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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