Words on the Global Energy Transition

In this episode of Words on Wealth, CIO Tim Rocks speaks with Jackie Funder, Associate Director with the Green Investment Group in Macquarie Asset Management, for an insightful conversation on the global energy transition. They discuss the trillions needed to achieve net zero, the surge in demand from electrification and AI, and why renewables are now the most cost-effective power source. Jackie also shares her perspective on Australia’s unique opportunities and Macquarie’s role in driving the shift. Tune in to learn more.

This episode is also available on Apple Podcast. 

Tim Rocks 
Hello and welcome to Words on Wealth. I’m Tim Rocks, Chief Investment Officer. Today we’re going to talk about where we are in the energy transition and some of the macro market implications. And to help me do that, I have Jackie Funder. She is an Associate Director for Macquarie Asset Management’s Green Investments. She’s responsible for a number of onshore renewable investments and worked on a number of renewable projects in Australia and India covering wind, solar and battery. She joined the Quarry in 2014 and previously worked at JP Morgan and Price Waterhouse Coopers. Welcome Jackie and thank you very much for your time.

Jackie Funder 
Thanks, Tim. Good to be here.

Tim Rocks 
All right, well, let’s get into it. Maybe start sort of a big picture macro. mean, the clean energy transition is a major economic driver now already. Feels like it’ll be a big investment opportunity over the next two decades. Do you want to talk me about through those sort of big picture numbers in terms of the size of the investment needed to achieve global net zero and some of those sort of big macro implications?

Jackie Funder 
Yeah, sure. So the global energy transition represents the largest investment opportunity, certainly of my lifetime. It really is truly quite extraordinary. estimates we’re talking are about 150 to 200 trillion US dollars that need to be invested by 2050 to hit a net zero target. So that equates to about five to 7.5 trillion dollars every year out to 2050 or otherwise two to three times the amount that was invested in 2022. So what’s underpinning that opportunity? It’s probably worth just jumping into sort of the demand side and supply side. If we’re talking macro, on the demand side, we’re seeing a rapid increase in electricity consumption. So Bloomberg forecasts that electricity demand is expected to increase by about 75 % by 2050. So what’s driving that? It’s underpinned by growing middle class using more power. And we see this every day, right? Like you see people with two iPhones, kids have iPads, schools now all have air conditioning gone are the days of just opening a window.

Tim Rocks
Yeah, I’m sure air conditioning’s a big part of that.

Jackie Funder 
Yeah, we also see electrification. So what do we mean by electrification? It’s basically changing fuels. So if you think about transportation, electric vehicles not using gasoline, using EVs, or even in your home, hot water systems, going from it being heated by gas to electricity, and the same with industry. So you see industry electrifying, so converting old system like heat pumps from gas to electricity. And then finally, massive energy requirement from data sensors due to the explosion of AI, which I think we’re going to get into a bit more. Yeah. Yeah. On the supply side, if we look at where we’re at today, so 33 % of the global electricity mix is renewables. Again, Bloomberg’s forecasting that that’s going to increase to 67 % by 2050. And we are expecting the increase in demand to be met largely by renewables. Historically, that was driven because of sustainability agendas as corporates and governments were working towards net zero. However, we are seeing now that as demand for electricity surges beyond supply, there’s a shift in primarily driven by energy consumers wanting to seek and secure the cheapest and fastest source of electricity. So a really good example of that is last year, 75 % of corporates that entered into renewable power purchase agreements. So that’s the contract to buy the electricity offer project. 70 % of those corporates were not signatories to RE100. So this suggests that they’re not being driven by a desire to hit some sort of ESG goal, but potentially because it’s the most economically rational solution to meet their energy needs. So if I go back to the macro, we’re seeing increase in demand and the solution to sort of meeting that increase in demand on the supply side is being underpinned by the most cost effective, fastest solution, which is renewables. And so that’s really what’s driving the investment opportunity.

Tim Rocks
Yeah. And did you want to do you mentioned that ⁓ cost relativity for renewables versus the rest? Do want to expand a bit more on that? So that’s solar and wind effectively being cheaper now than coal?

