The take-up of energy efficiency measures in buildings remains extremely low given the economic rewards on offer.
This statement is true here in the Unites States, but is equally true around the world. Dr. Steven Fawkes (Only Eleven Percent) explores what's really needed to unlock the potential from a European and global perspective. The following article, reposted from 2Degrees, goes into some of the specific challenges impeding adoption of energy efficiency across the globe, and some of the solutions that can help overcome these barriers.
This statement is true here in the Unites States, but is equally true around the world. Dr. Steven Fawkes (Only Eleven Percent) explores what's really needed to unlock the potential from a European and global perspective. The following article, reposted from 2Degrees, goes into some of the specific challenges impeding adoption of energy efficiency across the globe, and some of the solutions that can help overcome these barriers.
High energy prices and increased environmental concerns have accelerated the take-up of energy efficiency globally. In the UK as well as some other markets such as South Africa, real concerns about declining electricity generation supply margins – the threat of the “lights going out” - have helped raise efficiency up the political agenda. We all know that the potential for improved energy efficiency is still massive, and we know what the barriers to achieving that potential are.
However, the take-up of efficiency remains relatively small and patchy compared to the economic potential, especially around third party financed investment which remains largely a holy grail, despite the availability of dedicated efficiency funds in the UK (and elsewhere) such as those established by the Green Investment Bank. These funds are having difficulties deploying capital into energy efficiency - and this is not confined to the UK funds.
However, the take-up of efficiency remains relatively small and patchy compared to the economic potential, especially around third party financed investment which remains largely a holy grail, despite the availability of dedicated efficiency funds in the UK (and elsewhere) such as those established by the Green Investment Bank. These funds are having difficulties deploying capital into energy efficiency - and this is not confined to the UK funds.
So what is missing in the energy efficiency eco-system that if it was available would make the market really grow and start to achieve much more of its massive potential, producing greater economic benefits, reduced emissions, reduced dependence on energy imports and fostering local economic development and job creation?
"What we don't have is project developers that can develop large multi-site investment projects in line with the client's strategic goals."
Well several things seem to be missing. The first is in the area of project development. We have many energy consultants and energy service companies, as well as technology vendors that can develop stand-alone projects in single buildings or facilities. We even have a few (not enough) consultants who are experienced in developing and rolling out projects in multi-site portfolios such as retailers. What we don't have is project developers that can develop large multi-site investment projects in line with the client organization's strategic goals or who can develop large multi-client projects.
These kind of projects would go a long way to addressing a fundamental problem of energy efficiency financing - lack of scale. Developing such projects requires different skills than those found in traditional efficiency project developers including, managing multiple stake holders, aggregating and managing multiple small projects, and evaluating project risks and returns. It also requires risk taking and considerable working capital. Even developing a normal, "simple", Energy Performance Contract for a single site can take 12 to 24 months, time and technical resources that need working capital. Energy service companies and small under-capitalized consultancies cannot put the working capital into developing these projects.
Of course, we also need customers who demand such projects. On this side we need to think about how to develop and encourage groups or organizations in sectors, or across sectors that have some association or commonality, to work together and to demand large-scale projects.
Local authorities can do this with their own buildings but even the largest local authority portfolios would only represent a fraction of the quantum of capital required by institutional investor standards. Local authorities could convene groups of organizations within their areas but with a few exceptions lack the in-house capability to do this. Central government has a massive property portfolio and should take a lead in procuring massive, multi-site energy efficiency projects in a similar way to programs in the USA run by the General Services Administration. This however means cutting across departmental boundaries which of course requires leadership at the highest levels.
In the private sector large organizations such as manufacturers could take a leadership role around energy efficiency and convene their supply chain.In the private sector large organizations such as retailers and manufacturers could take a leadership role and convene their supply chain. This has to be handled carefully but it can lead to aggregation of opportunities and the grouping of buying power will lead to savings on capex, as well as opportunities to provide third party finance at scale. The large customer at the end of the supply chain could work with its banks to provide a standardized financial product to support investment in energy efficiency, possibly providing some corner stone capital or other support such as first loss reserves. Utilities are also well placed to develop and aggregate multi-customer projects.
From the investor side energy efficiency still suffers from a lack of confidence – confidence in the results and confidence in the technology. Although the energy efficiency industry always says the technology is proven, and it is usually is, there isn’t actually much in the way of independent post-investment assessment that can be used to build confidence.
Also the process to develop projects is generally ad hoc – every consultant and energy service company uses its own approach. If five energy surveyors reviewed your building you would get five different answers on savings, even if the technologies chosen were similar. Results would also be presented in five different ways. There are no standardized approaches to development and analysis and the five estimates of savings would have a large range – uncertainty which does not give investors (either external or even internal) confidence.
"What we don't have is project developers that can develop large multi-site investment projects in line with the client's strategic goals."
Well several things seem to be missing. The first is in the area of project development. We have many energy consultants and energy service companies, as well as technology vendors that can develop stand-alone projects in single buildings or facilities. We even have a few (not enough) consultants who are experienced in developing and rolling out projects in multi-site portfolios such as retailers. What we don't have is project developers that can develop large multi-site investment projects in line with the client organization's strategic goals or who can develop large multi-client projects.
These kind of projects would go a long way to addressing a fundamental problem of energy efficiency financing - lack of scale. Developing such projects requires different skills than those found in traditional efficiency project developers including, managing multiple stake holders, aggregating and managing multiple small projects, and evaluating project risks and returns. It also requires risk taking and considerable working capital. Even developing a normal, "simple", Energy Performance Contract for a single site can take 12 to 24 months, time and technical resources that need working capital. Energy service companies and small under-capitalized consultancies cannot put the working capital into developing these projects.
Of course, we also need customers who demand such projects. On this side we need to think about how to develop and encourage groups or organizations in sectors, or across sectors that have some association or commonality, to work together and to demand large-scale projects.
Local authorities can do this with their own buildings but even the largest local authority portfolios would only represent a fraction of the quantum of capital required by institutional investor standards. Local authorities could convene groups of organizations within their areas but with a few exceptions lack the in-house capability to do this. Central government has a massive property portfolio and should take a lead in procuring massive, multi-site energy efficiency projects in a similar way to programs in the USA run by the General Services Administration. This however means cutting across departmental boundaries which of course requires leadership at the highest levels.
In the private sector large organizations such as manufacturers could take a leadership role around energy efficiency and convene their supply chain.In the private sector large organizations such as retailers and manufacturers could take a leadership role and convene their supply chain. This has to be handled carefully but it can lead to aggregation of opportunities and the grouping of buying power will lead to savings on capex, as well as opportunities to provide third party finance at scale. The large customer at the end of the supply chain could work with its banks to provide a standardized financial product to support investment in energy efficiency, possibly providing some corner stone capital or other support such as first loss reserves. Utilities are also well placed to develop and aggregate multi-customer projects.
From the investor side energy efficiency still suffers from a lack of confidence – confidence in the results and confidence in the technology. Although the energy efficiency industry always says the technology is proven, and it is usually is, there isn’t actually much in the way of independent post-investment assessment that can be used to build confidence.
Also the process to develop projects is generally ad hoc – every consultant and energy service company uses its own approach. If five energy surveyors reviewed your building you would get five different answers on savings, even if the technologies chosen were similar. Results would also be presented in five different ways. There are no standardized approaches to development and analysis and the five estimates of savings would have a large range – uncertainty which does not give investors (either external or even internal) confidence.
Investors like standardization. In any asset class such as residential mortgages, or wind power, there are standardized approaches to developing and evaluating projects as well as presenting the investment case. This reduces transaction costs. In energy efficiency there are no standardized approaches – everyone makes it up as they go along, a situation analogous to wind power in the late 1980s and early 1990s. Over time the wind industry working with the banks evolved standardized approaches to developing and assessing projects and so today, twenty-five years after the wind industry started, there are standardized processes.
Over time the wind industry working with the banks evolved standardized approaches to developing and assessing projects.The result of this lack of standardization in energy efficiency is that the banks and financial institutions may have a round hole in their criteria through which energy efficiency projects could pass, but the projects being developed and presented are square, rectangular, five sided and every other shape under the sun. Standardization can be supported by projects like the Investor Confidence Project (ICP) in the USA (www.eeperformance.org) which brings together investors and energy efficiency companies to develop standardized protocols for the assessment, evaluation and presentation of energy efficiency projects with different protocols for different types of buildings. Leading investors and others need to promote the ICP approach and anyone who wants to work on this should contact me.
The lack of confidence manifests itself in the form of short payback period criterion (typically two to three years maximum) for internally funded projects and the high cost of capital, relative to the real risks, that inhibits growth of the third party financed market. This high cost is successfully being exploited by some investors but inhibits the growth of the market which would result from accessing appropriately priced money from institutional investors and the capital markets.
So how do we fill these gaps in the energy efficiency ecosystem? Firstly we need to foster both the idea that we can develop larger multi-site projects amongst appropriate groups of organizations such as the supply chains referred to above, and the capacity to develop them. The former will require both co-operation and partnership between organizations and some means of education or capacity building in the art of the possible – as well as in the need for standardized approaches and processes. The latter requires capacity building in the energy efficiency development community to ensure the ability to develop large complex, multi-stakeholder, multi-site projects using standardized protocols.
"The lack of confidence manifests itself in the form of short payback period criterion for internally funded projects."
We also need to ensure that the development process uses state-of-the-art techniques such as integrative design and the latest technology on modelling of efficiency projects. We cannot continue to use conventional, silo driven engineering design techniques, promoted both by vendors selling their technologies and by inherently conservative engineering design that works in single disciplines and tends to reproduce the last design used.
To address the working capital constraint we either need a new type of development company that can finance the considerable working capital required from equity, (unlike today’s consultancies or ESCOs), or some degree of technical assistance type funding from those institutions that want to build the lending market in energy efficiency. International financial institutions like the EBRD have long realized this and use soft funding to support project development. Until government or institutions like the Green Investment Bank and the private banks interested in the market realize this, the growth of the third party finance market will remain stunted. An increase in the size and visibility of the market for efficiency projects, particularly the growth of a secondary market, would also help project developers raise equity capital.
So to summarize – what’s missing from the energy efficiency ecosystem?
For more blogs from Dr. Steven Fawkes and an infographic summarizing the supply, production and import statistics for the UK's energy please visit Only Eleven Percent.
Over time the wind industry working with the banks evolved standardized approaches to developing and assessing projects.The result of this lack of standardization in energy efficiency is that the banks and financial institutions may have a round hole in their criteria through which energy efficiency projects could pass, but the projects being developed and presented are square, rectangular, five sided and every other shape under the sun. Standardization can be supported by projects like the Investor Confidence Project (ICP) in the USA (www.eeperformance.org) which brings together investors and energy efficiency companies to develop standardized protocols for the assessment, evaluation and presentation of energy efficiency projects with different protocols for different types of buildings. Leading investors and others need to promote the ICP approach and anyone who wants to work on this should contact me.
The lack of confidence manifests itself in the form of short payback period criterion (typically two to three years maximum) for internally funded projects and the high cost of capital, relative to the real risks, that inhibits growth of the third party financed market. This high cost is successfully being exploited by some investors but inhibits the growth of the market which would result from accessing appropriately priced money from institutional investors and the capital markets.
So how do we fill these gaps in the energy efficiency ecosystem? Firstly we need to foster both the idea that we can develop larger multi-site projects amongst appropriate groups of organizations such as the supply chains referred to above, and the capacity to develop them. The former will require both co-operation and partnership between organizations and some means of education or capacity building in the art of the possible – as well as in the need for standardized approaches and processes. The latter requires capacity building in the energy efficiency development community to ensure the ability to develop large complex, multi-stakeholder, multi-site projects using standardized protocols.
"The lack of confidence manifests itself in the form of short payback period criterion for internally funded projects."
We also need to ensure that the development process uses state-of-the-art techniques such as integrative design and the latest technology on modelling of efficiency projects. We cannot continue to use conventional, silo driven engineering design techniques, promoted both by vendors selling their technologies and by inherently conservative engineering design that works in single disciplines and tends to reproduce the last design used.
To address the working capital constraint we either need a new type of development company that can finance the considerable working capital required from equity, (unlike today’s consultancies or ESCOs), or some degree of technical assistance type funding from those institutions that want to build the lending market in energy efficiency. International financial institutions like the EBRD have long realized this and use soft funding to support project development. Until government or institutions like the Green Investment Bank and the private banks interested in the market realize this, the growth of the third party finance market will remain stunted. An increase in the size and visibility of the market for efficiency projects, particularly the growth of a secondary market, would also help project developers raise equity capital.
So to summarize – what’s missing from the energy efficiency ecosystem?
- Capacity to develop large multi-site and multi-client projects using: 0 integrated design and state-of-the-art modelling 0 appropriate standardization of development and evaluation including appropriate financial risk analysis
- Capacity amongst end-users to bring together multi-site, multi-client projects.
- Developers that have sufficient risk equity to develop large projects.
- And/or technical assistance funds from governments/investors wanting to develop the energy efficiency financing market.
For more blogs from Dr. Steven Fawkes and an infographic summarizing the supply, production and import statistics for the UK's energy please visit Only Eleven Percent.
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