Steven Fawkes IERC Cork 16 01 13 final
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Presentation made to IERC Cork, Ireland on 16th March.
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Steven Fawkes IERC Cork 16 01 13 final
- 1. Matrix Corporate Finance Energy EFFICIENCY : the biggest value opportunity on the planet? Dr. Steven Fawkes 16th January 2013
- 2. Matrix Corporate Finance Global potential for energy efficiency $170 bn a year investment would: -halve the projected growth in energy demand (reducing demand by ~ 64 million barrels a day) -produce half the emissions abatement required to keep atmospheric CO2 at 450ppm -have an average IRR of all projects 17% (at $50/barrel oil) Source: McKinsey
- 3. €336 bn Matrix Corporate Finance
- 5. Matrix Corporate Finance INEFFICIENCY EVERYWHERE US runs at least 8 large power stations just to power stuff that is turned off < 10% of the fuel that makes electricity for pumping applications actually creates customer value < 1% of the fuel that makes electricity for a data centre actually creates customer value Source: Rocky Mountain Institute
- 6. Matrix Corporate Finance Just How inefficient are we? $6 trillion pa on energy 475 Energy 55 55 services Source:Source: University of Cambridge, global figures , in EJ University of Cambridge Units: Exajoules
- 7. Matrix Corporate Finance Us ee market $43 billion EE premium $5 billion through EPC Source: ACEEE 7
- 8. Matrix Corporate Finance Us ee & DR market $59 billion EE and DR Source: Climate Change Business Journal 8
- 9. Matrix Corporate Finance Us real estate $279 billion investment opportunity Source: Deutsche Bank 9
- 10. Matrix Corporate Finance Global BEMS MARKET $320 million p.a. by 2020 for utility programmes alone Source: Pike Research 10
- 11. Matrix Corporate Finance UK EE MARKET £17.6 billion p.a. 136,000 jobs 5% pa growth rate Source: DECC 11
- 12. Matrix Corporate Finance india $16 billion in 2012 $148 billion to 2020 Source: EY 12
- 13. barriers 13 Matrix Corporate Finance
- 15. Matrix Corporate Finance BARRIERS TO energy efficiency Many barriers including: - Supply side domination - Low priority in many organizations - Not regarded as strategic - Split incentives – landlord / tenant problem - Measurement of results (M&V) - Limited capacity – technical skill shortages - Access to capital - ‘The ribbon problem’
- 17. Matrix Corporate Finance HOW TO WAKE UP THE SLEEPING GIANT OF ENERGY EFFICIENCY
- 18. Matrix Corporate Finance Massively scaling up efficiency Requires three things: - Expanding DEMAND for energy efficiency - Expanding SUPPLY of energy efficiency products and services - Expanding FINANCE for energy efficiency 18
- 19. SCALING UP DEMAND Matrix Corporate Finance
- 20. Matrix Corporate Finance Scaling up demand Requires: - a sector (and sub-sector) examination of Enabling Conditions - market segmentation NOT market classification - capacity building at all levels from: - Institutional shareholders - CEOs and CFOs, energy managers, shop floor workers - householders Regulations help but you also need to address capacity ISO 50001 Electricity market design 20
- 21. Matrix Corporate Finance Scaling up supply Requires: - Capacity building, especially in: - Improved M&V (IPMVP) - Integrative / holistic design techniques - Improved technologies (in some cases) - Analytics - Evaluation tools - Advanced materials (e.g. insulation, windows) 21
- 22. Matrix Corporate Finance Scaling up FINANCE Problems: - Small project size - Off-balance sheet issue - Not a recognized asset class - Mis-pricing of risk - Contract forms - Application of private equity model - Lack of standardization - Lack of M&V - Lack of a secondary market 22
- 23. Matrix Corporate Finance EMERGING technologies A few examples: - Adaptive building materials - Home automation - Energy analytics - Micro-generation (mCHP) - Materials processing - Integrative, holistic design techniques - Complete building retrofits - ‘Intelligent energy efficiency’ 23
- 24. Matrix Corporate Finance 38% energy saving 3.1 year payback on incremental capital 24
- 28. Matrix Corporate Finance BUSINESS MODELS – SHARED SAVINGS Net savings – D Repayment D O E O Total energy C of capital ST costs before DU R O DE contract PR N E Total energy R IS-U Total energy LY Mcosts during E Y contract costs after ID EL contract W ID W 28