Jackie Funder 
Yeah, yeah, that’s right. So we’ve seen massive advances in technology and economies of scale, particularly in wind and solar. So on the solar side, we’ve seen a decrease in the price of solar modules by 72 % since 2015. So huge decreases in costs. And even through sort of the COVID period where we saw inflation. We’ve seen that peak and everything on the wind and solar side has come down and stabilised in terms of capex. In fact, actually on the solar side, we’re seeing some sort of record low prices.

Tim Rocks
Yeah, yeah. All right, why don’t we then jump into AI? We mentioned that going through. I I saw data from another source that said AI would be 12 % or sorry, data center demand will be 12 % of power demand by 2030. And that’s almost from a standing start and with a great degree of acceleration in that. Yeah, just how big do you think that is and any particular impact on renewables? I understand that a big ⁓ four US tech companies have all committed to having all of that powered by renewable energy.

Jackie Funder
Yeah, data centers, yeah, massive driver of demand over the immediate term as well as the long term. We’re even seeing data center total usage, energy usage surpassing the total energy consumption of entire countries. So it really is sort of one of the key drivers on the demand side. What’s really important for the hyperscalers, so think Microsoft, Amazon, Apple, is cost and speed of energy. So when they’re looking at bringing a data center or building a data center, in some jurisdictions, they have to come with their own energy solution. So they need to be able to find and procure energy that meets the timeline of them building out their data center. So what does that mean for us? ⁓ And a really good example is we had a solar project in the US that we contracted. So we went through a process where we put it out to clients. So we went out to 20 different clients offering for them to buy the electricity off this project. We shortlisted four through a highly competitive process. And ultimately we contracted with one and it was one of the global hyperscalers at a price that was a significant premium to our investment case. So we’re seeing a total reversal of how this process used to work. you know, three or five years ago, where we would have a project and we would be bidding into corporate run RFP processes and hoping that our project would get selected. So now there really is sort of ⁓ a scramble to procure electricity from these hyper scales. And that’s really improving the economics of these projects.

Tim Rocks 
Yeah, yeah. And so while we’re talking about that US energy side, do you want to touch on ⁓ any implications from the changing government and potential wind back of some of those Bidenomic, the Bidenomics of tax incentives? that, what impact has that had on the future trajectory for some of these projects?

Jackie Funder 
Yeah, so interestingly, a lot of the regulation that impacts renewable development in the US is actually driven at the state and council level. So it’s very hard for a federal government that is opposed to renewables to completely stop, particularly onshore renewables. However, there have been two recent legislative changes, one that restricts renewable development on federal land. This mainly impacts offshore wind in the US and you have seen a decrease in those projects. The second is through early retirement of a tax credit program that renewable assets were eligible for. The ultimate impact of the latter is that there’s the potential for an increase in electricity prices in the long term as renewables will still be the cheaper alternative source of energy. It’s just they won’t be as cheap as what they were when they were eligible for the tax credit. What’s really interesting actually is when the US Treasury issued the latest guidance on the change in regulation relating to that tax credit program, which happened at the start of this month, there was a stock market rally for renewable energy companies. So you saw an increase on the share price for Sunrun, I think it was about 33%, next era was 5%. And even some of the solar module suppliers, so first solar, they rallied by 11%. And so that sort of really reflects the reality that the renewable industry is in the US is underpinned by fundamental value. So despite the sort of regulatory instability, which is not actually that uncommon, MAM has witnessed the development and maturation of energy transition regulatory frameworks in various global markets there’s still definitely sort of that fundamental value for these projects that can ride through that instability.

Tim Rocks 
Yeah, and as I understand it, the biodynamics tax incentives will still be in place for a number of years, or four or five years or so. So there’s actually an incentive now to bring forward investment in those projects. So even though Trump is dual baby drill, what you actually might see in the short term is actually an acceleration in investment in those areas.

Jackie Funder 
Yeah, that’s right. So there’s a number of projects that need to hit financial close by a certain date to be eligible for that tax credit. So yeah, that’s right.

