Ep14: Jonathan Maxwell 'Cheaper, Cleaner, More Reliable'

Transcript

Michael Liebreich

Hello! My name is Michael Liebreich and this is 'Cleaning Up'. My guest this week is Jonathan Maxwell. We've got together, here in my house, for a socially distanced conversation. Jonathan, apart from being a good friend, is also the CEO and founder of SDCL, that stands for Sustainable Development Capital, LLP. He's one of the biggest investors in the world, and almost certainly the biggest in Europe, in energy efficiency, which he defines as cheaper, cleaner, and more reliable energy. For disclosure, I am also a Senior Advisor to SDCL. So let's bring Jonathan into the conversation.

Jonathan Maxwell

Thanks for having me, Michael.

It's a great pleasure. I'm tempted to ask you what you've been up to today, but we might never get into the meat of what we're supposed to be talking about. But, what have you been up to today?

On my way here, looking forward to...

Okay, just preparing for this conversation. You know, I have to start by talking about the first time that we met or, in fact, we didn't meet because I was told that I was surprised I must meet you by a mutual friend. And I thought Maxwell and I were starting New Energy Finance. We were very nascent business and I thought: 'I don't need any scandal, I don't need any Maxwells in my business'. And then I discovered afterwards, only once we had actually met that you're from a different bit of the Maxwell. Well, how does that work?

Well, my father's name was Missoulas,

Missoulas. So not Maxwell at all.

People couldn't spell it, so my mother deal when they got married, convinced him to change his name to Maxwell.

So, my fears were unfounded.

<laugh>

Not a bit of Maxwell about you. And not a bit of crookedness, which is very good news. So, I gave him the preamble, I described that you now run SDCL. But I want to kind of start by just you've been on this journey to become a major investor in energy efficiency. Talk me through, where that started?

Before I set up SDCL, I was with HSBC Infrastructure. And I had an extraordinary opportunity, really, which was to get involved in, you know, social infrastructure - funding, projects around schools, hospitals, long term infrastructure services. Frankly, the stuff that society doesn't function without. And you know, if you'd like the financial structures that sat behind the creation of a lot of these sorts of solutions in the UK, I led the IPO actually at the first listed infrastructure company in Europe, and back in 2006, which was the HSBC infrastructure company, and I was working at HSBC.

Let me just jump in there, sorry, just one thing, because not all of our audience knows what an IPO is, what an infrastructure company is. This is taking a bunch of assets, big things, and put them in a vehicle, and then you float on the London Stock Exchange. Lots of assets, was it?

It's a great question, actually, because infrastructure assets, at the end of the day are contracts. And it was a contract, these were portfolio of contracts between government, in that those cases, and, you know, investors. And investors put up the money to build something - might be a school, or a hospital, maybe even...

PPP.

These are public, private firms, these are backing up day contracts. So there'll be 20 - 30 year contracts. The deal for the investors that they invest at, together with an industrial group took

the risk to build the project. Once it was commissioned, they would get a long term contract that income from the project.

Okay.

That's a fundamentally what is a public private partnership.

So that's an attempt to explain a little bit more. And if people didn't understand it, then it's financial engineering is finance stuff that people wouldn't normally associate with, you know, putting into a coated.

It's real, what they call real assets. So, but I think the other point about it is basically spreading the cost - which could be quite expensive - of a large infrastructure project, over the useful life of its.

These were not energy assets. You hadn't had the epiphany about energy efficiency at that point, right? And then you ended up... I know that you ended up in China.

Yeah.

I'm not quite sure how you got there, but you still weren't doing energy in China.

Correct. That deal happened in 2006, I had this fantastic opportunity to go to China, for HSBC...

With HSBC still, okay. To look at... After that infrastructure deal, to look at ways in which we might start and investing in Chinese real estate. And, you know, I think you use the word epiphany, but at least the eye opener for me was arriving in Beijing. This was mid 2006. And I couldn't see down the street, because of the pink at that time, the pink dust in the atmosphere and on the street. I was doing a lot of reading, looking for sort of why there was so much, you know, sort of dust sort of pollution. There are lots of reasons but one of the reasons back then

in 2006 was deforestation and deforestation outside of Beijing. That created sandstorm or factory dust. That would just come straight into the centre of Beijing. It started opening my eyes as to 'what environmental degradation can do'. And in fact, some further work I was doing around China at the time, whether it was basically, you know, to the dust coming in from the desert, into Beijing, or it was construction dust in Shanghai. And you know... I just told us as well, particularly

...in different cities and particulates, but I think what I was starting to see with my own eyes with air pollution. And the other thing that I started to see with my own eyes, which is real problem, with things like geotechnical problems, with trying to buy real estate, sometimes the aquifers were depleted. So geotech...

...meaning 'subsidence'? Subsidence. Which is another form of environmental degradation, correct?

Yes.

Around this time, I'm trying to remember because I was... You know, I was running this tiny... This is to which you are we talking here, this was 2006. So I had started New Energy Finance... I raised a little bit of finance in January, and I was, you know, struggling or, you know, running at 1000 miles an hour trying to get the thing stood up. And there was one thing, which I remember from around there, which is a report that said, some... It was a report on China's environment. Now, China was just regarded as - by me - as this kind of mysterious life force that was just growing, you know, at that time, probably 11/12/14% per year. And, we all knew that there were environmental problems, even though that wasn't the level of your experience. But there was a report that came out that said that environmental damages were costing, the Chinese economy, and the number was some enormous amount: more than 10% per year. And I remember looking at this and thinking 'come on!', I mean, 'Is that real?'. Can that really be and what dodgy methodology, you know, could that use and so on? Do you recall that?

