1. Energy Efficiency Finding and realising energy savings 27 th March 2006

2. The Carbon Trust is a business-led, Government backed company Our mission is to accelerate the transition to a low carbon economy by helping organisations reduce their carbon emissions and develop commercial low carbon technologies Set up in 2001, the Carbon Trust is an independent UK-wide company funded by Government Our objectives are, To help UK business and public sectors meet ongoing targets for carbon dioxide emissions To increase business competitiveness through resource efficiency To support the development of UK based low carbon technologies

3. 8.0 (15%) 3.8 (22%) Significant cost effective carbon savings: UK example 3.2 0.1 0.51.8 0.8 1.10.5 MtC pa (% of total emissions in brackets); assuming 15% cost of capital 3.3 (13%) 2.3 (18%) 1.6 (15%) 0.8 (15%) TOTALS MANUFACTURINGBUILDINGS TOTAL 4.2 (12%) Large Energy Intensive Industry Large Non-Energy Intensive Organisations Public Sector SMEs

4. Different sectors need different solutions Energy Intensive Industry – Clear commercial driver to improve energy efficiency Large organisations in other sectors – Low materiality, awareness, market failures (metering; landlord-tenant divide) – Corporate social responsibility driver Small and Medium-Sized companies – Transaction costs, financial constraints – Materiality, inertia and awareness Barriers and drivers EU ETS Potential solutions Building regulations/EPBD Taxes/target agreements Taxes/trading schemes Public sector leadership Supplier obligations Product standards Interest-free loans Taxes Building regulations/EPBD

5. Conclusions Possible to deliver significant carbon cost effectively from business and public sector in line with indicative targets in energy services directive (~1% pa) – however potential competitiveness effects in isolated sectors Tailored approach required by sector to overcome barriers and leverage drivers Require mix of economic, regulatory and information/awareness raising instruments. As emphasised in energy services directive: Metering is key enabler, Public sector needs to take leadership position and requires systems, capabilities and support to deliver

6. Making Business Sense of Climate Change www.thecarbontrust.co.uk The contents of this presentation are the copyright of the Carbon Trust and may not be copied or republished without the prior written consent of the Carbon Trust. The Carbon Trust trade marks, service marks and logo used in this presentation are the property of the Carbon Trust and no licence or right is granted to use any such marks or logo.

7. Direct engagement Carbon Management LA Carbon Mgmt Standard site visits SME General service Indirect engagement Networks Marketing Financial incentives SME loans Public sector loans ECA support RD&D Carbon Vision (EPSRC JV) Open call RD&D Technology acceleration Marine Energy Challenge EMEC (Orkney) Small CHP trials (mCHP) Smart metering Biomass accelerator Investment & commercialisation Incubators Venture capital Commercialisation projects Low Carbon Technology Assessment, December 02 Investor perspectives on renewable power in the UK, December 03 The European Emissions Trading Scheme: Implications for Industrial Competitiveness July 04 The UK Climate Change Programme: Potential evolution for business and the public sector, December 05 Climate Change and shareholder value, March 06 The Carbon Trust is making business sense of climate change in the UK

8. Policy recommendations Presenting results of review of UK energy efficiency policy for business and public sector Segment market and identify opportunity Establish drivers & barriers to action Construct and test policy options 5 Stakeholder workshops: - Energy intensive sectors - Non-energy intensive sectors (hosted by CBI) - Public sector - NGOs - Suppliers of energy efficient equipment Outcomes relevant to today: Highlights policy options for both energy intensive industry and less energy intensive sectors Analyses carbon impact, cost and competitiveness implications

9. Total = 54 MtC UK Business and public sector emissions by segment (MtC pa, 2002) Break- down of energy use, % Entity type 2513610 0% 20% 40% 60% 80% 100% Large Energy Intensive Industry Large Non- Energy Intensive Organisations Public Sector SMEs Manufacturing: Direct emissions Manufacturing: electricity use Buildings: electricity use Self generation Buildings: Direct emissions No. Entities 2 k13 k65 k909 k Emissions

10. Barriers and drivers for energy efficiency Investment cost Hidden costs Split incentives & other market failures Ignorance, inertia and lack of interest DRIVERS Value of energy savings Intangible benefits e.g. CSR Systemic efficiency Awareness and motivation BARRIERS

11. UK policies – some effective, some less so – EU ETS and negotiated agreements (CCAs) for large energy intensive companies – Building regulations and EPBD for buildings WEAKNESSES STRENGTHS GAPS – Double regulation of EU ETS and negotiated agreements (necessary until EU ETS strengthens and stabilises) – Implementation of building regulations and potential coverage of EPBD is weak Gap in coverage for less energy intensive segments – Existing energy tax (CCL) does not drive change – Energy costs are not material – Poor use of metering data and lack of reporting consistency

12. EEC for SMEs: place the burden on suppliers Product standards: remove poor equipment from the marketplace Interest free loans for SMEs: provide access to capital Improve governance and accountability Increase internal capability Top quartile buildings procurement Interest free ring-fence funds for energy efficiency investments …. to increase transparency and leverage CSR driver for large companies …. to overcome transaction costs and financial barriers for SMEs UK carbon embodied ETS Product standards Loans for SMEs EEC for SMEs Public sector leadership …. to take symbolic lead and use purchasing power A review of UK policies reveals gaps for less energy intensive segments that need addressing Includes electricity Company based 100% auctioning (rebate on Energy tax) Based on metered data Results in annual reports Potential to include other emissions, e.g. haulage

