PARTICIPANTS
Mark Brisley
Managing Director and Head of Dynamic Funds
Jennifer Stevenson
Vice President and Portfolio Manager
PRESENTATION
Mark Brisley: You are tuning in to On The Money with Dynamic Funds, a podcast series that delivers access to some of the industry's most experienced active managers and thought leaders. We're sitting down to ask them the pertinent questions to find out their insights on the market environment and navigating the investment landscape.
Welcome to another edition of On The Money. I'm Mark Brisley, head of Dynamic Funds. There's a saying that every great challenge leads to an even greater opportunity. While the environmental threats posed by climate change are immense, investment opportunities being created in the search for renewable power are equally unprecedented. It's become evident that the great transition from fossil fuels to renewable energy stands to be one of the most important developments of the new millennium for both investors and the planet and it's magnified by the situation that we find ourselves in globally, right now.
It breeds important questions: What will be the impact of behavior change? Will we completely return to previous habits? Will sustainable renewable energy production accelerate? What will demand for energy look like as the world emerges from COVID-19 restrictions?
The renewable energy conversation certainly isn't new to my two guests on this podcast series. They've been watching the developments in the industry closely as both energy and infrastructure portfolio managers. We're going to discuss the current landscape and their views on the opportunities this great transition may provide and how that will translate into a new investment mandate they will co-manage, the Dynamic Energy Evolution Fund. My first guest in this series is based out of the heart of the Canadian energy industry, Calgary, Alberta. Close to the company she covers and regularly finds herself on the ground in other major global energy hubs.
Jennifer Stevenson's experience spans nearly three decades and she's fostered a global approach to casting a wide net in search of the highest quality companies with solid management teams and sustainable long-term business models. Jennifer's commitment to actively managing her portfolios in combination with her vast experience allows her to take advantage of the inherent complexity of the sector so she can invest in the various segments of the global energy supply chain, including renewables and hydrogen.
Jennifer, it's great to have you here today. While we're gathering to talk about the energy transition on a global scale, before we dive fully into the renewable discussion, I just wanted to discuss the longterm outlook for energy demand and developed markets are generally seen as having a relatively flat growth profile with most of that growth coming from developing countries like India and China. How does the growth profile for renewables differ between developed and developing markets based on the current demand picture?
Jennifer Stevenson: Yes, that's a key fundamental thing to look at, Mark. What we don't want to lose sight of is the fact that energy demand continues to grow. I mean, we've seen that over time, it's fueled by population growth, by increasing standards of living in the developing world, and by increasing economic activity, predominantly, in the developing world. Of course, that's taken a setback here with COVID, but we've certainly seen it go down and then recover a lot of the way back.
When we look at what renewables are doing with the developed versus the developing world, what we had seen in the past is in the developed world, so OECD countries, think of North America, Europe, Japan, for example. We'd seen a pretty flat energy profile. The reason was that the growth from economic activity was being met through energy efficiency.
What we're seeing now with renewables is we're starting to see more of that replacement of the fossil fuels with renewables, so we end up seeing renewables growth and a slight amount of fossil fuel decline when we look out over the long-term.
In the developing world, you're rapidly developing regions, you highlighted China and India, that's, certainly, the case, but what we see there is growth in both our fossil fuel-derived energy as well as renewables. The trajectory of renewables growth is just steeper than that of fossil fuels, but they do both grow.
Mark Brisley: That's interesting, and, obviously, with an opportunity this big, based on where we live here in Canada, this is going to have local effects. Especially, for you as an Alberton where the economy is so heavily tied to oil, what kind of effects do you see this transition having on the local economy, and what is the sentiment like out there as this theme gains traction?
Jennifer Stevenson: Albertans, like everyone else on the planet, are very focused on climate change, mitigating that, and also making sure that the economy is healthy as well as the environment. The perception out here is that all of this is a good thing. Certainly, Albertans, we can hold our heads up that when we look at Canadian oil produced in Alberta, BC, Saskatchewan, for example, and we compare that to a globally produced barrel, on any measure of environmental, social governance type of measurements, it is a better barrel, however you'd like to characterize that.
