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

As regular readers will know I have a great interest in space exploration but today I am writing about another passion that many people may think doesn’t fit with my commitment to energy efficiency and some may not approve of – Formula 1.

Formula 1 is fascinating for a number of reasons. First of all it is still a sporting competition in which you are reminded that you never know what is going to happen next in life. Despite predictions that the new rules in 2014 would remove excitement the opposite was true and the Lewis Hamilton versus Nico Rosberg story had it all, excitement, rivalry and skullduggery   Secondly F1 is based on cutting edge, innovative technology (more of which later) and demonstrates what we can do when we try hard. Like space exploration, it demands the highest standards and attention to detail in everything from design and construction through to the all important execution from the whole team, not just the driver. And of course as we were reminded of in October 2014 with the Jules Bianchi crash there is still, despite great improvements in safety, the ever-present element of danger. Anyway I am an avowed F1 fan and a big fan of the 2014 World Drivers’ Champion Lewis Hamilton who is an incredibly talented driver and exhibited great skill and fortitude in coming from behind many times during the 2014 season.

What are the links between Formula 1 and energy efficiency?

It may be surprising to some but there are some links between Formula 1 and energy efficiency. First of all in 2014 the sport, driven by the large car manufacturers, adopted strict fuel efficiency requirements – a reduction of fuel use of 35% over the previous V8 engines, a maximum fuel load of 100kg and a maximum fuel flow rate of 100 kg/hour. The resulting hybrid power units – they can no longer be called engines – combine 1.6 litre V6 turbo-charged internal combustion engines (ICE), two Energy Recovery Systems (ERS) and an Energy Storage (ES) unit i.e. a battery. The ERS consists of a Motor Generator Unit-Kinetic (MGU-K) which harvests energy that would normally be wasted in braking and a Motor Generator Unit-Heat (MGU-H) which collects energy from the exhaust. The ICE produces 600 hp (485 kW) and the ERS can produce an additional 150 hp (112 kW), giving a total output similar to the old V8 engines.  The integration of the ICE, the ERS and ES is a complex task that can affect strategy. Various other rule changes reduced the all important down force from the car’s aerodynamics and banned actively using the exhaust to improve aerodynamics, making the cars harder to drive.

The new power units brought with them a highly controversial change in the noise levels and tone of F1 cars at full throttle, instead of the piercing high pitch scream the new sound has been described as like a sewing machine (probably not the best description as the noise level is still 138 dB) – judge for yourself here. The positive view is that spectators can now hear other sounds. At the end of the day all noise, and heat, from any process represents energy being wasted.

The Mercedes team and the W05 Hybrid car (both the car and engine were designed and manufactured in the UK) dominated the Championship in 2014 and a major factor in their success seems to have been the use of integrated design principles. I have written before about the principles of integrated design and the significant advantages that true integrated design can bring in terms of energy and material efficiency. Examples abound – from the Empire State Building retrofit to the excellent work carried out in Ireland by the Sustainable Energy Authority of Ireland (SEAI) in applying integrated design in industry.  We need to further promote integrated design in buildings and other areas such as vehicles and there are several examples of integrated design in the 2014 Mercedes F1 car and its 2015 successor.

The compressor and the turbo of the MGU-H are packaged at opposite ends of the internal combustion with the compressor at the cooler front, and the turbo at the hotter back. This meant having a shaft, spinning at c.120,000 rpm between the two passing through the V of the engine – it is a very demanding engineering task to design and build such a shaft without flexing and apparently it took two years to perfect. One consequence of the layout was that the compressor could be larger. The resulting reduction in pipework reduces turbo-lag. Another consequence was lower cooling requirements for the inter-cooler which meant smaller radiators and hence smaller side pods – less frontal area means less drag. Other teams had rear mounted compressors which had to be smaller to fit within the overall packaging of the car.

Another example of integrated design was that even the fuel and lubricants were developed by PETRONAS in conjunction with the development of the power unit. Never before have fuel and lubricants been developed in such close co-operation with the design of the power unit.

One of the regulation changes affecting down force was a reduction in the width of the front wings – which in 2014 could only reach half away across the tyre instead of right across as in previous years. Mercedes used an innovative solution, instead of a conventional V shape for the suspension lower wishbone they used a single arm with a forked arm. This acts as a wing and generates downforce which allowed a bigger gap between the nose and the wing, which allows more airflow through the underfloor and to the rear.  In order to do this, however, meant designing one arm that could do the work of two – a clear example of integrated design.

The rapid rate of technological development in Formula 1 is illustrated by the progress made on the KERS. In 2007 the first development system weighed 107 kg and achieved an energy efficiency of 39 per cent. By 2009 the weight had been brought down to 25.3 kg and the efficiency increased to 70 per cent. By 2012 the weight was less than 24 kg and the efficiency up to 80 per cent. The technological advances of Formula 1 do impact on ordinary vehicles and the MGU-H technology may yet appear in road cars, helping to further improve fuel efficiency.

Another link between Formula 1 and energy efficiency is the importance of large amounts of data, and real time data collection. Modern F1 cars have more than 150 sensors on-board that are feeding information back to the garage and the technical team at headquarters in real time. The telemetry is used to optimize strategy, run simulations and provide feedback to the driver. It is also used to help optimize the car’s on-going development programme. The increasing availability of real time data from buildings allows us to manage energy more effectively as well as model their performance and design better buildings.

The data collection feeds into an enormous effort to understand the interaction of numerous variables including; those which can be influenced by the design and the set-up of the car e.g. down force, brake balance etc; external physical factors such as track conditions – temperature and surface type – wind speed and direction, the effects of following other cars (which disrupts the air flow); and human factors – how the car is driven and how fast pit stops are for example. In building and industrial process energy use we are dealing with a similar interaction of design/set-up, external factors and human factors and just beginning to have the data and the computing power to create a better understanding of how to optimize energy use in real-time.

At the end of the day we are all utterly dependent on engineering and Formula 1 is an example of engineering at its best. We need to celebrate great engineering more.

I mentioned the high performance and quality standards of F1 at the beginning. The constant striving for improvement and the highest standards required from all team members is an example all organizations should learn from, whether they are involved in energy efficiency or not. All too often in many areas of life and business we put up with sloppy performance (I may return to this subject in future posts – the sloppy performance of banks is particularly driving me crazy at the moment). We need more absolute, “unreasonable” insistence on high standards in all areas of business from the board room down to the shop floor.

To sum up, Formula 1 – like it not – is an expression of much of what makes us human, our basic competitiveness which is a positive force (but of course can turn negative), our incredible technological ingenuity, the power of team-work and the importance of demanding high standards. The 2015 F1 season has started well for Lewis Hamilton and Mercedes, although Ferrari seem to have narrowed the performance gap and remain a real threat for the rest of the year, as does Lewis Hamilton’s team mate Nico Rosberg. I look forward to watching the rest of the season and particularly seeing my first-ever live Formula 1 race, the Monaco Grand Prix at the end of May.

I have written before about ESCO (Energy Service Company) obsessions (read here) and how the Energy Performance Contract (EPC) may be part of the problem and not the catch-all solution that some people seem to think it is.

At a recent meeting organized by EASME (the Executive Agency for Small and Medium Enterprises of the European Commission) on the topic of energy efficiency financing, I was reminded once again about the difficulties of communication, both in general and specifically on the subject of EPCs and ESCOs. At the meeting there were representatives from several projects receiving both EC and European Investment Bank support, and many of these are involved in EPCs in some way, either in buildings or street lighting. It seems as if there are many different interpretations of EPC across Europe (and the rest of the world).

Energy Performance Contracts

Personally I tend to use EPC to mean the classical North American model which developed in the 1980s and was successfully exported around the world by USAID funded trade missions in the 1990s. In this the contractor (normally called an ESCO but we will come onto that term) provides a guarantee of energy savings. EPCs are most often talked about, and most often implemented, using external financing and in the US most of the market (80% plus) is public sector and is financed by municipal bonds or federal funds. We should not forget of course that the client can fund an EPC themselves – the best example being the Empire State Building retrofit in which the energy efficiency components were carried out under an EPC but financed by the owners of the building. To my mind the classical EPC has a number of problems including the fact that the contractor is motivated to maximize capex, the contract is complex and it is often a black box to the customer.

ESCOs

The term ESCO is also a minefield of confusion. I am on record as saying we should abolish the term. It is generally taken to mean a developer of energy efficiency projects which provides some form of guarantee of their performance. It is also often used to denote a company that both develops projects and provides, or more likely facilitates, financing for the projects from a third party.

We need to be more precise in our language – in my book “Energy Efficiency” I argued for distinguishing between the concept of shared saving, the entity and the contract form.

