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

SDCL Energy Efficiency Income Trust (LSE: SEIT)

Last close As at 18/05/2024

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

SDCL Energy Efficiency Income Trust (SEEIT) is an investment trust focused on delivering energy and energy efficiency as a decentralised service directly to end users rather than supplying into the broader power grid. Its income comes from a range of services and is driven by cutting losses in energy generation, transmission and use. It has delivered a total NAV return of 7.2% pa (3.5p in NAV terms) since IPO in December 2018 and its 6p/share dividend is 1.2x covered, representing an attractive 8.9% yield.

Written by

Andrew Keen

MD - Head of Content, Energy & Resources, Industrials

Investment Companies

SDCL Energy Efficiency Income Trust

Initiation of coverage

Investment trusts
Renewable energy infrastructure

24 August 2023

Price

71.80p

Market cap

£784m

AUM

£1,100m

NAV/share*

101.5p

Discount to NAV
*Including income. As at 22 August 2023.

31.3%

Dividend yield

8.9%

Ordinary shares in issue

1,093m

Code/ISN

SEIT/GB00BGHVZM47

AIC sector

Renewable Energy Infrastructure

52-week high/low

125.4p

72,1p

NAV* high/low
*Including income.

108.4p

95.6p

Net gearing (as of 31 March 2023)

32%

Fund objective

SDCL Energy Efficiency Income Trust’s objective is to generate an attractive total return for investors, comprising a stable dividend income and capital preservation, with the opportunity for capital growth.

Bull

SEEIT is providing a high dividend yield while trading at a significant discount to NAV, offering a total-return focus and an attractive entry position.

A progressive dividend, which has been significantly covered since inception.

Further scope for operation and efficiency gains within its portfolio.

Bear

Rising interest rates and potential rises in discount rates.

Counterparty risk (although SEEIT is well diversified).

Regulatory risk in some markets.

Analysts

Andrew Keen

+44 (0)20 3077 5700

Harry Kilby

+44 (0)20 3077 5724

SDCL Energy Efficiency Income Trust is a research client of Edison Investment Research Limited

SDCL Energy Efficiency Income Trust (SEEIT) is an investment trust focused on delivering energy and energy efficiency as a decentralised service directly to end users rather than supplying into the broader power grid. Its income comes from a range of services and is driven by cutting losses in energy generation, transmission and use. It has delivered a total NAV return of 7.2% pa (3.5p in NAV terms) since IPO in December 2018 and its 6p/share dividend is 1.2x covered, representing an attractive 8.9% yield.

Year end 31 March

FY19

FY20

FY21

FY22

FY23

NAV (£m)

323.5

694

1,073

1,125

NAV per share (p)

98.4

101

102.5

108.4

101.5

DPS (p)

1.00

5.00

5.50

5.62

6.00

Dividend cover

-

1.5x

1.2x

1.19x

1.2x

Source: SEEIT

Efficiency is critical to net zero

Energy efficiency is a critical element of global decarbonisation, as a significant amount of energy (over 60% according to the International Energy Agency, IEA) is generated inefficiently and lost in generation and transmission or due to inefficient use by end-consumers. SEEIT’s portfolio is focused on assets that reduce losses in power generation, transmission and use, generating profits by providing efficient energy services to counterparties. Fewer losses mean fewer emissions, and its services allow for significant CO2 emissions savings.

A different portfolio focus…

SEEIT’s asset mix is different from other infrastructure funds, focusing on this ‘third pillar’ of infrastructure, energy efficiency, rather than general social infrastructure or renewable energy. Its assets include highly efficient power plants (such as combined heat and power (CHP)), highly efficient LED lighting projects and behind-the-meter solar. Its revenue and growth profile is uncorrelated with some of the potential peers in the renewables space, particularly due to its minimal links to grid tariffs. Its model has been successful, with gross asset value rising from £98m at inception (in December 2018) to £1.1bn as at 31 March 2023. SEEIT’s team sees further scope to continue to deploy this strategy in its main markets and deliver earnings growth through organic asset growth and operational improvements.

…and an attractive valuation

SEEIT presents an attractive potential return to investors, in our view. We see possible 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 provide 12–13% upside to NAV/share over two to three years. Assuming dividends 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 (see Exhibit 14 for further detail). If all these factors were realised, this would present a combined potential 85% total return over three years.

