Steven fawkes paris 19 09 12 final 3
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Presentation on "Waking the sleeping giant of energy efficiency", made to CleanTuesday Paris 18th September 2012. Video available at http://lnkd.in/XzVwCt (starts at 8 minutes 30. Slides via icon on top row.)
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Steven fawkes paris 19 09 12 final 3
- 1. Matrix Corporate Finance WAKING THE SLEEPING GIANT OF ENERGY EFFICIENCY DR. STEVEN FAWKES 18th September 2012
- 2. ENERGY PROBLEMS Matrix Corporate Finance
- 5. It is not all about CO2 Matrix Corporate Finance
- 6. Matrix Corporate Finance Premature deaths a year from air pollution: 2 million global World Health Organisation 700,000 China World Bank 300,000 EU European Commission 50,000 UK House of Commons Environmental Audit Committee
- 8. 1.3 billion Matrix Corporate Finance
- 9. THE EFFICIENCY RESOURCE Matrix Corporate Finance
- 10. Matrix Corporate Finance HOW (IN)EFFICIENT ARE WE? 475 55 Source:Source: University of Cambridge, global figures , in EJ University of Cambridge Units: Exajoules
- 12. Matrix Corporate Finance GLOBAL POTENTIAL FOR ENERGY EFFICIENCY $170bn 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
- 13. Matrix Corporate Finance BUILDINGS 40% of world’s energy 40% of carbon emissions 20% of water use 20-40% savings are possible Source: World Economic Forum 13
- 14. 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”
- 16. WAKING THE SLEEPING GIANT OF Matrix Corporate Finance ENERGY EFFICIENCY OR HOW TO MASSIVELY SCALE UP ENERGY EFFICIENCY
- 17. 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 17
- 18. SCALING UP DEMAND Matrix Corporate Finance
- 19. Matrix Corporate Finance SCALING UP DEMAND Requires: - a sector (and sub-sector) approach - 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 19
- 20. Matrix Corporate Finance SCALING UP SUPPLY Requires: - Capacity building, especially in: - Improved M&V (IPMVP) - Integrative / holistic design techniques - Better technologies (in some cases) - Analytics - Evaluation tools - Advanced materials (e.g. insulation, windows) 20
- 21. 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 21
- 22. 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 22
- 23. Matrix Corporate Finance PROBLEMS WITH THE ESCO MODEL ESPC/EPC model requires client to take on debt 75% of the US market is MUSH - access to cheap municipal debt Accounting standards - on / off-balance sheet Transaction costs Projects are too small for institutional investors - project sizes ~ £/€/$ 1m to 20m - cheque sizes > £/€/$ 100m + 23
- 24. Matrix Corporate Finance INVESTOR APPETITE Energy efficiency projects produce: - long-term low-risk income which is very attractive - environmental benefits - and don’t require subsidy “Institutional income investors are looking for an iconic investment in this area” Fund Manager 24
- 25. Matrix Corporate Finance THE MINERAL RIGHTS ANALOGY Asset owner (farmer in PA or building owner) does not have capital or technical knowledge to access asset (shale gas or efficiency savings) 3rd party pays “access fee” to have the right to exploit the resource 3rd party uses external capital to develop the projects Royalty payment / profit sharing over time Source: Deutsche Bank 25
- 26. Matrix Corporate Finance BUSINESS MODEL INNOVATION The problem is NOT availability of money ESCOs are NOT the answer Need to develop and structure projects in a way that allows institutional investors to invest at scale Innovation needed 26
- 27. Matrix Corporate Finance SOME EMERGING INNOVATIONS Energy Services Agreement (ESA or MESA) - off-balance sheet services contract - backed by an EPC 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 27
- 28. t ion ga Matrix Corporate Finance ct/ t g re tra en Ag on rem C u ary Pro c & V d M on et Sec ark m nce Fina a nd Dem l ca e ni c nc e ch tan ala et Te sis B he As S 28
- 29. Matrix Corporate Finance SUMMARY Potential for energy efficiency is very large We need to wake the giant of energy efficiency by: - Increasing DEMAND - Increasing and improving SUPPLY - Increasing availability of FINANCE On FINANCE - Capital requirements are large but manageable - Institutional income investors would like to invest - ESCO / EPC is only part of the answer - Need to address all the barriers, not just supply of finance - New models are beginning to emerge - A few large scale examples will catalyze change Need to address problems holistically 29
- 30. Matrix Corporate Finance CONTACT Steven Fawkes Matrix Corporate Capital LLP +44 20 3206 7185 +44 77 0223 1995 steven.fawkes@matrixgroup.co.uk www.outsource-energy.co.uk 30
Editor's Notes
- Good evening. I am very pleased to be here tonight. I am Steven Fawkes. I am a partner in Corporate Finance at Matrix, a boutique advisory firm in London, and Chairman of Day 1 Energy Solutions, a company that has been established to develop and finance energy retrofits. I have been involved in energy efficiency since 1980 and wrote a PhD about the potential for energy efficiency in UK industry and then went on spend many years implementing large energy management programme s for corporates, the public sector and governments. I also co-founded two energy services companies, one in the UK that became part of RWE and one in Romania.
- I like to set the context first and talk about energy problems. I won’t spend much time on these because I know this audience will be very aware of them.
- As we know energy is in the news a lot and everywhere you look there are energy problems. The first of these is oil peaking, the idea that oil production will peak while demand for the fuels and products that come from oil is still increasing. This is a controversial idea but there is some evidence that oil production has already peaked, certainly in some of the major oil producing regions of the world.
- The next big problem is energy security. These two guys are guarding oil tankers in the Straits of Hormuz, which has been under threat from Iran. 20% of the world ’s oil goes through the very narrow straits, if it was disrupted we would have major energy supply problems. There are a number of other critical choke points in the global energy supply network.
- We also hear a lot about the environmental effects of energy use. Over the last decade the focus has been on carbon dioxide and global warming but there are a number of other big environmental problems arising from energy use – this shows a small part of the oil slick from the BP disaster in the Gulf of Mexico.
- This slide shows a beautiful satellite photo that illustrates the level of atmospheric pollution over China. The numbers from the WHO and the World Bank illustrate that air pollution is a big cause of premature death in many parts of the world including China, 2 million premature deaths a yea globally, 300,000 across the EU. That is a high price to pay for cheap energy.
- Another big energy issue is nuclear power. The terrible events in Fukushima illustrated here show some of the dangers of nuclear power. I know France is dependent on nuclear, and I am not anti-nuclear. The issues of safety and proliferation, however, are very real.
- A really big issue with energy is that despite all the concerns over energy supplies, we really are not using enough of it. Over 1.3 billion people are estimated to be without electricity at all – an almost unimaginable scenario for most of us who are becoming more and more electrified.
- 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.
- 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%.
- 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.
- 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.
- 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.
- 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
- 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.
- Investors, or at least some, are very interested in these projects in principle. They are long term, reliable safe income type projects which is what people want. They don’t require subsidies. Quote
- A useful analogy that sums up how we need to start thinking about the energy efficiency resource
- 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
- So the secret is make sure you have all the pieces of the jigsaw, not just one or two parts.
- To summarise: