The economics of energy service contracts

Energy service contracting can provide a cost-effective route to overcoming barriers to energy efficiency. Energy service contracts allow the client to reduce operating costs, transfer risk and concentrate attention on core activities. However, the energy services model may only be appropriate for a subset of energy services and energy using organisations. A challenge for both business strategy and public policy is to identify those situations in which energy service contracting is most likely to be appropriate and the conditions under which it is most likely to succeed.     

Energy service collaborations—it is a question of trust

Energy services have been highlighted both in European Union directives and in academic literature as an important tool to increase energy efficiency. Performance-based energy services, i.e., outsourcing energy management in performance-based remuneration contracts, is said to overcome many of the barriers that have been used to explain the energy efficiency gap. Energy service companies (ESCOs) help organizations to implement energy-efficient solutions in order to reduce energy costs. By combining science and technology studies (STS) analysis and economics in an interview study of firms, the paper contributes insights on the relational nature of energy service collaborations. The objective of the study is to describe how knowledge and incentives affect trust between partners in performance-remunerated energy service collaborations. Performance-based remuneration is one aspect that makes energy service contracts complex. On the one hand, risk is recognized as an important barrier to energy efficiency. Since remuneration to ESCOs is based on energy savings, they also share the financial and technical project risk with their clients. On the other hand, performance-based remuneration can create a lack of trust. Performance is measured in calculations made by the ESCO, calculations that demand expertise that client firms do not possess. ESCOs are consulted for their knowledge on energy efficiency and therefore an imbalance of knowledge is in the nature of energy service collaborations. The paper concludes that if the initial doubt is overcome, long-term collaborations can be advantageous for both parties, since this builds trust and generates long-term profits.     

The insurance effect of renewable distributed energy resources against uncertain electricity price developments

To combat climate change, many countries all around the world currently foster the development of renewable energy sources (RES). However, in contrast to traditional energy systems that relied on few central power plants, RES are typically highly decentral and spread all over a country. Against this backdrop, the promotion of a decentralization of the energy system by fostering a regional balance of energy demand and supply with a corresponding increase in energy democracy is seen as a promising approach. However, energy democracy driven by an increasing involvement of consumers requires adequate investments of consumers in their own local RES in order to become active players, usually called prosumers. Risk associated with uncertain long-term electricity price developments is generally seen as a barrier to investments. In contrast, we describe that an investment in distributed energy resources (DERs) may actually serve as a consumer's insurance against price risk. Our results set out that the consideration of risk-aversion may actually positively shift an investment decision in renewable DERs. This is due to the prosumer becoming more self-sufficient and less dependent on uncertain price developments. To analyze such an insurance effect, we create a formal decision model considering the prosumer's risk-aversion and derive the prosumer's optimal investment in renewable DERs. However, our results also indicate that under some circumstances the insurance effect disappears: When a prosumer turns into a predominant producer, the prosumer is again exposed to risk in terms of uncertain revenues. Ultimately, our work highlights the importance of a consideration of the insurance effect when assessing an investment in renewable DERs.     

What encourages local authorities to engage with energy performance contracting for retrofitting? Evidence from German municipalities

Municipalities aiming at mitigating climate change by implementing new energy efficiency technologies face budgetary and capacity constraints. Outsourcing through energy service contracting could provide a solution. This paper reports results from a survey of 1298 municipalities concerning barriers to retrofitting public street lighting and the possible role of energy service contracting to overcome these barriers. Using a logistic regression analysis, the authors investigate determinants of opting for energy service contracts in the specific context of LED retrofits. Results point to an advantage of outsourcing in a financially and capacity-constrained environment, which corresponds with the main reasons for engaging in contracting: minimising investments and financial risks. However, municipalities often do not fully grasp the risks associated with retrofitting especially using a novel technology such as LED. In relation to that they underestimate the risk reduction potential of energy performance contracts (EPC). Previous experience with outsourcing increases the probability to engage in servitization although certain existing partnerships, particularly with utilities, prevent municipalities from considering energy performance contracts. Interestingly, engaging an energy consultant has a negative propensity to use energy service contracts, while pre-negotiated standardised contracts for energy performance contracts have a positive influence.     

On the appraisal of “Triple-A” energy efficiency investments

Traditional investment institutions lack the technical understanding of the essence of energy efficiency investments. This often creates a lack of trust to such investments, which acts as a barrier to including energy efficiency projects in the investment portfolio, even though such investments are often robust and have a guaranteed return. Mainstreaming energy efficiency finance remains still a challenge. This paper proposes a decision support framework for identifying “Triple-A” energy efficiency investments, aiming to reduce the respective time and effort required at the early stage of the project conceptualization as well as increase transparency and efficiency of decision making. The “Triple-A” investments are the ones that successfully pass the proposed three-step approach, namely Assess – Agree – Assign. By elaborating a meta-analysis on the De-risking Energy Efficiency Platform available data, first insights from the adoption of such an approach are derived. Moreover, future directions are presented and discussed.     

