The Crisis Forcing An Energy Revolution | Ep268: Jonathan Maxwell

Jonathan Maxwell
So I do think that we've now got to the breaking point in Europe. Now, that's not going to resonate very much with people in the US, where there's relative abundance of oil and gas, for example. But here in Europe, for certainly, whether it's down to security, either geographic security, energy security, or indeed just managing our energy resources, or prices, affordability, and cost of living for people, this is a forcing function. And I think that's the “known known” for the future.

Michael Liebreich
You won't find me disagree. I wrote something just recently about the Great Clean Energy Acceleration 2.0, because the 1.0 was straight after Russia's invasion of Ukraine, and this is going to be 2.0. We're also going to see a return to fossil.

ML
Hello, I'm Michael Liebreich, and this is Cleaning Up. My guest today will be familiar to any regular watchers of the show or listeners to the podcast. It is Jonathan Maxwell, founder and CEO of SDCL, a specialist investor in energy efficiency. Now, for those who are not familiar with Jonathan and his work, we'll put links in the show notes to the previous episodes when he's come on the show in 2020, in 2023, and in 2024. But for now, we're going to be talking about world events and we're going to be talking about Jonathan's business. Please welcome Jonathan Maxwell to Cleaning Up. Jonathan, thank you so much for joining us here today. You've heard the short introduction, of course, I forgot to mention that you are also a member of our Leadership Circle.

JM
One of the first, a founder, a founding, I should say.

ML
A founding member of the Leadership Circle, and I thank you for that. But you're here with us today, amazingly, it has been two years since you were last on the show, 2024. So, much has been going on both in the world and in your business.

JM
Indeed.

ML
So, your business, the thumbnail.

JM
Yeah so, I mean you described my business as an investment in energy efficiency, which is true. In some degree, it's kind of a narrow topic, right? It's in some ways, it's a solution to a problem. But the problem is a very big one. It's vast, right? There's enormous amounts of energy that we'll argue about this, I'm sure, during the course of this discussion, but large amounts of energy that's wasted, I argue, well most of it, let's put it like that, about half the world's food, a third of the world's water. So, it's not to really forget about the rest of the world's resources, but it's to try and define sustainable development as resource efficiency. And within that context, we invest in energy efficiency, which is probably the biggest market of those ones that I've just described. It's really about buildings, industry, transport, which is where most energy is used. The business is about a solution to a big problem, resource waste, and therefore making the world more efficient, more productive, more competitive and grow better. That's the business.

But it obviously sits within a very large context and the context is global. We don't and we wouldn't invest in everything. I do like to think about the context, the global context in which we live and work. So, I did a lot of thinking around that and I started writing it down in the last few years. I wrote a book in 2023 called The Edge, partly a nod to our business, Efficient Decentralised Generation of Energy, partly a nod to geopolitics. It's actually what happens if you translate Ukraine literally from Russian to English, it means it's on the edge. So writing, I publish a substack, which is a newsletter every week now, every weekend, poison chalice I'm sure, called The Weekend Briefing, which is free to anybody who wishes to pick it up. And a monthly or bi-monthly, much longer piece about what's going on in the world and what we can do about it.

ML
In the last episode, when you came on in 2024, I made you slow down and do Efficient Decentralised Generation and Efficiency, because that spells edge. So, I just did that again. We'll put the link in the show notes to your book so people can buy that at all good bookstores and including online ones. And also to your substack and to The Weekly Briefing, because you're in the content generation game as well as the investing game. And in terms of the investments, just give an order of magnitude, you're sort of north of a billion pounds and you've got a public and a private piece. And we'll come back to that in more detail.

JM
Yeah. So, we've got two major funds, one's public, one's private. As you say, the equity, significantly north of a billion pounds, taken with all the project finance that we've put together around our projects, it's just over two billion, two and a half billion dollars. So, in the last five years, we’ve invested in 10 countries, lots of energy services that we're providing, about 50,000 properties that we are connected to across our portfolios, providing cheaper, cleaner, more reliable energy out into the market.

ML
Let's come back to how the world has impacted on that business since you last came on the show. But let's do the world. So, I think we've got to start, we have to start with the Strait of Hormuz. You've already mentioned the context of Russia having invaded Ukraine. We've also got the US having attacked Israel, Iran in the Gulf with the results that we see today, which is we've got, well what have we got? I don't know, how do you describe where we are? Are you optimistic, pessimistic? What do you think is going to happen next?

JM
Aristotle had this concept of past, present and future about how you guide arguments. And past is about blame, that's what he said. So, there are many ways you can define the inputs to what's going on in Iran. Now, anybody who listens to me or reads my stuff knows that I like traditionally to tie resource competition to geopolitical events. I think this is much more complicated and I'm not going to spend today trying to explain all of that. But I think blaming this entirely on resource competition is probably not right. If we then go to the present, the most direct impact right now is feeding through into inflation and very possibly into the interest rates environment, which is going to take us back or is taking us back to memories of the ‘22 era.

ML
But this present, the Strait of Hormuz price spike was never as extreme as the spike that resulted from Russia's invasion of Ukraine, which was quite a surprise because it could have been much worse. And it could be much worse, by the way, if things fall apart going forward.

JM
Well, look, I think that we're on the present, I'll come on to the future in a second. But on the present, we don't know how long it's going to take to repair the broken infrastructure. We don't know how long it's going to take for the channel to reopen the Strait of Hormuz. We don't know what the impact short, medium, long term is going to be on food prices globally, given the fertilizer dependency on gas coming out. So I think we're right in the middle of all of this. And I think the future about resolution to this is, not today I'm not going to suggest any kind of resolution to that issue, I think the “known known” about where we're going in the future, the certainty about the future and how this argument I think needs to resolve not locally, but globally, has got to be recognising that this is not a one off, right? This is a symptom of an underlying cause. And the underlying cause is we are incredibly reliant, most of the world still is all gas and coal, we're incredibly reliant on centralised energy networks, centralised systems. We're incredibly reliant on the marginal cost. And that's what's happening when you get 20% of the world's flows moving. And you then end up with an extremely difficult problem to solve.

