Jan. 18, 2023

Ep113 Jonathan Maxwell 'Checkpoint 2023: Energy Efficiency Investment'

This week’s episode of Cleaning Up sees the return of Jonathan Maxwell, Founder and CEO of Sustainable Development Capital Limited (SDCL), one of the world’s biggest investors in energy efficiency.

Jonathan is back for the first in a series of 'checkpoints' on Cleaning Up, as we invite guests back to the show to give an update on their sector or specialism on the path to net zero.

Guest Bio:

Jonathan Maxwell is the CEO of Sustainable Development Capital (SDCL), an investment firm that set up the UK’s first listed investment trust investing exclusively in energy efficiency - Sustainable Energy Efficiency Income Trust (SEEIT). Jonathan chairs the Trust’s Investment Committee.

Jonathan has over two decades of experience in the financial sector – he spent early days of his career at HSBC Infrastructure and led the IPO process of HICL Infrastructure Company (formerly HSBC Infrastructure Company) – one of the biggest infrastructure funds listed on the London Stock Exchange.

In 2007 he founded Sustainable Development Capital (SDCL), a boutique investment firm specializing in clean energy, energy efficiency and decentralised energy infrastructure projects. He has led the company ever since as the CEO. Jonathan holds a degree in Modern History from Oxford University.

Edited Highlights: CLICK HERE

View: Relevant Guest & Topic Links:

Find out more about SDCL: CLICK HERE

Explore LLNL's flowcharts, or Sankey diagrams: CLICK HERE

See last year's flowchart's produced by BEIS detailing UK energy use: CLICK HERE

SDCL Energy Efficiency Income Trust PLC's listing on the LSE: CLICK HERE

BEIS in the Chancellor's Autumn Statement, including the pledge to establish an Energy Efficiency Taskforce: CLICK HERE

Watch: Related Episodes:

Watch Jonathan's first appearance on Episode 14 of Cleaning Up in 2020: CLICK HERE

Watch Episode 111 with Dan Yergin: CLICK HERE

Watch Episode 110 with Adair Turner: CLICK HERE

Watch Episode 109 with Ion Yadigaroglu and Dipender Saluja: CLICK HERE

Watch Episode 84 with Mark Carney: CLICK HERE


Michael Liebreich Jonathan, welcome. Welcome back.

Jonathan Maxwell Thank you very much. Great to be back, and to be invited back.

ML And you are the first person to have been invited back on Cleaning Up so a pioneer, as always. Now, let's do this. There is a previous episode and people could watch that. But, for those that don't want to do that, why don't you start by giving us a thumbnail sketch of your business. We don't need to go into as much detail as last time, but what is it that SDCL and you do?

JM So, we focus on developing and investing in projects - infrastructure projects - that deliver energy directly to the end user, and that help the end user reduce the amount of energy that they need. Why? Fundamentally, the problem that we're trying to solve is that most energy is wasted; most energy is lost somewhere in the conversion, generation, transmission, and distribution process. So, by the time energy has got where it's needed, in the US about 70%, in Europe, 60% to 70% of energy, power, will have been lost. Extraordinary inefficiency of supply. And by investing in projects that deliver energy close to, or right to the point of use, we can help to mitigate or eliminate a lot of those losses. So, onsite or decentralized energy generation is a very big part of the investment platform that we manage, the other part of it is on the demand side. Now, although so much energy is getting lost getting to the customer, who is the customer? 70% of all energy in the world is used in buildings, industry, and transport. So, while we're trying to find ways of getting energy where it's needed more efficiently, we're also looking at investments, and making investments, that reduce the amount of energy that gets used by the end customer. Typically, 10%, 20%, maybe 30%, of the energy that's being used by buildings, industry and transport, gets wasted. So, improving that by bringing in better infrastructure on - again - lighting, heating, ventilation, air conditioning at the point of use, and building on site generation, like solar storage, ground and air-source heat, however we can deliver energy to the point of use. Those two features address, I think, the biggest problem in the energy sector that has largely been overlooked, which is that the energy system can be incredibly inefficient. And that is, I think, for the reasons we'll probably come on to discuss, one of the biggest problems that we need to solve over the next decade if we're going to have any hope in meeting our carbon emission reduction targets, delivering energy security, or getting the energy system to a price point that everybody can afford.

ML Those statistics that you mentioned, so 60% to 70%, lost en route, on the production side and distribution, and then another 15%, 20% was it, you said? That could be wasted at the demand side? I mean, it's quite extraordinary. How does it fly under the radar? How is it that this isn't just the burning issue that everybody is working on? Not just a minority?

JM Yeah. So, I mean, since the 1970s, the Lawrence Livermore National Laboratory... They became super famous recently, again, because they figured out how to make more energy...

ML The fusion breakthrough?

JM ... than they put into it. But actually, what they've been doing since the 70s is counting the amount of energy that gets lost - one of the things they've been doing - is counting the energy that gets lost on the route from conversion through to...

ML This is their famous Sankey Diagrams, isn't it? And we can put one into the shownotes, for those who have not seen one.

JM I think it's a great idea. It's updated every year. In fact, the UK Department for Business - BEIS - Business Energy and Industrial Strategy, actually produces one for the UK, too, and it shows exactly where the conversion, generation and transmission distribution losses happen. Now this is complicated stuff on the one hand, but on the other hand it's relatively simple. The energy system and the energy business has been set up to supply energy. That kind of sounds obvious. But each part of the value chain could be - problem is - very efficient. People are converting energy from crude or natural gas into pipeline... as efficiently as they can. There's big centralized energy plants like combined cycle gas turbines that are working as hard as they can to take a molecule and turn it into power, and so on... Transmission and distribution lines leakages, and so on are managed. The problem is when you put the whole picture together, the cumulative impact of those losses by the time we get to the point of use is not really the business of the supply businesses, and it's not really been the key focus of government. The key focus of government has been - roughly 80% of policy, roughly 80% of the IRA, the Inflation Reduction Act, for example, in the United States - is to do with supply side; add more energy into the system, generate more. Relatively little money, policy has gone into the demand side - how do we make sure that it's not wasted in the process, or dealt with at the point of use. It's about customers: that's fiddly. It requires a lot of work, thinking about not how to supply energy, but how to solve specific problems, to get energy where it's needed, the 70% of energy that's used in buildings industry and transport. And I think it's that work, and it's a different business model dealing with the demand side than the supply side. I think good news is, I think we're going through an inflection point, and we're seeing this marketplace for solutions scale up very dramatically.

