PJ SOLOMON Chairman Peter J. Solomon and Managing Director James McGinnis discuss the factors that are leading the transition to clean energy in the US rapidly and forcefully ahead.
PJ SOLOMON Chairman Peter J. Solomon and Managing Director James McGinnis discuss the factors that are leading the transition to clean energy in the US rapidly and forcefully ahead.
Jim, you used the metaphor of a pole vaulter and pole vaulters have to cross the bar. What exactly is the bar of renewable energy?
James McGinnis:It's the concept of grid parity. So a renewable energy producer must deliver the concept of firm power at a cost that is better than or equal to what's available from all other sources on the g rid.
Peter J. Solomon:I'm Peter J. Solomon, chairman of PJ SOLOMON, an investment bank. And I'm here today with Jim McGinnis, our partner in charge of renewable energy, a part of the world and an industry that is accelerating in terms of importance globally. Jim, you've been with us since 2018. Tell us a little about your background, which is unusual because you've been both an investment banker and in the industry, which gives you special insight.
James McGinnis:Thank you. I came from Mainstream Renewable Power where I was the CEO of Mainstream Renewable Capital, the funding and investments arm of that global developer based in Dublin, with the New York office that I was building and approached by our partner, Jeff Pollard, in early 2018 to think about coming to PJ SOLOMON to start the renewables effort. Before that I had been at Goldman Sachs and Morgan Stanley for 16 years in between them as a banker covering the energy sector and then had been at AIG where I ran the private equity energy arm of that firm on balance sheet and a couple of hedge funds, Harbinger, and Halcyon doing energy investing on the hedge fund side. And so you're right, I have a different perspective on how capital is deployed in the space from the corporate side, from the investor side and from the investment banking side. And it's good to be back in investment banking.
Peter J. Solomon:Well we are glad to have you. It's one of the areas that Natixis, our parent company i n France and throughout the world thought very strongly about and has a real commitment to the strategic initiatives in terms of renewables. They have presence in Europe, Latin America, and Asia. So they needed a strong presence in the United States.
James McGinnis:Agree that it's quite the opportunity for the firm now. And for me professionally after 30 years in the energy and power sectors at such a transformative time.
Peter J. Solomon:Well, you've had a terrific month. It's really been a terrific period to have you. Tell us about some of the deals that you just worked on, some of the investments.
James McGinnis:Yeah, we just announced two landmark transactions last month in August. Earlier in the month, we announced the strategic partnership and an initial$265 million investment in our client, the Italian-owned off shore developer US Wind, by the$435 billion AUM, global investment behemoth Apollo, to build a$1.3 billion off shore wind farm off the coast of Maryland. It's the first step in what is designed to be a$4 billion plus investment program and a big boost for US offshore wind, in my view. And just last Thursday, our client Energy Capital Partners announced a definitive commitment to sell a 40% stake in Terra-Gen, LLC, one of the country's largest wind, solar, and energy storage firms to First State, a rapidly growing and relatively new infrastructure investment arm of Mitsubishi UFJ financial group via its Australian affiliate First Sentier Investors.
Peter J. Solomon:It's terrific to hear about this high level of activity, both of course from the firm point of view, but equally it shows the sort of momentum in the renewable space. You write a lot, which is a terrific way to communicate. And one of the things you wrote, you wrote a piece called Clean Energy's Pole Vault Moment. It's an interesting metaphor. Were you a pole vaulter?
James McGinnis:No, I use the metaphor for a different reason. You recall in late February, just as the COVID-19 pandemic pushed many of us into some form of a Zoom-tethered lockdown, I wrote a piece called Skyscraper Turbines and Ankle High Fences, which is available on the website(pjsolomon.com) now. It's a critical examination of certain low lying obstacles which are tripping up a slowly emerging, renewable energy sector. And now, in a combination of internal and external factors, which I discuss in the new p iece, the clean energy business is really t aking off. I l ike the metaphor in part because it captures the theme of a sector undergoing a remarkably powerful pivot, essentially boosting its economic importance across many sectors and increasingly in the public's eye. I l ike the metaphor also because of a personal memory.
Peter J. Solomon:What was the memory? Did you fall on your face going over it?
James McGinnis:In grade school years, I lived at West Point when my father was an engineering instructor there and he was a graduate of the Academy. So I'm an Army brat. And my dad, who was also an airborne ranger was a track star undergrad, and a track coach while I was there. I went to a lot of track meets which was awesome. To see the events was thrilling as a child, but also a particular fascination with the pole vaulters. These cadets have a five second performance, a fearless run and a make or break. Either you clear the bar or you don't. And that is what was all still fresh in my mind.