And Europe and the UK with very low gas reserves coming into the present now, what do we do about this for the future? And I think that's really the kind of the “known known”. People often have said to me, we've been talking about there are better ways to do things. You can be more efficient, you can build energy closer to the point of use, why hasn't it happened? If it's so bleedingly obvious, why hasn't it happened? And I wrote a substack recently called The Forcing Function, thinking that actually, for better or worse, this very possibly is a forcing function. I'm not sure where we go from here unless there is a much more efficient way for Europe to handle its energy mix or the UK to handle its energy mix.

So I do think that we've now got to the breaking point in Europe. Now, that's not going to resonate very much with people in the US, where there's relative abundance of oil and gas, for example. But here in Europe, for certainly whether it's down to security, either geographic security, energy security, or indeed just managing our energy resources or prices, affordability and cost of living for people, this is a forcing function. And I think that's the “known known” for the future.

ML
And I think Asia as well. Because the Strait of Hormuz, unlike Russia's invasion of Ukraine, which cut off the supplies to Europe and then the ripples hit Asia. This one, it's the tsunami that hits Asia, because the commodities going through the Strait of Hormuz were mostly going to China, India, Japan, South Korea, Bangladesh, Pakistan, the Philippines and Australia, where I've just spent some time, so the ripples are coming to Europe in this case. But I think that we're going to see that forcing function. You won't find me disagree, I wrote something just recently about the great clean energy acceleration 2.0, because the 1.0 was straight after Russia's invasion of Ukraine. And this is going to be 2.0. We're also going to see a return to fossil though. It's going to be that as well. It's going to be a clean energy forcing function, but also, for instance, coal in Asia forcing function, is it not?

JM
Yeah, I think pushing the world back into a position where resilience is really critical. And I think it's kind of reminded people of the availability and literally the physical delivery. Every one of those boats that were stuck in the Strait of Hormuz is a day's oil for the UK. That's kind of the easiest way of explaining it, which by the way, 70% typically gets lost. But still...

ML
Wasted, you would say.

JM
Wasted. I know, I'm trying to be careful because we debate about these things sometimes.

ML
We'll come back to why we have a difference on whether we should use the word waste, but we'll come back to that later in the conversation.

JM
So, I think what we've got going on in that Strait has, bottom line a very substantial difference to what was going on in 2022, 2023 with availability issues. Because we were more or less able to diversify. America was a big winner in exporting petrochemicals, gas in particular, into the European marketplace. But I think we've got a very fundamental long-term problem that we have to deal with over the next 5 to 10 years. And I think I'm going to be slightly optimistic here, if we've got a forcing function and there are things that we can do to help ourselves here in Europe, then I would like to be optimistic in thinking we actually seize this opportunity.

ML
So, I did a calculation because you said we've got the forcing function and we need to deal with this in 5 to 10 years. I did a calculation comparing and it was a very simple calculation, that said if the Strait remains closed and if you try to replace the oil by buying EVs, acronym electric vehicles, versus if we replace the gas by somewhere in the world just doing a lot more wind and solar - which is quicker? And the problem with the EV route for oil is that it takes a long time. Cars have a long lifetime. So, half of the cars that the world will be driving around in 10 years' time are already on the roads, maybe slightly under half. So, it's just a very slow process. And of course, road transport is under half of oil. So, you've got a 10% or whatever gap you've been left with after everybody has responded with the short-term supply elasticity. And the rest of the, let's say 10% of oil you're trying to replace, it takes about a decade to do it with EVs, it's very difficult to do it faster. With gas it's much quicker.

JM
Well, I think that might be optimistic because even EVs is a small proportion. We're talking about marine aviation, road transport, so within that context it's a harder problem to solve because it's very substantially lower than 1%, maybe even half a percent of global transport has got anything to do with electricity at the moment. It's very challenging.

ML
True. But if you were to postulate that the 25% electric vehicle sales, not the fleet but the sales, if you double that and then you wait and you see how long it takes to suppress oil demand by 10%, it is a decade. Just do the spreadsheet and it's a decade. So, I think we see that the same way. The interesting thing is, if you look at the amount of wind and solar installed last year, 830 terawatt hours produced from new wind and solar between 2024 and 2025, if you could just double that, it will actually replace the lost LNG from the Strait of Hormuz because you're not losing 10% of all gas. You’re only losing, it's 20% of LNG, but that's only 3% of all gas. So, it's a complicated calculation. Counterintuitively, I think that the gas can be replaced much, much more quickly than the oil.

JM
I think that on the gas side, we are coming back to the present rather than the future, and what we've got to deal with now. What we've got to deal with now is lower gas reserves in the UK and Europe than we had going into the Russia-Ukraine crisis. A difficult price environment, a difficult, we don't know yet, but a difficult potential future for inflation and interest rates, and a very difficult situation for affordability. And if we cast our minds back to those summers in 2022, and what we've seen in Europe with gilets jaunes, people on the street, concerns around how to deal with getting food on your plate versus paying for fuel, whether it's the winter fuel allowance, tobacco in the UK or other markets, these are very serious problems that we've got to solve. And this is why I get so passionate about it, a lot of these problems are solvable.

ML
If we look at the specifics of the negotiation that's now underway between Iran and the US, you I think have not had the opportunity yet to see the episode that just came out with John Kerry. So, I'm not sure if you want to comment on the negotiation, and in the light of your sort of historic read of Iran, John Kerry's view was that President Trump will be extremely lucky to get a deal that is in any way better than the JCPOA, the Joint and Comprehensive Plan of Action, which was the deal between the world's leading economies and Iran, not just the US, but there was Europe and China and so on. So there was a deal negotiated, President Trump tore it up in 2018. And Secretary Kerry's view was that President Trump will be very lucky to get anything better than that.

JM
It's almost like there are two different conversations going on, right? I mean, they think the US conversation is very different from the European conversation. So, the US conversation is, and this comes back to the point about the causes of what's been happening, but the US conversation understandably is around global, in the way that it's expressed anyway, global security and nuclear management. I think for Europe the issue as I've described is different. This isn't an energy security issue for the US, it really doesn't get anything much out of the Middle East. And as I wrote in my substack, I think part of the speculation that America had in taking this geopolitical, this political action rather than an energy action on its own, was because they felt the oil price and gas price could probably tolerate this. And we've seen the price going up into the $120s, it's down in the $70s at the moment, can’t predict where it’s going. They're not necessarily wrong, at least from an American perspective.

