Task 16

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Key Publication: Building deep energy retrofit: Using dynamic cash flow analysis and multiple benefits to convince investors

25 July 2017

Presented at the eceee Summer Study 29 May–3 June 2017, Presqu’île de Giens, France

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Abstract

Deep energy retrofit (DER) of existing buildings is a meaningful strategy to reduce fossil fuel consumption. However, investment volumes required for DER are enormous. In Europe, cumulative demand is estimated at close to 1,000 billion EUR until 2050. Public expenditures and political measures can help to stimulate DER, but substantial private investments are required to achieve significant results.

In this paper, we analyze the economic and financial implications for investors renovating an office building to the ‘Passive House’ standard. This is achieved by applying a dynamic Life Cycle Cost & Benefit Analysis (LCCBA) to model the cash flows (CF). The model also includes a multi-parameter sensitivity analysis to analyze impacts of parameter deviations. In the second part, we use the ‘Multiple Benefits’ (MB) concept to identify project-based co-benefits of DER, to make the business case more attractive. We categorize the identified MBs in: 1) monetary, 2) unquantified project, and 3) societal benefits.

Results show that the DER project cash flow over a 25-year period achieves a 21-year dynamic payback with an IRR of below 2%. Levelized Cost of Heat Savings is 100 EUR/MWh with a 70% CAPEX and 15% interest cost share. Pecuniary MBs identified are increased rents, real estate values, productivity, maintenance costs and CO2 savings.

Compared to simpler economic modeling, the dynamic LCCBA cash flow model provides solid grounds for business case analyses, project structuring and financial engineering, but also for policy design. CF from future energy cost savings alone are often insufficient in convincing investors. However, they can co-finance DER investments substantially. Consideration of MBs can offer meaningful monetary contributions, and also help to identify strategic allies for project implementation; however, the ‘split incentive’ dilemma is still present. Furthermore, the approach supports policy makers to develop policy measures needed to achieve 2050 goals.


ESCo market development: A role for Facilitators to play

30 September 2015

Abstract

Energy-Contracting is a many times proven ‘delivery mechanism’ to implement demand side energy efficiency and (renewable) supply projects in buildings and industries. However market volume is behind expectations in comparison to market potential forecasts and its contribution towards energy policy goals.

There is plentiful empirical evidence (e.g. from public institutions putting out tenders for ESCos to bid on) and growing awareness among stakeholders, that successful energy service market development requires a strong commitment and a ‘driving position’ on the client side. In this paper we want to find out, what the challenges and barriers are on the client side of the energy service market, when setting out to procure energy services?

Which know-how, procedures and organizational change processes are needed? And how can potential clients be enabled to do so?

The analyses reveals a need for a broad and interdisciplinary range of activities and know-how such as project development and communication skills, interdisciplinary feasibility studies, life cycle cost analyses, “make or buy” decisions, structuring of business and financing models, procurement specifications and procedures, legal advice and contracts up to quality assurance, measurement and verification (M&V) of the project performance.

As a solution, we have found that so called ‘Facilitators’, who mostly consult on behalf of a client, can play an important and enabling role and have successfully done so. Besides enabling project development, another important advantage of this buyer-led approach is to foster competition between ESCos, other EE suppliers but also financiers. Likewise important, the Facilitator approach provides a fair and level playing field for this competition. Another Facilitator role is to serve as an intermediary between clients and ESCos ‘(corporate) cultures’, interests and expectations in different phases of the project cycle.

However we also want to raise awareness among Facilitators and other stakeholders, that the identified organizational needs for change require approaches beyond economic rationale or environmental awareness.

Instead psychological and organizational change processes need to be put on the agenda, even though this may be new territory for most energy efficiency professionals.

Project facilitation cost in the more developed facilitation markets turned out to be on average at about 3 % of the investment cost for the demand side measures, decreasing with project sizes. In a first approximation this is about one half order of magnitude below standard engineering cost. However this up-front investment often constitutes an obstacle for project development and we would like to raise the attention of policy makers to this opportunity to support market development. It was also repeatedly mentioned by clients and Facilitators, that through an intensive (but fair) competition between suppliers, the advantages achieved with regard to prices and quality outweigh the initial facilitation cost by far.

To our knowledge, the figure of the Facilitator is hardly mentioned in the literature. The goal of this paper is to create a scientific reference of the project and market Facilitator case for further discussions. Furthermore we want to demonstrate the added value of a wider application of Facilitators for ESCo market development and provide guidance for facilitation services and activities as well as policy recommendations.

