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The BID

Is the sun setting for fossil fuels?

Esta semana com o David Giordano, head global de energia renovável da BlackRock

Pense na última vez em que você trocou uma lâmpada, carregou o celular ou cozinhou. De onde veio essa eletricidade? Cada vez mais, a energia é proveniente de fontes renováveis, como a energia eólica e solar, em vez de combustíveis fósseis. Quanto mais pensamos no impacto da sociedade no meio ambiente e no clima, mais difícil fica ignorar as energias renováveis.

Neste episódio de The BID, David Giordano, head global de energia renovável, fala sobre o momento decisivo para a energia renovável e por que o mercado está pronto para essa revolução.

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    Oscar Pulido: Electricity is a little bit like the air you breathe: You don't really think about it until it’s missing. When you switch on a light, charge your phone or cook your food, you’re using electricity. But do you ever wonder where it comes from? How it was generated or how it got to your home? Increasingly, that power is coming from renewable sources like wind and solar power. We’re moving away from coal and fossil fuels to cleaner energy sources. And as we focus more on society’s impact on the environment and our climate, renewable energy is becoming harder and harder to ignore.

    On this episode of The BID, we’ll speak to David Giordano, Global Head of Renewable Power and the Chairman of the Board of Directors for the American Council on Renewable Energy. We’ll discuss what’s going on in the renewables market today and what it means for us as members of society and as investors. I’m your host, Oscar Pulido, we hope you enjoy. David, thank you so much for joining us today.

    David Giordano: Thank you so much for having me, Oscar, it’s great to be here.

    Oscar Pulido: So David, let’s start with the basics. When we say renewable energy, what exactly do we mean by that?

    David Giordano: It’s a great question, and when we’re talking about renewable energy, what we’re really talking about is harvesting the wind, harvesting the solar insulation, the power from the sun, and then transforming that from that raw resource into electricity. We can also do this with hydro plants, do this with geothermal, but the most common technologies out there, are wind and solar.

    Oscar Pulido: And how has the renewable market grown over time?

    David Giordano: As you think about power generation in the developed world and the United States specifically, two-thirds of our power generation comes from the fossil fuel technologies, coal being included in those technologies. This is shifting over the next thirty years to renewable power, but the real sort of inflection point where we industrialized renewable power happened kind of in the early 2000s. I think that's when you really saw that revolution from kind of a niche generation technology into something that was on the track that gets us to where we are today, where renewable power is a mainstream source of power generation. As I think about the technology disruption in electricity generation, I think a great example of that is if you look at telecommunications and the telephone. If you go back to sort of the original Alexander Graham Bell telephone and you think about what an iPhone looks like today, they’re almost unrecognizable. It’s a completely different form of technology. And you see what’s happened in the developing world where many countries and many regions essentially skipped the landline and went right to mobile technology. Well, now take us to electricity and imagine Thomas Edison walking around New York City. He might look up at a transformer hanging downtown in Manhattan and think that it was one that he hung. If you took somebody to a coal-fired power plant, yes, it will have new emissions controls and new systems around it, but it’s essentially the same basic technology. We hadn’t had that kind of disruption in the power generation world until we really began to see the industrialization of renewables.

    Oscar Pulido: So it’s interesting because everywhere around us, it seems like industries are being – you used the word “disrupted” – but you’re saying it really hasn’t come to the power generation market yet, and why is that? Is it because of cost? What is it that has prevented the power generation market from experiencing the type of disruption that has hit other industries?

    David Giordano: I think it’s really two-fold. I think on the one hand, it’s a very high barrier to entry from a capital standpoint to transform that infrastructure, and it’s a very difficult part of the infrastructure equation to do piecemeal. So say unlike telecom, which is a highly regionalized opportunity, with electricity you’ve got to make some major changes. Power plants are one of the essential physical infrastructures that creates this centralized input of electricity into a very old transmission and distribution system, and it’s really kind of the first 1.0 if you will of the power generation infrastructure, transmission, and distribution. The wind blows in places that you wouldn't put a coal-fired power plant, so that changes the need for transmission and distribution.

    Oscar Pulido: So that is an interesting point. When you talk about renewable energy and wind and solar – and this might sound like a silly question – but what happens if the wind doesn't blow or the sun doesn't shine? Do we not have power? How does that get accounted for in a transition to renewable energy?

