[Scott] Up next on "Energy Switch," how to invest in and develop alternative energy projects.

Is this a high risk investment space?

- The only way to actually develop infrastructure like this, you have to play definitely where you think the puck is going.

And you better have the right people that have then seen it enough to know, 'cause the most important thing in development is to know when to stop.

Like we kill or stop way more than we move forward with.

- Yeah, yeah.

- A huge part of the investment comes in through the construction capital.

And I think there, the kinds of risks that come in, who's actually gonna pay you?

Are they gonna pay you?

What is the credit quality?

Is it needed?

What might make that customer not want to pay you?

And so those are the types of things that you have to ask yourself.

[Scott] Coming up, investing in alternative energy in the U.S.

and abroad.

[Narrator] Major funding for this program was provided by Arizona State University.

Shaping global leaders, driving innovation, and transforming the future.

Arizona State, The New American University.

[upbeat music] - I'm Scott Tinker, and I'm an energy scientist.

I work in the field, lead research, speak around the world, write articles, and make films about energy.

This show brings together leading experts on vital topics in energy and climate.

They may have different perspectives, but my goal is to learn, and illuminate, and bring diverging views together towards solutions.

Welcome to the "Energy Switch."

Twenty years ago, wind, solar, grid-scale batteries and the power lines to connect these often remote energy projects were rare.

Now they are mainstream.

My two guests have been there since the beginning, helping lead alternative energy investment and development companies with great success.

We'll hear about the industry, their strategies and areas of business, and the roles of investors, governments and subsidies.

Joining me are Hunter Armistead.

He's the CEO of Pattern Energy, who develops, builds, and operates alternative energy projects across America.

And a former partner at Babcock & Brown.

Michael Harrington is a partner, chief investment officer, and former head of America's and head of strategy for Actis, a global energy generation and distribution investment fund.

In this episode we'll hear about successful investing in alternative energy.

Hunter and Michael, great to have you here.

[Hunter] Great to be here.

- Thank you.

- I'd like to start real high level just with our viewers, you know, why should they care about investors and investing in mostly alternate energy, but all energy.

- Back in the mid 1700s we had electricity come and fundamentally transform society.

And you could argue today artificial intelligence is putting us on this next cusp.

We're also on the cusp of over the next several decades, multiple large, secular trends that are gonna require anywhere between 140 to $170 trillion in order to meet demand growth, net zero targets, and just really to replace obsolescent plants.

And so we need to build two planets of power over this time period.

- How did you choose to focus on the things you focus on?

Or did it choose you [chuckles] Did you at least evolve into it?

- When I tell people that we invest outside the U.S.

and Europe, they usually imagine some headline or story about the worst frontier market they could ever think about, some sort of bond default in Argentina or something else.

And what I think it fails to capture is there are a lot of big, emerging middle income countries that have multi-decade institutional track record that require this capital, and that's where we want to be.

We wanna be in a place where we can work with public entities, regulators to scope out what needs to be done and to be the provider of that.

- Right.

Interesting.

- Well, it gets back to regulatory certainty too 'cause that's one of the challenges.

And interestingly enough, and I don't know that you could call the U.S.

like the example of regulatory certainty during this time or really almost most times, there's all types of changes that are, 'cause the rules matter a ton.

- Yes, they do.

- Which is one of the biggest challenges that we've like, 'cause we have invested in Chile and Japan, which was, you know, had more clear rules than the U.S.

and most awesome thing, not to get off on Japan, but like when we enter into power purchase agreements in the U.S.

and you have lawyers, you have a contract that's like this and exhibits like this, in Japan, they're two pages.

They say, we will buy your power unless it's in an emergency.

What does the word emergency mean?

You'll know it when they know it, but the point is, is jurisdictions have very different approaches.

Personally, I've had the good opportunity to work in very large like M&A and different other kinds of things.

But the thing that I have always just so loved is creating an asset that's going to be there for a very long period of time and deliver significant economic benefits to local communities, and you can just come back and you can see that forever.

You know, we're building right now an $11 billion, really energy venture that is, I mean, it's bigger than the Hoover Dam.

And it fully delivers, I think it's two percent of the entire national carbon goals.

Which is this three and a half gigawatt facility that basically moves power through into Phoenix and basically delivers this complimentary wind shape to a market that is oversaturated with solar and strangely has really high resource adequacy because the wind tends to blow at night when it's otherwise there, but you know, and there's 3,000 people out there working right now, it's kinda awesome.

- Do you initiate a lot of your own projects or how does that work?

- We will partner with early stage people who are doing more of the, let's say the early stage processes.

And so you're gonna have somebody who's meeting communities, meeting owners, working out local permits.

