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.

In February 2002 the then US Secretary of Defense Donald Rumsfield made a very famous speech in which he said: ‘There are known knowns; there are things we know we know.  We also know there are known unknowns; that is to say, we know there some things we do not know.  But there are also unknown unknowns – the ones we don’t know we don’t know’.  He was roundly criticized for this but somewhat unfairly.  Geoffrey Pullum, who is a Professor of Linguistics at both Edinburgh University and Browns University disagreed, saying the quotation was ‘completely straightforward’ and ‘impeccable, syntactically, semantically, logically, and rhetorically’.

It is a statement that we can usefully apply to energy efficiency.  First of all let’s think about the known knowns.  The biggest one is surely the huge economic potential for energy efficiency to improve productivity, reduce costs, improve energy security, create jobs and reduce carbon emissions.  For 30 years there have been so many reports from credible bodies that no-one can realistically challenge the potential.  Likewise the generic barriers to achieving the potential have been studied to death.

If we want to scale up energy efficiency we need to scale up three things: demand, supply and the flow of finance into efficiency investments of all types.  A big known unknown is how do we increase demand, particularly in the residential sector.  Schemes like the Green Deal and equivalents have to face the facts that sometimes even when insulation and other measures are free people don’t take them up and – however much we may like them to do – the average consumer does not wake up in the morning and say, ‘I want to buy some efficiency today’.  It is not sexy, cool and desirable – however much we complain about our energy bills.   For every market segment we need to understand the enabling conditions that do make people buy energy efficiency in whatever form – the industry is a long way from that right now.

On the supply side there are a number of known unknowns, one being how do we standardize evaluation techniques and models.  Models that produce building energy use or Energy Performance Certificates (EPCs) can give widely differing answers for very similar buildings.  In California residential evaluation models have been found to be 50 per cent out 25 per cent of the time.  One major supermarket in the UK questioned the widely differing results for Energy Performance Certificates for sets of similarly sized, designed and constructed buildings.  On investigation much of the variation came down to the different software models being used and of course the parameters being fed into the models.  Standardizing models and input parameters greatly reduced the variation.

On the finance side the big known unknown is how do we get long-term low cost third party finance into energy efficiency.  Again a lot of this is around standardization of evaluations, contracts and documentation.  The money is there, it wants to invest, the industry needs to give investors the structures and the assurances that they needs and that comes from standardization.

So, that is just a few of the known unknowns.  As for the unknown unknowns – well who knows?  One thing is guaranteed – there will be surprises out there.

I am a (sceptical) fan of the current governments policies on energy efficiency and as I said in a recent Energy World article we have built some reasonable foundations for an energy efficiency policy. The launch of the Energy Efficiency Mission in February, hosted by Greg Barker, which included a letter of support from Bill Clinton, a video message from Arnold Schwarzenegger and appearances by Secretary of State Ed Davey and most importantly the Prime Minister David Cameron marked a new and significant step forward to UK energy efficiency policy. Any energy efficiency programme needs top level support and the PM demonstrated that support.

Now we have to build something on those foundations. There are some things where we clearly need government action, mainly to help rebalance the influence of the supply side industry most notably around Electricity Market Reform (EMR). In other areas we need more entrepreneurial action and leadership. The efficiency market is growing rapidly. Finance is beginning to flow into the sector, both into technologies and projects, although not yet at the scale we need. Where we really need action is at the local level, we need more people to take responsibility for their energy. Up until a few years ago this would have seemed a crazy thing to advocate. Energy is the preserve of mega companies and very technical (and even dangerous when mis-handled). What can local people do? Probably a lot more than you think.

A few weeks ago there was a brilliant good news story on the BBC about a community that had financed and built (literally) their own high speed fibre optic internet connection, an amazing achievement that came about simply through people power. If a community can do that in a highly regulated, highly technical area why not the highly regulated technical area of energy supply?

Now the whole idea of community energy is clearly growing but many of the projects to date are limited in scope, mainly installing small scale renewables and taking advantage of Feed-in tariffs. A community owned energy supply company, providing electricity (and maybe gas) as well as a range of energy efficiency services should be possible. A community owned energy company could keep money in the local economy, create local jobs, make energy more transparent and increase people’s sense of engagement. The whole idea can also be linked to the growing area of community finance with a return to the old idea of utilities providing safe secure income.

Prior to the formation of the CEGB there were over 500 local electricity companies, mostly owned by local authorities. Although 100% ownership is no longer possible, or even desirable, maybe we should aim to get back to having 500 suppliers instead of a big six and some small players. As John F. Kennedy said, ‘Ask not what your country can do for you, ask what you can do for your country’.