Transcript Investing in Alternative Energy

INVESTING IN ALTERNATIVE ENERGY
5th Annual Economic & Financial Development Conference
The Road to Recovery: Caribbean’s Economic Development
& Pension Funds
July 14 – 16. 2010
The Biltmore Hotel
Miami, Florida
Moderator: Ronald Simmons, Chair Investment Committee
Panellists: Randy Bauslaugh, Blake Cassels & Graydon, LLP
Jay Womack, FIS Group Inc
Farrell Crane, Energy Opportunities Capital
Management
Agenda
1. Introduction
2. Legal Issues Associated with Alternative
Energy Investments by Pension Funds
3. Energy Investments Generally
4. Alternative Energy Investments
5. Conclusions
6. Q&A
Introduction:
Asset
Allocation Mix
Fixed
Income
Public
Equities
Alternative
Assets
Resources
Traditional
Asset
Classes
Energy
Infrastructure
Introduction
•
In a pensions context, alternative investments
are anything other than publicly traded stocks and
bonds, including:
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private equity
infrastructure
resources
real estate
derivatives
commodities
hedge funds
Introduction
•
Risks commonly associated with alternative investments:
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liquidity risk
operational risk
counter-party risk
reputation risk
outsourcing risk
Barriers to pension funds investing in alternative
investments:
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attitudes
knowledge and expertise
illiquid and long-term
– divestment difficulties
– valuation difficulties
less transparency than publicly traded stocks and bonds
limited access to performance data
law lags the commercial environment
Legal Issues:
The Legal Framework
•
Tax Legislation
–
•
foreign investment issues
Pension Legislation
–
mostly prudent portfolio
•
•
–
standard of care
•
•
use of experts = expert?
Common-law
–
pension documents
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–
trust deed
investment policy
investment management contract
fiduciary standards
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with some qualitative or quantitative limits
legal for life
prudent person vs. prudent expert
SRI or ESG Considerations ?
Business Law
–
limitation of liability
•
•
corporations
limited partnerships
Legal Issues:
Alternative Investment Structures
1. Fund of Funds (FoFs)
Institutional
investor
2. Funds (& Co-investments)
Institutional
investor
Funds
Institutional
investor
**
FoF Asset
Managers
Companies &
Assets
Funds
** Co-investment with Fund partners
or other plans
Companies &
Assets
Note:
3. Directs – Lead/co-lead
Diagram for illustrative purposes and not intended to be exhaustive. (Slide courtesy of Caledon Investments)
Companies &
Assets
Legal Issues:
Alternative Energy -- SRI / ESG
1.
Best Financial Interest of Plan Members
–
direct financial interest Cowan v. Scargill
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2.
Distinguish value from values
–
–
3.
not for collateral or speculative benefit
not pre-determined social values
Ethical screen vs. Risk mitigation and enhanced returns
Document rationale
Consider Governance Culture
–
Unionized Members
•
•
P3 and infrastructure projects
in-house expertise and remuneration
Legal Issues:
Alternative Energy -- SRI / ESG
• …integrating ESG considerations into an
investment analysis so as to more reliably
predict financial performance is clearly
permissible and is arguably required in all
jurisdictions
– A legal framework for the integration of environmental, social and governance
issues into institutional investment, Freshfields Bruckhaus Deringer, UNEP
Finance Initiative, October 2005 (the “Freshfields Report”)
http://www.unepfi.org/fileadmin/documents/freshfields_legal_resp_20051123.pdf
Legal Issues:
Alternative Energy -- SRI / ESG
•
“so long as ESG considerations are assessed within the
context of a prudent investment plan, ESG factors can
(and where they implicate value, risk and return,
arguably should) constitute part of the asset
management process” – Arnold & Porter
• “it does not appear that U.S. law forbids integrating ESG
considerations into an asset manager’s decision making
process, so long as the focus is always on the value
inuring to the beneficiaries and not on achieving
unrelated objectives – even if positive collateral benefits
result” -- Freshfields
Legal Issues:
Alternative Energy -- SRI / ESG
•
Imbed ESG or SRI language in:
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trust deeds or similar constating plan documentation
investment policy statements
investment management contracts
notices and information provided to plan members
Legal Issues:
Consider Governance Culture
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Quote from Nova Scotia Federation Labour:
“The NSFL proposes that the Pension Review Panel directly
address the corrosive effects of privatization and P3s on pension
plan coverage in Nova Scotia. Further, it is important that the
Pension Review Panel call for the clarification of statutory and
common trust law as it applies to pension investment in order that
decisions by pension fund trustees to expressly avoid investments
in P3s and other forms of privatization that threaten unionized,
public sector employment (and the pension coverage that such
employment generally provides) are clearly permitted.