ML And I've been talking for more than a decade, as you know, about how much I hate talking about primary energy, because that seems to come from the 1970s; you have the oil shock, and then the developed world said, we have to get our arms around as much energy as possible, that's the most important thing is not to be left without supply. So, we grab it, we call it primary energy, and we measure how much of it we've got, and that's the key measure, is what we've got. Whereas actually, what we ought to be doing is flipping the whole paradigm on its head and saying, what are the things we want to do in our economy - transport, industry, buildings, heat, light, those sorts of things - and then figuring out how to do those as elegantly, and as low impact as possible. But it's a completely flips the paradigm on its head, doesn't it?

JM It's completely different. You're looking through the other end of the telescope, to put it simply. I think that what you're really talking about though, when you boil it down, is a huge productivity problem with economies and with companies. If you think about this, if we're losing most of one of the most valuable and essential resources before it gets to the end user, and then the end user then is going on to lose or waste more of the same stuff still, what an extraordinary cost financially in terms of carbon, and indeed, as we're fighting over limited resources, a few years ago in the Middle East, now Ukraine. This from an energy security perspective and a resilience perspective, it doesn't make any sense. So, the productivity point is, how do you fix that problem? By fixing that problem, if you can reduce some or most of the loss associated with getting it where it's needed, and solve that waste problem at the point of use, it's actually one of the biggest opportunities, I think, of our generation, Michael. Frankly, not only is it a big opportunity for productivity gains, but if we don't do it, we're not going to achieve any of our economic, financial or energy security goals.

ML And it's funny, because productivity is a hot topic, and both sides of the political spectrum will say productivity is very important, but it's very rarely phrased in terms of energy productivity, it's usually around human productivity. But of course, the constrained resource right now is humans and skills and talent, but it is also energy and natural resources. And so, I agree, I think that there's a huge challenge, a need and an opportunity to frame productivity around all of the factor inputs of an economy. I think that's an absolutely essential piece, particularly when you've got a situation like the Russian invasion of Ukraine, what that's done to markets. Now, when I started, I said, let's do a thumbnail sketch of your business, and we've dived in because we love doing this, talking about energy efficiency, productivity, that kind of content. Just round out the picture of your business. What do you do to solve that problem, or to exploit that opportunity?

JM Yeah, so there are fundamentally three types of projects that we invest in. One develops and generates energy on site for end users. So, if you're a data centre, a hospital, commercial industrial facility, you will have a round the clock, sometimes 24/7, all day all year need for energy, both electrical and thermal energy. We will develop and invest in a solution to your energy needs. So, we'll generate energy as close to, or right at the point of use, and we'll make the investment, and our investment return is associated with providing an energy surplus, heat light or power, to our end customer.

ML CHP, combined heat and power? Is it solar on the roof?

JM So, a very large part of the portfolio is CHP, that's combined heat and power. So, you're taking some form of molecule, typically, and then turning into a combination of power and heat. Most of the loss that I described earlier is actually the feature of putting a molecule into a turbine. A molecule, thermodynamically, will create, 50% of it will go to electricity, the other half typically goes to heat.

ML On the Sankey Diagram, it's called rejected energy, I believe.

JM Rejected energy. It's rejected because generally, the central power plants are built very far away from the point of demand, so there's nothing you can do with the heat. So, cogeneration or CHP, combining...

ML So what else, you were gonna run through?

JM So, we run that off natural gas, if it's efficient, but more often off green gases, recycled gases, waste heat. We do on-site solar. We're doing geothermal, obviously moving as heavily as we can into heat pumps, and other low-carbon or renewable energy technologies. The second thing that we do is help buildings, industry, transport, reduce energy at the point of use. Big area is lighting. Heating, ventilation, air conditioning... Cooling, is one of the biggest users of energy in the world. And then the third area for us is distribution. Sometimes it's not possible to generate energy where you need it, so we invest in efficient distribution networks to get green energy where it's needed.

ML Some of that's around transportation, electric vehicle charging.

JM We have a big business around fast-charging electric infrastructure.

ML Talk me through: you've got geographies, and then vehicles, what funds have you got? So, geographies first.

JM We're about 55% United States, 45% Rest of World, most of the rest of the world is in Europe, some of it's in the UK, and a bit in Asia. In terms of types of projects, I would say it's about 60% on-site generation, about 40% demand reduction or distribution. In terms of scale of the business, overall, our portfolio of projects is connected to about 55,000 buildings. Some of them are very, very big - factories, industrial facilities, hospitals, data centers, steel mills - some of them are very, very small - commercial industrial facilities, commercial buildings, some residential. And so, it's quite broadly diversified. In terms of how the investments are structured, or framed or housed. We have a London Stock Exchange listed investment company, it trades under the ticker, SEIT.

ML Okay, and we're gonna put a link into the show notes. We're not allowed to market it, but we can put a link in the show notes.

JM And so, that's got a pretty big portfolio now, about £1.6 billion worth of investments across the world, investing in these types of projects. People [who] say that it can't get this type of project to scale, can take a look at that portfolio that has really got to scale. We also have a private equity infrastructure platform. So, for the larger projects that take a bit longer, we invest in those with private [capital.]

ML And SEIT, why do it as a quoted vehicle? I mean, what was the rationale there? This is presumably opening up the opportunity for people that are not allowed, or just don't have access to the sector.

