The press coverage on what looks like DECC’s (and Ed Davey’s) attempts to attract, (“woo” in the words of the Sunday Times), Chinese firms into the UK nuclear industry highlights one of the many signs of desperation in UK energy policy.  EDF is also seeking Chinese involvement in Hinkley Point but apparently China General Nuclear Power Group want some operational control for their 50% stake, (probably not unreasonable from an investor’s point of view!).

I have nothing against China and of course the growth in the Chinese economy, as well as their technology development, over the last thirty years has been incredible.  I accept that the world is generally better off through globalization but we really should think seriously about encouraging Chinese involvement in nuclear power on three grounds.

Firstly there is a cost to importing the technology – but that of course also applies to French nuclear technology or any other energy technology from abroad (almost all of it now).  Secondly there are security risks – we have seen concerns raised about Chinese firm Hauwei supplying technology to the telecoms sector – what are the risks of Chinese involvement at the heart of our nuclear plants – part of the Critical National Infrastructure? Finally there should be legitimate quality control concerns.  Although there have been no examples of large-scale failures in the Chinese nuclear sector (that we know about) there have been accidents and concerns have been raised.  In 2011/12 there were reports of problems in the China Experimental Fast Reactor (CEFR) and safety lapses at the China Institute of Atomic Energy.  A former state nuclear physicist, He Zuoxio, has claimed that a Chinese nuclear disaster is “highly probable” by 2030.  Also we have seen a number of problems in Chinese products and technology including high-speed trains, the Chinese cabinet criticized the railway industry for lax safety standards after the Wenzou train crash in 2011, and milk – in 2008 the milk scandal had a reported 300,000 victims.

Nuclear power requires the highest levels of safety, 24 hours a day. 7 weeks a year for decade after decade.  Of course, we also have train crashes and accidents here – all technology wherever it comes from is risky wherever you are – but we do need to assess all of the risks and all of the costs of all energy options fully.

It is easy to criticise the Green Deal, and many people have done just that in the last few weeks, but it is a very complex response to a complex problem – how to make the UK’s housing stock more energy efficient.

It is inevitably a camel – that is to say a horse designed by a committee.  We need to use this first phase of implementation, and let’s face it we are only in month 9, to measure results, learn and improve the system.  It is now generally agreed that the most cost effective way of addressing our energy issues of high costs, energy security and emissions, is by improving energy efficiency and this is undoubtedly happening at an increased rate due to high energy prices.

Even recently we had statistics that showed average household energy use has gone down by 25%, most of this is probably due to economising – switching things off more often or turning thermostats down – but some is due to previous energy efficiency programmes such as CERT and CESP (now replaced by ECO). Our challenge is how to improve the rate of improvement
of energy efficiency beyond its “natural” rate and the Green Deal is a serious attempt to do this in the residential sector, possibly the hardest sector to address.

To improve the rate of energy efficiency improvements we need to build demand for greater efficiency, build supply of efficiency goods and services and build the flow of finance into energy efficiency investment.  The Green Deal attempts to do all three.  The problems include; we don’t know how to build demand for efficiency – despite high prices people don’t wake up and say I want to buy an energy efficiency retrofit for my house (or building).  Behavioural economics, changing local social norms and identifying the factors that really push people to make such a major decision are all critical factors on the demand side.

On the supply side we need to greatly improve the accuracy of energy modelling – the approach taken by Green Deal just isn’t good enough.  Other countries have similar problems – in California research shows that a frighteningly high proportion of energy surveys get the savings wrong by 50% – a major error especially if you are investing yours or someone else’s money.

Accessing the right kind of finance is critical – the Green Deal’s 6.9% interest rate is too high for home owners with good credit.  Those with cash in the bank may use that rather than borrow. We need to use the public money put into Green Deal into better research on all three aspects, demand, supply and finance – rather than on marketing campaigns that are doomed to only push a few people into action.  We need to learn how to create market pull.  Of course the number of people having Green Deal assessments is much higher than the 132 signed up for implementation last month – we also need to see how many of the others have taken action on their own without further involvement from the Green Deal.  Then we will get a better idea of what is working and what is not.

