Co-authored by Ernst & Young and Bloomberg New Energy Finance (BNEF)
Here we provide an overview of key energy efficiency developments in the world’s major economies.
Europe: Energy Efficiency Directive
The European Parliament will debate the Energy Efficiency Directive (EED) in June. If passed, it should see a significant increase in energy efficiency activity across the EU. It is likely to focus on binding measures rather than binding targets, and will make EU Member States accountable for implementing specific energy efficiency measures, instead of insisting their energy consumption hits a certain level.
Its cornerstone is a mandate for governments to set up energy saving obligation (ESO) schemes for energy suppliers. These already exist in several European countries and require energy suppliers to implement or fund measures resulting in energy savings equal to a certain fraction of their annual energy sales (the level will likely fall by 1%-1.5%).
Schemes like this lead to significant activity when enacted effectively. We estimate that an ESO set at 1.5% could lead to €160-€320b of additional investment in energy efficiency. The question is how this will be distributed – the design of Member States’ schemes will determine which products and business models can be used by obligated parties to save energy under the ESO.
An interesting development in the EED is the focus on demand response. This will mandate Member States to open power reserve and capacity markets in response to demand, and include demand in future capacity planning. The US experience shows that, with the right regulatory framework, demand response can scale quickly – here it accounts for 35GW of capacity and generates annual revenues of around US$1b (€0.7b).
The United States: financing at a crossroads
The US has arguably the world’s most developed energy services industry, with annual revenues of around US$4-US$5b (€3-€4b) from energy performance contracting.
The sector faces two major issues, though:
- Almost all its revenue comes from government facilities, which are a small fraction of the total building stock. If energy service companies (ESCOs) could make progress in commercial buildings, the industry could generate annual revenues upward of US$25b (€19b).
- The leasing structures available to government agencies – which enable off-balance sheet financing for energy performance contracts – will be revised as US accounting standards are harmonized with international equivalents. Off-balance sheet financing is one of the main reasons the US ESCO industry has been so successful in public buildings, but this position is set to be challenged in coming years.
Both factors mean that developing new models for financing building retrofits in the commercial sector is essential for US ESCOs.
Several structures are being looked at:
- Commercial Property Assessed Clean Energy (PACE) programs, in which the cost of retrofits is repaid through a property’s tax bill, are showing early promise in pilot counties. An equivalent model has also proved very successful in South Australia.
- The Efficiency Services Agreement (ESA), which is similar to a power-purchase agreement for saved energy. Its main appeal is that it keeps alive the hopes for off-balance sheet financing (if accounting standards allow).
- The solution may be altogether simpler than PACE or ESA. Fannie Mae plans to launch an initiative which will bracket mortgages by the LEED and Energy Star rating of underlying assets, in the hope that banks will offer lower interest rates for green buildings.
If financiers and ESCOs are unable to find a solution to the financing problem, energy efficiency in the US will likely hinge on the Energy Efficiency Resource Standards. Equivalent to the ESOs being mandated across Europe, they impose a tight regulatory framework for energy efficiency, but guarantee results.
China pushes toward energy intensity target
Energy efficiency in China has to be seen within the context of energy intensity targets in its 12th five-year plan. Between the start of 2011 and the end of 2015, it aims to reduce energy consumption per unit of gross domestic product output by 16%.
Although this target is self-imposed, it is important that the 11th five-year plan’s equivalent target of 20% was more or less met. In that case, the Government resorted to forcing closure of inefficient production lines. The 2015 target is likely to be met, one way or another.
By 2015 we expect changes in economic output to reduce China’s energy intensity by 12%, leaving 4% to be achieved through energy efficiency measures.
The Government has identified strategies to achieve this, for instance the addition of 20GW of waste-heat-to-electricity generation (circa US$30b (€22b) in investment by 2015), and improvements in boiler efficiency (circa US$7b (€5b)).
China’s energy services sector has developed rapidly There are around 400 Chinese ESCOs that generated revenues of US$4.2b (€3.1b) in 2010. These focus on energy-saving projects in the industrial sector. With the Government’s plans, we expect this sector to continue to grow.
The 12th five-year plan also pledged investment in “key energy saving technologies”, including efficient motors, light emitting diode lighting and heat pumps. Government support and a domestic market gives Chinese companies an advantage over foreign competitors. LED manufacturer Sanan Optoelectronics is an example. Benefiting from a combination of government subsidies for manufacturing equipment and large street lighting contracts, its revenues grew 140% in 2011. Taiwanese and South Korean rivals do not enjoy this support, and mainland Chinese companies like Sanan and Xiamen Changelight are threatening to replace them as the “factory floor” of the global LED industry.
Japan embraces LED lighting
Lighting sales generate around US$40b (€30b) global annual revenue, and energy efficient LEDs are likely to be this market’s future. At the moment it is considered too expensive though, and despite developing technology and falling prices, sales have not yet taken off.
Japan is the exception to this rule. Just under 75% of revenue from ceiling lights sold in the consumer market this March came from LED varieties. A year earlier, this was less than 20%. Analysts predict 2012’s LED lighting sales to total US$4.6b (€3.4b), an increase of 69% on 2011. This increase is directly related to the Fukushima crisis – the resulting strain on the country’s electricity supply seems to have prompted consumers to reduce energy consumption.
Japan’s healthy domestic LED lighting market has implications for the global industry. Nichia is one of the few upstream LED manufacturers that has not seen falling revenues in the past 12 months. The three best-selling LED lighting fixtures are all produced by Japanese companies (Panasonic, Toshiba and Sharp).
These “aggregators” benefit from a head start in scaling capacity and gaining experience in assembling finished lighting fixtures from LED components. By the time other markets reach their tipping points, it’s possible Japanese aggregators will already have an unbreakable grip on the downstream of the LED lighting industry.
Operating margin and quarterly change in revenue for selected quoted LED companies, Q4 2011