Public Pension Fund Investments & Investing in Renewables: Opportunities and Challenges

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1 Public Pension Fund Investments & Investing in Renewables: Opportunities and Challenges June 5th Portland State University State of Oregon Office of the State Treasurer OVERVIEW June 5th Over 100 representatives of industry, finance, and academia came together to discuss the specific opportunities and challenges of investing in renewable energy in a daylong conference cohosted by Oregon State Treasurer Ted Wheeler, Pegasus Capital Advisors, and the R20 Regions of Climate Action. Participants reviewed critical economic issues driving the procurement of renewable energy, current technological applications, the impact on traditional electric utilities, and financing strategies for renewable energy projects. This document presents a high-level summary of the discussions during the conference and reflects the general consensus of panelists and speakers. CONFERENCE MISSION Oregon State Treasurer Ted Wheeler began the proceedings with a statement on the importance of the conference. Responsible for overseeing investments for the state, Treasurer Wheeler must assess and manage risks as well as understand potential returns for each of the state s investments. His goal for the conference was to gain an understanding of the opportunities and obstacles that exist in renewable energy investments. THE IMPORTANCE OF RENEWABLES TODAY According to Dr. Mark Jacobson from Stanford University, the forces driving increased interest in renewable energy include air pollution, climate change, and energy security. Dr. Jacobson demonstrated that the costs of producing renewable energy are now competitive with fossil fuels and renewables can be expected to fulfill future electricity needs efficiently. Such a change will allow a significant reduction of air pollution and greenhouse gas (GHG) emissions in the future as well as improve energy resilience and create jobs for the economy. CHANGING ECONOMICS Even though the cost of photovoltaic power has decreased by 75% over the past 15 years and can now be installed for about $2/watt, a key remaining obstacle in the transition from fossil fuels to renewable energy PUBLIC PENSION FUND INVESTMENTS & INVESTING IN RENEWABLES: OPPORTUNITIES AND CHALLENGES 1 / 6

2 sources remains cost. There is optimism that the cost of implementing renewable infrastructure will continue to decline leading to further use of renewable technologies. With the future of fossil fuel prices uncertain and renewable energy costs on the decline, an investment opportunity is emerging quickly in this market. INVESTING IN THE NEXT GENERATION GRID Creating distributed production sites with renewable energy will be a key infrastructural step toward building the next generation electric grid. Strategically distributing production sites will generate energy resources closer to the source of demand. Distributed energy, as exemplified by solar rooftop installations, provide power both to the building where they are located as well as feed excess power back to the electricity grid. Experts agree that an electricity network becomes more valuable when it becomes a twoway grid. This two-way grid and distributed production will make the energy grid more resilient and provide increased value to producers and consumers. In this improved system, electricity will be less interrupted by storms and other current-day service stoppages. Another important factor in the transformation of the grid is that resiliency in energy infrastructure is beginning to be mandated by governments. The mandate for energy resiliency combined with the changing economics of energy are causing institutions such as the US Department of Defense to look to renewable energy sources to replace expensive fossil fuels and improve reliability. Large commercial and government organizations recognize that they need alternative energy sources in order to improve power reliability, and distributed assets should be able to create value for grid resiliency while at the same time reduce electricity prices and lower environmental risks. ELECTRICITY STORAGE IS CRITICAL The technology to predict output from renewable sources such as solar and wind has improved significantly. However, such technologies are still dependent upon the availability of the sun and wind. Many experts believe significantly increasing our dependence on these intermittent technologies will require better storage capabilities. Surprisingly, technology is no longer the limiting factor in electricity storage; rather, the real challenge is cost efficiency and financing. Available storage technologies can meet current energy needs but operational costs must come down in order to make reliable and affordable renewable energy ubiquitous. This may occur more quickly as individual states begin to mandate energy storage, which California has already done. Energy storage increases flexibility and adds value to the renewable energy systems in the next generation grid. There is still significant inefficiency at the utility scale and improving efficiency across the grid will help storage realize increased value. ROLE OF GOVERNMENT When the fossil fuel infrastructure was developed in the US, government investments enabled critical infrastructure. Today, it is up to the private sector to make renewable energy infrastructure investments. The role of government in supporting the transition to an advanced grid that will support renewables is to stabilize the environment for purposes of capital spend by setting rules and establishing policies. Government enabled technologies designed to reduce bottlenecks in the renewable energy transmission and distribution infrastructure are also needed. To date, the market is still getting mixed signals and could PUBLIC PENSION FUND INVESTMENTS & INVESTING IN RENEWABLES: OPPORTUNITIES AND CHALLENGES 2 / 6