In previous blogs we have discussed the pros and cons of Energy Performance Contracting (EPC) as a mechanism to enable financing of energy efficiency investments and seen that EPCs have a number of issues and may not be suitable in all situations.  In the EU the main focus of attention is still on fostering growth of the EPC market, (which to be clear is a worthwhile objective), but in the USA we are seeing a flowering of innovation in contract forms and financial structures.  Some of these innovations have the potential to unlock a huge market and transform energy efficiency financing into a mainstream market, rather than the rather small niche market it is today.  Here we take a look at the emerging contract structures.

PACE

Property Assessed Clean Energy financing (PACE) is a modification of an old approach to funding public goods.  Benjamin Franklin invented the original concept in the 1700s to finance investment in sewers.  PACE is a senior obligation which is on an equal footing with other taxes on the house and the system is still commonly used to finance sewers and projects to put utility wires underground.  It is tied to the house and not the owner or tenant.  PACE was first used in California and the first schemes were operated in two very different Californian markets, Berkeley – which has a mild wet climate and liberal politics – and Palm City which has hot dry climate and conservative politics – and it was a success in both markets.

Despite its subsequent adoption in 28 states and Washington DC and rapid growth, PACE in the residential market has been stopped by a controversial decision by the Federal Housing Finance Agency (FHFA) to limit its use in housing.  Since then several states have started to implement PACE schemes in the commercial sector and these hold great promise.  The potential for commercial PACE is estimated at $2.5 to $7.5 billion annually in 2015 with a total opportunity of $88 to $180 billion in large commercial buildings alone.  The largest project to date, recently announced, is a $3.16 million retrofit to a four building, 250,000 square feet, office park in Sacramento California.  The retrofit was financed through Clean Energy Sacramento, a city-wide programme backed by up to $100 million of financing from Ygrene Energy Fund.

Efficiency Services Agreement (ESA)

In the ESA structure, pioneered by Metrus, the agreement leads to the contractor being paid purely for savings on a price per MWh basis.  This makes the client – contractor agreement much more of a services agreement than a traditional EPC and therefore can help in getting the project off the client’s balance sheet.  Metrus contract with service providers (ESCOs) who guarantee a level of savings to Metrus.  Metrus have applied this structure to a number of sites including four sites belonging to BAE Systems and invested $8 million.  It is now rolling it to other BAE Systems’ sites in the US.

Managed Energy Services Agreement (MESA™)

The MESA™ has been pioneered by SciEnergy.  It involves the contractor taking over responsibility for the clients energy bill and the relationship with the utility provider(s).  The building owner then pays the contractor the historical energy bills corrected for weather and other factors i.e. what they would have paid.  SciEnergy invests in energy efficiency upgrades.

On- bill repayment (OBR)

On-bill repayment, where the repayment of capital is added to utility bills, is also growing but this is more of a collection mechanism than a type of financing, as it can be tied to various contract forms.  Investment funds for many OBRs came originally from stimulus money or utilities mandated to invest in efficiency but there is a move towards attracting private investment.  Work is typically carried out by a certified contractor who often introduces the client to the financing scheme.  OBR has been mainly used in the residential sector but is now attracting attention in the commercial sector.  In 2011 New York was the first state to enact state-wide OBR and offers finance at 3.49%.  The New York State Energy Research and Development Authority (NYSERDA) is currently issuing $24.3 million of AAA rated bonds backed by residential energy efficiency loans – 35% of which were on-bill loans and the rest being direct with the householder.  The UK Green Deal is a form of OBR with external financing provided through the Green Deal Finance Company and faces many of the same difficulties as OBR schemes in the US such as generating sufficient demand and the accuracy (or otherwise) of building energy models that are used to predict savings.

Measured Energy Efficiency Transaction Structure (MEETS)

MEETS is the latest structure to emerge and was developed by EnergyRM and applied to the Bullitt Foundation’s “Living Building” in Seattle.  It uses EnergyRM’s “DeltaMeter™ dynamic baseline metering system” which is a system for measuring savings that has been approved by the utility industry in the Pacific North West.  The client pays the agreed price per unit of energy as per normal and an agreed price per unit saved (negawatt hour) on a 20-year agreement similar to a Power Purchase Agreement.  The advantage is that the repayment is linked to the building rather than the occupier and this allows a longer time-frame to be considered when looking at retro-fit options – allowing deeper retrofits to be financed.  The system is well suited to US markets where the utilities are mandated to make energy efficiency improvements (which of course includes EU countries after the implementation of the Energy Efficiency Directive).