Yes. That report was created by something called the State Environmental Protection Agency together with western economists. And what it basically said: it broke down the cheap loss of GDP, from water and air pollution, from acid rain from deforestation.

Do you remember that report? That's what you were seeing this stuff? And that you remember the actual analysis?

Yeah, it's an extremely important report for me. If you asked about perfectly for me, that was a massive eye opener. And in fact, the report pointed to up to 12% per annum loss of GDP from environmental degradation. So the link came back to me to say, if the if the economy, the real economy can be degraded, or this kind of value can be taken or suffered by the economy because of environmental degradation, then surely, there's an investment case to start investing in what I was describing as environmental infrastructure.

Do you called time environmental infrastructure, you haven't made the jump to calling it. It's very interesting, because one of the my epiphany, when I was thinking of starting New Energy Finance, was realising that effectively, you know, 60 - 70% of all energy, primary energy is just wasted, and thinking well. But I know that there are technologies that can, whether it's the fuel cell that right now I have in the basement of this very building, or whether it's wind and solar. I mean, it just... It was maybe similar. I just thought: this is billions and billions and more per year, if you can just close that gap.

It's the same issue that after I was got sort of fascinated in this concept of environmental infrastructure, and can we do deals with this. My fundamental question is: can you do the same sort of deal that you do to finance a school or hospital or railway link, to actually finance environmental infrastructure? That's also critical for society. But the leap, maybe it took me longer than it took, you know, New Energy Finance, but after a few years, that that that loss, that 70% of energy being wasted or 60% of energy being wasted, that's really where I alighted. That's why I ended up focusing...

I'm not sure that there was any faster, by the way, because in retrospect... I think Steve Jobs says that: you can always, you can only join the dots, you know, looking back was one of my favourite quotations, because, you know, now I can say, I had this insight when I started the business. No, I didn't, you know, I was running around doing all sorts of things climbing in the Andes, and you know, and following the news about the Gulf War, and you know, now it seems pretty obvious, but at the time, it took a few years, to be honest, just like you. So you. Did you start to do what you call an environmental infrastructure in China? Or did you think right? I had this massive epiphany idea. I got to get back to the UK to make it happen.

I went back to HSBC in London. I said, we needed to set up a division of the bank just to focus on environmental infrastructure. It wasn't the right timing for HSBC. So I left, on very friendly terms, and set up Sustainable Development Capital as a place to focus. And, you know, it was really, I think that, two things I was very interested in. One of which was this concept of environmental infrastructure, the other one of which is going on a bit of a journey to figure out where the inefficiencies were in the energy space. So that's really what's got the business started. And I really just wanted to set up an institution that just focused on those problems, and not go what went off into funding airports or toll roads and things like this, but focused entirely on this sort of sector. So that's really what got me started.

And it's an interesting question for large companies. Why didn't HSBC not say: well, we don't fully understand it, but you know, you've been out in China and you've seen this stuff... Why don't you take a year or two, try and figure it out within HSBC? Because you're building a very successful business, but HSBC does not now own it? And presumably, had they come and offered you the right, you know, nice office and a couple of analysts and whatever, you may well have stayed there and built it or not?

Yeah. And that probably had less grey hairs as well...

Possibly.

Yeah. I mean, I think it wasn't the right timing, it was a sort of break of mould, if you like. And I think that's hard to do, and existing institutions...

I'm fascinated by because, you know, I started New Energy Finance, which, of course, was eventually acquired by Bloomberg. And it's not the only example that you know. The world is full of examples where large corporates, they just can't take a senior person, which would have been at that point. And, you know, like myself, done 20 years out of business school, and I started nearly 15 years out, yeah. They just can't take such a senior person, and have them kind of do nothing obviously productive for a couple of years. And it does take a couple of years, doesn't matter, to kind of figure out. How long did it take for you, to kind of do your first transactions from getting back from China?

Oh, quite a while. I mean, you know, we got going as a firm, we got going quite well actually in sort of 2007, so we're 13 years old, more or less. So 10th of October 2007, we got started. I mean, we were doing advisory work for a while but this sort of fascination...

Advisors deal by deal just helping...

A little bit helping attract, ironically, helping investors or like investment fund and firms like HSBC and other, and the World Bank, Asian Development Bank, look at how to bring private capital into what I was describing at the time as environment infrastructure. The term caught on back then...

It's very keen during these conversations, to sort of, you know, to rate accessible to those who are not very financial. So advisory work is really just helping people, just to find deals, to structure deals, to think through where to put money, right?

Yeah, I often think of investment or financing, there's some two to three things, capital and help,

Capital and help. Okay.

So, for the last decade, we've had the good fortune to be able to manage cap money, and that doesn't provide capital. I guess before that, and from 2007 to 2010, we're already providing help. The first type of help is helping investors like HSBC, and other sort of public sector institutions, in 2008/2009/2010, figure out how to bring private capital into environmental infrastructure. We got big opportunity to really focus in on this energy efficiency problem, because in 2010 we started getting advisory. In other words, help pass mandates from some big corporates, and they've been very interested in where their carbon was in their business. And they identified that, really, the bulk of their carbon was in their supply chain. Supply chain was in touch, right?

