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.

Friday 10th July was the 75th anniversary of the start of the Battle of Britain, a pivotal moment in history that changed the course of World War 2 and consequently the world.  I was lucky enough to see some of the fly-by in London of four Spitfires and two Hurricanes accompanied by four state of the art RAF Typhoons.  The 18th August was named “The Hardest Say” as both sides lost more aircraft combined than on any other day of the battle.  The story of the Battle of Britain has been told many times, famously in the 1969 film which used 100 real aircraft in stunning aerial warfare sequences.  Like much of WW2 history, the more you learn about the Battle of Britain the more amazing the story.  The average age of RAF fighter pilots was about 20 and many went into combat with less than 10 hours flying experience on type and then flew three, four or more sorties a day.  Without getting too carried away in patriotic fervor it is true that Britain and the rest of the world owes the RAF pilots of the Battle of Britain a debt, and not only to the pilots, but also to their leaders and also to the Spitfire and the Hurricane and the people who designed, built and maintained them.  As Churchill said; “never in the field of human combat has so much been owed by so many to so few”.

Having been moved to write something on the Battle of Britain I was struggling for an energy related theme.  I first thought about the Rolls Royce Merlin engine that powered Spitfires and Hurricanes.  A great piece of engineering at the time it produced 977 kW (at 9,200 feet in III specification) from 27 litres displacement with a weight of 744 kg.  As a measure of technology improvement in the intervening years, and referring back to my Formula 1 blog, these numbers should be compared to the numbers for the Mercedes F1 W06 hybrid power unit which produces 671 kW from 1.6 litres and a dry weight of 145 kg – 11 times the output per litre and 3.5 times the output per kg.  As well as the Merlin, the use of 100 octane gasoline, a relatively new development in 1940, was another factor that helped give the RAF air superiority.

Then I thought about how the struggle for oil drove several WW2 strategic directions and battles.  There is a view that the German invasion of Russia was driven by the need to secure oil.  The war in the Pacific was essentially about Japan looking for resources after the US embargoed oil exports to Japan. Romania’s oil was a critical resource for the Germans and the oil refineries in Ploesti were the target for a famous 1943 American bombing raid – Operation Tidal Wave.  (I once flew myself over Ploesti and the same oil refineries which was exciting.)  The Germans, lacking domestic oil, developed the Fischer-Tropsch process to make oil from coal, which continues to be used and developed to this day.  General Patton’s tanks famously ran out of gasoline in their rapid charge across Europe in 1944, highlighting the importance of fuel supply chains.  Another less known energy story from WW2, and one that is relevant to today, is how Britain boosted domestic oil production from 750 barrels in 1938 to 845,000 barrels in 1943 – much of it from wells drilled secretly in Sherwood Forest.

I even thought about making an analogy to a new battle of Britain, the battle around energy dependency – something we need to take more seriously.

But in the end I decided we should just simply take a few minutes to remember the Few.

Of the nearly 3,000 RAF aircrew who fought in the Battle of Britain 544 lost their lives and of the remainder a further 814 died before the end of the War.  The Battle of Britain Monument on the Victoria Embankment, London, records the names of the 2,936 flyers from the 15 nations who flew for Britain in the Battle.  Of course we should also remember the Luftwaffe pilots who were lost.

“The gratitude of every home in our island, in our Empire and indeed throughout the world, except in the abodes of the guilty, goes out to the British airmen, who, undaunted by odds, unwearied in their constant challenge and mortal danger, are turning the tide of the world war by their prowess and devotion.  Never in the field of human conflict was so much owed by so many to so few.”

– Winston Churchill

News this week that Chrysler were recalling 1.4 million cars because they are vulnerable to hackers taking control of dashboard functions, steering, transmission and brakes was somewhat alarming given widespread enthusiasm over the Internet of Things (IoT) and driverless cars.  The Sunday Times followed up with an article saying that hackers would be able to use smart fridges to access smart home networks and hold people to ransom in the same way they do with computer hard drives – pay up or we crash your smart home.  Although journalistic this article did raise some serious issues about the security of smart devices and smart systems – the emerging internet of things (IoT).

Much of the discussion around the IoT has an energy focus, smart and interlinked thermostats like the Nest are part of IoT and now every light fitting in a building, and now even every light bulb, can be internet enabled.  The benefits for energy saving and maintenance can be very large and no doubt this kind of application will grow dramatically because of those real economic benefits.  This trend is part of the fusing of energy supply and energy demand that is disrupting the energy market everywhere.  In the past every energy using device was simply a fixed load and the electricity supply network had to deliver enough power to meet the load at all times.  Variation of load was simply an addition of all the fixed loads that were on at any time.  Now with IoT enabled devices each individual load can potentially be varied or switched on or off, and of course linked directly to supply network intelligence, enabling a more dynamic, two way interplay between supply and demand.

At the International Energy Research Centre’s conference in Cork in May there was an interesting session called “the internet of energy things” (IoET?).  I took away the idea that the IoET is a sub-set of the IoT which impacts on the energy sector.  (It is almost certainly the largest subset although there can be non-energy using IoT enabled objects).  Now, as well as the things in the energy generation, transmission and distribution system, (which tend to be big bits of kit), joining the IoET we are now seeing more and more (small or even tiny) end-user energy using devices also joining the IoET – adding to the complexity of what is already our largest machine, the electricity system.  At  that meeting I did raise the issue of security of the IoET, citing the infamous Stuxnet virus which was used to infect Siemens motor controllers which were attached to centrifuges in the Iranian Natanz Nuclear Technology Centre which were enriching uranium, possibly (probably?) for use in a nuclear weapon.  If someone can use Stuxnet to take out centrifuges in what is presumably Iran’s most secure facilities, (by the way the Siemens motor controllers weren’t even connected to the internet the virus was put into computers inside the plant from a USB stick), the risk to internet enabled devices in the energy system has to be serious.

There is no doubt that the benefits of the IoET could be huge in terms of energy savings and more dynamic markets, but the issue of security is critical and I am not sure it is receiving the attention it deserves.  Of course there is always the possibility that it is but we never hear about it for security reasons.   Anyway, we definitely have to add cyber security to all the other growing risks to the energy system.