Heating Up

Heating Up: The Rush to Bring Renewables Online

Craig Churman: Good afternoon, this is Craig Churman with Saturna Capital, and we continue our series of sustainable investing webinars. This topic actually has been a been a discussion within our investment team and Levi is joining me. It’s really been a part of where we are seeing investment opportunities across a number of firms and a number of industries as we look to renewables and how it affects the auto industry and how it might affect batteries. And we thought of sort of cramming that into one discussion, but I think what Levi has done here is really start with renewable electricity and then we’ll have subsequent webinars and subsequent information on other aspects of where the investment opportunities are. I really appreciate the work that Levi has done. I’ll warn the audience that the charts are fairly detailed, so we’ll try to go through them slowly because we’re trying to cover a lot of ground. And I’ll also let everybody know that we do reference a little bit the studies that was published last week by the intergovernmental policy panel on climate change, which is a 1,300-page document. You know, obviously a long read, but it talks about the science behind climate change and really well done. There’s also a very nice 42-page policy summary and some of the information that Levi will share really talks about what are the policy implications and what does that mean for the investment opportunities going forward? So, I really appreciate the work that Levi has done to this point. You may have heard Levi on other webinars or seen some of the white papers that he has done. He’s a Senior Investment Analyst and a Portfolio Manager with us, but he’s really taken the lead on some of the deep research that we do to identify investment opportunities across countries and regions and market segments and individual securities that we recommend. And toward the end of the conversation, we may talk a little bit about... probably not specific securities, but where we see opportunities in the renewable space around utilities and other forms of electricity generations that’s renewable. So, welcome, Levi.

Levi Zurbrugg: Yeah, thanks, Craig. So happy to be here today. This is a subject that I find just absolutely fascinating and is one of my favorite parts of the job that I get to do. I wanted to set the scene a little bit today before we get into the investment opportunities and just discuss what’s led us to this point today. Over the years, we have seen a really widespread interest in renewable energy and the push toward a low-carbon economy has slowly gathered steam over those years. But during the last 18 months, we have seen this critical mass develop. And as we dig into what sparked this increased interest, I find it’s really valuable to just set a basis here. And what you see in this graph is a clear relationship between rising carbon dioxide levels and increased global temperatures. So, Craig spoke to the Intergovernmental Panel on Climate Change... their recent report. It’s a UN agency. Top climate scientists from around the world. This is their fifth assessment report. They’ve been working on these since around the early 90s. And the report stated this week—this has caught quite a bit of headlines, so I’ll quote from it—it’s a very direct statement of the situation we face and that is, “observed increases in greenhouse gas concentrations since 1750 are unequivocally caused by human activities.” So, it’s this clear link between human activities, rising carbon dioxide levels, and temperatures increasing that has really kind of set the scene around the concerns folks have today of climate change and where it could be headed.

Craig Churman: Yeah, and I think, Levi, the report, just like you’ve done, the history of climate change and carbon dioxide release is... now, all the science is there. This is hundreds of scientists and studies just like you’ve shown, of really, what are the future implications, and I think that’s what we’ll show later. Looking backward, but also looking forward. What does this mean for the future?

Levi Zurbrugg: Yeah, that’s absolutely right. There’s another graph that’s similar to the one you see here. It dates back 800,000 years, just showing the tight band that global carbon dioxide levels have held for those 800,000 years and the hockey stick that’s developed during this industrial revolution. So, this is... we’ve gone through periods of warming and ice ages that haven’t marked the same degree of carbon dioxide levels that we’re seeing today and that’s what’s really led to the concerns that the IPCC is speaking to. There are a lot of ways to slice and dice this information around greenhouse gas emissions and what’s led to the increases, but a couple trends are really clear. And that is, although the US has become more efficient over the past couple of decades with greenhouse gas consumption, there’s no other major economy that even comes close to producing GHGs on the same level as the US. And the optimist in me sees that as an opportunity. In the US, renewables only account for 11% of total US energy consumption versus 35% in the EU. Obviously with current technology, we can really help to lower these emissions levels, but it’s a clear red flag that the US needs to get ahold of its greenhouse gas emissions.

Craig Churman: And I think you do a nice job of putting the two important regions that—when you’re talking about countries and segments of the world, the US and China—you’ll talk about both of those later on. Because those are pretty important factors and like you said, the US has shown improvement. There is a lot of room for improvement and there are opportunities to create that improvement.

