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.

The City of Chicago, (my all time favorite US city and one that is well worth visiting), is a leader in the US and the world on promoting energy efficiency and sustainability generally. Chicago has a unique history in buildings, the skyscraper was invented there, and as well as many historic buildings it still has some of the tallest buildings in the world in the form of the Willis Tower, (formerly and still to most people the Sears Tower,) and the John Hancock tower.

The city, whose official motto is ‘Urbs in Horto’ or ‘city in a garden’, has the aim of being more liveable, more competitive and more sustainable. It has had sustainability programmes for a number of years and has achieved the following:

• been voted ‘most sustainable large community’
• number 1 in number of LEED certified buildings
• has the largest urban solar capacity (10 MW on brown field site)
• number 1 in green roofs, with more than 5 million square feet
• has the 3rd largest concentration of green jobs in the US
• has recently shut down two urban coal fired plants, thus improving air quality.

The city’s sustainability efforts have been accelerated under the leadership of Mayor Rahm Emmanuel and the city has 24 goals for 2015 in 7 key areas (‘24/7’) with 100 specific activities being monitored. Number 2 in the 7 key areas is ‘Energy efficiency and clean energy’. It is refreshing to see that the order is energy efficiency first, rather than clean energy. Energy efficiency also clearly links in with number 1, creating jobs, and number 7, addressing climate change.

The city undertook a study of energy use split into census blocks and the numbers show that there is $3 billion a year spent on energy in 600,000 buildings and that 71% of Chicago’s carbon dioxide emissions come from buildings. This realization led to the creation of the Retrofit Chicago programme which has three sub-programmes, one for public buildings, one for commercial buildings and one for the residential sector.

In the public sector the City set a target of reducing energy use by 20% in its 10 million square feet of facilities. Recognizing that finance could not come from public funds the City created the Chicago Infrastructure Trust which is designed to bring in multiple, private sector finance partners to invest in infrastructure upgrades. Although less than a year old, and still, as the Deputy Mayor described it at the recent ACEEE Financing Forum, an ‘infant that has probably got too much attention’, it is working on financing energy efficiency retrofits in buildings, large pumping stations and schools.

The Commercial Buildings Initiative (CBI) was launched as a voluntary , opt-in, programme. It initially had 14 million square feet of buildings owned by major real estate companies signed up but now has 32 buildings with 28 million square feet. It both “makes it easier” for building owners to have a retrofit and provides recognition. Interestingly enough finance is not considered a barrier in the CBI as these are major buildings owned by large real estate companies.

The Residential Partnership used the data on energy use at a census block level to identify twelve zones with a high potential for energy efficiency. This information is available through the city’s information portal and the city is encouraging people to come up with new ways of using the data. After less than a year 1,300 retrofits have now been undertaken with a total of 2,600 across the city (including areas outside the twelve zones). As in other residential retrofit schemes a critical issue is accelerating demand and the city uses an out-reach team using various techniques including house parties.

For more information on Chicago Retrofit see here.

Many US cities are doing really interesting and effective things to improve energy efficiency but ‘the windy city’ is definitely up there amongst the leaders and worth studying.

This is the text of the speech I made at the International Energy Research Centre’s 2013 Conference in an enjoyable debate over whether we should commit public and private resources to energy supply or energy efficiency. Needless to say I argued in favour of energy efficiency.

Good afternoon everybody. I am here to make the case for investing in energy efficiency over energy supply.

The first thing I want to cover is just how big the efficiency resource really is – and we do need to think of it as a resource like any other.

The University of Cambridge a few years back came up with these numbers:

• We use 475 Exajoules of primary energy, that’s oil, coal, gas, solar, nuclear, and out of that we get a 55 Exajoules of useful energy services, so that is heat, cold, motion and sound.
• That is 11% efficiency – with all of our advanced technologies we get an overall efficiency of 11%, which means we waste 89% of all that primary energy, even after allowing for some of that we can never use, it is still pretty pathetic.
• Out of the 6 trillion or so dollars we spend on energy, something like 5 trillion is wasted. By the way, onlyelevenpercent.com is my blog – so now I have the commercial out of the way!

So, now we are talking about money we’re going to look at some big numbers. I don’t see many £50 notes but interestingly enough they have Boulton and Watt on who made their fame and fortune by selling energy efficiency in the form of long-term shared-savings contracts. Most people think James Watt invented the steam engine, he didn’t – he invented a more efficient steam energy and sold them on the basis of energy savings.

So let’s compare renewables with efficiency. In the power game the common denominator is Levelized Cost of Energy (LCOE). Let’s look at LCOEs for renewable technologies using some numbers from the Fraunhofer Institute which is pro-renewables.

The LCOE for the existing grid – that is fossil fuels and nuclear – is in the range 30 to 75 euros per megawatt hour, so that is the bench mark.

First, we look at onshore wind. Fraunhofer says the LCOE is 60 to 75 euros per megawatt hour.

