Investors target big returns in using energy more efficiently
Efficiency is a key to reaching net zero but gains are lagging
Smarter Energy Use Is a New Green Bet for Big-Money Investors
A largely invisible driver of the green transition is rapidly gaining backers among some of the world’s largest investors, even as other climate initiatives falter.
Firms including KKR & Co., Blackstone Inc. and Brookfield Corp. are piling billions of dollars into companies and technologies that help reduce the vast amount of energy that goes wasted on assembly lines, in office buildings and even on farms.
“So far, people have largely tended to focus on making the supply of energy greener,” said Emmanuel Lagarrigue, partner and co-head of climate strategy at private equity giant KKR. “But there’s also real opportunity in reducing demand.”
The business of energy efficiency is attracting greater interest after power and natural gas prices jumped during a global energy crisis, prompting large users to take a close look at operations. At the same time, wind- and solar-power developers are stumbling due to high interest rates and supply-chain issues, leading climate investors to look to the demand side in the pursuit of returns.
The downside is similar to any environmental project, with upfront costs and a bewildering array of technologies and applications. That obscures the payoff as companies often ignore the energy and emissions savings when they look at costs. But the higher power and gas prices are creating an automatic incentive for companies and in turn attracting investment.
“The big smart money is not narrowly focused on downstream renewables now. Energy efficiency is the largest and most untapped investment market, and it’s just getting started.”
“The big smart money is not narrowly focused on downstream renewables now,” said Jonathan Maxwell, the founder of Sustainable Development Capital LLC. “Energy efficiency is the largest and most untapped investment market, and it’s just getting started.”
One of his firm’s first forays into efficiency was a 2015 project for Banco Santader SA’s 800 retail outlets and offices in the UK, switching old-school light bulbs for more efficient LEDs and taking a cut of the savings. Such wins are easy, and money is now flowing into more sophisticated offerings.
Last year, KKR bought CoolIT Systems — a Canadian company that provides liquid-cooling solutions to energy-intensive data centers — for $270 million through its Global Impact strategy. Brookfield snapped up UK-based HomeServe for £4.1 billion ($5.2 billion), which it aims to turn into the largest residential decarbonization platform globally.
Blackstone’s Legence Inc. acquired new firms to expand its portfolio focused on making buildings more efficient.
Legence, based in San Francisco, has worked on projects from medical facilities in Boston to high schools in Washington, DC. Its network of design, installation and maintenance companies aim to help create smarter buildings, source efficient materials and install heat pumps and rooftop solar.
“Buildings are complex,” said Jeff Sprau, Legence’s chief executive officer. “In order to optimize their operation, you really need a good overall plan.”
The Blackstone unit is part of a small but fast-growing segment trying to tackle industrial-scale energy waste. Along with established players such as Siemens Energy AG and Schneider Electric SE, the firms combine engineers, designers and former energy traders to find ways to get more efficient, which means trimming costs and carbon emissions.
“This is the front line of decarbonization,” said Norman Crowley, the founder of Ireland-based CoolPlanet Ltd., which serves clients from commodities trading houses to cider breweries. “Convincing massive industrial users to do this can save more money and carbon than most of the more glamorous stuff people talk about.”
CoolPlanet’s technology found ways to reduce carbon at C&C Group’s factory in Clonmel, Ireland, where Bulmers cider is produced. Waste heat produced when the drinks are cooled is now being recycled for the pasteurization process, helping the company reach its target of reducing direct emissions by more than a third by the end of the decade.
“The reality is there will never be just one solution,” said Ahmed Wafi, director of global business development at Schneider Electric. “It will be a spectrum.”
Energy savings are key to reach net-zero goals, but are lagging. Up to 2022, there was a slowdown in efficiency improvements in all sectors except transport, where electric vehicles are helping, according to the International Energy Agency.
The improvement in the rate of primary energy usage is about 2% per year, less than half of where it needs to be, the IEA says. Last month, in the same pledge as they agreed to expand renewables, countries at the COP28 climate conference agreed to work to double that pace to 4%.
“We need to build so much more energy infrastructure — but we also need to ask ourselves how we’re actually using that supply,” said Emma Champion, an energy-transition analyst at BloombergNEF. “Simply using energy more efficiently in the first place is one of the most important ways to reduce emissions.”
The world’s energy transition, which has been enabled by huge subsidies for renewables, is now facing political and commercial hurdles. Leaders in the wind-power sector have faltered this year due to surging inflation, while politicians face push-back from voters worried about rising costs and turned off by unsightly pylons for wind turbines.
While that adds urgency to efficiency efforts, governments aren’t always understanding. In September, UK Prime Minister Rishi Sunak disbanded a task force that was set up just six months earlier to accelerate energy-saving initiatives. It was just one of a series of policy moves in Britain and elsewhere seen as easing off on climate protection.
Advocates say that energy efficiency offers an alternative to the politicized discussions around renewables in many countries. By reducing waste, the initiatives are as much about financial savings and national security as protecting the climate. The hope is also that they can sway skeptics by showing that consuming less doesn’t have to mean lower quality of life.
“People say the problem is that we need more renewables, but that’s not the problem,” said Maxwell from Sustainable Development Capital. “The problem is the energy system, and we need to fix it any way we can.”