Navigant Research Blog

ESCOs See Opportunity Growing Across Europe

— February 19, 2013

Energy service companies (ESCOs), which offer performance guarantees and financial assistance to building owners making energy efficiency retrofits, employ a compelling model for reducing energy consumption with minimal capital costs for end-users, known as energy performance contracting (EPC).  Despite the theoretical appeal of low-capital energy cost reduction, the market for energy efficiency remains largely untapped in Europe.  Assessing the state of the current European ESCO market was the focus of discussion at ESCO Europe 2013, the annual conference that gathers leaders and experts in the ESCO market, including service providers, government officials, and financiers.

In the past, access to financing instruments was often described as a barrier to broader adoption of energy efficiency services.  Today, however, it seems that financiers are eager to invest in energy efficiency opportunities in Europe.  Firms such as Sustainable Development Capital LLP and ENVESTCO are creating financing instruments with risk and return expectations specifically suited to ESCOs and energy performance contracting and are “greasing the skids” for a wider range of customers to engage in deep energy efficiency retrofits using third-party financing resources.

Europe benefits not only from the presence of these new financiers, but also from a range of funds and mechanisms for efficiency at the EU level.  For example, the European Investment Bank, the world’s largest international public lending institution, is currently lending €1 billion ($1.4 billion) per year to energy efficiency projects.  In addition, the European Energy Efficiency Fund (EEE-F), established in 2011, is a €265 million ($358 million) fund, managed by Deutsche Bank, which invests in small-scale, €5 million to €25 million ($7 million to $34 million), clean energy and energy efficiency projects for local governments across Europe.

Raising Awareness

So if financial resources aren’t the issue, then what are the barriers to wider adoption in Europe?  One persistent issue facing energy performance contracting in Europe is the low level of awareness among local governments and building owners regarding the availability of ESCO services and their benefits.  At first glance, many potential municipal customers see energy performance contracting as an unattractive type of off-balance sheet municipal debt.  In some cases, they assume it’s not allowed due to tender law (which is sometimes but often not the case).  In others, they shy away from ESCOs because they doubt that promised energy efficiency gains will be delivered.  Groups such as the European Association of Energy Service Companies are actively trying to change tender laws to allow for energy performance contracting and assuage concerns about the model among government officials.

Still, most of the ESCOs I spoke with in Copenhagen reported that business has been good over the last few years, despite the gloomy economic conditions in Europe overall.  In fact, some ESCOs said that concerns about operating budgets among governments and industrial firms have in fact boosted their businesses.  As awareness of energy performance contracting grows, the financial markets for energy efficiency mature, and policies such as the EU Energy Efficiency Directive transform decision-making on energy efficiency, I expect that ESCOs will continue to tap more of the latent potential that exists in this market.

To learn more about innovative energy efficiency financing instruments, you can view the replay of our Pike Research webinar on “Financing Energy Efficiency.”


New Steps Toward Driving Autonomy

— February 19, 2013

Autonomous driving has crept back into the headlines again after important announcements at CES and NAIAS:

At CES, Toyota displayed its Lexus Advanced Active Safety Research Vehicle, which has similar equipment to Google’s autonomous Prius.  Toyota insists that this is a research vehicle and not destined for production but plans to use it to develop technology for what it calls “assistive autonomy.”

Also at CES, Audi demonstrated its traffic jam assistance and self-parking technology to show visitors.  In slow-moving traffic, a push of a button will get the car to follow the car in front.  Self-parking will allow the driver to get out of the car, which then parks itself in a tight space.

At NAIAS, Continental Automotive announced that it has received approval from the State of Nevada to test its semi-autonomous vehicle on public roads.

Careful to distance themselves from “driverless” cars, the automakers describe their systems as driver assistance rather than driver replacement.  There are many issues to deal with before true autonomous driving comes to the market, not the least of which are liability and insurance.  In an attempt to develop a better understanding of the whole topic, the Southwest Research Institute and TÜV Rheinland Mobility have signed a memorandum of understanding to develop functional standards for the performance of autonomous driving on public roadways.  Having participation from both Europe and North America is a good start toward global standards (which will be essential in the long term), but Asia Pacific must also be represented.

Not So Fast

Google promised in September 2012 that self-driving cars will be available for everyone within 5 years, but the automotive industry doesn’t work that fast.  While it’s technically feasible to have self-driving cars today, as Google has demonstrated, the practicalities of legislative approval, thorough testing, and acceptance by the insurance industry will take time.  Some industry insiders have suggested that 2025 might be a realistic goal.  In the meantime steady progress toward more automated driving features will continue.

One concern is driver acceptance, but the introduction of new features has always been resisted at first.  When blind spot detection (BSD) was first introduced, the majority of drivers were either baffled by the concept or insulted that their driving ability was being questioned.  A recent survey of U.S. consumers showed that BSD is now the most preferred safety feature.  Cruise control was first patented in 1945, but it took nearly 3 decades for it to gain wide acceptance.  Today it’s practically a standard feature, at least in the United States.  Gradual introduction is a practical necessity, but the high-end models compete to be first to market with the latest technology.

The next 10 years will see the broadening availability of more driver assistance features, and the role of the driver will shift from directly controlling the engine, steering, and brakes to being more like a pilot and selecting among various modes, from autonomous through semi-autonomous to manual.  It’s important to remember that driver assistance technology offers great potential for significant societal benefits from automating some aspects of driving, such as fewer crashes and better flow on congested roads.


Defining the Smart City Market

— February 19, 2013

During Pike Research’s recent webinar, The Year Ahead in Cleantech, the question was raised as to whether smart cities represent a market in the traditional sense.  It’s a common topic of discussion among those involved in smart cities. I believe we need to look at this question from three angles.