Europe is very, very different, Europe is very vulnerable to this. And the reason I contrast it again to 2022 with Russia-Ukraine is that Europe found a way, or tried to find a way, of diversifying its oil and gas. I mean, there's still by the way Russian oil and gas making its way into Europe, plenty of it, but still they diversify, particularly with America. It's very difficult to diversify out of this particular conundrum that we're in at the moment because it's physical, it's not just financial. And I think the reason I think a forcing function can make immensely important change right now is because perhaps this is the time, 2014 Russia-Ukraine didn't do it, 2022 Russia-Ukraine didn't do it, but maybe this does it, is to say, look, energy security is not something we achieve as a destination. We didn't get there because we suddenly diversified our oil and gas after Russia-Ukraine. We did that and now look at what's happening with availability physically, as well as pricing. So, if you've got any sense of energy security, America does, Europe's trying to, it's not a destination. It's a position that you need to defend. So, what do you do to defend that? And the only way to defend it is just getting better, being able to use your resources more efficiently, more effectively, driving competitiveness, driving productivity. Otherwise, you're going to go out of that type of business. And I think that's the really critical thing.

Europe now has to figure out how it does more with less. The UK has to figure out how it does more with less. We are not yet, and may never be a clean energy superpower in the UK, we import most of our energy. But we know that. So, what can we do to make ourselves more independent, more secure?

And just simply starting, at least with not wasting most of it, is a fantastic place to go. And if it wasn't possible to do it, I wouldn't go on about it all the time. But it's what I do all day, every day, all around the world.

ML
So, when you were saying that energy security is a process, it's not a destination, you were channeling your inner Metternich, endless negotiation, brilliantly undertaken. But actually, you then swap. I was going to say that I slightly disagree, because what we saw after the Russian invasion of Ukraine was effectively a doubling of everything in clean energy. That's why I call it the great clean energy acceleration, and when you track it, you can see it on every chart. So, the output of clean power doubled, the capacity of manufacturing, the kit if you average between wind and solar and you add batteries in of course, as well, that all doubled, the money doubled, everything doubled.

And so, we're actually going into this crisis in a way, in a much better situation, even than 2022, because everything has already doubled. And if it doubles again, and the key thing that is different, there's been eight price spikes since the 1970s. There's been eight times that the oil price has gone up by 30% or more in a year or less. There's been six times when it's crashed, very painful for oil producing countries, but eight times it's gone up. And 2022 was the first time that you could really say, there's kind of an alternative. But this time, you can do a lot more than say, there's kind of an alternative. There really is an alternative.

JM
I think you're absolutely right, and it's in certain geographies. So, I think the marketplace is much better set up in Spain right now. For example, you could argue there's a much higher level of penetration of renewables, it's had a couple of famous hiccups in the last couple of years, but nonetheless, their actual domestic capability, energy security has been improved. You talk about just skipping technology, you talk about EVs. Yeah, EV car sales went up quite a lot actually this year, particularly in April here in the UK. So, these things do get better, they improve the situation. But that's, I think, supportive rather than arguing. I think it's about saying, these are the forcing functions that make change happen. And that change makes you less vulnerable. The sad news is that if these things are actually making a really big difference, why are we going into this crisis with lower levels of gas storage than we had back in 2022?

ML
Right. And that's Aristotelian going back to your model of the past, the present and the future. Because when you say Spain is better set up, that feels a little passive to me. Obviously, they've got wind and they've got solar, they also have an overhang of gas and they've got a very strong grid other than I think it was April 24th last year when they didn't. But that may be the luck of geography that they are where they are. But in the UK, for instance, or in Northern Europe, we kind of should have known this was going to happen.

There's been eight price spikes, another price spike is coming. And yet, we didn't seriously get into heat pumps or into electrification of heat, all the different variants, not just heat pumps. We are plum last in Europe in heat pumps. And we have these ridiculous conversations about, “oh, it's our geography or it's our geology” I've heard, that we can't do heat pumps as most absurd discussions, “oh, it's the electricity price”. But of course, these technologies that we're talking about should help to push the price down. When we made more phone calls, we got cheaper phone calls. When you use more electricity, you should get cheaper electricity. And so we have these absurd discussions and we let the UK heating industry just run away with the narratives. And so we don't install, we don't electrify our heating. And then surprise surprise, the gas price goes up and we complain that it's hitting consumers.

JM
We're to some degree prisoners of our past, right. There's a, just to give a shout to Ed Conway, who published a really good article.

ML
Ed Conway, who is of course an alumnus of the show like yourself, not been on quite as often, but fabulous a episode, we'll put a link in the show notes. He's the…

JM
The economics editor of Sky News.

ML
The economics editor of Sky News and absolutely brilliant and he's got a new book coming out. And yes, so I plug Ed Conway because I think he's absolutely brilliant.

JM
Yeah, he wrote a very interesting I thought, very good article this morning about precisely this idea of being prisoners of the past, my phrase. But his article was about saying, look 100 years ago, we decided to heat people's homes by pumping water through radiators and you do that through boilers. And, you know by contrast, I've got a heat pump on my roof. I have to say it cost me twice as much to get the planning consent to do that than to actually buy the heat pump and that's another story for another day. But I put it in what it does for me. It does a much more efficient, frankly, lower carbon and substantially free heating upstairs for me in the winter. And amazingly, you know, I'm sorry to say this for those people that are suffering without these things, cooling in the summer.

So it's a better product. It's more efficient, it's cheaper than the planning consent from Westminster Council, and you know, I think that's what Ed was writing about this morning. We're victims of the past. What I think we're victims of in the past on, or prisoners of the past I should say, is we have built a legacy for understandable historical reasons, but we're not talking about the past now, we're talking about the present and the future. We've built this system, which is centralised energy networks with actually established systems and technology. But there's a better way to do this now and part of that is about decentralising, part of it is about being more efficient. And if we can plug clean energy production, better generation into that infrastructure, that's the way out of this.

ML
At this point, you said there's more going on than just that, right, because we've also got power structures, we've got incumbencies that are trying to protect that old system. Essentially, gas heating industry in the UK has tried to preserve not just the fact that we're using radiators, which is a worse solution because it doesn't allow you to do air conditioning. They've also ensured that our condensing boilers don't condense and that the public is completely confused into thinking that we're going to do hydrogen and therefore not upgrading to electrified heating. And until such time as people like the Energy Utilities Alliance, and if you look at their board members, it is a roster of the heating industry in the UK and it has fought tooth and nail against the electrification of heating in the UK. Until we deal with people like that I think we're going to remain plum last in the UK. It's a UK specific point, but it's an important one.