Fund profile: Energy efficiency

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).

Edison’s take on SEEIT

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

It has an attractive dividend yield and is trading at a discount to NAV. As at 30 June 2023, SEEIT had a dividend yield of 8.0%, trading at a 25.8% discount to NAV. Its FY23 dividend of 6p is 1.2x cash covered. SEEIT has maintained a progressive dividend due to the nature of its contracts with end-users, which are predominately (80%) long-term availability-based or pre-determined contracts it has with its counterparties. SEEIT is also relatively inflation protected, with c 50% of its portfolio positively linked to inflation.

It is a mature, well-established fund with scale. As at 31 March 2023, SEEIT’s total NAV was £1,125m. SEEIT has shown consistent growth in NAV since its inception through the acquisition of assets and the development of organic opportunities in its existing portfolio. SEEIT’s portfolio is geographically and technologically diverse (with the US market particularly suited to its strategy) and its size and diversity help to lower counterparty risk (a feature of its business model). It has the ability to use leverage to grow and is currently at the upper end of its gearing (32% versus a target of 35%, although it can reach 65% for the acquisition of new assets). In our view, it has a range of opportunities to grow via acquisition or organically.

It has a unique position in the renewables space due to its focus on energy as a service. SEEIT was the first investment trust, listed in the UK, aiming to tackle the transition to net zero from the perspective of energy efficiency. It is distinctively positioned within the general renewable energy infrastructure space as it generally supplies directly to end-users rather than into the power grid. SEEIT aims to deliver cheaper, cleaner, low-carbon energy solutions on-site directly to high-quality counterparties. Like other renewable energy infrastructure investment trusts, SEEIT’s overall aim is to reduce CO2 emissions in energy generation while increasing renewable energy consumption, aiding the progression towards the global goal of net zero by 2050.

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.

The investment manager: Sustainable Development Capital LLP

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 manager’s view

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.

FY23 results

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%.

Exhibit 1: NAV per share bridge for FY23

Source: SEEIT, Edison Investment Research

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.

Exhibit 2: Portfolio valuation bridge for FY23

Source: SEEIT, Edison Investment Research

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.

Exhibit 3: NAV bridge (portfolio basis)

Source: SEEIT, Edison Investment Research

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.

Current portfolio positioning

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):

cleaner and more efficient energy supply,

green energy distribution, and

point-of-use/demand reduction.

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.

Exhibit 4: Life cycle of assets

Exhibit 5: Geographical exposure

Source: SEEIT, Edison Investment Research. Note: As at 31 March 2023.

Exhibit 4: Life cycle of assets

Exhibit 5: Geographical exposure

Source: SEEIT, Edison Investment Research. Note: As at 31 March 2023.

Exhibit 6: Technology exposure

Source: SEEIT, Edison Investment Research. Note. As at 31 March 2023

Exhibit 7: Summary of assets

Asset name

Technology

% of portfolio

Capacity
(MW)

Location

Status

Ownership

RED-Rochester

District energy network

22

117

US

Operational

100%

Primary – Cokenergy

Recycled energy, CHP and cogeneration

9

-

US

Operational

100%

UU Solar

Solar PV/wind

9

69

UK

Operational

100%

Onyx – Obsidian II

Solar PV

8

175+

US

Operation, construction & development

100% in 4 solar and storage portfolios – 100% in Onyx and its pipeline

Värtan Gas

Gas distribution network

6

58,000 customers

Europe

Operational

100%

Primary – Northlake

Recycled energy, CHP and cogeneration

4

-

US

Operational

100%

Capshare

3

Europe

Operational

100%

Primary – Portside

Recycled energy, CHP and cogeneration

2

-

US

Operational

100%

EVN (construction)

Electric vehicle charging

2

112 sites

UK

Construction

100%

Oliva Cepuente

CHP, biomass and olive processing

2

-

Europe

Operational

100%

Remainder of portfolio

29

-

-

-

-

Cash

3

-

-

-

-

Source: SEEIT, Edison Investment Research. Note: As at 31 March 2023.

Summary of assets

RED-Rochester (RED)

Exhibit 8: RED-Rochester

Source: SEEIT

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.

