You're listening to Redefining Energy. Your co hosts from Berlin Gerard Reid and from
London Laurent Segal. Today on Redefining Energy, we're going to talk about energy
efficiency. Yeah, John, and it's a very interesting one because I think
nobody talks about it and it's everywhere buildings, industrial transport, electrification, heat
pumps. Really, it's all over the place. But it's not something you
can see outside, you know, like a solar panel or a winter Buine.
It's not sexy. No, it is because look, you can say
to your neighbor, Look, I'm doing a bit for my environment. I've
got a solar panel, I've got an electric car. How about guess what,
Ln, I've got some insulation on my home. It doesn't sound the
same, right, I feel the same, but I know it's incredibly important.
First the word from our partner. E quit A Capital is a sustainable
investment company headquartered in Hamburg, Germany. E quit A Capital investment realists such
as clean energy, sustainable infrastructure, energy efficiency and growth private equity on behalf
of its clients. Yes, not only it's important, but it's important that
we adopt a business model where some infrastructure of funds intrust your specialists can apply
to some method that we are doing for say win and solar two energy efficiency
investment, and there are very few people who can do that. Yeah,
no, no, I can great totally on this. And a lot of
the projects and energy efficiency are small and they're not the same. It's not
like a wind turbine where has to be clear. A lot of them.
There's a small number of manufacturers and they're pretty standardized. Houses are not standardized.
They come from different generations and we're always improving and changing stuffing in them.
So it's difficult. Really, it's not that easy. That's why we
brought it. Jonathan Maxwell is the founding partner and CEO of a two billion
dollar phone called Sustainable Development Capital as DCL, and is one of the savviest
investors in energy efficiency. Yeah, that's great to have him on the shoulder
on. Let's bring him on. Jonathan, Welcome to the show. I'm
really happy to be here. Thank you both for inviting me on. Great
to have you. Well, let's jump right in. Let's talk about your
book, The Edge, And in fact, the Edge is an acronym which
is pretty phenomenal. An acronym for efficient and decentralized generation of energy. Oh
my god. Well, you know, people accused the energy efficiency sector of
being uncalled for many years, and so we're going to have to do something
about that. And I'm not saying calling it edge is going to make all
the difference, but I think it's a strategy. It's a different way of
thinking about the energy system. The acronym was partly to do that leron,
but it was also partly to do with the fact where the feature of energy
at the moment underlies climate for sure, and economies for sure, particularly Gerard
in Germany, but then where you were speaking from in the UK, where
we had a cost of living crisis because prices went up so much recently after
the Russian invasion of Ukraine. So it's about climate, it's about the economy,
but it's also about security, and it's about energy security, but it's
also about national security. And the edge also is the translation from Russian into
English of Ukraine, which literally means on the edge. Wow. Wow wow,
I didn't know that. Okay. The reason we wanted to do this
episode is because at Cup twenty eight everybody was talking about tripling honorables, yeah,
which is all good, But there was another part of the same sentence,
the second part doubling energy efficiency. And if I look at the last
IEE report, I see a pie of four hundred billion dollars a year of
energy efficiency, which is as big as the level of the upstreme investment into
oils. So what's your definition of energyfficiency? What's inside that four hundred billion
dollar pa your pie? First way I'll describe it, Laura, is that
why is the pie there in the first place? Like, what's going on?
If there's an opportunity in investing in solutions to energy efficiency, what's the
problem? So the problem must be inefficiency. So is the energy system inefficient?
And the answer to the question is actually staggering because it's so staggeringly inefficient.
