Arctic flightMilitary dronesfind a peacetimerole over thefrozen northPage 2

Inside »

Power billsBusinesses look toembrace efficiencymeasures as costsseem set to risePage 2

Pollution risksIndustry faces upto environmentaleffects of hydraulicfracturingPage 3

Biomass debateA nascent sectoris tipped to gomainstream,despite doubtsPage 4

Wind farmsTurbines furtherout to sea makecompanies putsafety firstPage 4

FT SPECIAL REPORT

Innovations in EnergyTuesday January 29 2013 www.ft.com/reports | twitter.com/ftreports

For decades, the energy indus-try has been a crucible ofinnovation, spawning techno-logical breakthroughs thathave changed the lives of mil-

lions, from nuclear reactors to lique-fied natural gas to fracking.

But currently the industry does notseem to ascribe much importance toinnovation. A Boston ConsultingGroup (BCG) survey has found only 64per cent of energy companies rank itas a priority. For the automotive sec-tor, the figure was 91 per cent and formedia and entertainment 85 per cent.

Maurice Berns, an energy partner atBCG, points to a “risk-averse” cultureand a workforce typically older –hence more conservative – than insectors such as media, consumer andretail, and healthcare.

As a result, energy groups rarely

score highly in surveys of companiesmost admired for technological inno-vation. BCG says only two – RoyalDutch Shell and Sinopec – made thelist of the world’s 50 most innovativecompanies, in the opinion of seniorexecutives from across business. Thetop 10 was dominated by technologycompanies such as Apple, Google andSamsung.

Such surveys are backed up by sta-tistics on investment in research anddevelopment. According to the Break-through Institute, a California-basedthink-tank, US energy firms reinvestless than 1 per cent of revenues inresearch, development and demon-stration. In contrast, sectors such asIT, semiconductors and pharmaceuti-cals typically reinvest 15 to 20 percent of turnover in RD&D and productdevelopment.

In some ways, such statistics areunsurprising. Alex Trembath, a policyanalyst at the Breakthrough Institute,says: “In energy, stability and reliabil-ity have traditionally been favouredover technological change.”

The industry is more capital-inten-sive than IT, assets are long-lived andprojects have notoriously long devel-opment times. As with massive oiltankers, it is often impossible tochange their direction once a designhas been agreed.

But critics of the industry say it hasproven too complacent. Argumentsabout stability were all well and goodin the old days, when energy compa-nies simply had to find enough oil,gas and coal to heat people’s homesand fuel their cars, but things aredifferent now.

“The challenge comes when you getto climate change,” says Mr Trem-bath. Many believe big energy compa-nies should be coming up with tech-nologies to mitigate global warmingand helping humanity wean itself offfossil fuels. Yet progress on that fronthas been slim.

For some, it is not only the privatesector that is failing to invest enoughin innovation, but governments too.That is a problem, considering howcritical energy is to a growing globalpopulation and the planet’s future.

US federal RD&D spending onenergy, for example, has typicallybeen in the range of $4bn-6bn a year –a modest sum compared with the$19bn a year spent on Nasa and the$33.5bn each year put into healthresearch, primarily through theNational Institutes of Health.

Indeed, annual federal governmentspending on clean tech in the US isactually in decline. Some $44bn wasspent on the sector in 2009, much of itthrough the Obama administration’s

Continued on Page 2Measure of success: a BCG survey revealed few energy groups are noted for theirtechnological innovation, but Shell is an exception Photographic Services, Shell International

US energy firms reinvestless than 1 per cent inresearch, developmentand demonstration

Fossil fueldominancestill framesR&D debateBusinesses in the sector are rarely thought of asbeing among those that are driving greattechnological change, reports Guy Chazan

2 ★ FINANCIAL TIMES TUESDAY JANUARY 29 2013

As the political debate inthe UK about the prospectsof building the Severnbarrage between Cardiffand Weston-super-Marecontinues, in watersaround the Orkney Islandsof Scotland, blue-skythinking about tidal andwave power continues tobecome reality.

The European MarineEnergy Centre (Emec)celebrates its 10thanniversary this year, withdemand for its wave andtidal test sites off theOrkney’s mainland andneighbouring island ofEday at its highest level.

The centre, set up on therecommendation of the UKgovernment, aims toexploit the high wave andstrong tide potential ofwaters near thearchipelago and hasattracted an internationalslate of industrial andacademic research projects.

According to NeilKermode, Emec’s managingdirector, the centre isexperiencing the highestlevel of demand to date.Last month Mr Kermodesaid all 14 test berths,based at its Billia Croo andFall of Warness wave andtidal sites, had beencontracted out to marineenergy developers.

Interest in Emec’ssmaller-scale testingfacilities, which try to fillthe gap between testing intanks and full-scale tests ofprototypes at sea, is alsogrowing, he says.“Achieving our target ofhaving 100 per cent of ourtest berths contracted outto developers was a majormilestone for us. We’relooking forward to seeingthem all occupied over thenext couple of years, withmachines at sea for longerand longer periods.”

Among devices installedat Emec’s testing sites overthe past year is thePenguin, developed byFinnish company Wello.The 1,600-tonne machine iscapable of generating500kW and is designed tocapture wave energy todrive a spinning flywheelcontained in the device’shull. This drives agenerator connected toland via a subsea cable.

Bristol-based TidalGeneration, which lastyear announced it wasbeing sold by Rolls-Royceto Alstom, has also beenworking on the nextversion of its Deep-Genundersea three-bladed tidalsteam turbine. The latestversion, expected to betested over 24 months infast-flowing waters, doublesthe generation capacity ofunits to 1MW. Thecompany’s plan is to thendeploy a turbine “farm”with a 10MW capacity inUK waters by 2014 as thenext step towards fullcommercial production.

Kawasaki of Japan isalso scheduled to begintesting a 1MW underwaterturbine driven by the tidesat Emec by 2014. Scalemodels, based on astandard wind turbine

design, are being tested inthe Netherlands. A berthhas been booked at Emec’sFall of Warness tidal testsite since October 2011.

