Katherine Gorman: (00:06)
You are listening to Climate Now. I’m Katherine Gorman.
James Lawler: (00:09)
And I’m James Lawler. As we transition globally into a new industrial paradigm powered by renewable and carbon free energy, the question will be how, and with what dollars we will affect the changes we need to make.
Katherine Gorman: (00:21)
We had the opportunity to meet up with Salim Samaha, who is a partner at Global Infrastructure Partners. Salim runs the energy business in the Americas for GIP and is responsible for identifying business trends and companies to invest in within the energy sector. In this episode, Salim is joining us to discuss how private equity investors are approaching the global transition to a carbon neutral society. And to give us some perspective on the emerging energy technologies that look most appealing from a private equity investment perspective. So Salim, let’s start with the basics for those who are not in finance. Your company, GIP, is a private equity fund. Can you just tell us what that is?
Salim Samaha: (01:03)
Yeah. So private equity funds, they raise money from institutional investors, and we’re really talking about pension funds and insurance companies and sovereign wealth funds, primarily. And then they look to invest those funds in companies where there’s real scope for a new approach to grow the business or to improve operating efficiency. A lot of people don’t know that private equity owns almost half the companies in the United States by value. So, it’s quite a big business. And a lot of them don’t recognize that their pension money is often invested through private equity. When you talk about other kinds of investors, there are many, one I would distinguish from private equity is venture capital, where they will focus on earlier stage investments that are less mature. There’s probably more technology risk, more risks around the business model or risk that a particular technology that works can actually scale up. Then you have corporations that are public like Google or Microsoft, or your publicly traded electric utility. And there’ll be much more narrowly focused on a sector or subsector, but judging by the names I mentioned, it can also be quite large.
James Lawler: (02:19)
And what kinds of companies does GIP invest in?
Salim Samaha: (02:23)
Let me start by describing GIP in a nutshell, and then I’ll get into the ideal investments for GIP. We’re a large infrastructure focused asset manager. So, we invest only in energy, transportation, the wastewater and digital sectors. So, energy will be electric utilities, gas utilities, it’ll be renewable power generation. Transportation will include airports, which we’re famous for, seaports, rail, and the digital sector will include data centers, telecom, and other elements of that sector. We invest in equity. We also are lender, and we do things on a global basis. One of the key distinguishing factors about GIP is we’re actually quite deep from an operating capability perspective. We have just as many engineers as we have investment professionals, and those engineers really help us focus on how we can run companies better and more importantly, grow faster, which is the way we’ve created a lot more value, over time.
James Lawler: (03:27)
These are the sectors you work within. Tell us within those sectors, what kinds of businesses do you work with? What do you look for in a company when deciding whether to invest?
Salim Samaha: (03:36)
The characteristics of an ideal investment for GIP are, one, strong market position. A utility is a perfect example of a company that has a strong market position. It’s effectively a monopoly, and it’s regulated because it’s a monopoly. And we like our companies to be providing critical services. So an airport is a perfect example of providing a critical service to the economy and to the public, and companies that have a very strong growth potential to grow organically or development. And when you look at our renewable energy businesses, there’s an enormous amount of development and legwork that has to happen starting by working with farmers to put together parcels of land that are appropriate for renewable energy. And then we like them to also be well aligned with our customers because we find that there’s always unexpected things that will happen. And the more aligned you are with your customers, the better you’re going to do over time. And last, but certainly not least, some companies that have a strong license to operate. And that’s not just something that we observe from the outside in, that’s the way we manage our businesses, is to ensure that they continue to have a strong license to operate.
Katherine Gorman: (04:52)
So, you find companies that meet these criteria. They are stable, offer critical services with stable market position, and have lots of room to grow. Where’s the intersection between that criteria set and companies that are helping us decarbonize and move away from fossil fuels.
Salim Samaha: (05:08)
I’ll start with the low-hanging fruit. I still think onshore wind and solar with battery storage are very interesting, and will continue to grow rapidly and create a lot of value. If you have the right development capability. As the renewable penetration increases, I think battery storage and other forms of storage will become increasingly important, and that’s potentially underappreciated. Once you see what’s happening in California, there’s a lot of solar that gets produced at times of day, where we can’t consume all the solar. So you have to store it somewhere. Battery storage and other forms of storage are becoming more important and are going to be a key enabler for additional renewable penetration.
James Lawler: (05:51)
Is your team at GIP investing in any of these technologies already?
Salim Samaha: (05:54)
We’ve built the fifth largest owner of renewable energy in North America. It’s called ClearWay Energy. It owns about 6,000 megawatts of generation, and has a very big development pipeline of wind and solar. They also own some gas plants that are critical to the reliability equation in California because of the renewable intermittency issue. We bought a company called, it used to be called, MAP. MAP is a very early-stage developer, working with local development partners who work with farmers and other landowners to create advantage sites for renewable energy. They’ve been responsible for 10% of the wind development in the US, but they’ve never built one of these facilities. They, once they develop the sites, they sell them to companies that will actually build the wind and the solar.
