A Look at the Energy Efficiency Opportunity

The subject of energy efficiency received scant media attention at COP26, although significantly, it featured in the text of the final agreement – a first in the history of the climate talks.

Yet, it has been called the “first fuel” by IEA Executive Director Fatih Birol.  And Amory Lovins of the Rocky Mountain Institute points out that “Saved energy is already the world’s largest source of energy services – bigger than oil.  (i.e. reductions in global energy intensity between 1990 and 2016 resulted in more saved more energy in 2016 than the world’s consumption of oil in 2016”.

Lovins argues that “most deployers of energy efficiency see and exploit only a modest fraction of the worthwhile efficiency resource, saving less and paying more than they should.” This is because we tend to think about energy efficiency in terms of parts (isolated pieces of equipment) rather than whole systems (buildings, for example) and we mistakenly assume it is a dwindling resource with increasing cost.

These two points have important applicability for schools everywhere – energy efficiency represents a major (and mostly untapped) opportunity for cost and carbon savings. But rather than focusing on (for example) lighting or air conditioning systems separately, a whole systems approach will yield the biggest returns.

Energy efficiency investment is the focus of Sustainable Development Capital Limited (SDCL)’s business. Anthony Dixon, Metanoia’s founder, spoke recently with Jim Maguire, a partner and Managing Director at SDCL, about the energy efficiency opportunity in Asia.  Jim was in Edinburgh in October for COP-related side-meetings.

This article, the first of two, focuses on SDCL’s business model, the outcomes of COP26 with regards to energy efficiency, and the use of IoT to monitor a building’s performance.

Anthony Dixon: Jim, tell us a little bit about SDCL’s business.

Jim Maguire: SDCL is a London based private investment management firm, which invests primarily in energy efficiency projects and distributed generation. We invest globally, apart from Latin America, and have a London Stock Exchange listed platform, called SDCL Energy Efficiency Income Trust or SEEIT, which is now part of the FTSE 250, additionally, we’ve recently raised the Green Energy Solutions Fund (“GESF”) in Ireland. We focus on renewable energy projects in Europe and the US and, apart from SEIT and GESF, we have just IPO-ed a Special Acquisition Company (“SPAC”) in the US, which is entirely focused on investment in sustainable infrastructure, both green-field, and also looking at mergers and acquisitions, and/or investment into operating businesses.

Anthony Dixon: Can you give us a description of your business model?

Jim Maguire: We’re an investor, we’re not an energy services company or an engineering procurement construction contractor, we’re an investor in cooling and energy efficiency assets and distributed generation projects.

Anthony Dixon: What is the distinction you make between an energy service company and an investor in the asset?

Jim Maguire: An energy services company would be a party in the value chain, which is conducting an investment-grade audit, they’re doing the baseline studies, they’re working with the technical staff or the facilities manager, to understand how the energy is utilized in that asset. We partner with that energy services company, or if needed, to bring in an EPC Contractor and we finance the asset. We own and operate the equipment which is providing the air conditioning equipment for example or the energy to that asset. Across the spectrum, we’re an investor. In some projects, we’ve got solar energy on rooftops, and we are looking at utility-scale increasingly because we want not only to be in on efficiency, which is about energy utilization, but also on the generation piece, but in a much more efficient way. We’re not a big utility, not a CLP in a Hong Kong context.

Anthony Dixon: Thanks for that introduction. I wanted to start out by asking for your take on Glasgow – were you there for the whole of COP26, and what was the tone of the event in your mind?

Jim Maguire: SDCL and a global consulting engineering firm called Mott MacDonald co-sponsored a ‘side-event’, but we were in Edinburgh, not Glasgow. At COPs, there is the main event, which is the governmental negotiation, then in and around the negotiations are a series of side events. Our event was focused on the built environment and urbanisation of cities, a sort of local lens into the issue of decarbonisation and climate change, and the tone was fantastic! A couple of the key messages that came out of Glasgow were very much in line with what we, as a firm, are looking to do in the areas of distributed generation and energy efficiency.

One point I’d highlight was the International Energy Agency’s (IEA) statistic that 40% of global emissions are derived from the built environment. If we don’t get the built environment correct, even with all the wind farms, solar farms, and battery storage, we’re not going to get to where we want to be or where we hope to be. There was certainly a lot of positive energy, no pun intended, about now being the time for energy efficiency investors.