JM One of the benefits of the investments themselves is that they generate income for a pretty good amount of time. The weighted average contract length of our projects, infrastructure projects, is about 14 years. So, that can deliver a relatively stable, predictable dividend policy through to our end investors. And I think that was the design, in that how could we put a very large scale portfolio together that can generate income that we can pay out as a dividend, and that can grow progressively. The other feature of our investments, because we're generating energy, and we're providing energy services that reduce demand, is that we can add capacity to those projects; we can invest more, we can follow on. So, it's a total return story, which I think is very attractive for institutional and private investors. So yes, you're right listing on the London Stock Exchange provides access both to institutional investors - and we have some very large ones - as well as everybody, to the open market.

ML And when you've talked about investing, and you can increase capacity... So, you take over and manage these assets? You become their energy provider, you take over the power source within a factory and then provide energy to that factory?

JM Yeah, so very often, we're running the utilities or the energy system for our customers. So, a couple of examples: we've got a very large district energy facility that we run in upstate New York; we've got 116 customers, some of them are very big warehouse customers, some of them are industrial. We provide 16 different types of utility services, but the biggest ones are power, heating and [inaudible].

ML Okay, I think that's a good thumbnail, and hopefully people will have followed what you do. And when you came on the show in October 2020, you said, if we look at what we've achieved as a firm in the last two years, it's probably five times as much as we achieved in the 10 years before. We did grind through the 10 years, and the whole kind of origin story of you in China, and the smog and so on. Then the last two years, as much as - and this was, presumably 2018 to 2020 - as much as you did the 10 years before.  What have the last two years since then been like?

JM About the same again. At least a doubling of the business. Why? I mean, partly because we've built the scale and the momentum, we have a pretty broad reach, we've got a great network, we're good at identifying where the projects are and getting them done. And I think partly because the total addressable market has grown. So, I pointed out that most of the money, most of the policy over the last decade or two, Michael, has gone into the supply side of the business, right? If you look at the energy investments, we celebrate how much of energy investment goes renewable.

ML Wind and solar and other...

JM But here's the issue, it's all been adding supply into the system. Now demand, sadly, demand for natural gas and coal and oil, which is still 82% of the energy system, has also been going up. So, we've been adding clean energy, but there's also been an increase in conventional energy. In fact, right now post Russia-Ukraine crisis, sadly, there's more conventional energy being added to the system; we've all read the news around Germany and coal, for example. So, adding new renewable energy capacity is happening at the same time as additions to the conventional. What we're interested in doing, and I think what's been starting to happen, is there's been a focus and an understanding that you have to reduce the amount of energy that's needed for output from a productivity perspective. But you also need to replace. So, to the extent that renewable energy comes onto the system, it now needs to start to displace, certainly coal, and in due course, natural gas and other futures. And for that reason, we've seen the market starting to transform. And I think in a high energy-price environment, saving energy is very compelling. In an energy-insecure marketplace, both policymakers and companies are starting to worry about where they're getting the energy coming from. And increasingly, decarbonizing while companies are really committed to decarbonisation, as well as [inaudible,] then this becomes very compelling.

ML But two years ago, we talked about how to achieve the Paris targets, you know, well-below two degrees, and as close to one-and-a-half as possible. Energy efficiency investment, which was about sort of $300 billion a year, according to the International Energy Agency - our good friend Brian Motherway - $300 billion per year; it needed to go up by about a factor of eight in the next 10 years, was what we calculated two years ago. So, is it on track to do that?

JM I don't think so, I don't think so. And I think it's even more stark, how much we need to change gears. Now, having said that, the IRA, the Inflation Reduction Act in the US, at least 20%, broadly, 20% of the budget goes into something to do with on-site generation or efficiency. I'd say the narrative in Europe has also changed post-Russia-Ukraine. And we're going to see that, I think, increasingly implemented in '23, '24. But the mood music -which is we're going to add more into the energy system, we're going to find replacements for Russian natural gas - a lot of that narrative, Michael, has been replaced by, we're going to have to reduce; 15% reduction in gas, 5% reduction in electricity. Frankly, taking away all the barriers for distributed generation, like rooftop solar in Europe, digitizing the European energy market, has translated also into a mandate to introduce solar across all commercial public buildings across Europe. So, I think the storyline, and the deployment of de-centralized energy and energy efficiency, is going to have to now, because there's no other choice, go through this inflection point.

ML Fascinating, though: one of the recent episodes, I think it was Episode 111, the first episode of season eight, was with Dan Yergin, the extraordinary energy analyst, and he talked about how he agreed that there was going to be a great clean energy acceleration, which was my thesis, and in fact, Fatih Birol at the IEA has also postulated that. But then he said, equally, it's going to be a realization of the importance of fossil and investment in fossil. He didn't split out and emphasize energy efficiency as anything particularly kind of compelling within the mix.

JM I'll have to review the interview because I think - I listen to these things - I think he said his thesis was about energy efficiency, and it's something that he loved. But I do agree...

ML He does say, separately, he does say he loves energy efficiency. I was seeing whether he was channeling Amory Lovins there, in some sort of subconscious way. But yes, he does mention it elsewhere. But not in that... The big dichotomy is between clean energy supply and fossil supply, or the two big ones at that point in the interview that he pulled out.

JM I think he points to a realist's... issue. It's not a dilemma, it's just an issue. The facts are that 80% plus of the world's energy is conventional, and it is increasing. So, going back to the point I made before, the only way we're going to get decarbonisation is to deal with that, and to use less conventional energy, make it more productive and actually, in due course, replace. And it's such a big challenge, and I think this is the thing we're gonna have to be really, really realistic about and '23, '24. We can, hopefully, green the electricity supply. But we've also got to be realistic about that, too.  Electricity supply, Michael, is what, 20% of the world's energy system?

JM Currently. So, the first job to do is to green the current electricity system. The next thing to do, which we all talk about, is electrifying more. Now you talked to Adair Turner about perhaps getting to a point where you're electrifying, what, 60%?

ML Yeah, I think 60%, and the rest over time, it's not going to be immediate.

ML Currently, yes.

JM I think this is the time, this is the timeframe; we've got to be really realistic about the incredible scale of the job in front of us over the next two to three decades. We've got to think in that period of time, we've got to think about what change can realistically, most ambitiously, putting it another way, be affected. And then what we do in the meantime. Because we've only got eight years of carbon budget left if we're going to keep anywhere within the two-degree threshold, let alone one-and-a-half, and we do not have time not to improve the fossil use in the economy.