Peter J. Solomon:Why does wind and solar development evoke a memory of a pole vaulter? Are they going to get over the bar? Or are they going to hit the bar? I remember that tantalizing thing as they go over the bar and their last toe hits the bar and the bar quivers, quivers, quivers and then falls. So is the bar, is it going to fall? Its going to quiver without doubt.
James McGinnis:I think the winners will definitely clear the bar Peter. The industry is at yet another juncture with a really significant pivot here with exponentially boosting its economic importance and role across many sectors and increasingly in the public's eye. And this comes from dramatic cost drops and efficiency gains in both the sources of power, solar panels and wind turbines as I've written in the past, but also in large scale batteries and frankly financial innovation that brings the firm delivery of power, important from an intermittent delivery of power, a firm delivery of power for renewables, not just up to the bar of grid parity, but now easily clearing it in most parts of the country.
Peter J. Solomon:So, Jim, I spent a lot of my life as have you on Cape Cod and the environmental impact of the proposed wind farm in Nantucket Sound, and that was proposed for about a generation. And it finally, I believe, was shot down. Are the new proposals going to be able to get by environmental concerns, regulatory concerns, etc.?
James McGinnis:Peter, yes. In fact, I've spent the last six months of this COVID lockdown in my place in Brewster on Cape Cod. And so I love the Cape and New England. That project, Cape Wind on the Nantucket Sound, was defeated after, as you said, a great deal of line of sight protests, but also because simply put the cost of that power was enormous, maybe 5X, what we're looking at today. And the new farms that are being built south of Nantucket, Vineyard Wind, which is an 800 megawatt farm, part of what will be more than 2000 megawatts. But the first 800 megawatts is in its final stages of approval. Its awaiting the final approval from the Bureau of Ocean Energy Management. It has a competitive price. It has the engineering to bring it to shore. It stabilizes the southern part of New England's electricity supply. And I think there'll be many more projects that come from that, that will be built successfully off shore. So I think we're in a new phase. We'll talk about that in a little bit with one of the announcements we had last month.
Peter J. Solomon:So the winners will certainly clear the bar is what you're saying.
James McGinnis:Yes, that's correct in some markets and in some states the developers are ascendant, but not everywhere. Modestly better prices and improved product rarely guarantee success. The national winners among our clients are products whose consumers simply choose to buy them with little or no cost to change their behavior. But in the case of electricity, customers usually must actively petition to unplug from another source. So there's a friction cost. The product has to be compelling. It has to be consistent and delivering better value in order to change the old habits.
Peter J. Solomon:These issues have always been political issues. There are a lot of invested costs, a lot of positions on each side, but the world seems to be moving towards renewables. How do you look at the political landscape and the Biden green plan? How's the Senate going to react? What do you think about all this?
James McGinnis:It's unknowable and as you know, my profession is investment banking, not political prognosticator. That said, the$2 trillion four year spending plan that Joe Biden has announced is sweeping in its potential to change and accelerate the growth of renewable energy in the US. The big economic stimulus, which he emphasizes creates jobs and directly from those expenditures will also boost efficiency across the manufacturing of the turbines, the solar panels, and add manufacturing jobs with better efficiency as a big economic bonus. The plan calls for, among other, many other things, the entire US electricity generating sector to be carbon neutral by 2035. That's in 15 years. So it's still in early draft form with an enormous number of details to follow, of course. It's meaningful in parts beyond wind, solar and storage, such as carbon emissions cuts, and transportation, housing, manufacturing, and commercial real estate. It's quite a broad program. That said, you know, I studied government at Harvard, our alma mater, and one thing I learned about congressional action is you need both houses. You would need a 60 vote majority in the Senate to pass whatever bill is put on the table. So I think, whereas the Senate, in certain circumstances may be up for grabs on a majority basis, it's not likely to be up for grabs then on a 60 vote basis, which was the same drill the Waxman Markey carbon tax legislation had over a decade ago. But overcoming obstacles with legislation is one thing. I think overcoming obstacles with costs is another. My clients are pushing with lower turbine blade costs and lower solar panel costs into cities and states to meet renewable portfolio standards(RPS). In fact, 29 states have assigned portfolio RPS' and required that utilities purchase power from renewables and obtain renewable energy certificates or credits. And according to the National Council of State Legislatures, for instance, they estimate that approximately half the growth in renewable energy since 2000, so for the last 20 years, is a direct result of those RPS mandates.