3 benefit from consistent guidelines from the government to help support stable and liquid markets. In the end, however, the market will define the future of the electricity system. Central to all government efforts in the energy sector is the US Department of Energy (DOE). There are a number of ongoing financing programs that can support progress in renewable energy production, storage, and continued improvements to the grid. Ongoing and future programs include financing for energy storage, energy efficiency, and developing other renewable resources. The government helps provide the impetus for the private sector to deploy its own resources as the market matures. THE CHANGING ELECTRIC INDUSTRY & INVESTING IN RENEWABLES The electricity grid and electric utilities are undergoing a transformation that will impact renewables. These changes include: 1. Declining electricity consumption is impacting the utility business model 2. Increased competition and distributed generation is interrupting the traditional relationship between utilities and their customers 3. Government environmental policies are reshaping the energy landscape and 4. Increased innovation in technology and financing are providing new opportunities for institutions outside traditional utilities. The rise of distributed solar is one of the growth areas the market is seeing in the push for innovation. Some utilities are investing in solar because they see an opportunity for excellent returns. Others are looking for ownership opportunities in companies that will help the market reach critical mass. Equally important in this infrastructure transformation is the need for regulators to create a positive environment for utilities to embrace competition, distributed generation, and new grid opportunities as well as to help utilities with the transition to a new business model. Renewables can be important to the long-term viability of utilities because risk in traditional fossil fuel investment is increasing and is not currently being considered in existing models. What remains clear is that we need to build the grid of the future carefully and efficiently with utilities, regulators, and consumers working collaboratively. INVESTMENT OBSTACLES FOR INSTITUTIONS One of the biggest challenges for institutions looking to invest in renewables is the negative perception of investment history. Clean Tech funds have historically not performed well, and people often lump renewables into this broad basket of investments. However, the current environment of investing in renewables is distinctly different from Clean Tech funds that are largely a mix of venture and equity with technological risk. Unfortunately, there has been a misperception of this asset class. Today, when evaluating renewables, investors are essentially financing power plants, e.g., they are looking to invest in credit-worthy off-takers like Walmart that want to offset the long-term cost of energy consumption. There was substantial risk in these investments initially but over the past five years, that risk has largely dissipated due to improved technology, reduced costs, government support, and increased demand. While some pension and institutional investors have invested directly and indirectly in renewables, those investments have not correlated with traditional market investments. What seems clear is that as the PUBLIC PENSION FUND INVESTMENTS & INVESTING IN RENEWABLES: OPPORTUNITIES AND CHALLENGES 3 / 6

4 market penetration of renewables grows, so will the pension fund investments in this market. Investment institutions are now financing long-term renewable power contracts as evidenced by the Chief Investment Officer of Denmark who is investing over $3B in this space. Investments in renewables go beyond the big name commercial customers like Walmart. It also includes the pool of residential customers installing solar panels on their rooftops. The advantage of this type of investment is that there is little risk of loss. That is, if a bank invests in a restaurant and the restaurant fails, the investment fails; with solar panels, if a homeowner defaults, the panels can be removed and reinstalled at a new location. The market has demonstrated that there exists an asset class in renewables that provides long-term, stable returns with very low risk to investors. And it is not limited to the U.S.; there are big opportunities in the rest of the world for investing in renewable energy projects. REASONS COMPANIES INVEST IN RENEWABLES Factors that drive corporations to invest in renewables are cost savings, power reliability, and sustainability initiatives. More companies are investing in renewables and installing solar on their buildings. Some companies are looking for price predictability, energy reliability, and offsets for increased demand in power while others are responding to corporate leadership interests in sustainability and concerned shareholders and customers. For some companies, their founders want to be good stewards for the planet and motivate their company s renewable energy investments. In some cases, while these investments started on a whim, the ventures performed so well financially that future investments are now driven by positive economics instead. While many companies invested in renewables for sustainability reasons, these investments are simultaneously contributing to overall profitability. Some companies are asking their suppliers to be good stewards of the environment as well and requiring them to use renewable energy. Other companies are interested in renewables due to commitments to reduce GHG emissions. A second driver for investments in renewables is the need for energy reliability and an interest in securing energy supplies for a stable economy. This is particularly critical for the increasing power demands of data centers. Renewables combined with adequate storage and making the energy supply chain more efficient provides the best opportunity to achieve this goal. For corporations, the risk-adjusted returns on renewable investments have improved significantly and technology risk has mostly disappeared. Renewables have a positive risk-adjusted profile and provide other non-economic benefits such as meeting sustainability goals, improving customer relations, etc. There are no other investments that provide similar low-risk economic returns and high non-economic benefits. Lastly, customer interest in sustainability is also driving investment in renewables by corporates. An increasing number of customers say that a company s actions on sustainability impact their buying decisions. Millennials, in particular, have such unprecedented access to information that they know if a company s actions are authentic or not. Companies cannot fake values in sustainability, and customers care what actions companies take. Leilani Münter, a professional race-car driver and environmental activist, pointed out the importance of PUBLIC PENSION FUND INVESTMENTS & INVESTING IN RENEWABLES: OPPORTUNITIES AND CHALLENGES 4 / 6

