My recent first ever trip to South Africa was too short (36 hours) but exciting and fascinating. The African sun and energy of the people I met was truly invigorating, especially after a long cold and wet winter in the UK. The commitment to energy efficiency, which of course is vitally important to the country, was also good to see.

As is well known South Africa has a power supply crisis and on the 23rd May this year ESKOM’s (the power supplier) supply margin was a frighteningly tight 0.4%. Any additional failures or a small amount of extra load would have led to demand exceeding supply capacity. Because of this supply situation, increasing the uptake of the energy efficiency resource has a critical role to play in South Africa’s energy future. Much good work has been done and many initiatives have been taken or are planned.

Chief amongst these are ESKOMs IDM (Integrated Demand Management) programme which since 2004 has removed 3.5 GW from the system. IDM has several elements including:

• Energy Efficiency Demand Side Management (EEDSM) – to identify and promote more efficient electricity use through technology enhancements and behavioural change.
• Energy Management Programme (EMP) – assisting Corporate Customers to enhance energy efficiency.
• Solar Water Heating Programme – providing financial incentives for consumers to switch to solar water heating.
• Power awareness and communications campaigns.
• Coordinated internal energy efficiency programme.
• Energy conservation scheme (ECS) – to achieve a 10% energy reduction amongst consumers using more than 25GWh per annum.
• Demand Response (DR) – system operator pays customers to reduce load on instruction to balance demand and supply.
• A Standard Offer programme in which ESKOM pays for verified savings between 50kW and 5MW.  The project host, or an ESCO, is paid a standard price per kWh for three years.

In addition ESKOM has an Internal energy efficiency programme which has a target of a 15% energy reduction for non-essential consumption (Eskom buildings and substations).

The Industrial Development Corporation (IDC), in conjunction with KFW, has established a ZAR 500 million (c.GBP 32m) Green Energy Efficiency Fund (GEEF). GEEF focuses on private sector companies and provides loans ranging from ZAR1 million to ZAR50 million at a concessionary rate of prime less 2%. GEEF allows for loan repayments of up to 15 years, depending on the energy efficiency or renewable energy technology.  To date, 17 companies have been financed utilizing ZAR 174 million with 95% committed to SMEs.

I was in Johannesburg speaking and taking part in a panel discussion at the IFC’s inaugural ESCO financing conference (see http://www.escoconference.co.za/index.html for details).  I was given the task of speaking on the thorny issue of on-off balance sheet financing and the implications of accounting rule changes. Perhaps not the easiest or most exciting subject but one that will become globally more important as the IASB and FASB harmonize on issues such as leasing and ‘balance sheet window dressing’. As someone who was at Enron at the end I particularly like Sir David Tweedie’s quote when he was Chairman of IASB, ‘the purpose of accounting is to keep capitalism honest’.  We need more honest capitalism.  Despite the lobbying of the leasing industry it looks like these changes will come into effect in 2015/16.

South Africa is doing some excellent work on energy efficiency but like most countries has a long way to go to fully exploit the huge and cost-effective energy resource we know to be out there. As I have found on my trips to other countries, it is clear that the major issues of energy efficiency financing – namely: creating demand, picking the right contract form, standardization, the need for aggregation, and access to the right kind of long term low cost finance, are the same all over the world and there is a global market for the right solutions.

A big thank you to the IFC, the organizers, the driver, the staff of the Intercontinental Sandton Towers hotel, and as always British Airways for a safe flight and excellent service.

As my friends know one of my other big interests in life other than energy is space exploration and although I don’t read as much as I used to I am still a fan of ‘hard science fiction (‘a category of science fiction characterized by an emphasis on scientific or technical detail, or on scientific accuracy, or on both’ according to Wikipedia). We can learn a lot from science fiction and of course many of the technologies and gadgets we take for granted today actually first appeared in yesterday’s science fiction by Arthur C. Clarke, Robert Heinlein and many others.

On my recent trip to the USA I read’ Power Play’ by Ben Bova. I am a huge fan of Ben Bova whose ‘Grand Tour’ series describes an exciting future where we explore the solar system and find life in surprisingly many places. Anyway, ‘Power Play’ is extremely unusual – probably even unique – a science fiction story about the problems of commercializing a new energy efficiency technology. The technology in question is Magneto-Hydro Dynamics, MHD, which is actually a more efficient way of generating electricity rather than an end-use efficiency technology, but we know there are large efficiency opportunities in the power generation system just as there are in end use applications such as buildings, industry and transport and we need to focus on improving efficiency in all areas.