Peter J. Solomon:Jim, you know, I worked for Jimmy Carter in 1976 and that's during his administration, and almost everything he proposed included, wind, water, and sun, but the push for that mostly was coming from the federal government. There was no groundswell of localities or endowments or state houses. Even when I worked for Ed Koch during that same period, and I was responsible for energy and renewable energy, we couldn't get much done because the costs were too high, etc. I do think you have a changed environment. Is that what you're seeing?
James McGinnis:Absolutely. Solar plus storage is coming in at roughly 2 cents a kilowatt hour, which is below grid parity in most states. And that's at a relatively high capacity factor. So thinking, thinking US southeast or US southwest, and offshore wind comes in at a roughly 50% capacity factor in the northeast. So it needs to be blended with, of course, utility scale storage. But those governors, for instance, in the northeast, Governor Phil Murphy of New Jersey, my old boss at Goldman in fact, who introduced me to the power sector. Governor Baker in Massachusetts. Ned Lamont in Connecticut, and Governor Hogan of Maryland, for instance, have all linked arms together to push ahead for this offshore wind development to take place. What they see is not just a reliable and cheap source of power over the long term, because the size of this resource is immense, but also jobs. So jobs to restore kind of battered Northeastern ports and jobs for longshoreman and, as Phil Murphy and Joe Biden pointed out, these are union jobs in many of these states. And so it's an economic jolt for that group of states who want to pursue US off shore. And it is, it is highly political, but it's also highly economic.
Peter J. Solomon:As you look at the various states reacting to renewables, one of the concerns seems to be arising from the issue of California and whether California's problems are related somehow to too much projected reliance on renewables, particularly I guess, solar in terms of sunset and other times it ceases to be as valuable.
James McGinnis:Listen, Peter, the Cal ISO, which is a shorthand for the California Independent System Operator, governs the deployment of the allocation of power resources across the state. And we're looking into what happened over the last couple of weeks, as blackouts occurred on a rolling basis to curtail demand. The Cal ISO is, was curtailing power when reserve margins were still something in the, in the 9% or below or, and so eight to 9% when in fact their counterpart, the ISO in Texas(ERCOT) regularly operates with reserve margins below 5%. So it was a decision to curtail power where reserves were at 9%. I think there'll be more of an investigation and determination of when is the right time to curtail power. Nonetheless, it has a white hot focus on battery storage for utility scale battery storage, in Northern California, in Southern California. So to the extent that, solar power or wind power can't provide the baseline needed, the batteries kick in. We think that lithium ion cells, a 35 year old technology, is improving in its cost and efficiency, but we're also looking at this energy storage sector in terms of other chemical processes and solutions and the technology and the space is being very closely watched. It's the most important piece of the puzzle in my view. And so we're working with a number of clients that, both are producers of battery storage units, developers of the battery storage and all of the renewable developers that we see today think about solar plus storage or wind plus storage. And so we're seeing that battery piece come into play in a huge way in our space.
Peter J. Solomon:One of the interesting things is in an era during the pandemic, where you think that activity would slow down, activity actually is strong. Again, talk about some of the deals you've seen. Have there been any in the battery area or investments in the battery area that are evident?
James McGinnis:There are a couple of ongoing processes with some confidential details ongoing right now where a number of buyers are looking to make an acquisition of better technology companies. And I'll say that, you know, it's interesting, this COVID slow down that you mentioned took us off course for a few months. For instance, the Apollo-Toto transaction focused on US Wind, which is building an offshore wind farm off the coast of Maryland, as I mentioned the$1.3 billion project, but the parent company of US Wind, Toto Group Holdings, which has its main asset as the A24 toll road known in Italy as Autostrada dei Parchi. And that toll road went from a$35 million plus EBITDA business to almost zero, over the course of March, April, May. And so the transaction with A pollo, thinking about a parent with an infrastructure business and US Wind with, as I mentioned, the delay on Vineyard Wind with a bit of a pause on approvals for, for offshore wind. That transaction was complicated and the COVID slowdown prevented us from traveling back and forth, getting in a room and solving the issues. And yet through all of that Riccardo Toto and his team at US Wind and their resilient counterparts at Apollo w ere determined to look past that turbulence and get to an answer and think about what is the historic nature of their combined business plan. A nd, so getting all of that done in the context of a COVID shutdown in my mind was the most remarkable transaction I've worked on in my 30 plus year career on Wall Street. It's the product of grit and resilience, quite an experience.
Peter J. Solomon:No, it's amazing to me that you guys have been able to do so much business, both in your area and at the PJ SOLOMON company, but remotely. What have you learned about doing business remotely?