1. Is it a market that has real customers with real needs to be addressed?

It became clear in 2012 that the answer to this is yes.  City leaders all over the world have embraced the smart city concept with enthusiasm, heralding innovative projects and laying out a vision for how cities can use technology to meet sustainability goals, boost local economies, and improve services.  While these leaders may not care whether that makes it a “market” or not, it is their commitment to changing how cities operate that ultimately defines the viability of the smart city concept and moves it beyond vendor hype.  Projects like the City Protocol and other collaborations show that cities are starting to play a more active role in defining their technology requirements.

2. Is it a market with well defined products and solutions competing for business?

The answer here is more complicated because of the vast diversity of technologies and solutions that can help cities address their challenges.  We need to see the smart city technology market as a complex confluence of several existing markets as well as a space for the emergence, testing, and implementation of new cross-functional technologies and solutions that are smart city specific.  The majority of smart city projects will continue to be rooted in existing operational functions or industry sectors and will act as a market accelerator for established products and services – for smart metering, for example, or for traffic management.  The smart city movement is also creating opportunities for new technologies in areas such as smart street lighting and smart parking, which offer innovative approaches to core city operations.

Integrated smart city platforms or operating centers bring all these systems together in a single system.  IBM led the way in this part of the market with the launch of the IBM Intelligent Operations Center (IOC) for Smarter Cities in 2011. In 2012, Schneider Electric launched its Integrated City Management Platform addressing smart city integration issues from an infrastructure perspective.  Indra, the Spanish technology and services company, has now launched its Urban Interoperability Platform (UOIP), based on traffic management systems it has developed for cities such as Medellin in Columbia.  We expect to see more suppliers producing smart city platforms in 2013, as they look to provide an integration framework for their diverse city solutions.

3. Can the smart city market be sized and forecast?

Needless to say my answer to this is also yes.  We have recently updated our own forecasts for the market in our new Smart Cities report.  The increasing commitment to smart city projects that we have seen from city leaders around the world leads us to be even more positive about this market.  We now expect the market to be worth over $20 billion annually by 2020 (a 25% increase on our forecast made in early 2011) and to represent a cumulative spend of over $117 billion between 2012 and 2020.

We have looked closely at the constituent elements of the smart city market and, in particular, at how smart city opportunities relate to our other market assessments in areas such as smart meter adoption, electric vehicle charging, smart street lighting, and building energy efficiency, for example.

We also take into consideration macro trends in population, economic growth, and infrastructure investment to provide an estimate of the addressable market for each of these sectors as they relate to urban development.  The third dimension to our forecast involves the horizontal technology markets that span industries and new solutions – such as smart city platforms – and that are addressing the integration requirements of the smart city.  Together these three perspectives provide a multidimensional view that is essential to understanding the complexity of the smart city market.


Data Centers Morphing Into Virtual Power Plants

— February 12, 2013

What is a “virtual power plant?” The term means different things to different people in different parts of the world.  Pike Research has come up with its own definition: A system that relies upon software to remotely and automatically dispatch and optimize generation, demand-side, or storage resources (including PEVs and bi-directional inverters) in a single, secure web-connected platform.

At their core, VPPs tap existing grid networks to tailor electricity supply and demand services for a customer, utility, or grid operator.  Without any large-scale fundamental infrastructure upgrades, VPPs can stretch supplies from existing generators and utility demand reduction programs.

The latest VPP model to emerge is based not on geographic proximity – typically the top consideration – but rather on enterprise ownership of global operations.  Ironically enough, the farther away each facility linked in the VPP, the better!  Companies such as PowerAssure are investigating ways for companies that use large global data center operations, such as Apple and Google, to create enterprise VPPs that span the globe, whereby data centers shut down operations and shift load from the regions of the world in daylight to the nighttime half of the globe, where power is cheaper.  The technology to carry out this level of global energy arbitrage – known as “following the moon” – is nearly here (though some engineers may disagree). “Data centers can modulate their IT loads based on external events, such as the price of power, and in the process, save money and get paid for providing demand response (DR) services,” Peter Maltbaek, vice president of worldwide sales for PowerAssure, told me.

Changing Models and Mindsets

The U.S. Environmental Protection Agency (EPA) recently revised rules governing limits imposed upon use of diesel generators that should help increase the availability of DR throughout the United States.  The chief challenge for global enterprise VPPs comes on similar regulatory restraints as well as the accounting end of such transactions.  Of course, if large numbers of large energy users employed this strategy, it could wreak havoc with local grid stability instead of enhancing reliability.  How national and regional regulators would respond to such a business model, based largely on financial flows instead of engineering smarts, is unclear.

Another challenge is changing the mindset of data center owners.  “They need 100% availability and are leery of anyone fooling around with their power supply, especially since it is only typically 3% of total costs,” added Maltbaek.

Lawrence Berkeley National Laboratories (LBNL) released a study last year that looked at data centers and their potential for DR.  ABB, which has invested in PowerAssure and has its own Decathlon DCIM VPP offering for data centers, has already installed a 1 megawatt (MW) DC microgrid at a data center in Zurich, Switzerland providing DR through use of its emergency generators; this system is currently being expanded to 10 MW, will later go to 30 MW, and will then be aggregated with three other data centers in the region.

In Germany, meanwhile, Siemens claims that recent regulatory reforms will allow it to boost its supply-side VPP capacity to 3,000 MW by 2018.  Last year, the company announced that it would increase the capacity of its VPP from less than 10 MW to 200 MW by 2015.  The company says that Germany has enough spare capacity on its transmission lines to create VPPs that span the entire country.


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