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.

Like many others I have long been troubled by the UK government’s decision to support new nuclear and particularly by the bizarre decision to guarantee the Hinkley C project by agreeing a strike price of £92.50/MWh and up to £17 billion in Treasury loan guarantees.  I have never been against nuclear power per se although I have serious questions about the choice of basic technology, (uranium cycle pressurized water reactors), and the risks of failure in very complex systems where the consequences of failure can be huge.   I do worry about the wisdom of choosing a reactor design where the two other examples are hugely over-budget and behind schedule.  I seriously worry about relying on Chinese funding and Chinese technology to build future reactors.

Having read a piece in the Sunday Times (“New threat to Hinkley nuclear plant cash”), I am now less worried because it looks less likely that the project will ever go ahead.  The “new” (not actually that new) information is that the EU’s approval of the Treasury’s guarantee is dependent on the French reactor at Flamanville having “completed the trial operation period” and other operational milestones by December 2020.  In September 2015 EDF announced that the Flamanville start-up was now scheduled for Q4 2018 – the latest in a long-line of delays (as well as budget increases).  Even if the French regulator does not force EDF to remove the steel containment vessel, which has been found to have “anomalies” and “lower than expected mechanical toughness values”, I have no confidence in their ability to meet this target given their inability to meet any of the previous ones.

The decision from the regulator on the pressure vessel may not even come until the end of 2016.  Even if EDF hit the Q4 2018 target (a big if) that only leaves 24 months to satisfy the EU’s conditions.  So, in my opinion, Hinkley will never get built and prove to be the biggest in a long line of UK energy policy mistakes (and no doubt the tax payer will end up picking up the bill in some way).  So, time to stop worrying about Hinkley and worry about how to really solve the problem of the short and medium-term electricity capacity shortage caused by years of inaction by successive governments.  The answer is not new nuclear and it is not subsidizing fleets of polluting diesel generators (which we are doing) – the demand side of the answer lies in properly valuing all the multiple benefits of efficiency and making it measurable and an investable asset class, as well as reforming the energy market to allow efficiency to properly compete with supply.

It would be impossible for me not to comment on the terribly sad death of David Bowie. As for many of my generation he was, and remains, a big part of my life and is by a very long way my favourite musician of all time.  His influence on music, art and culture cannot be under-estimated.  Perhaps it can only really be appreciated by those of us who were there and watched the 1972 performance of “Starman” on Top of the Pops on black and white TV, under the dis-approving parental gaze. The world changed at that moment.

In 1976 I was lucky enough to win tickets to see the world premier of his first film, “The Man Who Fell to Earth”.  Apart from the excitement of attending a star studded (minus Bowie) world premier I will never forget the first shot of him on the big screen in Leicester Square or the impact of the movie.  I still have the ticket and the movie poster, bought for the then not inconsiderable sum of 50p.

I first saw him live on the “white light” Isolar II tour in June 1978.  A friend and I managed to get to the front row centre stage, no more than a couple of metres away from Bowie.  Subsequent concerts in stadia, The Glass Spiders tour in June 1987 at Wembley, and the Sound+Vision tour in August 1990, were great but could never beat being in the front row of the New Bingley Hall County Showground in Stafford.

So what was/is the appeal of Bowie?  For those who know of my interest in space it will not be a surprise that the space and science-fiction nature of “Ziggy Stardust & the Spiders from Mars” was the original draw for me.  It soon went far beyond that as his lyrics always seemed to have great meaning about life, love and the universe.  As the cliché goes he always innovated and it seems hard to believe that fans, me included, who loved the sci-fi rock of “Ziggy Stardust” could also like what Bowie called the plastic soul of “Young Americans”, the indefinable “Station to Station”, the techno “Low”, and the dance music of “Let’s Dance”.  There was always that period of adjustment to the new style when a new album came out but with the exception of a few albums they all came good in the end.  Even the low points had their moments of brilliance.

As well as the changes in style he was always at the cutting edge of musical experimentation and technology, and then later video and the internet.  In a 2000 interview with Jeremy Paxman he talked about the power of the internet to disintermediate and break down the barrier between the artist and the consumer.  It is hard to remember the primitive nature of the internet in 2000 but Paxman’s reaction and look of skepticism expresses it well.  Now of course, 16 years later, we take disintermediation and “prosuming” as the norm, and the kind of music and video technology that used to cost a fortune is now available in apps that cost pennies or are even free – meaning anyone can create professional quality music, video and art.

Without a doubt David Bowie was a creative genius, but perhaps more importantly one who was able to channel that creativity into action without worrying about the barriers or what people will think.  We are not all musical, (I know I am not) but we are all more creative than we think, but we allow lots of barriers to get in the way of creating so Bowie’s life should inspire us to always act on the creative drive.  His music, film, art and effect on culture will live on forever.  As he said in “Quicksand”:

“I’m not a prophet or a stone age man

Just a mortal with the potential of a superman.”