SDCL Energy Efficiency Income Trust — Energy and efficiency as a service

SDCL Energy Efficiency Income Trust (SEEIT) listed on 18 December 2018 and trades on the Premium Segment of the Main Market of the London Stock Exchange. It was the first listed company in the UK to invest exclusively in the energy efficiency sector. Energy efficiency involves the delivery of cheaper, cleaner and more reliable energy solutions at the point of use, with the aim of reducing or eliminating the dependency on the grid or subsidies. Energy efficiency is a rapidly growing sector with several potential options for growth.

The projects in which SEEIT invests either provide decentralised on-site generation of power and heat or reduce energy demand. SEEIT’s investments provide essential services, targeting sectors that comprise essential industries (which helps in reducing credit risk) and its current portfolio consists of assets across North America, Europe, the UK and Asia-Pacific. The company benefits from this geographically diversified portfolio, reducing the sensitivity to discount rate movements in any one jurisdiction.

SEEIT’s company objective is to generate an attractive total return for investors, comprising stable dividend income and capital preservation, with the opportunity for capital growth. It aims to deliver this to its investors via its diversified portfolio of energy efficiency projects, which can be broken down into three segments: cleaner and more efficient supply, green energy distribution and point-of-use/demand reduction. SEEIT is a constituent of the Association of Investment Companies (AIC) Renewable Energy Infrastructure sector.

The portfolio is highly diversified with regard to technology and geography, while being total returned focused, which allows investors to benefit from both dividends and capital growth. This allows SEEIT to adjust its strategy to take advantage of changing market conditions. The benefit of SEEIT’s large organic pipeline (c £200m, see page 15 reduces dependence on energy market pricing and enhances its focus on asset management, with the aim of growing value and managing the risk of its assets. The company’s portfolio is less affected by energy policy and market downturns, which is predominantly due to contracted cash flow with limited unmitigated exposure to merchant power prices or demand. Approximately half of the current portfolio by value has revenue that is partly or wholly inflation linked, resulting in an overall positive correlation.

SEEIT targets a total return of 7–8% pa and achieved a negative return of 0.9% in its FY23 results (FY22: 11.2%). This included unrealised losses in the year of c £81m associated with upward adjustments to discount rates across the portfolio. As at end March 2023, company had accumulated a total net asset value (NAV) return of 7.2% pa since IPO. SEEIT has a low gearing strategy with a medium-term target of c 35% of NAV, with FY23 gearing at 32% of NAV, comprising consolidated gearing across the whole portfolio on a look-through basis. Its gross asset value has grown from £98m at inception to £1,128.7m as at 31 March 2023.

The revenue model used for all assets within SEEIT’s portfolio follows a general process. The basis of the model is that each of the assets supplies a direct service to its counterparty, and in return receives payments through long-term power purchase agreements (PPAs) or tariffs. SEEIT then takes the net cash flows of individual assets after any costs associated with the assets have been deducted.

SEEIT’s valuation approach (as a percentage of its total portfolio valuation) is calculated through the following breakdown: price per MW (2%), held at cost (3%) and predominantly discounted cashflow (DCF) (95%). This therefore means discount rates are extremely important in regards to the portfolio’s valuation.

The company has been awarded the Green Economy Mark from the London Stock Exchange, which identifies London-listed companies and funds that generate between 50% and 100% of total annual revenue from products and services that contribute to the global green economy. SEEIT is also an Article 9 fund under the Sustainable Finance Disclosure Regulation (SFDR).

In our view, SEEIT is an attractive option for investors for the following three key reasons:

SEEIT presents an attractive potential return to investors, in our view.  We see further upside to NAV possible from management improvements within its current portfolio (eg efficiency improvements, utilisation of idle capacity and small capital projects), which we believe could add 12–13% upside to NAV/share from these gains alone over two to three years. Assuming dividends growth at a CAGR of 3% could add a cumulative 27% to returns over three years, taking three-year returns to 39–40% (or 13–13.3% per year). This is before any potential closure of the discount to NAV, which stands currently at a significant 31.3%, providing an additional potential 45% return if this discount is closed over time. If all these factors were realised, this would present a combined potential 85% total return over three years.

SEEIT is classed as an alternative investment fund and is managed by Sustainable Development Capital (SDCL). The key personnel involved in the management of SEEIT are as follows:

Jonathan Maxwell is the founder and CEO of SDCL with overall responsibility for its investments. He has 25 years’ experience in international finance infrastructure and private equity. Jonathan is the chair of SEEIT’s Investment Committee. Jonathan established SDCL in 2007, and today it has offices in the UK, Ireland, Singapore and New York. Prior to establishing SDCL, Jonathan was at HSBC Infrastructure and managed the company’s successful IPO, which resulted in the first Main Market, LSE-listed infrastructure fund, which now has an enterprise value of more than £3bn.