A growing list of clientshas prompted the centre toexplore expansion options.Optimism over thepotential for furtherprojects being attracted tothe centre has beenencouraged by the CrownEstate. The state-ownedbody, which controlsproperty rights over mostof the seabed around theUK’s coast, has announcedit plans to invest £20m inmarine energy arrays.

The amount on offer maybe modest, but RobHastings, director of theCrown Estate’s energy andinfrastructure portfolio,hopes competition for thefunds will provoke interest.“Several wave and tidalstream technologies arenow proven and it istimely for the industry tomove on to demonstrationprojects. First arrays areimportant because they areon the critical path tolarger schemes around theUK and worldwide,” hesays. “By bringing ourcapital and expertise tobear, we hope to catalyseinvestments by others andto see projects proceed toconstruction and operationas soon as possible.”

Max Carcas, previously adevice developer on thePelamis wave powerproject deployed at Emec,agrees marine power needs

higher subsidies than otheralternatives to carbon-based fuels. Currentgovernment policy offerswave and tidal energyprojects an electricity tariffof about 25-30p/kWh. This,says Mr Carcas, isgenerally thought toprovide an adequate returnfor investors.

He says: “This cost isrelatively high compared toother low-carbon options,such as onshore wind at10p/kWh, offshore wind at15-17p/kWh and nuclear –which will probably besomewhere in between.”

The cost to consumers ofhelping support the earlycommercial adoption ofmarine power is likely tobe almost negligible as thetariff is limited to projectsbelow a certain size, MrCarcas says. “While 25-30p/kWh seems quiteexpensive it is oftenforgotten that there hasnever been a new energytechnology that has beeneconomic ‘out of the box’.”

The momentum ofmarine powerdevelopments shouldensure its cost will fallsignificantly as projectsmove into commercial use.

“The cost of generatingfrom wind and solarenergy has fallen by about80 per cent since the mid-1980s,” he notes. “The factthat the opening costs ofmarine energy are lowerthan many precedingenergy technologies putsthis sector in a very goodposition to be competitivein the longer term.”

Demand foroffshore testbeds increasesMarine power

The momentum foralternativetechnologies isbuilding, writesMichael Kavanagh

’There has neverbeen a new energytechnology thathas been economic“out of the box”’

fiscal stimulus. But by 2014it will have fallen by 75 percent, to $11bn, says MrTrembath.

Of course, substantialfunds are still flowing intoinnovation, and the amountof money going into cleantech and green energy is athistorically high levels.Last year, global invest-ment in renewables stood at$268.7bn, according toBloomberg New EnergyFinance – five times what itwas in 2004 and the second-highest level on record.

But that is just a “drop inthe bucket”, says SteveMinnihan, senior analyst atLux Research, an innova-tion-focused research con-sultancy. “If a utility wereto invest $1bn in installing

Continued from Page 1 solar power, they would beaddressing just 0.0025 percent of our global powerdemand,” he says.

And that figure pales intoinsignificance against the$644bn in global spendingon oil and gas explorationand production forecast forthis year by Barclays.

That reflects a sobretruth – that the globalenergy balance is still domi-nated by conventional fossilfuels and will continue tobe for decades. In its latestoutlook, BP said oil, gasand coal would each have amarket share of 26-28 percent of the global energysystem in 2030, with renew-ables and nuclear boastingjust 6-7 per cent each.

And those hoping for adisruptive technology thatcould fundamentally

change the balance infavour of non-fossil fuelsources of energy may bedisappointed. Lux’s Mr Min-nihan does not expect any“game-changing” energysource or form of powergeneration to appear for atleast another 50 years.

Yet the outlook is not allbleak. Change will come,Mr Minnihan says, but onthe energy consumptionside rather than in terms ofproduction. “Improvementsin energy efficiency – forexample in lighting, heatingand ventilation systems –can have a huge impact onpower demand,” he says. Hecites the examples ofcompact fluorescent lightsand LEDs, which are chang-ing the lighting market.

It is a similar picture inthe automotive sector. Elec-

tric vehicles have failed totake off on the scale manyin the industry predicted.The same goes for fuel cellvehicles. But while thereally disruptive technolo-gies are still at the embry-onic stage, more modestimprovements are takinghold. Mr Minnihan cites theexample of micro-hybridvehicles that use start-stopsystems – in which a car’sengine automatically shutsdown when it comes to ared light or gets stuck in atraffic jam, reducing theamount of time the carspends idling. He says suchtechnology can lead to a5-10 per cent improvementin a vehicle’s fuel efficiency– “which will have muchmore impact on fuel con-sumption than if two percent of drivers switch to

EVs.” By 2020, most newvehicles will be micro-hybrid enabled, he says.

The process of drivingenergy innovation is alsochanging. For years, ven-ture capital (VC) was a bigbacker of clean tech. Somebits of the sector, such as“capital lite” softwaredesigned to assess andunderstand energy con-sumption, still suit the VCmodel. But for most capital-intensive ventures, such asmarine and tidal energy, itis often inadequate.

“It costs $30m to get yourfirst wave energy deviceinto the water,” says JamieVollbracht, head of newventures at the CarbonTrust.

Instead, Mr Vollbracht,says, we are seeing the riseof the “innovation partner”,

as big corporates, seekingto harness the long-termpotential of clean energy,increase their involvementwith the sector.

He cites the example ofArtemis Intelligent Power,which has pioneered anovel hydraulic drivetechnology.The company initially

sought to apply it to theautomotive industry,

but MitsubishiPower SystemsEurope, a sub-sidiary of theJapanese con-g l o m e r a t e ,helped it iden-tify a morep r o m i s i n gapplication inthe offshorewind market.Mitsubishi went

on to buy Artemis in 2010.Another example is

Ecomagination, a strategylaunched by GE in 2005 todouble its revenues fromenvironmentally friendlyproducts. As part of this, in2010 the company startedan open innovation initia-tive called the Ecomagina-tion Challenge, in whichbusinesses, entrepreneurs,innovators and studentscompeted for $200m in fund-ing with ideas on improvingthe world’s energy future.Entrants submitted ideas toa panel that included GEexecutives, academics andtechnologists, with the bestreceiving funding from GEand its VC partners to startnew ventures.

