Michael Liebreich Why don't you start by giving us a thumbnail sketch of your business: what is it that SDCL and you do?
Jonathan MaxwellWe focus on developing and investing in infrastructure projects that deliver energy directly to the end user, and that help the end user reduce the amount of energy that they need. By the time energy has got where it's needed, 60% to 70% of it will have been lost - extraordinary inefficiency of supply. That is 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. Losing most of one of the most valuable and essential resources before it gets to the end user, is 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.
MLWhat have the two years since we last spoke been like for the firm and the industry?
JM We should celebrate how much of energy investment has gone renewable, but here's the issue: it's all been adding supply into the system. What's been starting to happen, is there's been an understanding that you have to reduce the amount of energy that's needed for output, but you also need to replace. To the extent that renewable energy comes onto the system, it now needs to start to displace natural gas and other futures. We are seeing the market starting to transform, and I think in a high energy-price environment, saving energy is very compelling.
MLOk, but I talked to you two years ago, and you were incredibly bullish. Then, after Russia invades Ukraine, all these politicians start talking about new LNG terminals, nuclear power, hydrogen. Everything except being more efficient…
JMI think policy has massively lagged, has really let down this opportunity, frankly. 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. When the new chancellor in the UK Jeremy Hunt came out with his energy plan, at least he put energy efficiency alongside renewable energy and nuclear power. So, I'm pleased to see policymakers starting to get it on the agenda, but you're absolutely right, we don't have any more time to waste, 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 think we need to make sure that we plan large scale renewable energy transformation over the next 20 years and in the meantime, get much more productive. In fact, I think we've reached a point of no return. When European energy prices for natural gas are five times what they are in the United States; when universities, hospitals, public sector, are paying four to six times the amount for the same energy that they did last year; I think Russia's invasion of Ukraine was a point of no return. Energy prices are too high. Energy security, nobody cared about at all in Europe. Europe [now] understands that price, security, and frankly, decarbonisation, all depend on efficiency.
MLYou mentioned the Inflation Reduction Act. How does it change how you look at a project?
JMTo focus on the positives: yes, there are tax incentives. There are simplifications that have been introduced into policy which make the US much more attractive than it was before for certain types of investment. But again, let’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. 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. 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. If you want to save energy, Michael, put on, a duffle coat and a woolly hat. Meanwhile, the public sector - hospitals, universities, government, buildings the Ministry of Defense, the transport system - are leaking energy every day. If the public sector get it right in their own estate, not only are they saving public money, they're also in a position then that they can turn around and mandate change.
MLWhat are your predictions for the rest of 2023?
JMSo, I'll have some fun at the beginning of the year, and risk being wrong. Gas 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'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 LNG from the US. But on a more positive note, 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, I think we have to start really focusing our efforts on much more energy productive projects, a much more efficient energy system.
MLWhere does all this get us to in 2030? Are we going to be bending the curve on emissions?
JMNot without a huge change in attitude towards efficiency. Here's a quick prediction: I don't think nuclear power is going to produce much in terms of low-carbon energy by 2030. 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! It’s such a big prize that it gives me great grounds for optimism.