Conclusions

The US is seeing significant innovation in energy efficiency financing, prompted by the falling away of stimulus money over the last few years.  Although currently small, these new contract forms have the potential to grow the energy efficiency financing market from its (2010) level of c.$14 billion (some $3 billion of which was stimulus money) to more like the $100 to $200 billion market some analysts predict it could become.  Commercial PACE shows particular promise.  With the exception of the Green Deal, which is an on-bill repayment scheme, we have yet to see these kinds of innovation in Europe, and some structures such as PACE are constrained by existing property taxation systems.  To grow the market for energy efficiency financing to the level we know it could achieve, and the level we need to hit environmental targets, we need to recognise that EPCs are not the be-all and end-all and foster greater innovation in contract form and financial structure.

Dr. Steven Fawkes

Steve’s latest book, “Energy Efficiency: the Definitive Guide to the Cheapest, Cleanest, Fastest Source of Energy”, will be released in September.  It is available with a pre-publication discount of 35% by using the link to the right of this page

Following my note on DUKES one of the important aspects of the UK energy picture that is illustrated by DUKES 2013 is the growing dependency on imports – the dependency has increased from -20% (i.e. net exports equivalent to 20% of energy supply) in 2000 to +43% (i.e. net imports equivalent to 43% of energy supply) in 2012.  This infographic summarises the supply, production and import statistics for crude oil, gas, coal and electricity.  Net energy import costs in 2012 were £24 billion, 41% of the current account deficit and c.1.5% of GDP.

The 25^th of July saw the annual publication of DUKES – the Digest of UK Energy Statistics – with the release of DUKES 2013.  DUKES is the starter for ten for all UK energy sector analysts and has been published pretty much in its present form for many years, making it a consistent set of government statistics.  Even a quick scan of DUKES can give you a good feel for what is actually happening in UK energy, as opposed to the many opinions on what is happening which are expressed in the media.  It shows short-term changes and long-term trends.

Some notable highlights I picked up from the press release and DUKES itself, along with some “flash” first impressions – some of which merit further analysis – follow.

Primary energy production and import dependency

Primary energy production in the UK fell by 10.7% on a year earlier due to the continued decline of oil and gas production from the UK Continental Shelf.  Production is now less than half of its 1999 levels, an average annual rate of decline of 7.1%.  Gas production has fallen 64% since its peak in 2000 while production of oil has fallen 67% since 1999.

Energy imports were up 6.9% on 2011 levels, reaching record levels.  For oil the major supplier was Norway (46%) with a large growth in imports from African OPEC countries.  For gas Norway accounted for 55% of UK imports.  LNG imports were down from 47% to 28% of total imports with 98% of the imports from Qatar.  The main source of coal imports was Russia (40%) with Columbia supplying 26% and the USA 24%.

Overall the dependency on imports reached 43% – continuing the upward trend from 2004 when the UK became a net importer.

Oil and gas production from the Continental Shelf continues to fall dramatically despite some talk of a resurgence.  Increasing dependency on energy imports increases the vulnerability of the country to supply disruptions, whatever their cause, and exports money and jobs.  Current instability in some energy producing countries and regions is worrying.  Looking forward at the global energy situation over the next ten to twenty years, many of the exporting countries will have rapidly increasing domestic demand, and this plus the increase in the global middle class – particularly in Asia – will put increasing upwards pressure on energy demand and increase competition for available energy exports. 

Final energy consumption

On a temperature adjusted basis final energy consumption was down 0.9%, continuing the downward trend of the last eight years.  Consumption in the domestic sector and services sector increased (due to cold weather) while industry, transport and non-energy use all declined, (2.9%, 1.4% and 10% respectively).

Looking at the longer term energy consumption in 2012 was 4.5% lower than in 1990 – with a 34.9% reduction in industry, a 1% reduction in services, public administration and agriculture, a 9.5% increase in transport and a 5.9% increase in domestic.

Energy consumption per unit of output, i.e. a measure of energy efficiency, fell by 47% in the chemicals sector between 1990 and 2012 – with chemicals accounting for 16% of all industrial energy consumption.  For iron and steel there was a 12% reduction and for all industries a 33% fall.

