A small company with a BIG IMPACT – Energy Recovery
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Article Type
Sustainability Soapbox
Topic
Responsible Investing
Published
August 04, 2023
Read time
4 mins
Author
Malcolm McPartlin
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One of the core tenets of our global sustainable equity strategy is to find companies that are successfully addressing the worlds sustainability challenges through their products and services.

 

An example is Energy Recovery, a US-listed company which designs and manufactures a niche component used in industrial processes called a pressure exchanger (PX for short). A PX is a small, but clever device that helps save energy and money when dealing with fluids in industrial processes. It enables customers to capture and reuse the energy created to pressurize fluids. Energy Recovery has created a category killer product that dominates the niche markets which it currently serves.

 

In 2021, Energy Recovery's products saved customers approximately $3.9 billion in energy costs, helping customers avoid 30 terawatt hours of energy usage, representing a 4% reduction in the global energy consumption for potable water utilities. Avoiding approximately 14.5 million metric tons of carbon emissions - equivalent to removing more than 3.1 million passenger vehicles from the road every year*.

 

Energy Recoverys PX is predominantly used in water desalination, which is the process of creating fresh water from sea water. While desalination does have drawbacks, it is an essential process in many regions, such as Africa and the Middle East, where there is an acute lack of fresh water.

 

Given increasing water scarcity and global warming, desalination is becoming more mainstream. Drawing in sea water and pressurizing against a membrane to capture salt makes desalination a very energy-intensive process. Using an Energy Recovery PX reduces the energy intensity of this process by up to 60% and many current desalination plants would not be viable if Energy Recoverys PX technology did not exist.

 

In water desalination Energy Recovery has the dual impact of reducing energy intensity and facilitating the provision of water in water-stressed regions.

 

The refrigeration opportunity

 

An exciting part of the investment case for Energy Recovery is the application of PX technology in other markets, such as commercial refrigeration. Most refrigeration units in places such as supermarkets are based on hydrofluorocarbon (HFC) technology, which is massively environmentally damaging (up to 10,000 times more potent than CO2 in terms of greenhouse gas impact).

 

In a rare case of global agreement on climate issues, 151 states, including the European Union, have ratified the Kigali Amendment to the Montreal Protocol, which recommends phasing out HFCs. This means supermarkets around the world will have to replace their refrigeration units over the coming decade. For example, the EU has mandated a 70% reduction in HFC units by 2025 and total elimination by 2035, with other countries such as the US on a similar path, with later timing.

 

Energy Recovery's PX technology can play a crucial role in the replacement technology, with the ability to increase energy efficiency by 25-30%. Refrigeration is a relatively new market for the company, but with huge potential. Energy Recovery aims to generate $100m to $300m in revenues from refrigeration in the medium term. This compares to the companys total revenues of $125m in 2022.

 

There are risks around the pace of adoption and the market share that would be required to deliver these revenues, but with such a large opportunity to provide a valuable piece of technology into an industry on the cusp of a global replacement cycle, the refrigeration opportunity is compelling.

 

With unique technology, material added value for their customers, and strong secular tailwinds, we believe that Energy Recovery has the potential to generate strong and persistent revenue growth at high profit margins.

 

Energy Recovery remains a long-term holding in the Aegon Global Sustainable Equity Fund and is also held in other Aegon AM funds.* Sourced from Energy Recovery financial reports, 2021

 

 

Important disclosures

Author

Malcolm McPartlin
Investment Manager

Malcolm McPartlin is an investment manager in our equities team, where he co-manages the award-winning Aegon Global Sustainable Equity strategy and the Aegon International (ex-US) Sustainable Equity strategy. 

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