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Big firms target low-carbon start-ups

The world of energy efficiency and micro-renewables has something of the 1990s dotcom fever about it.

A combination of government policy, the stark rise in fuel prices and attractive financial feed-in tariffs has led to an explosion in start-up firms. There are supposedly a thousand solar firms alone in the UK.

Just as in the dotcom days, there has been a dash by investors and construction firms to get a slice of the action. Carillion recently signed a £306.5 million cheque for energy services specialist Eaga, and Kier paid £2.4m for photovoltaic specialist Beco.

Then there is the emergence of alliances to offer specialist energy efficiency upgrades to the commercial sector. The two most prominent have been Brookfield teaming up with WSP, Woods Bagot and Mercury; and Arup with Skanska and GE – a triumvirate flying their flag high at Mipim earlier this month to tap into what they say is a £10bn-a-year retrofit market. Arup, meanwhile, has been in a similar tie-up with Kier and Gleeds for the past 18 months.  

Scramble for space

Dermot Coady, sales and marketing director of renewables specialist Myriad CEG, owned by the Wates Family but separate from its construction operation, says of the current activity: “There’s a scramble for renewable space whatever the cost.” He says Myriad has no plans to sell, but has been talking to a number of investment companies.

That said, contractors report that there are not really the renewable specialists out there with the coverage and client base to make it worthwhile dipping into their pockets. Some have embarked instead on a flurry of activity reshaping their businesses and forming new specialist energy efficiency divisions and bringing in experts to beef up their know-how. These include Willmot Dixon, which has set up a new division called Re-Thinking led by Rob Lambe and has brought in green guru David Adams to bolster its technical expertise; and Wates’ housing arm Wates Living Space, which has brought in energy specialist Miles Hearn from EDF.

Wates chief executive Paul Drechsler says: “We don’t need to acquire to build a strong business in energy.” Similarly Morgan Sindall chairman John Morgan says his company will build on the newly acquired elements of the Connaught business to deliver energy works; while another social housing specialist, Keepmoat, is banking on the expertise it gained on the Decent Homes programme to compete in the sector.  

Leadbitter is also thinking about growing expertise organically, says deputy group chief executive Paul Abson. “Any acquisition would need to address the issue of operating across our broad trading area and we don’t see companies out there with enough critical mass. Many haven’t been around that long, though they do have the knowhow.”

He says the firm is currently in discussions with a PV company about working in partnership but is not considering going down the Skanska route and tying up with consultants. “A couple of architectural practices have approached us to explore working together on retrofitting sustainable technology on commercial offices,” he says.

The Green Deal

Underpinning the interest in renewables is legislation to reduce UK CO2 emissions by 80 per cent by 2050. The government is on course to have one of its main instruments for doing this – the so-called Green Deal – up and running by the end of this year. Under this initiative, households will be offered measures to reduce the CO2 emissions from their homes, which will be paid for by energy savings to their bills over 25 years.

But there are questions over whether the deal provides enough of an incentive for householders to bother to sign up to it. On commercial and housing association schemes it is not clear who will pay for this retrofit revolution, particularly as three funding mechanisms that have been promoting energy upgrades are being phased out. These are Warm Front and CESP – both geared at deprived communities – and CERT for households generally.

PWC construction partner Jonathan Hook observes: “We all know there is a massive opportunity. The big question is: who is going to pay for it?” Contractors admit that despite enormous potential, the market is proving slow to take off. “It is a bit of a slow burn at the moment,” says Mr Drechsler. “But we expect that 25-30 per cent of our business will be related to energy in three to four years’ time.”

Like Wates, many contractors are confident that, longer term, they are on pretty safe ground. Apart from Carillion, most are taking a cautious approach and see energy as an extension to their support services and maintenance arms, particularly around social housing and local authorities. Social landlords are investing in upgrading stock, sharing the energy savings with tenants and using the rest to pay back loans. But not all are convinced it is the best way to tie up their capital, and demand is patchy.

