When we took a Deep Dive into climate change and what the largest LPs and GPs were doing to combat it in May 2020, we found – among other things – that energy efficiency was widely overlooked as a means to transition to net zero. “It should be the first lever pulled in any carbon reduction efforts,” an infrastructure fund manager told us recently.
Yet, then and now, it continues to be forgotten and overlooked.
SUSI Partners’ co-chief executive and chief investment officer Marco van Daele had provided an explanation for this. “I think what people have struggled a lot with – both from the LP side and the manager side – is to actually make it happen,” he told us in 2020, when SUSI reached a final close on its second energy transition fund, SEEF II, on €289 million.
“That is something that is very tricky because of the nature of these investments, which tend to be small, quite fragmented and to have varying degrees of equity structuring capability,” he added.
Looking at the trends that have prevailed in the infrastructure investment space since then, it’s easy to see that the focus remains on renewable energy generation. Consider that in 2021, more than half of the $51 billion raised for sector-specific infrastructure funds was for renewables. The third-largest fund close of last year – Copenhagen Infrastructure IV – was a €7 billion renewables fund, a world away in scale from the energy efficiency-focused SEEF II.
And demand for renewables is going strong despite supply chain disruptions, geopolitical tensions and inflation that are creating an imbalance between market demand and what developers are able to deliver.
More important than the above challenges, however, is the “broken system” into which this clean energy is supposed to be channelled into. “At least as much effort, time and money needs to go into energy efficiency as it does into clean energy generation,” Jonathan Maxwell, chief executive of Sustainable Development Capital, told us recently. “Otherwise, we’re going to be putting good energy into a broken system,” he added, referring to the high proportion of energy that is wasted before it reaches the end user. According to Maxwell, more than two-thirds of energy can get lost before it reaches the point of use, while another 10 to 30 percent can get lost at the point of use.
But it appears that effort, time and money are all lacking. While it’s understandable that investing in energy efficiency projects is a difficult proposition for infrastructure GPs and LPs, it makes sense for infrastructure managers to at least invest in energy efficiency at the firm level, as well as in their portfolio companies. We can think of two obvious reasons as to why. The first is because it’s the right thing to do if we’re to avoid the worst consequences of global warming; the second is they would be adding value to their existing assets. The insight gained, could, perhaps, even spur some managers to join SUSI’s van Daele in creating strategies to help make third-party businesses more energy efficient.
To be fair, though, this isn’t just on the private sector – governments are also guilty of overlooking this important step in the transition to net zero.
A recent example that comes to mind is the UK’s energy strategy for 2022, announced early last month.
“The best way to reduce energy bills permanently, cut emissions and reduce our dependence on imported gas is a step change in energy efficiency,” Simon Virley, head of energy and natural resources at KPMG told the Financial Times. “Yet, the UK strategy is almost silent on measures to improve energy efficiency.”
With IPCC scientists warning us that “it’s now or never, if we want to limit global warming to 1.5 [degrees] Celsius”, energy efficiency needs to be front of mind for both government and private capital.
We delve more into the subject in this month’s Energy Transition report, which you can read here.