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.

At the recent EU Sustainable Energy Week, Vice-President Maroš Šefčovič said “we should treat energy efficiency as an energy resource in its own right” and in fact the Commission now talks about energy efficiency first. Efficiency enthusiasts have long advocated this view so it is good to see it beginning to be adopted by the EC.

If efficiency is to be treated as a resource we need to map the language of efficiency onto the language of other energy resources. The energy and finance industry has its own language when taking about resources, a language that is itself often mis-understood by outsiders. In the 1970s there were many reports of oil running out based on the fact that there were only 20 (or 30 or some other number) of years of oil reserves left. This completely mis-understood the meaning of reserves. So let’s look at the language of conventional fossil fuel energy resources and how that maps onto energy efficiency.

The methodology for defining and measuring resources and reserves is called the Petroleum Resources Management System (PRMS) and has been developed by the Society of Petroleum Engineers and endorsed by the World Petroleum Council, the American Association of Petroleum Geologists, the Society of Petroleum Engineers and the Society of Exploration Geophysicists. The valuation of oil and gas companies are based on the use of the PRMS and when oil and gas companies come to the public markets the price is related to the PRMS assessment as it provides a standardized way of assessing, and therefore valuing, resources and reserves.

The diagram and the text below explains the PRMS and the definitions.

RESERVES are those quantities of petroleum anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions. Reserves must further satisfy four criteria; they must be discovered, recoverable, commercial, and remaining (as of the evaluation date) based on the development project(s) applied. Reserves are further categorized in accordance with the level of certainty associated with the estimates and may be sub-classified based on project maturity and/or characterized by development and production status.

CONTINGENT RESOURCES are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations, but the applied project(s) are not yet considered mature enough for commercial development due to one or more contingencies. Contingent Resources may include, for example, projects for which there are currently no viable markets, or where commercial recovery is dependent on technology under development, or where evaluation of the accumulation is insufficient to clearly assess commerciality. Resources are further categorized in accordance with the level of certainty associated with the estimates and may be sub-classified based on project maturity and/or characterized by their economic status. Note that for resources to be classified as Contingent Resources they must be discovered.

UNDISCOVERED PETROLEUM INITIALLY-IN-PLACE is that quantity of petroleum estimated, as of a given date, to be contained within accumulations yet to be discovered.

PROSPECTIVE RESOURCES are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective resources have both an associated chance of discovery and a chance of development. Prospective resources are further subdivided in accordance with the level of certainty associated with recoverable estimates assuming their discovery and development and may be sub-classified based on project maturity. Prospective Resources can be sub-classified as Prospects, Leads and Plays as follows:

• Prospect: A potential accumulation that is sufficiently well defined to represent a viable drilling target.
• Lead: A potential accumulation that is currently poorly defined and requires more data acquisition and/or evaluation in order to be classified as a prospect.
• Play: A prospective trend of potential prospects, but which requires more data acquisition and/or evaluation in order to define specific leads or prospects.

UNRECOVERABLE is that portion of Discovered or Undiscovered Petroleum Initially-in-Place quantities which is estimated, as of a given date, not to be recoverable by future development projects. A portion of these quantities may become recoverable in the future as commercial circumstances change or technological developments occur; the remaining portion may never be recovered due to physical/chemical constraints represented by subsurface interaction of fluids and reservoir rocks.

Determination of Commerciality

Discovered recoverable volumes (Contingent Resources) may be considered commercially producible, and thus Reserves, if the entity claiming commerciality has demonstrated firm intention to proceed with development and such intention is based upon all of the following criteria:

• evidence to support a reasonable timetable for development.
• a reasonable assessment of the future economics of such development projects meeting defined investment and operating criteria.
• a reasonable expectation that there will be a market for all or at least the expected sales quantities of production required to justify development.
• evidence that the necessary production and transportation facilities are available or can be made available.
• evidence that legal, contractual, environmental and other social and economic concerns will allow for the actual implementation of the recovery project being evaluated.

To be included in the Reserves class, a project must be sufficiently defined to establish its commercial viability. There must be a reasonable expectation that all required internal and external approvals will be forthcoming, and there is evidence of firm intention to proceed with development within a reasonable timeframe. While 5 years is recommended as a benchmark, a longer time frame could be applied where, for example, development of economic projects are deferred at the option of the producer for, among other things, market-related reasons, or to meet contractual or strategic objectives. In all cases the justification for classification as Reserves should be clearly documents.

The energy efficiency analogues

So, having explained the PRMS, what are the equivalents in energy efficiency and how do we need to change the language so that we can think of efficiency as a resource?

