The renewable revolution

Edwin Conway:   Thank you, Zach.  I’d like to thank my esteemed guests for joining me today.  I really can think of no two better people to have a conversation with about the future of energy.  You know, we do all know, and we’re very aware of the energy transitions alive and well in both developed and emerging economies, and we’re seeing a tremendous amount of innovation and a relentless pursuit to introduce new forms of energy into this world, and tomorrow’s power generation will be very different from yesterday, and I’m very excited about the conversation we’ll have today with my two esteemed guests who are really our industry experts in this sense.

First, we have Jim Robo.  He’s Executive Officer of NextEra Energy and also Chairman of Florida Power & Light.  NextEra, as you know, is the largest provider of electricity in the United States, and the worlds largest generator of renewable energy from wind and solar, and certainly, world leader, too, in battery storage.

It’s also been a leader in both conventional and renewable energy sources.  As an example, NextEra Energy has been recognized for its efforts in sustainability, of corporate responsibility, ethics, compliance and also diversity.  They’ve also been ranked number one in the electric and gas utilities industry on Fortune’s 2019 list of worlds most admired companies, and also ranked among the top 25 on Fortune’s 2018 list of companies that changed the world. 

So, well deserved accolades for Jim and all the work he’s done in that industry, and Jim, thank you, again, for joining us.

We also have with us today Mark Florian.  Mark leads our BlackRock global energy and power infrastructure team. 

Mark was previously a partner at Goldman Sachs, had a 22-year career at that firm … BlackRock.  So, gentlemen, thanks so much for joining us … we’ll get into the Q&A. 

Jim, if I can start with you.  The energy revolution comes across as though wholesale changes are occurring in the energy market, but in reality, 95% of energy consumed today actually comes from traditional sources.  It would be really interesting to hear how quickly do you think adoption will occur, but also, how soon do you project fossil fuels to represent the minority of energy consumption, not the majority?

Jim Robo: So, Edwin, our view on this, first of all, renewables are really exploding in terms of demand that we’re seeing in the US right now.  Our view is that you will see—you know, you’ll see at least 30% of electricity generated by renewables in 2030 if nothing changes, and if government policy becomes more favorable, I think you could be easily over 50%.

The economics of renewables are more compelling right now than fossil fuels are.  You know, our view is without subsidies, wind and solar combined with battery storage without a subsidy, new projects that are wind and solar and batteries without a subsidy are cheaper than the operating costs of existing coal and nuclear plants right now.  So, it’s just a matter of time permitting and the ability to get that infrastructure put in place to see fossil fuels be the minority of electricity generation in the country.

Edwin Conway:   Maybe, Mark, over to you next, because we’re dealing with a demand supply function that is standard around demographics and population.  What are some of the themes that you think about when investing in the future of traditional energy?

Mark Florian: Thanks Edwin.  I think the biggest theme that Jim was talking about is the drive towards cleaner energy in the future, and we’ve actually invested heavily in that theme.  About a third of our portfolios, as an example, are in wind and solar power plants, but there are some other big macro themes that we think about in terms of the world and where we’re heading in terms of energy.

The first is just the growth in energy demands.  Right now, we have seven billion people in the world.  That’s expected to be about nine billion people by 2035.  So, another 20% more people around the world demanding energy.  In addition, income per capita has been going up around the world, particularly in developing markets where the economies have been growing

we need to be cognizant of a couple things that you actually just mentioned.  One is the demand for cleaner energy, but also, we need energy 24/7, 24 hours a day, seven days a week, and we want it to be inexpensive, as Jim was mentioning, so everybody has access to it readily. 

Edwin Conway:   So, Jim, NextEra now has 119 wind projects in operation across 19 US states and four Canadian provinces, which provide homegrown, affordable energy to, and economic benefits, to local communities.  There’s clearly additional focus on the environmental impact that your business is directly addressing, but also the socioeconomic impact to communities you operate within.  Could you share your thoughts on what energy consumers and investors should be considering as they look to join the energy revolution?

Jim Robo: So, I think that one of the key things that both investors and consumers need to think about as they look at the energy revolution is, you know, what are the sources of the energy they’re consuming?  And more and more we’re seeing our customers, consumers, investors having a perspective that they want their energy generated in an environmentally sustainable way, and that really is, I think, a big megatrend , and one of the things that has been a hallmark of our strategy as a company over the last 20 years has been to be on the forefront of that megatrend that’s going to happen over the next two decades.