    David Giordano: Yeah, it’s a key aspect to this energy transition, and the intermittency is the primary criticism and challenge of the transformation. First and foremost, natural gas is going to be a huge part of the transition to how power is generated here in the United States and I think across the developed world. You know, the biggest enemy to coal-fired generation is really not renewables. It’s natural gas. Natural gas is cheap, it’s efficient, it’s low emission. So that's one piece to it. The other piece is the continued growth and proliferation of storage, and right now we’re seeing lithium ion battery storage as the primary technology to be able to have dispatchable power as needed, 24 hours a day, 7 days a week. You draw upon the battery to use electricity when you’re not getting enough power from your renewable source, whether it be wind or solar, and so that's the way that you kind of balance out the supply and demand. The next leg of that stool I really think about is just being smarter about how we consume power. And so right now there’s very few places where an end user is actually encouraged to modify behavior around an efficient use of power being generated, whether it be from renewable sources or any other source.

    Oscar Pulido: You talked about natural gas, you made mention of lithium ion batteries, so just take a step back again and help us understand. There’s the traditional coal-fired power plant, and I’m picturing that as a piece of infrastructure, and help us understand what that infrastructure looks like as we shift to a world where there’s more renewable energy.

    David Giordano: One of the things to think about is you think about centralized power generation that requires a feedstock fuel. Let’s just sort of stay generic with it, right? First and foremost, you’ve got to be located at a place that is centralized for the delivery of that feedstock fuel, so you’ll see a lot of coal-fired power plants along rivers, right, so barges bring coal in. For a natural gas-fired power plant, you’ve got to be on the gas pipeline, the interstate gas pipeline system. Piece two of it, which is an important one as well, is access to water. The most efficient power plants are water cooled, not air cooled. You can air cool some gas-fired power plants, but the water cooling makes for a much more efficient power plant, but it requires a healthy access to water. And then you’ve got the transmission system, which those are the big lines that you see that are carrying massive amounts of electricity over longer distances, and then you get into the distribution which that's really more about the load centers and the end users. So now switch your thinking to what renewable power projects look like. Now, you’re on higher elevations where you can harvest the wind, where you’re going to have more consistent wind, so that's putting you in a very different part of the country than you would, say, for traditional fossil-fired generation. And then that means you need a different transmission infrastructure to support that centralized power generation. And then you go to the distribution level where you start to see power generated on site by a solar array let’s say. Now you’ve got a very different need on the distribution system. It needs to be two-way, so that when you’re generating more power than you’re using on site, you have a way to get that out into the grid to users that need the electrons.

    Oscar Pulido: And you touched on, it’s different parts of the country –

    David Giordano: That’s right.

    Oscar Pulido: – where the infrastructure might live just because of the elements that you need around you for it to succeed.

    David Giordano: Yeah. What state in the U.S. do you think generates the most renewable power?

    Oscar Pulido: I’m picturing wind turbines somewhere in the Midwest, so I’m going to say Nebraska.

    David Giordano: It’s actually Texas, so from sort of a political perspective, I think it’s interesting to think about, you know, Iowa gets 33% of its power from wind. It’s parts of the country that frankly in the past didn't see that kind of economic development and now are really at the forefront of the energy transition, and it’s bringing not just electricity and not just cheap electricity but it’s also bringing jobs along with it as well.

    Oscar Pulido: So if Texas generates the highest amount of energy from renewables, I’m picturing obviously there’s a lot of land there, open land where they can put wind turbines for example, but could you do that in a part of the country that's more densely populated like the Northeast for example?

    David Giordano: So the first opportunity is really just continued developments in technology. There are technologies out there already that are being worked on like thin film over windows of skyscrapers that are essentially solar panels, roof tiles that are also capturing solar energy. One of my favorite gadgets that I use when the power goes out are some light bulbs that have little solar panels on them and that store it up in a small battery and make light. And then the other place is offshore, especially here on the East Coast and especially here in New York. Long Island is perfectly situated for offshore wind. The water depth is right, the wind resource is right, and you’re offsetting some of the most expensive retail electricity prices we have anywhere in the country.

    Oscar Pulido: And so if I think about an economy that's moving to renewable energy, I start to think about something like electrical vehicles, but what else, what other technologies are out there that we will start to see and that will start to impact our lives as an economy transitions to renewable energy?

    David Giordano: You’ve touched on the biggest one, right, which is going to be electric vehicles, and that's going to be a huge driver also in lowering the cost of battery storage because the technology used in electric vehicle batteries is the same that’s used for large centralized battery storage. The next place is just what they’re calling kind of the electrification of things, and so just more things that we do day-to-day with other sources of energy we’re going to start to do with electricity because a) it has zero emissions and so that's a positive, but also b) the economics that drive it. It is the cheapest source of new energy, it’s the fastest-growing source of new energy, and so we’re going to see more things that we do transition to being driven by electricity. 

