Banking the Transition

Roman Dubczak: Hello, everyone. I’m Roman Dubczak, Deputy Chair of CIBC Capital Markets. 2024 has been called The Ultimate Election Year, with at least 64 countries and 50% of the world’s population holding national elections. One of the most closely watched and potentially consequential will be the US Presidential Election in November. Business craves certainty and this is especially true for the energy sector, which relies on long project lead times and asset duration. So, in effect, this could be a pivotal year for the energy transition plans in the United States. Despite the fact that there has been remarkable momentum in this part of the energy complex, with over $300 billion having been invested in the United States since the passage of the Inflation Reduction Act.

Roman Dubczak: To provide some insights on this topic, I’m joined by two colleagues to talk about how banks have responded to the energy transition. How our client needs have evolved, and the impact of the US policy today, specifically the Inflation Reduction Act. Joining me are James Wright, Managing Director and Co-head of US Corporate Banking, who is based in Chicago, and Luisa Fuentes, Managing Director and head of our Energy Transition Practice US Corporate Banking, based in New York. Growth in energy transition in the United States market has been a key focus for our bank, with the result being that our US renewable energy loan book has more than doubled in the past three years. James and Luisa, welcome. Good to have you here today. James, maybe you set the scene for us. What are the key themes that you’re seeing in the energy transition space for our clients?

James Wright: Sure. Roman. Thank you. Great to be here. Starting on a very basic level, one of the biggest themes we’ve seen has been the broad range of clients active in this space. And it’s not just the traditional names we’re used to seeing in the energy field. It’s everyone from retail, ag, commerce, across the piece. So, new clients. We’ve seen these clients putting the Inflation Reduction Act to work. The IRA was a real game changer for the space. Industry landscape in the US has changed massively. It’s also having real overseas consequences for our supply chains as well. It all starts with energy, but it’s permeating into the tech sector, data centres, we’ve got building supplies with sustainable concrete. That’s been an example. Real estate. We’re making our infrastructure more resilient to climate change and also energy efficient. Transportation space, EVs…That’s been a big theme. Retail. Every major retail player is now trying to buy sustainable energy. And Ag, thinking about carbon capture and ethanol driving high purity CO2 there. So really, every sector got a nexus to transition as we’re seeing it.

Roman Dubczak: Yeah. No thanks. You know, I’ve heard the analogy and I don’t think it’s an exaggeration actually, that this is the greatest reallocation of capital since the Industrial Revolution, and it’s affecting all our clients. So very exciting time to be in this space and as a banker and maybe touch on how banks in general are responding to this reallocation of capital.

James Wright: For sure. I mean, high level, I think let’s go back to COP-28. That highlighted, again, the really important role the private sector has to play in this journey, not only just building the transition, but funding it. So I think I think the stats that came out of that were 5 to $7 trillion per year going to be spent between now and 2030, which is just astronomic when you think about it. On the banking side, we’ve had a step change here to do our part. Every bank now has an energy transition business, whether it’s a dedicated vertical, as we’ve done within CIBC, amalgamations of existing energy utilities, renewables, teams to build that thematic…So energy transition is a key business strategy has become a theme across all banks. On the product and services level, the needs of our clients are also changing. Two clear examples of this in the US would be adapting lending practices. And there’s a vast array of tax credits that have now become, part of the post-IRA landscape, some very creative financing structures that are popping up as part of those. On the trading side of the business, we’re seeing environmental trading being a big theme… power, carbon trading RECs, and really kind of new value streams that clients are trying to monetize as part of this transition. Finally, I’d just mention stakeholder engagement. As we as bankers, are much more engaged, I think, with advocacy groups, nonprofits, research bodies, industry forums. And if I think about that, it’s really boiling down to thought leadership. Where can we be driving thought leadership in this space?

Roman Dubczak: Thanks, James. That’s a great summary of what’s going on. It’s just remarkable. As to, the amount of money that’s being transferred. You know, it was just earlier today, I caught a piece out of Europe that the impact on the global economy by 2049 of climate change will be $38 trillion annually, 19% of per capita income. So, you know, these numbers are staggering, but there’s just so much, to move, so to speak. Now, Luisa. The impact of the Inflation Reduction Act, it had $500 billion in new spending and tax breaks embedded in it. And it’s catalyzed a remarkable amount, spending in the last year and a half. Maybe give us a broad assessment of just how impactful the IRA has been.