Interult laughing. But one of the reasons I had to write the book
is it's difficult to make the following statement and then not unpack it. And
we're not going to have time to go to all of it today. But
about seventy percent seven zero percent of the prime re energy in the United States
is lost before it gets to the point of view, so about two thirds
of it in Europe. I mean, it's a staggering number when you think
that energy, as I said before, is defining climate is a key factor
for any economic business performance, and it's frankly driving sorry national security challenges around
the world geo politically. So what's going on is that can that possibly be
right? And in a nutshell, it happens in a series of very specific
areas along the value chain for energy, ten percent of energy primar energy gets
lost just extracting and converting energy into centralized energy networks. Oil, gas and
coals still eighty percent of the world's energy system, But the biggest part of
the energy loss in the system is actually to do with the fact that we
centralize energy generation. So for example, if you take a big combined cycle
gas turbine or open cycle gas turbine, about half of the energy turns into
electricity and the molecule that you put into this machine, thermodynamics limits the amount
of electricity that can be made out of a molecule. So what happens to
the rest of it, Well, the answer is, if you've built the
energy system very far away from the point of use, the rest of it
is heat that just gets dumped, and that actually the largest single loss in
the global energy system, which is heat losses, and then you lose another
ten percent getting it transmitted and distributed to the point of view. So this
is the world's biggest problem with inefficiency, which is the supply side, and
then there's a demand side problem as well, which is buildings, industry and
transport seventy percent of the world's energy, they typically weighs twenty thirty percent of
the energy they use. If that's the problem, what's the solution. And
that's what I've been investing in actually for the last fifteen years. I wrote
the book to make sure I'm on the right track, and I should spend
the next fifteen years doing the same thing. And you can solve these problems
by instead of building energy over here and it being used over there, build
energy much closer to or right at the point of use. We've got the
technology and the CEA systems to do that today, and that is a transformation.
That's the D and edge that's decentralized, and then once the energy gets
to the point of view. The E in edge efficiency is about reducing the
amount of energy that the building's industry and transport need in the first place.
Just don't have old lights HVAC, heating, ventilation, air conditioning, building
management systems, controls. Just get the right equipment in your buildings and industry
and that will make that will cut ten to thirty percent in some cases more
of the energy needed. And if that's the story, that's the size of
the cake. That's your number that you just quoted to me. Because the
energy system is worth unbelievable amounts of money and most of it being dumped,
and investing in the solution to that problem is even bigger, more valuable from
economic and carbon emission reduction perspective, even bigger and more valuable than adding more
energy into a broken system. I just wanted to take up on what you
said there in terms of solutions. I mean, for me, the obvious
actually is to electrify as much as you can of the system, because by
electrifying you're burning less fuels ultimately, And i'd be interesting here related to that.
Then, I think the advantage of electricity is that you can control it
easier, so it lends itself to digital technologies in and around us. So
I'd love to hear your pod on that for we sort of dig a little
bit deeper. Yeah, So, first of all, I will agree with
you. However, I would also say that we have a big job to
do, all of us investing, developing, or even making policy when it
comes to electricity. They're just to put it into context. And this is
another staggering number. Electricity is only twenty percent of the world's energy system today,
right, so to green the twenty percent before you get onto displacing fossil
fuels in the other eighty percent. And at the moment where it's working electricity,
about thirty three maybe forty percent of energy is green in the electricity sector
where it's working intermittance, it needs to be balanced as well. But to
get that number up even to one hundred percent of electricity is going to take
trillions and decades. Now, those trillions and decades will happen for sure.
For the last two decades with the world has invested six trillion dollars in renewable
power and three trillion dollars in grid upgrades. And you know, the trajectory
of those numbers continues, and we're going to see enormous trillions of capital invested
over the coming decades. But it's going to take time. Enormous amounts of
money and of course it's going to take a lot of planning, consenting and
grid infrastructure. So I think it's just about the reality, you know,
how long, how much, how many of the resources is it going to
take to get this done? And secondly, what do we do in the
meantime. So I don't think it's a what if in the sense of what
if we don't do it. I think the world will electrified, and it
should. But we need to be extremely honest with ourselves. And I think
this is really the wake up core. Yes, we to do that.
But at the same time, Gerard, we have to stop wasting two thirds
of the energy that's being generated in the first place. So it's not either
or, it's and And just to follow one question, and that is if
I take a step back and say, well, why are we building lots
of solar and wind, why are we building eves, etcetera. That I
can look at that and say it's sexy. I can show it to people.
I'm a politician, I can say look what I've done. Yeah,
it's very difficult to do that when energy efficiency that makes it a little bit
more difficult. Or how do you see that I would approach it in a
slightly different way. And by the way, there's there's a statement I made
in my book, which is that when I asked somebody years ago why energy
efficiency really wasn't the focus, he said, real men build power plants.
It's a perfect description, the kind of a bit of fashion. That's ourgynistic
quay of thinking about the energy sector. But it was probably the best explanation
I could give you. Actually, a lot of this solution I described in
terms where the problem is mean that you need to build power plants or energy
centers. Anyway, it's not just power, it's heat and the rest of
it. And energy efficiency includes on site generation because that's much more efficient supply.