Clearly assets in Production are efficiency projects that have been implemented and working. Like oil fields actual production (of “negawatt hours”) will vary from the initial design estimates, this variation can be down to errors of designs (technical performance) and variations in other factors e.g. occupancy patterns in a building. The economic performance will of course be affected by the price of energy that is being “saved” which will almost certainly vary during the project lifetime, just like the price of oil varies during the production lifetime of an oil field. In both cases the only certainty is that the actual output and actual economic performance will be different to that estimated in the investment case.

Energy efficiency reserves, using the PRMS criteria of being discovered, recoverable, commercial and remaining, are those projects that have been identified in some process (probably involving an energy audit), can be implemented practically, are commercial according to the investor’s criteria and are as yet not implemented. The level of uncertainty addressed in the PRMS fits nicely with the difference between a regular energy audit or survey and an Investment Grade Audit (IGA). IGAs typically include fixed prices and a financing plan. (An IGA can be level II or III in ASHRAE or Type 3 under ISO50002.)

Also of course an audit of either type, a simple audit or an IGA, can find projects that are sub-commercial i.e. Contingent Resources. One of the definitions of sub-commercial is projects for which there are “currently no viable markets” – there actually isn’t a market for energy efficiency although we can envisage a situation where there could be, similar to the market for demand response. Creating such a market would require the appropriate regulatory framework. The other criteria is “where commercial recovery is dependent on technology under development”, in energy efficiency there are projects that are dependent on emerging technology and assumptions about its timing and/or costs and benefits. The third criteria is “where evaluation of the accumulation is insufficient to clearly assess commerciality”, i.e. the level of uncertainty is too high due to a lack of information. This may be a project identified by an audit but where there is still uncertainty over costs and savings, uncertainty that can be reduced by further measurement and analysis or cost determination, or external, contextual uncertainties e.g. uncertainty about the future ownership or occupancy of a building.

Over the last forty years there have been numerous studies of the potential for energy efficiency. One problem with these studies is the definition of economic, what is economic is defined by the investor and will vary from investor to investor. They also often cover the equivalent of Reserves, Contingent Resources, Undiscovered, Prospective Resources and Unrecoverable without breaking the potential down. The size of the Unrecoverable energy efficiency is driven by the technological frontiers with the upper limit set by the laws of thermodynamics.

It is often said that one of the problems with energy efficiency is that it is invisible. This is true but let’s not forget that oil and gas resources and reserves are also invisible, it is only the tools of geology and seismic studies – which are increasingly sophisticated – which allows us to “see” those resources. In energy efficiency it is tools like benchmarking and energy audits that allow us to see the resource.

One of the differences between energy supplies and energy efficiency is that once the reserves are identified they don’t usually sit around for many years without being developed. Compared to oil and gas the reserves are made up of many (millions of) individual small projects and implementation usually follows evaluation fairly quickly, unlike in oil and gas where projects can cost billions and take many years. On the other hand we know that there have been years of energy audits which identified economic projects which have not been implemented – energy audits are notorious for sitting on the book shelf (or these days on the hard drive). The projects identified in those audits are effectively energy reserves and contingent resources which are not valued. They have a high degree of uncertainty but they are there.

If you are an oil and gas company with control over reserves and even resources, these have a value against which you can raise money. This is how oil and gas E&P (exploration and production) companies raise money on markets like AiM (Alternative Investment Market) or TSX (Toronto Stock Exchange). Given that nearly every building has reserves of energy efficiency potential we need to think about mechanisms that value that potential, just like we value oil and gas fields before they are exploited.

The built environment is probably our biggest energy resource.

Continuing the retrospective of the last two and half years of onlyelevenpercent.com

Opening up data

Open performance data can be a real driver for greater energy efficiency. US cities like New York and Chicago have mandated large buildings publish their normalized performance data every year. In the 1980s the UK’s Audit Commission programme that required all Local Authorities to produce Normalized Performance Indicators (NPIs) for every building and this drove a lot of improved energy management and investment activity (having been involved in developing the NPI I was involved in a lot of the follow-up implementation). The use of NPIs can be criticized but if used properly, as a guide for management action, they can be extremely powerful.

In 2014 Knauf Insulation launched the Local Authority Energy Index which we had developed for them. The Index uses a range of quantitative and qualitative indicators to gauge local authorities’ response to the energy agenda. With Knauf we are now working with others to expand the Index to about 100 local authorities covering about 50% of UK energy use. Anyone interested in becoming a sponsor please let me know.

Working with the Crowd on another open data initiative we developed the Energy Investment Curve which sought to identify what investments companies have made in energy efficiency (and renewables) and what their expected payback periods were as well as their experience of the project. The Crowd, having raised money in a very successful (and highly appropriate) crowd funding campaign, are now developing this tool further. I can see it being developed to record actual payback periods and integrated into initiatives such as the Knauf Local Authority Index.