JM
It's a UK specific point, which comes down to something that's economic, which is what it costs to buy electricity versus gas. Because the technology is there to get rid of it, I did it in my house. Look, I'm going to admit something, I did it in my house because I felt that I should do, I wanted to and at the time, I felt that I could afford it. But let me just finish the point. I don't have a molecule of gas coming into my house, even to send that water around my 1836 radiators, which I can't move because of the planning. So it is possible. And I want to give a shout out to your co-host Bryony on this point as well, because the market, 70% of all of this energy that we fight over and we've got these utility incumbents and all the rest of it, is used in buildings, industry and transport. But most of that is controlled by people like you and me, or the people that you and me work for. So basically, this is there. We do have agency in this, I had agency in my house. I don't need to run my house on gas, it runs totally on electricity. I've got an electric boiler, I've got thermal storage, I've got my heat pump. And that does it, as far as my heating and cooling for the whole house, 24-7. And it works, and it's never caused me any trouble. It's totally possible. The market, the demand side, can do something.

Industry, buildings in the public sector, universities, hospitals, the Ministry of Defence in the public sector, 15% of the energy supply, commercial industrial buildings, all residential, and to the point you're making around at least you and me driving around in our cars, or maybe trucks, as I know you're doing in a separate life at the moment, these are things that we can just get on and do. And do you know what? Very often, they're cheaper, cleaner, more reliable than the grid. And whether or not that's where we shouldn't be waiting for government, you and I at least, to be waiting for government to make change, we go and talk to them and say, as we do, these are the simple changes that you need to make to make sure that there is a level playing field for the energy system to work. Because given a level playing field, I firmly believe if you apply the lens of efficiency, you will get to a much better energy system.

ML
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Let's come back to this question of waste, because a few times you've hinted that we have a slight philosophical disagreement. And the reason is that a lot of that two-thirds of primary energy, the energy that we put into the system, the loss of coal, the oil, the gas, I'm just trying to think if I said, yes the thermal, the nuclear, the heat in a nuclear power station, two-thirds of it is wasted. It's gone. It's actually called in the Sankey diagrams, I think they call it lost rather than wasted, which I sort of prefer. And the reason is, if you've got a lump of coal and you want to ride up and down in an elevator, then what the two-thirds does is it upgrades the one-third into electricity to do the work of riding up and down in the elevator.

So, in a sense, it's not waste. It's actually used to upgrade the other third. Just kind of call me a thermo geek, right? But it is inherent. I react a little bit against it being called waste because it's not like we're being foolish or stupid and we could just, if only the turbine was more efficient or if only the ship that the coal arrived on had a better engine, that we could waste less of it. It's just inherent in trying to ride up and down in an elevator using coal as an input, it's inherent. So, that's why I don't like calling it waste. I like the word lost or something.

But also, I think that it points to the way forward. The reason I'm working mostly on electrification is it sidesteps that, because you can go straight from wind, solar, hydro and batteries and if you want to do some nuclear, before anybody writes in comments, do nuclear if you can get the costs anywhere acceptable, that's absolutely fine. But it is just inherently, it's almost like not efficiency, I just call it elegance. It's the right way to run an economy that needs lots of work is, don't start with the fuel.

JM
Yeah, I think that's right, you've argued both sides of that. You've said that you're starting with the fuel, which almost assumes that you have to in some way, shape or form. I think my argument is that yes, there's a thermodynamic inevitability. So, what do you mean by that? You mean if you put whatever it is, coal, gas, uranium for that matter, into an energy making machine, less than half of it turns into electricity. But as we all know, the energy doesn't disappear. So, what happens to the other bit? The other bit turns into some form of a different type of energy and you use the word thermodynamic, it turns into some form of heat. And then the question is, and this isn't absolutely, you can't apply this universally. The question becomes, is there anything I can do with that heat? And if there is, what can I do? And would there be conditions under which I could do something with that heat?

So, I'll give you a couple of real life examples. We're building a 112 megawatt energy centre in South Dublin. It's a constrained market, we're going to be producing round trip, whether it's green or otherwise, about half of the energy that comes out will be heat, the other half of it will come out as power. The power is very useful for the local data centre market. The heat, that's where I get excited because the heat, if we recover that for high temperature process heat or for district cooling, then it's more efficient. So, that's the fossil side of it. And then there's another side of it, which basically says, look, and this is another live example, we're working hard at the moment on a project to build a big system up in Scotland. And the system is located very close to an offshore wind farm and on average about a third of offshore wind was curtailed for one reason or another in the last couple of years in Scotland. So, it's sort of a local issue, because the generation is far from the demand load. But again, this isn't necessarily just about fossil to exergy. It's about renewables to exergy, useful energy work ideas.

So, if you can take that curtailed component, store it and then use it locally, that to me is the same other side of the story. So, I like the phrasing. I think I corrected myself earlier. Rather than calling it waste, because I think it's a shame, I don't think we necessarily need to waste this resource, the heat that comes off. And the last point I'll make is, this isn't a semantic thing. This is a really fundamental thing, because unless, and I believe this, I've just written a white paper, I'm trying to get enough peer review that I'll put it out publicly but so far, so good and I'm speaking to the Commission about it on Tuesday. If we don't capture that heat, if we don't recycle heat, whether it's from industrial processes or from energy generation systems, it's going to be very hard for Europe, if not impossible, to meet any carbon emission reduction targets, let alone its own energy security. Because you and I know, actually also, that most energy consumption, whether it's in the UK or Europe, is heat rather than power at the moment. Of course, electrification is going to reduce that.

But going back to my Aristotle present, we are where we are. And why waste? Let's be a bit more… If you can capture that waste heat, if you can use it instead for district heating, for cooling, for industrial heating processes, or if you can locate a data centre next to that offshore wind farm, and instead of that offshore wind farm dumping 300 megawatts unnecessarily, you could harness that and be the demand sink for that. That's where I get super excited. We can do these things, by the way. What I'm talking about isn't science fiction. It's just cheaper, cleaner, more reliable, more efficient, faster energy solutions.

