Bulletin

The capital role of Measurement and Verification (M&V) to unlock the full potential of energy efficiency

22 Mar 2018

By Denis Tanguay, Executive Director, Efficiency Valuation Organization (EVO)

In an address at the Arthur Burns Memorial Lecture in Berlin in September 2016, the governor of the Bank of England, Mark Carney, highlighted two paradoxes about climate change. The first is that climate change is a cost imposed on future generations. The second is that if the transition to a low carbon economy is too fast, this could put global financial stability at risk.

To resolve these paradoxes, Carney suggested that we collectively need to consider three forms of risks. First, physical risks resulting from more frequent climate severity. Second, liability risks for those who will suffer damages and who will seek reparation from those held accountable for our climate deterioration. Third, transition risks related to a low carbon economy which could fundamentally impact the value of carbon-intensive assets. These are very important considerations. Potential solutions will emerge at the macroeconomic level and through global policies.

As part of the transition process to a lower carbon economy, it has been suggested that energy efficiency should play a more significant role. Energy efficiency projects, however, have this bizarre characteristic that their main outcomes, energy savings, are somewhat unique: savings are the absence of energy use. We cannot measure what we do not have so nobody can “measure” savings. However, we can measure energy use, and we can analyse measured energy use to determine savings. This defines transaction costs risks which can be addressed by proper verification of savings.

The International Performance Measurement and Verification Protocol (IPMVP) and EVO

In 1994, stakeholders in the energy efficiency industry identified measurement and verification (M&V) as one of the key tools to validate energy savings following the implementation of Energy Conservation Measurements (ECMs). This approach of measuring and verifying energy efficiency resulted in the publication of the International Performance Measurement and Verification Protocol (IPMVP) in 1997. To maintain and improve the IPMVP over time, IPMVP Inc. was incorporated as a not for profit organisation in 2001 and renamed the Efficiency Valuation Organization (EVO) in 2004.

The core mission of EVO is to ensure that appropriate measurement and verification techniques are the basis for assessment of savings, as well as for impact assessment of energy efficiency and sustainability projects. Its work is based on three key ‘messages’:

  • The first is confidence in energy efficiency. Although this might be self-evident, we must realise and understand that decision-makers at various levels of the energy supply and demand chain cannot base their decisions on wishful thinking or vague statements.
  • The second refers to reliability. While we are all striving at reducing our energy use, we must recognise that utilities and governments have had the security of energy supply at the very top of their list of issues. The strength of our economies, the stability of our healthcare facilities operations, our survival in harsh climates all depend on a reliable and stable energy supply.
  • To generate confidence in reliable savings, they must be appropriately measured and verified at different stages. This is the third message. The validation of energy savings is core and central to many types of transactions – financial and non-financial equally – between economic agents. M&V was developed as a method to reduce some of the barriers to the broader implementation of energy conservations measures.

Making sure energy savings are real

Energy efficiency projects are financed through a variety of mechanisms. Projects could be self-financed, they can be implemented by energy services companies or publicly funded by green banks. The reasons to perform M&V are numerous, and include: increase energy savings; document financial transactions; enhance financing for efficiency projects; improve the design, operations, and maintenance; account for variances from the utility budget; support evaluation of efficiency programmes; educate facility users about their energy impacts; and improve building certification programmes scores.

Energy efficiency is not a tangible asset. It provides, however, a flux of revenues in the form of costs avoidance. Intangible assets are difficult to value, let alone to trade. To make energy efficiency projects “bankable”, there is only one solution: verify that the energy conservation measures impacts are properly assessed. Without this nobody can credibly claim energy savings. Savings must be measured before, after and at a periodic frequency of the operation after the implementation of ECM, to confirm the sustainability of the savings. Otherwise, we are dealing with deemed savings for energy use and consequent deemed reduction regarding greenhouse gases.  

To help address market needs for M&V at different stages in the lifetime of an energy efficiency project, EVO is currently developing a new Certified Energy Savings Verifier (CESV) programme. The CESV will recognise engineers who have the knowledge and competencies to lead or perform detailed analyses of M&V plans, prepare or review investment grade audits and to validate and verify energy savings for tradable energy efficiency projects.

Conclusion

The IPMVP provides a repeatable methodology for M&V. It is intended to increase reliability and level of savings, to reduce transaction costs and to reduce financing costs. It has been successfully used over the years in thousands of energy performance contracts. Current training and certification programmes have been effective to satisfy contracting parties’ needs at the individual project level.

But the generally accepted M&V practices set in the IPMVP are not always being consistently applied, and this is creating a gap in the energy efficiency markets. As a result, the verification of energy savings remains a key barrier for global investors to have sufficient confidence in the estimated savings to be willing to fund and implement energy efficiency projects on a scaled-up basis. The consistent use of the IMPVP principles –for example through EVO’s CESV programme - should help reduce financing costs and increase the reliability of savings, thereby allowing project bundling and pooled project financing that lead to greater energy efficiency deployment.

 

 

 

 Denis Tanguay is the Executive Director of EVO. Prior to his current role, he was the President and CEO of the Canadian GeoExchange Coalition, Canada’s national association for ground source heat pumps. He has also held positions in the Bank of Canada, the Canadian Government, and academia as a part-time lecturer at the Université du Québec à Hull. Denis received a Master of Arts (Economics) degree from Carleton University and an Honours BS – Economics from the Université de Sherbrooke.