James Lawler: (06:48)
Interesting. So what’s the process for developing a site for wind energy? How does that business work?
Salim Samaha: (06:54)
You have to find the right wind resource, the right amount of land, get the local community to buy in, and have access to an interconnect for the grid that’s advantaged. So, there’s a lot of legwork that you have to do at a very local level to get that done, and you have to have a strategy around where do you think coal plants are going to retire and where the load is going to require more renewable energy. So, the company is now being renamed Eolian. They have about a 30-gigawatt upline between that and ClearWay, we believe we own the largest development pipeline of renewables in North America. They have also pushed into battery storage. They have quite a big pipeline of battery storage that where they started positioning themselves five, six years ago. And the thesis is very, is what I mentioned earlier around renewable intermittency. And this will be critical to enabling a greater penetration of renewables. And in that case, we will actually build, own, and operate the batteries, unlike what Eolian has typically done on the solar and wind.
James Lawler: (08:03)
Wow, it’s so interesting. When, when you dig deep into this kind of space to realize there are so many businesses within businesses. You wouldn’t necessarily think of all this groundwork that has to be done, but of course, you know, you have to have a business that’s doing all of that before the wind turbine comes on site. You know, I don’t know that any of those or many of those layers are really thought about much when we’re talking about businesses that produce energy.
Salim Samaha: (08:23)
Yeah, and these people go to local town halls and have to explain everything to the local communities. So, the license to operate and building trusted relationships is quite important.
James Lawler: (08:35)
Absolutely. I can imagine.
Katherine Gorman: (08:38)
So, let’s think about the future. What do we think this market is going to look like in five or 10 years? Can you talk about any emerging technologies that maybe aren’t quite at the PE investing stage yet, but you are watching?
Salim Samaha: (08:50)
We are looking to build offshore wind farms in Asia. We also are quite excited about the US market and the growth of offshore wind in the US market. So, we’re working on building a US platform because one of the issues that is going to keep coming up is our NIMBY issues for anything, even, even for renewables.
Katherine Gorman: (09:11)
That means not in my backyard.
Salim Samaha: (09:13)
Exactly, and transmission is key to enabling those renewables. And a lot of people don’t want to see transmission in their backyard. One way to solve that partially is by going offshore, far away from anybody’s site, and having undersea cables. And when they land, you can put them under parking lots and interconnect to a grid that already exists.
James Lawler: (09:36)
And what are the challenges that you’ll have to deal with in developing energy, from offshore wind?
Salim Samaha: (09:41)
The challenges are number one, you have to have a capability to really build these wind farms they’re in a harsher environment because they’re, by definition, they’re not on land, they’re in the ocean. That’s a lot more challenging to construct and to operate. You have to work with fishermen, you have to work with the coast guard, you have to work with the Navy to figure out are these an obstacle to their navigation path, to fishing? And strike the right balance, to get a license, to build these wind farms. And then you have to work on where you land the cables to interconnect with the grid because communities along the shore sometimes don’t want to see any construction activity, even if it’s going to be buried underground. Sometimes people complain about six months of construction activity to bury the cables. There’s also a big local content element. So, price clearly wins in terms of who’s got, who offers the lowest power price, but the states that are pushing for more offshore wind also want to see jobs come to their states. And I’d say, in general, it’s about 30% of the value proposition is your local community relations, and the value add that the state thinks you’re bringing.
James Lawler: (10:54)
Wow. So as part of the business that you’re building, there must be a whole component of local relations and strategy with reaching out to the community, is that right?
Salim Samaha: (11:03)
Absolutely, that has to be a core competency for you to succeed.
James Lawler: (11:05)
And what do you think the growth trajectory will look like for offshore wind in the United States market over the coming decade?
Salim Samaha: (11:13)
Over the coming decade, they could easily see 30 gigawatts of offshore wind in the US. We’re probably close to one right now. That’s a massive increase.
James Lawler: (11:22)
That’s 30 times growth, 30X growth.
Salim Samaha: (11:25)
Yeah, 30X growth, and probably longer term going to 100+ gigawatts because with increased electrification, you’re going to need a lot more renewable energy. And for a lot of the coastal states, it will be difficult to do that on shore. The other challenge I’ll mention with offshore wind in the US, is today offshore wind has really taken off, it has some history in Europe. So the supply chain has been developed in Europe. It hasn’t been developed in the United States yet, so there will be some growing pains.