Purvi Sapre joined in January 2016 and leads the wider investment team’s strategy regarding asset management and acquisitions with overall responsibility for the fund’s activities, while playing an active role in SEEIT’s Investment Committee. She has more than 15 years’ experience in investing via debt, equity and impact investment funds across Europe, North America and emerging markets. Some of the renewable energy technologies Purvi has transacted and managed across her career include solar, wind, energy efficiency and waste to energy. Purvi’s previous experience includes the role of senior associate at Green Investment Bank (an investment manager of offshore wind, energy efficiency and waste/biomass) and investment director at the Low Carbon Enterprise Fund. She holds a master’s in chemical engineering with environmental technology and has CIMA and IMC qualifications.

Eugene Kinghorn is the group CFO of the SDCL Group and has overall responsibility for the finance function covering its corporate activity and fund, including SEEIT. He is also a member of the Investment Committee for SEEIT. Eugene has over 15 years of experience in financial and portfolio management, with a particular focus on private equity and listed infrastructure investment management. He is responsible for portfolio and investment management of SEEIT. Eugene joined SDCL in 2019, and prior to this he spent 11 years with InfraRed Capital Partners performing a variety of financial and portfolio management roles.

The global energy crisis has brought forward the demand for energy security and energy efficiency solutions. One of the main drivers of energy efficiency is cost, and the need for energy cost reductions has highlighted the importance and value of efficiency in the generation, distribution and transmission of energy to end-users.

SEEIT is an energy efficiency-focused investment trust, whose diversification in its portfolio originates from its geography, technology and counterparties. Each of the assets is underpinned by contracted cash flows, directly connected to its end-users. Due to the nature of the company’s general revenue model (mentioned in the fund profile section), which predominantly relies on predetermined, long-term contracted returns from counterparties, the portfolio is largely unaffected by energy price caps or windfall taxes.

SEEIT’s fund manager, Purvi Sapre, describes the fund as being positioned as the ‘third pillar’ of infrastructure, with each of the assets acting a direct service to the end-user, rather than a power-driven utility-type business model.

The investment manager views SEEIT as extremely differentiated from other renewable energy infrastructure and energy transition funds, due to its specific investment mandate and portfolio of assets, which solely focus on the theme of energy efficiency. SEEIT’s investment mandate generally prohibits it from entering into agreements with assets that have a direct connection to the grid, meaning almost all of its asset portfolio is directly connected to and used only by the specific offtaker. This business model leaves SEEIT exposed to counterparty credit risk. However, the investment manager takes multiple measures to manage and evaluate this risk on an ongoing basis and the company has had no issues regarding counterparty credit risk since inception.

One of the key themes within the fund is to look for organic growth by developing opportunities in the existing portfolio, increasing total returns via reinvesting any excess cash outside of the dividend rather than using this excess cash to enter into new investments. However, if necessary, the company can increase its leverage position up to 65% to complete any future acquisitions, but with a medium-term target leverage of 35%, an equity raise would be necessary after the completion date to offset this.

Purvi Sapre sees the US market as the most open and mature in terms of energy efficiency solutions and services. This is reflected by the portfolio’s geographic weighting, with 59% situated in the US as at 31 March 2023. The scale and design of the US grid network means that privately funded energy efficiency solutions are particularly attractive. End-users require large-scale individual energy generation assets, and the providers are incentivised to ensure the efficiency of these assets to reduce costs and emissions. US end-users are willing to outsource energy in this way, whereas European consumers are more used to incumbent state/large-scale utility providers as their infrastructure is deeply embedded within the sector. SEEIT sees these utilities as one of its main competitors in the energy efficiency space (see the competitors section below for more information), therefore investing in these assets or similar is much more difficult due to the saturation of the market and infrastructure already being in place. However, the development and use of new technologies tends to happen in the European market before it is adopted globally.

SEEIT’s investment mandate only allows the fund to invest in proven technologies, but there is an exception that allows it to invest up to 3% of gross asset value (GAV) into early-stage technology or asset developers, which gives SEEIT early rights on the successful completion of any technologies/assets as well as pipeline access and further diversification of technology within its portfolio.