And then there comes a point when the idea moves to selling this project and in particular selling the output of the project, whether it's power or it's the data center side, the capacity.

When it gets to that point, that's where we tend to enter in so we can help to structure the revenue contracts that will back the plant, secure the financing, help build and put it online.

But a lot of the early stage stuff, we will allow the funnel of prospects to come in for us to work with the best projects out there.

- And where like top two or three places in the world you're working currently?

- We have 17 offices across the globe that span from Sao Paulo to Tokyo.

We invest across 35 markets.

The biggest, most structurally active, what we see, just see constant investment opportunities in Latin America and then in Asia, and I'd really be specific there and say right now, India.

We're in our third generation of investments in India.

- How do you start to initiate your projects, Hunter?

- Well, we're a full greenfield shop, so we have full teams of land teams that are out there signing up, meeting with the landowners, you know, meeting with the counties and developers.

And then we have environmental folks that are coordinating the environmental impact statement, preparations and all of that.

And then we have a group of people that you really market the power or think about if we wanna retain some of it and market only some of the attributes, so we're a fully encompassed.

And then a finance team that basically structures all of the either project financing and corporate financing that goes on to support these very large activities and so it's-- - Very, very vertically integrated.

- Well, and then we have an entire operations team that's out there, and we also have a whole group of a fundamentals team that kind of deals with a lot of the questions that you're asking.

And we use that because the only way to actually develop infrastructure like this, you have to play definitely where you think the puck is going.

- Yeah.

Yeah, yeah.

Could you tell our viewers just kind of an example of a project that you've done that represents your experiences in the industry?

And then come back to you with the same question.

- I think what makes our investment strategy distinctive is we also build companies that then are able to build projects over and over again.

But a recent project that we did was last year is a project called Terra Solar.

It's in the Philippines.

The facility that's being built is 3.5 gigawatts of solar and a four and a half gigawatt hour battery.

It's gonna be, it's one of the largest on the planet.

[Hunter] Wow.

That's huge.

- It's being built right now, and it's under a 20-year revenue agreement.

And once it's fully constructed, it will supply power to the equivalent of 2.4 million households.

- And where do all the materials for three and a half gigs, where's all that come from?

- A lot of it's gonna be coming from China.

I'd love to see, I think that this was started under the last administration for more industrial capacity to come out of the U.S.

market.

But right now, I think that when it comes to solar, there are limited options on the table.

- How about you Hunter, Project that, you mentioned one.

- I'll go into that one just 'cause it's such a fun one.

It's SunZia and it was actually-- - What's it called?

[Hunter] SunZia.

- SunZia.

- So one of the core problems that I mentioned before is the interconnection of the resource to load.

And right now New Mexico has this remarkable wind resource that is complimentary, in other words, it generates basically as the sun starts to come down and I sometimes call it greening the night.

And so it encompasses basically a three gigawatt, 500-mile HVDC in a area of land that's kinda like the size of New Jersey.

- And HVDC is direct current?

[Hunter] Yeah.

- Is that what we're talking about for the-- - Generally the grid is AC or alternating current.

And in most of the places in the world where they're trying to move large bulk amounts of power, it's more efficient to actually convert it to DC or direct current.

Move the power as direct current and go back to AC.

And right now there's one high voltage project being built in the United States and that's us.

And it actually provides, interestingly, a loop down around where there was inadequate transmission to deliver it all the way into Phoenix.

Which is just awesome.

So why I picked this project is it's 'cause it's one of the examples of us investing in both transmission and renewables.

- Right.

It was a lot of work to get every rancher and farmer to agree to have big power lines.

How did you get that done?

- A portion of the right of way was actually federal land.

And so we worked through a right of way grant via NEPA review.

But a very large portion of us was through private landowners, however, we never condemned one landowner.

[Scott] There you go.

- We negotiated all pieces of it, all privately.

- That's good.

- But the reality was one of the issues, like we're building this entire thing in 30 months.

- Okay, now how much state and/or federal government money is in there as compared to private sector?

[Hunter] Zero.

- So it's all private.

- It's all private, which was extraordinarily exhausting.

- I bet.

You're only 28 years old.

[laughs] - Exactly.

Yeah, that's right.

[laughs] I had a full head of hair before we started through the whole thing, but yeah, now it's gone.

- Yeah, that's a big, about three gigs and your three and a half gigs in the same kind of scale you're talking about.

So there's a guy out there that tracks wind projects that don't go, I think he has 600 or something that have been, for whatever reasons, mostly communities said, we don't want these things.

Is this a high risk investment space?

- You better have the right people that have then seen it enough to know 'cause the most important thing in development is to know when to stop.

Like, we kill or stop way more than we move forward with.

- Don't push the buffalo through the nickel.