James Lawler: (11:58)
So for perspective, 30 gigawatts of electricity is about the same amount that the entire state of California used in 2019, and the entire US used about 430 gigawatts of electricity in 2019. So 30 to 100 gigawatts of electricity is not a small portion of the total electricity market in the United States though, obviously the numbers you’re, Salim you’re using our capacity built capacity versus actual use.
Katherine Gorman: (12:23)
Are there other technologies that you’re following?
Salim Samaha: (12:26)
Hydrogen is another area. I do think it’s longer dated because it’s still very expensive and the affordability issue is real, but in certain applications, you have to have hydrogen because of energy density that’s required, or because it’s very difficult to electrify those applications. Renewable fuels and particularly around sustainable aviation fuels, I think are quite interesting. It will be very difficult to decarbonize the aerospace sector because the energy density required is very high. There are interesting technologies that still need to prove that they can scale up, that will convert feed stocks, like municipal solid waste, that’s releasing very harmful methane into sustainable aviation fuels. And long duration storage is another interesting area because today battery storage to help with renewable intermittency, will generally go four to six hours tops, and then it gets too expensive. Working on longer duration storage is cost-effective, will help us replace natural gas as a source of fuel that can help with that intermittency.
James Lawler: (13:35)
In another podcast, we spoke with Duke University professor Dr. Ben Wiley, who has pioneered a new type of electrode for electrolysis that decreases the cost of hydrogen production. I think it effectively decreased that cost by about 50X, 50 times. So the idea was you could produce it with renewable energy during peak energy production times, and then use it for energy storage.
Salim Samaha: (13:57)
Yeah, that is quite interesting. And we need all of the above to make it work. Two thirds of the cost of hydrogen production is really renewable electricity. So you’d want to cite it where you have the highest load factors or renewable energy and the lowest cost. Then you have the electrolyzer with which you just talked about, and that could be a meaningful, but what people often miss is the systems for transmitting and distributing the hydrogen, which are very expensive, non-existent today. You can’t leverage existing infrastructure to a large degree. So that remains quite a challenge. If you’re in the south of Chile, you have 70% capacity factors on wind, so you’ll have a great renewable resource, but there’s no market in sight. So you’re going to have to turn that hydrogen into a vehicle like ammonia, which is quite toxic, but we know how to transport it and then ship that somewhere else and turn it back into hydrogen or burn it as ammonia.
Katherine Gorman: (14:58)
So, these considerations might seem secondary, but infrastructure, building community relationships, getting energy from the source to the users, that can really make or break any technology.
James Lawler: (15:10)
One more avenue we’d like to discuss with you is the outlook in the investment community among managers of large funds or among investors, that is, is there any consensus on how to take advantage of the opportunities or deal with the risks of this energy transition?
Salim Samaha: (15:24)
Yeah, so that’s a very complex topic. There are a lot of common views at a very high level. And then when you get into the detail, I think you get divergent views because the global energy system is very complex and has been built up over a couple of hundred years. First and foremost, I would say most investors are very, very focused on ESG, and ESG is environmental, social and governance practices. And the environmental piece would certainly touch on climate change. So they want to firmly put their money against investment opportunities that are well aligned with where the energy transition is going. And generally try to avoid places where there’s a greater risk because of the energy transition. And in many cases, they’re thinking about the cost of carbon on their own portfolios as fiduciaries. And they understand there needs to be some collective decisions and sacrifices in order to make that happen.
Salim Samaha: (16:20)
I think nobody really knows what the right path is. So, you’ll get a lot of divergent views about how quickly will technology change? Will there be second and third order effects? If the cost of carbon is high in the short term to help mitigate climate change, will you get protests like you did with Gilets Jaunes in France? Will emerging markets come on board when they can’t afford to do that? And will that slow down what we need to do collectively as a globe? So, once you start getting into these types of issues, you get a lot of different views on how to get there. But I think generally speaking, what you should take away from it is, the money is going in a way that’s very aligned with mitigating carbon and avoiding other areas. It doesn’t mean that now we’ve risen to the challenge, to the level necessary to get the impact that we want, but there is real momentum with investors and they will shun investment managers that don’t take that view. Over time, the way that gets measured is becoming more sophisticated because it’s a sophisticated, complex problem, and everybody will get better at it. At the same time, people recognize it as a big investment opportunity in the energy transition, because it will take tens of trillions of dollars over multiple decades to make that happen.
James Lawler: (17:37)
But at some point, there’ll be this, you know, an explosion of demand for alternative energies and a desire to ramp up the supply chain and infrastructure that’s going to support their development. So, what do you think it will take for the switch to get flipped, to sort of open the floodgates for investment in this area?