    Oscar Pulido: So if the industry is at a tipping point, what will be the driver that will ultimately turn it on its head?

    David Giordano: The main driver will be the economics. The cost of solar power has come down 80% over the past 10 years. The cost of wind has come down about 46% over that same period of time. In many countries today, wind and solar are actually the cheapest form of new power to go into the grid, United States included by the way. And the other thing to remember in that transformation is the average age of a coal-fired power plant is over fifty years. The average age of a nuclear plant is over thirty years. Just the simple cost of operating a piece of equipment that old means it needs to be replaced, and it’s going to be replaced with the cheapest option available. The other driver is just the demand for power coming from end users. You see individuals looking to add solar in particular but solar and storage, either in their community or directly on their own properties, and so these are big, big drivers of that transformation as well. And then finally, it’s just at the policy level. You’re going to continue to see policies that facilitate the energy transformation. I think they very well will transition to be technology-agnostic, and that takes us back to the beginning of this conversation which is the economics.

    Oscar Pulido: With everything you mentioned, why aren’t we all using renewable energy at this point?

    David Giordano: There’s two big barriers to the transition. First and foremost, it’s just the supporting infrastructure, but secondly it’s just the high upfront cost. There’s no cost for fuel when it comes to a wind project or a solar project, but the counterbalance to that is a higher upfront capital cost. The challenge becomes then folks that can’t afford that kind of generation end up bearing a disproportionate amount of the cost of the existing grid, and so as we think about that transition, we’ve got to also think about a way in which that happens where not only the folks that can afford it end up with renewable power. 

    Oscar Pulido: And what role does government play in this? How could federal policies in the U.S. affect the growth of renewable energy?

    David Giordano: It doesn't have a direct impact. I think an important thing to remember in the United States in particular is that there really isn’t a federal energy policy that then gets granular down at the actual implementation level. It’s much more of bottoms-up industry. So for something like off-shore wind, the federal government will play a more direct role because they are going to control the permitting of off-shore wind projects, so if you have an administration that is not excited about more off-shore wind, you could see that maybe not having the same velocity as it would under other administrations. But really the bigger drivers are going to be state level policies around it. We have over thirty states in the United States that have targets for renewable energy. And you do see some waxing and waning at the local levels around renewables, and renewables don't come at sort of zero societal cost. I mean they change viewscapes, they have a different impact on wildlife depending on where they’re located. And so as we see that transition, it’s going to be really important I think as an industry that we stay very focused on the social and governments component to the ESG just because the environmental piece is so compelling when it comes to renewables.

    Oscar Pulido: And are there countries outside the U.S. where you see the federal government playing a bigger role in enforcing the growth of renewable energy?

    David Giordano: Absolutely. In Europe for example, the EU has hard targets with real teeth behind countries missing their targets, and so that's a place where you see that kind of centralized approach to facilitating renewable power investment as being one of the main drivers, and that's why I think you see a much more mature renewable energy infrastructure and industry in Europe. China is another place where again we’re seeing on an absolute basis the largest amount of growth that's happening there, and that's because it’s being mandated down from the federal government. So under a different construct, the federal government plays a huge role, but here in the United States it plays a much lesser role.

    Oscar Pulido: So you’ve given us a good background of this transition to a renewable energy economy, some of the impediments that we might have along the way, but ultimately some of the benefits that we could feel, so let’s transition to thinking about from an investor’s perspective. You’re the Global Head of Renewable Power at BlackRock, and how do you think about investing in renewable energy?

    David Giordano: I think about it all day every day.

    Oscar Pulido: I’m sure.

    David Giordano: I think what was attractive about this strategy back in 2011 when we launched it here at BlackRock was that it’s a space that has a lot of growth potential, as you think about 9 trillion dollars of infrastructure investment around the energy transformation to renewable power. I think the other thing about renewable power investing is that it requires very specific skillsets just in terms of underwriting investment opportunities, you know, the technological issues are specific to the industry, also the measurement of resource and really understanding how that resource is going to behave over time and how that then translates into an investable opportunity if you will. I think the other thing about this space is that it’s evolving, and that there’s going to be changes that are fundamental, that are disruptive, to go back to a word we used earlier in our discussion, and that is where we see real opportunities for attractive risk-adjusted returns for our partners in the space.