The second point I’d highlight is that for the first time in the history of COP, the concluding document referenced energy efficiency. To put it into cricketing terms, going one for 26 is not necessarily where you want to be, but it’s better than going zero for 26. From our perspective, there isn’t a question mark around energy efficiency being part of the value proposition in achieving a decarbonized world. It’s fundamental.

Anthony Dixon: I find it very encouraging, but I also find it astonishing that this is the first time that energy efficiency has featured. The voices haven’t exactly been silent on it. The Rocky Mountain Institute (RMI) for example, has been advocating for a long time that energy efficiency is the cheapest form of energy – what you save you don’t have to generate. I was also surprised to learn that this was the first time “fossil fuels” got mentioned in the text. It’s 30 years since Rio, so it’s hard to fathom that the one of the main reasons for the climate talks, has never appeared in writing until now.

Jim Maguire: One other thing I’d like to mention: you see pieces written in The Guardian and elsewhere saying that COP 26 was too much about capital and about banks and private equity, and the need for solutions to come from capital providers. Perhaps what you’re seeing is that there’s a slight change in the weather in terms of who’s a stakeholder in the narrative. Obviously, without capital, we’re not going to get to where we need to be. But if we look at how the public balance sheet is impacted by extreme weather, it’s a dismal situation, so we do need private capital. I’m not suggesting that the only solution is private capital. But I do firmly believe that the public and the private sector must work together on this, otherwise, we’re not going to get to where we want to be.

Anthony Dixon: Agreed. So, with regards to COP, obviously the big headline decisions got a lot of press, but there were several almost equally significant wins that perhaps didn’t get as much press. Can you comment a little bit on what some of those are?

Jim Maguire: I think you’re referring to the deforestation issues or biodiversity, etc. Not to sound too laser-focused, it’s all good and necessary, but from SDCL’s perspective, our reason for sponsoring and working through that side of COP with Mott MacDonald was very much to try and get this issue of energy efficiency into the spotlight. One of the sidebars for us, particularly in this part of the world, is cooling efficiency. The ratification of the Kigali Amendment [to the Montreal Protocol] in 2019 recognised that hydrofluorocarbons (HFCs), the refrigerants that are now commonly used in refrigeration and air conditioning, have global warming potentials that are thousands of times greater than CO₂. We have been using this issue to try to raise the profile of energy efficiency in the built environment; how do we move that discussion more to the front of what people think about when they think of climate change?

Anthony Dixon: Why is it now, in 2021 that energy efficiency has risen to the level of warranting a mention in the text of the COP agreement?

Jim Maguire: One reason is the data. The IEA refer to energy efficiency as the “first fuel”. I think people are realizing that this 40% number is important. If we take the statistic that 70% of the world will be living in an urban environment by 2050, this greater concentration of people living together on a warming planet means that about four and a half billion more air conditioning units are going to be purchased in the next 10 or 15 years, I think, is the IEA study. Once we emerge from the pandemic, and GDP growth comes back, we’ll hopefully have more disposable income in people’s pockets, thus more people purchasing air conditioners. Then, on the other side of the equation, the IoT (internet of things), and more broadly, ICT (information and communication technologies) – where’s that going? A 2017 study found that by 2025 ICT will be the fourth largest consumer of electricity, after China, the US, and India.

Anthony Dixon: It’s ironic that people are promoting the use of IoT and smart energy management in buildings to save energy, yet, what you just said implies that all these sensors around the world that are monitoring the energy and storing the data are consuming an enormous amount of energy at the same time. I don’t know what the math is between the savings and the energy cost, but it strikes me that the savings are often not quite as impressive as people claim; you can have a lot of sensors in a building, but it doesn’t necessarily mean you’re going to use less energy.

Jim Maguire: Yeah, agreed. I don’t know what that trade-off is. Certainly, if you’re putting in sensors and you’re monitoring a building, and you’re slicing and dicing that data at a workstation that could be on the other side of the world, as is increasingly happening, the demand requirements will grow, which highlights the need for more efficient and better renewable energy sources. But the one aspect that needs to be reinforced, is that today, a building owner/operator can understand the performance of that building, in a way that 15 years ago, they simply couldn’t. Dr. Nils Koch, who is one of the co-founders of GRESB, did ground-breaking research in the US and Canada which looked at the performance of buildings that had gone through an energy efficiency retrofit versus those that hadn’t. He found that if you and I both have a building on the same street, and I do a retrofit, but you don’t, my leasing terms are going to be better, my occupancy rates are going to be higher, and my capital valuation at point of resale will be higher. Then, incorporated into that, I’m monitoring the performance of that building, so I can see how well my asset is performing. Also, I now have a safer building because I’m monitoring for leak detection, humidity, vibration, etc. If I have an air handling unit which is flapping, it will show up on the facilities manager’s monitor, and he can notify the guy on-site before it causes a spark and a fire, or before it simply breaks down, and must be replaced. Understanding how a building operates is a fundamental part of owning and operating assets.

