First published here
We know that there is a massive potential for cost effective energy efficiency in nearly all, well all in fact, sectors and situations. Study after study in many countries and many regions have repeatedly shown this as has case study after case study. We know the efficiency resource is available, now we have to turn it into reserves and use it – we need to get it out of the buildings, out of the factories, out of the power systems and out of transportation. To use the oil and gas resource analogy we are in the position of a small exploration company who have found massive reserves of oil but lack the means or the know-how to exploit it.
So what do we need to really scale up utilisation of the efficiency resource, the cheapest, cleanest and fastest to deploy energy resource we have?
Well here are (six) things that we need in any country, situation or sector.
- First of all we need to see that the resource is there. Wallace Everett Pratt, a pioneer petroleum geologist said; “where oil fields are really found is in the minds of men” and it is the same for efficiency. It is only there when you recognise it as being there. The scale of the resource, as in oil and gas, can also be limited by imagination or technical know-how. Applying integrated design will generally lead to a larger, more economic reserve than using conventional incremental engineering. It opens up bigger reserves in the same way that conceiving of and then implementing horizontal drilling increased oil reserves.
- Someone, and preferably someone with some authority and power needs to believe that it is a) viable and b) economic to spend the time and money needed to identify and then access the reserves. Viability is in the eyes of the beholder and there is a need for entrepreneurs (in both the private and public sectors) to lead. Such people are often “unreasonable”. An example is the Empire State Building renovation that used integrated design and reduced energy use by 38%. Without a forceful, informed client in the shape of Tony Malkin that project would not have happened in the way that it did and at best there would have been smaller, less financially attractive savings, and at worst no efficiency at all.
- There needs to be a good business case. Traditionally energy efficiency business cases have been of the form, invest £x and save £y on energy costs. The world is more complex than that and it has never really been that attractive because just saving money is rarely strategic. That is why there are so many stories of frustrated energy managers or consultants with dozens of “two year payback projects” that have been turned down by CFOs. In the last few years we have started to recognise the multiple non-energy benefits that efficiency improvements can bring, including greater productivity, better health, better learning outcomes and many more. These tend to be much more interesting and strategic to decision makers and with strategic investments there is much less focus on the payback. Energy efficiency advocates need to learn to make better business cases that identify and value all the benefits. It is not easy to value them but then again it is not easy to value the effect of advertising and PR spend.
- There is a need to spend some money developing the opportunity, taking it from an idea to an investable proposition and that is risk money. Development requires some level of engineering work, which can be very simple adaptation work for a simple measure based on a single product like high efficiency motors where you can almost replace like for like, (although that may not be the optimum solution of course) through to complex engineering to modify existing systems or structures and calculate interactions between them. As in oil and gas exploration advanced software tools can be useful here but we have to recognise that there is often still a performance gap between what models say and what actually happens. We need better, and standardised tools. Development of all kinds can be complex and iterative but at the end of the day there is no certainty that a real project will happen as a result of development work. The development process is one that combines engineering, financial work, legal work, and what I call contextual work, looking at how the proposed development interacts with other factors inside and outside the host organisation. It is essentially a process of risk reduction but at the end of the day all development work, whether it is for energy efficiency, a new building, a new product or a new rocket, is high risk, the kind of risk that has to be taken by equity or equity type funding, aided where possible by grants. Equity funding is very different than debt type funding typically used for project implementation. One of the issues in the market is confusion between development and contracting, particularly around Energy Service Companies (ESCOs) and Energy Performance Contracts (EPCs). ESCos are typically contractors and not developers, they respond to Request for Quotations from clients and don’t go out and develop pipelines at risk. So called super-ESCos such as the Etihad Super ESCo do this kind of multiple project development which is essential for scaling up the market.
- There is a need for project implementation finance. This can come from inside the host organisation or outside. There is much focus on external funding but the reality is for something like 90-95% of energy efficiency projects the funding is internal. There is little point developing a project if there is no project implementation finance available. External finance will usually be some form of debt.
- The ability to procure, contract and manage the safe, on-time and on-budget implementation of projects. Although there is much focus on Energy Performance Contracts they are only one way of contracting for energy efficiency projects and are best suited to large, high value capital projects involving infrastructure upgrades. Most projects are implemented through industry standard contracts used for all kinds of mechanical, electrical and building works or through standard procurement terms.
That is pretty much it. Other things to note;
- We need developers who can aggregate demand such as Etihad Super ESCo, EESL, the Saudi Super ESCo and the Carbon & Energy Fund. The super ESCos (or super developers as I prefer to call them) contract the work to ESCos.
- We do need performance measurement and verification.
- We do need project development standardisation as provided by the Investor Confidence Project’s Investor Ready Energy Efficiency™.
- What legal or organisational form is chosen for the super ESCo / super developer is completely irrelevant – there is no right and wrong here – as long as the activities are taken care of. We see successful examples from the public and private sectors.
- Developers seem to perform best when they focus on a sector or segment of the market. A developer of hospital projects is not likely to fare well in the residential sector or even the commercial office sector – the norms, the customers, the experience and the skill sets are too different.
- Where you fund the projects from, and how you fund them i.e. what mechanism is used to recover the investment is irrelevant, different situations will demand different solutions such as simple loans, on-bill recovery or property tax supplements.
- The hard part of funding is the development piece.
That is all for today. More to follow on this – but in the meantime “just do it”.
Stay tuned! Best ideas for energy efficiency and energy transition...
Sign up for our monthly newsletter and stay connected to the best ideas in Energy Efficiency Finance, Energy Management, GreenHeat, IoT, Blockchain, Smart Grids, Green Buildings and Energy Policy.