“We are seeing the emer-gence of intelligent innova-tion,” Mr Vollbracht says.

Fossil fuel dominance still frames research and development debate

The Carbon Trust’sJamie Vollbracht

In the jargon of the polarworld, they are calledgrowlers, icebergs too smallto be picked up by satellitesbut big enough to damageany boats unlucky enoughto run into them.

That makes them a prob-lem for the growing numberof energy companies tryingto exploit the Arctic’s oiland gas riches.

It is one reason the Arcticis becoming a civilian prov-ing ground for a piece ofequipment more commonlyassociated with the Afghanwar and other conflicts: thedrone.

Environmental research-ers have been usingunmanned aerial systems,or remotely piloted aircraftas they are also known, in

the Arctic for well over adecade.

They offer importantadvantages in a remoteregion with such an unfor-giving environment, whichis making them increas-ingly interesting to oil andgas companies, according toRune Storvold of the North-ern Research Institute inNorway.

He says several groupsare investigating the use ofdrones. “One big advantageof drones is you don’t putpeople at risk,” he explains.Another is the cost of keep-ing an eye out for naviga-tional hazards such as ice-bergs.

When companies send aseismic vessel to theArctic’s icy waters to probethe seabed for promisingexploration pockets, forexample, they often have tosend an advance guard ofscouting ships, helicoptersor aircraft to look out fornavigational hazards suchas growlers. If the icebergsare small enough to be

towed out of the way, thatis all right. If not, theseismic vessel might haveto change course.

But there are other rea-sons seismic companies useaircraft and other expensivemonitoring equipment.They have to be sure loudnoises emitted during seis-mic operations do not dam-age nearby marine life,such as whales, dolphins orseals.

“They can blow out theeardrums of animals if theyare too close,” says Mr Stor-vold. “It’s an immenselyloud sound.”

It is much easier to spotanimals from above thanfrom the bridge of a ship,which gives drones anadvantage over traditionalmonitoring measures, headds.

Those measures can oftenadd substantial amounts tothe costs of an explorationvoyage in a regionrenowned for being expen-sive. “It can be three to fourtimes more expensive to

operate in the Arctic thanin the North Sea,” says OleNjaerheim of the Pöyrymanagement consultinggroup.

That is partly because theregion is so far away frombig logistical supply centresthat companies have had totake twice as many supplyships with them, adds MrNjaerheim. It is also

because Arctic countriesoften have regulations todeal with potential oil spillsthat may be easy enough tocomply with in shallowercoastal areas where pastdrilling operations havetaken place, but are tougherto stick to in the deeperwaters companies are keen

to venture into. Canada, forexample, requires compa-nies to be able to drill so-called “same season reliefwells”. These are wells thatare drilled deep under-ground to intersect withwells that have suffered ablowout or oil spill.

Oil spills are another rea-son why drones can be use-ful, says Ole KristianBjerkmo at the emergencyresponse department of theNorwegian Coastal Admin-istration.

Not only can they help todetect oil spills in the firstplace, but they can thenhelp figure out exactlywhere oil is moving,he says.

“They are something wesee as a really good optionin the future, both forshipping and oil and gas,”he adds.

But there are problemswith using drones in theArctic. At the moment, theair space over the region iscontrolled by eight nations:the US, Canada, Russia,

Denmark, Norway, Finland,Iceland and Sweden. Eachoften has a very differentset of regulations for suchflights, meaning companiesand scientists can facearduous and often lengthyprocesses when trying togain approval for them.

The International CivilAviation Organisation, aUN body that sets globalaviation safety and environ-ment rules, has been work-ing on establishing harmo-nised rules that wouldmake it easier for compa-nies to operate drones.

A working group withinthe Arctic Council, the bodyset up in 1996 to promoteco-ordination among Arcticgovernments, has beenworking on a report aimedat promoting more harmo-nised rules for drones usedfor scientific purposes.

Nothing is likely to hap-pen soon but, if a morecommon set of rules doeseventually emerge, both sci-entists and energy compa-nies are likely to be pleased.

Drones find peacetime role in the frozen northThe Arctic

Pilita Clark reportson how pilotless craftcan aid exploration

On a mountain in centralSweden, one of the largestland-based wind powerprojects in Europe is takingshape. Once operational in

2015, the wind farm will generate90MW of electricity that will not helpto power homes or offices, but storesowned by Ikea. The Scandinavianretailer has ambitions to generate 100per cent of its energy from renewablesources by 2020.

The Glotesvalen wind farm willmake Ikea completely self-sufficient inenergy in Sweden and raise renewa-bles’ share of its global energy use tobetween 70 and 80 per cent. It hasearmarked investments in renewableenergy of up to €1.5bn, focusing onsolar and wind.

It is both “a values and a hearts andminds exercise”, says Steve Howard,chief sustainability officer at Ikea. Byreducing its carbon footprint andsecuring its own supply, the group isnot only being environmentallyresponsible but also reducing itscosts.

“Carbon prices will come back inev-itably over the next decade and priceswill rise. This is a big cost to busi-ness,” says Mr Howard. “If we canmanage our own supply, we can turnit into a profit centre,” he says.

Ikea is not alone. All around theworld corporations are changing theirbehaviour to control their energycosts. In the past, energy efficiencywas part of a company’s “greenagenda” but with costs on the rise ithas become a corporate issue.

Governments too are zeroing in onthe issue, offering tax credits, incen-tives and rebates to help reduceconsumption and cut bills and carbonemissions. The EU has set itself atarget of increasing energy efficiencyby 20 per cent by 2020 to help cut itshuge gas and oil import bill.

