12 January 2012

...ESCOs and EPCs, past, present and futurePresented by

Charles Ogilvie and Andrew ShortisSerco Energy

Energy service companies

Serco Internal

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.

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Serco Internal

Index

Brief history

Market drivers

Case study

Variations in the model

Conclusions

Public sector?

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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∼ ∼

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Serco Internal

US/UK sector growth

A Survey of the U.S. ESCO Industry: Market Growth and Development from 2008 to 2011, Satchwell, Goldman, Larsen, Gilligan, Singer- Berkeley National Laboratory, June 2010, Uk market DATA from ESTA and Sorrell 2005

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~$700m~$950m

Serco Internal

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

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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

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BAUBO

Em

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

Serco Internal

Case study: Paid from savings model

SPV funds the implementation of

the energy efficiency projects

SPV is paid a share of the

energy savings achieved

Capital is invested into SPV

Investor receives share of the

energy savings achieved

Investor Finance

Special Purpose Vehicle

Customer

Project Company

During project

After project

Before project

Energy costs

Savings retained by customer

Savings retained by investor

Serco Internal

Case study: How this would work

Financier

Serco Lighting Co

Special Purpose Vehicle

Logistics Co

Share of energy savings

Equity investment

Procurement & installation

Energy Performance

Contract

Investment return

Performance guarantee

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

Customers?

EG?

Serco Internal

PROs/CONs

CON

PRO

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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Serco Internal

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 post-retrofit 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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Serco Internal

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 3 rd 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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Serco Internal

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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Serco Internal

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

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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

Federal Energy Management programme – FEMP

– Enabling agency to build escos for separate departments

– Off balance sheet issues need to be addressed

-> HMG licence an ESCO assembler to procure on behalf of departmental projects and supply services through a service lease???

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