Anyway. ‘Power Play’ deals with the interaction of the power industry with power politics and paints a dismal, (but probably realistic), view of US (and not just the US) politics, with one character saying, ‘It’s the old game, tell the voters you’re giving them what they want, when in reality you’re giving the special interests what they want’. Needless to say the bad guys try to stop the development of MHD, a technology which can improve the efficiency of generation by 50% and, in what one character admits is an exaggeration, offers the potential to cut electricity prices in half. The plot moves with the usual Bova pace and attention to detail and without giving it away, of course the good guys triumph in the end.

MHD is an intriguing technology that has links to rocket technology and in theory could offer high efficiency with no moving parts. The principle is that a when a high temperature, fast moving, (supersonic) plasma passes through a magnetic field it a generates an induced voltage. This is exactly the same as in a normal mechanical dynamo except the stream of plasma, which results from combustion, replaces the metal rotating conductor.

MHD is not a new idea, it first emerged in the late 1930s, resurfaced in the 1960s and then gained widespread publicity and a lot of government funding in various countries in the late 1970s and 1980s, as a response to the energy crises. It was seen as a way of burning coal, including high-sulphur coals, efficiently and cleanly although it was also considered as a way of generating power from nuclear power. Numerous experimental systems were built and in the 1970s Russian MHD systems actually delivered power to the grid.

Like many other technologies, especially in the energy field, the promise and predictions turned out to be optimistic and today we see nothing about MHD. In practice the technological problems are very tough in a number of areas. Firstly there is the problem of containing a high temperature plasma, akin to that in a rocket engine or found during re-entry from space. Chamber walls and electrodes are prone to extreme erosion due to the high temperature and nature of the plasma.

Secondly there is a need to seed the plasma, typically with potassium, to increase its charge, and the seed material needs to be recovered and re-used or disposed of. For maximum efficiency the magnetic coils should be super-conducting to reduce parasitic loads so as in Tokamak fusion reactor designs you end up with very high temperatures close to a containment vessel close to very cold temperatures – not impossible of course- just difficult from a materials perspective. To achieve the high efficiencies talked about by Ben Bova, probably as high as 60%, the MHD generator needs to be combined with a steam turbine system utilizing the heat of the MHD exhaust, effectively a combined cycle. Without that the maximum achieved efficiency of MHD alone is about 22%. The other problem in a carbon constrained world of course is CO2 emissions. Ben Bova – who has included the effects of climate change in several novels – skips over this with a quick reference to Carbon Capture & Storage.

The other factor that inhibits any development of MHD is that conventional generators are getting much more efficient. The average efficiency of all coal fired power stations in the world is c.33% but modern stations can reach an efficiency of 45%, with a target of 50% in sight in the next decade (http://www.iea.org/publications/freepublications/publication/name,32869,en.html). With these efficiencies the relative advantage of MHD, which is far more complex and risky, is greatly reduced even if it could achieve 60% efficiency. The extra cost and complexity just isn’t worth it.

So, MHD remains a technology that has never been fully developed and one for which both the technology and the economics would seem to be challenging at best. It seems set to remain in the realms of science fiction – but don’t let that put you off ‘Power Play’ and the many other fine Ben Bova stories.

Having spent the last few weeks proof reading I am glad to report that work on my new book, ‘Energy Efficiency. The Definitive Guide to the Cheapest, Cleanest, Fastest Source of Energy’, is nearly complete (at least from my side). Publication is expected in September. When I finished the manuscript in January I said ‘never again’ but I suspect there may be some more books in me yet as the energy efficiency scene continues to evolve and develop. Meanwhile readers of this blog can take advantage of a 35% pre-publication discount on the book’ – click here for details on how to order.

An interesting recent research note by Liberum Capital highlighted the problems at the heart of UK energy policy and the very real risk of a crisis in electricity supply. This was of course not new news, while at Matrix I published a research note outlining the same problems – ‘The Ghost in the Machine’, 24 November 2009 – and the threat has been widely reported, but the Liberum report was a good piece of integrated analysis tying together the physical situation and the current reality for investors. At the end of the day, whatever energy sources we want to use, we need investors to invest in new plant and infrastructure and right now they are not likely to do that.