[both laughing] - I mean, I think that the, you know, on the development side, I think that you put your finger on it, which is having a community approach.

Having a social community approach, absolutely we would only partner or work with people who've developed a track record of being able to de-risk the social community elements of a project.

The development spend though of a project as you know, Hunter, I mean like that is the smallest component of the overall investment.

And so a huge part of the investment comes in through the construction capital.

And I think there the kinds of risks that come in, who's actually gonna pay you?

Are they gonna pay you?

What is the credit quality?

Is it needed?

What might make that customer not want to pay you?

And so those are the types of things that you have to ask yourself.

- Say they do, but then don't or?

- Now, again, given the fact that most of the markets that we're investing in have either relatively low reserve margins, every kilowatt hour is needed.

I mean, the demand in the U.S.

has been flat or declining for many years.

Until this kind of data center piece has come up, right?

- Yeah.

- Well, the demand in the markets that I'm in are growing irrespective of data center demand.

- We started to talk about a little bit about subsidies.

How do they work in your investment model, Hunter?

- You know, I'm trying to remember when the PTC started, but it would've been in, you know-- - Production Tax Credit.

- The Production Tax Credit.

It is a tax credit that basically is a available to the owner who otherwise generates the power.

So, to round numbers, if you generated power and sold it for $40 and you own that power, you get a $20 tax credit.

So in theory, your revenue could be $60, this gets a little nerdy, but because you have lots of tax depreciation, you end up with basically very little taxable income.

So the big problem with the U.S.

subsidies has always been that the party that was actually developing and owning it struggled to realize the value from the tax credit.

So then the question is, there had to be a regime to allow you to receive that value, otherwise you just lose it.

In 2003, we came up with a way to basically bring in institutional investors who have tax appetite who could utilize the tax.

[Scott] Gotcha.

- But the real value of the tax credit is to lower the cost to the consumer.

- And so how much of that really translates down to the actual paying customer?

- I would say 75%.

The other 25%, it disappears though higher, through friction costs associated with monetizing that.

[Scott] Right.

- So I wouldn't call renewable technologies like solar and wind as new technologies, I consider them actually quite mature.

And so the question is why are there subsidies?

And this is the part that sometimes does confound me in the U.S., which is, I believe a lot of it is just distortions on the costs.

So why is it more expensive to build a solar plant in the U.S.

than it is in Brazil?

Like why, like how can that be?

How can you offer three cent power for wind or solar across the border in Mexico, but you need subsidies in the U.S.

in order to offload the costs of renewables in the U.S.

So I see the tax credits and other subsidies as a balancing of trade policy versus kind of some sort of fiscal policy.

The truth is that it's cheaper to build these type of technologies in the markets that we invest in, which is why they don't require subsidies, Scott.

So I think you bring up a good point, which is, okay, well, you know, what are the tradeoffs?

I mean, this is what the conversation is about, is what are the trade offs?

And I would go to, again, if you were going to supply with a local natural gas fire power plant next to the load, that's got a certain cost availability, carbon footprint element to it.

If you say you're gonna add into that system renewable that's coming in through a transmission line, which is cheaper, maybe more intermittent, these are all different, I'd say features of products, which is why you need to have all of them.

So far, Hunter and I have talked I think pretty emphatically that, you know, this has a strong commercial proposition that delivers returns on its face.

But also one of the other features to this is it does decarbonize.

And I think that is in, again, however you want to position that point to the debate, whether it's kind of ideological or activist or economic.

- I mean, how does decarb, how does that drive your businesses?

- I guess one of my frustrations around that type of conversation where it's either/or, is it also it gets to almost an incumbent or position around old tech.

And I don't know why the U.S.

would position itself as the winner of old tech when you have a lot of technology acceleration coming online.

And you know, for us, the decarbonization piece is fundamentally a part of the economic story because it's either reducing losses, it's reducing climate damage in the costs that are associated around it for the projects.

These are elements that I would say most of our investors that are large institutional investors, again, they're not activists, they just see this as part of fiduciary responsibility in terms of protecting their returns too, to make sure that you're thinking about how you're creating value holistically and not within an old technology paradigm.

- Interesting.

How about on your side?

- We are capitalist and we have shareholders that expect premium returns which we have delivered for more than 20 years.

Now our company is very mission driven and we absolutely see the opportunity and effectively the responsibility to economically come up with ways to decarbonize our energy future.

And we're proud of that mission, but we're not confused that we have a group of investors who have put confidence in us because we have had a long track record of success of delivering differentiated products that has basically created good returns for our investors.

- Yeah, 'cause you wouldn't have a company if you weren't making money.

- One of my British colleagues, when it comes to this is, you know, renewables, it does solve a lot of things.

It is like a medicine, but it tastes great too because like it does do the decarb, it does provide returns.