ML Ok, but I talked to you two years ago, and you're incredibly bullish, right? You say things like, I feel there's a massive opportunity to take step changes now. And it's a very upbeat, positive discussion. And then, a couple of years later, Russia invades Ukraine, and all these politicians start talking about new LNG terminals, they talk about nuclear power, small modular reactors, they talk about hydrogen, they're going to import hydrogen somehow; I don't know how they're going to get them on a ship, because according to my knowledge of physics, that's not going to work. You can do it, but it's extremely expensive. And so, they're all rushing around, either on fossil fuels, or, they do talk about accelerating more wind, more solar. But doesn't that sort of fill you with, almost dread, that what they're not doing is saying that the single thing they can do most quickly in response to what's going on in the world - high energy prices, and so on - is be more efficient, which we can do, essentially, immediately?

JM So, we didn't talk about this last time I was on the show, because it hadn't happened yet. But after Russia invaded Ukraine, this time around, it made me think about the last time they did it. Last time they did it in 2014, the European Energy Commissioner, Mr. Oettinger made a very, very interesting point. He said that every unit of natural gas we don't use is 2.6 units of natural gas, we don't need to buy from Russia. Now, this set off a series of policy frameworks in Europe, which ultimately ended up in an extraordinary policy called Energy Efficiency First - not second, third, tomorrow, maybe. So, I think policymakers understand... By the way, the reason one unit you don't use now is 2.6 units you don't need to buy from Russia, or anybody else, is because of the efficiencies that we talked about before, which is how much it cost on the way to the point of use, to unpack that. So, I think there is a fundamental policy understanding. But what's happening [is] I think policy has massively lagged, has really let down this opportunity, frankly. And I think that there is a... Yeah, I'm optimistic. Do I think that energy efficiency should be 20% of the Inflation Reduction Act? No, I think it should be 50% of the Inflation Reduction Act. But I'm happy that it's at least 20% of the story, rather than zero. Do I think that Energy Efficiency First should actually be implemented? Well, when Ursula von der Leyen talked to us about doubling down on renewables last March in the response to Russia-Ukraine, the mood music changed to cut gas consumption by 15% by the autumn. So, at least I think the headline policies... When the new chancellor in the UK Jeremy Hunt came out with his energy plan in the autumn statement, at least he put energy efficiency alongside renewable energy and nuclear power, as the critical backbone of his policy going forward, stated a national ambition. So, I'm pleased to see policymakers starting to get it on the agenda. It was only Glasgow, COP26, when energy efficiency for the first time was put alongside renewable energy as an international ambition. We're getting started, but you're absolutely right, we don't have any more time to waste, we're wasting two thirds of the world's energy, we've got eight years to keep within any reasonable carbon budget. We can't substitute all of the fossil fuels with renewables within eight years. I don't know how much that's part of the policy debate, I don't know how much that's part of the corporate thinking, I don't know how much it's part of the investment committee discussion. But I don't think we should go into battles we can't win. I think we need to make sure that we plan large scale, huge scale, renewable energy transformation over the next 10, 20 years and in the meantime, get much more productive. We can't solve for not being where we are... The world's in, as Fatih Birol says, the world's first global energy crisis. That's where we are, right? But we can come out of it much better; that we can control.

ML I think what's correct there is that we are, in a sense, finally getting serious. I'm probing to see whether there's frustration because, you know, every model of the energy system since I've been doing this - call it 20 years, actually, to be honest, even further back - has said that 50% of what we need to do is energy efficiency. There's no way, and we talked about it in the last conversation, two years ago.

JM And when we first met, the very first time.

ML And when we first met. So, 50% of everything ought to be energy efficiency. And you know, you go back to 2014, what the European... In fact, you go back to the Russian invasion of Crimea, and the European Parliament asked for a plan from the European Commission for getting off Russian gas - 2014. What happened to it? Nothing. Nothing. In fact, the dependence on Russian gas increased, it didn't go down. So, you know, I'm probing for whether you're frustrated, because what you're sort of saying is that energy efficiency is kind of now seen as a 15% solution, which is better than nothing, but it's nowhere near the 50% that it is, and that it always should have been.

JM I tell you why I'm not screaming about it, which is how I feel inside. I actually do think it's rising up the policy agenda, and I want to be supportive of that. I don't think there's any gain to be made from being super critical. We are where we are, now we know better, let's do better. So, I think that's the first point. I think the second point is, I actually don't think there's an alternative. I think we've reached a point of no return. I think when European energy prices, by the way, for natural gas are five times what they are in the United States; when universities, hospitals, public sector, which by the way, use as much energy as private domestic dwellings, are paying four to six times the amount for the same energy that they did last year; I think when you're shutting down business and industry in Europe; as to your point, with Dan Yergin and Adair Turner, where there's an existential threat around energy-intense industry in Europe. There is no choice other than to rethink the way that you're dealing with the energy system. So, I think we've actually reached a tipping point; I think 2022, I think Russia's invasion of Ukraine was a point of no return. Energy prices are too high. Energy security, nobody cared about that at all in Europe. I wrote an article a year ago, January, for the Atlantic Council about energy security first; nobody cared about energy security at that point, barely anybody cared in the United States about energy security, except the government who spent every day until 2019 securing energy security. But we've now gone past a point of no return. Europe understands that price, security, and frankly, decarbonisation all depend on efficiency.

ML But let me just challenge: what are the two biggest stories of the last year in energy, outside the high prices? It is, basically, hydrogen, hydrogen, hydrogen, hydrogen, and fusion, right? There's no appreciation in the press, in the general business environment, in the mainstream media, that heat pumps are the solution to all heating. In fact, not just domestic heating and commercial heating - which by the way, they're used very extensively already, which people don't even know - but even... we had Silvia Madeddu, this brilliant academic who wrote a groundbreaking paper that looked at industrial heat, and found that 99% of European industrial heat could be supplied by using heat pumps - i.e. more than one times efficiency, more than 100% efficient - 99% using technologies that either exist already, or are under development, and the majority is the ones that exist already. I mean, heat pumps are the answer. And yet, most of the press coverage about heat pumps is how, oh you know, they don't really work, and you couldn't do them here, and you couldn't do them there, and they won't work for this, and for high temperatures, you have to use hydrogen. I mean, doesn't that just burn you up inside?