Comparing the statistical distributions of energy efficiency in manufacturing: meta-analysis of 24 Case studies to develop industry-specific energy performance indicators (EPI)

There is growing interest among policy makers and others regarding the role that industrial energy efficiency can play in mitigation of climate change. For over 10 years, the US Environmental Protection Agency (EPA) has supported the development of sector-specific industrial energy efficiency case studies using statistical analysis of plant level on energy use, controlling for a variety of plant production activities and characteristics. These case studies are the basis for the ENERGY STAR^® Energy Performance Indicators (EPIs). These case studies fill an important gap by estimating the distribution of efficiency using detailed, sector-specific, plant-level data. These estimated distributions allow Energy Star to create “energy-efficient plant benchmarks” in a variety of industries using the upper quartile of the estimated efficiency distribution. Case studies have been conducted for 14 broad industries, 2 dozen sectors, and many more detailed product types. This paper is a meta-analysis of the approach that has been used in this research and the general findings regarding the estimated distribution of performance within and across industries. We find that there are few sectors that are well represented by a simple “energy per widget” benchmark that less energy-intensive sectors tend to exhibit a wider range of within-industry efficiency than energy-intensive sectors, but changes over time in the level and range of energy efficiency do not reveal any single pattern.     

Achieving California's 80% greenhouse gas reduction target in 2050: Technology,policy and scenario analysis using CA-TIMES energy economic systems model

The CA-TIMES optimization model of the California Energy System (v1.5) is used to understand how California can meet the 2050 targets for greenhouse gas (GHG) emissions (80% below 1990 levels). This model represents energy supply and demand sectors in California and simulates the technology and resource requirements needed to meet projected energy service demands. The model includes assumptions on policy constraints, as well as technology and resource costs and availability. Multiple scenarios are developed to analyze the changes and investments in low-carbon electricity generation, alternative fuels and advanced vehicles in transportation, resource utilization, and efficiency improvements across many sectors. Results show that major energy transformations are needed but that achieving the 80% reduction goal for California is possible at reasonable average carbon reduction cost ($9 to $124/tonne CO₂e at 4% discount rate) relative to a baseline scenario. Availability of low-carbon resources such as nuclear power, carbon capture and sequestration (CCS), biofuels, wind and solar generation, and demand reduction all serve to lower the mitigation costs, but CCS is a key technology for achieving the lowest mitigation costs.     

Stochastic valuation of energy storage in wholesale power markets

Energy storage systems are well poised to mitigate uncertainties of renewable generation outputs. Grid-scale energy storage projects are major investments which call for rigorous valuation and risk analysis. This paper provides a stochastic energy storage valuation framework in wholesale power markets which considers all key revenue streams simultaneously. As part of this framework, an operational optimization model is developed to determine the energy storage system's optimal dispatch sequences. A future curve model is built to capture the volatilities of electricity prices. In addition, a frequency regulation service price forecasting model is developed. Simulation results with a realistic battery storage system reveal that the majority of the market revenues comes from frequency regulation services. Simulation results also show that both round-trip efficiency and power-to-energy ratio are crucial to the cost effectiveness of energy storage systems.     

Implementation of energy efficiency measures in compressed air systems: barriers,drivers and non-energy benefits

Increased global competition and resource scarcity drives industrial companies to cut costs. Energy can be a significant component of such cuts, particularly for energy-intensive companies. Improving energy efficiency in industry is complex, as it pertains to various energy-using processes that are heavily intertwined. One such process is the compressed air system (CAS), which is used in most industrial companies worldwide. Since energy efficiency improvement measures for various types of energy-using processes differ, technology-specific measures might encounter different barriers to and drivers for energy efficiency. The same applies to the non-energy benefits (NEBs) related to energy efficiency improvement measures; since measures vary between various energy-using processes, the perceived NEBs might be different as well. The aim of this paper is to study the barriers to, drivers for and NEBs of CAS energy efficiency improvement measures from the perspectives of three actors. Carried out as an interview study combined with a questionnaire, the paper merges the perspectives of users, audit experts and suppliers of CASs. The results showed that the major barriers are related to the investment, or are of an organisational character, and that organisational and economic factors seemed to be important for making positive decisions on energy efficiency investments and measures in CASs. Major NEBs for CASs include productivity gains and the avoidance of capital expenditures. The results of this study also address the importance of having a comprehensive approach to recognise additional effects of energy efficiency improvements in CASs.     

