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Riding the $100T Renewables Infrastructure Wave

April 26, 2022

Setting the stage for renewables growth

In 2015, the monumental Paris Agreement established a global framework to deal with the ramifications of climate change. Nations came together and acknowledged that we have a real climate crisis, and that a plan must be put in place quickly in order to reach our carbon neutral target by 2050. It also provided the impetus for the massive growth in the renewable energy sector around the world, with individual countries having used it to varying degrees to kick-start the movement.

A few years later, the COP26 Climate Summit in Glasgow established that while it’s necessary to have a plan in place for the next three decades, it’s critical that strict interim targets be set from now until 2030. It was a call from the United Nations down to individual governments to figure out what it will take to set the wheels in motion and accelerate change by the end of this decade. In essence, it added considerable urgency for the decarbonization movement to establish some nearer-term goals.

Based on the best available data from the International Renewable Energy Agency, our research team estimates that the total dollar value of infrastructure commitments from now until 2050 is equal to $100 trillion—with approximately one-fourth dedicated to renewable generation capacity and the remaining three-quarters to grid infrastructure and modernizations.1

The drive for change will come from governments around the world, who will work directly with companies to implement the necessary actions. However, a country can only deliver so much by itself, and hence they must work in lock-step with the private sector as well. From our perspective, we’re seeing both of these trends happening now – with nine of the top ten largest economies in the world committing to net zero by 2050, and large-scale owner-operators of renewable assets creating targets that mirror those from COP26. It’s only when companies take more concerted action on their climate commitments, and governments devote sufficient resources to the problem, that net zero becomes an achievable goal.

A plan needs to be put in place quickly in order to reach our carbon neutral target by 2050.

The economics of renewables

The move towards decarbonization aims to address the lowest hanging fruit first, which in this case is the dirtiest of all fossil fuels: coal. Once existing coal plants are shuttered, countries will then need to tackle the more pervasive sources, such as oil and natural gas, replacing them with renewable options like wind and solar energy, battery storage, electric vehicles, etc.

In fact, we can remove a lot of carbon over the next 10 years, in part by the implementation of CCUS (carbon capture, utilization and storage) technologies, along with investing in new wind and solar to replace the legacy energy sources. However, with demand for energy only getting stronger, we will need to maintain some existing resources, such as nuclear power and natural gas, in order to bridge the gap to fully clean power. The more challenging issue will be how we effectively transition an energy grid used to baseload power from fossil fuels to one based on intermittent use of wind and solar to one that incorporates storage where renewables provide the baseload power. To make this a viable solution, both storage capacity as well as its cost of development must improve.

What’s extremely enticing is the fact the cost curve for both wind and solar has decreased substantively over the past decade due to technological innovation, heightened demand and, in the early stages, government support. It’s now possible to build a wind or solar plant at a very competitive internal rate of return (IRR), with a lower capex relative to a comparable fossil fuel plant, while also offering consumers a cheaper price2 Best of all, this is now possible in the absence of subsidies or tax incentives, which have become virtually unnecessary in the wake of growing demand.

What’s extremely enticing is the fact the cost curve for both wind and solar relative to fossil fuels has decreased substantively over the past decade plus.

More recently, we’ve seen a material connection between the price for fossil fuels and broader power prices, with both moving in lock-step more often than not. Although this might imply a negative for renewables, the opposite is in fact the case.

That’s due in large part to the lower costs today to produce renewable energy, which provide a competitive advantage when natural gas prices are rising, making the case for renewables all the more compelling. And though supply chain issues have also impacted the renewables industry, the price increases are nowhere near to the same degree as commodity pricing surges over the past six to nine months. The more predictable and stable pricing structure for wind and solar energy presents an added financial incentive to kick-start this shift, further accentuating the argument in favour of renewables.

Deep dive: BMO Brookfield Global Renewables Infrastructure Fund

In managing this fund, we employ a bottom-up strategy focused on listed securities that own and operate real assets. These companies should ideally have sufficient market share within their respective niches to give them pricing power, which will help insulate them from inflationary pressures.

What differentiates the BMO Brookfield Global Renewables Infrastructure Fund from traditional clean energy strategies is our focus on infrastructure, and on our belief that power generation is ground zero for decarbonization. We believe this issue needs to be addressed first before we can do anything else. We’re buying companies with competitive moats that have recurring revenue streams and strong cash flow over multiple decades – 10 to 30 years, in fact. These securities deploy capital accretively to create further value, offering institutional investors a better risk-reward trade-off over the long term.

A Renewables Success Story

Orsted, a global powerhouse in renewable energy, is an example of a true success story. We were attracted to the firm’s offshore wind farms in the UK, which is the best proof-of-concept, so far, that offshore wind can generate consistent production power closest to the baseload over a longer time horizon. It has scaled very quickly from a technology and efficiencies perspective, and while all of Europe has recently been a good adopter of offshore wind, the UK market has really embraced it, enabling them to zero out coal production across the country.

When investing in renewables infrastructure, we abide by our “Three Pillars of Sustainability in the Power Market,” which prioritize decarbonization, equitable access, and reliability and resilience as core tenets we actively support with action. Other key elements of our investment strategy include:

  • Limited exposure to manufacturing companies: Many of these firms don’t have a competitive advantage, and will struggle to remain profitable over the long term. Conversely, renewable infrastructure offers greater long-term revenue and growth potential, inflation protection with the ability to be a dominant player.
  • Investing across the electric grid spectrum: We’re investing in companies building new wind and solar farms, as well as companies that are stewards of the grid building new transmission and distribution infrastructure to control the node centres of supply and demand.
  • Choosing to be benchmark-agnostic: While the FTSE Global Core Infrastructure 50/50 Index is our benchmark, it’s not representative of our fund, as we are focused solely on renewables infrastructure that is almost entirely off-benchmark, whereas the benchmark includes several companies that don’t pass our screening.

Another strength of our team is the ability to leverage our relationships with the broader Brookfield organization, tapping into their localized, “boots on the ground” expertise to provide us with a deeper understanding of global markets. The enhanced knowledge sharing provides insights on public versus private markets, enabling a more informed decision-making process for listed securities.

Renewables as a global phenomenon

While the Paris Agreement and COP26 were critical milestones, the major work needed to reach net zero emissions still lies ahead. At present, no country can honestly claim they’ve made significant progress toward full decarbonization.

Europe and North America currently present the most enticing opportunities for institutional investors, no doubt due to their market size, leadership position and broad social awareness of ESG. As such, the portfolio is tilted toward companies based in these geographies. We find that emerging markets will likely exhibit much slower adoption and growth for renewables simply because they still have so much infrastructure to build.

Every country has a long way to go in moving away from fossil fuels and towards more sustainable renewables as their primary energy source. With $100 trillion in global investments required over the coming decades through to 2050, we believe that renewables infrastructure is a powerful megatrend that will continue in the coming years and decades.

1 Brookfield Public Securities Group LLC, International Renewable Energy Agency. As of December 31, 2021.
2 Ibid.

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