Levi Zurbrugg: Exactly and on the other end, you have China, which has rapidly developed... it’s close to the same levels as Europe on a per capita basis and of course when you consider how many folks there are in China, what we have seen is this rapid ascension in emissions coming from China. And this is a story that should be familiar to the West as well. In many ways, the West fueled its economic growth through fossil fuels, and this is what we are seeing in China and India and other developing markets is they are following the West’s blueprint. And so, it’s unsustainable, what the US consumer is using, but certainly if a much larger population were to consume at those same levels, we have a significant amount of greenhouse gas emissions that could further come online.

Craig Churman: And even some of the smaller segments like Africa and Asia had fairly big increases coming from a very low base, so there may be opportunities there also.

Levi Zurbrugg: Yeah, that’s absolutely correct. And this is, I think, leads us to why electrification gets so much interest. For one, it allows for folks to maintain a standard of living or to increase their standards of living while still addressing greenhouse gas emissions. And, in fact, while electricity and heat account for 30% of greenhouse gas emissions today, there’s the potential for renewables and electrification to address up to 70% of that global greenhouse gas emissions. And on this quest to raise electricity’s profile, there’s an expectation that renewable resources will capture 80% of the growth as electricity takes on these new markets. And that will entail growing their share of the grid from around 20% globally to 40% by the end of this decade. In the developed market, one of the major contributions to lead increases in electricity’s share in total energy’s used is the electrification of transportation. And these are graphs, according to the oil major, BP, they provide an interesting energy outlook, annually. So, you can consider these as not necessarily the most optimistic of any organization. BP certainly has a big stake in energy and maybe not as big of a stake in electricity. At least, yet. Certainly, an area they are looking at. But, according to BP, they expect to see electricity’s share of energy rise from around 20% today to 50% by 2050 and they actually acknowledge that we may well have actually already passed peak oil.

Craig Churman: You know, we talk about this because, as a firm, we tend to underweight energy. In the past, we have. And that may change going forward as there are opportunities in renewables and other segments. You may see an overweight. And there are segments in the energy industry, particularly utilities, that tend to not fit into an Amana screen because of their debt and maybe we will talk later about where we see opportunities in some of those spaces. But for the sustainable strategies we have that don’t have the Islamic, halal, screens, you may see a larger weight in energy compared to what Saturna may have done in the past.

Levi Zurbrugg: Yeah, it’s an interesting dynamic. We’ve seen, for a long time there has been this name for large oil companies—the super majors—and increasingly there is a handful of utilities that are becoming called the “renewable majors,” so you can see that direct competition where energy is competing across its uses and sources as opposed to maybe more where it used to be utilities competed against utilities and oil companies against oil companies. So, in order to reach net zero emissions by 2050, which has been this goal that’s part of the Paris accord, the growth in solar and wind will need to be very rapid. At the same time, unabated coal, which is coal that doesn’t use carbon capture storage—that’s the CCUS that you see over in the legend—is expected to be more or less phased out by 2040 with natural gas—which has often been promoted as a bridge—is expected to peak around late this decade and drop off rapidly there. We also see nuclear, hydrogen, other renewables as biofuels, see some growth, but it really pales in comparison to that of solar and wind and the growth that’s expected and really needed from those energy sources moving forward.

Craig Churman: Yeah, so, you know, just based on this chart, is it going to take 20 years to get to that point? Hopefully it happens rapidly and sooner, and I think one of the reactions to the IPCC report is, “We need to move faster,” but I think that this tells the story that the coal and traditional energy sectors will in fact shrinks and that there will be opportunities in wind and solar which is, towards the end, we’ll share some of the ideas you have of investment opportunities.

Levi Zurbrugg: Yeah, and I think that you were starting to allude to an interesting dynamic and that’s, “Why now?” Solar and wind aren’t necessarily new technologies. They’ve been around for some time. We’ve been more or less alert that climate change is happening. There is certainly a greater consensus today than just about ever. So, why now? What has spurred this along? What has allowed us to have this setup where renewables are coming online so fast? I guess the economist in me says that it’s all about price. Price is the greatest signal to an economist. But my human instincts are supported by the findings that we have read this week from the IPCC report saying that it’s an existential threat. You know, my instincts don’t make for as nice a graph as these unsubsidized, levelized costs of solar and wind do, and what you can really see here is those price levels coming down and falling well below their competition in nuclear, coal, or gas. And that’s certainly helped with the buildout of renewables. The fact that they are not cheaper than other conventional forms of energy.