In the UK, the governmentlaunched a consultation on how toreduce electricity consumption lastyear. It said addressing “cost-effectiveenergy efficiency potential could savethe amount of energy equivalent to 22power stations by 2020”. It has alsosimplified the much-criticised tradingscheme, the carbon reduction commit-ment – now called the CRC energyefficiency scheme.

The fear of rising costs is the maindriver behind companies’ actions,says Ben Warren, an energy and envi-ronmental finance expert at Ernst &Young. “The chief executive, the chieffinance office and the chief operatingofficer have got to have a handle onenergy. It’s a dollars and cents game,”he says.

Yet one of the difficulties for busi-ness is the often mind-boggling arrayof options available, both on thedemand side to reduce energy con-sumption and on the supply side, togenerate heat and power. Companieswill want to ensure any plan deliverssavings in “a reasonable timescale togive payback on the investment”, saysMr Warren.

An army of corporate advisers hassprung up. Ian King, chief executiveof Matrix, which helps UK retailerMarks and Spencer and BT, the tele-communications group, to cut theirpower bills, says it makes sense toincentivise companies to reduce theirenergy consumption.

The amount of wastage is huge. Histeam can cut office energy use by

about a fifth by deploying a remotemanagement system that can switchdevices on and off. Companies acrossa range of industries have allembraced efficiency measures to vary-ing degrees, including smart utilitymetering in hotels and restaurants,putting in low energy hand dryers oreven building combined heat andpower plants on site.

Changing your lightbulbs to moreefficient LED lighting can generatesavings. Ikea, for example, has saved€97,000 per store as a result of rollingout LEDs across its portfolio.

A recent survey for Ernst & Youngrevealed that even low or no costactions can reduce energy bills by atleast 10 per cent and that a 20 per centcut in costs represents the same bot-tom line benefit as a 5 per cent rise insales for many companies.

Don Leiper, director of new busi-ness at utility EON UK, says doingnothing is “not a realistic alterna-tive”.

“We’ve said before that the cheap-est, most efficient power station is theone we don’t have to build. Yes, wehave to replace ageing plant in orderto meet demand – either with new,

more efficient fossil-fuelled generationor with a range of renewable technolo-gies – but getting people to cut theirconsumption is half that battle,” hesays.

The biggest problem is policy flip-flops. In Europe, several countrieshave altered subsidy arrangementsfor renewable energy, throwinginvestment plans into disarray.According to Ikea’s Mr Howard, regu-latory uncertainty in the UK onrenewables incentives “has slowed usdown and protracted the decision-making both in wind and solar”.

Setting targets is just the start.Good management – also from govern-ment – is vital, a lesson recently rein-forced when an audit of EU fundsrevealed huge amounts of money hadgone to waste. Since 2000 the EUspent almost €5bn on co-financingenergy efficiency measures in memberstates.

Yet the Court of Auditors foundmany projects were so inefficient thatit would take longer than the lifetimeof an improved building to recover thecosts. The payback time for someprojects averaged half a century, andup to 150 years in some cases.

Changes incorporatebehaviour helpcontrol costsPower bills Companies are all embracingefficiency measures as costs become morecentral to their strategies, says Sylvia Pfeifer

The air space iscontrolled by eightnations, each withdifferent regulations

Cutting edge: awind turbine bladebeing made inGermany.Companies saypolicy flip­flops byEuropeangovernments haveheld back therenewablessector Bloomberg

‘Carbon prices willcome back inevitablyover the next decadeand prices will rise’

Innovations in Energy

FINANCIAL TIMES TUESDAY JANUARY 29 2013 ★ 3

Guy ChazanEnergy Editor

Sylvia PfeiferSpecial Correspondent

Ed CrooksUS Energy Editor

Pilita ClarkEnvironment Correspondent

Leslie HookBeijing Correspondent

Michael KavanaghCompanies Reporter

Jessica TwentymanFT Contributor

Adam JezardCommissioning Editor

Steven BirdDesign

Andy MearsPicture Editor

For advertising, contact: LiamSweeney on +44 (0) 20 78734148, or email:liam.sweeney@ft.com, or yourusual FT representative.

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Contributors »

The Empire State Buildingis not easily hidden. As oneof the world’s most famouslandmarks it inevitablyattracts attention. So thedecision by a group of com-panies and environmentalgroups to use it as a test-bed for ways to save energycame with a risk attached:problems and failureswould not be easily sweptunder the carpet.

So far, the project has notneeded any such conceal-ment. Progress on the workto upgrade the building’sfittings and systems hasbeen good, and the resultsbetter than expected,according to AnthonyMalkin, president of thecompany that manages thebuilding.

Already, he says, theproject to transform theenergy efficiency of theEmpire State Building,cutting its consumption byalmost 40 per cent, is throw-ing up valuable lessons forother property companiesthat might want to followsuit. It is also giving a senseof the challenge that isinvolved.

The project, which isexpected to cost a net $13m,was aimed at one of themost intractable problemsin environment policy:reducing the energyconsumption of buildings.

Residential and commer-cial buildings account forabout 40 per cent of USenergy use, and although

there is widespread interestin principle in reducingthat consumption, in prac-tice there are many barriersin the way.

Unlike some manufactur-ers, commercial consumersin service industries oftenhave energy as only a smallproportion of their totalcosts, meaning that it maynot seem worth managers’time and attention to focuson reducing their bills.

In existing buildings thathave not been designedwith energy efficiency inmind, improvements can becostly and disruptive.Where buildings are rented,landlords and tenants canhave misaligned incentives:the costs and benefits ofinvesting in improvedefficiency can be unequallyshared.

At a time when the needfor governments to addressthe threat of climate changeis still fiercely debated –particularly in the US – andmoney is often tight in boththe public and private sec-tors, energy efficiency is theenvironmental policy withthe broadest appeal, offer-ing cost savings as well ascuts in greenhouse gasemissions. Yet opportuni-ties for improvements areoften not taken. One prop-erty company even hired apsychologist to explain whyits tenants were refusing totake advantage of money-saving energy efficiencyimprovements that theywere being offered.