JM Maybe the problem with this energy efficiency story, certainly the one that I've heard before Michael, is it's not sexy. Somebody once said to me - years ago, 15 years ago, when I was looking at this for the first time, why don't people focus more on energy efficiency - and the answer that I got was a very misogynistic answer, but I'll repeat it: it said "real men build power plants," right? So, there is a fascination with technology, with something which is new and shiny. What we're talking about is using established processes and technologies to improve productivity. Going back to government, most of the economic policy is about adding to GDP, adding to sales. Supply-side works really well in that context. It's a much harder sell to say, actually, I'm going to reduce the amount of sales of this product into the system, in order to gain on productivity on the other side. It's just a harder sell into government. I think the point I'm making, which makes me more optimistic, is that I think that underlying all of this, whether it's sexy or boring, it was also nice to have, right? You operate a data centre, you operate a warehouse, it's a large part of any build, might even be most, but it's manageable, it's a manageable cost. You don't have to worry too much about availability or energy security. And you know what we're all on a decarbonisation path and I'll buy a solar plant and offset it. That game was over in 2022. Energy is not affordable, and it's not going to be - I'm sure you and I agree with this - I don't think it's very likely to be affordable for the next four or five years, at least in Europe, maybe longer. So, I think prices being very, very high, I think energy insecurity and instability of the grid, regional differences, but transmission and distribution grids in the United States need a substantial upgrade while Europe's suffering from availability from the war. And then decarbonisation, let's go back to that, right? Governments are committed to it; companies are committed to it. If the grid is turning on more coal, let alone natural gas to run itself, what are you going to do? And the only answer is to start to get real, look at the real electrons, and real molecules, and real performance of your buildings. But what forces it is money, and that's why I think we're in a different game.

ML Talking of money: two years ago, you came on, and we talked about the EU, which was doing the Green Deal - this is going back to before the Russian invasion of Ukraine - there was the Green Deal. And they were talking about... you'd calculated the infrastructure piece of the Green Deal, and then the energy efficiency, particularly building efficiency, piece of the infrastructure piece of the Green Deal. And you came up with a figure of €350 billion euros a year to be invested in the sector, co-invested with you, perhaps given to you to manage. How has that played out? How's the €350 billion a year actually started to flow?

ML I mean hydrogen seems to be one - it's not 96 gigawatts - but I think they're still trying for 40 gigawatts. I don't know how many... It's a huge amount; it's over €400 billion that they want investing. Hydrogen seems to be this one that kind of never dies, but I suspect probably a lot of it won't happen. But the theme that's coming out here is that it's a vital area, it's an exciting area, it's absolutely non-negotiable to hit all of our targets, and it is growing incredibly fast - but not fast enough.

JM I think it's started, but it's slow. And this would be, yes, it would be a frustration. Under the European Green Deal, I think it was roughly €90 billion a year were meant to mobilize, joined by €200-something plus billion of private sector capital like ours, that would go into developing and investing in new projects, it would be dispersed across the European member states. Look, the ball is rolling, but it's taking time. We don't have the time to waste. So, this is where I'll get a bit more belligerent.  I have to say, during the last couple of years, Michael, we've seen a lot of different policy positions from the European Commission, haven't we? There was one point where I think the plan was to build 96 gigawatts of offshore wind to drive electrolyzers to make hydrogen to turn it back into electricity? That didn't last very long... But there have been some ideas that have been floating around in Europe and, to the point that you made, sort of taking attention.

JM Because the scale... we've got to completely change our attitude and our level of investment and level of policy. Going back to what I said before, if 80% of the energy system is oil, gas and coal, 80% of our answer to it from a policy perspective is to add new energy into the system, not to produce it. So, let's just think about that: broadly speaking, if you look at all money that's been invested in the energy sector, it's about 80% in the supply side, about 20% in the demand side; policy, same. 80% of policy has gone into dealing with, adding new energy into the energy system, relatively little of it, one of the best examples being the IRA in the United States, being 20% into efficiency. It just needs to flip. We're trying to deal with 80% of the problem with 20% of the answer. So, it's not nothing, it's just nowhere near enough. We need to not double, we need to triple or quadruple the level of investment, policy, focus and effort that we put into this.

ML I want to come on to the IRA because we've mentioned it a few times. I think the audience probably understands that's the Inflation Reduction Act in the US which was passed. I mean, it was an extraordinary thing, because the US seemed to have given up on ever having any climate bill passed through Congress, and yet suddenly, within a period of a few weeks, one appeared and shot through; perhaps because it's got this marvelous title of Inflation Reduction, whether it actually reduces inflation or not, I've got no idea. But how does that work? How does it change how you look at a project?  Does that mean that you now are going to go from your 55% US, are you going to kind of put a bigger proportion in the US, because it's easier to operate? Or what does it do?

JM Before we get into it: there is a misconception that the United States spends more money on green and efficiency than Europe. Europe spends more money than the United States. I think there's been a complaint that this is absorbing capital away from Europe and into the United States. Not sure that's entirely true. But to focus on the positives: yes, there are tax incentives. There are simplifications that have been introduced into policy and market incentives in the US, which make the US much more attractive than it was before for certain types of investment. Take solar; take even the types of high-efficiency cogeneration projects that we're working on; yes, there is a market incentive, it's attractive for us to make investments in those thanks to the Inflation Reduction Act. But again, that's put it back into context: this was a $550 billion bill, it was reduced to $369 billion. It's gonna take time to work its way through the system, too.