When we look at natural gas, that's certainly viewed as a growth area, as a growth fuel. Even if you want to look at it as a bridge fuel as we get into more renewables over the longterm. Both of those things are accepted and we're proud of those, but Alberta, also being an entrepreneurial place, we've got pumped hydro projects going on and that we use pumped hydro to make up for the intermittency of renewables. We do have deployed wind and solar projects in the province and the premier just came out last week that we're looking at the small scale micronuclear as well. We're doing other things on the leading edge of renewables too.
Mark Brisley: You've been an energy investor for a long time, Jennifer, and your message has always been around quality and sustainable business models, but to make the leap into renewables and now in partnership with Frank, launching a standalone investment mandate that's going to be focused on them seems to be a fairly big statement on your conviction in the space. Can you walk us through how your views have developed over the last few years and why we're making this leap now?
Jennifer Stevenson: Yes, what's the energy person doing investing in renewables? Well, it's because they make money and they make sense. We've had renewables projects in the energy space for years. I've been inside big oil companies, I've been inside big pipeline companies, but what we've seen as technology and scale and deployment have progressed is that these projects now make money and make sense on a standalone basis. They could be within individual companies that focus on that business.
We've got drivers from, people want to act on climate change, people want to see net-zero carbon goals. We've got governments that want to achieve that, want to get back on track with their Paris Accord. We've seen numerous countries around the world declaring their net-zero goals, whether it's 2030, 2040, 2050, 2060, but definitely, big support there.
Put those two things together with the technology that allows these projects to scale, be deployed, and be profitable, which means you can invest in them. We've seen this ramping up over the last decade, but it's been really evident just in the last two to three years. That's what allows someone who's been an energy-focused investor and the company that I invest in has had some exposure to, and some investments in renewables to say, "No, this makes a lot of sense to do on a standalone basis now because it's real, it's got tailwinds, it's got support, and it makes money."
Mark Brisley: Yes, beyond just the investment opportunity, this conversation is almost becoming a part of the social conscience and we've witnessed in the last few weeks that it became a subject in the US election and the commitment that a Biden administration was going to make to green energy and a massive investment into that area. One of the questions we had for you is what will government's role be in the growth of renewables? As it pertains to the US, since we didn't see the blue sweep that many forecasters had predicted, do you see policy support, perhaps not going the way predicted even with a Biden administration in power?
Jennifer Stevenson: Yes, the election outcome in the US, Mark, the not having a blue sweep might make the pace of renewables rollout less frantic, but certainly, we still see bipartisan support for the climate change initiatives. We've got both sides of government support. We've got the support of the population.
We think about, well, what can get through the government what's supported by both sides? Anything that gets to President-Elect Biden's net-zero 2050 goal can get through with some acceleration. Support for extended tax credits for both wind and solar, there's been some talk about whether those will be extended. They're definitely supported by multiple states, by red and blue senators and congressmen. We'll see those continuing in our view.
Certainly, things like enhanced speed of permitting renewable projects, like wind, for example, we would expect to see more of that happening and increase permitting for carbon capture and storage projects. We still see lots of things progressing under the government situation as it currently looks down in the US as we go forward.
Mark Brisley: One thing that I thought would be interesting for our listeners to hear from you on would be the fact that companies that are deploying capital or developing technologies in the renewable space aren't necessarily new companies. Legacy carbon companies are very much a part of this transition. The question is twofold for you, is how are the legacy carbon companies making the transition to renewables? Are these companies places you will invest?
Jennifer Stevenson: Yes, a super key question. When we look at the legacy carbon companies, they're making a number of investments into renewables and some of them go in a major way and make major changes and others use the existing infrastructure and assets that they have and capitalize on the growth in and profitability of renewables projects.
All of those situations in the legacy energy companies fit perfectly into the energy income fund. That's where we're taking advantage of those. In the Energy Evolution Fund, we want to make sure we're focused on those renewable energy companies and all the ancillary companies that are directly related to that business. We're keeping energy evolution more pure on their noble side. Those companies that are in legacy hydrocarbon or are taking advantage of the transition are in the energy income fund.