The Empire State Build-ing plan was backed bydiverse bodies with a com-mon interest in advancingenergy efficiency: two com-panies, Jones Lang LaSalle,the property consultancy,and Johnson Controls, themanufacturing group; two

environmental organisa-tions, the Clinton ClimateInitiative and the RockyMountain Institute, andNew York state.

The building presented anattractive opportunity as ademonstration projectbecause it was alreadyundergoing a comprehen-sive overhaul aimed atimproving the quality of thespace. The additional costof the energy efficiencyimprovements was just 2per cent of the total $550mcost of refurbishing andmodernising the 102-storeybuilding.

Mr Malkin describes thestrategy as “an economi-cally enlightened approach”that would “make a realdifference to the way peoplethink about being ‘green’.”In other words, the invest-ment had to make commer-cial sense.

Most of the changes tothe building’s systems, suchas air conditioning controls,and to shared areas havenow been completed.

Some jobs, such as turn-ing the 6,500 double-glazedwindows into advancedtriple-glazed panes with a

sealed-in insulating gaslayer, could be carried outwhile tenants were in place.

Others, such as stoppingheat from radiators leakingout of the building, gener-ally have to wait for thespace to be empty.

The finished result is abuilding that creates fewercarbon dioxide emissions,is cheaper to run andpleasanter to work in.

Last May, a year after thework began, the buildingreported savings of $2.4m,ahead of its plans and morethan halfway towardsexpected savings of $4.4m ayear. With an expectedthree-year payback, the pro-gramme has much moreattractive financial termsthan many companies’attempts to polish theirenvironmental credentials.

For all the successes,though, the lessons learntfrom the project include animportant pointer about thelimits of this type of exer-cise. As the building’s web-site puts it, “maximisingprofitability from theenergy efficiency retrofitleaves almost 50 per cent ofthe CO2 reduction opportu-nity on the table.”

The building owner optedto sacrifice 30 per cent ofthe potential economic gainin order to improve the CO2performance and the qual-ity of the lighting and con-ditions for tenants. Even so,there could have beengreater reductions in CO2emissions if the costs hadbeen higher.

For cuts in emissions tomatch what might beneeded to tackle the threatof global warming, addi-tional incentives – perhapsthrough higher energyprices – will probably beneeded.

Sky­high retrofit provides lessonsReducing waste

Ed Crooks looks ata $13m project tosave energy at afamous landmark

The Empire State Building

Innovations in Energy

The recent feature film sound-ing the alarm about the USnatural gas boom, PromisedLand, opens with its starMatt Damon washing his

face in a bathroom. The film sets outits theme from the start: the greatestsource of concern about the extractionof gas from rocks is water pollution.

The use of water mixed with sandand chemicals in hydraulic fracturing,or “fracking”, has made the shale oiland gas boom possible.

The demand for that water – andthe disposal of the produced waterthat emerges from wells after theyhave been fracked – are at the heartof the debate over whether tightercontrols should be imposed on theindustry.

They are also potentially excitingopportunities for companies that haveways to manage water that are eco-nomically efficient and reduce theenvironmental risks.

“Everybody is relying on fracking tomake the US more energy independ-ent, but there are major issues withwater,” says Riggs Eckelberry, thechief executive of OriginOil, a com-pany that has recently entered thebusiness of water treatment for the oiland gas industry.

He adds: “It’s becoming critical tothe entire US strategy to do some-thing about this water.”

Dennis Danzik, a director of Ridge-line Energy Services, another smallcompany that has been developingwater treatment technology, agrees.

He says: “Eventually, we’ll need afull waste water treatment policy, orwe’ll have the country dotted withquarter-acre ponds. We have to havethe energy, so the issue is not going togo away. It has to be dealt with.”

A typical deep shale gas well needs4m-6m gallons of water for hydraulicfracturing, according to a 2011 reportfrom the National Petroleum Council,an advisory group to the US govern-ment that includes both industry rep-resentatives and environmentalists.

That does not make the industry aparticularly large user of water. Asgas companies like to point out, interms of water use per unit of energyproduced, shale production comparesvery favourably to other sources suchas coal or gas-fired power generation.

In some parts of the US, however,water use can be a problem, especially

during the drought conditions thathave hit much of the country over thepast year.

Scott Anderson, of the Environmen-tal Defense Fund, who has worked onthe issue for the NPC, says there aresome counties in Texas where 70 percent of the growth in water consump-tion is a result of oil and gas produc-tion.

Even in states where water is plen-tiful, it needs to be transported towells, adding cost and creating disrup-tion for communities that will beplagued by streams of trucks.

The more serious problem, however,is the disposal of waste water thatemerges with the oil and gas. Itincludes “flow back” fracking water –

between 10 per cent and 70 per cent ofwater used for fracking comes backout again, according to the US Envi-ronmental Protection Agency.

That water, contaminated with saltand the chemicals used for fracking,needs to be managed. It is generallyeither pumped into injection wells orsent to plants for treatment.

Neither method is ideal. Injectionwells have been blamed for causingsmall earthquakes in Texas and otherstates, and there have been warningsthat in some areas the volume ofwaste water needing to be stored willoverwhelm the available capacity.Standard water treatment plants arenot able to handle all the substancesin flow back water. In 2010-11 Pennsyl-

vania moved to limit the levels ofpollution in waste water that gasproducers were able to send to thestate’s treatment facilities. Plantswere also compelled to monitor forradioactive radium and uranium,which can be present in producedwater.

The solution for many companies isto treat and reuse water close to thewell-site. More companies now offerwater treatment technology, includingbig engineering groups such as Gen-eral Electric and Siemens, oilfield spe-cialists such as Halliburton, andsmaller businesses such as Ecosphere.