ML
This is great. I don't know, we should format this into a kind of cage fight format. Maybe do it on the White House lawn, who knows? And the reason is, let me talk about your examples. So, the wind farm curtailed, that was number one, going back to Aristotle's past, a failure of policy that every single scenario said that any type of future that is lower carbon is going to be more electrified. And yet, no more investment was put into the grid for decades. And now suddenly everybody woke up to the fact that the grid is not there, and we're accelerating, and we're doing it in a hurry, enormous inflationary pressures, and the grid isn't there. So, 37% is curtailed and that will ultimately, hopefully, reduce.

But if you're going to link it to anything, then why not just dump that into something that's already got a battery? Either an EV or into somebody's heat pump, which effectively you could do thermal storage. The idea of building a data center to use surplus electricity, what a data center wants is the bit of the wind that is always there, it doesn't want the surplus. So, what you should be doing is dumping that surplus, if you can, into the thing that's got storage. That would be my solution there and I know it's yours as well, in many cases. I want to come back, if I might, to the generation example. If I could do your other example, no, you come in now, and then I'll come back to the other one.

JM
Before we move off that, and again rather than, going back to why I said it's not about all of this or all of that, it wouldn't work if it was just about all of this. You park a data center next to an offshore wind farm, you're just going to pick up the bits that the grid doesn't need, you can’t. By the way, the data centre doesn't care if there's a wind farm, all it needs is 24-7 energy, totally reliable. So my point is, it works if you pair it with storage and a grid and a microgrid, and you're linked into the system properly. But there, it's just cheaper, cleaner, more efficient than either dumping it or building 22-kilometre transmission lines. It just is. But let's move on to the next one.

ML
But not to build the transmission line, you need to put, and people are looking at this, put the data centre at the offshore wind farm. And I think they'll find the complexity of servicing it and so on is a nightmare. But the other example, you said something about, well we're generating electricity, and so we have to use the heat and you said something about high temperature process heat. I mean, I'm sorry, but the heat that comes out of the back end of a generator, whether it's a gas engine, whether it's a turbine, is low temperature. It's not high temperature. If you want high temperature out of gas, you either have to burn the gas in the plant at the user, or you have to use electricity. One of the two. You can't just take waste heat or use your lost heat, whatever we're going to call it, and do high temperature processes.

JM
As we'll come onto in the capital market section, differences of opinion make a market.

ML
But that's thermodynamics.

JM
Well, it is, but it's also technically wrong. So, if you're running an engine, you have two types of heat that come off. One is a high temperature process heat, which you can use, which we use for industry.

ML
But that's what drives the electricity generation.

JM
Yeah, but you can do other stuff with that.

ML
But then you reduce, then you're producing less energy, less electricity.

JM
No, not necessarily.

ML
I'm sorry. I'm going to say sorry here, because that's not... If you take out high temperature heat out of any sort of plant, then you're going to reduce the amount of electricity you can generate at the back end of that. It's just energy balance.

JM
Two things that you can do with the heat offtake that doesn't turn into electricity.

ML
But they are either or. You can either generate electricity or you can use the high temperature heat.

JM
There is waste heat that comes off of engines.

ML
At what temperature?

JM
At very high temperature. You've got two different types, you've got a low temperature, which typically can be used for district heating. And you've got a high temperature, which you can use in an industrial process.

ML
Let's let the audience adjudicate that one. But the other problem is that you only need that low temperature heat during the winter. And so we're having this absurd conversation throughout Europe about, and particularly in the EU, that data centers should only be built if they are going to use their heat for district heating and use the heat. But first of all, that enormously complicates the building of the, and slows down the building of the data center to the point where most hyperscalers will say, forget it, as they have already done. Frankfurt said this, and they just walked away and said, we can't do it in Frankfurt.

But it's still only a third of the year, a quarter of the year. The rest of the time, you're still producing the waste heat and nobody needs it. And then these people will say, ah, you know what we should be building? Cooling networks as well. But we've all got hydronic systems which we talked about, we've got the wrong sort of built environment and they want to slow down the building of the data center by... And there will be situations, and to the final point that you made, you gave two examples and then you said, we are where we are. There are situations where we should use waste heat that we've got. But in a power system that is dominated by renewables, which most of the time there'll be either wind or sun, and therefore we'll switch the power generator, the fuel that we will need, most of the time it'll be switched off. So it won't be producing heat most of the time.

If you link it, if you do CHP, most of the time you don't have the heat because you don't need the P. Combined Heat and Power, you don't need the power, you don't produce the heat. That's the system that we're building. So I think it's great to exploit now opportunities. But strategically, as we think about the future of the system, those opportunities are going to be shrinking and ultimately will disappear.

JM
So coming back to the way that the energy market or the end demand base works, roughly 40% is in industry, steel, cement, chemicals, and plastics. They're called hard to abate because they typically run off fossil fuels, and it's hard to abate that. But there are applications where you can capture particularly waste heat and waste gases and recycle them into useful energy. So to come back to your problem about using a data center heat for district heating, your argument is that you're solving the wrong problem, I think. If you look at the industrial sector, there are massive opportunities for heat recovery. And that is roughly 40% of it.

I think that there are going to be massive opportunities candidly, and we can argue about whether or not you can produce hundreds of degrees of waste heat from onsite generation in the data center market, which you can. But there should be substantial opportunities. I think one of the biggest challenges the data industry's got, for example in America at the moment, is that there's pushback against gas to power. There's a huge now rush for behind the meter applications to be able to get data centers to market much quicker, much more reliably than the grid can in the short to medium term at least. And there's a huge concern about the increase in fossil fuel consumption. One of the things that I'm sad about is that there isn't more being done with the other half of that thermodynamic equation. If you've got gas going into a system and its producing power, what to do with the rest of it?

ML
We promised to talk about the capital markets. And we're in this extraordinary moment in the capital markets where AI is the single and massive tentpole that's holding up the US capital markets and thereby pretty much the capital markets around the world. Everybody is focused on AI. What is happening outside AI? Because we're in the physical world, okay there are AI data centers, by the way there'll be far fewer of them built than the connection queues. So one in 20 will actually get built. But what is happening outside AI?

JM
Generally in capital markets, well I mean, if we take a big step back, you might say that the technology sector and AI is sucking a lot of oxygen out of the market. But it's also really supporting the international capital markets. If you strip it out, it's not as pretty a picture underneath in the more traditional economy. I would say some winners that are coming off the back of it though, are in our sector. If you look at the performance year to date of some of the equipment manufacturers, let's call it the picks and shovels supplying, particularly behind the meter on-site generation solutions.