5 informing the general public about sustainability issues in a way that they can incorporate sustainability initiatives into their own lives. For example, she promotes environmental causes through her NASCAR online forum, where she started a dialogue about climate change. NASCAR is the second most watched sport on television and Leilani is convinced change will happen through efforts such as these that introduce and engage fans on sustainability issues. She is working towards getting all racetracks powered by renewable energy sources. PUBLIC AND PRIVATE SECTOR EFFORTS After the daylong proceedings, Craig Cogut, Founder and President of Pegasus Capital Advisors, said that corporate America is at the forefront of the renewable energy future, directly making investments in systematic solutions that link all parties together. This creates opportunities for public investors, private investors, and companies to create and invest in product solutions where everyone wins: investors, companies, customers, and the planet. Finally, Treasurer Wheeler acknowledged that there are investment opportunities worth exploring, and that this asset class, which is not private equity or venture, can be attractive for companies that want to invest in low-risk, fixed return products. He added that Oregon can take a leadership role and work together with the private sector on investments that make sense for all parties. CONFERENCE AGENDA Conference Overview: Ted Wheeler, Oregon State Treasurer Host: Terry Tamminen, Pegasus Capital Advisors Setting the Stage: Renewables Today and the Next Five Years Dr. Mark Jacobson, Professor, Stanford University Key Opportunities for Renewables Andrew Beebe, Vice President, NextEra Colleen Calhoun, GE Ventures Kevin Lynch, External Affairs, Iberdrola Renewables, LLC Jaron Rothkop President and CTO ZeroBase Energy Moderator: Scott Sarazen, Global CleanTech Markets Leader, Ernst & Young How the utility business model is changing Bertrand Valdman, Senior Vice President, Edison International Mark J. Ferron, former California Public Utility Commissioner Interviewed by Andrew Shapiro, Broadscale Department of Energy Financing programs Brandon Hurlbut, former Chief of Staff, Department of Energy and co-founder of Boundary Stone Partners Interviewed by Mark Bernstein, Pegasus Capital Advisors Culture and Public Opinion Play a Role Leilani Münter, Racecar driver and environmental activist. Introduced by Jon Wank, Chief Operating Officer of The Solutions Project PUBLIC PENSION FUND INVESTMENTS & INVESTING IN RENEWABLES: OPPORTUNITIES AND CHALLENGES 5 / 6

6 Asset Diversification and Renewables John Hershey, Director of Alternative Investments, Oregon State Treasurers Office Interviewed by Ron Klein, Pegasus Capital Advisors Investing in renewables and overcoming obstacles Marc Atlas, Invenergy Benjamin Cook, Vice President, SolarCity David Fann, President and CEO, Torrey Cove Capital Partners Marco Krapels, Pegasus Capital Partners David Zwillinger, Senior Vice President, D.E.Shaw & Co., L.P Moderator: Tom Rinehart, Chief of Staff, Oregon State Treasurer Renewables as a good business decision Jason Allen, Head of Asset Management, Google Steve Center, Vice President, Honda Motors Paul Scanlan, Senior Program Manager of Energy Strategy, Microsoft Ted Witt, Director of Operations, Clif Bar Inc. Moderator: Adam Umanoff, Akin Gump Review and Next Steps Ted Wheeler, Oregon State Treasurer Craig Cogut, Chairman and President, Pegasus Capital Advisors PUBLIC PENSION FUND INVESTMENTS & INVESTING IN RENEWABLES: OPPORTUNITIES AND CHALLENGES 6 / 6