Key takeaways from the CIBC Electrification Summit

Tom Heintzman: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape. I’m your host, Tom Heintzman. Please join me as we explore today’s most pressing issues with special guests that will give you some new perspectives and help you make sense of what really matters.

Luisa Fuentes: I think the other takeaway I had is regarding technology risk and how nuanced it can be. So there is evolution and then there’s revolution and clearly evolutions of technologies are much easier to finance than brand new completely first of a kind technologies and that will continue to be the case.[CS1]

Tom Heintzman: Over the past several episodes, we’ve explored different aspects of the electricity system and the electrification phenomenon that is underway. On today’s episode, we culminate the discussion with our key takeaways and observations from CIBC’s inaugural Electrification Summit, which was held in Toronto on June 11th, 2024. This event explored the progress of electrification in Europe and North America and the opportunities to transition the economy to clean electricity. We were thrilled by the attendance with more than 300 people giving up their day to listen to speakers on the status of electrification. To provide further insights from the event, I’m joined by my CIBC colleague, Luisa Fuentes, Managing Director and Head of Energy Transition and Sustainability based in New York City. Luisa moderated a panel at our summit on financing electrification in North America and beyond and has extensive experience in helping clients finance their transition objectives. Good morning, Luisa. Welcome and thank you for joining us on today’s show.

Luisa Fuentes: Thank you for having me, Tom.

Tom Heintzman: Luisa, before we jump in, I thought it would be helpful for our listeners to review the day’s agenda. So the day began with a policy panel hosted by our Hon. Lisa Raitt, who interviewed both chair of the Canada Electricity Advisory Council and CIO of the Canada Growth Fund. Next up was a panel on electrification in Europe, where in many instances they are more advanced than we are in North America with leaders from Brookfield, GridServe, which is the UK’s largest EV charging network, and Gresham House, a large battery storage and renewable energy provider. That was followed by a panel on financing electrification, which you moderated, Luisa, and a second on investing in electrification, including representatives from CPPIB, First Nations Major Projects Coalition, Canada Infrastructure Bank, IMCO, Fitch, and ARA Partners, an energy transition fund based in Boston. Next up were three panels discussing the evolution of the electricity grid. The first focused on transmission and dispatch, which is often referred to as the bulk system. The second on distribution and distributed energy resources. And the third on the role of gas and electrification. These panels included leading utilities such as AltaGas and its subsidiary, Washington Gas and Light, Enbridge and Alectra, transmission operators and investors such as Fortis via subsidiary ITC and LS Power, and Ontario’s IESO representing the market operators. We finished up the day with three panels on the end use of electrification, one on transportation, one on buildings, and the final one on hard to abate sectors, including cement and steel. So, Luisa, let’s start with your first impressions of the event overall. What were your major reactions and high level thoughts?

Luisa Fuentes: First of all, it was a wonderfully attended event. It was great to see over 300 people in that beautiful space that all of our clients should come to at CIBC Square. Second, I would note that the format really was excellent. 30 -minute panels should be the rule for all conferences. You’re able to really load in a lot of information while not focusing on any specific subject for a bit too long. So I really enjoyed the format. This was the first electrification summit that CIBC has hosted, but I’m sure based on the event this week, it won’t be the last. Attendees were global, so it was great to see our CIBC colleagues and our clients from Europe as well as from the US and Canada. I think the conversations at the tables and at the breaks were flowing with a lot of natural connectivity between different clients, investors and consultants across the board. I’ll throw it back to you, Tom. You were the architect of this event with a specific vision about the content. Did the event fulfill your own expectations? And if so, how?

Tom Heintzman: Yeah, it did, Luisa. What I was, I think, most excited to see were various stakeholders along the length of the electricity value chain in the same room and also at breaks socializing. I find that often we treat this subject in silos, whether it’s getting generators in a room or utilities or transportation and buildings being quite separate on its own and than obviously the hard to abate sectors. And by doing that, there’s benefit in getting the depth and expertise of one group, but taking a horizontal view across the entire value chain allows each of the groups to better understand what’s affecting them upstream and downstream, how they in turn affect the upstream and downstream and the mutual points of problems and failure and similarly, possible solutions that can affect peers, both upstream and downstream. So for me, the composition of the group and then seeing just the various sectors mixing at the break was the highlight. Luisa, we started the day with a keynote from Thomas Rolands-Rees from BNEF. And we also had a lunchtime speaker, Dr. Michael Webber from EIP, a leading venture capital firm in the United States. Did any key points stand out to you from their presentations?