Mark Brisley: I want to talk a little bit about the technologies themselves. There's a lot to unpack here, so maybe we could go through at least some of the key ones, one at a time. I'll start with solar because it's the one that I think everyone's heard of, is most familiar with, it's been around for so long. How has the technology improved here? What kinds of companies are you invested in, in that space?
Jennifer Stevenson: Solar is pretty amazing because a lot of people probably remember, "I remember when solar was the buzz and there was lots of market attention paid to it and then it went away, what happened?" During that time, that was solar panel manufacturers, that's what was interesting to the market.
What happened in that business is solar panels became very commoditized. They were not just produced in the US, they were produced internationally, including in China, and the cost of solar panels in the last decade have come down 90%.
That is then the segue into what do we like about the solar business, we like the fact that the cost of the panels have come down 90%. The panel side of the business is not as interesting to us from an investment side for that reason, but the inverter, the technology has really moved ahead and the costs have come down. The control systems are impressive. If you have a solar system on your roof, you can actually control it, see what's going on, monitor your energy generation, use, storage on an app on your phone. Those have really improved.
We also have the ability now to add battery to your solar panel generation. When you look at people who want to do something positive for the climate or want to be independent of the utility grid, residential solar has answers that are available today for those questions.
Depending on where you are, it's more rolled out or more available than other places, but the companies in that business are really exciting with what they can deploy and what the growth profile has been and continues to be.
Mark Brisley: Another key area is wind. What strides have been made here? What kind of companies in the supply chain with respect to wind power would fit your quality criteria?
Jennifer Stevenson: Wind is really interesting because if you think of the progression of wind, everybody has seen a wind turbine on land somewhere. There's that big one in downtown Toronto. You drive down south Calgary, there's a bunch.
What has changed with wind turbines is that we now have the technology in the composite material. What the blades are made of to make the blades longer, and yet they're still light enough to be effective. What does a longer blade mean? It means you can harvest more wind resource from the area around a given tower installation.
Just thinking about it, that's much more efficient. Then, if we take that another step further, we can make the blaze longer, fine, but now we take technology from other industries. We take it from oil and gas and we put the wind turbines offshore and we attach them to the bottom of the ocean so they can only be so deep, but what's the benefit of being offshore? Well, there's nothing in the way. There's no buildings in the way. There's no mountains in the way. The wind is unimpeded. That's an improvement.
Then we take it another step forward and we, again, use technology from the oil and gas sector and we go into deep water. Those wind turbines are not attached to the bottom of the ocean. They float and they don't float away because they're attached to cables that are affixed to the bottom of the ocean. That's what we do when we drill really deep oil and gas wells in deep water. We take that technology and we can put those wind turbines in the middle of anywhere, away from anything, and they are huge.
The efficiency and the resource capture is massive. What we do with that resource that we capture is we collect it. It's electricity that it generates. It goes back on a transmission line to shore. The wind supply chain, like solar where we have-- I talked about, we don't have paddle manufacturers, but we have inverters, we have battery storage, we have installers. On the wind side, we have the turbine manufacturers, we have the blade manufacturers, and we have the companies that run those subsea cables and install those deepwater wind turbines, as well as the companies that are actually running the projects and generating the power. Again, a really wide range of companies all invested in those types of projects.
Mark Brisley: Another key area in the conversation is hydrogen and probably the one that's going to be a little less familiar to our listeners. It's in the news a lot more, though, and it does sound fairly promising. What is the opportunity with hydrogen? How is it utilized and is it a mature enough theme to be added to your portfolios?
Jennifer Stevenson: Yes, hydrogen's super interesting. In certain instances, it certainly is mature enough to be added to the portfolio and it is in the portfolio in the Energy Revolution Fund and in applications such as fuel cells. There are fuel cells in use for Amazon or Walmart, just for example. Those two companies use hydrogen fuel cells in all of their forklifts in their warehouses and there's one application. You can buy a hydrogen fuel cell engine to drop into a diesel heavy haul truck.