Primary Energy

Exhibit 9: Primary Energy

Source: SEEIT

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.

Onyx Renewables Partners

Exhibit 10: Onyx

Source: SEEIT

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.

UU Solar

Exhibit 11: UU Solar

Source: SEEIT

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

Exhibit 12: Värtan Gas

Source: SEEIT

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

Exhibit 13: Oliva

Source: SEEIT

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.

Inflation exposure

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:

Primary Energy assumes periodic re-contracting within its valuation. It assumes that the revenue contracts (subject to negotiation) are renewed in future years at levels that outstrip project-level cost increases. These cost increases include operations and management (O&M) costs, which are largely inflation linked.

Värtan Gas assumes that the regular renewals of customer contracts include inflationary increases to the tariffs charged. However, it also assumes that these would not result in charges being above the regulatory cap and that the full inflationary increase is not passed on to the customer each time. Within the portfolio there are several investments with no or negligible exposure to inflation, notably where the investments are structured as senior debt loan investments.

Oliva Spanish Cogeneration has some natural offsetting and protection between revenue and costs for inflation variation:

Higher natural gas costs will generally be offset naturally by higher electricity prices through power sales to the offtaker.

There is also the Remuneration of Operation and Remuneration of Investment (RoRi) mechanism, which means the Spanish government should compensate SEEIT when gas prices go up faster than electricity prices. But equally where electricity prices go up faster than gas prices, this could create an obligation for SEEIT to make a payment to the Spanish government. This combination enables great predictability in returns most of the time.

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.

Investment pipeline

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:

efficiency improvements projects at RED-Rochester, contributing directly to increasing profit margins;

further scaling up of Electric Vehicle Network (EVN – one of the UK’s largest EV charging developers); and

the continued roll-out of solar and storage projects through Onyx, which benefits from the substantial policy tailwinds associated with the Inflation Reduction Act of 2022.

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.

Exhibit 14: SEEIT value accretion and upside returns over time

 

Estimated value uplift* (£m)

Estimated value uplift*
(pence per share)

Estimated time
(years)

NAV at 31 March 2023

1,125.4

101.5

 

RED – Increasing Fixed Revenues

15.0

1.4

2 to 4

RED – Improving Efficiency

12.5

1.1

2 to 3

RED – Investment in Other EE Projects

7.5

0.7

1 to 3

RED – Cost Recovery of Fixed overheads

7.5

0.7

3 to 5

Onyx – Increase in MW Deployed

7.5

0.7

3

Onyx – Increase in MW Developed

7.5

0.7

3+

Onyx – Improved economics via IRA

3.5

0.3

3 to 5

Primary – Capacity contracts

7.5

0.7

2 to 5

Primary – Improve operations via capex

3.5

0.3

2 to 3

Primary – BF #4 Restarted

30.0

2.7

N/A

Oliva – Using land for solar production

2.0

0.2

3 to 4

Oliva – Contract extension/improvement

7.5

0.7

0 to 1

UU Solar – Adding batteries across sites

3.5

0.3

1 to 3

Värtan Gas – Improved customer retention

4.0

0.4

2 to 3

Värtan Gas – New business offerings

12.5

1.1

3 to 5

Värtan Gas – Successful appeal

7.5

0.7

1 to 2

Total NAV upside from accretive projects

1,264.4

114.0

% change

12.4%

12.4%

2.5–3 years

Source: SEEIT. Note. *Mid-value taken from the range given in FY23 results.

Hedging strategy and performance

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.

Performance, revenue and future prospects

Exhibit 15: Previous performance

March 2019**

March 2020

March 2021

March 2022

March 2023

NAV (£m)

98

324

694

1,073

1,125

NAV (p per share)

98.4

101.0

102.5

108.4

101.5

NAV total return in the year*

-

6.2%

8.0%

11.2%

-0.9%

Cash inflow from investments (£m)

1.7

17.1

42.1

64.7

84.5

Dividend declared in relation to that year (p per share)

1.00

5.00

5.50

5.62

6.00

Cash cover for dividends paid in the year

-

1.6x

1.2x

1.2x

1.2x

Consolidated gearing (% of NAV)

0%

46%

36%

34%

32%

Source: SEEIT, Edison Investment Research. Note: *Dividend paid in the year and NAV movement in the year, divided by opening NAV. **Short period from IPO in December 2018 to March 2019.

