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SDCL has first mover advantage as energy efficiency becomes mainstream

"A far bigger bang for buck can come from energy efficiency."

data centre
CHP can be neat solution to data centre power needs believes SDCL's manager

How to meet the electricity demands of a data-driven, ‘cloud-based’ economy is a problem facing many developed countries.

Wind and solar power are growing fast and doing their bit as a source of green energy but they are not the only alternative.

Jonathan Maxwell, chief executive of Sustainable Development Capital, believes a far bigger bang for buck can come from energy efficiency.

WATCH: Energy efficiency's time is here says manager of SDCL, London's first dedicated trust

Maxwell is the manager of  SDCL Energy Efficiency Income Trust PLC  (LON:SEIT), the UK’s first listed trust to specialise in combined heat and power (CHP) and rooftop solar projects.

From a carbon efficiency perspective they work just as well or even better than renewables, he says.

Moreover, being on-site they offer the additional benefit of reliability and security at a time when electricity usage is growing and the grids in many countries is under increasing pressure.

For example, from almost a standing start, data centres alone are forecast to account for more than 5% of the world’s electricity usage by 2023.

That is a huge increase in power - more than all the electronic devices in the world currently in fact.

Energy efficiency projects can play a significant part meeting this demand, says Maxwell.

The technology has developed hugely over the past ten years, he says, and now offers a real alternative to buying power from the national grid for businesses and large users..

Citigroup data centre a blueprint

A recent contract at a Citigroup data centre, for example, is being used as a blueprint as a power solution by others across the ICT sector.

Maxwell believes this is just the start and as the technology proves itself, especially in critical environments, the use of on-site energy-efficient CHP boilers will soar.

“They typically provide cheaper, cleaner, greener energy.”

SEIT’s project is powered by natural gas and the ‘spark spread’, the difference between gas and electricity prices, is very favourable in most of Europe and the US currently.

That makes the cost of running these CHP projects extremely competitive and allied to the lower carbon emissions is driving a surge of interest.

Companies care about carbon reduction

In fact, Maxwell says he has been a little surprised at how important carbon emissions have become for the corporate sector.

Ten years ago there was a little awareness of the topic, but now at the very least companies are keen to ensure they do not worsen their carbon footprint though many are going a lot further than that.

“Companies going green are an incredibly important driver.”

Add in the reliability issue and it’s easy to see why Maxwell believes the time is right for energy-efficient CHP projects.

The knocking out of the grid in New York in 2012 by Hurricane Sandy has had a big impact on US thinking.

“They [CHPs] are cost-competitive, green, and the first line of defence against the grid’s problems.”

PPAs in place

Projects acquired by SEIT have power purchase agreements in place.

They can range from a relatively short 4-5 years for an LED lighting contract to 20 years or longer for large scale heat and power.

Power prices are not an issue for Maxwell.

This business is driven by technology, he says, and that means it will remain competitive against any alternative power source.

Even the best-combined cycle gas turbine loses half of the energy it generates, but that is much better than the UK grid where efficiency is 38%.

An on-site CHP system, however, where the heat generated is used rather than ‘dumped’ can see 75% - 85% energy efficiency.

At Citigroup’s data centre, the heat produced from the generator can be used to drive an/exchanger chiller to cool the centre.

No transmission costs

On-site users also do not have any of the transmission and distribution costs associated with the grid.

In short, it’s ideal if the end game is cleaner, cheaper, energy, says Maxwell.

“So much attention is paid to clean energy through renewables, but we have to focus on energy efficiency.

“If power can be provided on pure commercial merit and be cheaper, cleaner and more reliable, that’s really exciting.”

This was one of the reasons SEIT listed on the main market in December.

“It was a really strong message that this business has matured and has good future growth prospects.”

£100mln raised

SEIT raised £100mln when it listed, of which £57mln was used to acquire a seed portfolio from Sustainable Development Capital.

A further £30mln was earmarked for an additional three projects.

The first of these was completed earlier this month when SEIT paid US$5mln for a 71% stake in eight US projects.

They included CHP units for a prison, university, multi-family developments and a nursing home.

Total installed capacity was 2.5Mw of CHP with 1,250 tonnes of cooling capacity.

ICT and healthcare to be big adopters

Going forward, Maxwell expects ICT and data centres will feature heavily in the future portfolio.

The Citigroup contract was a first and has already led to other opportunities, he says.

Healthcare, too, will be another key market.

Barts in London recently signed a flagship CHP deal but of the 1,200 hospitals in the UK, only 5% have on-site generation.

Manufacturing is also a sector where Maxwell expects to see heavy demand.

Going forward he can see the trust growing to several times its existing size within a decade.

First mover advantage

The CHP market has potential to grow 2-3 times, while in rooftop solar ‘half of the world’s lights still need to be changed’.

“We have a good first-mover advantage”, he adds.

Target returns for the trust are 7-8% a year, which will include a 5p dividend initially rising to 5.5p by 2021.

At 102p, the yield is 4.9%.

Quick facts: SDCL Energy Efficiency Investments

Price: 107 GBX

LSE:SEIT
Market: LSE
Market Cap: £287.16 m
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