INVESTMENT POTENTIALS FROM ENERGY EFFICIENCY PROJECTS IMPLEMENTATION

During my time while serving in the government and now as an industry player myself, often question raised by many towards me. Can we really make money from energy efficiency and how good is the returns comparing to investing in conventional businesses?

Now, let us look at energy efficiency opportunities as reported by international energy related agencies, countries and until we reach to how much the potentials that has been identified in Malaysia. Then we can decide on how do we look at energy efficiency to make money out of it and how much its potential for businesses as an industry.

Energy efficiency markets deliver goods and services that reduce the energy required to fuel our economies. The International Energy Agency (IEA) estimates that investment in key energy efficiency markets worldwide with the total up to USD 300 billion in 2011. This estimation is very conservative based on an assessment of direct and leveraged investment in identifiable energy efficiency initiatives by the public sector, multilateral finance institutions and major private institutions.'

In the  United States of America(USA), ESCO industry reported annual revenues of USD5.3 billion in 2011 with revenues expected to grow to  about USD6.4 billion by the end of 2013 (Stuart et al. 2013). Stuart et al. (2013) also estimated a remaining market potential of USD77 billion to USD133 billion in facilities commonly serviced by ESCOs. Given this context, state policy makers in USA could consider implementing or expanding various types of policies and initiatives that support demand-side energy efficiency, such as energy efficiency resource standards, energy service performance contracting for specified market segments, building energy codes, retrofitting projects for government buildings, and financing, among others. 

The estimation of incremental annual electricity savings and savings in the report is from projects active in a given year developed and implemented by ESCOs in USA. Estimating these savings levels is a foundational step in order to determine total avoided Green House Gases (GHGs) from energy efficiency measures installed by ESCOs.'

In 1 July 2015 The American Council for an Energy-Efficient Economy (ACEEE) released a new report finding energy efficiency in the USA has come a long way in the last 35 years, slashing in half the “energy intensity” metric that compares energy consumed to the gross domestic product. The report indicated that the USA has cut the amount of energy it uses, compared to each dollar of gross domestic product, from 12.1 thousand Btus per dollar in 1980 to 6.1 thousand Btus per dollar in 2014. In 2014 year, the same study found, efficiency measures saved the United States USD800 billion. Most of the improvements over the last 35 years came from advances in energy efficiency itself, ACEEE concluded, and not changes in the broader economy.

In Germany, the government development bank Kiwi has provided USD 12.7 billion in loans for energy efficiency investments in the residential buildings sector in 2012, and it estimates that this stimulated USD 35 billion in home efficiency refurbishments.

In New Zealand, its home insulation program has invested USD 243 million over the last four years, evaluated as delivering benefits five times the value of this investment.

French public spending on energy efficiency in the residential sector stood at USD 473 million in 2011, and total spending associated with its “white certificate” scheme could trigger private spending 20 times this figure based on previous years’ performance.

In Mexico, the Green Mortgage Program mobilized nearly USD 1 billion in public subsidies and nearly USD 500 million in additional lending by mortgage providers to over three million householders between 2009 and 2012.'

From the above information and facts from each country, it is very obvious that energy efficiency has been planned and implemented in short, medium and long term with huge amount of monetary investment involved. It also signaled the confidence on good returns expected from their investments.

Business Potentials for Energy Service Companies (ESCOs)

ESCO industry has been relatively unknown in Malaysia due to various barriers that I will discuss further in the Part Two of this article in the next issue. However in some countries and other regions, ESCO industry has been estimated having a rapidly growing size of industry volumes as summarized in the table below.  

China has overtaken the US as the leading country in ESCO industry which valued between USD4 billion and USD7 billion.

Country	Estimated ESCO Industry Size(USD million)	Source
China	4,000-7,000	Cahill and Bertoldi (2013)
United States	~5,300	Stuart et al.(2013)
Germany	~3,900-5,200	Cahill and Bertoldi (2013)
France	~4,000-5,000	Marino et al.(2010)
United Kingdom	~320	Cahill and Bertoldi (2013)

In the United States, for example, levels of spending on ratepayer-funded efficiency program have grown from USD 1 billion in 2000 to USD 7 billion in 2011, an average annual growth rate of 20%.

For the Federal, State, and local governments in the USA, they have  invested over USD21 billion in Energy Performance Contracting(EPC) to implement energy efficiency projects since 1997.The Federal Government’s 2009 economic stimulus package included an additional USD3.1 billion for efficiency in existing federal government buildings. The Federal and State governments have also passed specific laws to facilitate EPC and accept up to 15-20 year payback periods to encourage more investments from ESCOs.

Research in the USA indicated that EPCs have delivered general benefit to cost ratios of 1.6 to 1, with higher 2.1 to 1 ratios for EPCs in health facilities.

In Australia, the Strategic Energy Efficiency Policy for Queensland Government Buildings has established the target to reduce their energy consumption by 5 % below 2005-06 levels by 2010, and 20 % by 2015. Some key features have been shared with the Victorian program where the use of EPC and facilitation by a single department, the Department of Public Works. The Department of Public Works has so far invested over 20 million dollars in improving the energy efficiency of 25 of the sites that it owns, and has reduced its energy use in those buildings by 18 megawatt hours per year.

In Korea, the annual turnover for Korean ESCOs has reached USD330 million in 2011, an increase of 63% compared to 2010. ESCO activity in Korea has managed avoided the consumption of energy equal to 1.3 Mtoe in 2011. At present ESCOs have been active in close to 50 countries globally.

Past and present efforts have been mainly on project basis which often ended with the end of each project’s duration. This has resulted in no clear impacts in energy performance improvements, economic benefits from investments made by private sectors and capital spent on periodical budgets spent by the government.'