Exhibit 16: Five-year discrete performance data

12 months ending

Total share price return (%)

Total NAV return
(%)

CBOE UK All Companies (%)

MSCI World High Dividend Yield Index (%)

MSCI AC World
(%)

30/06/19

-

-

0.3

14.0

10.3

30/06/20

4.8

7.9

(13.6)

(2.3)

5.7

30/06/21

15.4

7.0

21.1

14.9

25.1

30/06/22

5.1

12.6

2.2

10.0

(3.7)

30/06/23

(32.0)

3.5

8.3

4.2

11.9

Source: Source: Refinitiv, Edison Investment Research. Note: All % on a total return basis in pounds sterling.

Exhibit 17: Cumulative performance since inception

Source: Refinitiv, Edison Investment Research

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.

Exhibit 18: Revenue split

Source: SEEIT, Edison Investment Research. Note: As at 30 June 2023.

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.

Exhibit 19: Investment trust performance to 30 June 2023

Price, NAV and benchmark total return performance, one-year rebased to 100 from 12 months previously (not absolute)

Price, NAV and benchmark total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: One-year and since inception (SI) performance figures annualised.

Exhibit 20: Share price and NAV total return performance, relative to indices (%)

 

1 month

3 months

6 months

1 year

3 years

Since inception*

Price relative to CBOE UK All Companies

(17.2)

(9.4)

(22.3)

(37.3)

(38.5)

(29.5)

NAV relative to CBOE UK All Companies

0.3

2.1

0.4

(4.4)

(6.9)

3.9

Price relative to MSCI World High Dividend Yield Index

(18.2)

(9.7)

(19.4)

(34.8)

(37.3)

(36.1)

NAV relative to MSCI World High Dividend Yield Index

(0.9)

1.9

4.2

(0.6)

(5.2)

(5.8)

Price relative to MSCI AC World

(18.8)

(13.1)

(26.4)

(39.3)

(38.8)

(43.3)

NAV relative to MSCI AC World

(1.7)

(1.9)

(4.9)

(7.5)

(7.5)

(16.4)

Source: Refinitiv, Edison Investment Research. Note: Share price, benchmark data and NAV at 30 June 2023. *18 December 2018.

Key asset revenue and cost models

RED Rochester

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 40% fixed fees paid unrelated to demand or services procured.

Approximately 50% from a pre-determined tariff, based on cost of delivery of the service and demand.

Approximately 10% from a fixed mark-up for each customer on the total utility bill.

Primary Energy

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:

Cokenergy (c 57%) through demand protected, via a through true-up mechanism, long-term index-linked PPAs.

North Lake (c 19%) through demand protected, via a through true-up mechanism, long-term index-linked PPAs.

PCI Associates (c 7%) demand-based revenues.

Portside (c 17%) capacity based long-term PPAs.

Renewable energy certificates (c 4%) generated by Cokenergy and North Lake and sold on the open market.

Onyx Portfolio

Approximately 95% of the asset’s revenues are generated from end-users through PPAs that are index linked and typically 20 years (weighted average of c 18 years).

Approximately 5% are generated from solar renewable energy credits (SRECs).

UU Solar

77% of revenues are through PPAs with UU Solar for a fixed price on a take-or-pay basis, with a fixed escalation of 2%. The weighted average life of the PPAs is 25 years.

c 14% of the revenues are on an NPV basis of which the weighted average life is 17.5 years.

The remaining 9% comes from merchant revenues for electricity not consumed on site.

Oliva

Approximately 44% of revenue is from RoRi (for the duration of the asset’s life), which is a regulatory payment from the government paid to CHP and biomass assets adjusted to account for changes in revenue received by the asset (electricity) and operating costs (natural gas and EU Allowances (EUA) emission certificates).

Approximately 42% from the sale of electricity to the grid. While this is linked to market pricing, it is effectively hedged through the RoRi.

Approximately 14% through the sale of the product Orujo oil through short-term market contracts. The cost of the oil is linked to the cost of the biomass, providing some hedging against the fuel supply.