OriginOil was a specialist in tech-nology for processing algae for biofuelproduction, but spotted an opportu-

nity in fracking water treatment. Itsays its process, which it will demon-strate in Texas, will remove 98 percent of carbon contaminants fromwaste water.

Some processes can be expensive,but Mr Eckelberry says OriginOil’ssystem, used with further processing,can treat water for as little as 7 centsper gallon, less than the 21-26 cents ofother methods and less even than the11 cents typical cost of a gallon deliv-ered to the well-site by truck.

Ridgeline, meanwhile, has reachedthe point of selling its services to oiland gas producers, including Conoco-Phillips, EOG Resources and DevonEnergy.

Mr Danzik suggests a cost of 1-8

cents per gallon for its electro-cata-lytic process, compared to about 22-24cents for rival methods.

He also argues that the use of watertreatment will have to be much morewidespread. Government regulationmay also play a part. With the EPAstudying the impact of fracking onwater resources – its report is due latenext year – the industry could facetighter curbs.

“Technology can help, but technol-ogy alone isn’t a solution,” saysEvan Branosky, of the WorldResources Institute, an environmentalthink-tank. “We need to better under-stand the full water risks to informsmart decisions for responsible devel-opment of shale gas.”

Industry faces up to hurdle of water pollutionFracking These are, potentially, exciting times for companies that can reduce the environmental risks and the waste, reports Ed Crooks

Cleaning up: a worker near Carthage, Texas, connects a pump to load water into his truck at a treatment plant that separates oil, water and sediment mixed during the hydraulic fracturing process Bloomberg

4 ★ FINANCIAL TIMES TUESDAY JANUARY 29 2013

If the world wants toensure better food securityfor its growing population,then it needs to stopconverting food crops intotransportation fuel.

That is the bluntmessage from campaignerswho believe thedevelopment of biofuelsfrom food crops such asmaize or sugar isresponsible for increases inthe price of food as well asfor deforestation.

Environmentalists claimthat some biofuels,particularly those derivedfrom oil crops such as rapeand palm, may evencontribute more to carbonemissions than the dieselthey are intended toreplace.

In Europe, legislatorshave listened to thesearguments with growingconcern and last Octoberthey decided to takeaction.

Connie Hedegaard, theEU climate changecommissioner, announcedsubstantial policy changesthat would limit food-basedbiofuels to just 5 per centof the renewable energyused by the transportsector.

The EU’s goal is for 10per cent of all transportfuels to come fromrenewable sources by 2020.

“We must invest inbiofuels that achieve realemission cuts and do notcompete with food,” saidMs Hedegaard. “We are, ofcourse, not closing downfirst-generation biofuels,but we are sending a clearsignal that future increasesin biofuels must come fromadvanced biofuels.”

These advanced products,often referred to as secondand third-generationbiofuels, are typicallyproduced from agriculturalor urban waste or bygrowing algae. One of theearliest beneficiaries of theshift in favour of second-generation biofuels is UPM,a Finnish forestry companythat manufactures pulp,paper and timber.

This gives it “world-class” access to wastewood that could beconverted into biofuel,according to PetriKukkonen, vice-presidentof UPM’s biofuels business.“Paper demand isdeclining, so we’re lookingfor new opportunities. Forus, with all our loggingresidue and bark, second-generation biofuels is aperfect match,” he says.

In December 2012, UPMwas awarded a grant of€170m by the EuropeanCommission for theconstruction of abiorefinery in Strasbourg,France, to produce asecond-generation, wood-based renewable dieselcalled UPM BioVerno.

Before the companydecides whether or not togo ahead with the project,UPM will spend the next12 to 18 months assessing

the likely operating costsfor the new biorefinery;the availability of rawmaterials – feedstocks –the plant will require; thelong-term outlook forbiofuel market prices; andthe possibility that the EUwill amend rules in therenewable energy directive.These state that rawmaterials for biofuelscannot be harvested fromregions of high biodiversityor high carbonconcentration.

There is a great deal atstake, says Mr Kukkonen:“A careful assessment hasto be made, because noone wants to invest capitalexpenditure in thetechnology needed toproduce these fuels, whichare not yet mature andextremely expensive,without some confidence ina return on thatinvestment and somecertainty that theregulatory frameworkwon’t change suddenly.”

Second-generation biofuelproducers face a number ofchallenges, but funding isperhaps the biggest, agreesIan O’Gara, global head ofthe biofuels practice atmanagement consultancyfirm Accenture. Whilethere have been plenty ofdemonstrations and pilotsof the technology,full-size commercialimplementations remainthin on the ground, thanksin part to a shortage ofavailable funding.

“The hiatus in progressand the trashing ofexpectations that we’veseen, when it comes tosecond-generation biofuels,has been largely down tothe economic crisis,” hesays, adding that getting acommercial plant up andrunning can cost upwardsof $250m.

“It’s been disappointingbut, as restrictions onfunding start to lift, we’regoing to see a veryexciting times in biofuels,”he says.

In the US, for example,six new second-generationbio-refineries, with acombined capacity ofnearly 88m gallons peryear, are scheduled tobegin operations in 2013. InEurope, the EC announcedfunding for four otheradvanced biofuels projectsamounting to some €347m,at the same time as itsfunding award to UPM.

Mr O’Gara says the USbiofuels market willprimarily be driven by theneed for gasoline, while inEurope the main need isfor diesel. In both regions,a big hurdle will beovercome as commercial-scale plants come onlineand their viability is seen.

“Once the technology isproven at scale, then it’llbe time to move forward tothe next milestone:building all the plants thatwill be needed to meetgovernment targets andmarket needs,” he says.

Producersweigh risks ofuntested fuelsSecond generation

Jessica Twentymanfinds there is muchat stake for anyonelooking to invest innew forms of energy

‘The trashing ofexpectationshas been largelydown to theeconomic crisis’

Plans by the UK to installyet more wind farms atsites further from shorecould deliver the prospectof one in 10 homes beingpowered by wind in twoyears’ time.