ESCOs in Asia based on a study by Jyukankyo Research Institute of Japan in 2009 reported the Asian countries in which ESCO business development is proceeding and markets have formed to some degree, are only Japan, China, India, and Thailand. In other countries, such as Malaysia and the Philippines, there is great interest in ESCO business, and governments are currently taking measures to introduce ESCO projects, but markets have not yet been developed.

Based on the report presented and sourced from www.reexasia.com in 2011, Malaysia has the highest potential in energy efficiency in ASEAN which valued at USD907 million and USD530 million for building and industrial sector respectively  as illustrated in charts below.

The ranking according to the highest to the lowest for energy efficiency market in South-East Asia based on four criteria which are investment potential, payback period, regulatory support and ESCO development is summarized in the table below.

Criteria	Ranking
Investment Potentials	Malaysia Indonesia Thailand Singapore Vietnam Philippines
Payback Period	Singapore Philippines Vietnam Malaysia, Thailand Indonesia
Regulatory Support	Singapore, Thailand Malaysia, Philippines Indonesia, Vietnam
ESCO Development	Thailand  Singapore  Malaysia, Philippines Indonesia, Vietnam

For investment potentials, Malaysia is ranked number one but ranked at number four in payback period. This is mainly due to Malaysia’s lower electricity tariff which is heavily subsidized by the government. Malaysia is also lagged behind Singapore and Thailand at number two due to unavailability of comprehensive regulatory support.

With the lack of direction at the national level on holistic energy efficiency implementation, ESCO development in Malaysia has been affected as well where it ranked at number three behind Thailand and Singapore at number one and number two respectively.

The conclusion and the way forward

Prospects for energy efficiency around the world as reported by IEA are enormous where energy efficiency markets are expected to grow in all the regions and principally driven by energy price and policy. Much of that growth is anticipated to come from private investments enabled and encouraged by the government policy rather than direct public investment. Energy efficiency has a great potential and therefore many developed and developing countries have made energy efficiency as a strategic national level initiatives in its implementation. Here are some examples for selected countries around the world:-

1. The new Canadian National Energy Code is expected to save USD 350 million in 2020;
2. The French government is considering a nearly threefold increase in the target for the Certificats d’économie d’énergie obligation scheme to 600 TWh, stimulating energy efficiency investments in the building and transport sectors;
3. Germany’s 2010 Energy Concept could avoid USD 42 billion in energy costs in 2020. A 2% renovation rate requirement for buildings will deliver more and deeper energy-efficient retrofits, and provides certainty for market investors;
4. The market for fuel-efficient vehicles is accelerating rapidly in South Korea, with a requirement that suppliers shift from 30% to 100% compliance with a fuel efficiency standard of 17 kilometres per litre of fuel by 2015;
5. Standards entering into force for a range of appliances in the USA will lead to over 80 TWh of annual electricity savings by 2020. The ESCO industry and low-income weatherization industry will face challenges as federal recovery funding ends, but ESCO revenues are nonetheless projected to double to USD 13 billion by 2020;
6. From 2014, energy suppliers in EU member states will be required to achieve annual energy savings equivalent to 1.5% of their energy sales volume through to 2020. This is expected to lead to expanded energy efficiency investment across the EU;
7. China’s 12th Five-Year Plan envisages a 17% improvement in energy intensity, continuing the trend towards meeting the world average;
8. The UK government has developed polices to stimulate energy efficiency investments by households and businesses, which are expected to save 14.4 Mtoe of final energy consumption annually by 2020. The capital cost of the technical potential for energy efficiency in the residential buildings is estimated at USD 90 billion, of which USD 3.5 billion are low-cost measures; and
9. The Japanese Top Runner program, expected to deliver over USD 3 billion in consumer benefits through efficiency targets for lighting, vehicles and appliances, will broaden its scope to cover three-phase induction motors, LEDs, heat pumps and printers in 2015

The Efficient World Scenario of the IEA World Energy Outlook 2012 estimates that by implementing cost-effective energy efficiency measures and removing market barriers, total primary energy supply could be reduced by an additional 900 Mtoe in 2020 beyond those reductions generated from current and announced policy interventions. 

This additional 900 Mtoe in avoided energy is equivalent to 7% of 2010 global consumption, greater than the combined energy supply of Australia, Japan, Korea and New Zealand today, and would produce a corresponding reduction of USD 458 billion in consumer energy expenditure.

The energy efficiency market is growing in stature and maturity, but it is developing more rapidly than the ability to properly evaluate and understand it. A particular priority is to improve our capability to measure the size, nature and impact of energy efficiency markets and the outcomes from investments made in them.

Policy makers should consider expanding the use of effective strategies including energy efficiency resource standards, EPCs for targeted market segments, retrofit and etc. Given the large remaining market potential for the ESCO industry worldwide and recent project savings levels achieved as clearly recorded, there are significant untapped opportunities for the industry to develop new projects which substantially reduce future GHG emissions.

So, to answer the earlier question whether or not energy efficiency has business potentials that can make money like any other conventional industry, the answer is definitely yes and supported with the development at regions and countries and with facts and figures studied and identified. 

Based on my personal experiences through our investments using EPC business model for multi-national companies in Malaysia and some ASEAN countries, the returns from investments in energy efficiency projects is very good too with billions of monetary investments have been made globally by countries mentioned here.

Malaysia has to tap these ready-to-be-implemented opportunities for the country to be truly benefited from energy efficiency economically, socially and for its future environmental protection or facing the risks of opportunities lost to others in reaping its benefits as soon as possible in more holistic and sustainable manners.

Notes:

Sourced and compiled from various online reports.