Outlook for Investing in Carbon Neutral Energy

Migrating to carbon neutral has been under the limelight the last few years due to its tremendous benefits, mainly less environmental pollution and improvements to health. During this discussion, Kathi and Alex will share their outlook for investing and the rapidly expanding carbon neutral energy ecosystem, including Ridge Creek Global's journey, what components or types of carbon-neutral energy they focus on and why the greatest opportunities in the space, challenges faced, how the move to ESG has impact in carbon neutral energy investing, and finally, advice for other firms to start investing in carbon-neutral energy.

Hi, Kathi and Alex, thank you so much for being with me today.

Alex Chapman:

Thanks for having us.

EMS:

Absolutely. So to kick off the conversation, Kathi, love to hear about your firm and your journey to carbon-neutral energy.

Kathi Chapman:

I'd be happy to share that. Thank you. I started my career at the family office in Cleveland, Ohio and then moved over to become assistant treasurer, director of Case Western Reserve University, at the time the 25th largest endowment in the country. And because of that, we get to sit at the table with what I call the big guys. Learned a lot. One of the investments at Case Western at the time was battery technology very early on, which really started sort of my interest in energy at that time. I started my firm, just taking care of clients. One of the principles of the firm had, probably at the time, 30 years of energy expertise. So we were a very deep and strong energy firm.

What happened in about five or six years ago, seven years ago, energy prices collapsed. Typically, historically, actually when fossil fuel prices drop, investments in renewables go to zero. So Alex went out doing some research, checking into this. We thought there was an opportunity, and it turned out, what he found out was investments and renewables were actually increasing at a time when energy prices were at rock bottom. Never happened. And that started our interest in what's going on here.

We found out, at the time, renewables were either competitive or lower cost than fossil fuel energy. That totally surprised us. Then we saw that there was all kinds of other things going on in the industry around the world, not the US. We were behind the curve. Europe was ahead of us, far east was ahead of us, and we realized that this is a worldwide movement into renewable energy. Cost is low, worldwide movement, we thought there was an opportunity. So we started to look for a way to invest in this and realized there was either fossil fuel or clean and green. There was nothing in the energy transition. We looked at our backgrounds, what we had at our firm, and we started our energy transition strategy.

EMS:

Love the journey, Kathi. Alex, as a follow-up question, what types of carbon-neutral energy do you invest in? We'd love to hear about that along with the greatest opportunities.

AC:

So when we're looking at alternative energies, carbon-neutral energies, what we really thought of, there's four main areas that go smallest to largest. The smallest is the existing nuclear fleet. We thought that was an attractive place, be the capital costs are paid off, so it's just operating costs. And with new incentives, in the US, it should be very profitable for decades to come. So we thought, let's kind of focus on that area. And the next would be geothermal. Geothermal, the really interesting play, because that's clean energy and you can have it all the time, 24/7. The challenge with that is, it's very specific geology which had the opportunity for geothermal. So we have a piece of that, but it's a limited in the scope of how big it can get.

The next we looked at is wind. A lot more potential for wind, a lot more places have it. And also, the cost structure is cheaper than fossil fuels. So we've seen that gain in market share. But the really big one when it comes to generation is solar. Solar is everywhere. It is the cheapest form of energy, period. Even without subsidies, it's substantially cheaper than fossil fuels. For example, right now the US grid, about 1.2 gigawatts of nameplate capacity, trying to get on the grid right now is about 750 gigawatts of solar. So when it comes to generation, that's where we think of the opportunities are. Because of the cross structure, they're all cheaper than fossil fuels.

Other opportunities are really storage and transmission. When you think of renewable energies, especially wind and solar, they are intermittent. Well, that creates a problem, but also creates an opportunity. Because of the low cost of production, you're now seeing a lot of investment of batteries, both batteries and also hydrogen. So we think that's a big opportunity. As I mentioned, the US grid's about 1,200 gigawatts. Trying on the grid right now is almost 600 gigawatts of battery storage technology. And this is not just US, this is around the world, you're seeing this, trying to get on the grid. So we think that's something that really is going to get much, much larger than what it is now.