Craig Churman: We talked a little bit yesterday about nuclear which was what made Europe able to manage their carbon emissions really at a cost increase over the last few years, particularly when you had the tsunami that happened after the Japanese reactor imploded. Interesting how the dynamic does change in that that was the answer for Europe for many years and now solar and wind look like they are better opportunities.

Levi Zurbrugg: Yeah, it’s been really interesting to see that price increase in nuclear, which is currently the most expensive major form of electricity and a lot of that has come online after the challenges with permitting and what not due to the Fukushima disaster. There’s a lot of really interesting, very nascent work that’s being done on nuclear energy and so I wouldn’t, say, rule it out, as it is a low-carbon source, but right now, the prices of wind and solar make them certainly much more attractive. Another important aspect that’s been a clear catalyst for renewable energy development in the recent past couple of years is the sea change we have seen in countries that are making net zero pledges. So, 2020 turned out to be a pivotal year. It seems that the threat of a pandemic may have finally helped awaken our senses of mortality and governments have seen the potential to address the economic disruption caused by the pandemic with spending on green infrastructure. And really, whatever the reason is, I think it’s impressive and exciting to see the rise in global CO₂ emissions that are covered by net zero pledges. In 2019, there was less than 20% of emissions that were covered. And as-of Q1 2021, this year, over 70% are covered. Of course, a lot of these are pledges. Not all of them have been converted into law. And what will be really important is that we make good on them, the pledges that have been made.

Craig Churman: Yeah, and I think that the UN report, the 42-page summary, it is just a policy summary, and you can start to see that clearly that’ll be worked in and I think you’re going to see more movement in that policy summary. That actually has some really clear outlines for what business and government entities need to do in order to respond to renewables and the climate change issues.

Levi Zurbrugg: Yeah. That’s a great point. In a lot of ways there was an impetus for that to be published because there’s another meeting this year in Dublin that could be really fundamental as countries continue to make good on the Paris agreement and show that they can really reach those goals by 2050. And 2030 has kind of stood out as this interim step. Another aspect of renewable energy that has been under-shared but it starting to be appreciated is that although there is this politicized nature of renewables—especially in the US—the transition to a low-carbon economy is, or is likely at least, to increase the number of jobs available to the global workforce. And these are generally skilled jobs, and this has made investing in renewables much more palatable across the political spectrum. Both parties here in the US really do support job growth. Of course, there are areas that will or are likely to lose jobs and it’s important that we don’t turn out back on these, but when you look at it at a net level, the transition is exciting for job growth and there’s a lot of potential with it that I think both parties are starting to understand and appreciate.

Craig Churman: I think this is a really useful slide because it starts to explain why more than just an energy company or a utility, there are other industries like the technology industry that will support the growth here. And so, you’ll see the benefit just like you’re seeing semiconductors in the auto industry... you’re going to see the benefit of other industries that feed into this growth and that shows why the skill level is high in these areas: because of the trade, the work, and the engineering that goes into this.

Levi Zurbrugg: Yeah, that’s a great point. The organization that put this graph out, the International Energy Agency, they came around after the oil crisis in the 70s. So, again, it’s not necessarily a renewable think tank. I think it’s a pretty unbiased view. And they expect overall employment in the energy sector to increase by 9 million by 2030. But overall growth, including that of the energy sector, but also other kind of auxiliary industries to support it, overall job growth they expect to be around 30 million new workers. So, this is clean energy, efficiency level emissions technologies, and over half of those 30 million are expected to be highly skilled positions. So, it is promising to see this not just growth within energy but in industries that support it. So, on the previous slides, we have shown the expected energy increases. Those are really remarkable to consider. What’s just as remarkable—I think—is the expected dollar value of investments. Annual investments in renewables are expected to more than triple and then hold these levels over the next 2 decades before slowing to a rate that’s still more than double that of the annual average investment in renewables that occurred from 2016 to 2020. So, this is a remarkable opportunity for investors—I think—is this substantial growth in renewables.

Craig Churman: Yeah, and what we talked about is we’re going to do a future webinar probably just about batteries and the storage because that’s an important part of the delivery mechanism, which is on the top graph.