Around 80 per cent of the homes that will require retrofitting are in private hands, but most contractors are intending to steer clear of the consumer side unless through tie-ups with utilities or supermarket or DIY chains where they are purely the delivery agent. Wates is understood to be in talks with companies including British Gas and supermarket chain Tesco.

Second, construction firms are feeling optimistic because they see there is a market forming around a PFI-type model where funding becomes part of the package, and revenue generated by energy savings and feed-in tariffs provides income. This is the model Brookfield Green can offer.
WSP group head of sustainability Paul Toyne says: “We’re responding to the need for industry to provide affordable solutions around the low-carbon agenda.”
Brookfield Green guarantees performance and energy savings. Exactly what Skanska GE and Arup is offering is unclear – no one was available for comment.

Housing retrofits    

Meanwhile, on the social housing front, London & Quadrant is planning to retrofit 2,000 homes in London. Birmingham City Council is out to consultation on a £100m scheme to upgrade 20,000 homes over the next three years as part of its plan to upgrade 200,000 houses by 2026 and cut carbon emissions by 60 per cent.

The generous feed-in tariffs for PV panels were introduced in spring 2010 and will run in their present form until mid-2012. However, following a review, the government has announced it will curb the cash being paid to large-scale installations that generate over 50 kW of energy to stop the proliferation of solar farms by investors keen to take advantage of the returns (see page 8).

Consultant David Strong says: “The DECC review has put a bit of a damper on PV but it shouldn’t really affect commercial and domestic sectors – although large warehouse installations could be affected.”

Even with these likely constraints, demand is growing exponentially, albeit from a very low base – less than 1 per cent of the demand in Germany.
According to a report from Solarbuzz Europe, the UK demand for PV installations is expected to grow tenfold between 2010 and 2015, taking demand up to 500-600 MW, which is worth about $1.5bn (£915m) including installation. This on top of a tenfold increase from 2009 to 2010.

The demand for renewable heat technologies could mushroom in the wake of the Renewable Heat Incentive, announced by the government two weeks ago. This will start properly in 2012, but there is a £15m package to get the ball rolling in the meantime.

Carillion sees energy services as a massive growth area. Group director of corporate affairs John Denning says: “Carbon reduction is real, it’s not a fluffy green thing. We all have to get on board or the lights go out. Rising oil price just puts more and more pressure.

“Sceptics of the Green Deal are missing the point. As part of the Green Deal mechanisms, the government will be introducing obligations on energy companies to reduce their carbon footprint – and if they don’t, they will be hit with hefty fines – so they will find a way to make it happen.”

Eaga is the largest independent provider of energy reduction services, competing in the same arena as British Gas, so the opportunity to follow what Carillion has done is not open to other players. Other contractors feel the deal has been somewhat extravagant though, and say what Carillion has done could have been added organically.

At a crossroads

To Cenkos analyst Kevin Cammack, Eaga was ripe for takeover in that it was at “bit of a crossroads – in two years’ time their revenues would have collapsed, with the abolition of Warm Front, which as the sole deliverer of this programme accounts for 40 per cent of their revenue”. He says although Carillion paid a hefty sum, the opportunity it brings for cross- selling is enormous.

As Mr Denning points out: “We manage 40,000 MoD homes – and BT’s entire estate of 7,000 buildings – all of which will require energy reduction.” Eaga has also done a £300m PFI deal to install solar panels at more than 30,000 homes for a social landlord. Mr Denning expects this to be the first of many.

In contrast, Mr Cammack describes Kier’s £2.4m deal to buy Beco as “pocket money” and “conservative”. For executive director  Ian Lawson, the deal was important to bring in expert technical knowledge and funding knowledge, not just about PVs but about the whole renewables sector.

Kier is concentrating on installing PVs on local authority and housing association buildings. But it is also talking to supermarkets, says Mr Lawson.

Like others, he doesn’t envisage the consumer end being a big market to play for as a direct supplier. “We’ve tied up with Arup and Gleeds to provide retrofit in the UK commercial market – and we’re talking to a number of owners of office buildings to improve the energy capabilities of their buildings.”

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