So instead of getting the energy wasted before it gets to the point of
use, build the energy center, but build it at the point of use.
We've got in South Dublin one hundred megawat project coming out of the ground
to serve data centers in South Dublin that have no grid capacity, have high
carbon content if they are in the grid, and where energy costs a lot
of money, so that to me is sexy. Another great example in the
United States, in Indiana, we are a big energy provider to the Steel
industry, the so called hard to abate sectors. And in that case,
we've got two hundred and ninety eight megawatts of on site generation. Most of
that is being fueled just by the waste heat and gases coming off of the
steel mills. And to me, that's sexy. It's a big energy center.
And last point I'll make solar is sexy. Then we're probably the sexier
end of the solar market. So instead of building a solar panel in the
middle of a field, not nothing wrong with that, why not build it
on your rooftop, on the warehouse, on the data center, on the
school. So you know, we've got tens hundreds of mega lots of these
projects across the United States. And it's good business too. We've become one
of the top three or five commercial industrial, rooftop and carport delivery companies in
the United States. So these are sexy deals. Is it sexy to change
all the light bulbs with Santander across the whole country, cut the energy foot
print by fifty percent? I think? So. Is it sexy to put
chiller replacements in panasonic and manufacturing facilities around the world? I think so.
Beauties in the eye of the beholder Gerrard. But for me, this is
beautiful. Doesn't rely on regulations subsidy pumping more energy system into a place where
it's just going to leak back out again. Instead it's lower cost, lower
carbon, more reliable. It's pretty good, Jonathan, Thank you for those
examples. And and really I want to dig deep because your company is called
Sustainable Development Capital, and not only your financier of talent, but you really
have an industrial expertise. The question is you're going to have a certain number
of subsectors as you say, so, it's going to be probably low great
heat or data centers or on site generation. So is it bespoke an investment
or can you learn from what you've done and scale repeated? How do you
address investments? One thing I talk about christ a lot is the opereto principle
eighty twenty rule in business. Actually, eighty percent of the opportunity or the
market is in twenty percent of it. So you can be really quite focused
going into my point seventy percent of energies used in buildings, industry and transport
to start with, And if you then unpack each of those areas in industry,
it's really about ill cement, chemicals and plastics, and then within steel,
cement, chemicals and plastics, there's a limited number of mega players.
The technology solutions are repeatable. We're finding they're repeatable, so waste heat recovery,
waste gas recovery, and the steel industry or the cement industry, on
site generation in the chemicals systems. These are projects that we're implementing, proving,
commissioning, operating, and then we're able to go to customers and show
them based on to be fair at ten fifteen, the attract record the ability
to do it again. Data centers is a great example. Data centers are
one of the largest, fastest growing markets, and demand basis for energy are
hugely pressurized because how do you get it, what's the carbon content and what
does it cost you measurement data centers in medwats not square feet. What's the
solution, Gerard? The solution is building on site generation and reducing the amount
of power you need not just to run the racks themselves, but also to
cool them. So coming up with solutions to that problem and then to your
point, Laurent, it repeatable so you can proved clients that it can be
repeated time and time again. So you're right, we have an industrial capability.