Levi Zurbrugg: Yep. That’s exactly right. And when you see the batteries here, that’s just batteries for the grid and for storage and utilities. That doesn’t actually include batteries for cars, which is an even more substantial segment. So, batteries are another really exciting area that we’re looking at. Craig explained that we plan to do another presentation because it’s worth it in and of themselves to really dig into the work that’s being done on batteries and the opportunities there. What I’ll also highlight on this slide is the infrastructure. There’s been a lot of talk about infrastructure. We’re seeing the bill in the US Senate pass here to build out more infrastructure. That’s, in terms of the grid and renewables and making renewable electricity, that’s the next largest area for investment growth, is infrastructure. And so, along with renewable energy, what we see is the grid will need to be significantly increased to keep up with new energy sources and the challenges that are presented by more dynamic means of generating and using electricity that are associated with a non-dispatchable source that is renewable. So, it’s electricity. They can’t always be turned on and off. And so, the grid has to become even more, as they’ll call it, smart, or hardened, to deal with renewable electricity.

Craig Churman: Yeah, it’s interesting. When you look at the EV charger piece of that. We can’t picture the day when EV chargers are everywhere just like we have gas stations that are everywhere today and that’s exactly what will happen. But it’s hard to see that when you only see a few EV chargers around today.

Levi Zurbrugg: Yeah, I mean I think that’s a great point because it might be easier, at least for me I think it’s easier, to imagine just how drastic a change that would be. To build out all of those EV chargers. And you look at this and it—in and of itself—is a great investment opportunity, but the size of building out all of those chargers to match gas stations is still just a fraction of what’s gonna be needed to invest in grids. So, many industries will be disrupted and it’s almost hard to fathom the size of these investments. Taking it to a local level. Within the US, solar capacity has actually lagged wind over the past decade or so and you have to remember here, when became economic first and so it received more investment initially, but solar capacity is expected to surpass wind by the early 2030s. Another organization, or another thought leader in this area, is Princeton University. And they have developed a roadmap to what it will take to become net zero in the US. And according to their research, they expect $830 billion on top of what’s already spent will need to be invested in low-carbon electricity sources. And that’s between now and 2030. And this investment is really forecast to be dominated—again—by wind and solar. So, you can see, wind and solar continue to emerge as these crucial energy sources for the transition to a low-carbon economy. One thing I like to point out, as we see a lot of the exponential growth and graphs and think, “Okay, that’s a nice forecast.” I know we’re somewhat hardened to forecasts, thinking they are overly optimistic. And it’s always good to question them. But what we have seen is forecasts—especially by the US Energy Information Agency—but other organizations as well, have been continually adjusted upward. And there’s a clear trend that expectations continue to increase year-over-year.

Craig Churman: Yeah, and we talked about that. Historically, you look in a forecast and say, “Well, the reality will be different than that, and probably less,” but in this case it always keeps going up, you know? And I think a lot of the detail in the UN report really talks about not the 800,000-year history of what happened with climate change, but what the expectation is going forward and some of that feeds into your data.

Levi Zurbrugg: That’s exactly right and the more we learn about but... not to be too doomsdayish, but the more we learn about climate change and how far it has progressed already, I think the more realization there is that this change isn’t something that we can kick the can down the road on. It’s something that needs to happen now. And as you can see in this forecast of wind, wind is very much the same story as what I just showed with solar. The exception is the 2017 forecast, which was quite high and subsequent years were lower, but then saw revisions upward. And despite the downward revision from 2017 to 2018, 2017’s forecast that looked optimistic in 2018 and 2019... that forecast actually undershot actual deployments in 2018, 2019, and 2020. So, it’s not just that forecasts are becoming more and more optimistic. There’s a reason for it and that’s the buildout of these technologies has surpassed forecasts, historically. One of the more compelling depictions of this—I think—is the look at US offshore wind development. So, in 2020, the Biden administration with a goal to reach 30 gigawatts of offshore wind by 2030 and the 2021 forecast that we see here, which was made well after that announcement date, shows that the US Energy Information Agency only expects 10 gigawatts of capacity by that date. So, it’s 1/3 the capacity despite the administration having this 2030 target. So, by no means do I really think that these are optimistic forecasts. If you think about a large offshore wind development project, it only takes a handful of those developments to get to 10 gigawatts and we have seen permitting for them really start to go through the federal agencies for offshore wind. And so, I think that this, again, is a scenario where you see the forecast being on the more conservative side.