Barriers to energy efficiency in shipping: A triangulated approach to investigate the principal agent problem

Energy efficiency is a key policy strategy to meet some of the challenges being faced today and to plan for a sustainable future. Numerous empirical studies in various sectors suggest that there are cost-effective measures that are available but not always implemented due to existence of barriers to energy efficiency. Several cost-effective energy efficient options (technologies for new and existing ships and operations) have also been identified for improving energy efficiency of ships. This paper is one of the first to empirically investigate barriers to energy efficiency in the shipping industry using a novel framework and multidisciplinary methods to gauge implementation of cost-effective measures, perception on barriers and observations of barriers. It draws on findings of a survey conducted of shipping companies, content analysis of shipping contracts and analysis of energy efficiency data. Initial results from these methods suggest the existence of the principal agent problem and other market failures and barriers that have also been suggested in other sectors and industries. Given this finding, policies to improve implementation of energy efficiency in shipping need to be carefully considered to improve their efficacy and avoid unintended consequences.     

Modelling of thermal energy storage in industrial energy systems the method development of MIND

Industrial energy efficiency is of vital importance as regards environment and industrial profitability. Optimisation of industrial energy systems may show a way towards improved use of resources in energy supply as well as in production processes.The deregulation of the electricity market in some countries increases flexibility in electricity contracts. Taking advantage of the price structure in these contracts is one of the ways to minimise the energy costs and decrease the influence on the environment. Thermal energy stores are very suitable facilities for achieving these goals, having the capability of moving energy use from one period of time to another and thereby influencing not only energy cost but also costs related to power demand if electric energy use is involved.In this paper, the influence on energy costs, energy and material flows resulting from the use of energy storage is discussed. Energy storage has been modelled by using MIND (Method for analysis of INDustrial energy systems) in the form that has recently been developed by the author. A case study from the pulp and paper industry has been used to verify this.     

Acquiring energy resources in a competitive market

Since the opening of the energy market to competitive forces, power delivery companies have seen increased uncertainty regarding the source of energy to serve customers in their service areas. For many companies, the decisions related to the siting, timing, and operation of individual totally out of their control. These companies and their regulators are learning to cope with the new skills and techniques necessary to assure the availability of supply in this new market. The problem is made more difficult for many because they are prohibited from owning and operating generation resources due to fear that they will exercise vertical market power and prevent consumers from gaining access to competitively priced energy. When the series of discussions that formed the basis for this article began, the question to be answered was: How do energy delivery and energy service companies plan for the construction of new generating plants in a deregulated environment? The answer is, they don't. They must team a new set of skills to match a set of contracts, options, and other derivatives to the forecast for energy. They must manage risk using market instruments.     

Hybrid energy management with respect to a hydrogen energy system and demand response

A Hybrid Energy System (HES) is a mechanism that combines multiple sources of energy connected together to achieve synchronised energy output. However, increased energy consumption, operator energy expenses, and the potential environmental impact of increased emissions from the exhaustion of non-renewable energy resources (fossil fuel) pose major challenges to HES. This research is to conduct energy management strategy based on a demand response (DR) program and a hydrogen storage system by designing a Program Logic Controller (PLC) unit. The hybrid system is evaluated by comparing different scenarios such as a hydrogen energy system and demand response. The purpose of this research is to reducing peak demand, minimise the cost of the system and also to extract surplus power generation out of the rate of the battery. This can be achieved by improving the system performances and by eliminating any degradation at the early stages. Organisations or companies must be sure their systems are working properly and that their investments will pay off.     

An analysis of energy efficiency investments’ environment in Greece – The potential role of JESSICA instrument

The most important constraint toward the successful implementation of the energy efficiency investments in Greece remains the absence of appropriate and competitive financial schemes. Energy efficiency improvements seems to be one of the areas that JESSICA instrument should focus on in the case of Greece, considering that energy efficiency constitutes a major component of sustainable urban development. The scope of this paper is to present, in an updating way, an analysis of energy efficiency investments’ environment in Greece as well as to examine the potential role of the JESSICA instruments, aiming to the supporting of the real implementation of energy efficiency investments in Greece. In addition, a rigid methodological note is presented for the analysis as well as evaluation of the JESSICA instruments for energy efficiency projects in Greece.     

The value of domestic building energy efficiency — evidence from Ireland

Following the transposition of the EU Energy Performance of Buildings Directive into Irish law, all properties offered for sale or to let in Ireland are obliged to have an energy efficiency rating. This paper analyses the effect of energy efficiency ratings on the sale and rental prices of properties in the Republic of Ireland. Using the Heckman selection technique we model the decision to advertise the energy efficiency rating of a property and the effect of energy efficiency ratings on property values. Our results show that energy efficiency has a positive effect on both the sales and rental prices of properties, and that the effect is significantly stronger in the sales segment of the property market. We also analyse the effect of energy efficiency across different market conditions and we find that the effect of the energy rating is generally stronger where market conditions are worse.     