Further, the NSFL proposes that language be added to the PBA,
making it legitimate for pension trustees to consider social, ethical
and environmental principles.”
Energy Demand Growth Vs. Global GDP Growth (1970-2008)
Chart Notes
Global D% GDP estimates (IMF
April 2009 and October 2009):
2007
2008
2009
2010
2011
2012
Apr ‘09
+ 5.2%
+ 3.2%
- 1.3%
+ 1.9%
+ 4.3%
+ 4.8%
Oct ‘09
+5.2%
+3.2%
-1.1%
+3.1%
+4.2%
+4.4%
Solid recovery projected, driven
in large part by Non-OECD
economies.
Source: BP Statistical Review, IMF, EOCM.
ALTERNATIVE ENERGY FUNDAMENTALS
ENERGY – INEXORABLY LINKED TO THE ECONOMY AND THE PREDICATE TO ECONOMIC GROWTH
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Percent of Global GDP: U.S., China and India
Chart Notes
Year
1980
1990
2000
2010E
China
2.0%
3.6%
7.2%
12.7%
India
2.2%
2.8%
3.6%
5.1%
For 2014, the IMF estimates the
percentages as follows:
U.S.
China
India
18.3%
15.4%
5.7%
Source: IMF.
ALTERNATIVE ENERGY FUNDAMENTALS
THE RISE OF NON-OECD ECONOMIES – INSATIABLE ENERGY DEMAND
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CHINA THEN
CHINA NOW
INDIA THEN
INDIA NOW
WORLD POPULATION
(relative)
Out of every 100 persons added to the population in the coming
decade, 97 will live in developing countries." Hania Zlotnik, 2005
Source: www.worldmapper.com
1950s
2000s
Alberta Tar Sands Production
Sakhalin I
“The fact that we're willing to move four tons of earth for a single
barrel really shows that the world is running out of easy oil.”
- National Geographic, March 2009
ALTERNATIVE ENERGY FUNDAMENTALS
THE ERA OF CHEAP, EASY TO ACCESS ENERGY IS OVER
“My father rode a camel, I drive a car, my son flies an airplane,
his son will ride a camel.”
- Middle East saying
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The Supply Impact of Decline Rates (Depletion)
~ 2 new Saudi
Arabias
ALTERNATIVE ENERGY FUNDAMENTALS
GROWING SUPPLY CHALLENGES FOR TRADITIONAL ENERGY
"I'd put my money on the sun and solar energy… I hope we don't have
to wait until oil and coal run out before we tackle that."
- Thomas Edison, to Henry Ford and Harvey Firestone, 1931
Source: International Energy Agency.
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 The IEA is projecting long-term energy growth of 1.5% per annum through 2030, with a noticeable uplift
in energy consumption just beyond 2010 as the pace of expansion increases to 2.5% per annum through
2015.
 The primary regions for energy demand growth are the developing Asian and Middle East countries.
 Notwithstanding that fossil fuels remain and are expected to remain the dominant source of primary
energy worldwide, a combination of supply challenges and environmental concerns are expected to
result in decreased share of total energy sources, with the offset being renewable alternative energy
sources.
Drivers of Alternative Energy Demand Growth
Fossil Fuel
Limitations
(Peak Oil)
Global Energy
Demand
Growth
Environmental
Concerns
Alternative
Energy
Demand
Growth
ALTERNATIVE ENERGY FUNDAMENTALS
ALTERNATIVE ENERGY DEMAND GROWTH DRIVERS
Government
Regulation
and Incentives
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 According to the IEA, global power generation needs through 2030 equate to an additional 4,800 GW
(five times the amount currently installed in the U.S.). Over 80% of this growth comes from developing
economies, with the single largest increase coming from China.
 Coal, natural gas, hydro and nuclear are and are expected to remain the primary energy sources for
power generation, with coal’s share expected to expand from 42% to 44%. Natural gas share is expected
to remain flat at 21%.
