Congratulations to the team behind the launch of the SDCL (Sustainable Development Capital) Energy Efficiency Income (SEEIT) which has just listed on the LSE after raising an impressive £100m. This is a very unique fund exclusively in the energy efficiency sector and SEEIT will target a total return of 7-8 per cent. per annum with a targeted initial dividend yield of 5.0 per cent. Based on the initial offer price, rising to 5.5 percent. in the year ending 31 March 2021 and a growing yield thereafter.
The seed portfolio consists of nine Energy Efficiency Projects valued at c.£57m, and three contracted investment commitments with identified counterparties totaling c.£30m, which have not yet been drawn down. The assets include Combined Cooling/Heating and Power Plants (“CCHP”) at a Citi data center and St Bartholomew’s Hospital in London, as well as LED lighting projects for hundreds of Santander properties and over 100 NCP car parks in the UK. SDCL was founded by John Maxwell in 2007 and has a team of 23 employees, including 15 investment professionals. Chairman of the fund is HICL pioneer Tony Roper.
Digging around inside the main investor presentation one set of facts really stood out for this observer – according to SDCL “we may only need 25% of the energy we use. Current energy usage is characterized by inefficiency and wastage, with up to 75% of original energy resources lost in generation, transmission & distribution”.
Two technologies stand out for achieving more efficient energy usage. The first is the good old LED light. The IEA apparently predicts that by 2020, implementation of energy efficient lighting will reach 61%, from 35% in 2017.
The other key technology is CHP – I’ve included an excellent primer on this often-ignored segment of the market from a recent Edison report (see box below). According to SDCL again, “Global installed capacity is set to increase to 972GW by 2025 from 437GW in 2006. This reflects a market size of $26 billion, an increase of $5 billion. Installed capacity in the UK currently stands at 5.7GW, across 2,182 businesses, with an additional 4.0GW expected by 2025”.
So how does the strategy work in practice?
The fund highlights two projects as an example. The first is with LED lighting for bank Santander, designed to improve UK branch and office lighting, reduce energy costs and lower its carbon emissions. The solution consisted of a “complete lighting solution across 791 branches, with lighting, building management and heating, ventilation
and air conditioning (HVAC) solutions across 14 offices”. This meant installing over 9000 LEDs from 2015 working with GE Lighting. In total, the deal was worth £17.5m and is contracted to last for 10 years with a 5% escalation every year.
Turning to CHP, one big project comprises a Combined Cooling and Power solution at a data centre. In 2014, SDCL installed two brand new 1.4 mw GE CCP engines, in a deal worth £5.3m plus leverage. And revenues for this project? These consisted of a “service charge payable by the Host calculated as a fee per MWh of electricity generated by the CCP solution”.
As for the aggregate portfolio of 12 projects, 62% have visibility of revenues 10 years or more, with lighting accounting for 27% of the mix, CHP 27% and gas boilers 19%. One last thing caught my eye – coming down the line is the potential for £120m of cogeneration assets with capacity upto 300MW in Southern Europe.
|Edison Research on CHP: The basics
What place does CHP have in a renewable landscape?
CHP’s renewable credentials are clearly established. For every one kWh of electricity the average gas power plant produces, it ejects 0.5kg of carbon dioxide, but generates around 1.5kWh of thermal waste. Although not all thermal waste is recoverable, using cogeneration to reduce energy loss mitigates the carbon burden of CO2plants.
Following on from this, biogas CHP is even more environmentally beneficial, powered by the products of landfills, sewage gases or syngas produced from consumer waste, and creating carbon-neutral power through recycled materials.
It is only more recently that CHP has been seen as a solution to renewables intermittency issues, a product of fluctuating solar and wind output in unfavourable weather conditions. The move may cement CHP’s place in the renewable market as a backup to CO2-heavy generators. That said, batteries are likely to take some of this market, driven by what Morgan Stanley predicts will be a 42% decrease in price over the next few years. However, the long-term viability of either method of back-up generation has yet to be fully realised.
Hydrogen, as a renewable method of CHP power, has also seen some interest of late, especially given its potential for closed generation cycles. This means that surplus electricity generated from renewable sources can be used to produce hydrogen through electrolysis, which is then fed back into a CHP plant that has been modified to run off hydrogen.
For example, 2G Energy is providing a CHP system that will be fuelled by hydrogen produced by a power-to-gas-system at the port of Hassfurt, which uses surplus electricity generated by a nearby wind park for the electrolysis of the water. The CHP system will supply power to the city’s electricity grid and heat to a neighbouring malt factory, school and kindergarten.
Which companies are involved in the CHP market?
The US Environmental Protection Agency lists 417 partners for combined heat and power. Siemens is one of the largest companies on the list and recently won a contract to modernise a 260MWh combined gas-fired power plant in the UK.
Veolia, a leader in environmental water, waste and energy management, is also active. The company recently delivered a CHP generator that will provide energy to 888 homes in London, cutting emissions by 556 tonnes of CO2.
Following its recent struggles, General Electric sold its distributed power business, including CHP company GE Jenbacher, to Advent International for $3.25bn. Under the deal, Advent acquires the rights to Jenbacher engines and its manufacturing sites in Austria, Canada and the US.
Jenbacher has a particularly strong presence in Germany, where it retained 222,058kW of installed capacity in 2015. Jenbacher is followed by global CHP equipment providers Caterpillar (116,039kW) and 2G Energy (75,771kW) in the German market.
You can read the whole report online HERE.