More than wires: Investing in the grid of the future

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. 

Greg Payne: It’s both generation and network investments that need to keep pace with one another. So I wouldn’t say that one is the bigger problem than the other. But at this point, it really is the network investments that are lagging behind the generation and the consumption.

Tom Heintzman: Welcome to our multi-part series on the energy transition and the role of electrification. In previous episodes, we explored how the electricity system is growing, approaching the issue from both a generation and a consumption perspective. And we also began looking at novel forms of generation, notably closed-loop geothermal. In order to enable this increasingly electrified future, the transmission and distribution grids which deliver our electricity will have to grow and become more intelligent. On today’s episode, we’ll focus on the challenges and opportunities ahead for grid suppliers and operators. Joining me for this discussion is my special guest, Greg Payne, Senior VP, Portfolio Manager, and Team Co-Lead at Mackenzie Greenchip, a roughly $3 billion fund investing in the energy transition. Greg co-founded Greenchip Financial in 2007 and I have the privilege of serving on their board for several years and have seen first-hand Greg’s expertise and knowledge of the electricity system. Good afternoon, Greg. Welcome and thank you for joining us in today’s show.

Greg Payne: Good afternoon, Tom. Thanks for having me.

Tom Heintzman: Greg, we typically start episodes with some high level context for our audience. Can you provide a quick overview of Mackenzie Greenchip and how you view or group investment opportunities related to the electricity grid?

Greg Payne: Sure. So, Mackenzie Greenchip is one of a number of boutiques at Mackenzie and our focus is on environmental thematic. That means we’re focused largely on the energy transition, which means more renewable sources of production and more efficient uses of energy across the major use categories such as industry, transportation, water and food. We look at the grid opportunity as one that’s integral to the energy transition. You can break it up into buckets, first being the very high voltage transmission. We’re talking about voltages above several hundred kilovolts up to over a thousand kilovolts. These are used for the transmission corridors that we all pass by and that take very centralized large generation and bring that to smaller points of use. Medium voltage, somewhere between 2.4 kilovolts and up to 200 kilovolts is typically used by either distribution systems, or it’s used by consumer and industrial users such as the data centers. And then down to the smallest small voltage users, you can think of the 120 or 240 volts that we use at our home. So it’s residences and small commercial applications. Of course, within those buckets, you can break it down into the equipment suppliers, the operators, the materials that go into the equipment.

Tom Heintzman: Okay, Greg, that’s helpful. You’ve highlighted three distinct sub markets, high voltage transmission, medium voltage and low voltage. Could you go through each one of those briefly and summarize the challenges and the opportunities as we electrify our economy as more and more electricity has to run through each of these three distinct stages of the grid?

Greg Payne: I sort of outlined how these different voltage categories play into different markets. And you can kind of think of the market dynamics that are driving each of those and whether those get out of sync with one another and might lead to imbalances. And we’re definitely seeing that today, largely with the difference between the high and the medium voltage. So on the medium voltage side, there’s tremendous new demand from large commercial and industrial applications, both existing and new, but especially new. And I already mentioned artificial intelligence data centers. There’s a tremendous new demand source for medium voltage equipment. But even in the smaller to medium voltage, such as it depends on construction and general economic activity, there’s been a rebound post COVID and there’s been general increase in electricity demand across the lower points of use, low and medium voltage demand. We’ve seen electricity demand overall increase by a compound annual growth rate over the last 20 plus years of this century of nearly 3%. And that’s expected to if anything go up in the future due to electric vehicles and due to the advent of things such as data centers. 3 % compound growth may not sound like very much, but that means that the actual total demand doubles in just over 20 years. So it actually is very fast growth for a system as complex and frankly as old in a lot of places as the electricity system to adapt to. And where we’ve seen the real imbalances in the high voltage transmission up to the high category of the medium voltage. So the utilities that are slower to spend, slower to react to economic forces than say the commercial and industrial and even the consumer residential space. And they’ve got a lot of catching up to do. Not only the data centers and the commercial industrial points of use, but even the generation that wants to connect to the grid, such as solar and wind, there is such a big part of the energy transition are all very much limited today by a lack of investment and basically a lagging development of the high voltage transmission part or bucket that I identified.

Tom Heintzman: Greg, you laid out a few challenges there, amongst them, the growing CNI volumes, commercial and industrial, and whether they’ll overtake the capacity of the medium voltage grid, and then also lagging investment in high voltage. What’s the limiting factor in our ability to achieve 2050 goals? And frankly, is transmission and distribution a limiting factor or are there other like generation that really is the limiting factor in our ability to electrify?

Greg Payne: Well, you can’t even really separate the two. I think the way we frame it is that the 2050 goals, such as they are net zero or getting as close to net zero as possible, really depend on transforming or transitioning our energy sector. And the most renewable and lowest emission ways to do that are by using renewable forms of electricity and new renewable forms, particularly wind and solar as hydro is also renewable, but mostly developed in terms of the greatest hydro opportunities. And then taking non -electric uses of energy and electrifying them and converting them to electricity. There isn’t really a good renewable source of liquid fuels. So, electrification and then using renewable sources of electricity are the ways to get as close to the 2050 goals as possible. And it’s both generation and network investments that need to keep pace with one another. So I wouldn’t say that one is the bigger problem than the other. But at this point, it really is the network investments that are lagging behind the generation and the consumption. So it is that glue in between that’s causing the biggest hurdle to reaching those 2050 goals. If I can put it on the generation side, there’s over one terawatt or a thousand gigawatts by the IEA estimates of wind and solar that are waiting in the queue for connection to transmission networks so they can actually get on the grid and deliver their energy to waiting consumers. That’s more than three years at the current rate of development. And those queues that we’re seeing in the backlogs to actually get on and get your energy delivered are only growing. So on the one side, it’s slowing down generation. On the other side, it’s also a real challenge for the medium voltage and those consumers who want to build out to get access to clean base load power.