ML
The IPO of INNIO, the big gas engines provider, used to be Jenbacher.

JM
Jenbacher. So you've got, to call out GE Vernova has done very well this year on stock price perspective, no commentary on, this isn't investment advice I should hasten to say, but just looking in the rear view mirror, Bloom has been successful on the stock market at least. So we've seen, I think the AI sector has winners in our market, and I think it's going to drive a lot of demand. I think that there are huge challenges in other parts of the market. We've seen big contractions in alternative investments, particularly things like private credit, subsectors or verticals of the capital markets like London in general, specifically the investment trust market has been a very difficult place to be.

But just coming back to the AI story and maybe just our little debate before, I think we've been doing this, known each other for a long time, best part of 20 years at least and one of the things that people like to talk about in our sector is how much money gets spent in it. And the reason they do that is because it attracts industry and finance, and people that build this stuff and finance the stuff. And it's been a true story in the clean energy sector. I remember the time when you declared that there's more money going into renewables than there is into fossil fuels. And one of the things I took away from the BNEF report this year was that there's more money going into data centers than there is into energy. And that's an interesting number. I think there's something like $441 billion or something like that of CapEx compared to the renewables or frankly, even to the conventional energy sector.

What's happening is there's a lot of CapEx going into that market. And interestingly for the energy sector, the attitude, if you look at the proportion of CapEx that's going into energy, it's very, very small because those companies prefer for lots of different reasons, resilience and otherwise, to be able to treat the energy cost, A, as a delivery of service to them and B, as an operating cost. So, I think that rather than what's going on, let's have a quick look at what's going right. There's a lot of CapEx going into a particular market. It's going to feed through into the energy sector. It's going to feed through into specific areas of any energy sector, which I think are very interesting, like on-site generation. It's very much around efficiency. This is one of the ways in which I think the data centre market needs to operate. Power Utilisation Metrics like PUE, and making sure that that gets as close to one as possible, the amount of energy that goes into the compute that comes out. And that's where I'm seeing amazing innovation, new cooling solutions.

And by the way, going back to the on-site generation story, it's also one of the areas, thermodynamically, wait because you picked me up on this earlier and I want to come back on your contention that it's low value, the thermal side of the equation. It's not at all, Michael. I've been running energy centres for data centres now for 12 years. I've been producing not just power, but cooling for those data centres. It's not true that the output isn't as valuable on the thermal side as the electrical side, or at least isn't valuable. But it's extremely valuable. About half the energy historically, anyway, that's gone into power data centres has been to cool them. The other thing I'm seeing, which is interesting, and this is live and we'll see how it plays out, is that the traditional, what I built 10, 12 years ago, traditional CCHP, combined cooling and power, there are better ways of doing things these days in 2026. But there's also better technologies even than the data centres had a couple of years ago. So, the movement to liquid cooling, I think, whether it's in the UK, Europe, or the United States, is going to reopen this market about what you do with waste heat. Because if you can harness the waste heat and turn it into cools, that system running in parallel to the liquid cooling, which is doing a slightly different job directorship, that is where I think there'll be a really interesting…

So, I think the data centre market has a number of things going for it when it comes to people like you and I in this sector, and me in particular as an investor developer in the sector. It's the biggest CapEx programme of any kind. It's particularly hard to provide energy services to these data centres. It's a specialised market and the value of delivering energy quickly is immense compared to grid queues of four to eight years. Even if your phantom projects are 45 gigawatts, even if there was a tenth of that, we don't have the energy capacity from the centralised energy network to deliver against that. So, for me, probably one of the most exciting areas here, and it's not just because we want to provide energy services to customers and do that all day, and I'd love to do more of that, but it's because it will drive efficiency and innovation, because getting it as cheap as possible, as clean as possible, as reliant and resilient as possible. And then the other thing, which I just think is unbelievably important, is as fast as possible.

And the last point I'll make on that is, that's where your grid queues come in. The business is all about solving problems. That is one of the biggest and most valuable problems in the world. If a data centre can't make six million pounds a year per megawatt of revenue because it can't plug into the grid per megawatt, if it's waiting two, three, four, five, six years, that's an immensely valuable problem to solve. So that I think is where there's going to be tremendous opportunity.

ML
So, let me be very clear about the value. I agree with all of the above, and I want to come in on the grid connection queue piece. A data centre is very interesting because it needs electricity and it needs cooling. So, in a sense, in terms of using the waste heat from electricity generation, if it has gone with gas generators or whatever, then it is also a natural, it can eat its own dog food.

JM
Are you quietly agreeing with me?

ML
Hang on, wait. Yes, to a certain extent, as always. So, it can eat its own dog food, it can generate electricity, and then it can use the waste heat for cooling. But what happens then, and this is back to the thermodynamics, it then produces an even larger volume of low-grade heat. So, what it's dumping out in that situation, what it needs to actually lose, to use the word we agreed on, what it actually loses is heat at 30, 40 degrees, which is very difficult to use even in district heating and certainly, if you've only used it district heating part of the year. So, there is, at some point, thermodynamics says at some point, there is something very low value that you've got to get rid of.

JM
There is at a bottle of wine but it doesn't stop you drinking the bottle of wine.

ML
But let me paint a scenario, which is that there is now, you talked about the grid connection queues and the 45 gigawatts or the 50 gigawatts in the UK and so on. But let's put it, there's a much bigger picture here, which is, I'll give you Texas, 410 gigawatts of AI data centres in the connection queue. Across the US, I don't know what the number is, across Europe, across the Gulf states, there's probably terawatts of connection queues. And I think that the market is making a classic, classic mistake. I saw it, we both saw it during the dotcom period and so on, which is failing to understand the real demand function. A grid connection queue is not a demand function. All the people in the grid connection queue might want to buy gas turbines from GE Vernova or whoever, but that doesn't mean that when you add it up, that's how many turbines will be sold.

And I think that there's a classic, I'll tell you what I think is going to happen. I think that that realisation is going to dawn that of course, each hyperscaler needs some training clusters, and each city needs some inference data centres. And when you add it all up, it comes to 30 or 40 gigawatts by 2030, maybe of real demand function, maybe it's 50 gigawatts by 2035. It's that order of magnitude for the US and you've got literally a terawatt of connection queues that really is going to turn into 30 or 40 gigawatts of actual demand. Now, what that means, and there's all that innovation I don't disagree, wonderful innovation, incredible innovation. But that starts to look like the sort of innovation that we saw during the dotcom or the telecoms bubble, where we ended up with fibre across the world, we ended up with all these wonderful assets, because they were repurposed. And so I think a lot of those energy assets, I would be willing to bet we will see actually repurpose.