Those are in use, but hydrogen itself, it's one of, if not the most common element in the world. It doesn't exist all by itself, though. It's bonded with other things. H2O, that's hydrogen and oxygen, that makes water. To make hydrogen, we have to get it from something else. The way that we get it now predominantly is from hydrocarbon. We make it from natural gas and we use a process called steam methane reforming. We've done that in refining for decades and decades and decades. You need that to make things like gasoline.
That kind of hydrogen that takes a fossil fuel natural gas, runs it through a steam methane reformer, makes hydrogen, we call that hydrogen gray. If we do that exact same process, but the carbon dioxide that's given off by that process, if we put that back in the ground, so there's one example of carbon capture and storage, then we can call that blue hydrogen.
The final application is green hydrogen, and that is using a different process. We take water and we need to run electricity through it to break up the oxygen and the hydrogen. When we run that electricity on renewable, the machine that we use is called an electrolyzer. We have an electrolyzer, the electricity it gets is from renewable power. We can take water, break it into its component parts. We get hydrogen on one side, we get oxygen on the other side and that's green hydrogen. That's the most exciting area for hydrogen development because we can see uses for that in parts of the economy that are hard to electrify.
Decarbonization, the big focus is through electrification. Renewable power, you can get your solar panel or your wind turbine, or your electric vehicle. What do we do to make cement? What do we do to make steel? How do we run airplanes or trains in a lower carbon way? Hydrogen is a way that we can look to solving the decarbonization problem of these other industries. That's the big growth area, is using green hydrogen into these other sectors of the economy.
From an investment standpoint, now, I mentioned the fuel cell companies, we have investments in electrolyzer manufacturers. We have investments in companies that produce hydrogen because that's a fuel that's been in use for a long, long time. There's a number of ways that we are already invested in it, but importantly, it's also an area that has a huge amount of growth and you can see hydrogen being adopted over time because we can put it in existing infrastructure.
There will be changes that need to be made. We can put it in gas pipelines, but only up to a certain percentage unless we coat the pipelines. We can need to make changes to run it in our existing natural gas furnaces. Just think about, what about new neighborhoods? How do we build those? If you think further out, there's just a lot of exciting things that can happen with hydrogen in addition to the things that are currently underway.
Mark Brisley: Jen, I think one of the important questions that we're likely to get asked or would be on the minds of other investors with respect to investing in renewable energy, whether or not that means the exclusion of fossil fuels entirely. You've touched on the fact that the investment mandate, the Energy Evolution Fund that you're going to be managing is going to invest in renewable power, emerging solutions, and new energy innovators. How do you answer the question, will this investment opportunity be free of fossil fuels? I'm pressing your answer, but why is it more difficult to completely exclude fossil fuels from the conversation?
Jennifer Stevenson: It's not entirely free of fossil fuels because even when we look at some of our big renewable energy providers like the big utilities that our global leader recognized for their focus on renewables, they still have some backup, they still have some intermittency protection and sometimes that's in the form of natural gas. We're not at a point yet in society where we can completely eradicate it, but with the fund, what we do is very, very much focused on everything that is renewables to a massive amount.
As we discussed before, it's not like a company in transition fits into this fund. No. This is companies who are absolutely focused on renewables, but yes, there may be some Hydrocarbon backup because that is the stage that we're at in society. We don't have enough nuclear pumped hydro batteries so that every renewable utility can say, "No, we have zero natural gas backup," because they want to keep their customers having the uninterrupted energy supply.
Mark Brisley: Well, that's really insightful information, Jennifer, and it's really exciting to hear the opportunities that are presenting themselves, not only for the ability to invest in positive change, but also for the benefits that investing in this particular space will have on investor portfolios.
You've been listening to another edition of On The Money with Dynamic Funds. For more information on Dynamic and our complete fund lineup, contact your financial advisor or visit our website @dynamic.ca.
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