Luisa Fuentes: Yeah. Thank you Roman. So we’re almost one and a half years into the IRA and in various stages of discussion with our clients, really, as James noted, across all spaces, energy, power, corporates, infrastructure. If you dig into any particular project, you begin to see some of the limitations and challenges with some of the key frameworks created by the IRA. So, for example, the direct pay periods, embedded in some of the tax credits. So the 45-Q, the 45-V, is an opportunity for clients, but it also creates some working capital issues and challenges that need to be addressed. The guidance on the 45-V will require further refinement, and not every player is going to be able to, advance their project on that basis. However, if you kind of get out of the weeds and take a big step back, it’s fundamentally like James mentioned, a transformative project, and we would not be likely to be having this level of development and progress without the IRA. A couple of important factors, for traditional renewable developers, it gives them certainty, given the longer duration, that they’re able to rely on for their tax credits. Traditional green developers are the backbone of the transition. Everyone’s looking for those green electrons. The stimulus that it has given to things like carbon capture and hydrogen are an accelerant that no one anticipated. A lot of those developers were already working on their transactions and now have huge economic advantages. And finally, the renaissance in US manufacturing that, is resulting out of this, with manufacturing and clean tech really booming across the United States.

Roman Dubczak: Yeah, no, look, arguably we may not be where we are today, likely would not be where we are today. We’re not sure that, you know, that legislation and the approach it’s taken to stimulate investment in the US market, which has a fall-on-effect globally as well, from a competitive perspective. How has that evolved our client asks to date? And, candidly, as we were talking about earlier, we are in an election year and arguably it’s very, very close. And it can go one of obviously two ways. How may the election impact what our client activity is going to be, post ‘the election’?

Luisa Fuentes: There’s definitely more bullishness on the part of our clients. I would not say that the asks are different, I would just say that there’s more of them and that they’re across a broader set of subsectors. Development of maybe some new subsectors like debt transferability. At the end of the day, I think all of our clients still want to understand how they can build a commercial construct that is going to get them permanent financing. ‘What makes a technology proven?’ That’s a question that we get asked a lot as the climate tech sector. Where are the pockets of liquidity for me along my development chain? Should they be contemplating things like tax transfer? So those are not new questions. They’re just more of them from more clients. I think, the current political environment certainly brings uncertainty. Assumptions on traditional politics are out the window. However, I think a few things give me hope for the longevity of the IRA, regardless of who comes into office. First of all, there’s a red state angle, which I don’t think can be understated. Projects, are developed in Texas, Oklahoma manufacturing places like Georgia, South Carolina and Ohio. They fuel job growth and training programs. Those are very popular and really hard to remove once they’ve been put in place. The other thing I would say is, like, we live in the weeds of, some of these tax credits and some of this type of technology, most of the IRA provisions, I wouldn’t call ‘red meat fodder’ for the typical American. I think the exception to that might be the EV 45-W tax credits. I do think that might be at risk under a Trump administration, but, I think that might be the only one. Finally, I would say, what I’ve seen is that developers in 20 plus years that I’ve been doing this, don’t wait for regulations to come in favour them. They are, looking to develop transactions and hoping, and working so that the regulatory environment meets them where they are. To that end, like the CCUS and hydrogen, acceleration that we’ve seen is just that, an acceleration. Projects were in development for years prior to the IRA.

Roman Dubczak: Good. I wouldn’t call business as usual. The business is continuing. So how would you frame the mood of our clients right now, given all the geopolitics and macro going on?

Luisa Fuentes: For energy clients specifically, I would say careful innovation

Roman Dubczak: Yeah.

Luisa Fuentes: Energy clients, obviously are, you know, not immune to regulatory uncertainty, of course, but most of the players in the energy space have a global view, and make short, medium and long-term plans. In the short term, energy companies are certainly taking profit from commodity swings that favour them, but this has not impacted, I don’t think, the attractiveness of decarbonization and other transition opportunities. A lot of them are going into the ammonia space, for example, given the uncertainty around exporting LNG, they’re looking to transform their molecules into ammonia for export. We continue to need CCGT fired power plants in support of our economic growth. I think attaching things like carbon capture to that, or investing in carbon capture companies, for example, are some of the things that energy companies continue to do while also acting in the short-term benefit of their shareholders. I would also say that for energy companies specifically, they are the parties with the most expertise in the area. They work on complex projects and, can develop things like hydrogen, carbon capture, renewable natural gas, CCGT with new technologies attached to them. So if I were to sum up, I would say that clients are leaning in, to the transition, albeit to varying degrees.

Roman Dubczak: Thanks Luisa. So so my takeaway is, there’s… the game is afoot. We’re in the early innings, arguably, with the amount of investment being made in the energy transition. Clearly, things are exciting from a political perspective, but I think collectively we’re optimistic that this train doesn’t get stopped. And, you know, we continue to work towards, the transition to a lower carbon environment. So James, Luisa, thanks for joining me here today. It was a great conversation. Lots, lots more to discuss. And I’m sure we will. And I look forward taking a deeper dive on these topics and more on some further webcasts. Our goal is to help our clients make sense of these issues, and we hope you join us again for, some further conversations on the energy transition. Thank you.