Made to GLTE San Francisco November 2011

1. THE MAGIC OF ENERGY
EFFICIENCY
STEVEN FAWKES
ECOSUMMIT 22nd March 2012

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4. 20%

5. It is not all about
CO 2

6. Air pollution causes 2 million premature deaths a
year
World Health Organisation
Air pollution causes nearly 170,000 deaths a year
in China
World Bank

9. 1.3 billion

10. How efficient are we?
475
55
55
Source: University of Cambridge
Source: University of Cambridge, global figures , in EJ

11. 11

12. 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

13. Global potential for energy efficienc
$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 CO 2 at 450ppm
-have an average IRR of all projects 17% (at
$50/barrel oil)
Source: McKinsey

14. barriers
14

15. 15

16. 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

18. Conclusions
Energy is at the start of a technological revolution
The future will be:
-radically more efficient
-significantly cleaner
-more diverse

19. 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

20. 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

21. Us real estate to 2050
$0.5 trillion invested
$1.4 trillion NPV
21
Source: Lovins

22. 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

23. Business models – esco / EPC
23

24. 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

25. 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

26. 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

27. Mesa structure
Vendors
Source: Deutsche Bank
27

28. The mineral rights analogy
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
28
Source: Deutsche Bank

30. A new industrial
revolution?

31. contentS
• Potential for energy efficiency
• Barriers
• Capital requirements
• Business models
• Summary
31

32. Inefficiency is everywhere
Central power stations
Typically 30-40% efficient
Power amplifiers
Typically 15% efficient – 85% goes to heat
Buildings
US building stock consumes 2.5 x energy European building stock after
correcting for climate
Data centres
Useful computing uses 2.5% of energy input
etc etc etc 32

33. barriers
33

34. 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

35. 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

36. Us real estate to 2050
$0.5 trillion invested
$1.4 trillion NPV
36
Source: Lovins

37. 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

38. Business models – esco / EPC
38

39. 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

40. 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

41. Mesa structure
Vendors
Source: Deutsche Bank
41

42. The mineral rights analogy
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
42
Source: Deutsche Bank

43. 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
43