A Focus on the Energy Efficiency Opportunity
In this article, the second in a two-part series on energy efficiency, Anthony Dixon, Metanoia’s founder, speaks with Jim Maguire, of Sustainable Development Capital (SDCL) about how companies in Asia are responding to the concept of cooling as a service, how the growth in demand for cooling will impact CO2 emissions, and the growing problem of refrigerant gases.
Anthony Dixon: Let’s talk about your business model. As an investor, SDCL’s provides the capital to enable companies to upgrade the energy efficiency of their equipment – lighting and cooling equipment, for example or to install energy generation equipment like rooftop solar. You own the equipment for say, 5 to 10 years, during which, you share the operational cost savings with the client. At the end of that period, ownership is transferred and the client benefits from 100% of the savings for the remaining life of the equipment. Is that a good summary?
Jim Maguire: Yes, although we have moved away from the shared savings model. In the early days of energy efficiency, energy savings performance contracting was the prevailing business model. What we’re doing now – and we think this is very much the future – is selling “cooling as a service” by owning and operating the equipment for a period, and then either selling the equipment or extending the service contracts.
Anthony Dixon: How do clients get comfortable with the idea of someone else owning their cooling equipment and the fact they don’t have direct control over it?
Jim Maguire: To be frank, it’s still hard work doing energy efficiency projects in Asia with this model, as many corporates in this region aren’t as comfortable with the notion of cooling as a service yet, compared to companies in the US or Europe. The point we try and convey is that because we own and operate the asset, all the risk is with us. If there’s a service interruption, we have an obligation to make that whole.
Our proposition as a business is that when it comes to energy efficiency, we want to understand how energy is produced and utilized throughout the system, i.e. the whole building. This is a much more valuable approach in the long term, even though cosmetically, it’s easier just to put panels on a roof and declare the building to be green.
One complicating factor with our approach is that it requires some interdisciplinary decision-making. Traditionally, decisions about building plant and equipment are made by facilities managers from a technical engineering perspective, whereas our value add is about improving the net operating income of an asset or reducing CO2 emissions – finance and sustainability issues rather than facilities.
So, we often see a disconnect; the finance people don’t always get as involved in the decisions as they should, and the facilities managers are not incentivised to think about upgrades if the equipment is still operating smoothly. Then there are sustainability people coming in with their perspective, and so the issue is – who’s got the ultimate decision-making authority? Issues like this tend to slow uptake.
How many schools do you know of in the region today, for example, that have a sustainability officer whose remit includes these kinds of decisions? Even among the large corporates in Asia, there’s only a select few that have a Chief Sustainability Officer, and those are the big ones with a pan-Asia footprint or a global footprint.
As far as achieving cooling and energy efficiency at scale in this part of the world, we have yet to hit our inflection point. Personally, I think it’s going to take a weather catastrophe that makes the tsunami in Japan or the floods in Thailand look like minor events. It may be a super typhoon that hits the Philippines or Hong Kong, or it may be the impact of sea level rise in Guangzhou or Jakarta, but only then are people really going to wake up to the fact that we need to move to a different approach in terms of the built environment.
Anthony Dixon: I think that is such an insightful point, this disconnect between facilities, sustainability and finance. Those three functions need to be well coordinated for good sustainability outcomes. You could say that a co-benefit of your business model is that it brings them all to the table.
Jim Maguire: Certainly! But challenges aside, the opportunity is enormous because the demand for cooling is growing rapidly. There’s been some great research done by the Kigali Cooling Efficiency Program (K-CEP) and the EIU (Economist Intelligence Unit) looking at the impact of this demand growth on emissions. In a warming world with an increasing percentage of the population living in cities, we can’t do without air conditioning. Between 2080 and the end of the century, India is forecast to have 181 days a year where the temperature is35 degrees Celsius or higher, and Indonesia is forecast to have 123 days each year where the temperature is above 35. So we’re in a bit of a perfect storm right now and we have to find a way to provide cooling in the most energy-efficient way possible.
Anthony Dixon: Indeed, certainly in light of the IEA’s estimation that energy consumption from AC’s will triple by 2050. You mentioned K-CEP – can you elaborate on what that is?
Jim Maguire: K-CEP (the Kigali Cooling Efficiency Program, recently renamed the ) is an NGO supporting the UN Environment Program to address the impact of cooling demand growth on global warming. The Kigali Amendment is a supplementary agreement to the 1987 Montreal Protocol. Whereas the Montreal Protocol was all about phasing out the use of ozone-depleting substances like CFCs, the Kigali Amendment, which was signed in 2016, addresses the issue of hydrofluorocarbons (HFCs) which are a class of refrigerants used in air conditioning, cold storage, and refrigeration. HFCs have a global warming potential (GWP) that is one to two thousand times worse than CO2. The objective of Kigali is to reduce the production and consumption of HFCs by 80%, by 2047.
Anthony Dixon: What about lighting? Lighting is probably 10% to 15% of a building’s energy consumption, while air conditioning in Asia is probably on average about two-thirds of it. The efficiency gain from replacing a T5 fluorescent tube with an LED might be of the order of 10%, whereas the efficiency gain from upgrading old air conditioning fleets, or chillers, to best available technology is potentially 20-30%. So, the real bang for the buck is clearly cooling efficiency improvements.
