THE MAGIC OF ENERGY EFFICIENCY

STEVEN FAWKES

ECOSUMMIT 22nd March 2012

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20%

It is not all about CO2

Air pollution causes 2 million premature deaths a yearWorld Health Organisation

Air pollution causes nearly 170,000 deaths a year in ChinaWorld Bank

1.3 billion

How efficient are we?

475

5555

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

11

INEFFICIENCY EVERYWHERE

The US runs at least 8 large power stations just to power stuff that is turned off

Less than 10% of the power plant fuel that makes electricity for pumping applications actually creates customer value

Less than 1% of the power plant fuel that makes electricity for a data centre actually creates customer value

Source: Rocky Mountain Institute

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

barriers

14

15

Some of the money is nailed down

Many and various barriers to improving energy efficiency including;

- Supply side domination

- Low priority in many organizations

- Run by engineers / not strategic

- Split incentives – landlord / tenant problem

- Measurement of results

- Limited capacity – technical skill shortages

- Access to capital

- The ribbon problem

16

Conclusions

Energy is at the start of a technological revolution

The future will be:-radically more efficient-significantly cleaner-more diverse

Some of the money is nailed down

Many and various barriers to improving energy efficiency including;

- Supply side domination

- Low priority in many organizations

- Run by engineers / not strategic

- Split incentives – landlord / tenant problem

- Measurement of results

- Limited capacity – technical skill shortages

- Access to capital

- The ribbon problem

19

Capital requirements

• $170bn a year investment would half the projected growth in energy demand (reducing demand by ~ 64 million barrels a day)

• up to half the emissions abatement required to keep atmospheric CO2 at 450ppm

• average IRR of all projects 17% (at $50/barrel oil)• $83bn a year invested by 2020 would allow

industrial sector to abate ~25 million barrels a day

Source: McKinsey

20

Us real estate to 2050

21

$0.5 trillion invested

$1.4 trillion NPV

Source: Lovins

Investor appetite

“Institutional income investors are looking for an iconic investment in this area”

Fund Manager

Several investors have committed funds in principle but………….few examples

22

Business models – esco / EPC

23

Not a new idea

Boulton and Watt – 1770s

Associated Heat Services – 1966

Utility Management Company – 1982

US ESCO industry been very active- 1,473 projects- $2.3 billion investment- 74% in public sector (MUSH)- not really spread into commercial real estate

24

Problems with the esco model

ESCOs have limited balance sheets

Energy Performance Contract model requires client to take on debt

Accounting standards – on / off-balance sheet question

Even the largest projects are too small for institutional income investors who have cheque sizes > $100m/£100m

25

BUSINESS MODEL INNOVATION

Need to scale and structure projects in a way that allows institutional investors to invest at scale

Two innovations are emerging:

• Managed Energy Service Agreements• Transaction vehicles

26

Mesa structure

27Source: Deutsche Bank

Vendors

The mineral rights analogy

28

Asset owner (farmer in PA/building owner) does not have capital or technical knowledge to access asset (shale gas/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

A new industrial revolution?

contentS

• Potential for energy efficiency

• Barriers

• Capital requirements

• Business models

• Summary

31

Inefficiency is everywhere

Central power stationsTypically 30-40% efficient

Power amplifiersTypically 15% efficient – 85% goes to heat

BuildingsUS building stock consumes 2.5 x energy European building stock after

correcting for climate

Data centresUseful computing uses 2.5% of energy input

etc etc etc

32

barriers

33

Some of the money is nailed down

Many and various barriers to improving energy efficiency including;

- Supply side domination

- Low priority in many organizations

- Run by engineers / not strategic

- Split incentives – landlord / tenant problem

- Measurement of results

- Limited capacity – technical skill shortages

- Access to capital

- The ribbon problem

34

Capital requirements

• $170bn a year investment would half the projected growth in energy demand (reducing demand by ~ 64 million barrels a day)

• up to half the emissions abatement required to keep atmospheric CO2 at 450ppm

• average IRR of all projects 17% (at $50/barrel oil)• $83bn a year invested by 2020 would allow

industrial sector to abate ~25 million barrels a day

Source: McKinsey

35

Us real estate to 2050

36

$0.5 trillion invested

$1.4 trillion NPV

Source: Lovins

Investor appetite

“Institutional income investors are looking for an iconic investment in this area”

Fund Manager

Several investors have committed funds in principle but………….few examples

37

Business models – esco / EPC

38

Problems with the esco model

ESCOs have limited balance sheets

Energy Performance Contract model requires client to take on debt

Accounting standards – on / off-balance sheet question

Even the largest projects are too small for institutional income investors who have cheque sizes > $100m/£100m

39

BUSINESS MODEL INNOVATION

Need to scale and structure projects in a way that allows institutional investors to invest at scale

Two innovations are emerging:

• Managed Energy Service Agreements• Transaction vehicles

40

Mesa structure

41Source: Deutsche Bank

Vendors

The mineral rights analogy

42

Asset owner (farmer in PA/building owner) does not have capital or technical knowledge to access asset (shale gas/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

summary

• Potential for energy efficiency is very large• Energy efficiency does not require subsidies• Improving EE addresses supply, cost and environmental

problems• EE is gaining political support• Capital requirements are large but manageable• Returns are in line with or exceed expectations• Institutional income investors would like to invest• ESCO / EPC type model is only part of the answer• Managed Energy Service Agreements and Transaction

Vehicles are beginning to emerge• A few large scale examples will catalyze change – expect

to see them soon

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