Luisa Fuentes: They were both excellent presentations. I enjoyed Dr. Rolands-Rees’ presentation, just really laying it out there with his six thoughts on electrification. So why electrification matters, and he talked about the role that that played in decarbonization, and the meaningful impact. We’re not just going to get there through carbon capture or hydrogen. Electrification is going to be a big driver of decarbonization. He also mentioned that it’s happening already. So I think the idea that the transition is pending is false. There is electrification already happening under any scenario. It’s there. The growth of investment is something else he talked about, particularly in electrified heat and transportation and just the many forms that electrification can take. Finally, his two points were about the requirements of additional transmission in order to satisfy the level of electrification that we need and how that electrification itself will shape the evolution of the grid. So the symbiotic relationship between those two was probably the key takeaway from his session. And then Dr. Webber talked about really more like on a global perspective, the challenges of decarbonization and how do we increase water, energy and food, et cetera, for the 1 billion people in the world who don’t have consistent and safe access to those resources while also decreasing the impact of the 7 billion that do. So he posited a four part solution to that and then went on to discuss the concept of breakthroughs. And we were in this business, particularly on the energy transition side, of seeing things like the Inflation Reduction Act as something that can catalyze a lot of change and be really impactful. We tend to call it a game changer. He threw a little bit of cold water on me when he basically said the last real breakthrough was nuclear power, and I think he said 1919. So we get there through a series of steps, and the fact that we can’t count on breakthroughs is something that really stood out for me. At the same time, he said you can’t count them out either. So it’s was a reminder that we are on a journey and that there’s no shortcuts.

Tom Heintzman: Luisa, turning to the panels now, you moderated a panel on financing electrification in North America and beyond. Can you summarize some of your key observations from that discussion?

Luisa Fuentes: Sure. A couple of things. So starting with IMCO, their investment in Northvolt was a first of a kind really, where they created a traditional project finance contract out of a sector that had never been financed before in order to render it financeable. There was a creativity there and acknowledgement of what the traditional project finance market needed. And so we have a line in the sand as to what could make a very large scale, multi -billion dollar project financeable. So that was super interesting. On the other side of the coin was the Canada Infrastructure Bank that has been the lender to the EV charging space, for example, as that develops in Canada, and tries to solve that valley of death that would otherwise happen between supply and demand and the chicken and the egg problem that I like to talk about by providing that financing in anticipation of more EV uptake and then being able to go into the traditional commercial bank market. So they’re bridging that gap and taking some of these companies through to stability, which was super interesting. And then Fitch, who is always realistic, right? They primarily focus on what it takes to get to an investment grade rating. Obviously the volume uncertainty around EV uptake, et cetera, makes it more challenging for them to give out investment grade ratings or even high double B ratings to projects in this sector. But they are focused on being constructive and helping companies develop the capacity to eventually get to investment grade. One of the things they noted that they work a lot on, which I think will give them a head start in the future, is working as a counterparty to the DOE. And so every DOE loan requires a rating. And so they’re getting a sneak preview into projects that they otherwise would not have seen. They would otherwise not be ready for financing. And so I think that that preparation will serve them well when this kind of matures into a financeable space. I think the other takeaway I had is regarding technology risk and how nuanced it can be. So there is evolution and then there’s revolution and clearly evolutions of technologies are much easier to finance than brand new completely first of a kind technologies and that will continue to be the case. So we talked a little bit about technology as well. So Tom, at a high level, what takeaways did you gleam from the other sessions? Did anything stand out to you or maybe even surprise you?

