The Future of Electrification

Roman Dubczak: Hello, everyone. I’m Roman Dubczak, Deputy Chair of CIBC Capital Markets. Building a clean electricity system worldwide is an essential, if not the essential, step to mitigating the worst impacts of climate change. To keep a 1.5°C aligned pathway within reach, we need rapid electrification of the global economy, especially in sectors like transportation, the built environment and industry where electrification is more feasible. But to electrify everything, so to speak, it will require a tripling of global renewable energy generating capacity by 2030. To be capable of delivering this amount of renewable energy will require substantial capital and an acceleration of the dollars invested in order to expand and enhance electric grid infrastructure and related equipment. To help our clients navigate this dramatic transition. CIBC is hosting a electrification summit on June 11th, 2024 that will explore the progress of electrification in Europe and North America and the opportunities and challenges to transition significant portions of the economy to clean electricity. Today’s discussion will focus on certain aspects of the electricity value chain in a bit more detail, to provide context in the lead up to the summit. Here with me today to give further insights are two experts in our energy transition franchise at CIBC. Tom Heintzman, Managing Director and Vice-Chair, Energy Transition and Sustainability, and Alex Wilson, Managing Director and Head of European Corporate Banking, joining us virtually today from London. Thanks, guys, for joining me today. Tom, the progress of electrification worldwide is happening at varying degrees. Perhaps provide us an overview of the world’s energy generation mix today and how that impacts demand.

Tom Heintzman: Roman, to set the context today, renewable electricity would constitute about 12% of the overall electricity mix, including gasoline and coal, etc.. If you look just at electricity, it represents about 30% of the electricity mix. So it has to grow a lot to hit the numbers that are required by the IEA. As you just mentioned in the most recent COP, there was a commitment to try to triple renewable electricity by 2030. And that’s a big challenge. The good news is, that for 20 years, solar has been growing at more than 20% per year, and wind at more than 10% per year. So if you extrapolate that out to 2050, we do hit our numbers. But obviously it has to grow that much for a long period of time. There are some challenges, however, that come along with electrification. As you mentioned, a lot of capital that’s required in order to convert over. Second thing is renewable electricity by and large is not firm, meaning it’s dependent upon the weather. So sometimes it’s sunny, sometimes it’s blowing. And that makes it harder for the grids to be managed. And then third, you have to start firming up that power so that we can manage peaks and also so that there is power when the sun’s not shining. That’s requiring more and more storage. And so for instance, recently here in Ontario, there was just a procurement for about 1800 megawatts of storage, which hasn’t happened in the province’s history. So that’s all novel and will be challenging.

Roman Dubczak: Huge issues, huge opportunity as well. Alex… Europe, you’re bailiwick. Europe has adopted an electrification as an enabler of the energy transition, more so than the other regions. And consequently, you could argue that Europeans in general And consequently, you could argue that Europeans in general are further ahead on the curve. What are some of the trends or practices you’re seeing in Europe that could serve as lessons to accelerate electrification here in North America and then also globally?

Alex Wilson:Thanks Roman. Yeah, I think that’s right. If you look at electricity generated from renewable power in Europe, it currently stands at around 40%. It’s higher than in the US. It’s higher than in Asia. In some countries in Europe it’s already at 100%. So Europe, as you say, is in a good starting place. I think further acceleration comes from three areas, in my opinion. On the generation side, we need to continue to supply. Europe operationalized 60GW of renewable power last year. But realistically to hit net zero we need to be doubling if not tripling that supply. Then there’s the demand side: businesses, consumers, society. We need to keep investing in our own transition. EVs in Europe now represent 25% of all car sales, 65% in China. So there’s room for improvement there. And then thirdly, I would say infrastructure is the key. To integrate renewables and upgrade our grid, and Tom mentioned the grid, we need $1.5 trillion of investment by 2040 to meet this electrification challenge. The other area this topical with clients right now is raw materials. How Europe sources raw materials, such as critical minerals for its own transition is very topical.

Roman Dubczak: Yeah. Thanks, Alex. Tom, back to you. Not a technical phrase, but these are serious numbers that need to be raised in terms of capital investment. And you know what, in your view, would be some of the key aspects of this build out that would, you know, help us, kind of keep us on track to getting to the goal in the first place?

