SUSI Partners’ Marco van Daele on the emergence of energy transition strategies

In a recent interview with Infrastructure Investor’s Charles Waine on the financial sector’s efforts to decarbonise existing assets, Marco van Daele, SUSI Partners’ Co-CEO and Chief Investment Officer, discussed the rise of value-add energy transition strategies in the infrastructure space, the firm’s energy efficiency-focussed credit strategies, and the role of private capital in driving forward the energy transition.

In the following, his statements from the interview are presented with minimal context added. The resulting article titled “Greening the brownfield” is available to Infrastructure Investor subscribers in the magazine’s special “Strategies” report published in early September 2022.

Commenting on the rise of energy transition funds and how they reflect an evolution towards value creation within infrastructure portfolios, he says: “It speaks to how investors perceive the infrastructure asset class overall and specifically energy infrastructure within that. A lot of investors came to the power sector probably a decade to 15 years ago, perceiving it as a very defensive, highly regulated, and mostly contracted business dominated by large assets and regulated utilities, so it was at the very low end of the risk spectrum. Now the energy transition – which encompasses the rewiring of an entire industry – has led to the emergence of new business models and much more varied revenue compositions that each have their specific risk profiles. As a consequence, infrastructure investors had to regain more competencies to underwrite those risks, and acquire a much deeper knowledge of energy markets, including energy prices, commodity dynamics, asset buildout dynamics, permitting issues etc. But this change has also created a lot of opportunity. For those that have done the work and have acquired that knowledge, it is a tremendous opportunity to be a value-add investor in the energy space.”

Asked about the motivations to bring to market energy transition funds that specifically address the decarbonisation of existing assets rather than the mere buildout of renewables capacity, he explains: “Ideally, new strategies do not come into being because they respond to the trends of the day, but because there is a real need for capital. In the case of our credit strategies, which focus on financing a wide array of energy efficiency measures, we recognised that companies set climate targets and realise the risk to their business if they do not have an energy strategy. But the capabilities and capital are often missing as they will always prioritise spending on their core business rather than decarbonising. That is why our strategies came about because we saw a gap and the fundamental need for more capital.”

Further elaborating on the development of the firm’s decarbonisation-focussed credit strategies, he notes: “We recognised that we are good at raising and investing capital, and underwriting the underlying risks, but we are not an engineering company, nor an advisor that assesses the energy savings potential of end customers. So we partner with energy service companies and technology providers that have that expertise but need capital to grow, and together we can provide solutions that help decarbonise a wide range of businesses and industries.”

Asked how important industry-specific experience is to be successful in this specific sector, he states: “On the one hand, we are very pleased to see so many energy transition funds being launched, raised and hopefully invested, because the world needs it. But I think there is a real danger that a lot of people are jumping on the bandwagon, and maybe they are very good at raising funds, but the test will be whether investments actually generate an attractive risk-adjusted return, and some might be heading for a train wreck. As always with new themes, there will be some, and hopefully many, that do very well, and others who will not, which can happen for many reasons but one of them will be that they do not have the right expertise and experience. And expertise means two things: First, having the right networks of people to work with in place, because it does need partnerships and collaborations to play this well. It is not a single company that can do it, it is a network of companies that has to do it with specialisations by market, by sub-sector, by industry sector, by client type…it is quite a complex world. And second, it is important to not just have a nice excel spreadsheet with calculated returns but to fundamentally understand the businesses of the end customers and of the partners that help implement these solutions – to be able to provide valuable capital and not just money.”

Assessing which areas of decarbonisation he sees as particularly attractive for infrastructure investors, van Daele explains: “The most logical place to start is the highest energy use industries, for example steelmaking or cement, where 60-80 percent of the cost is energy. If you look at the largest steel manufacturers, they realise that this is absolutely core to the point of being mission critical. The next layer is companies where energy is not such an obvious target to optimise. In terms of type of energy, after electricity, heat and cooling is the next big vector that is currently very much underinvested.

In general, an important part of the puzzle will be reducing the waste of energy. Such waste can occur at the point of production where potential energy production of wind farms is curtailed, for example. Then at the grid level, and at the usage level, through inefficient processes, through inefficient grids, and through inefficient energy management systems. A shocking amount of all energy produced is never used productively. So focussing on reducing our energy consumption is certainly important but if we manage to reduce the waste of energy, we will already have achieved a lot.”

Commenting on hydrogen-based solutions and carbon capture, utilisation, and storage (CCUS), he says: “Hydrogen-based solutions have to be a part of the puzzle, but it is a very complex puzzle. Producing green hydrogen by using electricity, only to eventually convert it back to electricity at a later point often does not make much sense given the current system losses. I think the technology has to advance for that to make sense. Where it does make sense is where hydrogen is an input into chemical processes, for example in the production of ammonia, or for refined fuels. Those are clear use cases.

CCUS to me is a transitional technology. It is a way to use existing assets longer and to help save on capex, and reallocate that capex saved to, say, building the new wind farm next door. But it cannot be the reason not to fundamentally change things.”

Asked about the role private capital can play in fast-tracking decarbonisation ambitions, van Daele concludes: “I think private capital is essential to doing that for several reasons. First, there is a tremendous amount of private capital available these days, and it can take longer-term views. That is a fundamental requirement for energy transition strategies. None of this happens overnight. When you are a listed company and you are reporting against quarterly targets, making an investment today which might yield a result in two, three or five years is very hard to do under the public eye. Therefore, private ownership is extremely valuable when done well, with a stated intent, with a clear strategy that allocates capital into things that yield tangible economic returns while also delivering against climate targets. There is often this false narrative that a trade-off exists between an economic return and an ecological one. But I think by now it has clearly been proven that one can generate attractive risk-adjusted returns by investing in the energy transition. It offers a perfect opportunity to do good and do well at the same time.”