Energy Efficiency Finding and realising energy savings

27th March 2006

The Carbon Trust is a business-led, Government backed company

Our mission is to accelerate the transition to a low carbon economy by helping organisations reduce their carbon emissions and

develop commercial low carbon technologies

Set up in 2001, the Carbon Trust is an independent UK-wide company funded by Government

Our objectives are,

To help UK business and public sectors meet ongoing targets for carbon dioxide emissions

To increase business competitiveness through resource efficiency

To support the development of UK based low carbon technologies

8.0 (15%)3.8 (22%)

Significant cost effective carbon savings:UK example

3.2

0.1

0.5 1.8

0.8

1.10.5

MtC pa (% of total emissions in brackets); assuming 15% cost of capital

3.3 (13%)

2.3 (18%)

1.6 (15%)

0.8 (15%)

TOTALS

MANUFACTURING BUILDINGS TOTAL

4.2 (12%)

Large EnergyIntensive Industry

Large Non-EnergyIntensive

Organisations

Public Sector

SMEs

Different sectors need different solutions

Energy Intensive Industry – Clear commercial driver to

improve energy efficiency

Large organisations in other sectors– Low materiality, awareness,

market failures (metering; landlord-tenant divide)

– Corporate social responsibility driver

Small and Medium-Sized companies– Transaction costs, financial

constraints– Materiality, inertia and

awareness

Barriers and drivers

EU ETS

Potential solutions

Building regulations/EPBD

Taxes/target agreements

Taxes/trading schemes Public sector leadership

Supplier obligations Product standards Interest-free loans

Taxes Building regulations/EPBD

Conclusions

Possible to deliver significant carbon cost effectively from business and public sector in line with indicative targets in energy services directive (~1% pa) – however potential competitiveness effects in isolated sectors

Tailored approach required by sector to overcome barriers and leverage drivers

Require mix of economic, regulatory and information/awareness raising instruments. As emphasised in energy services directive:

Metering is key enabler, Public sector needs to take leadership position and requires

systems, capabilities and support to deliver

Making Business Sense of Climate Change

www.thecarbontrust.co.uk

The contents of this presentation are the copyright of the Carbon Trust and may not be copied or republished without the prior written consent of the Carbon Trust. The Carbon Trust trade marks, service marks and logo used in this presentation are the property of the Carbon Trust and no licence or right is granted to use any such marks or logo.

Direct engagementCarbon ManagementLA Carbon Mgmt Standard site visitsSME General service

Indirect engagement NetworksMarketing

Financial incentives SME loansPublic sector loansECA support

RD&D Carbon Vision (EPSRC JV)Open call RD&D

Technology accelerationMarine Energy ChallengeEMEC (Orkney)Small CHP trials (mCHP)Smart meteringBiomass accelerator

Investment & commercialisation Incubators Venture capital Commercialisation projects

Low Carbon Technology Assessment, December ‘02

Investor perspectives on renewable power in the UK, December ’03

The European Emissions Trading Scheme: Implications for Industrial Competitiveness July ’04

The UK Climate Change Programme: Potential evolution for business and the public sector, December ’05

Climate Change and shareholder value, March ’06

The Carbon Trust is making business sense of climate change in the UK

Policy recommendations

Presenting results of review of UK energy efficiency policy for business and public sector

Segment market

and identify opportunity

Establish drivers & barriers to

action

Construct and test policy

options

5 Stakeholder workshops:

- Energy intensive sectors- Non-energy intensive sectors (hosted by CBI)- Public sector- NGOs- Suppliers of energy efficient equipment

Outcomes relevant to today:

Highlights policy options for both energy intensive industry and less energy intensive sectors

Analyses carbon impact, cost and competitiveness implications

Total = 54 MtC

UK Business and public sector emissions by segment (MtC pa, 2002)

Break-down of energy use, %

Entity type

25 13 6 10

0%

20%

40%

60%

80%

100%

Large EnergyIntensive Industry

Large Non-Energy

Intensive Organisations

Public Sector

SMEs

Manufacturing: Direct emissions

Manufacturing: electricity use

Buildings: electricity use

Self generation

Buildings: Direct emissions

No. Entities 2 k 13 k 65 k 909 k

Emissions

Barriers and drivers for energy efficiency

• Investment cost

• “Hidden” costs

• Split incentives &

other market failures

• Ignorance, inertia and

lack of interest

DRIVERS

• Value of energy savings

• Intangible benefits e.g. CSR

• Systemic efficiency

• Awareness and motivation

BARRIERS

UK policies – some effective, some less so

– EU ETS and negotiated agreements (CCAs) for large energy intensive

companies

– Building regulations and EPBD for buildings

WEAKNESSES

STRENGTHS

GAPS

– Double regulation of EU ETS and negotiated agreements (necessary until EU ETS

strengthens and stabilises)

– Implementation of building regulations and potential coverage of EPBD is weak

Gap in coverage for less energy intensive segments

– Existing energy tax (CCL) does not drive change

– Energy costs are not material

– Poor use of metering data and lack of reporting consistency

• EEC for SMEs: place the burden on suppliers

• Product standards:remove poor equipment from the marketplace

• Interest free loans for SMEs: provide access to capital

• Improve governance and accountability

• Increase internal capability

• Top quartile buildings procurement

• Interest free ring-fence funds for energy efficiency investments

…. to increase transparency and leverage CSR driver for large companies

…. to overcome transaction costs and financial barriers for SMEs

UK carbon embodied ETS

Product standards

Loans for SMEs

EEC for SMEsPublic sectorleadership

…. to take symbolic lead and use purchasing power

A review of UK policies reveals gaps for less energy intensive segments that need addressing

• Includes electricity

• Company based

• 100% auctioning (rebate on Energy tax)

• Based on metered data

• Results in annual reports

• Potential to include other emissions, e.g. haulage

UK Carbon Embodied ETS – Coverage in target sectors based on half-hourly metering of electricity

Sector # HH* sites(thousands)

# HH Buyers** Sector TWh % of Sector Use

Note: *Half hourly meters, **Implies overall average of 7 sites per buyer. Source: Datamonitor

Total:

0 10 20 30

Water

Construction

Printing

Plastics

Textiles

Vehicles retail

Hotels and Restaurants

Vehicle Eng

Electrical Eng

Transport and commsReal estate, renting, etc

Wholesale trade

Education

Health and social work

Mechanical Eng

Retail trade and repair

Public admin

0 1,000 2,000 3,000 0 10 20 30

50%

12%

63%

94%

86%

44%

23%

100%

84%

79%50%

50%

83%

13%

78%

65%

68%

91,000 sites, owned by 14,000 companies, using 99TWh per year

Net value at stake** (% of current EBITDA)

Product price rise required to keep profits flat (% of current price)

2010 2020

EU ETSsectors

High scenarios*

• Cement (in EU ETS)

2010 2020

20% 52% 5% 10%

• Steel (in EU ETS) 9% 27% 1% 4%

• Newsprint (in EU ETS) 1% 3% <0.1% 0.6%

• Petroleum (in EU ETS) 0.5% 1% 0.1% 0.3%

• Car manufacture(in EU ETS)

1% 3% <0.1% 0.1%

• Brewing (in EU ETS) 1% 3% <0.1% <0.1%

• Aluminium (in CCA) 80% 170% Unable to maintain current profits

CCAsectors

• Grocery Retail (in UK ETS***)

2% 4% 0.1% 0.2%

• Hotels (in UK ETS***) 8% 16% 1.1% 2.2%

CCLsectors

Note: *Includes impact of doubled CCL plus direct and indirect EU-ETS effects **= (inc. in total costs after allocation)/(starting EBITDA), ETS prices 2010:15 €/tCO2, 2020:30€/tCO2, allocation cut back 1%pa from 2005; ***Assuming 100% auctioning at EU ETS prices

• Cement and steel potentially under threat by 2020

• Aluminium very exposed to EU ETS electricity price rises across EU

• Small price rises required to maintain profits

Competitiveness implications under policy scenario that creates greatest burden for each sector

Significant potential carbon prize by 2020

Buildingregs

EPBD EU ETS* CCA Others Totalexistingpackage

Potentialadditionaldelivery

RemovingEU ETS/CCA

overlap

Totalpotentialdelivery

3.00.6

1.5 allowance cut-back0.5 electricity price effect

2.61.0

0.6

9.0

9.0(exc. Sales)