Tom Heintzman: Yeah so, Roman, there’s sort of, three changes that are ahead for market operators, for the transmission and the distribution that…those are the areas that I think, you know, would be helpful to focus on. So the market operators are dealing with a number of factors. First of all, increasing electricity demand. As we electrify our economy, think electric vehicles, think heat pumps more and more electricity required. Also population changes… And AI is a new load that no one anticipated even a year ago. And it’s growing. So market operators have increasing demand they have to deal with. And also as there’s more and more renewable energy, then the power, as we mentioned earlier, is not firm and it’s much more complicated to manage. So market operators have a challenge. Transmission, which is the high voltage lines that take the power from the generating stations to the cities to where the people are, those have to grow, both to manage the new loads, so this is the growing population, including mining, you know, as a new load. As we start to diversify the economy in the north to try to find those critical minerals, it requires more and more load, but also to connect to the new generation. So, there’s a lot of investment that’s required in transmission. And then distribution is often overlooked but very interesting. So those are the smaller wires that connect all of our buildings and our homes to the main infrastructure. Historically was built in a hub-and-spoke model. So the generation would send electrons out in one direction to the edge of the grid, where our houses and our buildings are. Now, what’s starting to happen is you have distributed electricity resources at the edge of the grid. So think solar panels, think batteries, storage generators, etc.. And so you’re starting to have two way electrical flows, which dramatically complicates the grid. And you’re having also increased usages with EVs, etc.. So the complexity that’s getting introduced at the edge of the grid is multifold what it used to be, which again will require capital commitments. So capital commitments all the way along to really transform our energy system. Exciting time. But lots of challenges.

Roman Dubczak: Loads of opportunity as well. Yeah, for the generation, the distribution and then the use of it, it’s just been remarkable. And, you know, I like to ask Alex a question about some of the exciting projects that our team in Europe has been working on. You know, very proud of having a global energy transition practice here at CIBC. To kind of put some context on it, a lot of the interesting new developments are coming to us sooner in Europe, and our team has been involved in, several leading edge, projects that have come on stream, been financed importantly, and come on stream. Alex, maybe I’ll ask you to speak to a few of those examples right now.

Alex Wilson: Yeah. Thank you. Roman. I mean, as you know, CIBC has always been a leader in the energy, in the renewables space in Europe, for example. I think we’re the largest lender to the offshore wind space. So we have pedigree there. I think what we’ve seen most activity in the last two years has been in two areas: energy storage and EV charging. In energy storage, we finance the number of industrial scale battery energy storage systems strategically located in areas close to offshore wind, to manage that intermittency. And the other big trend that we’ve seen, as I mentioned at the start, the growth in EVs is there to see. In parts of Europe, the EV charging infrastructure networks, we’ve seen that in, you know, destination places on highways, at homes, on streets, etc. that’s been another huge area of growth for us. We’re very pleased to be involved in that, and I incidentally, we’ll have two clients at our summit, on the 11th of June, representing those two sectors. So very excited to bring those over from Europe.

Roman Dubczak: Thank you. Yeah. And, so maybe the question, you know, what’s next? Like, you know, we’ve got some of these early projects under our belts. What would we need to continue to see to accelerate these decarbonization efforts?

Alex Wilson: I think that the big areas in Europe are hydrogen, low carbon hydrogen and carbon capture and storage. Those are two areas where we are seeing a lot of activity in the financing markets in both the UK and Europe.

Roman Dubczak: Yeah. And, Tom, how about you and what are your use here in North America?

Tom Heintzman: Yeah. So some of the, I mean you’ve mentioned that there’s throughout the grid, there’s going to be a requirement for capital. One of the issues that I’m seeing being raised is this sector has not changed much in 100 years.

Roman Dubczak: Right.

Tom Heintzman: And so the amount of change that’s required in the next 20 or 30 years… change management is also going to be, a huge complicating factor. Other factors are just the volume of new growth, the AI that we mentioned. So it’s coming, the change is coming at us from many different directions.

Roman Dubczak: Well, look, perfect segue into, you know, the backdrop for this webcast is are Electrification Summit. As Alex mentioned, it’s on June 11th. How can our clients participate in the summit?

Tom Heintzman: If clients would like to participate, they should be speaking to their, representative. The summit will be interesting, I think. Typically, we look at these issues kind of in silos. So we look at generation or we look at buildings, the built environment, or we look at vehicles and the purpose of the summit is to try to look horizontally across them and link these different uses and sources of electricity so that they can see the others in the value chain and share stories, make contacts. And, there will also be lots of capital providers in the audience as well that are looking to finance legs of the chain. So great place to, network both within your industry and across industries. So, you know, reach out to the RM and, and we’d love to have more guests.

Roman Dubczak: Lots of room. A lot of people signed up already. So it’s going to be a phenomenal summit. So, look, Tom, Alex, thank you for joining me here today. A great opportunity to talk about, you know, recent developments in renewable energy and clean energy, the evolution of, the electrification world, and lots to come. So I want to just thank all of you who have joined us here today on the webcast, and I hope to see you at the conference, if at all possible, in your schedule, some more so to continue the conversation as we move along in this exciting era of our lives and in the history of the economic development of the world, and that’s decarbonization. So thanks for joining us here today.