Energy Efficiency as a Grid Resource

Spain is a lucky country. We have one of the largest energy reserves in Europe ready to be harvested, and they are reserves that do not require investment in networks or substations, which are distributed throughout the national territory and can save 25% in gas supply (incidentally, we are one of the European countries that have burned more gas in electricity generation in the past year and the largest importer of Russian gas, contributing to finance this unjustifiable war).

I am not referring to the sun, the wind or the tides, I am referring to the building stock (more than 80% of which is inefficient), to our industries and more specifically to energy efficiency.

The president of the International Energy Agency, Dr. Fatih Birol, has been in a state of aphonia for five years now, arguing that efficiency is the most abundant energy resource on the planet, the cheapest to activate and the one that has the greatest impact on decarbonisation as well as on health, welfare and local jobs; in reality we should be talking about Energy Efficiency, perhaps then we would begin to understand it better.

One of the pillars of public policies derived from the European Green Deal is precisely the Efficiency First Principle.

One of the few, I believe the only, country in the EU that has this principle in its legal system is precisely Spain.

Article 5 of Law 10, 2022 of 14 June, on urgent measures to boost building renovation activity in the context of the Recovery, Transformation and Resilience Plan, states that in accordance with the principle of Energy Efficiency First, "energy efficiency solutions should be taken into account as a priority within a cost-benefit analysis in planning, policies and major investment decisions related to both the energy sector and non-energy sectors, where the latter sectors have an impact on energy consumption and energy efficiency".

In other words, an energy resource in its own right to be prioritised in the generation mix and in the grid regulation and remuneration to its agents.

Among its differential advantages are "reducing energy consumption and optimising the energy system, in particular ... reducing and managing demand, achieving energy savings, making the energy system more flexible and minimising losses in energy generation, transmission and distribution".

Any other energy source integrated into our generation mix simply pales in comparison to the potential and diversity of advantages that Energy Efficiency delivers.

And returning to my initial statement, this article of the Law clarifies that "Buildings participate in both the energy and non-energy sectors because, in addition to being a consumer, they constitute the largest distributed energy asset with the greatest potential for energy efficiency in its primary field, which is the reduction of demand, favouring the additional incorporation of generation, storage and exchange systems, connected to networks and other energy uses on an urban scale".

We can transform the building stock into a real Negawatt factory, which would be the largest clean energy generation plant in our country. Buildings are set to become smart, sustainable, distributed and grid connected generation assets.

The obvious question would be: "if it is so good, why don't we exploit it to its full potential?

The answer is mainly based on the fact that it has not been understood, regulated or promoted as a sustainable energy resource, but rather as a mere heterogeneous set of active and passive engineering measures that promise estimated savings on the bill and that in reality nobody understands very well, depending on the individual decision of hundreds of thousands of isolated owners or grouped in communities, with no voice or vote in the management of the grid, beyond being resigned payers of costs and taxes that for the most part have nothing to do with either generation or distribution.

The concept of "efficiency" must transition from a perspective of mere savings or lower consumption to one of being a grid-integrated source, the cheapest distributed energy resource, which also serves to shift consumption hours and provide reliability and flexibility services to the system: it must be properly remunerated as a normalised and metered source of energy.

Every new source of green energy has been supported from the outset by generous public policies of grants, subsidies, tax credits, accelerated depreciation and feed-in tariffs - solar, wind and not to mention hydrogen - always with the long-term objective of consolidating an industry and a competitive market in terms of financing, generation and distribution.

Support for Energy Efficiency, on the contrary, has been at best fragmented and temporary, without a vision and aspiration to create an industry and an additional source to the energy system. Hence its current failure.

To give an indication of the potential of this resource, already in 2018 in the USA the magnitude of efficiency savings (211 billion KWh) was more than double that of solar generation (96 billion KWh). Institute for Electric Innovation.://www.edisonfoundation.net/iei/publications/Documents/IEI_Clean%20Energy%20Top%2010_April%202020.pdf

The need to decarbonise the economy and adapt the architecture of the energy system and the grid to a more distributed and dynamic one requires a rethink of the current regulatory structure for and by Energy Efficiency.