James McGinnis:Sure. There's a ubiquitous trend of availability. You and I are writing, but we can find people, find people and they can, and they can find me. And so there's an acceleration to answering questions or solving problems. The feedback loop gets tighter and the information flows become more efficient. I'd also say that the trends that I described at the start of our conversation about the renewable energy sector has imbued everyone in the space with an increased sense of urgency. This is the time this get this done. And so there's been a virtual focus, which has resulted in a real set of business opportunities that have been pretty dramatic. And I think we're going to continue to see the same based on that, the backlog of business that we see.
Peter J. Solomon:Let me ask you another question. It's an old investment banking question. How do you do due diligence? How do you do site visits and travel, all of the important things you've learned in investment banking to actually make sure that the warehouse is there and make sure that the turbine is actually turning?
James McGinnis:A fair question and the answer is on the one hand travel itself is a challenge. My clients in Rome were certainly not flying to New York, but yet, you know, an offshore wind farm that is not yet built is desktop due diligence. On some of the projects that we're working on, where there are existing development projects, that's desktop due diligence as well, where there are operating projects or projects under construction. Those construction crews are still working. They are deemed necessary infrastructure players. And so, the actual work on the projects, the construction of wind turbines has not slowed down. And so the access to those projects by consultants that are in the field has not slowed down that part of it. Its a little inconvenient in terms of the managers flying in to visit. But the reality is it hasn't slowed things down.
Peter J. Solomon:Let's talk about Harvard a little. I was an overseer of Harvard when there were proposals to divestment because of South Africa. President of Harvard, then Derek Bok, said if we do that, next week somebody will come back on chemicals and that one day they'll come back on oil. And lo and behold, that was 40 years ago. And now three overseers elected to the board on write in, who have proposed that, and at Harvard they have six. They accepted that. I believe that gets rid of all fossil fuel investments by 25 years or so. Is that a trend you see happening elsewhere?
James McGinnis:I do. I think Harvard endowment has always been a leader, just like the Yale endowment has. I was in the freshman yard when Derek Bok was president and when the South Africa divestment protests occurred. And look, I think there's a voice to student protesting saying, if we shout loud enough, the endowment will listen to us. I think that transaction occurred, that there was a noise and the endowment did hear, but I also think those of us in the renewable power space exclusively, which is what I do, are cognizant of the fact that fossil fuels need to provide a bridge. We can't just go from 8% of the generation source to 100% overnight. We need to step into it carefully and large players like Shell and BP are examples of companies that themselves have said, we're going to pivot to the energy transformation space. And so divesting of an investment in Shell, divesting of an investment in BP, may not be the right solution either. Having said all that, I think investors always have to think about the future and the future is in energy transition. And that's what we're focused on.
Peter J. Solomon:So to get back to the old pole vaulter, we've got to clear the bar. It will quiver, but the foot will get over. And, it looks like there's going to continue to be huge amounts of activity and investment in the field. One of the points you just made, which I think is very important, is that some of the largest investors in renewables are going to be the legacy companies as they transition because they have the need to be in the business.
James McGinnis:They know how to deal with change. They know how to deal with fundamental challenges to their space. Another example is Equinor. It used to be called Statoil. They have the largest piece of land to develop offshore wind in New York right off the coast of Coney Island, 25 miles off, but for an oil company to be one of the largest wind developers in the US. Shell is doing it in New Jersey and Massachusetts as well. I think these players, as I said, are used to risk. They're happy to deploy billions of capital to pursue a transition that they know is occurring with their effort and a bridge to the future through perhaps moving from coal to natural gas fired generation, for instance. We see the energy transition taking time, and there are going to be multiple players and investors to follow in that. In that regard, I'm thrilled to be in this industry at this time. There's a lot of innovation. There are a lot of talented engineers and strategic minded leaders and purpose-driven professionals. So I feel like I'm at the right place now and helping people clear that high bar.
Peter J. Solomon:Jim, thanks. I think you are. And, as the Chairman of PJ SOLOMON company, I'm thrilled, you're with us. I think you're in exactly the right place. You talk about, in closing, New York City. New York City's energy costs are twice those in most other places, the largest other cities. It's one of the reasons New York City lost all its manufacturing was the cost of energy. So a city like New York or Boston, cities, like Boston really require new energy sources at lower rates.
James McGinnis:My partner Jeff Pollard and I think about that specific problem all the time with other clients. So that is a way for us to collaborate because New York's an example of a city that must use a transition fuel. It can't go 100% renewable right away. Its got to be fixed in the meantime.
Peter J. Solomon:Well, thank you, Jim.
James McGinnis:Thank you for listening to PJ SOLOMON Present. My research papers on the topic are available on pjsolomon.com.