energy efficiency projects and those that are actually implemented – the so-called “energy efficiency gap”.  Closing the gap will help towards achieving our energy security and climate goals – saving money, protecting the environment and creating jobs..

One of the primary reasons I see for the energy efficiency gap in corporations is the inability of energy managers developing projects to create a sufficiently compelling business case for them to board level decision makers, particularly the CFO.

Part of this problem is clearly that energy managers and CFOs speak different languages – energy is typified by engineering and technology speak – MWh, tonnes CO₂ etc;  while finance is dominated by ROI, ROCE, risk etc.  One thing is for sure – the CFO is unlikely to learn “energy speak” so the energy people need to learn how to talk so CFOs will hear them, understand their message and take action. The easiest way for an energy manager to bridge this gap is to take some time prior to an encounter with “finance types” and look for compelling ways to state the positive effect that implementing the proposed changes will have on  the bottom line – and this certainly needs to be phrased in the financial language used by the CFO.

All investment decisions are based on financial analysis – however good or bad and even if the investment is mandated by law or regulation.  Only by talking about the financial benefits to the CFO, will those working to implement more energy-efficient solutions meet with greater success.

Understanding the decision making process is critical.  Catherine Cooremans[2] of the University of Geneva has researched energy efficiency decisions.  She explains how investment decision making is influenced by many factors, including the financial and human capital that will be involved, the organizational context, and of course market pressure and regulations.

[1] 2 Degrees Network Energy Performance in Property 2015

http://2degreeslive.com/event/energy-performance-summit1

[2] Cooremans, C. “Strategic fit of energy efficiency”, 2007 ECEEE Summer Study

http://www.eceee.org/library/conference_proceedings/eceee_Summer_Studies/2007/Panel_1/1.177

The divestment campaign, encouraging investors to divest from investments in fossil fuels has always slightly puzzled me but it does seem to be growing in strength.  One issue with it is that if an investor sells their shares in an oil company someone else buys them, the company itself is unaffected unless there are far more sellers than buyers and then the share price will drop to a new equilibrium.  Shareholding is about ownership and the shareholders are the owners of the company, surely a counter strategy to divestment would be to invest more and start taking a tighter control of the asset that you own – the gulf between shareholders and management is a major contributory factor to many corporate ills in my opinion.  If you own 100% of a company (or even a majority) it pretty much has to do what you want which could of course include investing more in alternative energy assets or electric cars or private rockets or whatever you want.

The other issue that the divestment campaign has is that it is predominantly negative and if large investors do divest they then have to find an alternative home for their wealth, preferably one that has the same (or better) risk and reward characteristics that they were seeking by investing in fossil fuel companies.  Clearly there are opportunities to invest in renewable energy and green infrastructure and ultimately of course energy efficiency.  With recent changes in the UK to support mechanisms renewables may not look as attractive as they once did and dependence on government subsidies should now be considered a significant risk factor in all jurisdictions.  This is likely to increase the amount of capital at least considering energy efficiency as an alternative.  Those of us in the energy efficiency business would argue, with some considerable evidence, that there is still massive potential (even at low oil prices), to increase investment into very cost-effective, profitable energy efficiency opportunities which as well as bringing energy cost savings, reduction in exposure to energy price volatility and reduced emissions can also bring significant non-energy benefits such as improved health and welfare.

The problem is not about potential however, it is about how to turn potential into real investment opportunities at scale and there are a number of significant barriers to doing that.

Firstly, as we looked at in a previous post Energy Efficiency as a Resource the fossil fuel industry has a well developed and fairly standardized system for developing and valuing fossil fuel resources and reserves in the shape of the Petroleum Resources Management System (PRMS).  There is no equivalent in energy efficiency although the Investor Confidence Project Protocols (currently available in the US with European versions to be launched soon) are the basis of a similar system for energy efficiency projects in buildings.  Utilization of the Protocols will help standardize the development and documentation of energy efficiency projects which will reduce transaction costs and improve the consistency of technical performance.  They are being used by a growing number of developers, investors and programme managers.  The Investor Confidence Project in the US has also launched a quality management system under the title of Investor Ready Energy Efficiency^SM.  The European Commission has recently launched a project that will work with the financial sector to develop a standard approach to under-writing energy efficiency projects which is likely to build upon on the Investor Confidence Project approach.

Secondly there is very little available data on the actual technical and financial performance of energy efficiency projects.  Many organizations investing in energy efficiency don’t conduct post-investment analysis and even if the performance data sits somewhere in their energy monitoring system (assuming they have one!) it is not readily available without considerable data mining and manipulation.  Host organizations who have used Energy Performance Contracts, or their Energy Service Companies do have data on performance but again it is usually proprietary.  For investors  considering energy efficiency projects there is no  place to get actuarial data on the performance of buildings and projects similar to the ones they are considering.  This is being addressed in the US by projects such as Department of Energy supported Building Performance Database and will be addressed in Europe by a forthcoming European Commission funded project.  In the fossil fuel industry project performance data is easier to get hold of, oil companies revenues are based on oil production and the oil price, capex figures are generally available (at least for public companies) and there are industry forums for benchmarking the capital cost of projects.

Next there is the lack of human capacity within the financial sector to understand, evaluate and underwrite energy efficiency projects.  Investors in and lenders to the fossil fuel industries have considerable human capacity with a deep understanding of the industry, typically they have specialized teams, including people with direct working experience in the industry and access to analysts who really know the sector.  Twenty-five years ago there was no equivalent capacity in the renewables sector, the growth of the renewables industry (particularly wind) has been mirrored (and indeed enabled) by the growth of human capacity in renewables within the financial sector.  There is very little capacity around energy efficiency in the financial sector.  Of course it is only really possible to scale-up human capacity around standardized systems such as those of the Investor Confidence Project and standardized under-writing procedures.  You can’t build teams or companies when every transaction is done in a different way.

Another part of the problem is that compared to fossil fuels and even renewables there is a lack of development capacity and by this I mean specifically the ability to develop large-scale, investable projects.  Large property owners in both the public and private sector lack the technical capacity, and the development finance, which is risky capital at the end of the day, to develop large-scale, multi-property, bankable projects.   In the fossil fuel industry there is a well developed network of project developers ranging from small E&P oil companies, often with very few resources when they start, through to the oil majors.   Building owners and energy efficiency developers tend to work on a single (small) project by project basis or at best an individual building.  A number of factors contribute to this including the small capital cost of efficiency projects, the fragmented nature of the energy efficiency industry and the fact that efficiency is not seen and valued as a resource like fossil fuels or wind power is.

All these problems make investing in energy efficiency hard to do at the moment.  Specialized efficiency funds that have been established in the UK, Europe and around the world are finding it hard to deploy capital.  The development of the Investor Confidence Project and establishment of project performance databases are critical enabling conditions to foster a growth in investment into energy efficiency.  Interest from the financial community and desire to invest in the sector is growing, particularly amongst investors who have previously invested in renewables and now find them less attractive, as well as investors with social and responsible investing objectives.  To convert the potential into reality now requires building capacity in both the demand side, the building owners, the supply side, i.e. the energy efficiency supply chain, and the financial sector.

So if investors want to divest from fossil fuels and invest in energy efficiency they need to put some seed money into solving these problems first.  Just providing project investment funds will not cut it.