Värtan Gas

Approximately 51% of revenue is from a fixed annual fee to the regulated grid from end-users, which is not related to consumption. Contracts are typically rolling yearly contracts with residential customers (c 50,000).

Approximately 49% from variable tariffs for the supply of gas. Tariffs are renewed annually and are based on gas cost and margin (this includes transport and restaurant customers).

Peer group comparison

Exhibit 21: Selected peer group performance to 31 July 2023*

Group/investment

(% unless otherwise stated)

Market cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount/
premium
(cum fair)

Ongoing charge

Performance fee

Dividend yield

SDCL Energy Efficiency Income

825.4

(1.1)

19.7

-

-

(25.8)

1.0

No

7.7

Aquila Energy Efficiency Trust

59.3

0.6

-

-

-

(38.9)

-

No

3.8

Aquila European Renewables

288.7

12.1

22.1

-

-

(21.8)

1.0

No

7.0

Atrato Onsite Energy

119.4

2.1

-

-

-

(14.5)

1.4

No

5.4

Bluefield Solar Income Fund

704.4

5.1

45.1

72.0

159.9

(17.6)

1.0

No

7.1

Downing Renewables & Infrastructure

161.6

5.5

-

-

-

(24.2)

1.4

No

5.7

Ecofin US Renewables Infrastructure

68.4

(1.7)

-

-

-

(33.1)

1.8

No

11.3

Foresight Solar

585.3

6.3

57.7

65.8

123.5

(21.2)

1.1

No

7.3

Gore Street Energy Storage Fund

446.7

12.4

46.3

58.2

-

(19.0)

1.4

Yes

7.5

Greencoat Renewables

1,047.2

12.1

27.8

50.2

-

(6.5)

1.2

No

6.7

Greencoat UK Wind

3,349.3

33.1

64.5

94.2

185.9

(13.3)

0.9

No

5.2

Gresham House Energy Storage

714.5

12.4

90.2

-

-

(20.3)

1.1

No

5.6

Harmony Energy Income Trust

214.6

2.8

-

-

-

(19.4)

-

No

2.1

HydrogenOne Capital Growth

70.1

5.2

-

-

-

(45.6)

2.5

No

-

JLEN Environmental Assets Group

689.3

6.0

57.1

68.9

-

(15.8)

1.2

No

6.7

NextEnergy Solar

553.3

(0.1)

40.0

52.1

-

(18.5)

1.1

No

7.8

Octopus Renewables Infrastructure

540.1

1.7

25.9

-

-

(11.7)

1.1

No

5.4

Renewables Infrastructure Grp

2,856.1

5.7

41.6

71.4

141.8

(13.5)

0.9

No

5.9

Thomas Lloyd Energy Impact Trust

143.7

(4.0)

-

-

-

3.6

-

No

1.6

Triple Point Energy Transition

69.0

9.5

-

-

-

(31.0)

2.5

No

8.0

US Solar Fund

163.3

0.4

16.0

-

-

(33.9)

1.4

No

11.3

VH Glob Sustainable Energy

348.1

4.0

-

-

-

(25.6)

1.3

No

4.6

Simple average (22 constituents)

637.2

5.9

42.6

66.6

152.8

(21.3)

-

-

6.4

SDCL SEEIT rank in peer group

4

20

12

-

-

17

-

-

5

Source: Morningstar, Edison Investment Research. Note: *Performance to 31 July 2023 based on ex-par NAV. Ordinary shares only. TR, total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

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.

Dividends: Progressive with an attractive yield

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.

Exhibit 22: Dividend history since inception

Source: SEEIT, Edison Investment Research

Discount: 31.3% discount to NAV

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.

Exhibit 23: Premium/discount since inception

Exhibit 24: Share issuance

Source: Refinitiv, Edison Investment Research

Source: Refinitiv, Edison Investment Research

Exhibit 23: Premium/discount since inception

Source: Refinitiv, Edison Investment Research

Exhibit 24: Share issuance

Source: Refinitiv, Edison Investment Research

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.

Investment process

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.

Investment policy

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.

Investment restrictions

SEEIT’s investment policy states:

No investment will represent more than 20% of the gross asset value, calculated at the time of investment.