We're not just an investment group. In fact, the way that we
make our investments first is to make them ourselves. We go out and we
talk to data center operators, hospitals, universities, industrial facilities, and we
designed solutions to those problems. But they are fundamentally repeatable. So back in
twenty fifteen we developed and invested in the project for Citygroups data Center. It
was a couple of mega wants. We did another one for them in New
York that was about ten megaants. Fast forward to twenty twenty four and we've
got a hundred megawats going up for one customer in Dublin. Fundamentally, it's
the same approach to the same problem with a similar solution. But you're absolutely
right. One of the characteristics of this market, which is why we've had
to develop a very specialist expertise, is that each location, each building does
have its own specific resource availability, specific channel. So while the basic blueprint
broadly is the same, the way that you apply this but the solutions in
each individual cases is actually quite bespoke. How much I said, do you
have under management right now? In total across all of our family of funds
and investment portfolios. It's about two and a half billion dollars. Wow,
So you own the kit? Do you sell what electrons, molecule, mega
jewels? I mean, what do you sell? What are your revenues and
coalatively fuel risk? In terms of market prices? You know how much can
you pass through? Please? Our projects take the form that would be very
recognizable to any mainstream infrastructure investor. We have a project agreement with a client,
let's call it a data center or a hospital. The project agreement says,
design, build, finance, own, operate, and maintain an energy
solution for us. The outcome of that solution will be, as you say,
Laurent, delivering some form of energy service. It's energy or infrastructure as
a service. So it's power, it's heat, it's light, it's cooling,
but as a service, and under that contract, the client pays for
that service as long as the key performance indications are being met, is it
available, is it efficient? If it's light, are they shining brightly enough
for the right temperature? And so on. So that's kind of the project
agreement. We have a project company to own the project agreement, and then
we have contracts in place with construction and operational firms to build and then subsequently
to operate that system, and we have appropriate arrangements in place to make sure
that it is available for use in order to meet the project agreement specifications with
the client. So it's very similar actually to the project finance or infrastructure project
investment techniques that have been employed for the last decades. That was my heritage.
I came from a very large club infrastructure fund. That's what we've been
doing really in the energy efficiency sector, which is simplifying the contractual approach,
making it consistent with what capital markets expect to see when they make investments in
projects. For the customer's perspective though, Lauren, this is kind of where
we've been able to industrialize this. To make your point, when a client,
a customer works with us, like a hospital, a data center,
a steel mill, they're facing off against the company that's delivering a solution to
them as far as they're concerned, will design, will develop, will deliver
a project, and then they pay for that project as a service, provided
it's working over a contracting period, and the price that they pay for that
project should be cheaper than the grid lower carbon the grid and more reliable than
the grid. Well, I presume you must have been a really see period
in terms of growth phase going forward. And the reason I say that is
just because of the whole Ukrainian crisis. Yeah, and the impact that it's
had in Europe. So maybe talk a little bit about that and what would
impact that's had on your business and how you see it going forward. As
I said at the beginning, there are kind of three key features to this.
It's security, as climate, and it's the economy. Basically all three
of those factors are flashing green or red lights, depending on you want to
look at it for this sector. If we start with the security point a,
Europe really didn't talk about energy security until about February twenty twenty two when
Russia invaded Ukraine. But in fact they did, they'd just forgotten about it
if you remember when last invaded Ukraine or so to speak, annexed Crimea.
Actually the European Commission at that point in twenty fourteen said for every unit of
natural gas we don't use is two and a half units we don't need to
buy from Russia. So there was an element of that and it led onto
a policy in Europe that was mumbled for a number of years but became very
serious only a year and a half ago, which was energy efficiency first.
That's where that came from. But think up until that point February twenty two,
energy security just wasn't on the radarsk But it took catastrophic geopolitical event in
order for that to really force change, and it really has force change for
ever we are only six months later. The European Commission mandated reductions in gas
use by fifteen percent electricity use by five percent, not by twenty thirty like
we have here in the UK, but immediately. By the way, security
is really what's driven as in America too, it's just that not because of
invasion, it's hard to invade America, but because of the weather. So
you've had very serious natural disaster risk and events over the course of the last
ten twenty years that have really forced a lot of change, and you've seen
energy decentralized, so instead of people getting knocked off the grid like happened to
New York in twenty twelve for Super Song Sandy, or have we seen so
often in superstorms or natural disasters hurricanes over the course of the last three years,
Texas, Louisiana, Florida, America instead started to decentralize energy and people
wanted to put energy closer to the point of use, not just because of
the lower carbon, lower cost aspects, just because if the grid went down
they didn't. So it's security is really driving this now and we're seeing it
in Asia as well as in Europe. That's not going away. I don't
think we're going back to pre twenty twenty two geo political framework. So you're
right, availability and security is a big driver of this policy business and thefore
our business. The second is carbon. What I can tell you is when
I started Sustainable Development Capital, I was able to buy the name to start
with, so nobody was really looking at sustainable development investment in the same scale.