It meets the growing demand that's out there.

And so it doesn't have to be either/or.

- Yeah.

So, what are some steps we can improve the investing environment.

- Regulatory certainty.

And knowing the rules of the road is fundamental to infrastructure, long-term commitments.

So I think we always say that.

- And that's across the energy space.

Probably everybody would like regulatory certainty in energy.

- And so I'd say that's number one.

I do also, this shouldn't be a partisan issue.

This is a challenge for our country to meet and we have all the tools to do it.

And I think of that as a more constructive way than all sides saying this one is the right one, because the truth is it really is all of the above.

- Agree.

How would we improve it?

- The number one thing with the same thing that Hunter said, I think that in order to invest in this space, the kind of capital, the kind of horizons, you need to have very clear rules.

You need to have business certainty, you know, the rules of the game out there and this all comes around regulatory wind shifts.

And if there was one other thing I'd kind of offer to this market and the U.S.

is to lean in more to some of this innovation and not to let that run away from other markets that are investing behind it.

[Scott] You still having fun?

- I remember the very first day at the office, the partner walked by and he dropped a book off, which was called "Principles of a Combined Cycle Turbine."

And my heart dropped in some ways.

Because I wasn't an engineer, I just thought, "Oh my God, what did I get myself into?

This doesn't sound exciting, you know."

And you fast forward, the arc has definitely leaned into this space, energy security, energy decarbonization, my kids ask me about it.

It's more important for society today than ever before, I think.

And so somebody asked me the other day, tell me the best day that you've had at Actis.

And I tell 'em today, today is.

Because everything we're looking ahead of us looks great.

- That's awesome.

- Yeah.

- How about you, still having fun?

- Oh my gosh.

I think that to be able to find yourself in an industry that kind of grew up since I've been here.

I mean, we were doing a couple hundred megawatts a year and now we're doing 10, 12, 40, 30 gigawatts a year to see the industry mature and to see the industry go from being kind of a bit player to a significant player.

Now, it doesn't need to be the, it's not intended to be the only player, but to see that it's now a meaningful part of the energy mix and to see the opportunity for it to continue to expand its contribution, especially at this time in history, when we are seeing expanded electrical growth.

Like the most fun thing about this to me is that the answers are not yet known.

And so, yes.

- That's awesome.

[Hunter] Energized every day.

- Yeah, awesome.

You got 110 million households out there.

What's a thought or two you'd like to leave with 'em, Hunter?

- At least with respect to the U.S., that we have all of the natural energy and it's a uniquely competitive advantage versus the rest of the world.

We have gas, we have wind, we have solar, and we have the ability to respond to this opportunity that's in front of us.

But it just requires us recognizing this is a joint problem.

It's not a partisan problem.

This is how are we going to meet this challenge?

- Yeah.

- And we can do it.

- Yeah.

Love that.

Good.

Same question.

- You know you started asking why the viewers should listen.

It comes back to the fact that we're on the front of what looks like a multi-decade journey, which involves a massive wave of drivers for new demand in the space.

Technology acceleration in the space.

It impacts society at every level.

So the point I'd make is learn more, invest, invest time into this space.

If you're young, invest your career, this is gonna be a great place to be in the next two to three decades.

If you're an investor, invest your money into this space with the right people.

We have to come up with these types of energy solutions, so it'd be to engage.

[Scott] Awesome.

- By the way, and I do think some of what we do here is gonna be filtering into other places, which is it's gonna be the example.

[Scott] We can lead.

[Hunter] Yes, we can.

- Fantastic.

Well, Hunter, thanks for being here.

Really enjoyed the visits.

Michael.

- Scott, thanks a lot.

Appreciate it.

- Scott Tinker, "Energy Switch."

My guest said that alternative energy investing is driven by growing electricity demand, in the U.S.

for data centers and developing countries for economic growth.

Investing in the U.S.

is challenging because of uncertain regulations, policy and subsidies.

Many developing nations have simpler regulations, good credit, clear power demands, and cheaper construction costs.

My guests have built low carbon energy projects with solid returns.

That's the priority of their investors and shareholders, decarbonization is an added benefit.

Michael's projects often have government power purchase agreements, but not subsidies.

Hunter's benefit from subsidies when available, which can reduce prices, but also distort the market.

Reliance on Chinese energy products could become an energy security issue here and elsewhere.

But whether investing or starting a career in this space, they remind us that energy doesn't have to be a partisan issue.

[upbeat music] ♪ ♪ ♪ ♪ [Narrator] Major funding provided by Arizona State University.

Home to the Julie Ann Wrigley Global Futures Laboratory, addressing critical challenges toward a future in which all living things thrive.

Arizona State, The New American University.