Large scale solar PV has a LCOE of 110 to 140 euros per megawatt hour.

Small scale solar PV has a LCOE of 125 to 250 euros per megawatt hour.

Now offshore wind, which the UK is putting an awfully large bet on, has a LCOE of 125 to 175 euros per megawatt hour.

The UK says that the cost of offshore wind can be reduced to 100 pounds per megawatt hour compared to a wholesale electricity price of 50 pounds per megawatt hour. That is if everything goes to plan and the industry can deliver 100 pounds per megawatt hour, and many people think that is a very big ‘if’, the cost will still be twice the current wholesale price.

Finally let’s look at tidal power which has huge potential. Now if the cost-down curve for tidal is achieved, the LCOE is 250 to 350 euros per megawatt hour.

So now let’s look at energy efficiency. By the way, one of the other problems with energy efficiency is that it isn’t photogenic!

Work by the American Council for an Energy Efficient Economy looking at all the energy efficiency programmes supported by American utilities came up with a LCOE of 20 to 45 euros per megawatt hour.

Now I have thrown a lot of numbers out so let’s summarise here:

• Fossil fuel/nuclear – €30 to €75/MWh
• On-shore wind – €60 to €75/MWh
• Large scale PV – €110 to €140/MWh
• Small scale PV – €125 to €250/MWh
• Off-shore wind – €125 to €175/MWh
• Tidal stream – €250 to €350/MWh
• Energy efficiency – €20 to €45/MWh

We can see that efficiency, which we saw at the beginning is a huge resource, is also by far the cheapest resource.

Now let’s look at a very famous building which is now an icon for energy efficiency: the Empire State Building. As has been well reported some clever holistic engineering as part of a major refurbishment led to 38% savings with a three year payback period on the incremental capital. Tony Malkin, who owns the Empire State Building is an environmentalist but he is also first and foremost a New York property magnate. He only invests if there is a three year payback period and he forced his supply chain to do it right and because of the financial results now every other New York property owner wants to do energy efficiency, and it doesn’t matter if they believe in climate change or not. So energy efficiency is an environmental activity that isn’t controversial. And of course it does not need any subsidies whatsoever.

And now another thing: the LCOEs we quoted before don’t take account of the additional costs that low-carbon generation impose on the grid. I am not going to go through the numbers from this research by OECD but you can see that, depending on the degree of market penetration achieved, the additional costs on the grid for wind and solar can range from 20 to 80 dollars a megawatt hour, that’s on top of the LCOE numbers we have already looked at.

On the other hand, energy efficiency brings with it additional benefits rather than additional costs. This work by ConEd in New York shows the additional benefits that come from a commercial lighting retrofit in terms of reduced need for investment in transmission and distribution, avoided line losses and capacity savings. Even excluding the energy savings and the environmental benefit, a kilowatt of lighting retrofits can save 1400 dollars.

Now let’s talk about jobs, a critical subject everywhere but particularly in Ireland. Work by ACEEE has shown that energy efficiency generates 21 jobs per million dollars compared to 10 in the energy generation industry and 17 in the general economy. So if you take one million dollars revenue out of the energy industry by saving a million dollars you lose 10 jobs but you generate 17 jobs in the economy as a whole and if you spent a million dollars on energy efficiency you generate 21 jobs.

Two more points: one looking forward and one looking back. Looking forward, decarbonisation through renewables just does not look plausible. This chart from a recent report by Liberum Capital shows the scale of growth we need in renewables in the UK to meet our targets. Quite frankly, these growth rates in wind and nuclear are just not plausible. Doubling the amount of nuclear power in 17 years, 2013 to 2030, is quite frankly a joke when it takes years and years just to get to a decision and every comparable nuclear project everywhere is way behind schedule and over budget.

Now if we look back at the last 40 years, and this chart shows US data but the same is true everywhere, we see something really quite interesting. The top lines show what energy use would have been if we had stayed at the same level of efficiency the US had in 1970. The total would have been 203 to 210 Quads but in reality the US now uses about 100 Quads. So if you look back at the last 40 years, energy efficiency has delivered more energy services than any other source of energy, coal, gas, nuclear, renewables, by a very long way. And we did that without trying except for a 10-year period between the mid-1970s and the mid-1980s.

So to sum up:

• Energy efficiency delivers much lower cost per megawatt hour than any other energy resource.
• It is a very large resource.
• It does not require subsidies.
• It brings with it additional system benefits in the electricity network unlike renewables which bring additional costs.
• It generates more jobs per million dollars than energy generation and the economy as a whole.
• Decarbonisation through renewables is not plausible.
• Over the last 40 years energy efficiency has delivered far more energy services than any other source of energy – without really trying.

So just think about what we can do if we really try!

Thank you to all at the IERC for inviting me to speak and organising such a great conference. Thanks also to my fellow debaters on both side of the argument and to the audience for their contributions.