As soon as there is discussion of energy efficiency and the potential for improving energy efficiency, someone counters with the argument that reducing energy use per unit of output only leads to more energy use as people and firms spend some (or all) of the money saved by greater efficiency on more consumption, resulting in more energy use. This is the Jevons Paradox – first put forward by William Stanley Jevons in 1865 in his book, ‘The Coal Question’. Jevons pointed out that coal consumption in England soared after James Watt introduced his steam engine which greatly improved on the energy efficiency of existing steam engines which used Thomas Newcomen’s technology.

Numerous referred papers, articles, blog posts and even whole books have been dedicated to the Jevons paradox and some people have used it without really understanding it to rubbish energy efficiency. I don’t want to start any more debates but I would say that that we don’t say the same things about the use of other resources e.g. metals – you do not hear the argument that we shouldn’t improve productivity of metal use as it will only result in more metals use. It may be equally true in metals as it is in energy but the argument isn’t made nearly so often.

Fundamentally improving the productivity of resource use, whether it be metals or energy or land, is one of the basic drivers of increasing wealth. Another driver is our ability to create resources out of ‘thin air’ by creative thinking, for example, turning something that has no value or is currently thought of as waste into a productive resource.

There is an interesting area for research, as yet under-researched, on the importance of improving energy efficiency in driving economic growth. Some recent research from the American Council for an Energy Efficient Economy suggest that it may be more important than we generally think. For some more information see the work of Skip Laitner and the ACEEE here and here.

I saw a video of a great TED talk today by Justin Hall-Topping, ‘Freeing energy from the grid’.

The video, along with my current re-reading for the nth plus 1 time of one of Arthur C. Clarke’s great science fiction novels, ‘Imperial Earth’, reminded me of the expression ‘the future isn’t what it used to be’ – usually attributed to the famous baseball player and manager Yogi Berra. If we look back only twenty years, and certainly when we look back forty years ago, the future and specifically the energy future looked very different to what it looks like now. Official energy forecasts in the UK in the 1980s foretold of a future based on ‘CoNucCo’ – coal, nuclear and conservation, and increasing energy demand. As it turned out energy demand in 2011 was pretty similar to energy demand in 1970, despite very significant growth in real GDP. Coal use has declined but still makes up a significant proportion of power generation and of course the use of gas grew dramatically. It seems as if we serious under-estimated the effects of improved energy efficiency.

Anyway, back to the theme of the future. I am a technological optimist and the presentation by Justin Hall-Topping focused on the fascinating area of nanomaterials for energy. Examples given included materials that are only a few molecules thick but could convert windows into active components that can allow energy into a building or let it out at will (an old idea which is also being worked on using some other technologies), super efficient water filtration systems, and super-efficient storage systems. Friends of mine at the University of Illinois in Urbana-Champaign have developed and are commercializing self-healing materials – itself an amazing technology. Now they have applied them to batteries and have technology that can extend battery life and prevent battery fires (note to Boeing – you should check this out for the 787 problem).

It doesn’t matter whether the specific technologies described in any examples are really viable, that is the nature of new technology development, some will be winners and a lot will be losers (along with their early investors). The point is that world-wide there is an incredible number of new and amazing technologies, many of which will change the world’s energy system and greatly improve energy efficiency, either at the level of individual devices or by completely changing the way we do things. These are the ‘unknown unknowns’ I referred to in an earlier post that will change the future. It is likely that the energy future in twenty years time will look very different to what it looks like now as some of these technologies – particularly in smart and nano-materials – will have emerged and started to be widely applied. I suspect the future vision then won’t include such basic and archaic technologies as combustion based systems of all kinds, nuclear fission, wind turbines and photovoltaics as we know them today. I look forward to seeing that exciting future.

I recently attended a meeting of the Chop Sticks Club – a group that has been promoting Anglo-Chinese relations for the last twenty years. Although of course the projected future where the Chinese economy continues to grow dramatically may not be totally assured it’s phenomenal growth over the last twenty years, along with similar rapid transformations in many other countries, coupled with a lack of growth in Western economies, certainly means global growth will be driven by the developing countries.

Here in the West there is only one clear path to growth and job creation – exploiting the huge potential for resource efficiency – especially energy – that we know exists. In buildings alone the UK spent in 2011 £42 billion. We know that we can achieve savings of c.10% by better management (much more in many cases), c.20% by low cost investment in better controls and monitoring technologies, and far more by extensive investment in holistic retrofits. A 20% saving would produce £8 billion saving for consumers. Studies from the USA suggest $1m spent on energy efficiency produces something like 20 jobs. If we assume 20 jobs per £1 million and capex to produce the £8 billion of £40 billion, that would produce 800,000 jobs and free up a lot of cash flow for consumers.

We are at the beginning of not one but two revolutions, an energy revolution and a finance revolution.