In other words, I think what I'm saying is, there'll be a crash in that demand function, people will suddenly realise that there isn't going to be a terawatt of data centres, there's going to be 10s of gigawatts, maybe a few hundred gigawatts at most, over a bunch of decades. And then they will look for ways to use the resources, if they've already invested in them, they will be recycled through the capital markets, and they'll be reused elsewhere in the energy system. And by the way, I think that's kind of good news. That's sort of the way that capitalism does technological change, railways, electrical, electricity system, internet, fibre. Why would this be different?

JM
Well, look I mean, you've been talking about some really big numbers. So what it crashes to is a very big number, and is some number of orders of magnitude bigger than the installed capacity today. So let's start there, right? So your floor is very high compared to where things are at the moment, so I’ll put it back to you, because you’re challenging me, I'm challenging you - so what? So the point is...

ML
I said it might be a good outcome, but it won't be a good outcome for people who own it when the music stops.

JM
Well, it depends what you're betting on, right? And if you're betting from top down or bottom up. So my life is bottom up, I don't bet on top down things so what, it's a little facetious, it doesn't really matter to me or my investors or partners whether or not it's this many gigawatts or tens of gigawatts. What's interesting to us is that if we've got a known demand for 100 megawatts, 300 megawatts, a gigawatt of energy from a company that needs those megawatts, the known for us is demand is there. And so I would say that right now, there is known demand. And the other “known known” is that to make any intelligence a token let's say, you need megawatts. Now, the two bets I don't know and I don't want to make is how big this gets. Although I'm not saying any shortage of demand on the ground, in reality there's a lot of braggawatts out there. I see more tens and hundreds of megawatts than I see gigawatts.

But last time, now you mentioned Texas, when I was in Texas last time, which wasn't very long ago, it's a true story. It is a true story that the hyperscalers are building gigawatt scale campuses. And in order to bridge the gap between their requirement to make that £6 million per megawatt, they need to bridge that with some form of energy system that comes before the grid can get there. So the point is, I think two things. So what if it doesn't get to the moon, I think you've got a lot of atmosphere to get through first. So I think the market is there. I think “so what” for the energy, I know you've got engine manufacturers and other equipment suppliers in the Cleaning Up cycle, they're probably listening to this, they'll probably tell you that they're sold out until 2028, 2029. So if they get another order, so what? They can't fulfil it anyway. So I would say that the market is important. It's robust for the next three to five years. And I think during that period of time, in particular, I think this is an extremely important thing to get right.

And as I say, the three things that I'm used to problem solving is how do I deliver energy that's cheaper than the grid? Usually we can solve that because the technology is there. Second, how do we do it that's cleaner than the grid? Well, if I apply efficiency first, we can do that. And then how do I do it that's more reliable than the grid? And that's part of the design function of everything that we do around the world. The thing that I get excited about in particular with the data center market isn't just because it's big, which it is, but because it's fast. And there is no other market I've ever seen anywhere in the world that's got that sense of urgency and pace behind it. And coming back to the thing, there are two certainties for the future. Going back to Aristotle resolving our argument, argue me with this, you cannot make intelligence without a megawatt.

ML
I thought you were going to say death and taxes, but you're right. I mean, look, the context here is that in the US last year, for all of the big numbers, there was something like three gigawatts of AI data centers that actually got through to the end of the sausage machine. So even if you're talking about trying to build a very modest 30 gigawatts by 2030, you've got a huge challenge, and everybody should be excited. I guess the point is that if they are building plans on the idea that there will be hundreds of gigawatts of AI data centers in the very near future, then I think that that would be quite risky.

JM
And it's hard. One of the reasons we do what we do is because it's hard and we know we can do it. We've just built 110 megs of onsite generation or adjacent generation in Ireland. The big ones like Stargate and Colossus in America have been very hard and haven't necessarily worked out in the way that the guys hoped it would. The last point I would say that I like about this market for people in our industry who have been doing it for a long time is that not only that, we've got a big demand load, but the customers, if any of them are listening, should be working with people who have done it before and have got a proven track record because it's not as easy as it looks.

ML
And on that note, I did an episode with Rob Dunn, which is the Start Campus in Sines in Portugal. It's a 1.2 gigawatts data center, but it was all in phases going through till 2032. So this stuff is hard and if anybody turns up, and Fermi would be the example, anyone turns up and says, we're going to do gigawatts within a year and so on, it's laughable. It's just not going to happen. I want to come back though to the capital markets because what we've done is actually we've mapped out a number of risks in this AI boom. Do I want to call it a bubble? I don't know. AI data centers, I'm going to call it, it's a bubble. But in any case, you've got these risks and then you've got the capital markets, which exist to move risks around. And you've got these different, you've got the public markets, we've got private markets, you mentioned private debt, where there are enormous concerns already about instability and whether that's going to be systemic when it adjusts and so on.

You operate in both the public markets and the private markets. And it's been a tough time. The public market piece has been a tough time because what you talked about is saying, you do the homework, you've got real demand, you've got a real customer, the customer signs up for a real stream of energy, and you can provide that. And you've done all of that within the private market model, that's working great. In the public market model, valuations have not, I mean, you've had a torrid time, I'm trying to find a nice way of putting it. You're trading well down on the last time you were on the show.

JM
Yeah. I look, I think there are some systemic factors that have happened. It's interesting you point back to ‘24, because that was probably a year into this higher rate, higher inflation environment that we were suffering from. And it was a period during which I was concerned because in the investment trust, there were most markets like America, your company, you go out there, you trade, you're up against 5,000 competitors and the rest of the market, and you just make more EBITDA and more profits and people invest. In the UK, we categorise things and we've got a categorisation called the investment trust market. Our fund if you like is structured as an investment company and the investment trust segment, chapter 15 of the London listing rules. And there are various things that have happened to that market. Now, some of them are systemic, right?

ML
And just to be clear so listeners understand, so SDCL acts as the manager, but it is an investment company. So, it's a bunch of assets, sometimes called a yield co, where you've got a bunch of assets that yield dividends and you manage them and that's the structure. So, that is the public piece.