In its latest stateof the industry report,RenewableUK, the bodythat represents the windand marine energy compa-nies, estimates that atotal of £1.5bn was investedin the UK’s offshore windsector in the year to June,

up 60 per cent on the previ-ous year. The latest phase –the so-called Round 3 – ofwind farm projects, whichincludes projects on theDogger Bank, Hornsea, andEast Anglia fields, isdesigned to help the UKgovernment deliver on itstarget of securing 15 percent of energy from renewa-ble sources by 2020.

But such developmentstake turbines into lessaccessible and more hostilesea conditions. And theprospect of dealing with themaintenance of turbinesmuch further from shore, inwave heights of up to threemetres, is forcing the indus-try to grapple with theproblems of transportingengineers and equipmentsafely.

According to the CarbonTrust, a government-backedadvisory service, today’s

wind farms typically consistof no more than 100 unitsless than 25km from thecoast in relatively benignsea conditions. This allowsmaintenance in boats about90 per cent of the timewhen waves are up to 1.5m.

But Round 3 projectsfurther out to sea, consist-ing of up to 2,500 turbinesin rougher conditions,threaten to reduce engineeraccess to just 210 days ayear based on current sys-tems.

Hence the body, alongwith six companies, is spon-soring research intoimproving safe mainte-nance of offshore turbines,

The aim of the CarbonTrust’s Offshore WindAccelerator scheme is todevelop better methods oftransfers that would allowsafe access to remoteturbine arrays for a mini-

mum of 300 days a year.That, according to Phil de

Villiers, head of offshorewind at the Carbon Trust,could cut the downtimeexperienced at turbines andsave £3bn in lost generatingrevenue over the lifetime ofRound 3 wind farms.

In particular, the body isbacking the development ofa boat that can remain sta-ble at sea with suspensionthat has been inspired byParis-Dakar winning rallycars. There is also a “sea-horse” vessel with a tower-ing keel that minimisesmovements in the oceanswell.

These are two of sixdesigns that three monthsago were selected to receivefurther funding in the questto keep Britain’s offshoreturbines turning.

“Bringing down the costof offshore wind is an abso-

lute priority for the indus-try,” says Mr de Villiers.“By increasing the accessi-bility of Round 3 turbinesby up to a third, these sixdesigns could play animportant role in improvingthe economics of offshorewind and helping to keepour engineers safe far out tosea.”

In spite of their relativelybenign appearance, theoperation of wind turbinesboth at sea and on landposes significant safetyrisks to installation andmaintenance staff, andpotentially to the public.

Data collated by Renewa-bleUK and released inDecember 2011 pointed to1,500 accidents leading to300 injuries and four deathsamong workers.

Incidents such as bladesshearing off at high speedsand turbines crashing to

the ground at onshorefarms have also occurred,although no members of thegeneral public have beenhurt.

As Paul Gipe, a leading

US writer on the develop-ment of wind energy andauthor of the book WindEnergy Comes of Age, hasnoted: “The concentrationof energy in any form

is inherently dangerous.”The possibility of death or

injury from electrocution,falls from heights, crushingby heavy objects and thehazards of working close torotating machinery areclear risks on land. Thesedangers are exacerbated atsea.

The British wind powerindustry’s safety record isnot perfect, but at leastattempts to improve tech-niques that will reduce acci-dents and cut the downtimefor maintenance of turbinesgive the sector a chanceto develop market-ableproducts.

The global market forcompanies providing accessto wind turbines could beworth more than £2bn by2020, according to the Car-bon Trust. The UK marketalone could account for upto half of the demand.

Turbines in deep waters make companies put safety first

Stability: Paris­Dakar rally cars inspired this boat design

Everyone knows the comfort-ing glow of a roaring log fire.This traditional form of heat-ing is coming back on anindustrial scale as a new

form of renewable power. Biomass –biological matter derived from sourcesincluding wood, plants and sometypes of agricultural waste – isalready widely used in Europe to gen-erate heat and electricity.

Today, backed by attractive subsi-dies from governments that see it as away of helping them meet toughcarbon reduction targets, this nascentsector is tipped to go mainstream. Anadded attraction is that, unlike otherforms of renewable energy such assolar and wind, which provide powerintermittently, biomass providesstable baseload power.

With many coal plants due to bephased out to meet environmental leg-islation in Europe, utilities are look-ing to co-fire coal with biomass orconvert their plants to burn only thelatter. A recent report by Bain & Com-pany, the consultancy, forecasts thatglobal demand for biomass will growat a compound annual rate of 9 percent to 2020.

This expansion is not without con-troversy. Environmental campaignersargue that burning biomass in powerstations may actually hinder attemptsto tackle climate change. Fears arealso rife about sustainable sourcing,especially as the market grows.

“It’s the oldest trick in the book touse wood as an energy source,” saysBrian Potskowski, European poweranalyst at Bloomberg New EnergyFinance. “Now there is the addedpolitical element of governments hav-ing to meet renewable energy targets.The question is, is it carbon neutral?If biomass was excluded as a renewa-ble source of energy, then govern-ments could not meet their targets.”

EU nations have to cut carbon emis-sions by 20 per cent by 2020 comparedwith 1990 levels and increase theshare of renewable energy in the mixto 20 per cent. The burning of biomassis included in all these targets.

However, it is not a zero-pollutionoption. Cutting and transporting thewood creates greenhouse gases, as

does burning it. A report by the Insti-tute for European Environment Policyfound there is no reason to believe therequired emissions reductions will beachieved with the current biomasspolicy.

Proponents of biomass argue it candeliver significant carbon savingsrelative to fossil fuel, even aftertaking account of the energyconsumed in harvesting, processingand transport. Utilities say biomasscan be sustainable when forests aremanaged properly and growth is inexcess of harvest.

Dorothy Thompson, chief executiveof Drax, the owner of the UK’s biggestcoal-fired plant, which is convertingthree of the six generating units at itsSelby plant in North Yorkshire tobiomass, insists it is a sustainableindustry.