The operational performance of SEEIT’s investment portfolio in FY23 was generally in line with management expectations, with the exception of Oliva Spanish Cogeneration, which was affected by regulatory and operational factors (discussed in more detail below). As at 31 March 2023, SEEIT’s NAV per share had fallen 6.9p from 108.4p in FY22 to 101.5p. The main driver for this decrease was the result of global increases in interest and bond market rates, which have continued to inflate discount rates across the investment trust universe. The weighted average discount rate applied to SEEIT’s portfolio valuation was increased by 70bp to 7.7% unlevered (March 2022: 7.0%) and 8.5% levered (March 2022: 8.0%). This upward move in the discount rate resulted in a loss per share of 7.3p on SEEIT’s NAV. In September 2022, the company raised £135m in equity by issuing 118.4m shares, c 11% of the enlarged share capital.

However, this move in NAV was partially offset by increases in macroeconomic assumptions related to inflation of 1.5p, FX movements of 0.9p, portfolio performance of 3.1p and an accretive share issue of 0.7p. NAV also benefited from SEEIT’s underlying revenue streams being positively correlated against inflation at the portfolio level. SEEIT recorded a loss before tax of £18.6m for the financial year ended 31 March 2023 (profit of £79.8m for year ended 31 March 2022), due principally to discount rate increases and some project-specific adjustments. As a result, SEEIT’s NAV total return for the year ended 31 March 2023 was -0.9%.

The portfolio valuation (see Exhibit 2) as at 31 March 2023 was £1,100m, up from £913m as at 31 March 2022, with investment cash flow from the portfolio at £84.5m, up 31% on a portfolio basis from FY22’s £65m. The change included £240m in new investments, £16.9m from macro changes, £46.6m from foreign exchange and £48.8m from portfolio return. There was also a deduction of £81.2m from changes in discount rates.

For the year ended 31 March 2023, SEEIT invested c £240m into a mixture of new, organic and early-stage development platforms. Approximately £100m was used to acquire United Utilities Renewable Energy (UU Solar), a portfolio of predominantly solar photovoltaic (PV) assets, c £119m was used to reinvest into growing and developing opportunities within the existing portfolio and c £19m was invested into five new platforms to secure access to a proprietary pipeline of future opportunities to diversify its investment type and technology within the portfolio.

SEEIT’s absolute NAV rose from £1,073m in FY22 to £1,125m in FY23 (with the breakdown of this increase on a portfolio basis shown in Exhibit 3). SEEIT’s progressive declared dividend of 6p, which was up 4% year-on-year, was substantially covered 1.2x by cash for the year ended 31 March 2023. The target dividend for the year to March 2024 is 6.24p.

SEEIT’s portfolio saved a total of 1,202,528t CO2 for the year ended 31 March 2023, which was 13% greater than the amount saved in FY22. SEEIT bought back £14m worth of its own shares at a discount to NAV from an allotted allocation of £20m in the period ended 31 Mach 2023.

SEEIT’s diversified portfolio of cost-effective, low-carbon and reliable energy solutions can be divided into three categories (with assets overlapping across all three):

As at 31 March 2023, SEEIT held by value c 59% of its investment in the US, c 17% in the UK, c 20% in Europe and c 1% in Asia Pacific.

RED-Rochester (RED) is SEEIT’s largest asset, representing 22% of its portfolio. The project consists of 117MW of steam turbine generators, boilers, chillers and other equipment that provides exclusive utility services to commercial and industrial customers within the 1,200-acre Eastman Business Park in Rochester, New York. With completion of the asset on 21 May 2021, SEEIT has a 100% equity interest in the RED project, which is one of North America’s largest commercial district energy systems.

RED’s 100+ customers are typically contracted on a 20-year fixed-term basis with automatic five- to 10-year renewals, which is linked to their tenancy on the business park. These contracts enable predictable cash flows with substantial mitigation against volatility in demand. Roughly two-thirds of the value of RED’s offtake contracts are derived from investment-grade or equivalent counterparties. The acquisition was funded from existing cash reserves and a revolving credit facility (RCF), including capital raised by SEEIT in the equity fund-raising in February 2021. However, RED’s existing project debt finance facilities, equal to c $84m, remain post-acquisition. Since 2016, RED has delivered 40+ energy efficiency projects, resulting in annual savings of over $4m and carbon savings of over 50%. The investment manager has identified a large potential for growth, on the RED site, with a pipeline of potentially accretive energy efficiency initiatives that can deliver additional cost and carbon savings, through the addition of new customers to the site. More information about RED can be found in the appendix.