This was the period of all of the kind of people were trying to get carbon neutral. They were all making great promises, News International was going to go carbon neutral, all that stuff. And then of course, they have to work out what it means. Right?

Having said it, right. And I tried that was good for us, because we were then set. The question was, where is the carbon efficiency? Where do we make the saving? And we were mandated to try and find those savings. The hunting ground, the biggest hunting grounds is in the supply chain, the biggest supply chain was in China, and the biggest source of the current was in the factory. So all gravitated towards energy efficiency.

I remember at that time, you know, Walmart. Everybody wanted to kind of persuade Walmart to go off to China and bounce on their supply chain, because they realised that. I think there was some, you know, some huge proportion of Chinese exports, like 6% was actually supplying Walmart. Okay, good. So, so that's your kind of journey to energy efficiency, because you don't talk about environmental infrastructure. You talk about energy efficiency. And energy efficiency, through the whole time that I built Bloomberg New Energy Finance, until quite recently, was always the sort of the unloved stepchild of all of this.

Yeah.

But you, you always loved it. It was like, you know, this was your thing. What was it that you saw that? That, frankly, a lot of people didn't see about energy efficiency? Kind of, you know, what was it? Is it because it was such attractive, easy pickings? Deal wise? I don't think it was that, but it was in the importance of the sector.

I think the first thing is, you mentioned your reason for starting New Energy Finance, which is, you know, once you figure out that the energy system waste 60% - 70% of the energy before it gets to the point of use, and then another 20% - 30% of the energy once it gets to the point of use...

Now make me feel guilty, because I realised that started the business and then went off and spent most of my time covering, you know, wind, solar, natural gas and nuclear and batteries and smart grid.

And it's amazing, you created this ecosystem or lexicon around clean energy without which energy efficiency wouldn't be performed for all these years!

We actually tried, but we couldn't sell information about energy efficiency, there just weren't enough Jonathan Maxwell's in the world that we could create a market on. So you saw something that was different.

I saw a gap. And I knew the gap would be hard to fill because, you know, I though there is this fundamental problem and it's complicated as to why so much energy gets lost between the point of generation and entities. And then it's also fiddly and complicated about why buildings and even the transport sector wastes so much energy in the process, so this was going to be a hard task. It wasn't that sexy. Candidly, 10 years ago, I think it is now, but it was very sexy. To me asking somebody who'd been in the business for a long time. Since 70s and 80s. You know, why doesn't energy efficiency get the same attention? I think still, to this day gave me the best possible answer, best one I've ever heard, which is 'real men build power plants'.

Because real men build fossil fuel power plant!

<laugh>

You see what I mean? Hopefully, there are now a lot of women building power plants and increasingly clean power.

You know, actually we've got some very nice shiny power plants

But it's true, it is the eye catching thing is the supply side. But talk to me about the demand side. I mean, now that we've got such nuanced understanding of the climate challenge. You know, what is the relative importance of demand and supply side? How do you see it?

So, you know, I think that the way I see it is endorsed, I think, this year by people like the European Commission, who basically said: look, if we're going to meet 2020 - 2030 carbon emission reduction targets, we have to think after, like the last decade is, which is fantastic, is that bringing renewables onto the electricity system. You and I know that electricity is part but by no means or even most of the... But you know that we have this fantastic decade for renewables. But actually the only way to make carbon emission reduction targets for 2030 is to reduce the size of the cake. And that's the fundamental story behind the European Commission's energy efficiency or rather even the energy policy for the next 10 years.

20% of energy, but...

Right.

I was a commissioner at the IEA, it was the IEA Commission for Urgent Energy Efficiency, and I love that juxtaposition of urgency with energy efficiency that never been attempted before.

And certainly, the thesis there was: if we don't do the energy efficiency and up our hit rate there, then all the stuff you do on the supply side simply can't get us to the plan, the climate goals. We have, you know, ferocious goals that we need. It really goes back. It's not just the EU, this is IEA. I think they've been saying for more than a decade. Half of the heavy lifting has to be done by the demand side. And if you go back to, I think, there were these things back in the mists of time, there were these things called Socolow wedges. If you didn't do energy efficiency, you just weren't going to get that.

Yeah. So you know, we need at least 3% per annum that we between now and 2030.

So that's 3% per annum of energy. Actually, it's probably energy efficiency, energy productivity 30%. So, because the targets, which I've talked about in previous episodes, with people like Christiana Figueres and others, we've got to achieve for one and a half degrees, we need

something like a 50% reduction in emissions by 2030. If we don't do that, if we do a 25% reduction we've got, then we'll get to two degrees. And I think we probably, at the moment, we're kind of bending the curve, but we won't get, we won't even get to 25%. And obviously, getting 30% out of energy efficiency, you kind of have to adjust them for economic growth and supply side. We have a chance of getting somewhere that's not, you know, horrendous.

So let's be really provocative, okay? Let's say, go back to this point or epiphany, whatever you call it and say: okay, if we're wasting 60% to 70% of the energy in the economy, between generation transmission energies... I mean, that's massive. Energy is one of the biggest inputs into the economy and we're wasting most of it, right? And that's before it gets to the point of use.