Tom Heintzman: Luisa, I think I’d emphasize the same three points that I brought out in the conclusions that I drew at the end of the summit. First is how big it is. I’ve been in the sector for a long time, as have you and as have many others in the room. But despite the years, it’s still staggering how big a challenge and opportunity this is. The Canada Electricity Advisory Council announced the day previous in its final report that its estimate that it would require about $1.4 trillion between now and 2050 to electrify Canada, which amounts to about $55 billion a year, which is a staggering number. Although it is only two times the rate of expenditure today. So while staggering, it’s also within the realm of contemplation. The First Nations Major Projects Coalition is working on a portfolio of projects with a combined total capital cost of $30 to $40 billion Canadian. CPP is another example. They talked about doubling their $34 billion renewable energy portfolio. Fortis talked about a $25 billion capex plan for 2024 to 2028, driven in large part by transmission investments. There are many similar examples cited throughout the day, including local distribution companies who are seeing their capex requirements rise by more than 40 % as they seek to address the wave of electrification that’s happening around them. The second thing that stood out to me is how complicated it is. The electricity grid was built with a certain structure and use in mind, namely large generators with largely firm or predictable generating capacity, sending electrons out to the extremities of the system where consumers use the energy. This entire system, including the regulations, governance and financial incentives were built around this structure and this model. But that model is now getting upended by a whole host of factors. Demand is growing rapidly, whether driven by a desire to decarbonize, demographic factors such as increasing populations and wealth, or the adoption of new technologies such as cell phones, electric vehicles, and more recently AI. At the same time as demand is changing dramatically, generation is also changing. Renewable energy is a technology and like any technology, the price plummets with maturity. In most cases in the world, renewable electricity can already generate electrons much more cost effectively than fossil fuel to fire generation. And it will only get cheaper as the technology develops. However, renewable energy is intermittent, meaning we can’t rely upon it and we’re dependent upon nature for its production. Fortunately, other solutions are emerging, for instance, battery storage whose cost is also plummeting, as well as other forms of storage such as pumped hydro, compressed air, and even EVs to provide power back to buildings during peak periods. And these technologies are helping to firm up the renewable energy, meaning they can store it and then dispatch it when we need it. We’re also improving at demand response, where users are incented to reduce their usage during peak periods. Generations also increasingly distributed with solar generation and storage being increasingly located at point of use. This means that rather than energy only traveling out to the extremities of the grid, now energy is bi -directional and is also being injected from the edges of the grid. The dynamism at the edge of the grid dramatically increases its complexity and challenges the traditional business models of distribution companies. Various panels touched on the many challenges and risks inherent in this transformation on both the demand and the supply side, including the vast amounts of capital required, the technological risk where new technologies are being deployed, adoption and utilization risk. There’s also long development, permitting and construction timelines and many, many players at all levels of government and including communities, First Nations, and all of the developers, etc., that are involved. So it makes for a very complicated process. The need for joint planning between electricity and gas utilities, compensation modelswhich means utilities being compensated currently based upon the capital that they invest, which incents build, but does not incent clever ways to meet electricity demand short of investing capital. So when you add all these challenges up and the changes that are going on in the system, even for somebody who’s been involved with the sector for many decades, the list can be daunting and sobering. And then third, as I walk away from the day and reflect, I realized that despite these challenges, and these obstacles, we’re clearing them one step at a time. There’s no doubt that progress is being made. BNEF estimates that in 2023, $1.3 trillion was invested globally in energy transition. So it’s already a dramatic portion of the energy spend worldwide. Solar has been growing at about 20 % per year and wind capacity at about 10 % a year over the last 20 years, while fossil fuel -fired electricity generation has been relatively stable and coal has been falling. EV adoption is rapidly increasing, despite what you read in the newspapers. Slowing growth still means that the number of EVs is growing year after year and for many of us our next car will be an EV. Investors and utilities are deploying the capital as I gave reference to earlier with CPP IB and Brookfield and Fortis. So we’re on the path. It’s bumpy. We don’t entirely know which direction the path is going to lead. I think we all have a pretty common view that ultimately it will lead to dramatically more electrification, but exactly how we get there will play out over decades, but we’re all taking it one step at a time and clearing one hurdle at a time. So despite all the challenges, I definitely see the momentum and I remain confident. Luisa, back to you as we wrap up here. To electrify everything will require a significant deployment of clean technologies, substantial capital, and an acceleration of dollars invested in order to expand and enhance electric grid infrastructure and related equipment. Since you work with many clients looking to finance energy transition and sustainability objectives, how do you see clients embracing electrification?

Luisa Fuentes: Thanks, Tom. I just wanted to address something you just mentioned. So we talk a lot about addressing the cost of climate change and the trillions of dollars and the multiples of billions of dollars that it costs every year. But ultimately, the cost of not addressing climate change could have a similar impact in the negative as well. So we have to choose how to spend our money. It’s either through GDP losses because of unprecedented climate events or through investment in the future. So I think a lot of our clients see it that way. Addressing climate change back to your question, through the energy transition will require electrification, no doubt. Our clients across all platforms are engaging in the space. Just to take electrification of transportation as an example, we see the effect all along the value chain. Infrastructure for EV and EV bus charging with networks and agreements being developed to allow for more access to charging, we see PE funds, infra funds involved in this space, as well as entities such as the Department of Energy through their loan program and other infrastructure programs and the Canadian Infrastructure Bank. At the same time, we have also seen developers investing into new battery technologies such as iron -air or solid -state or even enhancing traditional lithium chemistries, all in pursuit of longer duration storage, which will help drive more EV sales. You see the OEMs leaning into supply chain security with either direct ownership of lithium or signing long -term contracts that support domestic US manufacturing of key equipment, and then putting funds into investing into the manufacturing of that equipment. Of course, charging your vehicles using clean energy is key to decarbonization. So the continued development of renewables in the US and Canada is something that our clients in those spaces continue to do in an accelerated manner. And finally, getting clean electrons to electrification load centers will be critical. And there is high demand for new transmission development or expansion of existing transmission development. All of those things are areas where our clients are investing. And that’s just one small vertical in the electrification space. And I just touched upon a sliver of what’s already there. So our clients are looking at it from all angles of the value chain and we hope to be there with them when they do.

Tom Heintzman: Well, Luisa, thanks for your thoughts and also thanks for participating in the summit earlier this week. And thanks to our listeners for tuning in.

Luisa Fuentes: Thank you, Tom.

Tom Heintzman: Please join us next time as we tackle some of sustainability’s biggest questions, providing you different perspectives to help you move forward. I’m your host, Tom Heintzman, and this is The Sustainability Agenda.

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