Edwin Conway:   And so, Jim, the technology is really at the intersection of the energy revolution.  So, for example, smart grids, storage and hydrogen.  Now, we know storage is the Holy Grail of the energy transition and NextEra has been a leader in this space.  What are you paying most attention to in terms of R&D?

Jim Robo: So, two things on that, Edwin.  One on the battery storage front.  You know, we started looking at battery storage almost a decade ago, our approach is a toe in the water approach, and next year we’re going to invest a billion dollars in battery storage projects in the US.  And so, you know, these infrastructure technologies take a while to mature and to come along, and so, right now what we’re seeing is the same opportunity in hydrogen. 

Mark was talking about natural gas fire powered plants and how important they are as a part of the mix.   I think very quickly, probably by 2030, 2035, 2040, you’re going to see hydrogen as the fuel rather than natural gas, and the economics of hydrogen are getting better and better every year, just as we’ve seen happen in the wind business and the solar business and the battery business.  Technology gets better every year, the economics are getting better every year, and so, we have a big focus right now in both storage and a very nascent but expanding focus in hydrogen as well.

Edwin Conway:   Very interesting, Jim.  Thank you, and certainly, I know we’ll definitely provide more information on hydrogen through BlackRock channels as well in the future given its prevalence.  And Mark, maybe back to you very quickly.  The public markets have endured a great deal of disruption from COVID, and particularly in the energy market.  We’ve seen credit spreads that widened, and many energy names are, and they’ll continue to be challenged. 

at the same time opportunities quickly went away, what kind of companies are you working with, and how do you assess the risk profile of these companies?  And also, aligned to that, what is unique about these deals?

Mark Florian: That’s a big question Edwin.  Thank you.  This has been an extraordinary time in the capital markets.  We all experienced a massive plunge in the market in March, but the snapback in the capital markets happened much more quickly than we’ve ever seen during any economic crisis in the past many decades

Our longer-term investment themes, a lot of which we’ve been talking about, are really, really important to think about.  We’ve been intensifying our focus on a couple of key parameters that we’ve always thought about with regard to our investments but are even more important in a volatile and uncertain market like we have today.

The first thing is the resilience of our investments.  We want to invest in portfolio companies that no matter what’s happening in the markets, these companies are going to continue to drive cash flow on a consistent basis that we can deliver in terms of dividend yield and also on the returns to our investors. 

That means we really want to avoid commodity price risks in today’s market as one example.  We want businesses where we can get long-term contracts for revenues that provide certainty in terms of our revenue streams over time

The second key parameter is essentiality.  How important is our business to our customers at the end of the day?  If our business is very important to them, it doesn’t matter what’s going to happen in the market, they’re going to continue to demand our services and will continue to have revenues. 

Maybe I’ll just give you one quick example, next week, actually, we’re closing on an investment in Spain.  It is a pipeline that provides 20% of all the natural gas into Spain for the country.  the interesting think is we have long-term contracts from utilities that are demanding the natural gas that come through our pipelines, so we have that resilience in terms of that revenue certainty that those contracts provide.  Plus, this is an absolutely essential infrastructure asset for the country.  The natural gas demand in Spain is actually not just for electricity, it’s for heating and it’s also for industrial purposes, and so, it’s a more diverse set of end uses and it ultimately provides us a lot of resilience because that is always going to be demanded. 

Edwin Conway:   Great.  Mark, well thank you, and Jim, also thank you for your leadership certainly in this industry.  Tremendous amount of change of thought, and we’ll love to follow the innovation that you’re in charge with, and hopefully as BlackRock participants in this market, create change as well.  It was really interesting to hear your perspectives.  The massive transformation of the energy industry is not going to happen overnight.  We collectively know that.  This is going to require technology, innovation, and moreover, pioneering leadership.  These are aspects which BlackRock is absolutely committed to share in common with organizations like NextEra, and I hope we’ll have many opportunities to work together.

Listen, we heard both of you talk about the important investment themes that are driving the transition.  We actually believe that navigating the energy transition from disruption to growth is really not an easy road, and the threshold to accessing opportunities to participate in the transition can absolutely be simplified by leveraging investment expertise in this category.

So, for the institutional investors that have joined us here today, you know, we look forward to continuing the conversation and we hope that you join us on this journey together.  Jim and Mark, I really sincerely thank you again, thank you for joining, and back to you Zach.

Jim Robo: Thank you, thank you Edwin.

Edwin Conway:   Jim, thank you …

Jim Robo: Thank you.

Mark Florian: Thank you so much for doing it Jim.

Jim Robo: Nope, happy to do it, and it’s an exciting time right now.