The Local Authority Energy Index and the Curve were featured in these blogs:

Launching the Local Authority Energy Index

Launching the Energy Investment Curve

Community Energy

One of the major trends of the last few years has been the growing trend in community energy in many forms. I have written about this several times and have supported the idea of local authorities forming municipal energy services companies, several of which have now been formed. It is important that we move community energy beyond a few subsidized small-scale wind or solar projects and re-connect energy supply with energy demand at a local level. Like other community led projects, as well as the physical and economic benefits that can be created, the benefits of real community involvement can be huge, bringing both greater understanding of the issues and an enhanced sense of involvement to the community – something that is lacking in much of modern life. The following blogs considered community energy.

Ask Not What Your Country Can Do For You

Power to the People – the Rise of the CESCo

ESCOs, EPC and energy efficiency financing

Most of my efforts of the last few years have been in the area of energy efficiency financing which naturally includes ESCOs, Energy Performance Contracts (EPCs) and other forms of shared savings contracts. I am on record as saying we need to ditch the term “ESCO” and that EPCs are not the answer to everything that some people seem to think they are, particularly some new entrants to the energy efficiency arena. This is a deliberately controversial statement and of course many EPCs are beneficial. I do think the energy efficiency industry has historically been very poor at understanding it’s markets and what the decision drivers really are. There has been, and continues to be, a belief that the fact that an energy efficiency project has a two or three year payback should automatically make it a “no brainer” whereas there may be many other non-energy considerations in an investment decision. This has been a recurring theme and one which I am sure I will return to in future.

Isn’t It Time to Ditch the Term ESCo?

A Road Map for Energy Efficiency Financing… And Free Negawatts on Offer

ESCO Obsessions

The history and future of the energy industry

The one certainty is that the future will be different to the past but having said that we can always learn from the past. Anyone with an interest in energy should read as much as possible on the history of the industry in all its forms including fossil fuels, electricity, nuclear and renewables. One of the best books I read in the last few years is “Children of Light: How Electrification Changed Britain Forever”, a history of the UK electricity industry. I highly recommend it.

Children of Light – book review

Another great read, particularly for anyone who leans to the idea that nuclear power is the answer, is “Going Critical”, Walt Patterson’s history of the UK nuclear industry. Unfortunately we don’t seem to be learning much from that particular bit of history.

Over the last few years there has been much discussion of the effects of renewables and efficiency on the future of utilities. A Citigroup report titled “Energy Darwinism” said that half of the addressable market for utilities could disappear as a result of distributed solar and efficiency – something that should be worrying the CEOs of any utility. We have recently seen E.On restructure dramatically and it is clear that restructuring utilities will be a growth industry for advisers for many years to come. The following blog looked at the future of energy companies.

Utilities: Dinosaurs Looking up as the Asteroid Impacts?

Thank you to all my readers over the last two and a half years. Expect more exploration of these themes and a few other personal diversions in the future. Please subscribe to updates from onlyelevenpercent.com and follow me on twitter @DrSteveFawkes

To mark my 100th blog I thought I would do a retrospective and summarise some old material – particularly for newer readers who haven’t been following onlyelevenpercent.com since the beginning. This is actually blog number 103 since I started blogging in February 2013.

Looking back over the last two and half years there have been a number of recurring themes, interspersed with a few personal diversions such as celebrating the 45th anniversary of Apollo 11 and the attractions of Formula 1.

Energy efficiency is working – but we need to accelerate it

One of my big themes is that energy efficiency is working and we have successfully (at least in mature economies) decoupled energy use from growth of GDP. Despite the evidence this does not seem to be generally recognized and we still often hear the refrain “energy use is rising inexorably” or something like that. The fact is that it is not increasing in mature economies – but of course it is still rising in developing countries – once income per head reaches about $1,000 per year energy use ticks up sharply as more and more people buy more energy using stuff from light bulbs to cars. Decoupling of GDP and energy use is good (even great) news – although I think we achieved it without really trying through general technological improvement and some regulation. Now, the realities of the global energy situation mean we should make a more conscious effort to accelerate that reduction in energy intensity to achieve all the economic, environmental and security benefits that would come from having a larger economy with less energy use. If we achieved decoupling without really trying just imagine what we could achieve if we really try and implement tighter performance regulations and work to make energy efficiency just as investable as energy supply options. We know the economic potential is still huge.

Blogs that explored this theme include:

Asking the right questions

Surprise! You are living in a low energy future… (almost)

Consumers see the light – more evidence that energy efficiency is happening 

The energy efficiency revolution

Conscious uncoupling? 