Anthony Dixon: One aspect of this is that if you own equipment, you want to make sure it’s operating in an optimal fashion. Part of that is about energy saving – turning it off when it’s not needed, for example. But part of it is about outdated equipment that is suboptimal from an efficiency point of view. Many of our clients – schools – well, their AC equipment may be 10 years old, and the efficiency standards from 10 years ago, are very different to what they are today. So there are large fleets of air conditioning units all around the region that are consuming a lot more energy than is necessary. What’s your experience been with this?

Jim Maguire: You’re hitting the nail on the head. I think a lot of it is this issue of CAPEX and OPEX, and the allocation priorities of a school or of a building manager or owner, in terms of the equipment that he’s got in the building. I would argue that energy efficiency, or cooling and energy efficiency, is just another name for industrial upgrading. Some people’s philosophy is to simply run their asset into the ground. However, it’s the asset owners who understand that upgrading, whether that is CAPEX out of their own budgets, or using a third party such as SDCL, upgrading that chiller, or air conditioning units, means those savings are absolutely net to their bottom line. They’re getting the best available technology, and they’re able to run and operate their asset in a much more financially advantageous way.

Anthony Dixon: So apart from improvements in the energy efficiency of cooling and air conditioners, what other aspects of energy efficiency have you looked at financing or have you financed?

Jim Maguire: The best example is an acquisition we just made in the United States called Red Rochester. It is the old Eastman Kodak industrial estate. We have 104 clients to whom we provide utility services, such as electricity and air conditioning, cooling air, demineralized water, and so on. We are not just doing electricity; we’ll work with the client to address the energy management needs that they’ve got. In Ireland, we’ve got a client, who is focused on water energy efficiency and purifying water, and we followed that client into a project in China in 2019. Wherever assets can generate in a more efficient way or can contribute to the generation of electricity or any other utility service in a more efficient way, we’ll look at it.

Anthony Dixon: In the context of schools, this equates to potential for financing to be brought to equipment upgrades, mostly air conditioning units and potentially lighting fixtures. What types of savings do you think are possible when upgrading air conditioners from five- or 10-year-old fleets to the best available technology today?

Jim Maguire: In the case study that we’ve been looking at in Hong Kong, the savings are massive, and I don’t use the term lightly. They may be upwards of 40%.  We have to be looking more astutely at when to upgrade physical plants and the value that brings to the use of energy.  The alternative is your air conditioners run for 20 years until they fall apart – nobody wants that.

Anthony Dixon: Have you financed air conditioning system upgrades or chiller upgrades in the Asia region?

Jim Maguire: We’ve done chillers, – seven projects, six projects in operation in Singapore with one in installation right now. Those are all large compressors and chillers. In terms of air conditioning units, we’re looking solely at what might be the first project right now in Hong Kong.

Anthony Dixon: What about lighting efficiency upgrades?

Jim Maguire: Lighting efficiency upgrades have been financed mostly in Europe. We have the Banco Santander lighting project in the UK which is a massive replacement project. There are some others too, primarily in the UK. In the Asia region, we’ve not looked at financing lighting upgrades yet.

Anthony Dixon: Replacing old light fixtures with state-of-the-art LEDs – what’s the typical payback that you would see on that?

Jim Maguire: We haven’t looked at it in Asia, so I can’t give you an Asian reference.

Anthony Dixon: Okay, what about for chiller upgrades? What’s a typical payback period?

Jim Maguire: Five to seven years, in that range. We will go longer if we need to, but it’s right in that five to seven.

This brings us to the end of the first part of this interview. In the second part, Anthony and Jim dive deeper into the SDCL business model, discuss the need for closer collaboration between building managers, sustainability officers and finance teams, and discuss regulation of the disposal of refrigerant gases.