JM
Yeah. So, in 2018, we listed a company called the SDCL Energy Efficiency Income Trust, it's now called the Efficiency Income Trust. And it owns a portfolio of energy generating assets, which all meet our mantra of efficient decentralised generation of energy, sort of onsite clean energy generation and energy efficiency projects and so on. And we just printed results recently, it's a good business, £91 million worth of EBITDA last year.

ML
Say that again?

JM
£91 million of EBITDA.

ML
Profits of £91 million?

JM
It's a decent scale business, but let me finish, it's about roughly £1.5 billion of enterprise value, but the stock is trading very poorly. So, I think that's where you're going to kind of why. Now, there are some systemic issues, higher rates, higher inflation. What that meant was the cost of capital generally went up quite a bit since 2023, 2024. And as a result of that, prices of all listed infrastructure assets, all of them came down.

ML
And the way I explain that is, you have a bunch of assets that are generating something like 6% or 7% or 8% a year, more than the risk-free, more than putting your money into a gilt, into a government bond. And of course, if the government bond suddenly starts paying more, then that's going to affect the value because you're no longer providing that same margin that's being squeezed. And so, the valuation comes down. So, a lot of what's happened has been that or has it been other things?

JM
It's a layer cake, but that was absolutely the foundation of how all investment trusts…

ML
And there's a cycle, I mean, it also goes into reverse. If interest rates come down, then suddenly you look better, your valuation goes up, if you can wait out the cycle right?

JM
Yeah. Going back to Aristotle, I'm in the present right now, just in a higher rate, higher inflation environment. So, I think that was the first sort of piece. The second, what that did is that historically, investment trusts have been able to trade effectively close to or even in a lot of cases at a premium to the value of the underlying assets. Why? Why have they been able to do that? People had long-term confidence in continuation of value, of growth, just as importantly of the profitability and EBITDA of the business.

ML
Was there a climate premium at any point?

JM
It's a very interesting question. And I think that it came through in volume of interest. There was a very, very substantial increase in assets under management.

ML
So, every time you did a rights issue, every time you raised more money, you were oversubscribed?

JM
I would say that it was more volume than price. So, I can't tell you that any time in my career, I've seen a particular moment when people are prepared to pay more. And I'm sure most certainly they shouldn't. But I don't think we should be asking investors to spend more money, because I think if it's not commercial, it's not sustainable. But I think there was a great interest in getting into asset classes that could do well as well by doing good.

ML
Because the corollary is, is there a climate discount now, or is it because you've also attracted attention of at least one activist investor who has triggered a process whereby you need to realise value at a bad time in the cycle, frankly?

JM
I wouldn't attribute it to a particular investor or a particular class of investors. But I think what's happened since that period of time, as I said, there were systemic issues that drove the market down, systemic issues that created discounts of price to value.

ML
But it's not just a climate. I guess what I'm probing is, it's not just the mood changed, and people didn't want climate assets and so now we've got a problem. It's not that, is what you're saying.

JM
No, I think these are capital markets issues. And it would have happened to... Those are systemic ones. Then there are specific issues, and I would say that probably there are a number of specific issues that we've dealt with. The most specific of those is related to the structure. So, when you trade at a discount, you can't raise equity or debt. And therefore, at some point, we were going to have to look at a restructuring of the business. And it's the structure rather than the underlying characteristics of our portfolio, which now need to change. And that's triggered change.

ML
The choice of the investment trust structure for that sort of asset. But you are still making investments, perhaps more on the private side than you're able to on the public side. Very briefly, what excites you right now?

JM
Our number one thing that gets us excited is making sure that we're getting the returns for our investors. So, honestly, I'm actually looking forward to coming to a resolution and finding the best possible path, whether it's about the present or the future, for any of our investors that want to come along with us in terms of, I think, the great business we've built for our public company. In terms of the rest of our business, more of our equity is actually in private markets, investment vehicles. So, I'm extremely excited about making sure that we squeeze the juice out of those assets and deliver returns for our investors.

The piece where I think we've got enormous growth links back to something that we described before. So, since about 2014, in the business, we've been providing energy services to data centers. We did it way before it was cool. In fact, we were providing cooling. And then, started to move into the hyperscale energy as a service market in the mid part of last decade, backup systems, prime power, now combined power and cooling systems. So, I'm excited about using the learning. If you can be humbled by the world around you and by capital markets, then the important thing is to learn from it. And I think great companies learn faster than competitors. And we've got a lot of muscle memory in certain parts of this industry, industry buildings. When it comes to the data center market, we can harness that, apply it, and I think put our efforts into creating great value for our data center customers and creating a great investment opportunity for our investors.

ML
Jonathan, it's always a pleasure. We could always keep going for another hour and you'll be back on the show and we will do that other hour and we will hopefully do it before two years more has passed. Thank you very, very much for joining us.

JM
Thank you, Michael, for having me back.

ML
So, that was Jonathan Maxwell, who is the founder and CEO of SDCL, a big investor in energy efficiency broadly defined. As always, we'll put links in the show notes to resources that we mentioned during our conversation, principally, of course, the three episodes in which Jonathan has come on the show in the past. And with that, I'd like to thank our producer Oscar Boyd, video editor Jamie Oliver, head of operations Kendall Smith, the whole team behind the scenes at Cleaning Up, you the audience for spending time with us today, and our Leadership Circle without whom none of this would be possible. Please make sure that you have subscribed to our newsletter. It helps you make sure you don't miss any episodes and it helps us grow our audience. You can find it at cleaningup.live, that's cleaningup.live. And please join us at this time next week for another episode of Cleaning Up.

ML
Cleaning Up is proud to be supported by its Leadership Circle. The members are Actis, Alcazar Energy, Arup, Copenhagen Infrastructure Partners, Cygnum Capital, Davidson Kempner, EcoPragma Capital, EDP, Eurelectric, the Gilardini Foundation, KKR, Mitsubishi Heavy Industries, National Grid, Octopus Energy, Quadrature Climate Foundation, Schneider Electric, SDCL, and Wärtsilä. For more information on the Leadership Circle, please visit cleaningup.live. If you're enjoying this episode, please hit like, leave a comment, and also recommend it to friends, family, colleagues, and absolutely everyone. To browse our archive of around 250 past episodes and to subscribe to our free newsletter, visit cleaningup.live.