Energy management as the management of innovation

It is often said that investments in energy conservation are in some way low risk. This paper shows that like all investments they must, by definition, have elements of risk. It is part of the Energy Manager's role to manage these investments, which because of their novelty, are innovations. Consequently Energy Managers should consider themselves to be innovators and draw lessons from theories of the management of innovation. This paper indicates what can be learnt from these theories and suggests a basic, systematic model for energy conservation innovation.     

Modelling the impact of energy taxation

Energy taxation in Sweden is complicated and strongly guides and governs district energy production. Consequently, there is a need for methods for accurate calculation and analysis of effects that different energy tax schemes may have on district energy utilities. Here, a practicable method to analyse influence of such governmental policy measures is demonstrated. The Swedish Government has for some years now been working on a reform of energy taxation, and during this process, several interest groups have expressed their own proposals for improving and developing the system of energy taxation. Together with the present system of taxation, four new alternatives, including the proposed directive of the European Commission, are outlined in the paper. In a case study, an analysis is made of how the different tax alternatives may influence the choice of profitable investments and use of energy carriers in a medium‐sized district‐heating utility. The calculations are made with a linear‐programming model framework. By calculating suitable types and sizes of new investments, if any, and the operation of existing and potential plants, total energy costs are minimized. Results of the analysis include the most profitable investments, which fuel should be used, roughly when during a year plants should be in operation, and at what output. In most scenarios, the most profitable measure is to invest in a waste incineration plant. However, a crucial assumption is, with reference to the new Swedish waste disposal act, a significant income from incinerating refuse. Without this income, different tax schemes result in different technical solutions being most profitable. An investment in cogeneration seems possible in only one scenario. It is also found that particular features of some alternatives seem to oppose both main governmental policy goals, and intentions of the district heating company. Copyright © 2002 John Wiley & Sons, Ltd.     

Planning versus implementation of energy-saving projects by industrial companies. Insights from the Dutch Long-Term Agreements

Companies participating in the Dutch voluntary agreements on energy efficiency are required to announce the energy-saving projects that they have planned for a specified reporting period in an Energy Efficiency Plan (EEP). All projects with a payback period less than 5 years should be implemented. The aim of this paper is to provide insight into the differences in planning and implementation of energy efficiency investments by companies. This analysis is based on the EEPs submitted in the period 2009–2012. By comparing the characteristics of projects that have been implemented with those that were planned, insight is gained in the adjustments that companies make in their energy efficiency investment plans. We look at external circumstances that could explain these adjustments. Our results show that over 12,000 projects have been planned by the 904 long-term agreement (LTA) participants, about half of which are planned ‘certain’, which means that companies are certain that these projects will be implemented. However, we find a large difference between the planned and realised savings of companies and a huge variation in the payback period of both planned and implemented projects. We do not find a correlation between implementation rate and payback period. This suggests that the payback period in the EEPs was not assessed properly or that other than economic motives are more decisive for investment decisions. Our results can be used to improve the effectiveness and efficiency of voluntary agreements.     

Assessing the relative efficiency of energy use among similar manufacturing industries

This article presents a methodology to measure relative industrial energy efficiency across plants within a manufacturing sector through the use of energy‐production signatures (EPSs). Linear programming in combination with regression methods, benchmarking and simulation models are used to study the behavior of a representative manufacturing plant. The methodology is validated using data available from the Department of Energy database. The proposed EPSs can be used for proactive benchmarking and diagnostic purposes leading to improvements in energy consumption for individual companies. The results show that the proposed methodology successfully identifies energy and production inefficiencies within a manufacturing segment. Copyright © 2010 John Wiley & Sons, Ltd.     

Distributed generation,storage, demand response and energy efficiency as alternatives to grid capacity enhancement

The need for investment in capital intensive electricity networks is on the rise in many countries. A major advantage of distributed resources is their potential for deferring investments in distribution network capacity. However, utilizing the full benefits of these resources requires addressing several technical, economic and regulatory challenges. A significant barrier pertains to the lack of an efficient market mechanism that enables this concept and also is consistent with business model of distribution companies under an unbundled power sector paradigm. This paper proposes a market-oriented approach termed as “contract for deferral scheme” (CDS). The scheme outlines how an economically efficient portfolio of distributed generation, storage, demand response and energy efficiency can be integrated as network resources to reduce the need for grid capacity and defer demand driven network investments.