SEEIT’s second largest investment is its interest in Primary Energy, which has increased in value over recent years, with SEEIT now owning 100% (as of 1 October 2021) of the recycled energy and cogeneration projects located in Indiana, US. The 298MW portfolio consists of five individual operational projects that generate low-cost, efficient energy with substantial environmental benefits via three recycled energy projects, one natural gas CHP project and a 50% interest in an industrial process efficiency project. The strong environmental benefits associated with these assets qualify the projects for renewable energy certificates, which are equivalent to those generated by 536MW of solar or 374MW of wind projects. The portfolio is fully integrated with two of the most efficient and advanced steel mills in the US, providing electricity and steam to the steel blast furnaces, being the sole source for the fuel handling and emission control equipment that is critical for the operation of the facility. The energy required is generated utilising waste heat and gas from the steel mills or natural gas, which is supplied to a highly efficient heat and power system. Portfolio revenues are contracted via long-term offtake agreements with the steel mill owners, with an average remaining contract life of c 10 years.

The acquisition was funded from cash reserves and the existing project debt finance facilities of c $186m remained in place post-acquisition. Operations and maintenance of the portfolio will continue to be carried out in house by Primary Energy, as well as in partnership with the offtakers.

SEEIT also owns Onyx Renewable Partners in the US. This represents a 100% interest investment in four portfolios of on-site solar and energy storage projects, providing more than 175MW of renewable energy on-site directly to end-users. This acquisition was completed in March 2021 through existing cash and debt facilities.

SEEIT also has a 100% interest in Onyx’s pipeline, having acquired the remaining 50% from Blackstone in June 2023, which is projected to exceed 500MW in the coming years, which SEEIT will have a right of first refusal to purchase at a pre-agreed rate of return. The four portfolios consist of more than 200 operational, construction and development-stage rooftop, carport and private wire ground mounted solar PV projects, located across 18 US states. These projects are closely associated with a diverse range of clients including municipalities, schools, hospitals, military housing providers, utilities and counterparties. The current operational projects are contracted under long-term PPAs with predominantly investment-grade commercial and industrial counterparties. These investments have provided SEEIT with a substantial portfolio and a scalable pipeline of opportunities in a major growth market.

On 12 July 2022, the company announced that it had signed an agreement to invest c £100m to acquire a 100% interest in UU Solar, which has a portfolio totalling 69MW across 70 sites in the north-west of England. The renewable portfolio consists of 90% solar PV, 9% wind and 1% hydro in terms of generation. Each of the assets provides renewable energy generated on-site directly to the end-user United Utilities Water (UUW), which is the regulated water and wastewater business of United Utilities Group, the largest listed water and wastewater company in the UK. The solar PV and wind assets are connected directly via private wire and provide the electricity under long-term, fixed-price PPAs with UUW, which covers around 74% of the asset’s total revenue. A number of the assets also benefit from 20-year feed-in tariffs, with fixed RPI-linked payments backed by the UK government, which accounts for roughly 17% of the asset’s total revenue, having a remaining weighted average life of 13.5 years. UU Solar is a fully operational, yielding project, with an investment grade counterparty, underpinned by predominantly long-term contract cash flows. The project increases the supply of renewable energy generated on site while reducing greenhouse gas emissions arising from the supply and consumption of energy to critical water infrastructure sites.

Värtan Gas owns and operates Stockholm’s regulated gas grid, of which the majority (c 78%) is sourced from locally produced renewable biogas, sourced primarily from the city’s wastewater facilities. Värtan Gas supplies and distributes to over 58,000 residential, commercial, industrial, transportation and real estate customers in Stockholm and has been fully operational since the point of acquisition, having strong long-term yield metrics and inflation correlation. Värtan Gas provides essential infrastructure services and reduces pollution and greenhouse gas emissions by reusing waste gases both at the point of production (for example, at municipal wastewater treatment plants) and at the point of use, through the displacement of natural gas in buildings and diesel in transport. These characteristics are aligned to Swedish national and EU regional strategies to attain carbon neutrality by 2040.

Värtan Gas brings geographical diversification, as well as a substantial customer base and the opportunity to unlock further growth in volume – including through the transport segment.

Oliva Spanish Cogeneration, located in southern Spain, comprises nine operating projects, of which five are efficient, natural gas cogeneration (CHP) plants with a combined capacity of 100MW, two olive waste biomass plants with a combined capacity of 25MW and two olive pomace processing plants. SEEIT Oliva has good yield metrics and inflation correlation, as well as good energy efficiency credentials bringing heat generation closer to the point of use. The assets also process waste pomace to produce Orujo oil and electricity, which is an efficient energy solution that reduces greenhouse gas emissions.

SEEIT’s underlying geographic exposure to cost inflation largely reflects its portfolio distribution (US with c 59% of NAV, followed by 17% in the UK and 20% in the rest of Europe), although the level of exposure to changes in inflation in its underlying investments in each geography varies. As at 31 March 2023, the investment portfolio had a positive correlation to inflation, as a net effect as the costs of most projects have inflationary pressures, with roughly half of the current portfolio by value having revenues that are partly or wholly linked to inflation.