The aggregate maximum exposure to any counterparty will not exceed 20% of gross asset value, calculated at the time of investment.

The aggregate maximum exposure to energy efficiency projects in either a development or construction phase will not exceed 35% of the gross asset value, calculated at the time of investment, provided that, of such aggregate amount the aggregate maximum exposure to projects in a development phase will not exceed 10% of the gross asset value, calculated at the time of investment.

The aggregate value of the company’s investments (calculated at the time of investment) in developers, operators or managers of energy efficient projects that are not made at the same time as an investment by the company in an associated energy efficient project will not exceed 3% of the gross asset value (with this 3% limit being included in the 10% limit on exposure to projects in the development phase).

SEEIT will not invest in other UK-listed closed-ended investment companies.

Use of derivatives

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.

Sustainability and ESG considerations

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:

Aiding the transition to a low carbon economy, through:

the deployment and/or operation of ‘best available technology’ equipment and low-carbon solutions;

utilisation of waste gases or other waste; and

minimising resource usage.

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

Minimising its environmental footprint, through:

ensuring projects and O&M providers operate in compliance with applicable local and national laws (as a minimum) but seek leading practice substantially beyond minimum legal requirements;

monitoring, measuring and minimising through mitigating actions, the risk and impact of environmental damage, waste, biodiversity loss, air quality and emissions of each individual project;

ensuring the sourcing and use of sustainable materials to the extent possible for construction projects and incorporating the best procurement requirements to minimise the depletion of rare earth minerals and non-replenishable materials; and

maximising resource use through the extension of project lives.

Robust governance and business integrity. SEEIT will adhere to the highest standards of corporate governance practice in its investments ensuring all parties involved with the company:

comply with all applicable laws and promote international best practices, including those intended to prevent extortion, bribery and financial crime;

have a clearly defined and transparent management structure and governance;

deal with any regulations in an open and co-operative way;

use effective measures of internal control and risk management covering all significant issues including ESG concerns;

demonstrate a commitment to a zero-tolerance approach for any unethical practices; and

have robust processes for assessing and monitoring risks arising from climate change that could have an impact on any project or its operation.

Safe and healthy environment. SEEIT will ensure anyone who encounters its projects, encounters a safe environment via:

compliance with all local and national laws to ensure safe working conditions;

robust critical incidence response plans and employee training to be able to handle these situations; and

monitoring and quickly resolving any complaints in relation to operations received from the local community.

ESG highlights from the year ended 31 March 2023 include:

1,202,528t CO2 saved (equivalent to removing 1,004,619 cars from the road).

4,373,103MWh of total energy generated.

605,823MWh of renewable energy generated.

387,868MWh of energy saved (enough to power 26,031 homes in the UK, based on average emissions for a typical UK household).

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

Gearing

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.

Capital structure, history of the company and ownership

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.

Exhibit 25: Major shareholders

Exhibit 26: Average daily volume (ordinary shares)

Source: Bloomberg as of 13 July 2023

Source: Refinitiv, Edison Investment Research

Exhibit 25: Major shareholders

Source: Bloomberg as of 13 July 2023

Exhibit 26: Average daily volume (ordinary shares)

Source: Refinitiv, Edison Investment Research

Fees and charges

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.

The board

Exhibit 27: SEEIT’s board of directors

Date of appointment

Remuneration for year ended March 2023 (£)

Shareholdings at 31 March 2023

Tony Roper (Chair)

12-Oct-18

69,500

148,500

Helen Clarkson

12-Oct-18

49,500

20,000

Christopher Knowles

12-Oct-18

51,500

94,000

Emma Griffin

21-Oct-20

51,500

20,509

Sarika Patel

1-Jan-22

54,500

25,000

Source: SEEIT, Edison Investment Research


Appendix

Energy market overview

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.

The energy efficiency problem and solution

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.

Exhibit 28: Investment necessary in energy benchmarked against IEA 2030 scenarios

Source: IEA data, Edison Investment Research. Note: APS, Announced Pledges Scenario, STEPS, Stated Policies Scenario.

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.

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General disclaimer and copyright

This report has been commissioned by SDCL Energy Efficiency Income Trust and prepared and issued by Edison, in consideration of a fee payable by SDCL Energy Efficiency Income Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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