When I started the business in two thousand and six seven, we didn't
have iPhones. It was a slightly different world, right, But now carbon
really matters, especially in the last three to five years, if governments have
been going backwards and forwards on it. My observation is corporates are very serious
about decarbonization. You know, they may be slightly nervous about talking about it
because of greenwash, accusations today, so there's kind of a green hash movement
now. But my direct experience of working with corporates is that they've made public
commitments to decarbonize and therefore they have to try and find a way to do
it. An energy efficiency is the lowest cost, fastest, greenest way to
get there. And then the last point is on cost, and this is
something that is not a fashion item. It's always around and that is if
energy costs can be mitigated or eliminated, then that's good business. And you
asked about the Russian invasion of Ukraine. We all remember when natural gas prices
in Europe went up six times, and we also know the catastrophic impact that
the availability and price of natural gas has had on industry across Europe. Price
matters a lot in the data center market and other areas, and it's because
of that that energy efficiency comes to the fore because if you can cut your
cost and do the same job, or even do a better job, that's
what efficiency is about. So maybe just to conclude there, maybe you can
talk a little bit about how you see the next three to five years with
STCL. The last three to five years we've grown a lot. Actually and
we've got a large listed investment company on the London Stock it's change called CEA
at the SECR Energy Efficiency in Come Trust. It's got to work about one
and a half billion pounds of assets in it. We launched a new private
fund back at the end of last year which is investing already in development and
construction of projects. We've also started a small but what we hope is going
to be a fast growing private equity platform here at STCL. So most of
our investments have been the overwhelming majority of our investments so far have been in
infrastructure projects. But by building that capability and portfolio, we've also started to
see where there are technologies and companies coming through that are going to make a
big difference. So if you can provide high temperature process heat and store it,
if you can provide rare earth motors, if you can cool data centers
without using so much energy and water, then those are the types of companies
we get very excited about. We've started to make some investments through our public
companies see it, but that is an area that we really want to grow
out. In terms of our private equity capabilities, we see much bigger scale
happening now to your point about the drivers of change in our sector security,
cost and carbon in Europe and North America, but there are also some other
markets where we see huge growth opportunities, like other geographies like Asia. I'm
excited about the next three to five years. The biggest problem in the energy
system is that most of it's wasted. We can do something about it,
and that's what we intend to do. Well. Johnath Dan, thank you
very much for this speak panorama of a sector which is huge but not talked
about enough. And that's one of the reasons we've brought you on the show.
And itwas a very pleasant, very very informative job. Jonathan, very
informed. Thanks for coming on the show. Laurent Gerra, thank you so
much for having me on job. Actually I'm going to start aron, what
do you think? What's your conclusions and reflections? Well, first reflection,
Janatan speaks much better English than the tw of us. We're gott have to
take over the show from us. He's smart. I think it's smarter than
we are. Second, is a very pretty man. I'm in love with
him. Okay, let's put it this way, but it's very no Actually,
what you what you're saying is incredibly articulous. Yeah, in terms of
his ability to actually and he actually does he you know, to make sexy
a difficult topic and to make it accessible to a much broader audience. Absolutely
brilliant. He is trying to crack the code of scaleability. This is what
professor or Benfleiberg in How Big Things Get Done or Our Book of the Year
and everybody's Book of the Year, has proven that the success in any industrial
sector is scalability. And the fact that he's trying to replicate the fact that
he's using the same contract, the fact that he's even starting his vertical integration
with p Funds where he's going to invest in certain of his suppliers, I
think that's absolutely brilliant. I agree with you. It's badly needed because as
I said, it is energy efficiency. You can finance it, but it's
hugely, very expensive to finance that type of project, and that's obviously you
know, it makes that projects on economic is a great pioneer. I would,
in fact, I would like other people to imitate Team because what he's
doing it is this year is really brilliant. And let's face it, we
need capital for energy efficiency it's a tough one one and we're very grateful to
Jenaton to drag the code and liston. As we go back to the McKinsey
carbon debatement carve many years ago, we're talking about the mega wark rather than
the megawat right. It's much easier to say that extra unit of energy than
it is to build another unit of energy, and it's also cheaper, so
we do need to focus, focus, focus on it. And you look
at any of the road maps going forward, whether it's the IA or any
of these NGOs, energy efficiency is critical good. We like to congratulate Jonathan
for everything he's doing. We thank Aquila Capital, who's that back. Thank
you guys, good to have you back, and John I talk to you
next week, look forward to Thank you for listening to Redefining Energy. Don't
forget to read the show and subscribe on Apple Podcast, Spotify, or the
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