With Russia’s invasion of Ukraine recently passing the 100-day mark, energy security has emerged as a dominant market theme. Kim Parlee speaks with Craig Buckley, Director, Private Debt, TD Asset Management, about the conflict’s impact on ESG investing and opportunities in renewable energy.
- Renewable energy and ESG has been in great focus for the past couple of years. But even more so now, with the conflict in Russia and Ukraine, a lot of people more focused on where their energy is coming from and what the source of that energy is. Craig Buckley is Vice President Director of the TD Asset Management Private Debt team. They've been working in this space for quite a while now. He joins us now.
Craig, we'll talk about fundamentals in a second. But really, the conflict with Russia-Ukraine has really put this in the spotlight.
- Yes, Kim. The recent tragic events in the Ukraine really brought shots in focus on the source and use of fossil fuels. We're seeing huge economic impacts, rising gas prices, rising oil prices, none felt more so than in Europe. And Germany was actually producing offshore wind power at economically viable prices even before the recent rise in prices. So the technology is there.
On a more global basis, 90% of the world's power still comes from nonrenewable sources. So there's a long, long way to go here.
- Well, let's talk about that. That long, long way is why I think the fundamentals interests you so much and the 90%. So maybe just take us through the fundamentals and why you see such an opportunity in renewables.
- Yeah. I mean, firstly, there's a real need. We've talked about that small topic of geopolitics. Climate change is real. It's here. And these projects are really needed to address those challenges. I find the topic interesting. I worked in the sector for almost 15 years. And I've seen projects balloon in size-- so individual turbines now producing 10 times the power that they used to.
From an investment perspective, these projects require significant capital outlay upfront. And they repay over 20, 30 years, sometimes longer. Private debt is an ideal source of capital to address the capital needs for these projects.
- So Craig, the turbine example is fascinating, just to think that you can have one turbine be 10 times more efficient. What are some other examples of the kinds of projects that you've been working on?
- Yes. So personally, I've worked on offshore wind, onshore wind, solar fields of farmers' fields of solar panels and ground-mount solar and more urban rooftop solar projects. A couple of examples-- firstly, the largest offshore wind project in the world. This is the Hornsea Offshore Wind Project 100 kilometers off the east coast of the United Kingdom.
This is a 1.2-gigawatt project that was developed by the largest offshore wind developer in the world, a Danish company that's been doing this for more than 25 years. They're a great partner for a complex project. Very windy part of the North Sea, obviously. So that's great for the project. And that actually now produces 1.2 gigawatts, which equates to over 1 million homes in the United Kingdom powered by that one project. So by any means, that's a significant portion of their needs.
Much more close to home, we've worked on solar portfolios on the top of buildings. So top of buildings-- not really used for much. Solar panels on there, power is produced locally right where it's needed. So a bit smaller but both very interesting projects.
- I would think the logistics involved-- I think about even rooftops as an example, like being allowed on the regulatory side, municipal permissions, just everything. It's got to be a complexity in doing a lot of this right now. So what are the challenges that you look out for when you're doing this type of work?
- Absolutely. We talked about the turbines producing 10 times the power that they used to. This is huge technological advancement. So we spend a lot of time working with engineers to understand the technology.
And on that front, we look at where the turbines operate, all of the solar farms operate. So this would be different climates. So you can have icing on blades. You can have snow coverage on panels. All these things can stop the technology from working, which means the power is not produced, which means there's financial risk to the debt repayments. So we have to work with engineers. And we work on financial structuring and technological mitigations to get around some of these challenges.
Also global supply chain issues we've seen a lot about in other industries. And this is not immune to that. Working with developers with a big pipeline of projects is one way to mitigate that risk.
- Craig, can we talk a little bit about from an investor perspective what people can expect?
- Yes. I think you can expect bigger yields than the equivalent public fixed income. But I say that also in the context of these being long, strong, stable investments. So we typically deal with government counterparties, with strong utilities, with large corporates, so very stable, long-term investments over the long term in what is a very, very volatile environment, particularly recently. So I think we pride ourselves on the stability of our returns.
In the ESG front, I think I'd just like to mention that. We do do ESG analysis on all of our investments. And that's an important piece of our analysis. Our outcomes look pretty good, I would say.
So we do invest in social infrastructure. We invest in energy-efficient buildings, in vehicle displacement projects. But renewable energy, which is a big part of our book and what we're talking about here, doesn't get a lot greener than that. And I think this is absolutely essential, the investment here on the goal to net zero.
- One of the things I think is really interesting for people right now is, just given everything that's going on in the world, the outlook for renewables and the fundamental structural change that's going on is really compelling. Tell us what you see in terms of outlook.
- Yes. So in the short term, I see bigger and better. We talked about those bigger turbines. I think the existing technologies work. And there needs to be significant investments for solar and wind in the short term.
If you'll indulge me for a minute, I'll talk about a few new technologies we're keeping our eye on, firstly hydrogen. So hydrogen-- burn that, if you remember from your chemistry classes, you get water as the output. That's pretty good from an environmental perspective.
Secondly, battery-- so we're not talking about Elon Musk's car batteries here. We're talking about big, utility-scale batteries that would sit next to a wind farm. And when the wind's blowing during the night, it's not needed, can be stored and used the next day. So that's a really powerful tool in terms of the goal to net zero to improve that efficiency.
Nuclear is an interesting one, quite divisive. But I'd see this as smaller, more modular nuclear. And as long as that can be developed safely-- and it's under development significantly at the moment-- I would see that as a really important part of the puzzle here.
- Great conversation, Craig. Thanks so much for joining us.
- Thanks, Kim.