ML So, we had a deep-dive on it on Episode 109 with Ion Yadigaroglu and Dipender Saluja, from Capricorn Investment Group, the podcast and the YouTube channel's supporters. But one of the points that they made very strongly was that it's actually uncapped; it's not a $360 billion bill, it's a bill that just says, if you do this, then you get a cheque, you get money. And so, what when you say, oh, well only 20% of it is energy efficiency, isn't that up to you to prove that wrong? Just go and find, and do, more projects, because it's uncapped? Why can't you just do more, and then energy efficiency would be a bigger proportion of the results?

JM So, we've been investing in the United States for many years; many, many years before the Inflation Reduction Act, and we're investing the same before, as we have afterwards. We didn't go there because of that stimulus, nor do we actually invest in energy efficiency projects, per se, because there's a market incentive or a subsidy. The benefit of generating energy on site, or investing in projects that reduce energy, is it's cheaper, Michael. The product we deliver - the power, the heat, the light - is cheaper than business as usual. So, it's great to have the market incentive, it helps accelerate, but actually the underlying business model in the United States, in Europe, in the UK, now much more broadly across other markets in the UAE, and broadly GCC, Asia, is highly compelling. It's cheaper, that's one of the key benefits. It's cleaner. By reducing the amount of energy that you use, you're literally taking energy out of the system, that's literally negative carbon. I think there's a fallacy that there's such a thing as zero-carbon energy production, you can't do it, you can do it low carbon, not zero. But energy efficiency actually is negative carbon; you're taking energy out of the economy, and you're improving the security of the system, you're improving the resilience of it. So, for those reasons, that's why we invest. Now, the Inflation Reduction Act, is an accelerator, it's hugely welcome, right? But it's not the reason. I actually think that regulation should be the real driver of change. I don't think that public sector buildings should be allowed to leak energy. I don't think that national grids should be able to operate without a significant focus on efficiency. There's so much that regulation can do, frankly, to limit or even, over time, eliminate energy waste. And, frankly, here's putting it another way: if you're, if you're investing in a public company, Michael, and the CEO is being paid too much, people go nuts! They complain. If you're investing in the same company, and they're using too much energy for the business they're doing, nobody says a thing! So, I think these are some of the things that... Regulation is one thing, and then making sure that investors and business understands that this is now one of the most important things that we can do from a productivity perspective. And then punish... why aren't we doing it? And ask the questions.

ML This question about regulation versus fiscal policy or central banks, this is something that I talked to Mark Carney about, and I talked also to Adair Turner, who formerly was the Chair of the Financial Services Authority in the UK: to what extent can the financial sector, or incentives at the fiscal level - just a tax break - can that really do the heavy-lifting, if we don't regulate transport and buildings and industry to actually make the changes and clean up their act?

JM Adair Turner said, it's really government that's got [to be the] driver. He said, investors - I'm paraphrasing, but - investors and even, self-regulation can help to some degree, but the government has got to do something. I agree on two levels, fundamentally. One is at national level, and I'll go back to when I started investing in energy efficiency. One of the things that really grabbed me it was the Chinese energy policy, back in 2006 / 2007, I mentioned this on our last show. Recognizing the enormous challenges they had - and this was the beginning of the medium-term plan, which changed China's whole economic future - they said, we're going to reduce the amount of energy that we use as a country by 4% a year, every year. It's an energy productivity per unit of GDP output, by 4% a year, every year per unit of GDP output. So, a huge statement. And that type of policy, which actually tries to drive change through from central government, should be the sort of thing that we really think very hard about. The second component of it, which I think is really in the public sector's gift, is that in most countries, they are responsible - this is the public sector, and government buildings - themselves for a very large proportion of the energy use. Just taking the UK - I think I pointed to this point before - there's about as much energy used in the public sector as there is in private domestic dwellings. Almost everything we ever hear about is what I would call Paddington Bear-policy on energy efficiency. We're in this home... If you want to save energy, Michael, put on, a duffle coat and a woolly hat and a scarf, and that is basically energy efficiency, isn't it? Or insulate your home, or get a heat pump. Meanwhile, the public sector - hospitals, universities, government, buildings the Ministry of Defense, the transport system - are leaking energy every day. Barely any of them have on site generation, and barely any of them have LED lights, heating, ventilation, air [inaudible]. So, that is a leadership position the public sector has to take. Because if they get it right in their own estate, not only are they saving our money in public money, they're also in a position then that they can turn around to the commercial industrial sector - 60% of energy is public sector, commercial industrial, not private households - then they can turn around and mandate change. And that's really what needs to happen.

ML In the UK, we now have the Energy Efficiency Task Force. Have they reached out to you yet? Are you waiting with bated breath to see what they do?

ML I'm waiting with bated breath about all actions that would actually support it. But no, I think it's a great idea, I really do. I think it's a fantastic idea, I would be delighted to provide any level of support to it.

JM There's been a mystery in the West - in fact, everywhere - about why productivity levels are so low. I mean, we've talked all session about energy, right? Very broadly, that we waste - lose - waste is a hard word... but lose something like...

ML I do think it comes back to this productivity point; that energy is a factor input into our economy, we cannot have a really, healthy economy whilst being profligate.

ML Reject, regarding to the Sankey diagram, it's rejected energy.

JM Reject two thirds of the world's energy... But thinking about it in economic terms, from a productivity perspective, this mystery. Why do we have productivity limits? Isn't this part of the solution? There's other factors to it which I find fascinating. There's a huge nexus, an interface, between energy and food, right? All food gets around because of energy. Food prices have been going up, been seeing it in Europe, because transport costs have been increasing, because of everything that's been happening geopolitically. So, energy and food. But do you know how much food we waste?

ML 40%

JM Right. And there's another nexus as well, which is water. Do you know how much water we waste?

ML Well, define waste and I'll make up a number for you.

JM Broadly the same, let's call it a third. Just for fun, if we're wasting 60% of our energy, 40% our food, and 30% of our water, this mystery about productivity limits starts to become a bit more understandable.