2.3-3.70.6

11.2-12.6(exc. Sales)

Note: *EU ETS based on market price of €30/tCO2 in 2020 and 1%pa cut back, CCL at current strength; **Includes UK consumption-emissions trading scheme (CTS), net of overlap with CCL and CT (includes 0.5MtC from strengthened EPBD and 0.7MtC product standards – only additional to UK CE ETS in SMEs); ***Allowing for CCP delivery 2000-2005 (3MtC) Source: Ecofys

30% reduction vs 1990, 6.5MtC

CCL*

CT

0.6 EU ETS sales

2005-2020 Carbon delivery2020 MtC pa saving vs projected emissions (58MtC)***

Savings at risk if existing instruments implemented weakly

Prize of addressing policy gaps

• Building regs and EPBD key promoters of change in buildings

• EU ETS and CCA effective for energy intensive sectors,

• Broadened package including UK “CE” ETS could deliver additional 2.2-3.6 MtC

(0.1)

1.0

1.4

(net of policy overlaps)**

Creates net benefit for UK business with limited competitiveness effects

Negative resource

cost*

Isolated competitiveness

effects

• In aggregate, technical energy saving measures create net benefit for business and public sector

- Ranging from ~ -£20/tCO2 to -£70/tCO2 out to 2020

• Very limited competitiveness impact expected for most sectors• A few energy intensive sectors potentially threatened long term

– Steel and cement in long term/high case scenarios– Aluminium smelting exposed if plants buy electricity from grid

Expect limited GDP

impact

• Macroeconomic models produce very different views on GDP impacts

– One predicts minimal impacts and even possible gains while the other possible losses of similar magnitude–Follow-up study underway to resolve and understand differences

Current state of energy services in the business and public sector

Dalkia, 152

npower, 193

E.On, 135

Elyo, 76

Cofathec, 46

Others, 50

UK Energy Outsourcing Market, 2004 Turnover (£m)

Total = £652m

Energy outsourcing is a mature market in the UK

Focus on outsourcing of non-core activities,

50% of market build own operate CHP

Few examples of “true” Energy Service

Company (ESCO) offerings where

remuneration is linked to demand side energy

savings

Source: RWE Solutions

There are some examples of successful ESCO agreements in the UK

Contract type:

• 11 year agreement

• ESCO fee covers financing and maintenance

• Equipment Ownership transferred to client post agreement

Details of activities:

• Investment in CHP plant

• Improved combustion equipment

• Replacement of heating and lighting

• Improved air compressor, heating and ventilating control

• Energy management system

Inenco & United Biscuits RWE Solutions & Sainsbury’s

Contract type:

• 4.5 year energy management outsourcing contract

• Target energy consumption reduction of 11% over two years

Details of activities:

• Modification of refrigeration systems

• Lighting infrastructure upgrading

• Optimisation of efficiency of heating and ventilation systems

• Energy reduction programme

• Provision of gas and electricity

• Complexity of structuring and financing deal

• Difficulty in monitoring and attributing savings

• Lack of awareness and motivation

Barriers to development of full energy service company (ESCO) offerings

Large energy intensive industry

…. Not economic to serve SMEs

…. Even where ESCO offering could make economic sense, significant barriers to be overcome

Energy intensive process industries

…. Energy intensive process industries best placed to reduce their own energy demand

SMEs Large less energy

intensive organisations

• High transaction costs relative to the size of deal

• Higher credit risk for ESCO/lender

• Host company (e.g. chemicals, cement, glass) better qualified to understand process energy use than ESCO

Conditions required for ESCO model to work

1. Case for energy efficiency

2. Value proposition of ESCO model

3. Route to market

•High energy costs•Regulatory drivers

•Help to secure lower cost financing•Add value through greater technical expertise

•Awareness of ESCOs•Simple transaction model and performance monitoring

•Energy prices low (but rising)•No significant regulatory driver in target market

•Companies often have better access to capital and expertise

•Low awareness of ESCOs•Very complex deal structure with high transaction costs

Current UK situation