Corporates have started to take carbon seriously. That will drive a boom in onsite generation and energy efficiency – regardless of Brexit, the end of subsidies and changes to charging regulations, believes Sustainable Development Capital Limited CEO Jonathan Maxwell. Brendan Coyne reports
Five years ago, Maxwell was telling anybody who would listen that the most effective way to cut cost and carbon was to undertake energy efficiency retrofits led by LED lighting.
Yet deals were difficult to conclude and relatively scarce.
Today, that’s all changed. Whereas in 2012, fewer than 2 per cent of lights globally were energy efficient Maxwell says “the expectation is that by the end of 2019 we will cross the 50 per cent boundary”.
Maxwell believes onsite generation is approaching a similar inflection point. He thinks the UK market has the potential to triple in size. “There is a very substantial opportunity,” he suggests, with corporates driving the trend.
“Carbon is a key area. The intensity of focus from large corporates on minimising their carbon footprint is completely different compared to five years ago. Carbon is very high on the corporate agenda, and that is hugely positive.”
Corporates, however, tend to avoid uncertain investments and Brexit is viewed by many as deeply negative. Meanwhile, the energy regulator is tearing up the current electricity charging arrangements and starting from scratch. Some argue that the disruption threatens to undermine decentralised and flexible technologies.
But Maxwell thinks Brexit may ultimately create greater demand for onsite generation, while Ofgem’s root and branch charging reviews need not pose an existential threat.
“There are always two sides to these coins, and differences of opinion make a market,” he says.
“Brexit does create uncertainty. It will slow decision making at a corporate level. On the other hand, it may increase issues with energy security: we have a degree of reliance on international gas and interconnectors. Those problems do not go away, they are no easier to solve,” says Maxwell.
He says resilience – or security of supply – is a major aspect of the business case to invest in energy efficiency or on-site generation. As Japan appears to pull back, the UK new nuclear programme is diminished and behind schedule, while coal plants are closing and grid operators are working harder to reliably accommodate increasing volumes of renewables.
“If energy security is a driver to people being more efficient with energy and generating more on site, I would say Brexit is at least as much a tailwind as a headwind,” Maxwell suggests.
Ofgem’s charging reviews are “complex”, says Maxwell, a reflection of the UK energy landscape. “But if the fundamental question is who is going to pay for the grid and how that is fairly allocated, the answer to that question should not diminish the business case for a good onsite generation project, particularly where a good private wire solution is included,” says Maxwell.
“All the projects we have in development should be able to stand up to whatever comes out of the Targeted Charging Review. I don’t think it will be a deal breaker. You have to pick the projects that make sense and I don’t think the TCR will kill good UK projects.”
Everything as a service
SEEIT’s business model is to fund or acquire assets and deliver them to market as part of a structured deal. The esco or ‘as-a-service’ model is an approach many are trying to crack, some with more success than others.
“Pretty much all the assets [acquisition pipeline] are ‘as-a-service’,” says Maxwell. He says appetite for capex-free solutions is strong.
“The current level of activity as far as we are concerned is higher than ever. We are seeing more demand now than over the last five years put together.”
However, says Maxwell, “just because demand is there, it does not make it easy to do”.
“There are many aspects that make energy projects challenging: multiple stakeholders, sales cycles, financial, tax, regulatory and accounting factors. It takes a lot of expertise to make the deals sufficiently simple to unlock them.”
Maxwell thinks that is why SDCL is making headway.
“A lot of people have looked at this market and found it difficult. We had to make energy efficiency simpler than it was before. That required us to build a very specialist operation. That is how we add value and that is how we are breaking the conundrum.”
Putting energy efficiency on the stock exchange
Sustainable Development Capital Limited funds energy and environmental projects. In December 2018 it listed the SDCL Energy Efficiency Income Trust (SEEIT) on the London Stock Exchange via a £100m IPO.
SEEIT aims to acquire existing energy projects and infrastructure as well as fund new projects. It hopes to generate a total return of 7-8 per cent per annum and an initial dividend yield of 5 per cent on the Initial Issue Price (100p), rising to 5.5 per cent in the year ending 31 March 2021, with a growing yield thereafter.
Since floating, SEEIT has acquired a portfolio of existing projects including CCHP and LED lighting for £57m with commitments of a further £30m. It plans to buy other projects including a UK retailer’s rooftop PV portfolio via a combination of equity and debt finance, as well as CHP assets in Europe and North America.
In a post-subsidy world, Maxwell thinks SEEIT’s approach will gain traction.
“There are opportunities to deliver cleaner, cheaper, reliable energy without relying on government concessions and subsidy, without being beholden to constraints – and actually delivering significant benefits to the grid – while delivering them directly to the end customer,” he suggests.
“In the rearview mirror there is a great opportunity to acquire existing projects. Looking forward there is very significant opportunity to build new projects. So I think the next five years will be very interesting.”
SEEIT has to date acquired energy efficiency and generation projects, but transport is also on its radar.
“We talk to companies about the energy efficiency of their buildings, but it is difficult to escape the fact that in some cases 50 per cent or more of the energy they use is for moving around,” says Maxwell. “The electrification of fleets, and what that means for large commercial businesses from an energy and infrastructure perspective is an area of high interest for us.”
This article first appeared in The Energyst’s Feb/March print issue. If you have some responsibility for energy in your organisation, you probably qualify for a free subscription.