ML I want to touch on another couple of topics before we're done, and one of them is ESG, because in the last two years since we spoke, there's also been enormous developments along ESG. Obviously at COP26 in Glasgow, there was the GFANZ - the Glasgow Financial Alliance for Net Zero - and then there's the pushback. I would say the pushback in the US, partly from Texas and other states saying, well hang on a second, but ESG seems to be targeting fossil fuel use, and so we think it's a bad thing. But also, a pushback really from... I'm thinking of Stuart Kirk's speech when he was the Head of Sustainability for HSBC, pointing out that actually, a lot of the hopes invested - I'm going to paraphrase it - the hopes invested in ESG as the one box-ticking exercise that will save the planet as being, frankly, completely absurd. Have you seen in your business, ESG - the change, whether it's a renewed focus, or a backing-off from ESG - has it had any impact on energy efficiency investment?

ML I think it should do. So, the positive side of this is, ESG is about getting - or at least, I think, should be about - making sure that when capital is put to work... There's a positive side of ESG and a negative, before I get into that... ESG isn't actually about creating impact, it's about measuring impact. It's almost like an output, rather than an input. I think that that perhaps is one of the issues with it, tight? So, ESG has been about trying to feature, sort of understand the footprint [inaudible], but impact, when you're starting to make an investment, and it's designed to have a measurable environmental impact or performance, a positive one; I think more sophisticated metrics, and more sophisticated reporting features associated with them, I think is great, and I think I think we want to see that. But I would love to see them more specifically focused on outputs. So, effects rather than just simply on reporting, I think social impact has been improved, I think governance is still lagging behind a little bit. But everything that you're talking about, I recognize in terms of the backlash. I think green investments were on the run about two years ago, 18 months ago; you saw huge inflows into the sector. I do think that there has been some abuse by the fund management industry, and there have been some very broad definitions, I think it's got very complicated. I think if you look at some of the indices - green, sustainability indices, and you unpick them and I sometimes look to invest in them myself - I find it very difficult, because you don't really find companies, to the point I made about inputs and outputs, that are dedicated to the green economy. You find quite a lot of tobacco companies, general industrial groups, FANG stocks, and so on...

ML Oil and gas companies...

ML I'm not making the rights or wrongs, but this because I think some of the metrics that have been applied by indices look at outputs and reporting, rather than necessarily the specifics about the inputs and what these companies.

ML You said that it's about metrics, it's about data, it's about disclosures, it's about metrics.

JM I would say involves...

ML But isn't part of the challenge that, in fact, a lot of people have tried to sort of use it to drive choices. So, they want to go from well, you're going to disclose what you do, to now you're only allowed to do certain things, or you're only allowed to describe yourself in certain ways and tap into certain costs, pools of capital, and you're trying to change the cost of capital for the people not doing the right thing. So, it's almost like the sort of the backseat driver with the longest arms kind of coming through from ESG. Is that a fair sort of description of the weakness that you see? That a lot of people have invested in it, this hope that it will start to actually drive capital, not just describe and disclose what people are doing?

JM I think the hope is that it will drive capital, it will drive choices, it will drive companies, as well as investors, to make choices which have a better environmental, social governance output. My bigger picture frustration is I don't think we've got very much time. And what are we trying to achieve? So, I think all of those things are fantastic, but if you come back to the real challenges associated with carbon emission reduction - which is only a part of the E component of ESG - and you look at how to improve productivity and resilience, which are the key things that I'm concerned with, then you come back to some very simple frameworks. 80% of human-made greenhouse gas emissions are in the energy sector, so I'm interested from an ESG perspective in figuring out how we make that better and improve the performance. And then frankly, 20% of human-made greenhouse gas emissions are in forests and land management and agriculture. That's a huge area. So, those are the two key areas that I focus on. I think that ESG as a subject is broader than that, has a series of different... It's got massively complicated, Michael: how many different ESG standards are there? I mean, I've lost count. I've certainly got about 26 that we try to analyze and report against.

ML So, I at one point created a map of... It was more like 60 different global, climate ESG organizations working on different bits of the financial system, those were just the global ones, and it was massively complex. And some of the metrics are actually sort of epistemologically inappropriate. It's not a question of.... A lot of the stuff around scope three, it's not that with more and more data, we'll get better and better and better at working out the scope three emissions of a portfolio. Because of the double-counting, triple-counting, and the speed with which you can turn over a portfolio, and all of the options and the puts and the calls, you cannot tell what the impact of a portfolio is. So, it's kind of weird, because we all know what a good portfolio would look like, but as soon as you try and measure it, it's a bit like Heisenberg's uncertainty principle; you try and measure it, and you're just going to disappear in a welter of data that actually doesn't provide any insight at all.

JM Yeah, I think, going back to my point earlier, maybe to make them a bit more particular, I think that's where you can address some of the massive challenges. I mean, the backlash that's happened in Republican states, in particular in the US, against green or ESG, has been about the fact that they... the accusation is you're making these investments for ESG reasons, not for financial outcomes. And in fact, you could end up with an adverse financial outcome, and that is a breach of fiduciary duty. Now, that's the challenge. And that's why, in a sense, if you go back into what I'm saying, if you can focus your investments in areas that improve productivity, that make more money, rather than less, that can...

ML It's win-win-win.

JM Then you can be very specific, and very forensic. It's not possible to look at those investments and say, you're doing something which is trading, you know, financial gain for environmental or social benefit. What you're doing actually is making an investment, which, by definition, reduces harm and improves financial performance.

ML One question, which is a technical question, perhaps, is, you can do all of that, reduce harm; so, you've got, for instance, projects where you recover energy from the exhaust of steel mills, or you do CHP where you have to, you do it with natural gas, you said, which is much, much, much more efficient, so you're avoiding harm. But is it compatible with net zero, now that the goal - more so than two years ago - is absolutely clear, we need to get to zero not just, you know, better or less than would otherwise happen? How do you make sure you're compatible with net zero in all the activities at SDCL?

