Q&A – SEEIT: The nerds of Net Zero

The efficient generation of renewable energy, in most cases, is no longer the problem. We are yet to meaningfully address the not-so-insignificant issue of energy wastage. An analysis by the International Energy Agency (IEA) concluded that around 66% of global energy production is wasted, most of it during the transmission process.

Do projects with nameplate capacity in hundreds of megawatts, occupying the equivalent area of hundreds of football pitches put together – to borrow from British tabloid parlance – make financial sense if more than half the energy generated does not serve any purpose?

Can we reach our net-zero targets without addressing the issue of energy waste, and why isn't more being done to reduce said waste even when doing so can save money?

To answer these questions, inspiratia sat down with the managing director of SDCL Energy Efficiency Income Trust (SEEIT), Purvi Sapre. SEEIT is one of the early movers in the energy efficiency space, and it has a track record of implementing and operating these subsidy-free projects on both sides of the Atlantic.

What is SEEIT?

We are a listed investor; some would say the first of its kind, given our sole focus on energy efficiency.

The company went public in 2018 and is dedicated, exclusively, to investing in energy efficiency. We are certainly not the only ones in this space, but we were the first to make energy efficiency our core mandate.

What do you mean by "energy efficiency"?

We are trying to solve a problem. Nearly 70% of the energy that is generated around the world is wasted. This is from the point that energy is extracted to the point of end-use. Most people are aware of energy loss, be it from poor insulation to wastage arising from inefficient heating and cooling systems, what is less known is the extent of this loss.

This can be a major hindrance for any country trying to reach net zero.

To use an analogy, take a bucket which is filled with all the energy we use. The problem currently is that the bucket has a massive hole at the bottom. We are constantly trying to top up the bucket, lately with renewables generation, but losses are making our efforts inefficient.

We can build all the offshore wind farms and any other renewable energy generator you can think of, but we need to simultaneously address energy efficiency. We wouldn't need to build so much solar if it wasn't for the energy losses incurred.

What is the company's mandate?

We split our strategy into two broad categories. The first is what we call demand reduction.

An example of this is minimising energy losses in a building, which can be achieved through what we sarcastically refer to as "sexy infrastructure projects". This can be anything from installing LED lights and efficient air conditioning to insulation. It may not be as aesthetic as a big offshore wind farm, but it makes a massive difference.

One of the first investments SEEIT made was replacing around 90,000 lightbulbs in Santander's UK bank branches.

The second investment category for us is energy generation, which is in close proximity to the end user. This mostly includes on-site generation, such as rooftop solar and combined heat and power (CHP) plants, which helps reduce the waste that occurs during the transmission and distribution of electricity.

For instance, we developed and currently operate the energy system that powers St Bartholomew's Hospital in London.

In the US, we own a dedicated rooftop solar developer, Onyx, which is expanding quite rapidly. It is a testament to the demand for this asset class. Through Onyx we can guarantee clients sustainable energy supply for a decade or more. The power purchase contracts, however, does not meet the entirety of the energy consumption, but it covers a portion of it.

How does this generate revenue for SEEIT?

It is not entirely different from how you generate revenue from a traditional infrastructure asset. We own the energy efficiently asset; in Santander's case, it's the lightbulbs. We are in charge of installing and maintaining them and, in turn, Santander pays us a fixed fee out of the savings it makes on its energy bill. From the client's perspective, we've de-risked this investment for them and removed the hassle of maintaining it or fixing it if something were to go wrong. All they have to do is pay a "service charge" for the length of the contract which, for us, is usually around 15 years.

Who initiates this conversation? Is it the client?

It goes both ways. When we first embarked on this strategy, we approached the client. We spoke to corporates, data centres, and essentially anyone that was a major energy user. However, as we have established ourselves in this space, we now have clients coming to us with their specific requirements and SEEIT will develop and deploy a system or an asset that best suits the client's needs.

For example, for some clients we would look at lighting plus on-site generation, but this will differ among clients who will have different energy needs, circumstances and so on. We are a solutions provider; we don't stick to a single technology or a single solution. We go with whatever is best for the customer.

What about technology risk? Does SEEIT stick to tried and tested methods, or would you dabble in newer models if they fit within the client requirements?

SEEIT doesn't take technology risk. In the near term, we are focused on rolling out the more tried and tested systems as there is still a large part of the market that remains underserved. Take the NHS in the UK as an example. Many of its hospitals still do not use energy-efficient lighting.

Having said that, the size of our tool bag has increased over the years. Renewables as a whole is a relatively nascent sector, and the market is still in the process of testing new forms of generation to meet our needs. SEEIT is open to incorporating new technologies into its portfolio if and when there is a proven business case.

We also keep a very close eye on emerging technologies. Three years ago, we secured shareholder approval which allowed us to invest up to 3% of our fund size into growth equity, that is, companies developing new technologies. We are currently invested in a company called Iceotope, which is working to develop liquid precision cooling solutions for data centres.

Iceotope's liquid precision cooling technology is intended to replace air cooling. Although air cooling is the current industry standard, this system is slowly becoming inefficient as the processing capacity of data centres increases, which results in more heat being generated. There is, subsequently, a need for a stronger cooling system, and this is where Iceotope fits in. Right now, the tech is in the concept phase, but when Iceotope cracks the code for commercial application, we will be one of the first to adopt it at our facilities.

SEEIT operates on both sides of the Atlantic. Where do you see more opportunities for the company?

Around 66% of our capital is invested in the US. This is mainly due to the size of the country as well as the prevalence and demand for cogeneration and on-site generation.

Due to the way the UK's and even Europe's grids are structured, we are still very much focused on utility-scale generation in these regions, but this is slowly changing. Slower than we would like, but the momentum is there.

The Americans adopted an energy efficiency agenda far quicker than other countries, not because they were trying to save the world but because they wanted to save money. When we look at on-site generation, small projects in the US are considered to be around 50MW, whereas a 10MW system is classed as a large project in the UK. However, ensuring that these projects benefit the end user and are commercially viable remains our overall objective, and we continue to see great opportunities in the UK, Europe and the US.

Do you think a policy push will grease the wheels in the UK and Europe?

We already have some policy incentives to encourage the adoption of energy efficiency, but the implementation of said policy has not always been straightforward. The ownership structure of businesses also plays a very big role. In general, private equity and corporate businesses are more likely to implement energy efficiency measures in a bid to save money.

SEEIT's business case does not rely on government intervention to make it work. We can and have made energy efficiency profitable without the use of subsidies and grants. What we do need, however, is a change in attitude towards the sector and wider awareness of the benefits.

Finally, what is the commercial lenders' attitude towards energy efficiency projects?

It varies quite a bit as different lenders have different metrics by which they assess the risk profile of a project. Let's take energy efficiency for NHS Trust. Some may view this as a safe investment as NHS Trust is unlikely to collapse, but other lenders may have the opposite view if they were to look at the organisation from a pure balance sheet perspective. And for others, it comes down to scale. Some lenders will not come in on a ticket that is smaller than £10 million.

As a fund, we have not had any issues attracting commercial lenders on any of our investments, but ultimately, we are committed to a prudent approach to gearing across all of our projects. The recent improvement in financing for two of our US assets, Primary Energy and Onyx, is testament to that approach and the positive work being undertaken by SEEIT's asset management team.