The concept – shared savings

The concept of shared savings is straightforward. It is what it says on the tin. Financial savings resulting from some form of energy efficiency improvement are shared over a period of time between the host and the party responsible for producing the savings. The energy efficiency improvement itself could be an investment in technology such as high efficiency lighting, new boilers and controls or a behavioural programme with no investment (less common). However, the implementation of this simple concept is fraught with difficulties in practice and can be effected by a range of different business models, contract forms and financial arrangements. This has led to the confusion around the ESCO and EPC/ESPC concept amongst policy makers, suppliers and customers.

The entity

The entity developing the projects is called a developer in any other field, and could be an ESCO, a Facilities Management (FM) company, a construction company, a consultant or a community group. The term ESCO is usually reserved for companies offering some kind of performance guarantee.

The contract form

The contract form can be one of several variants such as EPC, Energy Savings Performance Contract (ESPC), Managed Energy Services Agreement (MESA), Efficiency Services Agreement (ESA), or some other variant. All these types of contract encapsulate some form of energy services. In addition there is the form traditionally used in France and other parts of Europe, called ‘chauffage’ which involves the sale of heat at an all-in price which covers the capital costs of the boiler and distribution system, operations and maintenance costs, and fuel costs. Chauffage contracts, in their original form at least, do not inherently produce energy savings and in fact during the length of the contract the supplier is actually incentivized to sell the customer more heat, not less. It is true of course that the upfront installation of new heat generating plant, either a boiler or Combined Heat and Power (CHP), can result in an energy saving when it replaces an old inefficient boiler plant and distribution system. In this case the contracts can be said to be shared savings (in some cases) because the total outgoings including repayment of the capital costs during the contract were less than the total outgoings on energy and maintenance prior to the investment. In some cases however, total costs go up in order to pay for the capital expenditure, but these costs are transferred to operational expenditure. Much of the EPC business being done in the public sector such as the UK’s National Health Service involve this kind of infrastructure upgrade and catching up with maintenance backlogs.

Large providers of chauffage contracts in their home markets such as EDF and GDF-Suez in France traditionally used their large cash flows and balance sheets to finance projects, as well as start or acquire operations in new markets, although this is becoming more difficult for them. In the UK these operators entered the energy service market in the 1980s and dominated the market for many years, predominantly selling outsourced operations and maintenance of boiler houses and making savings mainly through automation and demanning. In the 1980s in the UK uniquely, this became known as Contract Energy Management (CEM).

As well as chauffage, selling heat, some energy service companies also expanded into the provision of multiple utilities including cooling, compressed air, treated water, effluent treatment and industrial gases. A leading example of this contract form is the series of Utility Alliance Agreements (UUAs) signed between Diageo and RWE Solutions UK (latter RWE npower) between 2002 and 2003 which were 15 year multi-utility agreements. Like some chauffage contracts, these multi-utility contracts produced large upfront energy and maintenance savings, which were split between the client and the contractor, with the contractor recovering all costs including capital expenditure over the lifetime of the contract. These UAAs are yet another contractual variation of the shared savings concept.

Increased confidence in performance will reduce the need for EPCs

The Investor Confidence Project is working to improve confidence in the performance of energy efficiency by standardizing the development process and documentation. As confidence in the performance of energy efficiency increases, the need for an ESCO to offer a guarantee is reduced – there is no point in a client paying for a guarantee – and they always pay for the guarantee somewhere – if they have confidence in the outcome. The advent of energy efficiency project insurance as offered by companies like Huber Dixon also reduces the need for performance guarantees and the Energy Performance Contract. In time we should move to a more “normal” market where developers develop projects, insurance companies underwrite them, delivery companies implement them and finance companies finance them – just like in the rest of the energy or construction sector.

Anyway in summary we all need to be careful when discussing EPCs and ESCOs. We always need to “mind our language” as it shapes our thinking. ¹ Also, never forget communication is hard – in any language.

As an aside on ESCOs we should not forget of course that as in many things the UK was the pioneer in sharing energy services – although not necessarily the best at exploiting the early lead. Boulton and Watt, using the more efficient Watt steam engine, made a lot of money from the 1770s by replacing the inefficient engines in tin mines and taking one third of the savings in fuel over a period of 25 years. For that they truly deserve their place on the £50 note. Although the “no cure, no pay” option offered by Boulton and Watt was successful even they encountered problems we would recognize today – specifically those of Measurement and Verification and baselining.

“There was some local resistance in Cornwall, where the new engines were certain to save costs in pumping out water from the tin mines, ….., the ‘no cure, no pay’ terms offered by Boulton and Watt – based on one third of the savings in fuel over a period of twenty-five years – saved the day.”

Thomas Crump, The Age of Steam, p58, London, Constable and Robinson, 2007