She adds: “Unlike burning fossilfuels, which adds new carbon to theatmosphere, burning biomass onlyreleases the carbon removed from theatmosphere when the plant was grow-ing. Often, the models that implythere is a carbon payback time arebased on the nonsensical assumptionthat a plant is first burnt and onlythen grows.

“The biomass we use comes fromsustainably managed forests where,among other things, overall growthmatches, or is in excess of, harvest.”

“The prices energy companies canafford to pay for biomass mean theyare often the buyer of last resort, somuch of the bioenergy also comesfrom wood other industries have notbeen able to use. This means forestersget value from wood, or by-products,that would otherwise decompose andproduce some of the worst greenhousegases,” she says.

Drax’s first converted unit is due tobe up and running later this year andthe last by 2016. This will create2,000MW of capacity, making Draxone of Europe’s biggest clean energygenerators. The company is already aleading importer of wood pellets,which it burns with coal. Its movefollows subsidy changes in the UKannounced last July that make itmore attractive to fully convert coal-fired power stations into biomass,

rather than co-firing or buildingbrand new dedicated plants.

Drax’s transformation means it willend up importing substantial amountsof wood pellets a year. The companyplans to upgrade port facilities andbuild new wood pellet plants in NorthAmerica.

The demand for wood pellets inEurope will reach 29m tonnes in 2020,up from 8m in 2010, according to thereport by Bain. Yet the majority ofEurope’s needs, about 66 per cent or19m tonnes, will have to be importedfrom outside the continent, mainlyfrom North America, Russia andBrazil, the report says.

Environmental campaigners worryabout the sustainability of this sourc-ing. “The biomass sector is a disaster

in the making. It is a very inefficientway to use a varied resource,” saysMatt Williams, climate change policyofficer at the Royal Society for theProtection of Birds. “We would preferto see combined heat and powerplants that are small scale and uselocal resources,” he says.

Another difficulty is that the indus-try’s supply remains opaque, says MrPotskowski. There is “no standardisa-tion for pellet prices”, which makes itdifficult to understand the feedstockcosts. As a result, many utilities,including Drax and Germany’s RWE,are themselves securing feedstock bybuilding plants.

With biomass coming to the fore,investors in utilities will need tomake sure they are aware of the risksand rewards. Given its importance inthe UK power market, Drax’s progresswill be closely watched. So far inves-tors appear comfortable with the pro-posed transformation. After droppingto £4.42 in July after the news of thesubsidy changes, the shares edgedback to £5.62 per share on January 20.

Nascent sectortipped to gomainstreamdespite doubtsBiomass Sylvia Pfeifer considers the debateover an industry governments are subsidising inorder to meet climate change targets

Fuel change:Drax powerstation, in NorthYorkshire, isconverting threegenerating unitsto burn woodpellets Getty

‘It’s the oldest trick inthe book to use woodas an energy source’

Innovations in Energy

China often seems to worrywhere its next barrel of oil isgoing to come from. Asdomestic crude productiongrowth slows, the world’slargest energy user isincreasingly relying onimports.

Policy makers are seekingto reverse this trend bytapping some unlikelysources, including leftovercooking oil, algae and evendiscarded corn cobs. Biofuels,they believe, will be animportant energy source forthe future – not to mention amarket worth Rmb150bn ayear by 2015, according tothe government’s blueprintfor the sector.

Biofuels production is

expected to grow 20 per centa year over the next threeyears, as one of seven“pillar” industries that willbenefit from state support.

Energy companies havebeen quick to climb on thebiofuels bandwagon. Sinopec,

the country’s largest oilrefiner, is working onproducing aviation fuel fromleftover cooking oil collectedfrom restaurants. By 2020,aviation officials estimate thatChina will be producing 12mtonnes of aviation biofuelannually – roughly a third ofits jet fuel demand.

Boeing has a similarproject, in conjunction withthe Commercial Aviation Corpof China (Comac), which willresearch how to removeimpurities from cooking oil sothat it can be refined into jetfuel. Marc Allen, president ofBoeing China, says theproject reflects Boeing’s com­mitment to working towardscutting carbon emissions.

“These industry issues cannotbe solved by one companyalone,” he says.

Although most aviation bio­fuels are still more expensiveto produce than regular jetfuel, the Chinese governmentis confident the industry willbe a key plank in the energysector. By 2015, it aims toproduce 5m tonnes ofbiofuels annually, of which 1mtonnes will be biodiesel andaviation biofuel.

Aircraft makers Airbus andEADS are also working ondeveloping biofuels in China,by working with Chineseenergy company ENN to pro­duce jet fuel from algae.“Micro­algae are consideredto be one of the most prom­

ising pathways for the pro­duction of biofuels for avia­tion,” Jean Botti, chief techni­cal officer of EADS, said atan air show in Zhuhai inNovember.

Jet fuel is not the onlyarea where biofuels holdpromise. Chinese companiesare also forging ahead withbio­chemicals, which typicallyuse agricultural waste suchas corn cobs or corn stalksto produce chemicals such assolvents or detergent. China’sShengquan Group, for exam­ple, is already producingethanol from corn cobs in aplant in Shandong province,using enzymes made byNovozymes, the Danishenzyme company.

When it comes to bio­chemicals, “China is leadingboth politically and in termsof actual projects,” saysMichael Christiansen, Chinapresident of Novozymes.“The risk willingness ofChinese private companiesand their ability to makedecisions fast is one reasonwe see so many projectsmoving ahead,” he says.

China’s focus on bio­chem­icals and biofuels is driven bya desire to reduce energyimports, he adds. Will China’sinvestments in biofuels payoff, and make them a cheapenergy source in future?Beijing is betting they will.

Leslie Hook

China focus Policy makers turn to leftover cooking oil, discarded corn cobs and algae in efforts to reduce imports

Wind farms

An already riskybusiness is evenmore dangerous indeep water, writesMichael Kavanagh

Old corn cobs have a future