I'll tell you, the narratives and the choice of words and all of this, it's absolutely fascinating, because, for me, sustainability means environmental, social and economic sustainability. I've got this thing going on in the Alps, Moving Mountains, and we look at sustainability of mountain regions, and it's got to be environmental, social and also economic. Otherwise, it's just not appropriate. But, I will say that quite a lot of people on the right, absolutely hate the word 'sustainable'. Absolutely hate it, because it just seems fuzzy, and it seems focused and attempted to that sort of land, grab of the state or of nanny state or commissars.

Well, that comment, if it's not commercial, it's not sustainable was put to me in 2006, in Hong Kong by a commercial lawyer, not by an environment...

The Hong Kong commercial lawyer is a pretty serious guys.

This is not an environmental statement. It's a big point to make, Michael, because, you talk about sort of the left and right... In my view, this is where it collides, all coincides and comes together. Because, you know, you've got a conservation concept. Conservation, really, is don't waste. And then you've got a clear economic argument here, which is: this is the way to get better productivity and growth in the economy. As the IEA has identified, a million dollars spent on energy efficiency, not only is great for economic productivity - it also created 15 jobs.

I've been spending my time doing it so I agree that this is a way of bringing together you know, all the stakeholders, it's just an interesting one, that the language can sometimes create barriers, eventhough the concepts ought to be unifying. So energy efficiency - fabulous, right? And 75 % money on the floor waiting to be picked up, great for the economy. It's sort of a case of, you know, for things to stay the same, everything has to change to use that great Lampedusa quote, because it's everywhere in the economy, and we have to change everything you do.

What are the things, where are the most productive sort of sectors or business models that you have then been sort of, you've divided that enormous blob of opportunity into chunks, right?

And what are the chunks? Where do we look for all those opportunities?

So let's talk about the built environment, and then we'll come back to transport. Buildings, the built environment use about 40% of the world's energy, and therefore produce about 40% of the world's carbon.

So it's kind of buildings, industry, transport, agriculture, and probably some other really, really...

I mean, that's the energy system.

I'm imagining, I'm hoping people are imagining a pie chart out there enough out there and internet to think of a pie chart. So 40% of slice is built environment.

And what's going on inside that slice or box? So that's what you're asking, within that a big, big area, fascinating area, very topical. What we're doing now is data centres and information, communication technology. This is a massive user of energy in any economy. It's growing quickly. Let's come back to what you can do about it. But let's list a few of the chunks that you see... Another big area, again, pretty topical today, is hospitals,

Hospitals, right? Well, because the NHS has just announced its net zero plan.

Sounds wonderful. And then the third area that we've really focused on at the moment is manufacturing. Before you compare anything else with a huge opportunity on the data centre

market... You know, My think it's about improving the way in which data centres improve their efficiency and there are two elements to it. One, which is quite often overlooked, I'm afraid, is the way that the energy actually gets into the data centre. So it's the supply side, there's a tremendous industrial focus on data centres around the actual coefficient or the efficiency of the data centre itself.

The heat production and the cooling... Because at one point, data centres are sort of 2%. They were they were 1% of energy demand, I'm talking about probably 2010, but you could just see the trend. If they don't become more energy efficient, they're going to become, you know, I think it was like 33% of all. And then, I don't know whether it was you or others, but you know, that curve sort of flattened a lot didn't it?

Go flat that lot, except it's that 30% number is a real number, it's in certain locations. So there are hotspots in the area like Dublin, Luxembourg, Denmark. Within those contexts, the strain that puts on the electricity network is very...

So you're thinking... an end to end supply, right the way through to heat,

I think you have to look, when we talk about energy efficiency, I think you have to look at it as a system. And you have to look at the way that the energy gets generated, transmissioned and distributed to the building, as well as the way that the building uses and processes that energy. And in data centres there's the scale of these data centres is very substantial now, when we're talking about sort of, what they call, hyperscale data centres getting up to 100 megawatts, which in households or people is enough to power probably 100,000 homes, depending on where you are in the world. So it's a very, very substantial amount of energy demand. Clusters of data centres in cities, particularly for example, in South Dublin will put tremendous strain on the grid and potentially compete for energy use even for residences. So you know, the energy systems are very important. How do you supply it? How do you get it? Is it renewables? Is it fossil fuel that is going to generate that power that gets to the data centre? And then the second point is how you improve the efficiency or reduce the energy demand inside the data centre?

Let's just stick with their two cents for a second and I want to hear about some of the other things. Can you go to a completely net zero data centre? Because you can always buy green

energy, but does it appear at the right time of day? What's the best way of dealing with your data with the data centre? What have you found? And all of you looked at every different solution?

I said, there's a lot of work being done on this, where a lot of data centre operators are actually hugely committed, the great thing about this sector is that almost all of them are completely commited to net zero.

And they've got lots of cash flow from their business, their core business.

The problem is matching that load.

So that you know, let's explain, because not everybody will know what that means. What does that mean?

They use energy all day, all year.

So midday, they can use solar power and say 'we're virtuous' and when it's windy, they can use wind pounds, it will virtuous, but it's the bits in between.

That's what we mean by matching the load. It's looking for the renewable production and then trying to sort of figure out how they, at all times actually, can be supplied by clean energy.

That's a serious challenge. And it's a serious challenge at one or two of the software companies referred to as their 24/7 challenge. That's an exciting challenge for companies like ourselves, where we can look at our combination of on site of generation together with in a match with renewable supply.

Can you not sort of just jump to hydrogen and say: okay, well, we'll use the solar and the wind or whatever, we'll make hydrogen and all power on hydrogen. And we've matched it. Is that not a thing yet?