Methodically, the research builds on an analyses of a typical energy services project life cycle, primarily from the perspective of a client, taking a ‘negotiated procedure’ as the procurement model. Existing ‘Facilitator’ services and activities were identified through interviews with ESCo clients, Facilitators and ESCos in six European countries and Korea. This was also the source for an economic analyses of project facilitation cost, which relies on empirical data from 32 “real world” projects. For the analyses of change processes, we refer to Kurt Lewin’s model of change and take a first approach to apply it to client organizations and its individuals who want to outsource demand side energy projects.

We believe the Facilitator approach will need to be multiplied and better funded to foster ESCo market development. It will also need to become a standard procedure in public and private sector administrations in order to support structuring and procuring of comprehensive energy service projects. This is particularly true, if the market is to develop from individual projects, led by highly motivated individuals, to mass roll-outs of comprehensive building refurbishment portfolios. Only then will the energy services industry be able to provide more significant contributions towards energy policy goals.


Energy Contracting: How much can it Contribute to Energy Efficiency in the Residential Sector?

30 September 2015

Abstract 

Energy use for space heating and warm water in residential buildings accounts for more than a quarter of the final energy consumed in Germany. Yet, energy efficiency (EE) is not a priority for most building owners. At the same time Energy Contracting (EC) has climbed high on political agendas and has even reached the headlines of EE-legislation (2006/32/EC). But the realistic potential, the limits and obstacles of ESCo products in the residential sector are not well enough understood yet, as some political statements and the limited market success tell us.

Answers to these questions are thought in the framework of an ongoing research study for the German government. We have undertaken a conceptual analysis of Energy Supply Contracting (ESC) as the market prevailing product. And an economic analysis of transaction cost and a life cycle cost comparison between in-house and ESCo implementation. The results are compared with the empirical data of a comprehensive market query. We also studied statistical housing data to estimate suitable ESCo market potentials in the residential sector.

Over the range 30-1,000 kWth installations, the life cycle cost comparison reveals no significant cost advantage for ESCo compared to in-house projects. We found a cost effective minimum project size of 100 kWth for ESC-projects, derived from transaction cost accrued to implement ESC projects. This figure is confirmed by the market query.

The market query has further revealed around 250 ESCos, whose dominant product in the residential sector is Energy Supply Contracting. Based on their specialized know how, competent ESCos achieve an average efficiency gain of around 5 %. They are more likely to implement innovative and renewable technologies. Although there is still a lack of market data, it can be implicitly derived from other market data and results of our query that the actual market coverage for ESC in the residential sector is between 10 and 20 %.

In the German residential sector, a market potential of 12.3 TWh/a is considered “preferentially suitable” for ESC: This accounts for only 5.6 % of the total statistical demand. An additional, “conditionally suitable” potential amounts to 102.0 TWh/a, mainly limited by small size of the buildings.

We conclude that the EC market potential for the residential sector is confined by two major restrictions:

1. Due to transaction costs ESC is restricted to projects > 100 kWth in the residential sector.

2. With ESC as the prevailing product in the residential sector, efficiency gains are restricted to the boiler room and thus limited to around 20% compared to existing or 5 % compared to new in-house installations.

We recommend EC product standardization to access the “conditionally suitable” market. Additional efficiency potentials of 20 – 50% can only be tapped, with comprehensive building technologies, building envelope


Simplified measurement & verification + quality assurance instruments for energy, water and CO2 savings. Methodologies and examples (ECEEE’14)

1 July 2014

Measurement & Verification (M&V) is a prerequisite to assess the quantitative outcomes of energy, water or CO2 saving measures and to translate these into savings cash flows for energy efficiency financing and other purposes.
As a possible solution and often feasible compromise between no M&V at all and the effort and (perceived) accuracy of a full scale M&V approach, this paper proposes simplified M&V approaches for individual or groups of electricity, heat, water or CO2 saving measures (ECM) in combination with so called quality assurance instruments (QAI)1. QAIs shall verify the functionality and quality of ECMs, but not necessarily their exact quantitative outcome over an entire project cycle. In many cases the simplified M&V approaches proposed are combinations of savings calculations to determine savings cash flows backed up by QAIs.


The Life of ESCo Project Facilitators_A Task 24 Perspective

1 July 2014

Beyond economic rationale or environmental awareness, energy efficiency projects require organizational and psychological change processes on the client side. In order to support Facilitators and project development, this paper seeks answers to questions like: What are the most promising tools to be used by Facilitators? What is the role of Facilitators/intermediairies in this process? What psychological and organisational culture changes are conducive to success? The paper was written by Task 24 and initiated and commissioned by Task 16.

The life of ESCo facilitators_full report


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