JM We think about this a lot, and I think the first point is making sure that we're very clear that we're using best available technology, because we really don't want to sacrifice the good on the altar of the perfect. We really want to make sure that over the next 10 to 15 years, the lowest carbon, most efficient solution has been delivered to that customer. And Michael, if you can't deliver it with 100% renewable heat today, I would rather deliver it with the best available technology. I'd rather go with the old Bismarck phrase: politics is the heart of the next best. We do have to make substantial step changes. Now, over time, you know, what we always look at year on year, day to day, is how to, if we are investing in a cogeneration system that uses natural gas, which might be operating at double the carbon efficiency of the grid, how can we substitute the fuel? How can we tie that up with a supply of green gas? How can we use greener gas systems in the future? You and I know that you can run an engine on hydrogen, if you inject it behind the cylinder head, but we need to make sure that we're getting the hydrogen from a green place; the supply isn't so easy today. So, what we look for, are how do we make step changes, the best step changes that we possibly can, in the next 5, 10, 15 years, in buildings, industry and transport. But we're continuously looking at that, to invest in.... so if there's a substitution technology, we're able to implement it.

ML Do you have, for each of your projects, each of the things you invest in, do you have at any point in time, a plan for that to go net zero? Not just net better, but net zero eventually, and in time for 2050?

JM Yeah, so we have a net zero target for our funds. We have... the European Commission has categories which they've set up, under the taxonomy, effectively categorizing investments under Article Eight, do no significant harm, Article Nine, is a much more proactive standard that we set ourselves, which is really to try and get to, and ultimately to align ourselves to a net zero plan. So, the short answer is, yes, over time, our plan is to make sure that our assets, our portfolio, perform to a net zero standard. It is going to take time, and some of those solutions are going to have to be introduced when they're available.

ML So, we're almost out of time. What I want to know now is, what are your predictions for the rest of 2023, this new year, and then perhaps any that you can highlight through till 2030?

JM So, I'll have some fun at the beginning of the year, and risk being wrong. I think, right now, as we're sitting here today, gas prices in particular, which is the biggest driver of energy prices, are sitting at levels that we haven't seen since before the Russia-Ukraine crisis; I don't think that's going to persist. I think we're going to... Europe has run very, very high levels of storage, through a relatively mild winter, and I think the combination of that storage being released and the fact that we no longer have access, as Europe, to Russian gas, and therefore we're going to rely on diversified supply, and on the United States, means that there's upward pressure, again, coming back on to European energy prices. I'll be even more risky here and say that I fear that that higher energy price environment will catch into the United States. So, I think there could be a broader contagion, because we're going to have to buy natural gas, LNG - as you pointed out, new terminals here in Europe - from the US, and currently, it's five times more expensive, gas in Europe than the United States. I'm not sure how long that persists. I think that the concept of a reducing inflationary environment.... Inflation may persist longer than people would like to think, and I think that's partly linked to the fact that energy is a very big....

ML You're a bundle of fun! So, you're saying the energy prices are going to turn back, and go up, and the inflation is going to persist?

JM I think these are challenges, and I think that you're seeing central banks using interest rates as an instrument to keep up down inflation. What does this all mean? Okay, maybe a bit more fun: I think this really is a huge opportunity for the energy sector to get its act together. I think under that high price environment, where energy security is a challenge and decarbonisation is a critical objective for all of us, that's one of the reasons I'm so optimistic. I think that we've now gone through a tipping point; I think we have to start really focusing our efforts on much more energy productive projects, a much more efficient energy system. And I think that is going to be a big feature of European energy...

ML But you're now doing that in a higher interest rate, an inflationary and higher interest rate environment, than when we spoke two years ago. There's probably, what, 300, 400, 500 basis points difference in the interest rates that your projects are being charged.

JM I think you're dealing in a much higher energy price environment, a higher rate environment. I think the good news is that the benefit, the cost-benefit of implementing these projects, is even higher in a high-energy price environment. So, the net economic impact for, and benefit of, delivering these projects is going to be very, very, very good, if not better, notwithstanding the increases in rates.

ML So, a difficult environment, but you're optimistic. And then where does it get us to in 2030? Are we going to be bending the curve on emissions? We talked about, you have to get 50% down by 2030 to be on track for one-and-a-half degrees, I personally think that's not realistic, I said goodbye to that in 2018. 25% down to be on track for two degree - are we going to get anywhere close to that, where are we going to be?

JM Not without a huge change in attitude towards efficiency? As you say, it needs to double, triple, quadruple in terms of focus. I tell you, here's a quick prediction: I don't think nuclear power is going to produce much in terms of low-carbon energy by 2030. I don't think that however much we focus, which I really, really hope we do...

ML That's additional; the nuclear is not going to produce additional, because of course it is 20%, or 30%, or whatever, more than 20% of electricity, today.

JM Which is 20% of the energy system, but yes. Certainly, in relative terms, it's not going to change the game. I don't think other very large scale renewables are going to change the game, either, by 2030. Although I would like to see massive scaling-up and I really, really hope we do. But I would be surprised if we got much further than the numbers that you suggested at the top end, 50%, 60% of electricity. But you've still got the other 80% of the energy system, which is running on conventional energy systems. So, 2030 is very, very hard. And I don't think hydrogen is going to save the day, either. Nor do I think it's all about all of this, or all of that. I don't think it's possible to say, it's all solar, it's all wind, it's all hydrogen. There's no silver bullet: we need all of them. But I would predict that by 2030, this problem does not get solved on the supply side; I can't see any feasible, technical, financial way it does. I think, if there's a focus on improving efficiency and reducing energy consumption on the demand side, I think there's a massive opportunity because we're wasting two thirds of it! And that is what makes me so optimistic: it's so extraordinarily inefficient, the way that we provide energy into the system, and the way that end customers - 70% of the energy being used in buildings, industry and transport, 10% to 30% being wasted - that's such a big prize, that it gives me great grounds for optimism that we can achieve the 2030 or something like it, but not by what everybody thinks in terms of a gleaming new solar panel on its own. This is going to have to be a systemic change.

ML So, we talked about that kind of 15% focus on energy efficiency, when it needs to be 50%, or possibly even 85% in the near term. So, that's a very articulate, passionate pitch for energy efficiency and investment in energy efficiency. So, thank you once again for joining us here on Cleaning Up and I look forward to coming back and revisiting those forecasts over the coming years.

ML Thank you for having me back, Michael, really appreciate it.

ML It's my pleasure.