It's a thing that we're always looking at how to do. I said, it's quite a significant challenge today, because we have to figure out how to make the hydrogen and you can make it from that process.

There's an interest that isn't currently being utilised.

Yeah, you know the answers. I think you've got to figure out how, where you want to get to, and that's why we want to get to in 15 - 20 years time is a situation where there's enough green gas or even hydrogen in the gas grade, to begin replacing the gas in the gas grid. That fuel can transition from natural gas over towards other types.

There is kind of buying your electricity through wind and solar but there's another way, which is the CHP solutions: biogas, combined heat & gas, which generate the electricity, you then use the heat for cooling, and eventually you'll jump over to probably using hydrogen or something...

Right, and within our portfolio, we're building projects, which run on waste gases, we're running on bioenergy, and we're also building projects...

Let's guess, but that's the industrial gas, but...

Within the data centre, second wave, but we're also delivering projects, which sometimes use natural gas. If they use natural gas, we always look at offsetting that with procurement of green gas to actual suppliers. But the key thing is making sure that the productive energy is used. So we can use it now when you when you have a generator, you're producing two things electricity and heat. We use the electricity for the data centre, we transform the heating to cooling for the data centre, or heating for just...

That's massively more efficient! Without even although it leaves a little bit or it doesn't leave a footprint, but it is massively more efficient.

In round numbers, it should be doubled as the efficiency of the grid.

Right. And you also mentioned hospitals, and to me, hospitals as a way of talking about you sort of missed on your list. You add data centres, hospitals, and then waste gas and things... Just buildings, just the building envelope, the lighting, all of that stuff. That's so because that's a big piece as well. And you jumped over that you mentioned hospitals, and you've done some great projects.

I mentioned hospitals, because not all buildings use energy all day, all night. Of course, data centres and hospitals do too. And in fact, typically, both of them, 1% or 2% for data centres. 1% or 2% of energy use in any country is always hospitals. Huge energy users. The NHS in the UK is one of the biggest energy buyers in the UK. And, again, you know, there is a fantastic opportunity to introduce efficiency. There's two combinations, both on the supply side, by producing on site energy generation. We've got a project in London, which we are very proud of it, the on site utility for St. Bart's hospital, the England's oldest hospital. So we're doing on site generation. But the other thing that you can do in hospitals is obviously reduce demand for energy. And that sort of things like lighting, heating, ventilation, air conditioning, and so on. So hospitals is a big opportunity.

What about other, you talked about some waste gases, waste gases, and like waste gases of what? What are we talking about?

So I mean, we've got examples in that, we've been working on in heavy industry, and also in agriculture. So just to break those out a bit. On the heavy industry side, we have a portfolio of projects, which actually takes effectively gases that would otherwise be pollutants, and uses the gases and the heat associated with those gases to generate energy, electricity and steam back for steel mills. So it's effectively recycling.

It's interesting, because it's not that example and also the CHP example. You're not sort of shooting for perfection, at least not initially, I mean. Because these are still...

No, at the end of it...

There will still be some energy loss

Well, define perfection...

Net zero

I'll give you a great example, a perfect example if we take our steel mill projects in the United States. So what we're doing is we're taking the wasteflow gases, and we're using those to recycle the energy effectively. The heat back into steam, electricity back for the steel mills, but we stuck in average, recycling the energy. We get renewable energy certificates for those projects. So let's compare that to perfection. If we define perfection as a solid path, for instance, then we're actually generating one and a half Renewable Energy certificates for every one that an equivalent solar panel...

But what is that? Because the regulatory kind of arbitrage there's a regular or is it because that really is such a waste of energy that you know, such as scratch, right?

It's because they're measurable and verifiable productions, impact is so much more efficient. The second sort of waste gas that we use, for example, is we have projects in Spain, which address waste in the food industry. In fact, we've been talking about energy all day today. But and obviously, energy and climate are so not synonymous. But food is even more wasteful than the energy sector. In consultant's report, so 92% of food is wasted. Actually, we're in the olive industry where we were active in Spain. It's about right about 92% of the actual olive drill

Doesn't end up as calories in the olive oil. Correct?

Definitely. Yes, yeah. So what we look at there is how to sort of effectively reprocess or recycle the waste, right?

And that's a real thing that you're doing with olives.

That's a real thing with olives. And what it does is it effectively we've got an olive processing facility, and we take the olive that comes out of that waste process. And we use that as biomass to create renewable power back to the grid. So that is a, what they call it in Spain, a circular economy type of project. But it's creating efficiency, it's recycling waste. And what we're also doing through our cogeneration projects in Spain is providing heat to the industry.

Now, I'm going to take a small intermission, because you've just reminded me my favourite energy joke.

<laugh>

Which is a year is a long time in oil. Not if you are an olive. I'm sorry, I had to do that. We got to keep this thing, these conversations go for an hour . We have to try keep people on the podcast on the YouTube.

Yeah, it's a good one, isn't it?

But you've also, moving on from olives... transportation, they're big, they've got 40%, which is kind of fixed and buildings, or it's or associated things like data centres and some waste gas at the time, but transport: enormous opportunities. If you really define it the same way, you have the olive industry. So how many calories go from the extracted oil to driving, you know, one human from A to B, there must also be 92%, or some huge number wasted. How are you trying to unpack that?