Jim Maguire: Yes, but having said that, we did a very large lighting efficiency upgrade for Banco Santander in all their buildings throughout the UK, so although lighting is not our main focus, it’s part and parcel of what we’re trying to do in energy efficiency.
Anthony Dixon. What about schools? At Metanoia we are seeing an increasing number of schools start to emphasize energy savings as a response to climate change, some already plan to become carbon neutral schools. Is this an interesting market opportunity for SDCL?
Jim Maguire. Well, there’s plenty of research that shows that if you improve the environment in the classroom, kids learn better. And upgrading air conditioning results in better filters and better indoor air quality in general. But SDCL typically invests in chillers rather than residential-type air conditioning units or so-called DX units.
Anthony Dixon: But schools have very large fleets of air conditioning units, and they are often quite old and therefore inefficient by today’s standards, and there are many schools in a city. So conceptually, you could aggregate dozens of schools to create sufficient scale to be of interest, no?
Jim Maguire: That’s an approach we’re looking at. We may end up aligning with the manufacturers to help us achieve the economies of scale we would need. There’s no doubt there’s a need for this and many benefits including improved indoor air quality and comfort levels in those schools which translates into a better and healthier learning experience.
Anthony Dixon: I’d like to come back to refrigerants which are another big co-benefit. The UN estimates that if HFCs are not phased out they could cause an increase of up to 0.4°C by 2100. If a school or company upgrades its air conditioning fleet to the best available technology, it can select models that use a refrigerant like R32, which has a much lower global warming impact than the refrigerants that are currently in circulation – like R410a, for example.
Jim Maguire: Absolutely. But remember – the impact of these refrigerants arises in two ways. First, during operation, they leak – slowly, but no matter how good your system is, they leak. The industry-wide leakage average rate is estimated to be around 3% per annum.
Second, when the cooling equipment reaches the end of its life and needs to be replaced, how is the waste management of the refrigerant handled? If it is simply being vented into the atmosphere, that is a disastrous situation because of the very high global warming impact these gases have. In Singapore and Hong Kong, anecdotally at least, we hear that many small-scale contractors are not properly disposing of the refrigerant in the units they’re replacing, they’re just venting them. This makes you wonder – what is the practise in the larger economies of Asia such as Indonesia? Or in the Philippines or Thailand? What about the combined impact of this in large cities with say 20 plus million people? And it’s a growing problem because of increasing urbanisation and the growing demand for air-conditioning in a warming world.
We need to ensure that we are properly managing this refrigerant waste, whether by incineration, or chemical conversion, which we think is the next iteration of technology improvement in this space. A statistic that we are hearing from K-CEP is that if the complete elimination of high-GWP HFCs had started in 2020, and if they were substituted with low-GWP HFCs, this would avoid an estimated 53 Gigatonnes of so-called F-gases between 2020-2060. If the Kigali Amendment is successful, that number is more likely to go up because more F-gases will be captured prior to incineration. Alternatively – in the worst-case scenario, people are going to continue venting.
If we can replace 600 plus air conditioner units at a school in Hong Kong with more efficient units and manage the waste refrigerant gas correctly and use a lower GWP refrigerant, that’s a big win. Those are the results you want.
Anthony Dixon: Agreed! Just to come back to that number 53 gigatons of avoided high-GWP HFCs gases, do you know the source of that?
Jim Maguire: It’s from Dr. Gabrielle Dreyfus, who was our technical adviser and Chief Scientist at the Institute for Governance and Sustainable Development.
Anthony Dixon: Got it, thanks. Through our work with schools, Metanoia has discovered that no one really knows what quantity of these gases are in circulation in the air conditioning systems that are currently in operation. Can you comment on companies who are offering responsible refrigerant waste management solutions?
Jim Maguire: To our knowledge, there’s only one Pan Asia waste manager in the refrigerant space, a Singapore-based company, called Vemac, which is headquartered out of Bristol in the UK. We have had a conversation with a gentleman who was looking at starting up an HFC waste management platform in Indonesia. When we asked him point-blank what his research shows on who’s doing it right now, he said he didn’t think it was being done, which was why he was trying to get into that business.
SDCL has had several discussions over six to nine months with a chemical conversion technology company out of the USA that has technology that is Montreal Protocol approved but is pre-commercial. We’re looking to help him commercialize because we feel that this is essential. I’d like to put a pilot chemical converter in Indonesia: the units are modular and relatively small. We understand from the press in Singapore that chemical conversion is not being done in Hong Kong and Singapore, which are the two, arguably, most developed economies in the region.
Anthony Dixon: Which suggests that it’s almost certainly not being done in the less developed economies. Given that these gases have significantly higher GWP than CO2, that’s a serious release of warming gases into the atmosphere. There most certainly is an urgent need to address HFC waste management.
Jim, I think we have to leave it there. Thanks for your time. It’s been an interesting conversation.
Jim Maguire: Thank you very much, Anthony.