Non-energy benefits & selling energy efficiency better

One of the major changes in the energy efficiency scene over the last few years has been the increasing recognition of the importance of, and real value of, non-energy benefits (NEBs) or co-benefits. Great work by the IEA and RAP in the US, as well as others such as Greg Kats have highlighted the real value of the NEBs. I now say that every-time we mention energy efficiency we should talk about the NEBs. Most of them such as greater productivity, increased sales in the commercial world, or improved health and well-being and economic development in the public sector, are always going to be better motivators for decision makers to take real concerted action than just energy savings, which I realized after 30 years working in the field is just really boring to most people (see my presentation launching the energy efficiency cool wall). NEBs were featured in these blogs:

How do we make energy efficiency stickier? 

The layer cake of energy efficiency 

The Association of Decentralised Energy (ADE) in the UK also did a great piece of work on highlighting both the success of energy efficiency and the value of non-energy benefits which I contributed to. The ADE work was described here:

Shining a light on Invisible Energy

Energy security

The issue of energy security suddenly came back on everyone’s radar with Russia’s actions in the Crimea and the Ukraine, as well as their increased military spending and aggression – for example flying close to UK (and that of other countries) airspace without turning on their transponders. The combination of the Russian factor and the deteriorating situation in the Middle East with the rise of the so-called Islamic State has made me more worried about energy security, and our increasing dependence on imports, than ever before. UK energy imports continue to rise and the EU imports c.€400 billion of energy a year, much of it from Russia. Even if there was no potential military threat, the growing domestic oil demand in oil producing countries, most notably Saudi Arabia, suggests that a future in which their oil exports are severely constrained is getting closer.

In all the discussion of the threat of being dependent on Russian gas supplies there was little or no mention of Russian coal which supplied 45% of UK steam coal and therefore generated 16% of our electricity supplies (admittedly an improvement from 2012). We really should look at all the factors – not just the headlines about gas. As well as coal imports the UK became a net importer of petroleum products for the first time in 2013.

The reality is that dependence on any other country or region for energy supplies seriously reduces the dependent country’s degrees of freedom in response to any geopolitical situation. Independence of energy supplies gives true independence of action – which we clearly don’t have at the moment. On top of those concerns it cannot make sense to export about €1 billion a day out of Europe and for the US to spend $0.75 billion per day keeping the US Navy in the Gulf. In addition to security concerns, in a world where we increasingly pay attention to where and how goods are made – sourcing and supply chains – surely we should be asking the same questions about our basic fuel supplies.

An energy security story that didn’t get much attention in Europe was the Metcalf sniper attack on an electrical sub-station near San Jose, California. The perpetrators of this “sophisticated” attack by a team of snipers, which damaged 17 transformers and resulted in $15 million of repair work, have still not been apprehended. However, as a result security on the electrical infrastructure is being upgraded across the US (and one would hope the UK and Europe).

I am interested in how language shapes our thoughts and actions, at both an individual and corporate or national level. We always talk about energy security but as we know, no-one actually wants to buy energy they want the services that come from the use of energy, whether it be warmth, coolth, motive power, light or sound. In talking about energy security all the time we remain focused on the physical security of the flows of energy commodities. We should be talking about the security of energy services and when you do that it focuses the attention more on where the services are needed (close to home) and on improving energy efficiency. Retrofitting just the Soviet era housing in Central & Eastern Europe would significantly reduce Europe’s import dependence – perhaps we should put it on the defense budget?

The following blogs looked at energy security issues.

Energy Security for the UK and and Europe

More on US energy security

Don’t mention energy security again

Making a real market for energy efficiency

One of the problems with energy efficiency is that somehow it is regarded as “special” – and at one level it is because of the fundamental nature of energy. However the view that energy efficiency is something that can only be regulated or implemented through some kind of government programme or subsidized utility programme (still prevalent in Europe and even the US) is a hangover from the 1970s. Energy efficiency is a resource for meeting demands for energy services, like any other energy resource whether it be coal, oil, gas, nuclear or renewables. In fact, it is the resource that has provided more energy services than any other over the last forty years – this is still not widely recognized by policy makers and analysts.

The more we can create a real market in which energy efficiency actually competes with energy supply the more efficiency will be purchased – it really is cheaper, quicker and cleaner. In energy supply we have standardized ways of developing projects, an ecosystem of developers, constructors and operators of projects and multiple sources of finance. We don’t see that in energy efficiency but rather the idea that government, either directly or indirectly through utility programmes, should organize large-scale, top-down programmes to implement energy efficiency projects. This always results in higher costs and bureaucracy, however much energy efficiency is improved. We need to get away from this 1970s, statist thinking and move towards creating a true market in which efficiency. The Investor Confidence Project which I am involved in seeks to make efficiency a more investable asset class. The following blogs touched on this theme.

Making a market for energy efficiency

Moving energy efficiency from a public good to a market commodity

Thank you to all my readers over the last two and a half years. Part 2 of the retrospective will follow next time. Please subscribe to updates from onlyelevenpercent.com and follow me on Twitter @DrSteveFawkes