Tim Rocks
Yeah. Okay, so we’ve talked a lot about the US. What ⁓ tell us a little bit about the Australian background and how we compare and what what the opportunities are here.

Jackie Funder
Yeah, so the Australian market’s really interesting. The federal Labor government has a renewable energy target of 82 % by 2030. We’re roughly at 40 % today. So we have to double the capacity of renewable energy in the next five years. That’s a massive investment opportunity. And I think estimates have it at around $67 billion. So huge amount of work that needs to happen just to hit that target. And that will be driven again by the demand changes that we spoke about earlier. But actually in Australia, we also need to replace aging fleet. So the Australian Energy Market Operator, AMO, is forecasting that 90 % of our coal generation is going to retire, so be at the end of its asset life by 2035. That represents about 50 % of the generation in the East Coast market. So we’ve got some real physical challenges that we need to meet because we do actually have to get electrons in the system to replace this coal. And at the same time, we’ve got increasing demand. lots of opportunity, that’s for sure. We face similar challenges to a lot of markets going through the energy transition. And that’s namely that the grid infrastructure is not built out to where the best renewable resource is. However, I’m still very optimistic about Australia despite that challenge, because one, you know, there are many jurisdictions going through it and the Labour government has been very thoughtful about grid investment. But also we have such a fantastic renewable resource, plenty of great wind, lots of solar. So I really see that there is an opportunity here to take advantage.

Tim Rocks 
Yeah, yeah. And can you tell us a bit about some of the projects that you’re involved with in Australia? What have you done here?

Jackie Funder 
Yeah, so we own Alla Energy. It’s an onshore renewable platform ⁓ that has projects, one in Queensland, so Boulder Creek, which is a wind farm that’s in construction. It also has another project called Carmody’s Hill, which is a wind farm that’s hopefully going into construction at the end of the year. And then a number of sort of early to mid-stage development sites in Western Australia as well across the NAM. So all our energy looks to develop these ⁓ projects and assets through the life cycle. So development, construction, and then ultimately own and operate these assets.

Tim Rocks 
Yeah, yeah. And so perhaps just to pick up on that a bit more, do you tend just to be a manager of assets or do you like to take a role in developing them as well?

Jackie Funder 
Yeah, so we’re very much an active asset manager. We seek to take positions of control and assets we own to transform and grow them during our whole period. So how we do that is we have portfolio companies with management teams, but then we leverage our ⁓ scale and global portfolio to make sure that we’re capturing value. So examples of how we do that is the MAM has a global customer network of 400 customers, including the biggest clean power consumers. And through that customer network, we’re able to connect our portfolio companies with large global corporates, like the US example, the US Solar Project I was mentioning earlier. The other way we do it is we have strategic partnerships with a range of key equipment suppliers. through leveraging the scale of equipment we’re procuring across the man portfolio. And at the moment, I think we’ve got about 120 gigawatts of development. So it’s a massive pipeline of assets we have. We’re able to unlock more attractive pricing and delivering timelines, warranties and terms from suppliers. When we’re going and speaking about, you know, one maybe small project, a 220 watt wind farm they know that they’re speaking to a company that’s owned within the man portfolio that actually has 120 gigawatts. So we’re really able to leverage the supply that we bring through that portfolio, global portfolio.

Tim Rocks 
Right. Okay. And so I was going to ask where you saw the opportunities going forward. Yeah, McCrory has been a big investor in this whole space for a number of decades now, but it sounds as though you see no shortage of development opportunities in Australia and offshore.

Jackie Funder 
Yeah, that’s right. So we definitely focused on wind and solar, given that demand supply imbalance that I spoke about earlier. And I think that’s globally in developed markets. I think the other thing that we really see an opportunity around is the rapid adoption of energy storage systems. So we know that wind and solar projects only work when the sun’s out and the wind’s blowing. So energy storage systems are very much a part of the solution. So providing support to renewable generation, but also provides grid stability support. So we definitely see that as another key area.

Tim Rocks
Yeah. Okay, Jackie, that’s been a fantastic overview. Thank you very much for your time and good luck out there with all those opportunities. Okay, thanks. Bye.

Jackie Funder
Thanks, Tim.