The availability of a wide variety of low-cost sensors, AI technology, intelligent data management software, advanced and dynamic Monitoring and Verification systems, as well as distributed asset management systems ("DERMS"), now hold the promise of effectively measuring these savings and even more, of "orchestrating" energy consumption beyond mere reduction, as part of a new generation of programmes compatible with a strategy of decarbonisation and also and at the same time electrification.

It is an energy resource that we can measure and so what we need now are policies and programmes designed to reduce (and reward) demand at precisely those places and times of day that avoid the most emissions and bring stability and reliability to the grid.

A few years ago, the UK Energy Research Centre even proposed an Energy Saving feed-in tariff (ESFITs) for energy efficiency projects, as was the case with wind and solar.

This measure makes perfect sense if we consider, as the IEA states, that 75% of the value that efficiency contributes to the system as a whole never reaches those who generate it and that these are direct and indirect benefits, to which should be added the avoided costs which, for example in the United States, are the methodological basis for justifying each dollar of subsidies for energy efficiency programmes.

In Spain we have recently introduced a complementary system to the National Energy Efficiency Fund through the Energy Savings Certificates or CAES (White Certificates) which go in the right direction (monetising energy savings in the context of public policies of decarbonisation) but are still insufficient, as their demand is limited to the amounts that can be contributed in certificates annually by the obligated parties, for 2024 capped at 500 million euros.

In order to facilitate the management of this programme, it was decided to copy the French system based on estimates of energy savings according to a catalogue of active or passive measures implemented, i.e. it does not seek to reward an energy resource but the Co2 equivalent of the efficiency.

Of course, we could always scale this programme as a mechanism for remunerating the Energy Efficiency resource, allocating CAES according to the estimated amount of avoided costs to the system for the multi-year demand reduction target, so that they become a more than fair remuneration to the generator (building owner) or its financier, based on the savings harvested, bringing a new line of income (sovereign risk cash-flow) to the thousands of refurbishment projects and also generating a highly attractive asset for a voluntary market.

The philosophy and justification from the public side would be similar to that of TIF (Tax Increment Financing) systems whereby investments are anticipated based on future tax revenues, in this case taking at present value the use of future taxes to cover those energy system costs that would have to be met in the counterfactual, i.e. in a business-as-usual scenario, revenues/costs which are currently simply invisible.

If we fit this possibility within the requirement of a just transition, we could also introduce a multiplier coefficient in these CAES for rehabilitation projects in vulnerable population environments, so as to facilitate and prioritise actions in this segment by receiving more CAES for the same output than in higher income environments.

Looking outside Spain, major public utilities in California, New York and Oregon are currently implementing P4P (Pay for Performance) approaches based on smart meters (behind the meter) that pay variable incentives based on time zone for demand reduction services and flexibility associated with efficiency as a resource.

The metering systems and Pay for Performance (P4P), which rewards the performance and service to the system of the savings actually generated (and not estimated) at each moment, should be the way to monetise energy efficiency, in the absence of a more solid system of tariff retribution for this energy resource.

In England, a consortium led by Ofgem and implemented among others by Electricity North West and EP (whose founder is Dr. Steven Fawkes, Lead Author of the EEFIG report to the European Commission on how to activate the Efficiency First Principle in financial institutions), has launched a pilot project called "RetroMeter" which aims to demonstrate the feasibility, consistency and transparency of a new system of addressing and financing energy efficiency as a measured resource, as well as the development of business models that could help increase investment in energy efficiency through mechanisms such as pay-for-performance.

At the Green Finance Institute, we are working on a project called "Gear-up" (Generated Efficiency As a Resource") that takes efficiency as a measurable energy resource and establishes a novel triangulation system between the owner of a building, the tenants and the property manager, which solves the problem of split incentives and facilitates its financing, considerably mitigating risks and hopefully creating a new green asset class accessible to institutional investors.

In short, every challenge is an opportunity, and in Spain, with this obsolete and inefficient building stock, we can either continue as we have been doing, with the lowest refurbishment rate in Europe, or approach the problem from the perspective of Energy Efficiency and create new ways to monetise this first-rate energy asset and facilitate financing at scale for refurbishment projects that can also benefit lower-income homeowners.

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