SEEIT also benefits from other revenue rises that are independent of inflation linkages. Examples include:

While the portfolio does not have material exposure to unhedged commodity prices, certain investments do have some short-term exposure to natural gas prices, specifically at Värtan and Oliva. The investment manager proactively implements commodity hedges to help manage this volatility.

SEEIT is particularly focused on evaluating asset optimisation initiatives within the existing portfolio to unlock additional potential value. Organic growth as at 31 March 2023 comprises more than 70% of the near-term pipeline by value through follow-on opportunities at attractive pre-agreed rates of return. SEEIT also reviews new investment opportunities, taking into account the higher discount rate environment, and focuses on opportunities considered to be accretive to key portfolio metrics. Some examples of new investments in developers, operators or managers of energy efficient projects, of which SEEIT has an allowance of 3% of GAV, are rare earth-free motors, liquid cooling for datacentres and thermal storage.

Over the next one to two years, the investment manager expects that more than £200m in new investment could be spent on organic opportunities, of which c £50m is contractually committed and the rest at the discretion of the investment manager. These include:

The investment manager is confident that it can source the funding needed for the investments described above through a combination of current cash resources, existing acquisition facilities (£180m, which includes an accordion function for a further £20m), investment disposals and co-investment opportunities.

SEEIT’s hedging strategy looks to protect the value of both near-term income and capital elements of the portfolio from a material impact on NAV arising from movements in foreign exchange rates, to provide stability and predictability of near- to medium-term sterling cash flow. This is achieved on an income basis through hedging forecast investment income from non-sterling investments, for up to 24 months via foreign exchange forward sales. On a capital basis, it is achieved through hedging a significant portion of the portfolio value through rolling forward foreign exchange sales. To reduce foreign exchange exposure, the investment manager will seek to utilise corporate debt facilities in the local currency. The investment manager regularly reviews the portfolio’s non-sterling exposure and will adjust the level of hedging accordingly when the benefit of the activity outweighs the costs, to ensure that any potential liquidity requirements imposed by hedging counterparties during periods of volatility are met. SEEIT’s net foreign exchange gain for FY23 was £10.3m compared to a £7.3m loss in FY22.

The latest available reported figures are SEEIT’s annual results to 31 March 2023. On a total return basis, SEEIT’s NAV returned -0.9% for the year ended 31 March 2023. However, its total NAV return since inception is 36.4% (7.2% pa, as at 30 June 2023). SEEIT’s total share price return since inception as at 30 June 2023 is -7.5%.

We believe one of the reasons for the disruption in SEEIT’s performance in FY23 was due to specific one-off issues at the Oliva Spanish Cogeneration plant experienced throughout the year. There was a regulatory mismatch between power price caps (which were imposed) and input prices, which prevented the RoRi mechanism from being implemented for the higher gas costs. This resulted in limited operation in five of the nine sites, and an €8m EBITDA loss for the year ended December 2022. However, this issue has since been resolved, with the Spanish government updating the numbers necessary for the RoRi mechanism to be in place. Other contributing factors to SEEIT’s performance included high inflation and rising interest rates, which resulted in discount rates being adjusted upwards.

The decrease in SEEIT’s NAV/share from 108.4p/share in March 2022 to 101.5p/share in March 2023 was mainly due to the increase in risk-free rates pushing discount rates up materially from March 2022, which resulted in an unrealised decrease of 7.3p/share.

In terms of SEEIT’s performance relative to the market, it does not have a formal benchmark and its assets are very different from conventional financial instruments. However, for the purposes of a general comparison, we have used the CBOE UK All Companies Index as a proxy for the UK equity market and the MSCI AC World Index as a broad international comparator (Exhibit 16 and 20). Given that SEEIT’s company objective is focused on generating an attractive total return for investors, comprising a progressive dividend (FY23: 6p, proposed FY24: 6.24p), Exhibit 16 also includes the MSCI World High Dividend Yield Index.

As shown in Exhibit 18 above, c 73% of SEEIT’s investment portfolio by value has contracted revenues with limited exposure to demand risk (availability-based contracts). Some 19% of the portfolio is contracted on a right of first dispatch, where an offtaker agrees to pay for a volume of output on the basis that there is demand for it. Finally, c 8% of the portfolio has revenues from other sources, including debt and market-based revenues. Roughly 62% of portfolio revenues are associated with investment-grade or equivalent counterparties.