You and I would know that there's an a massive inefficiency of basically taking petrol and turning it into the useful energy to move a heavy car or bus or truck around with diesel. So for me, obviously, electrification of transport has an energy efficiency associated with it. We're really interested in providing and we are investing quite heavily at the moment in providing energy, efficient electric vehicle charging infrastructure.

So you've done a transaction to fund the rollout of EV.

This market is on its relatively early stage of maturity.

We're meant to turn it into an infrastructure deal, sort of deal that you can then ap ply low cost.

I think we're, in that particular case, we're providing the infrastructure that utilities can then use to deliver, you know, fast charging stations to their customers across the country. It's an exciting project, but it's also relatively simple, as far as our investment is concerned. I'm really interested in the scaling up of the electric vehicle market, whether it's cars, fleet, electrification makes a tremendous amount of sense. But there's another angle to it. I mean, we've talked about climate change and energy efficiency today. There's another big angle to this with electrification of transport, you know, which, obviously, is air pollution. I mean, my kids live around the corner from here, and they five and eight. I really don't want them growing up in a city where levels of air pollution is four times the level considered safe by the World Health Organisation.

Without getting party-political, but nevertheless, political. It's much easier for mayors municipalities to tax on air pollution in many cases than it is on climate. Because people feel it viscerally. You know, you see your kid coughing or with asthma or whatever your elderly relatives. You want action.

Ten more people die of premature lung disease in London than they do from road traffic accidents.

I was on the Board of Transport for London, I know the answer to that. The answer is yes. The answer is yes, road traffic accidents it's only a few hundred die, but it is tens of thousands that die from pollution.

So you know, personally...

And by the way, just for the record: both are unacceptable. Both are way too high. People really understood what was, you know, the avoidable risk that they're being forced to take just by living in London. And by the way, it's not just poorer areas, in some cases, do very badly. And you know, because they live near main roads. But you know, it's also some of the worst air pollution is in places like Kensington, Chelsea, Putney High Street, you know, posh bits of London. It's an equal opportunity killer.

People often equate electrification of transport to climate, whereas, actually, this is an optimal local climate issue. Of course, you've got the heavy trucks and vehicles, you've got ships and this is a massive area for opportunity.

And I know because I am an advisor to SDCL, that you were starting to look at opportunities to finance, not just the charging infrastructure, but actually potentially the vehicles because they are so different from traditional vehicles, their lifetime is, you know, we have the million mile battery. And, you know, what does that mean? We're going to end up with a million mile car, and if so, what does that do to the leasing companies? Nobody knows this stuff, do this stuff.

What we do now is, you know, that a lot of transport, infrastructure, or vehicles, if you like, are managed by fleet operators. You know, we see two wheelers, moving goods and services around now, we've been through lockdown...

Drones and automated autonomous vehicles we'll be doing delivery,

Right in there. But you know, last mile logistics, you know, deliveries all across the country. In fact, our economy wouldn't work without the internet, or indeed, that kind of delivery capability. So this is actually a massive opportunity to introduce efficiency.

I think this is actually one of the really big points, instead of framing it necessarily as energy efficiency. Clean energy, clean transportation, public transport, all of it is actually about more capex and lower running costs, because there's no fuel. And there's no fuel. This has implications right there out to treasuries, interest rates, macroeconomic implications, and that's

nowhere has that been, you know, encapsulated. We're all kind of feeling around that issue, that this is becoming a world where there are no fuel costs, there are almost no running costs. And if it's electrification, very low maintenance costs. But a lot of the users of those services, those energy and transport services, don't have access to capital, the way that you, Jonathan and SDCL have access to capital and capital at a low cost .

This is an interesting phrase, he said users of those services, actually, they're not usually procuring them as services, they are usually buying equipment today. I think that's the opportunity, which is to translate that upfront capital requirement into a service.

And that's what has been done with you started with light bulbs, right? I mean, just light bulbs. And but but why?

Why couldn't you do that for transport infrastructure? In other words for fleets? And, in fact, I think the issue actually is that exactly the point you've made, the total cost of ownership, over a five to 10 year period is actually lower if you use more sustainable infrastructure. Therefore, the solution to unlock that is to enable the market to deliver it as a service.

So is there a word called infrastructuralise? Because if there isn't, I might, I might have to...

You can add it to the European Commission.

Because what you're doing is you're infrastructuralising, these energy and transport services.

That's okay.

We're getting a bit too philosophical here. But I want to come on to the sort of as a final block of what we need to talk through is, this is all fabulous, right? It's a huge opportunity, we said everything has to change for things for our economy, lifestyle, to, you know, stay the same. Not just as you know, with the two of us, but around the world, and also people to be brought out of poverty and so on. Pretty much everything has to change in terms of efficiency. Why is now

the time? I mean, you know, you've spent 2007 to now it's been 13 years. Yeah, and does the next 13 years just look like more of the same sort of just slowly working your way up or is now a different point in time.

I genuinely feel like there's a massive opportunity to take step changes now. And I would say, if we look at what we've achieved as a firm in the last two years, we've achieved probably five times as much in the last two years as we achieved in the 10 years before.

It's kind of done this in the last five years.

I think there's a number of reasons for that, right? So one of which is acceptance and normalisation, right? You've used infrastructure example. One of the things, something as obvious, as changing a lamp from an incandescent light to LED, which might seem incredibly obvious today. This is basically a massive, massive infrastructure revolution that's happened very quietly, over the course of the last eight years. So the numbers go like this: in 2012 only 2% of the world's lights were efficient, today 60%. But very few industries or modes of application or infrastructure ever change that much. And if you then say: okay, well, we've done something extraordinary to the lighting, which is such a big...