Craig Churman: And back to your earlier slide where you talked about when the policy does change or the laws change, or the administration makes it a priority, you see rapid change. And, you know, we saw that in Europe and we’ve seen that in other markets, and I think the US will just follow suit there. Like you said, this forecast will look pessimistic when we look five years out and we see how rapidly things can be implemented. And particularly when the economics are strong, too.

Levi Zurbrugg: Yeah, that’s a great point. In some ways, the US gets to be a free rider here because, again, I have talked about this before, but I have talked about the Scandinavian countries and those along the Baltic have been really pushing their offshore wind capabilities and the companies that have been building out those projects have become very adept at doing so. And the US gets the benefit from essentially what’s R&D, the trial and error of building a new project offshore will help, I think, grease the wheels and drive down prices for developing them here in the US. And so, yeah, I expect to see significant movement in this area as policy kind of opens up and eases for the permitting. So, we’ve talked a lot about the need to build out wind and solar and just touched on building out the grid and I think it’s important to highlight how astounding this investment is and the fact that investments in electricity networks within the US are expected to triple by 2030. In Europe, much of that investment will be focused on transmission networks. If you think about how the grid is currently built, the distribution networks that all tie transmission networks to our houses... those are largely in place and there is certainly some updating that could be done, but the transmission networks that bring in electricity from the source where it’s generated to those distribution nodes are not necessarily the same. So, where solar and wind assets are located are likely not where coal or gas or nuclear currently is located. And so, that’s why we see such a substantial investment needed in electricity transmission. And as you can see, this entails millions of kilometers, globally, that need to be built out, just to bring renewables online. Another large chunk of this investing in the grid that I think is interesting to highlight is the investment in CO₂ transportation. So, this is developing pipelines that are refurbishing current pipelines to be used to transport CO₂ that’s captured to a place where it can be stored, and this is another large investment opportunity. It’s one that, in my opinion, will be hard to reach by 2030, just because the technology seems to lag that of electricity transmission lines or other renewables. But it’s something that is very much a part of any net zero plan and so, it’s technology that will require investment and will be interesting to follow if the technology can keep up with this goal of $130 billion being spent by 2030.

Craig Churman: Yeah, and you make a good point because one of the things that we have been very aware of is we used to talk about climate risk and stranded assets as the starting point for a conversation and now we see what the opportunity set is. As prices have come down, as policy has changed. As the science has been shared, globally, I think there is a lot of opportunity and we have changed a little bit of the conversation from, “Let’s avoid where you might have stranded assets or risk,” related to climate change and really where are the investment opportunities. And I think the Princeton data is pretty telling in terms of where the investment opportunities would be.

Levi Zurbrugg: Yeah, and I like these graphs. Even if you forget the numbers. It’s a nice big square. It says, “Look at me.” So, as Craig mentioned at the beginning of this presentation, there’s a lot of data that I just spewed at you. There’s a lot of graphs to digest. If I had to distill all of the topics that we discussed here today, the few key takeaways I would focus on are, one, global investment in renewables and in the grid is expected to more than double over the next decade. It’s a massive amount of investment. The global GDP will actually benefit from the increased investment in energy. And, of course, the reason why we’re doing all of this is if we can make these investments then global CO₂ emissions are expected to drop by 40% by 2030. And again, this isn’t something we can continue to kick the can down the road... that’s not optimistic to say, “Global emissions are expected to drop 40%.” We need to drop global emissions by 40%. So, I think this is all an exciting area to work in and pay attention to and I hope everyone took away a few, you know, interesting tidbits that will help them consider this transition to a renewable and low-carbon economy.

Craig Churman: And thanks, Levi. And like we said, we will do a subsequent discussion on renewables and probably do a deeper dive in the auto industry and maybe separate that discussion. But we’ll also send copies of the slides to everyone we’ll also send a link to the UN report and a copy of the policy summary, which I think are very valuable and useful follow ups. And all of the sources that Levi had in there are all marked if you have any questions about any of those sources, we’d be glad to provide that information. So, thank you very much. We really appreciate the opportunity. Gus will be sending out the follow-on materials and if you have any questions please get ahold of Gus or myself. Thank you very much.

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