On the 30th September I moderated a webinar on energy efficiency, Powering an Energy Efficient Future, for the IPFA as part of their energy transition series.
We had three great panelists who are all involved directly in energy efficiency and investing in energy efficiency:
Murray Birt, Senior ESG Strategist for DWS based in London. Murray is involved in all aspects of sustainability in DWS but has a particular interest in energy efficiency and worked with several groups on energy efficiency including the Energy Efficiency Financial Institutions Group, EEFIG, and the Green Finance Institute.
Jessica Luk, Director of Development NYCEEC in New York which was the US’s first local green bank. Jessica has wide experience in sustainability, policy and finance including in the NYC Mayors Office of Sustainability during Mayor Bloomberg’s administration, and she was one of the founders of NYCEEC.
Andy Holzhauser, from Donovan Energy based in Ohio. Donovan Energy develops and delivers energy efficiency projects for a wide range of commercial clients and Andy is an expert on PACE financing which is a major way of funding efficiency in the US. He has drafted PACE legislation in two states and sits on the board of PACE Nation – the association for PACE in the US.
Below is an edited version of my introductory remarks.
Welcome to this webinar which is looking at energy efficiency which as we will hear is an essential part of the energy transition but has long been neglected compared to cooler things like solar, wind and storage. Thanks to the IPFA for inviting me to moderate the discussion. This may be the last in the series but believe me, this is the most important element of the energy transition.
I should start off by defining energy efficiency. Essentially it is all about reducing the energy input for any particular activity. As an energy efficiency specialist I tend towards a fundamental position that excludes generation technologies, and this means things like insulation or better controls, but more and more when we say ‘energy efficiency’ it is about the whole range of demand side energy measures, including local generation and demand response coming together to reduce primary energy input for any given activity. I actually like the less common term, energy productivity, but let’s stick with energy efficiency.
Energy efficiency has long been the cinderella of energy policy. It has usually been last in importance for policy makers and energy specialists, partly because by definition it is ‘the absence of something’, partly because it is made up of hundreds and thousands small projects which are hard to see, and partly because it is boring. In the words on a poster I once saw in the office of a UK Energy Minister there is a sense that ‘real men build power stations”, they don’t do energy efficiency. Power stations, wind turbines and even solar panels are photogenic and can be used as backdrops by politicians, things like insulation can’t and so efficiency is often literally an after thought in energy policy – politicians often finish energy policy speeches by saying “and finally we must not forget energy efficiency”, even though they then promptly forget it.
But having said all that when you look at it properly the reality is very different. Energy efficiency is the largest, cheapest and quickest energy resource that we have and after many years and decades of neglect this is being recognised by governments and investors around the world and that is why we are here today. I just want to go through some of the important characteristics of energy efficiency.
Let’s start with a fundamental truth, users of energy, whether they be industrial, commercial or domestic, do not want or need electricity or fuel per se, they want or need the services that energy delivers. In the words of the energy efficiency guru Amory Lovins, people don’t want energy, they want ‘warm showers, cold beer, comfort, mobility and illumination’. Shifting the focus onto the services required and the total cost and total energy input to provide them, opens up the scope for far greater levels of energy efficiency as well as new energy service based business models.
Energy efficiency projects often have rapid paybacks. In the Energy Efficiency Financial Institutions Group’s (EEFIG) Derisking Energy Efficiency Platform (DEEP)[i], database, which includes over 10,000 projects, the average reported paybacks are 5 years for buildings and 2 years for industrial projects.
Despite this economic attractiveness many potential projects do not proceed because of other priorities of the project host, lack of internal capacity to develop projects, or shortage of investment capital. Furthermore, normal investments in building refurbishments and industrial facilities or new buildings and facilities often do not utilise all of the cost-effective potential for energy efficiency.
Many studies have shown that energy efficiency is the cheapest way of providing energy services. A UK study in 2012 based on real projects demonstrated that the Levelised Cost of Energy (LCOE) for energy efficiency was £4.34/MWh compared to £44/MWh for off-shore wind and £95/MWh for nuclear. The projects in EEFIG’s DEEP database showed an even lower LCOE. Energy efficiency really is the cheapest energy option.
The potential for improved energy efficiency is massive. It has been extensively studied, across many sectors and many geographies. Research at the University of Cambridge[ii] concluded that globally we use 475 Exajoules of primary energy resources to provide 55 Exajoules of useful energy services (motion, heat, cooling, light and sound), which means that for all of our technology we have an overall global energy efficiency of only 11%, which is why my blog is called onlyelevenpercent.com. Although this number does not take into account economic considerations it shows that there is a huge potential resource in untapped energy efficiency opportunities, a resource that is technically feasible but not necessarily economic, analogous to an oil or gas resource estimate. The most interesting part of this resource is the economic potential, potential that is both technically and economically feasible but not yet exploited, which can be considered similar to proven reserves in oil and gas – typically 30-40% reductions in energy use.
The impact of energy efficiency in the energy transition has been neglected compared to fossil fuel and renewables. Without energy efficiency improvements since 2000, global energy use would have been 13% higher in 2018, and energy related carbon emissions would have been 14% higher[iii]. In one US analysis energy efficiency was shown to have ‘fuelled’ three quarters of the demand growth for energy related services since 1970 and the UK story has been similar. People loosely talk about energy use going up but in the UK, the US and other countries it is actually going down – mainly because of improved efficiency. Once we start to electrify transport and heat with more and more renewable power it will go down even more as we cut out thermal generation, which is incredibly wasteful, and use electric motors that are far more efficient than internal combustion engines.
Energy efficiency has been described as ‘the linchpin that can keep the door open to a 2°C future’. The IEA estimates that to achieve a 2°C scenario energy efficiency must account for 38% of the total cumulative emission reduction through 2050, while renewable energy only needs to account for 32%.
So, we have this massive, very cheap and under-exploited energy efficiency resource that is an essential part of the global energy transition and critical to achieving our carbon targets. We are surrounded by a giant reserve of cheap, clean and exploitable energy in the form of energy efficiency potential everywhere you look, but we have historically under-invested in it and continue to under-invest. The essential challenge is how to shift investment into energy efficiency to even up the imbalance between investment into energy supply and improving energy efficiency.
I just want to wrap up by talking about the many reasons why financial institutions should consider deploying more capital into energy efficiency which include:
- Energy efficiency represents a large potential market. The IEA estimates that in 2018 global investment in energy efficiency was USD 240 billion. To achieve Paris aligned goals this level of investment needs to grow to circa USD 1 trillion per annum by 2050 and the provision of finance can help overcome some of the barriers to energy efficiency investment.
- Energy efficiency can produce long-term, stable cash flows, which can provide yield based products including green bonds if sufficient scale is achieved.
- Improved energy efficiency reduces risks in two ways. Firstly, increasing energy efficiency improves the cash flow of project hosts. Secondly there is the risk of financing assets that become stranded as energy efficiency regulations are tightened. For example, in England & Wales the Minimum Energy Efficiency Standards regulations make it unlawful to lease a commercial building with an Energy Performance Certificate rating below E, and the minimum standard will be tightened over time. Failure to upgrade poorly performing buildings puts owners of low performing buildings, and their lenders, at risk.
- Energy efficiency is one of the key pathways to reducing greenhouse gas emissions. It is strongly supportive of net zero commitments and the Paris Agreement.
- Investing in improving energy efficiency is in line with Sustainable Development Goal 7, ‘Ensure access to affordable, reliable, sustainable and modern energy for all’, and particularly Target 7.3: ‘Double the global rate of improvement in energy efficiency by 2030’. It is also supportive of SDG 9, ‘Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation’, SDG 11 ‘Make cities and human settlements inclusive, safe, resilient and sustainable’, and SDG 12 ‘Ensure sustainable consumption and production patterns’.
- Energy efficiency is an impact investment. As well as reducing energy use, efficiency projects can have a positive impact on factors such as local air pollution, job creation, improved health and learning outcomes. Therefore it should be a key part of any impact investing programme or CSR/ESG programme.
- Regulators are increasingly looking at climate related risks. Actions include asking banks to disclose the climate-related risks of their loan portfolios which will allow financial institutions to be better informed about loan performance and thus the cost of risk and carry out better risk appraisal. Possible future actions may include reducing capital reserve requirements for ‘green’ financing. Investing in energy efficiency reduces climate related risks.
We believe that these reasons mean that energy efficiency investment should increasingly be on the board room agenda of all financial institutions. Whatever markets they operate in there are growth opportunities, opportunities for risk reduction and opportunities to achieve wider impact aims.
It appears that the scale and attractiveness of the energy efficiency resource is finally being recognised and a new asset class is emerging.
Thanks to IPFA for hosting the webinar and including efficiency in the energy transition series. https://www.ipfa.org
[i] EEFIG Derisking Energy Efficiency Platform. https://deep.eefig.eu
[ii] Reducing Energy Demand: What are the Practical Limits? Jonathan M. Cullen, Julian M. Allwood, and Edward H. Borgstein. Environmental Science & Technology. 2011.
[iii] Recommendations of the Global Commission. Global Commission for Urgent Action on Energy Efficiency. June 2020.
About Dr. Steven Fawkes
Steven works on several energy efficiency financing projects around the world including the Investor Confidence Project Europe. He founded EnergyPro in 2012 to help accelerate investment into the energy transition, especially in energy and resource efficiency.He also runs the blog OnlyElevenPercent.