That's the technology shift. But there's also an ownership shift, as we talked about.

There's three things, it's technology, it's cost, and it's ownership and when it's translated into a service, it's all three of those things happen. But then if you look at the things that are starting to take the same trajectory, and it's a great example of this is the AC. And that money. Most scientific books or economic books will tell you that air conditioning is the number one route to carbon emission reduction, that the most cost effective way of reducing carbon emissions. And in fact, frankly, refrigerants in air conditioners can emit F-gases, 10,000 times more potent than CO2, is this kind of air conditioning. But hey, most air conditioners aren't efficient yet. And in fact, we're going to install another billion air conditioners in the next five or six years. To keep my lighting analogy, on why things are gonna look slightly different in the future than they have in the past, because we now understand and we've got the solution, we can try and take it into a service to scale up these ...

Talk through on the example of lightning, talk through your banking example. Because then you can ask the question: okay, what does that look like for air conditioner, which is a much bigger transaction value there, just a few light bulbs. So what did you do in the, in the banks?

In the relatively early days, so from that point of 2% penetration of LEDs and energy efficient lights in 2012. About 2014-15, we worked with one of the Europe's biggest banks, retail banks, and they looked at a portfolio value 100 buildings in the UK, and that one of the biggest sought uses of energy and costs for energy was lighting. By replacing the existing lights with LED, we could reduce the amount of energy demand and therefore the cost because you pay for energy, about 80 to 90%. By changing the bulbs. The problem was exactly the one that you point...

And you funded that?

...was capex, because for the day to day facilities management organise a budget within the business relatively big. We found it, we took the capex problem off the table. And we said to the bank, that we're delivering light as a service for the next 10 years and never had to worry about changing a light bulb for 10 years. White vans going across the country emergent, responding to emergency call outs was a problem of the past, we would replace the entire lighting estate, we'd run it as a service for a fee. And that fee would be less than they were paying for their lighting before.

Well, and what I like about this story is something else, which is how many fewer little vans do you have to have? Because LED lasts a lot longer?

Well, let's put it like this. They were spending a couple of million pounds a year, or those white vans going around town or around the country changing that. So it's about 2000 emergency call outs per year.

Yeah.

That's evaporated.

Yeah. Actually that is a key point and all this bubbling away underneath, which is that it's the

co-benefits. We talked about air quality. Now we've talked about lower maintenance costs. And in vehicles, there's some numbers out recently, I think, from underwriters laboratory, or somebody like that in the US that electric vehicles have half of the maintenance costs of internal combustion, fuel moving on their simplest. Okay, so on the timing, why now, you have got... some technologies have matured, and you've got smarter, and the contracts have probably become simplere. But there's also some stuff going on in the world. And I'm thinking of the climate awareness, I'm thinking of COVID, I'm thinking of just, you know, kind of this state, of the state of the world, is that also... Are you feeling that change as well in the air?

Well, I mean, I'm looking for the evidence for that. And the evidence that I can see is, if you look at what the European Commission is doing, for example, on policy for the next 7 - 10 years...

Such as the Green Deal...

I'll take a step back, let's look at the entire EU budgeting system for the next 2020 to 2027 budget...

That's not a simple thing.

Actually doesn't take long, because my reading of it is like this: they're looking at the next decade budget, to redesign the entire energy market in Europe, because it's inefficient. They're trying to figure out 2030 carbon emission reduction targets and how they're going to achieve them.

So they're trying to up that on...

And, just in case, there's not enough to do, they're trying to figure out the post-COVID stimulus packages. And the thing, the biggest single thing that they've decided that they're going to

focus on is green infrastructure. And the biggest single thing is probably European Green Deal. And the biggest single component of that is building efficiency. Right?

What sort of numbers are we talking about there?

The numbers, if you extrapolate everything out, you're talking about investment from the European Commission to private capital, like ourselves, upwards of 350 billion euros a year.

Per year, 350 per year, billions. So I'm excited about this, because, you know, I wrote my most recent piece for Bloomberg New Energy Finance, about energy efficiency, and I called it in terms COVID recovery, I called it the Swiss Army Knife of COVID stimulus programmes because it kind of does a bit of everything. So you've got the immediate, you do energy efficiency, and immediately you're employing the plumbers, the plasterers, the builders, the trades. You're also improving your long term assets, you're reducing that, we talked about that long term drag on the economy, and also you're hitting your or you're contributing to your climate goals. So that's going to be built in, but in a massive way within the EU.

In an incredible way. I mean, I have to come back to something now, you've got this massive policy drive in Europe, I don't know what's gonna happen in the US. But one outcome of what happens over the next couple of months is a massive policy for buildings. It's very similar, by the way, to Europe. And I don't know what's going to happen in the UK. But what makes a lot of sense from what I'm hearing and what I'm hoping to hear more often the UK, is we're going to take some of the same principles. But, come back to what we said...

The UK has legislated for net zero. I've been on the climate change committee, the sort of strategic advisory for the sixth carbon budget 2030 to 2035. You know, we have legislated that we have to get to net zero. So we're going to have the same conclusions as everybody else that you can't do it, without energy efficiency.

I would like energy efficiency, energy productivity, economic productivity to be the one of, if not the key messages, we can take into COP26.