The background is relatively well known. The 2003 EU Directive committed member states to a 20% reduction in average greenhouse gas emissions and endorsed a target of 80% by 2050. The UK Climate Change Act went further than the EU target and set the 2020 and 2030 targets in law. The previous government committed the country to massive expansion of renewables, particularly off-shore wind – a technology that can only provide intermittent power, is unproven at scale, and staggeringly expensive. The off-shore wind industry believes it can achieve a long-term cost of energy of £100/MWh by 2020 – compared to the current wholesale cost of power of c£50/MWh – but many think this is optimistic. Even if it isn’t it assumes a massive increase in power costs that need to be paid by the consumers, either directly or indirectly through subsidies.

At the same time a significant proportion of UK generating capacity is set to close due to a combination of the Large Combustion Plant Directive and the need to retire ageing nuclear plant, most of which have already has their lifetime extended far beyond the original estimates. Although the supply margin, the difference between total available generating capacity and peak load is currently ample, it is likely to decline quickly as older gas plants are mothballed as the current spark spread (the ratio of gas to power prices) is insufficient to justify either operating the plant or investing in refurbishing them at the end of their twenty year design life. Liberum estimate that the margin between available dispatchable capacity and peak demand in the winter of 2015/16 could get below 10% which is tight. At this level the risk of the lights going out somewhere increase. On 12 December last year the National Grid had to call on all available capacity to meet demand, which is fine as long as everything works as it should but the problem will come when there is a coming together of a sequence of unlikely events, any of one of which in itself wouldn’t cause a problem. Most large blackouts, aircraft crashes and industrial accidents are caused by long chains of unlikely events coming together (see this for a time line of events behind the 2003 blackout in NE USA and Canada).

In the words of the Liberum report governments (the current and the previous) have been playing Russian roulette with energy policy. There is a serious risk of an electricity supply crisis, either in the 2014 to 2017 time frame or post 2020. This could manifest itself as the lights going out or as a spike in wholesale electricity prices with consequent effect on retail prices. With one in five households in energy debt and six million households in fuel poverty, retail energy prices are already a major social and political issue.

The country has effectively placed a very large bet on energy prices increasing – a bet that according to Liberum will cost £161 billion by 2020 and £376 billion by 2030.

The Electricity Market Reform (EMR) was designed to address the problem and unlock the massive amount of investment needed to build new plant and energy infrastructure. It all but nationalises the electricity supply industry as all investment decisions will be dependent on prices set by government through the CFD-FIT mechanism. Right now the EMR is having the opposite effect on utilities and investors with most being unable to make any UK investment decisions and several stating they would rather invest elsewhere. OFGEM, SSE and Centrica have all criticised the current policy situation.

So how do we get out of this urgent mess?

We need to rebalance energy policy and recognise that massive deployment of renewables, particularly off-shore wind, is premature and not the least cost solution. Technology transitions in any industry, but particularly the energy industry with its inherently long time-scales, have to be driven by significant advantages and a major driver of change is cost. Renewables do not have that advantage and we have been pushing a rock uphill with subsidies before the technology is ready. We also need to rebalance energy policy by recognising that what we need are energy services and not energy – and that energy efficiency is a major resource that needs to be equally represented at the table of energy policy makers as the energy supply industry. It is not just an add-on, a ‘nice to have’, or mandatory schemes, but rather should be the central plank of energy policy.

We need to accelerate energy efficiency in all sectors of the economy. Energy efficiency needs to be promoted for what it is, the lowest cost, quickest to deploy and cleanest source of energy services. A 2012 report form the Fraunhofer Institute shows the average Levelized Cost of Energy (LCOE) for various renewable technologies in Germany and Spain, which range from a low of €75/MWh for on-shore wind through to €130/MWh for off-shore wind and €180/MWh for the more exotic concentrating solar and storage. The number for the existing fossil and nuclear grid is €60/MWh. Fraunhofer don’t report on the equivalent LCOE for energy efficiency but averaging various studies from around the world including this one by the ACEEE shows that the LCOE of energy efficiency is in the range of €20 to 45/MWh. In addition to these costs there are the additional system costs inherent in deploying renewables (and nuclear). These were highlighted in a 2012 report by OECD – these range from, depending on the degree of market penetration of renewables and nuclear, from $0.6/MWh for gas to $83/MWh for solar PV. In stark contrast, energy efficiency brings with it system wide benefits in the form of, reduced investment in transmission and distribution, reduced line losses and capacity savings,which have been estimated by ConEd for a commercial lighting upgrade, distributed generation and demand response examples. For commercial lighting the system benefits, excluding the energy saving and the environmental benefit, is c.$36/MWh. So renewables bring extra costs and efficiency brings extra benefits. We need to recognise system wide costs and benefits.