RED is predominately underpinned via long-term contracted cash flows with positive inflation correlation, with more than 115 commercial and industrial customers on fixed terms under an approved tariff structure. Contract lengths are typically 20 years long with no break clause. The revenue split of these contracts is:

Approximately 83% of revenue is derived from energy services to Cleveland Cliffs’ #7 blast furnace at Indiana Harbor Works, which is one the largest and most competitive furnace facilities in North America. The total revenues for Primary Energy are split across its five projects as follows:

Comparing SEEIT directly to any individual company or group of competitors is not straightforward due to its unique business model, the relationships it has with its counterparties, operators and developers and its key focus on energy efficiency solutions and services. However, as can be seen above, we have compiled a list of companies in the Renewable Energy Infrastructure AIC sector, which SEEIT is a member of.

Although it is within the AIC's Renewable Energy Infrastructure sector, we believe that SEEIT is generally miscategorised and lies outside of the traditional energy transition space. One of the main reasons for this is the nature of its assets and how each one’s main purpose is to provide a variety of services surrounding on-site generation and delivery of cheaper, cleaner and more reliable energy solutions at the point of use. The services in SEEIT’s portfolio range from heat and power, roof-top solar, energy demand reduction and effective energy storage solutions. Every asset is directly connected to the end-user and has the goal of maximising energy efficiency and reducing/eliminating reliance and dependency on the grid or subsidies.

We believe JLEN Environmental Assets Group is SEEIT’s closest competitor within the Renewable Energy Infrastructure sector. Both SEEIT and JLEN have extremely diversified portfolios in regard to the number of investments and technology. JLEN’s and SEEIT’s market caps are £689m and £825m respectively. Where SEEIT differs from JLEN is that SEEIT’s portfolio of assets is more greatly diversified regarding geographical location, with a total of 50 projects spread across the world, with 59% being based in the US, 17% in the UK, 20% in Europe and 1% in Asia-Pacific, whereas JLEN’s portfolio is primarily based in the UK, with three assets out of 42 being across Europe. Therefore, SEEIT has a competitive advantage over JLEN when looking at protection against governmental energy policy and exchange rate changes. The US has also generally seen less pronounced long-term yield curve movements, which is advantageous for SEEIT as the company looks to develop long-term added-value opportunities among all of its assets. The energy efficiency market is also well insulated from a recessionary environment, due to the focus on cost reduction and limited exposure to GDP-correlated revenue streams.

As of 31 July 2023, SEEIT had a higher dividend yield (7.7% vs 6.7%) and higher discount to NAV (25.8% vs 15.8%) than JLEN. SEEIT’s 7.7% dividend yield places it in the top five highest dividend yield stocks within the AIC Renewable Energy Infrastructure sector.

Arguably, SEEIT’s most valid competitors are utility companies and localised infrastructure funds, which have business models that are closest to SEEIT’s investments (that is the provision of a specific or multiple services directly to a counterparty in which revenue originates generally through long-term contracts).

Other potential competitors to SEEIT are the offtakers themselves, and the displacement of owner-operator facilities is SEEIT’s main competitive landscape. SEEIT competes by bringing its scale and enabling consumers to benefit from power efficiency without needing the capital and expertise that SEEIT brings. SEEIT assumes the risk of the asset, including operating risk and any maintenance costs and charges for this service.

Since inception SEEIT has had a continuously growing dividend, with the company’s first annual dividend at FY19 of 1.00p per share, followed by 5.00p per share in FY20, 5.50p per share in FY21, 5.62p in FY22 and 6.00p in FY23. SEEIT’s guidance for its FY24 dividend is that it will grow 4% from FY23 to 6.24p. The 2023 interim dividend payments of 2.9p (totalling £28.8m) was covered 1.3x by operating cash flow from investments (£43.3m), and the annual dividend was substantially coved 1.2x paying a total of £62m to shareholders. The company’s dividend has been significantly covered by cash from investments since inception maintaining average of c 1.3x. SEEIT’s consistent cash cover demonstrates the strength of its portfolio and has resulted in a cumulative excess cash cover of c £29m since IPO, demonstrating the reliable and contractual nature of the portfolio and its ability to generate excess cash that can be reinvested to enable further growth.

SEEIT is currently trading at a 31.3% discount to NAV, which is the sixth highest in the AIC Renewable Energy Infrastructure sector. Discounts in investment trusts have increased in general due to rising interest rates, so discounts to NAV are now common. The AIC Renewable Energy Infrastructure sector was trading at large premiums only one to two years ago, but now almost the entire sector is trading at significant discounts to NAV, with a simple average of 22.1%. In addition, the market has perceived alternative energy as being complicated by energy price volatility due to the war in Ukraine and the subsequent impact on gas and electricity prices, and complications in the regulatory environment arising from this. Many of these complications do not affect SEEIT due to the nature of its business model.