That's gonna be next November. And of course there are, you know that, there is a team beavering away on energy efficiency, and also looking at it from the perspective of industrial standards, which presumably helps, because it produces those... The next thing after the LED light bulbs is the air conditioners, right?

I go back to my friend who said that 'real men build power plants' and some of the technologies, that make the biggest difference, aren't that exciting. So changing lightbulbs, or changing motors, variable speed drives and industrial prices have a huge impact? As I said, refrigeration and air conditioning, some of this stuff you don't even see. Like, the irony, maybe there is light moved quickly as because you can see them.

Also because I have a limited lifetime. So there is this annoyance, you have to keep changing them, right is an opportunity to step up. I don't know. Okay, so that the the numbers you've talked about was at 350 billions per year. How does that compare to, let's call it 2/3/5 years ago? I mean, just order of magnitude

There is no comparison to draw. And this is what's so exciting. And to answer your question about, it's probably...

A standing start.

I wouldn't say quite standing start. There is a relatively significant market, but we're not talking about in the hundreds of billions.

I'm recalling Brian Motherway, who's the head of energy efficiency at the IEA. He used some figures recently, which was that there's about globally $200 billion per year spent on energy efficiency. And by 2030, it has to double twice.

Yes, it has to double twice.

So globally, I'm just doing the math in my head, that it would need to get to 800 billion. And then you're saying the EU has kind of stepped up and said... of broadly speaking it is. So well, if we use the two doublings, 8x , 10 years growth as a kind of rule of thumb. That's a pretty substantial opportunity for SDCL.

It's a huge opportunity. In Europe, you know, there's a huge opportunity in the United States, there's a massive opportunity further down the line, and in a different way in China. I mean, China's just adopted groundbreaking, historic...

So why is it further down the line they've been doing, when they decided in 2005, that they couldn't keep growing. They're just supply side energy supply, building more and more coal. And they started to kind of work on energy efficiency, do they not?

They did. And in 2006 in the 11th five-year-plan, they committed to an energy productivity goal, which was 4% reduction in energy per year.

I remember it, I'm scared that the two of us both remember this... <laugh> Credit to us. Let me just finish with one other question that if you're talking about the developing world now, I mean, the slower developable the... No, it's not really slow developing, but the kind of, you know, if we're talking about Africa, India... Should they care about energy efficiency? These are places where there isn't energy access? Why should they care about energy efficiency?

In these markets, and these areas and regions, I think, you know, access to energy is really crucial. But you and I know extremely well, that renewable energy is a fantastic way of delivering clean energy, or rather, any type of energy into remote locations or difficult to reach locations. It's a fantastic story around decentralisation. And, you know, local grids, micro grids, storage, self reliance, resilience. I find that we talked about what energy efficiency is: basically, eliminating the inefficiency of the way energy is supplied and decentralised energy and delivering energy to the point of use, it's a massive part of that huge opportunity for the developing world. And then, you know, let's make sure that when those billion new air conditioners are bought, over the next five or six years, that, you know, we have a mechanism. And this is what we're working really hard with the foundations this is about trying to find ways

that the new infrastructure that gets laid for the next five to 10 years is going to be efficient, right, not massively polluted.

Because I sometimes say that the solar revolution, that is bringing light, mobile phone charging, and some of these regions, it's actually an LED revolution. Because if you didn't have the efficient light bulb, then your solar panels would have to be so big, you wouldn't be able to turn toward the more, they wouldn't have space for them. That's similar goes right across, whether it's radio TVs, whether it's... I've worked with a company called Ignite Solar, and I have an investment in a company called Azuri, they're both delivering television. Television as a service, you can only do it if you have an efficient screen. And it's the same for cooling, it's the same for, you know, right across the board...

An argument is that the developed world has created an energy infrastructure, which is designed for a centralised, relatively inefficient system based on fossil fuels, and the future does not need it.

Right. And my worry a little bit is what's happening to a certain extent is that, you know, our motors that are not sort of variable speed are now being exported to these countries, maybe not the actual motors, but the designs, the same way, everything from sewing machines, to refrigerators to air conditioning, and... we've really got to stop that standards, I think plays a big, I think big problems done. Well, it's been an enormous pleasure to chat with you about this. We rarely get the chance, despite the fact that we do quite a bit of stuff together. We rarely get the chance to sit down and just talk philosophically about what we're trying to achieve. So it's an enormous pleasure. Thank you very, very much.

Thank you.

And I hope that our audience has found it as stimulating and interesting as I have.

Thank you very much, Michael.

My pleasure. So that was Jonathan Maxwell, CEO and founder of SDCL, one of the largest investors in energy efficiency anywhere in the world. And as you can see somebody with a real vision for how we work on the demand side, integrated with the supply side, to bend the curve and get emissions down to where they need to be by 2030. My guest on 'Cleaning Up' next week is somebody, like so many of my friends, that I met on Twitter. Auke Hoekstra is a researcher at the Eindhoven University of Technology. He's famous in the blogosphere and on Twitter for two things. One is debunking the nonsense that internal combustion engines are better for the climate than electric vehicles. The other is for auditing the outcomes of forecasts by the major energy agencies and pointing out that year after year, after year they undercook their predictions, their scenarios for renewable energy, particularly solar. Please join me next week when I will be talking to Auke Hoekstra

Ep14: Jonathan Maxwell 'Cheaper, Cleaner, More Reliable'

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