The global financial crisis exposed the stupidity, greed and complete lack of ethics in large parts of the financial system. Lots of people made an awful lot of money without doing anything useful. Banks built dubious models that “proved” a bunch of high risk assets were low risk, mortgage salespeople made fortunes selling mortgages to people who couldn’t afford them, private equity principals made fortunes by loading companies up with unsupportable debt and executives in big companies voted themselves huge pay rises while overseeing poor performance. Meanwhile governments were happy to encourage this behaviour. Needless to say most people think this is is unacceptable and want another way of doing things. This is manifesting itself in the rise of community funding vehicles, crowd funding, and credit unions – more and more re-connecting finance with the real world of people and projects.

Meanwhile in the energy scene (and this bit is primarily about the UK), we have an oligopoly composed of large energy suppliers effectively controlling the market. Public trust in energy companies is at an all time low, prices are going up and there is a record number of people in fuel poverty. Just like in the finance world there is a growing interest in community based energy schemes and companies. Most of these, however, are focused on installing renewables and taking advantage of Feed-in tariffs (which is an unsustainable business model for society as a whole), or on some form of community switching or cooperative buying model where large numbers of people club together to use their buying power – also ultimately limited in its effect. These types of schemes are all laudable but they are not the real answer.

The real answer is community owned energy supply companies.

In Germany many municipalities own their own utility and in many cases these utilities are truly multi-utility i.e. they supply power, gas, heat, cooling, water and waste water services. In the USA about 2,500 cities still own their own utility. Before the nationalisation of the UK electricity industry in 1947 there were over 500 electricity companies, many owned by local authorities. Why can’t we go back to that?

What should community energy supply companies do?

As well as straight-forward energy supply a community energy company should offer a full range of energy services aimed at improving the energy efficiency of customers’ buildings and facilities, this should be a central part of the energy supply offering and not an add-on. They should be technology agnostic, and supply vs. demand side agnostic, utilising technologies such as Combined Heat and Power, energy efficiency, some renewables, and where viable local storage. An integrated energy supply and demand side company would be a Community Energy Service Company (CESCo).

How should they be financed?

The community energy movement needs to be tied to the community financing movement. Consumers want safe steady incomes on their savings at rates better than those given by their high street banks, incomes that utilities traditionally gave and which community utilities can produce. Institutional investors want safe long-term income which is what utilities and energy projects, whether they be supply or demand side, can provide. A community energy supply company could access both community finance and institutional investors.

Benefits

Local energy companies could bring huge benefits in terms of improved local control, a greater sense of community engagement, job creation, and improving education on energy issues.

Barriers

Of course there are real barriers to establishing a local energy supply company, particularly around licensing and trading of power. But the biggest barrier is simply the idea that it is all too difficult. It can be done. We need to start a revolution by starting Community Energy Service Companies (CESCos).

The term ESCo, or Energy Service Company is widely used to describe companies that develop energy efficiency projects in clients facilities and then either invest themselves, less and less common by the way as balance sheets are constrained, or bring a third party source of finance to fund the projects. In a classic Energy Performance Contract, EPC, the ESCo provides a guarantee that savings will exceed a certain level and the savings should exceed the repayments such that the client is cash flow positive from day one.

The ESCO EPC concept grew out of work in the US public sector, and even today 75 to 80 % of the total market in the US is in the MUSH, Municipal, Universities, Schools and Hospitals market. The US government did a great job of exporting the idea around the world with USAID and other agencies promoting it widely. The concept was enthusiastically picked up throughout the world but the truth is it has never taken off to the extent that people expected. Why?

Fundamentally the US only exported half of the idea, the contract form. They didn’t export the low cost municipal bond market or central budgets that most users of ESCo EPCs in the USA take advantage of. Secondly a major problem is that the real incentive for the ESCo is not the shared savings they use to promote the idea, rather the real incentive is on the ESCo to maximise capex. They make their margin on capex not the savings. Interestingly there seems to be growing dissatisfaction with the EPC model even in the US public sector. When ESCOs have tried to expand into the private sector they have met resistance due to the complexities of contracts, the split incentive, lack of transparency and perceived excessive margins.

The ESCo term is widely used but there are many different understandings of the word. Is it a company that developers EPC contracts, or does it deliver energy services in the form of heat and power, or does it deliver warmth, light and motive power directly? Even at the recent ESCO Europe conference there were many different definitions.

It may sound radical but the time is right to ditch the term ESCo altogether and just talk about project developers, project delivery companies, financiers and underwriters. Project developers, just like in renewable or conventional energy can be a variety of types of organisations from small, independent entrepreneurial companies, to large multi national energy companies or equipment vendors. They can also be, and increasingly are, community groups., This is no different to the renewable industry. Being brave enough to ditch the term ESCo and adopting the standard language of energy projects would be a sign of maturity of the energy efficiency industry and be a useful step towards scaling the energy efficiency markets.