There is a common view that environmental improvement requires sacrifice of living standards, of pleasures we take for granted and of profits for businesses; that the path to salvation lies in discomfort, deprivation and denial. But entrepreneurs have set out to prove the puritans wrong by showing that profits can be made for investors, money saved for customers and the environment improved all at the same time.
Taking on the puritans
With this in mind, Jonathan Maxwell set up Sustainable Development Capital Limited (SDCL) in 2007, offering financial advice and energy-efficient investment. In late 2018, the SDCL Energy Efficiency Income Trust (LSE: SEIT) was launched, raising £100m to invest in a seed portfolio of assets and new projects. Maxwell was shrewd enough to recruit Tony Roper as chairman. Roper had previously been the manager of HICL, the £3bn infrastructure fund. This brought considerable credibility to a previously obscure business.
Maxwell says we may only need a quarter of the energy we consume: “current energy use is [so inefficient that] up to 75% [is] lost in generation, transmission and distribution”.
The path to greater efficiency involves evolutionary rather than revolutionary change, which means using improved fossil-fuel technology rather than just renewable energy.
A good example lies in a number of combined heat and power (CHP) projects in the portfolio. CHP involves the utilisation of surplus heat from generating electricity for other purposes. For example, Battersea Power Station, built in the 1930s, also heated many homes on Chelsea Embankment, but subsequent technological development makes this economic on a much smaller scale. SEIT has taken advantage of investors’ enthusiasm to raise another £226m in three subsequent placings. The shares have performed well. They are now on an 8% premium to the 100p issue price, despite having paid out 3.5p in dividends. The pipeline is extensive at “over £500m”.
Examples of recent investments include £20m to install solar panels on the roofs of Tesco stores and a €150m investment in nine CHP, biomass and olive-pomace processing plants in Spain. Earlier examples include a low-carbon CHP plant for St Bartholomew’s hospital and the installation of LED lighting at 149 National Car Parks locations. In each case, SEIT lowers energy costs, improves energy security and helps clients achieve carbon-reduction targets while making a sufficient return from sharing the cost savings and sales of spare electricity to generate a good return on its capital.
Taking on more risk
So far, SEIT has focused on acquiring operational assets generating immediate cash flow. But it is increasingly investing at an earlier stage, taking construction risk for a higher return. The portfolio is concentrated, with five projects accounting for 84% of assets. Just over 60% of assets are in Spain, 27% in the UK and 10% in the US, but high Spanish exposure is largely the result of the recent €150m transaction there and should fall as new investments are made. Expected returns are not disclosed, but the promise of 5p of dividends in the year to 31 March 2020 and 5.5p in the following year bodes well.
The speed of fundraising and investment invites scepticism, but this is clearly an experienced team with a considerable reputation and much knowledge of the opportunities in an area offering major potential.
The involvement of Roper adds reassurance. The 9% premium to 30 September net asset value at which the shares trade looks steep, but the confidence of investors should prove well placed as valuations progress upwards.