    Oscar Pulido: I picture an investor who is used to opening up the financial statements of a company and thinking about an investment in that sense, and there are certainly companies that are involved in renewable energy that trade as stocks and which you could pursue the analysis in that way, but there’s also I’m picturing people who have to do a completely different type of due diligence when they’re looking at a renewable energy project, which is maybe visiting a piece of land and understanding, I don't know, how fast the wind is blowing for example. Is that the right way to think about it?

    David Giordano: Yeah, it really is the right way to think about it. I mean early on in the industry, you used to go around and look for where the trees grew bent because the wind blew so hard. We’ve gotten a lot more sophisticated with the science in terms of measuring the wind and then forecasting what that's going to look like over the life of the asset, which is thirty years plus or minus. And so it becomes a very specific and self-learning model around measuring the resource, measuring the way in which the equipment is going to transform that resource into electricity, and then the efficiency with which that electricity is going to get delivered to the end user, and really thinking about that kind of holistically is the big driver in evaluating the risk associated with one of these investments. Because at the end of the day, the way that this investment is not going to go well is going to be primarily because you didn't produce the number of kilowatt hours that you expected when you made the investment.

    Oscar Pulido: So if fossil fuels were Electricity 1.0 and what you’ve discussed with renewables is Electricity 2.0, what does the future look like? What does 3.0 look like?

    David Giordano: I think it comes down to kind of three main factors. The first I’d say is flexible supply, so again it’s that movement from just a fully centralized power generation strategy to transmitting the power from the renewable sources, but also locating the power generation closer to the demand centers. I think the second piece of it is flexible demand, and so getting smarter about how we use electricity on a day-to-day basis. If it’s cheaper to use wind power at night, we shift operations, whether it be at the home or whether it be in the commercial and industrial world, to that time of day to where we can get the cheapest, most reliable power. And then finally, it’s the decentralization of the grid in general and going more to micro grids so that we’re able to really take advantage of the inherent benefits of a localized power supply and end user of electricity.

    Oscar Pulido: So while maybe this industry hasn’t been disrupted as much as others in the past, it certainly sounds like we’re on the precipice of something, and I’m going to be looking out for trees that are slightly bent as a potential site of a good investment in renewables. That was one of my key takeaways from listening to your comments here.

    David Giordano: You would have made a great wind power analyst in the nineties.

    Oscar Pulido: Alright. What we usually do here at the end, David, is we end with a rapid-fire round, and we’ve been talking about the shift happening in energy so I wanted to ask you about the shift that's happening in other industries. I’m going to ask you whether you think the following statements will happen in five, ten, thirty years, or never. Are you ready?

    David Giordano: I’m ready.

    Oscar Pulido: Okay. Brick and mortar is replaced with 100% online shopping.

    David Giordano: I might come across a little old-school here but I’m going to say never. I am going to say that we’re going to shift more to experiential shopping, but I think the idea of being in a store, interacting with the staff there, I don't think that's ever going away so I’m voting never.

    Oscar Pulido: I tend to agree with you on that one. Corporations shift to a four-day work week.

    David Giordano: That's a tough one. I think that's it’s not ever going to be officially a four-day work week, but I do think the flexible hours is going to not just be something that we talk about, it’s going to be something that we do, and it really plays into our whole conversation today, right? It might just make more sense to have all these computers going at night, and we know we all have plenty of friends that are night-owls. You know, I’ve watched my son play Call of Duty all night plenty of nights as he’s grown up, so I’m sure he could be a candidate for a night shift computer job. 

    Oscar Pulido: So I know you’re from Philly: when will they win the Super Bowl again? Again five, ten, thirty years, or never?

    David Giordano: That's a hard one because up until two years ago, the answer was never, and I think that there’s a lot of people that would still vote for never, but I like where Carson Wentz and Doug Pederson are, so I’m going to say that's within the next three years.

    Oscar Pulido: Okay. As of the 2016 census in the U.S., over 76% of Americans drive alone to work every day. Only 5% take public transit. When will we see a day where more Americans use public transportation instead of cars going to work?

    David Giordano: I don't know that we’re going to go that direction. I think that we’re going to get to a place, though, where those numbers turn on their heads in terms of ownership of vehicles. I think that we’re going to see less and less people actually just owning their own car, and I think that's where that big shift is going to happen. 

    Oscar Pulido: Do you own your own car?

    David Giordano: I am about to go carless, so I am trying an experiment. Beginning at the end of this month, I will be car-free for the first time since I was 16 years old.

    Oscar Pulido: Alright, I’m sure you’ll survive. David, thank you so much for joining us today on The Bid.

    David Giordano: Thank you so much for having me, Oscar, it was a pleasure.