The same thing with hydrogen. Hydrogen is still waiting for final clarity from the Inflation Reduction Act. Hopefully it's coming in the next few weeks, knock on wood. But that one had a huge amount of potential because it provides longer term storage, and also, it can be transmitted through the pipeline system up to about 20 to 30%. So we think that's another less talked about opportunity. And also just expanding the grid. We're going to be rebuilding and expanding the grid, and everyone in the world is going to be expanding their electrical grid all in the next 25 years, making it much larger in a very condensed timeframe. So there's a whole bunch of pieces and parts that go into those grids, which we think are going to be a big opportunity over the next 25 years and especially the next few years. That's where it really is going to scale.

EMS:

On the other hand, Kathi, what are some of the greatest challenges you face when it comes to investing in carbon-neutral energy and how do you go about conquering them?

KC:

One of the things we think about and we understand with our experience with energy is, energy, whether it's fossil fuel or renewable, is a very cyclical area of industry area. So what we're seeing is this cyclicality in energy, but at the same time simultaneously there's a structural shift going on in the energy universe. So we're having a cyclical industry going through a structural shift in the energy environment. We think that's a big challenge, but also offering a great opportunity to understand the cyclicality and appreciate that this structural shift is going to scale up and there's going to be an awful lot of opportunity and investments to do that. So that's the challenge.

So one of the things we've done is, because we understand energy, we've been doing this for so many years, is we structured a portfolio in a way that's uniquely different than anything we've seen where we have three tranches. We have foundational, we have growth, and we have innovative. What we do in each of those areas is we invest in companies that are going to benefit from the energy transition. Either they're actually transitioning themselves now, they have deep pockets, a lot of cashflow, or they're growing and where their growth rate is, it's in energy transition. Or we have these innovative companies that are smaller, they're growing faster. But what's unique about what we do in this area is they have to have a commercialized product and they have to be generating revenue, maybe not earnings, but revenue. So that's how we're addressing that challenge as a way restructure the portfolio, to take care of understanding the cyclicality in the energy industry, but also to benefit from this secular shift.

EMS:

ESG is top of mind. And Alex, I wanted to ask you how ESG has impacted your investing in carbon neutral energy?

AC:

Obviously with ESG, we're really focused on the E part, the environment. From where we sit, we view it as a tailwind. Around the world, most obvious with the Paris Climate Accord, there is concern about carbon emissions. Obviously, the best way to deal with that is to decrease the emissions by having cleaner energy. And what we've seen to address this is kind of an arms race around the world of incentives, which has been very beneficial we think for this whole ecosystem. In the US, it's the Inflation Reduction Act. In Europe, they have multiple, but two of the big ones are Fit for 55 and REPowerEU. In China, they're quieter about it, but they're investing three times as much in the energy transition. So that's where we're really seeing the push, is countries, company, individuals really caring about the environment part, about the emissions part. So we view that as the tailwind for us.

EMS:

So as a follow-up, Alex, what advice do you have for firms who want to start their journey into carbon neutral investing?

AC:

So if you want to get into this carbon-neutral energy ecosystem that's energy transition, this decarbonization electrification, you really have to understand all the different pieces involved. Obviously we've talked about the different types of clean energy generation, we've talked about the different types of storage, technology, transmission. We haven't talked much about EVs, but even EV is probably a big part of that. So all of these little pieces and parts that move at different times, and they have different things that impact them from incentives to just the overall economic growth rate of the country, to interest rates. So to really benefit the most from this time of transition, you have to have experts who really know how to play all those parts and kind of how to do it at the right time. And obviously, we know we're biased, so we think a firm like ours.

EMS:

Well, Kathi and Alex, I want to thank you both so much for sharing your perspective with our listeners.

AC:

Thanks for having us.

KC:

Thank you. We appreciate it.

EMS:

Thank you for watching. Visit eisneramper.com for more information on this and a host of other topics.

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