We should also remember that energy efficiency has contributed more energy services over the last forty years than any other energy source – and that is without us really trying apart from the decade of the mid-1970s to the mid-1980s.

The Electricity Market Reform (EMR) needs to include market based mechanisms which encourage consumers, and aggregators, to develop and implement energy efficiency and other demand side projects (i.e. distributed generation (DG) and demand response (DR)) and share in the system wide benefits described above. Right now it looks like the capacity market mechanism within EMR won’t do this and proposals in Europe put forward by grid operators seem to be aimed at carving out all the benefits of demand side response for the grid operators.

We need to put more effort into building capacity in energy efficiency and energy management in three areas; the demand side (i.e. end-users at all levels from the board to the shop floor), the supply side (i.e. of energy efficiency goods and services), and the flow of finance into energy efficiency.

We also need to develop mechanisms to deploy Combined Heat and Power (CHP) and District Heating (DH) schemes. CHP and DH schemes lead to significant improvements in overall energy efficiency and should be supported in preference to intermittent renewables. This can be done in a way that engages communities in their own energy supply much more, something that will bring other social benefits as well as local economic gains. What is needed here, as in energy efficiency, is small amounts of support to aid the development of investment grade projects in industry and the built environment.

We also need to step up Research and Development (R&D) of energy storage technologies which will become more important as a tool for managing demand fluctuations as well as intermittent supply from renewables. R&D in energy generally also needs to be ramped up.

In the short-term (2 to 4 years which may be too long for the 2015/16 potential crisis) there are a number of gas-fired plants that could be bought back into operation but even that is not straight-forward. Most have been ‘deep mothballed’, which means as well as changes to the physical plant the staff have been laid off or redeployed. Taking a large power plant out of deep mothballed state requires something like two years but in order to do this there has to be a financial return to the operator and at the current spark-spread it is not worth doing it. Government will have to do a short-term deal for operators to make this happen outside the main EMR – sooner rather than later.

Finally, however controversial it may be, we do need to develop indigenous shale gas resources. This needs to be done in a transparent way using the best technologies.

The trope about the Chinese word for crisis being made up of the characters for danger and opportunity comes to mind. (Interesting enough in checking this there is some question of whether it is actually true but anyway….). The dangers of the UK’s energy policy are clear – power cuts would cause huge social and economic disruption, possibly including social unrest – riots in the streets – and undoubtedly lead to big political shifts – probably even the downfall of the government of the day. The opportunity is to re-boot UK energy policy by:

• moving away from a supply dominated policy environment towards an energy services view-point
• really recognising the powerful effects of improving efficiency and the system wide benefits
• truly putting energy efficiency and the demand side at the heart of policy
• building capacity in the demand side of energy efficiency, the supply side and the flow of finance
• engaging communities in developing and operating the supply of energy services.

Getting this right might not do much to reduce the risk of a short-term crisis (2015/16) but it would help avoid the medium term risk (2020), most importantly doing it a least cost to the consumer, as well as bring benefits of increased productivity, reduced costs, reduced levels of fuel poverty as well as reduced emissions.

The Institute of Directors recently issued a new report, ‘Getting Shale Gas Working’, which outlines the benefits that shale gas exploitation could bring to the UK economy (http://www.iod.com/influencing/policy-papers/infrastructure/infrastructure-for-business-getting-shale-gas-working). There is little doubt, despite the controversy that fracking creates, of the potential for shale gas change the UK energy picture, just as it has in the US. Shale gas, particularly if combined with aggressive energy efficiency policies, could secure UK’s energy future for the foreseeable future and significantly help in resolving the policy ‘trilemma’ of balancing the needs for improved energy security, reduced energy costs and reduced environmental impacts.

I do find it interesting, however, that one of the key issues is cited as establishing ‘an acceptable tax regime’ for which I read some kind of generous tax break. We also saw in the government’s 2013 Budget a promise to introduce a shale gas field allowance and other support. The fossil fuel industry in the UK and globally is receiving massive tax breaks and subsidies, something like $1.9 trillion a year globally according to the IMF. Meanwhile, improved energy efficiency, which has been proven to be cheapest, cleanest and fastest to deploy energy resource we have, receives very little if anything in tax relief or subsidies.

We need to deploy shale gas for sure, but we also need to put all energy resources including energy efficiency on an equal tax basis and eliminate tax breaks and subsidies for fossil fuels – in the UK and everywhere.