SEEIT’s assets (which are non-market traded instruments) are valued using a discounted cash flow methodology and adjusted in accordance with the International Private Equity and Venture Capital (IPEV) valuation guidelines where appropriate to comply with IFRS 13 and IFRS 9, given the special nature of infrastructure investments.

On 3 April 2023, SEEIT announced a share buyback programme in response to its belief that its trading price was not fairly reflecting the value of the company’s portfolio. This buyback is being funded from the company’s surplus liquidity and operating cash flows from the portfolio. The announcement stated that the process will only be undertaken when it is to be in the shareholders’ best interest at the prevailing share price and accretive to NAV per ordinary share. Up to £20m of the company’s cash reverse has been allocated for the programme, and the allocation will be reviewed against the company’s ongoing liquidity position, the cost of investing in its own shares versus in the existing portfolio or pipeline of assets, as well as the prevailing discount to NAV. As at 31 March 2023, the company has deployed c £14m of the £20m total buyback allocated.

SEEIT’s investment strategy comprises owning and managing a diverse portfolio of energy efficiency and distributed energy generation assets, to achieve its objective of generating an attractive total return of stable dividend income and capital preservation, with the opportunity for capital growth for investors. It looks to achieve this through investing and acquiring portfolios, platforms or individual assets of proven operational projects that deliver energy and efficiency for commercial, industrial and public sector buildings. SEEIT invests for the long term, with an overall focus on optimising and improving each of its assets. The company aims to achieve its overall focus via financing/refinancing its assets and equipment, as well as financing the roll-out of energy efficient solutions on a large scale.

SEEIT aims to achieve its investment objective by investing principally in a diversified portfolio of energy efficiency projects with high-quality private and public sector counterparties, aiding the transition to a low carbon economy. The contracts governing these projects entitle the company to receive stable and predictable cash flows once the projects are operational. The company’s returns derive from long-term contractual payments by counterparties in respect of the relevant equipment. SEEIT only invests in projects that deliver positive impacts through an increase in energy efficiency, an increase in renewable energy consumption or a reduction in carbon emissions, waste or usage.

Although the company predominantly chooses to invest in operational projects, under specific circumstances SEEIT may invest in projects that are either in the developmental or construction phase or, to a limited extent, in developers, operators or managers of energy efficient projects. SEEIT will continue to look to target sustainable investments, such as assets that contribute to the reduction of greenhouse gas (GHG) emissions.

SEEIT looks to create a high-quality, diversified portfolio in regard to technology exposure, manufacturer or other service providers through contracting where it is commercially viable with engineers as well as public and private sector counterparties. The company initially focused its attention on investing in the UK; however, over time, SEEIT has expanded its portfolio across continental Europe, North America and the Asia-Pacific region, with its largest exposure in the US.

SEEIT’s investment policy states:

SEEIT’s investment policy states it may use derivatives for efficient portfolio management but not for investment purposes. The company may engage in full or partial interest rate hedging or seek to mitigate the risk of interest rate increases as well as full or partial foreign exchange hedging to mitigate the risk of inflation.

SEEIT was founded with an inherent focus on sustainability and ESG considerations and these matters are ingrained within the company’s operations. These principles are incorporated in the screening and due diligence process for assessing new potential investments, and then as a framework for engaging with third-party O&M providers, which are responsible for the day-to-day operations of each of the projects, as well as other service providers to SEEIT.

SEEIT’s four key ESG focus areas are as follows:

SEEIT will also support the achievement of net zero carbon targets through reduced GHG emissions.

ESG highlights from the year ended 31 March 2023 include:

SEEIT also supports the 17 UN Sustainable Development Goals (SDGs) and the Task Force on Climate-Related Financial Disclosures (TCFD).

SEEIT will look to maintain a conservative level of aggregate gearing in the interest of capital efficiency, in order to enhance income returns, long-term capital growth and capital flexibility. The company’s target medium-term gearing is up to 35% of NAV, calculated at the time of borrowing. As at 31 March 2023, the group’s overall gearing, measured on a consolidated and look-through basis to include project-level debt, was c 32% of NAV with a total debt value of c £361m, which is in line with the company’s medium-term target.

SEEIT may also enter into borrowing facilities on a short-term basis to finance acquisitions, on the basis that the aggregate consolidated borrowing of SEEIT and the project special purpose vehicles, including any structural gearing, shall not exceed 65% of NAV, calculated at the time of borrowing.