Salim Samaha: (17:53)
It’s flowing right now. Where there are impediments to it are, uh, where investors don’t have conviction that the regulatory support will be there. So for example, if you have hydrogen it’s very expensive, there aren’t a lot of companies that are willing to pay for it. The regulators have not really stepped up to subsidize it or impose a cost of carbon that’s big enough to incentivize people to use it. So the capital does not have as much conviction to invest in hydrogen in a bigger way. You can look at renewable fuels and as particularly some of the new technologies, the cost of abatement, once you run out of used cooking oil and feedstock. There is only so much of it that we can use, and so much biofuels we can use because you’re taking away arable land in many cases, then you have to move to the second-generation technologies like turning municipal solid waste into sustainable aviation fuels. And that cost of carbon abatement, it could be 150 to 200 a ton, clearly well above the current carbon price. So, it’s really about some support from a regulatory perspective. And then belief that that’s stable support to make sure that capital has confidence deploying.
Katherine Gorman: (19:09)
About 30% of emissions globally come from industry, mainly steel and cement manufacturing. And then there’s 18% from agriculture. Given that, I’m wondering if you’ve seen or heard about any interesting investment opportunities in these other sectors beyond just power generation.
Salim Samaha: (19:27)
Those sectors are very hard to decarbonize because of the required energy intensity. So, you either need to figure out a way to electrify them, that requires a big technological improvement, but that’s not a risk we take, like I mentioned, at the outset that’s for people that are more venture capital oriented. We wish them success. Then you have carbon capture and sequestration. We are actively looking at that. There are some tax credits that are making it more interesting. We have existing infrastructure that we own that supplies hydrocarbons to some of those facilities that can be leveraged to drive down the cost of that carbon sequestration. And so, we’re trying to actively work with customers to figure out how to do that. There are still some engineering challenges and subsurface challenges with carbon capture and sequestration that everybody needs to get comfortable with, you know, will the carbon stay there, for example?
James Lawler: (20:25)
Okay, so the geological storage and the permanence question.
Salim Samaha: (20:27)
Yeah. And who takes the risk? If something, everybody expects it to work perfectly well for a hundred years or longer, but we could be wrong. That’s the question that is out there. And investors are a little bit, still a little bit weary to jump in completely because of that type of risk.
Katherine Gorman: (20:46)
To follow that idea, let’s assume that these risks are being quantified or resolved, and CCS becomes a viable technology. Is this something that we could use to address the continuing use of coal? I mean, China in particular continues to invest huge amounts in coal, both in mainland China and internationally. And there are many developing nations, still, who are dependent on coal plants for electricity. If we assume the cost of carbon emissions is going to rise, is retrofitting these plants with CCS technology an attractive option?
Salim Samaha: (21:20)
I think it’s too expensive to add CCS to whole plants. It’s much cheaper to shut them down, build renewable energy with storage, maybe even some gas to help with the intermittency issue, and use the existing electric interconnect of those coal plants to leverage existing transmission lines. But ultimately, I mean, you’re onto something, which is when I look at all the consultant projections for the way the world energy system is going to evolve, you still see massive amounts of coal even 40, 50 years out. And I don’t see how we’re going to get to where we need to be if that’s the case.
James Lawler: (21:57)
Which projections are you referring to?
Salim Samaha: (21:59)
Take any consultant. Take Woodmack, take IHS, take the IEA. Nobody knows exactly how you achieve what we want to achieve. What they say is – this is what would need to happen in terms of electricity or primary energy demand. And generally, you have decreasing usage. So that’s a big assumption in its own right, particularly for emerging markets. Then they layer on some efficiency and other assumptions on, on the ultimate mix, and they say, that gets us to a two degree scenario, and it doesn’t capture, you know, the global inequities. It doesn’t capture the affordability issue. It doesn’t capture the fact that as energy gets cheaper with some of these efficiencies, people tend to use more, which is why I started off by saying it’s actually quite a complex issue that has a lot of layers to it.
James Lawler: (22:50)
So are you generally optimistic or pessimistic?
Salim Samaha: (22:54)
Um, I’m cautiously optimistic. Part of me is pessimistic because it’s a global problem and there needs to be, people need to figure out how to share in the burden that we all have as one planet. And we’ve never been very good at doing that. Look at our response to this pandemic. I would argue it’s still not very good. So that makes me very pessimistic. But I also think that we have great technology potential. And I think a lot of smart minds are focused on the issue. So, I believe there will be a breakthrough.
James Lawler: (23:27)
Well, thank you so much, Salim, for taking time to speak with us today, we really appreciate it.
Thank you very much for having me. It’s good to talk to you.
Katherine Gorman: (23:35)
That is it for this episode of the podcast. You can check out our other interviews, watch our videos and sign up for our newsletter at climatenow.com. And if you want to get in touch, email us at contact@climatenow, or tweet us @weareclimatenow. We hope you’ll join us for our next conversation.