Tom Heintzman: That’s a staggering stat, the three years queue length to get renewable energy connected to the grid. So given that level of progress or maybe more appropriately phrased, given those challenges, what are the game changers that could really accelerate the transition? and really accelerate the build out of the electricity grid. What innovations are you monitoring and what pieces of legislation or regulatory changes are you looking for?

Greg Payne: Mostly we’re looking for, at the generation side are economic and safe storage solutions. That being solid state, batteries, mechanical or hydrogen -based ways of storing energy, because electricity needs to be used at the same time as it’s generated. So storage is the big challenge for the intermittent sources such as wind and solar. On the grid development side, We’re just looking for stable regulatory regimes, more predictable trade policies as well, because this really is a global and globalized world. These are global systems and they depend on equipment that often isn’t even made in, for example, in the West at the scale that we require anymore. So some of the kind of trade conflicts that we’re seeing today make it difficult to imagine. and make it difficult for corporations to mobilize the resources to develop at the scale that’s required here. Also, more stable financial environments, less interest rate manipulation, more stable monetary environments that allow capital to be deployed where it’s most needed. And we’ve really found that this kind of challenge, is a challenge of investing multiple billions of dollars for projects that will have returns over multiple decades. That requires capital to be patient, to be willing to take risk over the long term. And the incentives of a zero or low interest rate environment have been a real challenge to allocating capital to that world. So there’s big macro considerations that really influence our progress toward the 2050 goals.

Tom Heintzman: Greg, the IEA estimates that some $4 trillion are required in clean energy investments. You just mentioned interest rates and in particular how low interest rates hurt investment and long -term capital, which I think is counterintuitive for a lot of people given that we saw a lot of infrastructure spend when there were low interest rates because the discount rate is low. And so when equity is getting its money back in year 17 on a renewable energy project, it can actually make a return because it’s been discounted at a relatively low number. Could you elaborate on that and why in your view low interest rates are a limitation on infrastructure investment?

Greg Payne: I do understand that it’s counterintuitive. And one way to think about it is to think about investment as the flip side of savings. The economy has the capacity to produce a certain amount of goods and those goods will be allocated either to, simplistically speaking, consumer goods or investment goods that will support future consumption. And anything that’s not consumed is by definition saved. So 0 % interest rates, you can look at it as a low hurdle rate that encourages companies to spend, but it also is a low reward rate for savings and discourages people and individuals, companies, governments from saving and encourages them to live for the moment and not for the future. And that’s actually what we saw. You alluded to a lot of infrastructure spending and there were some high publicity infrastructure legislation, both in Canada, the United States, around the world in response to the global financial crisis and in response to the COVID crisis. But in aggregate, the stats for investment as a share of global GDP have actually gone down over this century so far. So the fact is that even if the hurdle rates are low, the access to capital for companies is not as easy because the savings pool is not as large as it was because individuals are not incented to save. Another factor is that when investors are thinking about saving, they’re less patient with their capital because they have a shorter time horizon. They’re looking to make money faster. The environment is more speculative and it doesn’t lend itself to the long -term high ticket, infrastructure projects, the heavy lifting that’s really necessary to fix the grid and the challenges that we’re talking about.

Tom Heintzman:  Fascinating. Well, Greg, I can’t resist one more question regarding economics. There’s been a lot of attention drawn to the new tariffs that Biden is imposing on imports, particularly in the clean electricity sector, including EVs. And I guess I’m wondering about your perspective on those tariffs and the extent to which you think that they will ultimately slow down the energy transition, bearing in mind that the energy transition also has to be supported by an electorate. And if people see their jobs moving elsewhere, then they may be less supportive of a clean energy future. So if you could weigh the balances or the pros and cons of tariff versus non -tariff and its impact on the energy transition that would be very interesting.

Greg Payne: That’s another really difficult question. I certainly sympathize with the antipathy in the states and in the West to the large trade deficit that we run with China and the desire to solve that by policy means including tariffs. I do think it’s a much more complicated issue that’s built up on 40 years of policy and living off of the reserve currency and some of the infrastructure and advantages that we were the heirs to here in the West and that they aren’t easily fixed by something as blunt and simplistic as tariffs. They will make a difference to the energy transition, undoubtedly. China, much like it does with many products, but even more so in renewable energy, dominates global supply. And that’s what the West is resisting. That’s what the West is trying to fix. I think it would be better placed to, as it’s often done in many other aspects of the economy to try to add more value in terms of battery management systems, load balancing, some of the technical aspects of managing its own grid and take advantage of the fact that as Janet Yellen said when she went there to initiate the tariffs that normally if somebody’s trying to sell me something for very cheap, I say thank you. It’s a bit twisted just like the arguments about interest rates that we described before, but by trying to stop China supplying the rest of the world with the equipment that we need to generate, transmit and distribute and even consume renewable electricity, there’s no doubt that it can’t be replaced easily or cheaply in the rest of the world and that it will slow down the global energy transition, not to mention cause probably only increasing geopolitical trouble that we’ve been living through over the past decade or so.

Tom Heintzman:  Well, Greg, it’s always a pleasure to speak to you about Energy Matters. And thank you for taking the time to join the show today. And thank you to the listeners for tuning in.

Greg Payne: Thanks, Tom.

Tom Heintzman: If you’d like to learn more about how electrification trends will impact your business, join us for CIBC’s Electrification Summit on June 11, 2024, in Toronto. The summit will bring together leaders in energy markets, companies in the midst of electrifying their operations, financial sponsors, lenders, and policy experts to discuss how electrification is core to achieving net zero. To register, please contact your CIBC Relationship Manager. 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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