steven fawkes paris 19 09 12 final 3

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WAKING THE SLEEPING GIANT OF ENERGY EFFICIENCY

DR. STEVEN FAWKES

18th September 2012

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ENERGY PROBLEMS

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20%

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It is not all about CO2

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Premature deaths a year from air pollution:

2 million globalWorld Health Organisation

700,000 ChinaWorld Bank

300,000 EUEuropean Commission

50,000 UKHouse of Commons Environmental Audit Committee

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1.3 billion

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THE EFFICIENCY RESOURCE

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HOW (IN)EFFICIENT ARE WE?

475

5555

Source: University of Cambridge, global figures , in EJSource: University of CambridgeUnits: Exajoules

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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

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BUILDINGS

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40% of world’s energy

40% of carbon emissions

20% of water use

20-40% savings are possible

Source: World Economic Forum

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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”

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WAKING THE SLEEPING GIANT OF ENERGY EFFICIENCY

OR

HOW TO MASSIVELY SCALE UP ENERGY EFFICIENCY

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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

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SCALING UP DEMAND

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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

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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)

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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

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BUSINESS MODELS – SHARED SAVINGS

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Total energy costs after contract

Total energy costs before

contract

Total energy costs during

contract

Repayment of capital

Net savings

WID

ELY REPRODUCED –

WID

ELY MIS

-UNDERSTOOD

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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 +

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PROBLEMS WITH THE ESCO MODEL

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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

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THE MINERAL RIGHTS ANALOGY

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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

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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

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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

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Finance

M & V

Balance

Sheet

Contract /

Procurement

Technica

l

Assist

ance

Secondary

market

Demand

Aggregation

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SUMMARY

Potential for energy efficiency is very largeWe 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

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CONTACT

Steven FawkesMatrix Corporate Capital LLP+44 20 3206 7185+44 77 0223 1995

steven.fawkes@matrixgroup.co.uk

www.outsource-energy.co.uk

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