- 29. 29 Not a new idea Matrix Corporate Finance
- 30. Matrix Corporate Finance Problems with the esPC model ESPC/EPC model requires client to take on debt 75% of the US market is MUSH - MUSH has access to cheap municipal debt Excess margins being made in US public sector ESCO incentivised to maximise capex NOT savings Split incentive in commercial offices Accounting standards (IFRIC 12) Transaction costs Projects too small for institutional investors - project sizes ~ £/€/$ 1m to 20m - cheque sizes > £/€/$ 100m + 30
- 31. Matrix Corporate Finance BUSINESS MODEL INNOVATION The problem is NOT availability of money ESPCs are NOT the answer Need to develop and structure projects in a way that allows institutional investors to invest at scale Innovation needed 31
- 32. Matrix Corporate Finance SOME EMERGING innovations Energy Services Agreement (ESA or MESA) - off-balance sheet services contract - backed by an ESPC contract PACE - works in US local tax system - now bringing in private finance - now being applied to commercial buildings On-bill repayment (OBR) - dependent on regulatory regime On-bill loan - Green Deal in UK and others Aggregation vehicles 32
- 33. Matrix Corporate Finance AREAS FOR R&D Technologies Demand generation Aggregation of demand (city wide programmes) Business models (services) -Buildings -Transport Policies to create markets for efficiency -Enabling efficiency to be used in the electricity market 33
- 34. There are known knowns; Matrix Corporate Finance 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. 34
- 35. Matrix Corporate Finance summary Potential for growth in energy efficiency is huge We need to wake the sleeping giant of energy efficiency by: - Increasing DEMAND - Increasing and improving SUPPLY - Increasing availability of FINANCE 35
- 36. Matrix Corporate Finance contact Steven Fawkes Day One Energy Solutions +44 77 0223 1995 sfawkes@dayoneenergy.com www.linkedin.com/in/stevenfawkes @DrSteveFawkes 36
Editor's Notes
- Let ’ s now look at the size of the energy resource, and we really have to start to think about it as a resource, just like other energy resources. As with conventional energy resources there is an economic level of reserves and it is those reserves I am interested in exploiting.
- Lots of studies show the huge potential for profitable investment in energy efficiency. This study from McKinseys showed that $170bn a year investment would halve the projected growth in energy demand – reducing demand by 64 million barrels a day (compared to current consumption of about 80 million barrels a day), and produce half the reductions in emissions needed to keep CO2 levels at 450ppm, and have an IRR of 17% at $50 per barrel oil. And as we know, oil if a lot more than $50/barrel.
- The potential to become more efficient , and become more efficient profitably, is everywhere – you just need to put on the right pair of glasses to see it.
- Here are some amazing statistics; US runs 8 power stations to power stuff that is turned off Less than 10% of fuel burned at the power station for pumping produces economic value Less than 1% for data centres
- It may surprise you to learn just how inefficient we really are. Research from the University of Cambridge shows that we put 475 units of energy (fuel, nuclear, everything) in and we actually only usefully use 55 units – a total efficiency of about 11%. Isn ’t that amazing – all of our technology and the best the world can do is 11% efficiency! Now, we can never of course achieve 100% because of the laws of physics but we can do much better than 11%.
- Buildings account for a large % of total energy use, c.40%, 20% of water use and savings of 20-40% are possible economically according to many studies.
- Buildings account for a large % of total energy use, c.40%, 20% of water use and savings of 20-40% are possible economically according to many studies.
- So it is true there is money lying on the floor, and flying out through the windows everywhere you look.
- There are many barriers, however, to picking up that money profitably and again there has been many years of research on the barriers.
- These are some of the barriers that have been identified. The least well known of these is the ribbon problem…..
- The ribbon problem is that energy efficiency is not very photogenic and it is hard to get photo ops for politicians. It is much easier to get photos of politicians next to sexy win turbines or solar arrays. Energy efficiency can’t be seen so it can’t be photographed, photos are usually low energy lamps or boxes of some description.
- So how do we wake up what Angela Merkel called the sleeping giant of energy efficiency….how do we massively scale up energy efficiency investment and activity?
- Well, breaking down the problem we need to do three things: Massively expand demand for energy efficiency across the economy Massively expand the supply of energy efficiency products and services Massively expand the availability of finance for energy efficiency
- We are going to concentrate on finance but I do want to quickly talk about demand and supply. Creating demand for energy efficiency is difficult, especially in the residential sector. Nobody wakes up in the morning and says I want to buy some energy efficiency today. Even when energy efficiency is offered with no capital cost and net savings people still don’t buy it. Hassle factor, lack of visibility, lack of engagement. Energy efficiency is not sexy or cool We need to understand the drivers of energy efficiency demand in each sector much better than we do at the moment.
- Scaling up demand requires a sector by sector, and sub-sector by sub-sector approach. It needs market segmentation. Most energy efficiency professionals use market classification rather than market segmentation. It needs capacity building at all levels from shareholders to CEOS to CFOs to energy managers to shop floor workers and householders. Regulations help drive demand but unless the capacity issues are addressed you don’ t get real action. Standards like ISO50001 can help a great deal. Sensible design of the electricity market can encourage energy efficiency through market mechanisms.
- Scaling up supply means increasing improving technologies, and building capacity in the energy efficiency industry – especially in 2 key areas, M&V and holistic design. Explain both.
- Scaling up finance has many problems some of which are shown here: Projects are very small, even large projects may only be 20m £, € or $. There is a need to aggregate projects to match investor requirements to invest large amounts of money, in the hundreds of £, € or $. Putting things off balance sheet is more difficult than it used to be and changes in accounting standards will make it harder still Not a recognised asset class Mis-pricing of risk
- Describe
- A now famous case study on benefits of systems thinking ESB – a difficult building to retrofit >38% savings 3.1 year pbp on incremental capital Achieved because a very knowledgeable, and forceful client insisted that his service providers worked together and took a holistic approach
- The NEST This is a thermostat that has caused a sensation in the USA. It was described as the thermostat that Steve Jobs would love and was designed by a former Apple designer This is a $249 item that was sold out in the USA between November and January – I have one sitting on my desk if you are interested in a grey market one It provides lots of feedback to users and learns to adapt to your house and your lifestyle Not a new idea but 1 st one that has captured public imagination in any way
- Envision Charlotte This is a scheme in Charlotte – a unique public private collaboration in which information on energy use in the buildings in Uptown Charlotte is collected and displayed on displays in lobbies and public areas Collaborators include Duke Energy, the utility, Charlotet Centre City Partners, Cisco, US Green Building Council and others Goal is to reduce energy use in uptown area of Charlotte by 20% in five years
- A transportation example – Twin Cities metropolitan area – Minneapolis and St Paul Initiative includes several intelligent transport solutions include Priority lanes toll system with differential pricing Prices based on occupancy Dynamic message system showing availability of lanes, toll rates and travel speeds - real time transit information including next bus arrival information
- This is a familiar model – shared savings - it is widely reproduced but it is widely misunderstood.
- The most familiar version is ESCO / EPC model which came largely from the USA. Never has a model been so well promoted with so little understanding The model developed in the US MUSH market where projects are financed by cheap debt. The host takes the capex on their balance sheet as debt. US public sector can still raise cheap debt, most people can ’t. In the 1980s/90s/00s USAID were very successful in spreading the word about ESCOS and EPC around the world. They financed missions and training everywhere from Eastern Europe to China. Unfortunately they could not bring with them the cheap debt so in most places progress has been slow despite the huge potetial.
- Some ESCO companies will tell you the problem is a lack of money. This is totally wrong. Even today there is far more money available than we need to scale up energy efficiency.
- Describe
- To summarise:
- To summarise: