120110 EPC 3 0 san (2)
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Energy service companies ...ESCOs and EPCs, past, present and future Presented by
Charles Ogilvie and Andrew Shortis Serco Energy 12 January 2012
Biogs Andrew Shortis:
Engineering, and management consultancy background. Former VC
Experienced at delivering strategy lead growth and corporate recoveries
Appointed to develop the strategy and prove a new Energy business concept
Charles Ogilvie:
Lead Greg Barker’s policy team in opposition
Independent strategy consultant in new energy sector
Joined Serco as Head of Strategy in Energy business
Serco Energy Management Solutions partner with customers to deliver a phased programme of works that will not only deliver guaranteed energy demand reduction but also investigate, and where viable, integrate on-site renewable energy generation capacity.
2 Serco Internal
Index Brief history Market drivers
Case study Variations in the model Conclusions
Public sector?
3 Serco Internal
Brief history Oil shock – Time Energy Slow growth in US but model evolved – Monopoly Utilities made model more ‘stable’ – Sector specialists – By the 90s ESCO sector re-emerges in US, typified by Amaresco (2000) Pioneered in the UK and Europe in the late 80’s and 90’s – Limited by technology capability and costs – and stable low energy prices – UK turnover mainly med/large CHP and chauffage- mostly in industry – Utility competition and low energy prices meant little development of market in 1990s for smaller customers
– Now ∼50 ESCOs investing £100-200m pa total annual income of ∼£1bn 4 Serco Internal
US/UK sector growth
~$950m ~$700m
5 Goldman, A Survey of the U.S. ESCO Industry: Market Growth and Development from 2008 to 2011, Satchwell, Serco Internal Larsen, Gilligan, Singer- Berkeley National Laboratory, June 2010, Uk market DATA from ESTA and Sorrell 2005
Drivers Rapidly rising energy prices – ROCS etc! Pressure on Governments and private companies to reduce spending
Finance looking for more market insulated investments Increasing legislative support (for efficiency, reduced CO2 emissions,
encouraging renewable energy)? Lower tech costs: BEMS price down tenfold (capex/ kWh saved) Replacement of aging infrastructure
6 Serco Internal
Drivers DECC forecast central price scenario for energy consumption assumes
a 30% saving on energy consumption across economy by 2020 and a 40% saving by 2030- this includes transport where energy consumption will rise with electrification
350 300
BOEm
250 200 BAS@2% BAU
150
DECC projection
100 50 0
7 Serco Internal
Case study: Logistics Company Reduce energy consumption and
carbon emissions in UK cold stores – energy significant proportion of operating costs
LED replacement lighting pilot proven
substantial savings – Lower energy consumption – Less heat produced – reducing thermal load on the chillers – Switchable by sensors – saving energy in lighting and refrigeration – Longer operating life and less maintenance
Potential 85% cut in lighting energy
costs – better working conditions
£xxxm needed to fund an initial roll-out
to xx sites – then further xxx
Case study: Paid from savings model Capital is invested into SPV
Investor Finance Investor receives share of the energy savings achieved
Special Purpose Vehicle Project Company
SPV funds the implementation of the energy efficiency projects
Customer SPV is paid a share of the energy savings achieved
Energy costs Savings retained by customer Savings retained by investor
Before project
During project
After project Serco Internal
Case study: How this would work Share of energy savings
Special Purpose Vehicle
Logistics Co
Equity investment Financier Investment return
Energy Performance Contract Performance guarantee
Procurement & installation
Serco Lighting Co
Serco Internal
Case study: Features and benefits Investor funds full cost of the project – no Customer capital contribution Return is entirely contingent on realised energy cost savings
All of the risk is with the investor delivering the service (not assets) No minimum funding payment to make – no savings, no repayment Investment can be held off-balance sheet – confirmed at outset
Enhanced Capital Allowances can be paid-on to the Customer Customer have a right to purchase the assets at any time during the
Energy Performance Contract (EPC) Simple, straightforward and quick realisation – 6-8 weeks
Serco Internal
Case study: Investment proposal Four year Energy Performance Contract (EPC) – 43% of saving comes from lower energy consumption of lamps – 13% through sensing and switching
– 22% due to the lower thermal load on the chillers – 18% through lower maintenance costs and less down time – 4% from saving in Carbon credits Customer gets at least 20% energy cost savings during the EPC – and
all of the energy cost savings in excess of the ROI Serco and Lighting Co make up any shortfall in the expected ROI Measurement at one site will be used to help confirm savings made At the end of the EPC, title and all the benefit transfers to Customer
Serco Internal
Variations in the model Full ESCO, 5+ technologies, service contract.
Multi tech EPC
Onsite generation with service/ fuel contract
Single tech EPC EG?
-voltage optimisation -EIS funded -.5-2m capex
-LEDs, voltage optimisation, BEMS, AC motor retrofit -EIS/PE funded -1m+ capex
-boiler plant, lighting, insulation, BEMS, draught exclusion, PV -PE, institutional funds -£2m+ capex
-district heating/CHP -debt project finance -£3m+
-any
-public sector? -large sites make sense
-Local authorities, large estates, mid size commercials
Customers?
-B2B sales -aggregated small sites ?
Serco Internal
PROs/CONs Full ESCO, 5+ technologies, service contract.
Multi tech EPC
Onsite generation with service/ fuel contract
Single tech EPC CON
-scale aggregation -opportunity ‘lock out’ -simple savings -smaller market
-solution design risk -investor comprehension -harder to control operational risk
-hard to sell -buying energy -expensive development costs -blocked by incumbent FM
-tech capex heavy -planning -secure fuel supply/cost -tied into utility contracts
-greater access to compound savings -bigger market
-full market -squeeze out all savings -operational comfort -safer revenues
-established and easier to finance
PRO
-easy sale -low development costs -lower solution risk -differentiation
Serco Internal
More variations in the model – M+V – Asset ownership – Flow of funds
– Risk/warranty/insurance – Accountancy treatment PLUS -Policy complexity Social housing project uses: CERT, CESP, RHI, FITs, ECAs, EIS etc – GD?! -Planning.....
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EG Monitoring and Verification Description
Typical Application
Partially Measured Retrofit Isolation
Savings are determined by partial field measurements of the energy use of the system(s) to which an ECM was applied. Some, but not all, parameters may be stipulated.
Lighting retrofit where pre-and postretrofit fixture Wattages are measured. Operating hours of the lights are typically agreed upon
Retrofit Isolation
Savings are determined by field measurement of the energy use of the systems to which the ECM was applied.
Variable speed drive on a pump. Electricity use is measured by a kWh meter installed on the electrical supply to the pump motor.
Whole Facility (Utilities)
Savings are determined by measuring energy use at the utility meter level. Bills may be corrected for weather.
Several ECMs affecting many systems in a building. Utility Bills are used
Simulation
Savings are determined using building simulation. This option is rarely used, and is used primarily when there is no pre-retrofit utility data available.
Multifaceted energy management program affecting many systems in a building but where no base-year data are available.
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Early conclusions Sales only happen when customer and financier understand the deal More measures, more savings, harder to sell
Few people have real track record, even those who say they have.. Customers spend ‘free’ money as carefully as their own Approach to risk still reflects a very immature market
Every project need a good baseline but not every project needs 3rd
party M+V to recognise international standards. No-one in the private sector is buying escos Selling single intervention can start to develop a relationship It’s just a deal Serco Internal
What’s going to change? Finance
Accept/ understand project risks
Cut Tx costs and reduce cost of capital
Learn to aggregate projects
OEM/Suppliers
Willingness to deliver wider range of solutions
Recognise and squeeze out best savings
Provide stronger performance guarantee
Customer
Awareness
Learning how to buy
Willingness to lose some op control EPC-ESCO
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UK Trends/Forecasts Utilities – Model remains at odds with sales volume business model – Sector changing as a result of regulation OEMs – Can grow market share with balance sheet financed deals and performance warranties on their own kit – Will do well for narrower solutions and through procurement frameworks
Service companies – Slow starters but no reason why they can’t perform as well as in US
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How to accelerate deployment? Stimulate 25% target – government buying
Accreditation for new tech/ solutions aimed at finance community Experience sharing/ best practice/ procurement advice
Dampen Competing Efficiency grant schemes? GD?? Picking winners
Overlooking novel tech and new entrants 20 Serco Internal
Conclusions Horses for courses- but which ones and why? Utilities favour generation and full esco/chauffage model- why- sell kit
and protect market share OEMs look for tech (sales) driven projects initially focussed around
their offering Service Cos will make this feel like FM+
ESCOs? Consultants + finance + entrepreneurs. Will be drawn to
complex solutions but initially struggle to deliver much third party funded projects outside single solutions (risk management)
Serco Internal
Public Sector? Shares many challenges with private sector – Understanding the solution – Lack of clear executive focus on problem
– Operational concerns But enhanced by: – Restricted borrowing – but many authorities do have funds
– Lack of off balance sheet certainty – solvable? – Frameworks restrict creativity – Public procurement restricts speculative project development – Procurement expertise limits speed of sale Successes: – LEEF has energised sector
22 Serco Internal
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