 Renewables and biomass are expected to expand rapidly and increase share over this period, rising from
over 2% to almost 9% in 2030.
Recap of the Primary Energy Sources for Power Generation
Power Generation
Coal:
Natural Gas:
Nuclear:
Hydro:
Alternatives:
Backbone
fuel source
for power
generation
The cleanest
of the fossil
fuels
Renewed
interest, yet
construction
presently
restrained
Growth
confined
mostly to
non-OECD
regions
Fast growth
area driven
by wind
biomass and
solar
(44% share)
(21% share)
(11% share)
(13% share)
(9% share)
ALTERNATIVE ENERGY FUNDAMENTALS
POWER GENERATION – A KEY AND GLOBAL FORCE DRIVING ALTERNATIVES
Source: International Energy Agency
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 Given that the growth in fossil fuel consumption will be predominantly in developing nations where
emissions controls are less adequate, CO2 emissions are expected to rise at 1.5% per annum through
2030, all of which comes from developing countries.
 There is a real and growing risk of supply disruptions to oil and natural gas supplies due to future
incremental production coming from politically unstable regions and from concentrated areas.
 Spiking energy prices increases a country’s share of GDP spent on energy. In the OECD, spending onoil
and gas reached 2.3% of GDP in 2008, approaching levels last seen during the second oil shock of 1979.
For emerging economies, the impact was more severe. Spending on oil and gas reached 6.9% of GDP in
India and 3.0% of GDP in China.
Socio-Political Drivers of Alternative Energy Demand Growth
Emissions
Energy
Security
Economic
Development
• Energy related CO2 emissions are rising fast,
with an increase of >50% expected between
2007 and 2030.
• Noxious and toxic emissions contribute directly
to health and urban problems.
ALTERNATIVE ENERGY FUNDAMENTALS
THE THREE “E’S” – EMISSIONS, ENERGY SECURITY, AND ECONOMIC DEVELOPMENT
• Risk of disruptions arising from extent of
imports, age of infrastructure, distance from
supply to consumption, vulnerability of the
supply chain, diversity of fuel mix, and
substitutability.
• Wealth transfer from consuming regions to
producing regions creating energy poverty in
some of the least developed regions.
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 From 2005 through 2008, wind turbine installations rose at a meteoric clip of 35% per annum.
Notwithstanding the stunted growth in wind turbine installations during 2009, a function of the global
economic slowdown, worldwide installations are still expected to rise meaningfully beyond 2010 at pace
in excess of 20% per annum.
 In 2008, the U.S. had the greatest number of wind installations at 9,500 Mega Watts followed by Europe
at 9,200 Mega Watts. Both regions are expected to witness a doubling of this level by 2013.
Historical and Projected Wind Installations (Mega Watts)
ALTERNATIVE ENERGY FUNDAMENTALS
WIND– ROBUST GROWTH PROJECTED
Source: BMT Consult
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 Solar installations have similarly increased at a rapid clip. Despite the dip in 2009, which was associated
with the global financial crisis, expectations call for resumption of installations at a pace approximating
25% per annum.
Historical and Projected Solar Installations (Giga Watts)
ALTERNATIVE ENERGY FUNDAMENTALS
SOLAR – ROBUST GROWTH PROJECTED AS WELL
Source: BMT Consult
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While Wind and Solar get the bulk of attention, there are a number of other
sectors within Alternative Energy that have promising growth prospects:
 Power Generation
 Nuclear
 Geothermal
 Clean Coal
 Demand Response
 Energy Storage
ALTERNATIVE ENERGY FUNDAMENTALS
OTHER ALTERNATIVE ENERGY SECTORS
 Transportation Solutions
 Biofuels (Cellulosic Ethanol, Algae)
 Natural Gas
 Electric/Battery Technology
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Q&A
• Moderator: Ronald Simmons, Chair Investment
Committee
• Panelists:
Randy Bauslaugh, Blake,
Cassels &
Graydon, LLP
•
Jay Womack, FIS Group
•
Farrell Crane, Energy
Opportunities
Capital Management
Q&A
Moderator: Ronald Simmons, Chair Investment Committee
Panellists: Randy Bauslaugh, Blake Cassels & Graydon, LLP
Jay Womack, FIS Group Inc
Farrell Crane, Energy Opportunities Capital
Management