13. UK Carbon Embodied ETS – Coverage in target sectors based on half-hourly metering of electricity Sector# HH* sites (thousands) # HH Buyers**Sector TWh% of Sector Use Note: *Half hourly meters, **Implies overall average of 7 sites per buyer. Source: Datamonitor Total: Water Construction Printing Plastics Textiles Vehicles retail Hotels and Restaurants Vehicle Eng Electrical Eng Transport and comms Real estate, renting, etc Wholesale trade Education Health and social work Mechanical Eng Retail trade and repair Public admin 50% 12% 63% 94% 86% 44% 23% 100% 84% 79% 50% 83% 13% 78% 65% 68% 91,000 sites, owned by 14,000 companies, using 99TWh per year

14. Net value at stake** (% of current EBITDA) Product price rise required to keep profits flat (% of current price) 20102020 EU ETS sectors High scenarios* Cement (in EU ETS) 20102020 20%52%5%10% Steel (in EU ETS) 9%27%1%4% Newsprint (in EU ETS) 1%3%<0.1%0.6% Petroleum (in EU ETS) 0.5%1%0.1%0.3% Car manufacture (in EU ETS) 1%3%<0.1%0.1% Brewing (in EU ETS) 1%3%<0.1% Aluminium (in CCA) 80%170% Unable to maintain current profits CCA sectors Grocery Retail (in UK ETS***) 2%4%0.1%0.2% Hotels (in UK ETS***) 8%16%1.1%2.2% CCL sectors Note: *Includes impact of doubled CCL plus direct and indirect EU-ETS effects **= (inc. in total costs after allocation)/(starting EBITDA), ETS prices 2010:15 /tCO2, 2020:30/tCO2, allocation cut back 1%pa from 2005; ***Assuming 100% auctioning at EU ETS prices Cement and steel potentially under threat by 2020 Aluminium very exposed to EU ETS electricity price rises across EU Small price rises required to maintain profits Competitiveness implications under policy scenario that creates greatest burden for each sector

15. Significant potential carbon prize by 2020 3.0 0.6 1.5 allowance cut-back 0.5 electricity price effect 2.6 1.0 0.6 9.0 (exc. Sales) 2.3-3.7 0.6 11.2-12.6 (exc. Sales) Note: *EU ETS based on market price of 30/tCO2 in 2020 and 1%pa cut back, CCL at current strength; **Includes UK consumption- emissions trading scheme (CTS), net of overlap with CCL and CT (includes 0.5MtC from strengthened EPBD and 0.7MtC product standards – only additional to UK CE ETS in SMEs); ***Allowing for CCP delivery 2000-2005 (3MtC) Source: Ecofys 30% reduction vs 1990, 6.5MtC CCL* CT 0.6 EU ETS sales 2005-2020 Carbon delivery 2020 MtC pa saving vs projected emissions (58MtC)*** Savings at risk if existing instruments implemented weakly Prize of addressing policy gaps Building regs and EPBD key promoters of change in buildings EU ETS and CCA effective for energy intensive sectors, Broadened package including UK CE ETS could deliver additional 2.2-3.6 MtC (0.1) 1.0 1.4 (net of policy overlaps)**

16. Creates net benefit for UK business with limited competitiveness effects Negative resource cost* Isolated competitiveness effects In aggregate, technical energy saving measures create net benefit for business and public sector - Ranging from ~ -£20/tCO2 to -£70/tCO2 out to 2020 Very limited competitiveness impact expected for most sectors A few energy intensive sectors potentially threatened long term – Steel and cement in long term/high case scenarios – Aluminium smelting exposed if plants buy electricity from grid Expect limited GDP impact Macroeconomic models produce very different views on GDP impacts – One predicts minimal impacts and even possible gains while the other possible losses of similar magnitude –Follow-up study underway to resolve and understand differences

17. Current state of energy services in the business and public sector Dalkia, 152 npower, 193 E.On, 135 Elyo, 76 Cofathec, 46 Others, 50 UK Energy Outsourcing Market, 2004 Turnover (£m) Total = £652m Energy outsourcing is a mature market in the UK Focus on outsourcing of non- core activities, 50% of market build own operate CHP Few examples of true Energy Service Company (ESCO) offerings where remuneration is linked to demand side energy savings Source: RWE Solutions

18. There are some examples of successful ESCO agreements in the UK Contract type: 11 year agreement ESCO fee covers financing and maintenance Equipment Ownership transferred to client post agreement Details of activities: Investment in CHP plant Improved combustion equipment Replacement of heating and lighting Improved air compressor, heating and ventilating control Energy management system Inenco & United Biscuits RWE Solutions & Sainsburys Contract type: 4.5 year energy management outsourcing contract Target energy consumption reduction of 11% over two years Details of activities: Modification of refrigeration systems Lighting infrastructure upgrading Optimisation of efficiency of heating and ventilation systems Energy reduction programme Provision of gas and electricity

19. Complexity of structuring and financing deal Difficulty in monitoring and attributing savings Lack of awareness and motivation Barriers to development of full energy service company (ESCO) offerings Large energy intensive industry …. Not economic to serve SMEs …. Even where ESCO offering could make economic sense, significant barriers to be overcome Energy intensive process industries …. Energy intensive process industries best placed to reduce their own energy demand SMEs Large less energy intensive organisations High transaction costs relative to the size of deal Higher credit risk for ESCO/lender Host company (e.g. chemicals, cement, glass) better qualified to understand process energy use than ESCO

20. Conditions required for ESCO model to work 1. Case for energy efficiency 2. Value proposition of ESCO model 3. Route to market High energy costs Regulatory drivers Help to secure lower cost financing Add value through greater technical expertise Awareness of ESCOs Simple transaction model and performance monitoring Energy prices low (but rising) No significant regulatory driver in target market Companies often have better access to capital and expertise Low awareness of ESCOs Very complex deal structure with high transaction costs Current UK situation