Energy efficiency has consistently been one of the top areas of technology attracting global venture capital for the last 18 to 24 months.31 The market demand is there and is in tune with a tighter economy generally. Notwithstanding the climate change implications, energy efficiency investments stand up on their own, as they save owner/operators money. Current estimates point to a $170 billion per year investment opportunity in energy efficiency, and an approximate 17% internal rate of return. 32
ICT has played a significant role in the last decades of improving economic productivity. It now has the opportunity to enable further productivity improvements, helping transform the world to a more sustainable, lower carbon and more resource-efficient future in the process.
The case studies to illustrate ICT in energy-efficiency enablement mode have been mainly drawn from the developed world. That shows two things. Firstly, ICT applications for energy efficiency are in their early growth phase; they have much distance to travel in terms of technological maturity, economies of scale and reliability. Secondly, most of the near-term focus is on the opportunity for investment returns in the capital-richer and more energy-intensive developed world where investment to de-leverage cost bases is a high priority to bring economies back in shape.
As the World Bank recognized in its own report, stimulating the invention and development of such ICT-based innovations for areas such as smart buildings, smart grid and smart logistics is critical for the developing world too.
However, energy efficiency wins will not be easy. There are plenty of policy, market and behavioral hurdles that need to be overcome to deliver the savings possible. The kind of ICT solutions illustrated in this report still need to be implemented at scale.
And it is implementation, rather than technological invention, which will prove the greatest challenge from here. Integration. Inter-operability. Standards. These are all significant challenges for successful technical implementation, wherever in the world.
Location matters too. The energy-efficiency challenges vary, developed to developing, north to south, hot to cold.
Although energy-use patterns are surprisingly similar across the globe, it's impossible to develop single international solutions for energy efficiency. Energy efficiency strategies in developed countries mostly focus on retrofitting existing buildings and reforming existing networks, be they electricity grids or logistics/transportation supply chains. In contrast, the priorities for the developing world and the use of ICT will be quite different:
- 2 billion more people will live in cities in 20 years, mostly in the developing world.33 A priority for energy efficiency in buildings, therefore, must be how to design low-energy intensity into where new construction is going to occur - namely, in the new cities and buildings of the developing world
- Automated, networked, smart buildings may be realistic prospects in some urbanised areas of some developing countries, but the realities of energy efficiency in buildings for the majority of the developing world will centre on the most basic of basics - better lighting, for example
- Solutions and providers must adapt to different situations. Brazil and China are very different from Haiti and Tanzania, for example
- Many countries do not start with a grid to make smart, and those that do may be overawed by the scale and cost of the upgrade challenge
- For the 'grid-less', is this, on its own, such a disadvantage? One bright spot for the developing world is that its lack of electricity infrastructure isn't such a huge relative disadvantage by itself, as many of the deployed transmission lines and substations in North America and Europe are ill-equipped to support the smart grid. In the U.S., 70% of all transmission lines and power transformers are at least 25 years old.34,35 The complexity of overhaul is complicated by there being more than 500 owners of the U.S. transmission lines, whereas ownership is more centralized in most other countries.36
- This is where governments and supra-national development organizations could become critical since they are in positions to accelerate or underwrite the build-out of smarter, but perhaps more decentralized, grids. Is it easier when you start with very little, analogous to the by-passing of fixed-line telephony for a mobile network? Most smart grid programs, in Korea, China and the US for example, are driven by "green deal" stimulus funds.
- As discovered in this study, in many ways the development of ICT applications in smart logistics is least developed. There is, it seems, the least innovation activity stimulated here in the developed world. And yet, with the population growth continuing in the developing world, and the existence of mobile phone networks as a basis for communication, it may be that this is a field where adaptation could occur faster, where economic productivity could be increased, of which energy-efficiency is but one of the measures of enhanced ability to do more with less.
And lastly, but perhaps most important of all, business models matter too. Who pays and who benefits goes to the heart of whether something will happen and something is sustainable. What these case studies consistently show is the identification of a situation where upfront capital investment into some ICT-based solution (be that a networked lighting system, a sensor network in a building, or software to maximize fuel efficiency) holds the promise of lowering total costs of 'ownership and maintenance' over a period of time. But, to capture the energy savings, the user might need to tolerate upfront investment and payback periods, something that can be a psychological barrier in the developed world in these capital-constrained times and simply unachievable in many cases in the developing world.
This is where innovating with new business and finance models comes in.
The emergent business models in energy efficiency are analogous to how software discovered 'software as a service' in the early 2000s. It is now a popular business model with businesses and consumers alike. Essentially, it offered a choice. As opposed to having to buy software licenses upfront and servers and other software to support usage, the service model creates a monthly subscription. Quite simply, for the model to work, the subscription cost needs to be lower than the savings achieved by the service. Energy Efficiency can be such a service:
- This approach is evident in the GreenRoad case study
- D.light, through its partnership with a microfinance provider, was in effect trying to "package up" the same model, by offering a loan on the upfront capital cost, thereby enabling the user to realize the 'business as usual' savings
- It has also been evident in the approach of energy services companies (ESCOs) for many years
Other analogies are found in the printer and the mobile phone world. Printers are relatively cheap hardware; the money is made in the sale of higher-margin ink which is an ongoing, regular cost. Similarly, with mobile phones. By embedding the costs of the handset within the monthly subscription (be that a fixed price or pay as you go), the mobile phone industry overcame a barrier to market adoption: it flattened the initial upfront capital hurdle.
In the latter case, complexities had to be overcome in the value chain. How much does the handset manufacturer benefit, how much the operator, how much the provider of applications or content for the handsets? What savings over time should be passed onto the end user? Similarly, as energy efficiency grows up, such questions will need to be resolved. There are potentially many stakeholders in most energy efficiency situations with revenue and cost interests. This basic point is illustrated in a current housing project in Egypt. In this project, the builder, the electricity company, and Internet Service Provider (ISP) are collaborating and are using Broadband on Power Line (BPL) to provide broadband connectivity to the occupants but also using the same medium to provide smart buildings and smart grid solutions. Who pays and who benefits in situations like these?
There are no simple answers, but for ICT solutions for energy efficiency to thrive, such questions do need to be resolved. And nowhere more so than in the developing world where access to upfront capital is a significant barrier.
This study, illustrative rather than comprehensive, suggests the World Bank Group would be well-advised to concentrate on the following:
Build on what works, what is sufficiently developed, and what is realistic today.
Energy efficiency is a long-term game and whilst we can write about and visualize all these solutions, only some are in reach today, even fewer for the developed world.
The D.light case study powerfully reinforces the message that energy efficiency for many millions will not be futuristic or 'smart' (i.e. connected to a broadband backbone) but stand-alone and distributed, and serving basics today like the ability to see at night. How about concentrating on what is realistic and impactful today?
Building codes in the developed world are the norm and ever more complex. For the developing world, the ambition can be more limited. Yes, to some minimum requirements for building codes (with new construction), but how about concentrating on just one or two areas such as efficiency standards for appliances?
Concentrate on the enablers
Year by year, ICT will enable many solutions for energy-efficiency, much of which will start with a developed world focus but some of which will be quickly adaptable.
However, getting such applications into use will present many challenges, areas in which the World Bank Group is well-placed to assist. Three keys places that came out of the case studies:
- Education and Training - ICT applications and new technologies represent change in all parts of the world, but even more so in parts of the developing world where people are not exposed to ICT on a daily basis.
- The availability of finance (micro-finance) - Even where the return on investment is a no-brainer, the ability to finance the upfront investment may be too large a barrier. If facilities are available that support the business models, energy efficiency can work in the developing world. Most business models in ICT revolve around an upfront investment and a subscription to pay for a service. To work, this requires integrated finance mechanisms that enable the lending of capital (to cover the upfront investment) and the repayments (via the subscription).
- Aggregation - The Energy Efficiency landscape is typified by a large number of small projects, and probably nowhere more so than in the developing world. This report recommends that the World Bank Group looks at how it could help aggregate individual projects into a larger and more cohesive investable model.
31 2009 annual review and 4Q09 investment monitor. Cleantech Group. February 2010
34 Frayed Wires: U.S. Transmission System Shows Its Age, Fitch Ratings, 2006