In the private commercial sector energy consumption fell by 12% between 1990 and 2012 while economic output from the sector increased by 79% in real terms.  In the public sector consumption fell by 13% while output increased by 45%.

Energy demand continues to fall – the 4.5% fall since 1990 is interesting as clearly the economy has grown considerably since then (despite the current poor economic performance resulting from the global financial crisis).  Some of this is clearly due to changes in the structure of the economy and some is due to improved energy efficiency.  The old idea of a fixed relationship between GDP and energy use is breaking down but we can, and need to, accelerate the rate of reduction in energy intensity through improved energy efficiency in all sectors.

Oil consumption

Oil consumption, 75% of which is for transport, fell 2% with transport showing little change since 2011.  Diesel road fuel grew again in relation to petrol due to the continued switch towards diesel in cars.  Petrol (motor spirit in official parlance) consumption has fallen 4.4% per annum in the past 10 years while diesel has grown 2.4% per annum.  Biofuels account for 3.1% of road fuel.

Aviation fuel demand has increased by 20% since 1998 but is down 11% on the 2006 peak, demand since then has been fairly constant at 11 to 11.5 million tonnes.  Growth in passenger demand has been quite strong since the downturn but fuel demand has remained roughly constant due to increased fuel efficiency in the airline industry.

Transport energy remains pretty much unchanged – the shift to diesel in cars continues pushed by fuel efficiency standards making manufacturers introduce more diesel models, even in high-end ranges which previously were nearly exclusively petrol driven.  Overall the UK is a net exporter of petroleum products and the switch to diesel has resulted in a mis-alignment between UK product demand and UK refining capacity – we export petrol and import aviation fuel. 

The aviation fuel story is interesting – passenger demand growing and fuel use constant is a result of the combination of several effects – airlines retiring older fuel inefficient aircraft, buying more efficient aircraft and increasing utilization levels by changing schedules.  Pressure to improve efficiency in aviation continues and the introduction of new aircraft such as the Boeing 787, which has demonstrated a 20% improvement in fuel efficiency in actual operation, (not marketing hype), despite early aircraft being over-weight, will continue this trend.   

The electricity sector

Total electricity supply increased 0.6% to 375.9 TWh and UK production of electricity fell by 1% so net imports almost doubled to 12.0 TWh (3.2% of the total).

High gas prices led to a switch to coal for electricity generation, with coal increasing its share of generation from 30% to 39%. This led to a 6% fall in overall gas demand and an overall increase of 24.5% in coal consumption.  Driven by this coal imports rose 38% to 45 million tonnes (still 11% lower than the record level in 2006).

Nuclear generation remained constant at 19%.

Electricity from renewables increased by 19%, taking the total generated by renewables up to 11.3% from 9.4%.

Installed capacity of renewables rose 27%, mainly due to a 27% increase in onshore wind capacity, a 63% increase in offshore wind capacity and a 71% increase in solar PV capacity.

The growth of coal use sneaked up on nearly everyone but should not have been surprising with the high price of gas.  The generators are clearly maximizing the output of the remaining coal stations which are a mixture of those plants that have been retrofitted to allow operation under the Large Combustion Plant Directive and those that are due for closure and are on their last legs.  Clearly this increase in coal use will have an effect on overall carbon emissions.

We will see nuclear production drop off as older plant shut in the next few years.  Given the time to build new plant (see an earlier post “Six impossible things before breakfast”) it is unlikely to recover from that drop much before 2022/23.

The growth of renewables is impressive although of course all these numbers are from a low base – not surprisingly feed in tariffs work.  Whether the increase will continue at that pace post the Electricity Market Reform (EMR) and the new system of Contracts for Difference (CfDs) we will only see over the next three to five years. 

Energy spend

Although the quantity of energy consumed has gone down, from 160 million tonnes oil equivalent (mtoe) to 140 mtoe since 2000, the expenditure on that energy by final users has gone up from c.£60 billion to c.£137 billion.  56% of this expenditure was on transport, 24% the domestic sector, 10% industry and 10% the services sector.

Oil prices in 2012 averaged $112 per barrel, unchanged since 2011 but up from $80 per barrel in 2010.

As everyone knows energy bills have gone up.