Of the total project level debt, as at end September 2022, 83% was in the US and 17% was in Europe. The existing debt within the portfolio is not exposed to any material refinancing risk in the near to medium term and over 80% of the prevailing interest rate exposures are fixed or mitigated through contracted interest rate swaps.

As of 31 March 2023, SEEIT’s net assets were £1,125m, including a cash balance of £0.3m. Via SEEIT’s single subsidiary, Holdco, the company has access to an RCF of £180m, which includes an accordion function for a further £20m increase on an uncommitted basis. SEEIT is a guarantor to the RCF but has no other guarantees or commitments. This RCF, which is SONIA linked, has a margin of 2.65% and expires in June 2024, with options to extend for a further two years. The RCF, which was undrawn as of 31 March 2023, provides SEEIT with additional capacity to manage its liquidity risks and hedging strategy effectively as well as flexibility for identified pipelines projects and organic opportunities from the existing portfolio. As at September 2022, the company’s liquidity position was c £120m of cash held and c £110m headroom in the RCF.

SEEIT was launched in on 11 December 2018 via an IPO that raised £100m and is structured as a closed-ended investment company.

Investment management services are provided by Sustainable Development Capital LLP (SDCL), which was established in 2007. SDCL is a London-based investment firm with a proven track record of investments within energy efficiency and decentralised renewable energy generation projects across the UK, Europe, North America and Asia. SDCL has over 15 years of experience in the energy efficiency sector, and since 2012 the group has raised over £1.5bn in capital commitments, including six funds that are exclusively focused on energy efficiency.

For the company to achieve its investment objective, it makes its investments through its sole direct subsidiary and main investment vehicle, SEEIT Holdco Limited (Holdco). The investment manager has control over the actions of Holdco and its direct and indirect subsidiaries, with the aim of assisting the company in achieving its investment objective.

Ordinary shares of the company carry one vote per share on the basis that all amounts presently payable in respect of the individual share have been paid.

The Investment Management Agreement states that the investment manager will be entitled to a fee calculated at 0.9% pa of adjusted NAV in respect of the NAV up to and including £750m. Fees thereafter are calculated at 0.8% pa when NAV is in excess of £750m. The company’s ongoing charges ratio as at end March 2023 was 1.02% (March 2022: 1.00%). At end September 2022 it was 0.93%. The marginal increase came predominantly from the impact of increased discount rates and the associated adverse impact on NAV.

February 2022 saw unprecedented circumstances, with Europe plunging into an energy crisis. The invasion of Ukraine made Europe, and the rest of the world, rethink where its energy comes from and how it is used. Russia supplied Europe with 40% of its natural gas as well as being the third largest producer of oil globally. To reduce dependency on Russia, the EU therefore agreed to reduce its natural gas usage by 15% and its electricity usage by 5%, proposing new legislation that put decentralised on-site energy at the top of the agenda. Energy efficiency solutions are recognised as the most cost- and time-effective measures to tackle this problem, and are now at the forefront of the EU’s efforts in aiming to reach the energy efficiency target of 13% from the current 9%.

According to the IEA’s flagship report ‘Net Zero by 2050’, released in 2021, energy efficiency delivers the second largest contribution to the carbon reductions that are required by the end of 2030. The reduction of carbon emissions through energy efficiency can be achieved using available technologies that deliver investment returns driven by the cost of saved energy. SEEIT’s decentralised, on-site renewable energy generation and energy efficiency solutions assets supply low-carbon energy and improve efficiency by minimising transmission and distribution losses.

Throughout the entire energy generation and consumption process, there are several points at which energy is wasted. The energy supply sector converts over 75% of its total primary energy supply (TPES) into other forms of energy, such as electricity and heat. According to the IEA, over 60% of primary energy used for electricity generation is lost in the conversion process. Once energy has been generated or converted, the transmission and distribution to end-users sees a further 5–7% of TPES wasted due to heat being released into the air from line losses and conversion losses in transformers. The final stage of energy loss is at the point of use. Further energy can be lost here through inefficient ways of converting the energy into the necessary service required such as heat, light and electronic services. The amount wasted depends on the product and consumer use.

SEEIT’s general solutions to these energy waste issues surrounding energy efficiency include: bringing the energy generation site closer to or at the point of use, in turn reducing any associated generation, transmission and distribution losses; providing solutions and services that reduce the consumption of energy at the point of use; and connecting supply with demand in the most efficient way compared to alternative solutions.

Energy efficiency is critical to reducing GHG emissions by reducing energy demand and waste. According to the IEA, energy efficiency represents more than 40% of the emissions abatement needed by 2040.