Meet Canada Pension’s Green Team?

Vandana Gombar of BloombergNEF reports, Canada Pension’s Green Team Aims for $2.6Bn a Year:
Canada Pension Plan Investment Board, or CPPIB, has exceeded expectations for its new power and renewables group by investing more than C$3.5 billion ($2.6 billion) in its first year, and is now eyeing annual commitments of around the same scale.

The Toronto-based investor, with total assets under management of C$370 billion, says it will look at “very early-stage” projects and development companies, including opportunities in wind and solar and in India and emerging markets.

Bruce Hogg, head of power and renewables at CPPIB, told BloombergNEF in a phone interview that his almost-20-strong team, formed in December 2017, invested more than expected in its first year. “We found very quickly that we had a differentiated capital product.” He added: “We would like to be doing that kind of potential volume – on average – on an annual basis.”

Q: It has been 12 months since the power and renewables group was set up. What has been your experience so far? Have the targets you began with a year ago been met or been exceeded?

A: The establishment of a dedicated group shows CPPIB’s recognition of the significant growth that has been seen in the power and renewables space, and how significant the capital need is expected to be over the next few years. Our key objective in our first 12 months was to define global and regional strategies, figure out the best fit for our capital in what can sometimes be a crowded market, put together the team, and then move forward to look at opportunities. We exceeded our targets, because what we found very quickly was that we had a differentiated capital product, and that led to us completing over C$3.5 billion of transactions in our first year which is well in excess of what we had thought we would do.

We completed a transaction in Brazil at the very beginning of the year [Votorantim Energia joint venture, C$272 million]. We then picked up on ongoing conversations with NextEra Energy Inc. and bought a portfolio of operating assets in Canada and then, very quickly thereafter, announced the transaction with Enbridge Inc. to buy over C$2 billion of equity in operating and in-construction assets across North America and Europe. So, we literally hit the ground running and never stopped running.

Q: What was the target you had in mind?

A: It was a much smaller target for the first year as our focus was on just getting the business up and running. However, at CPPIB, we are careful not to have annual investment targets. What we try and do is assess what we think we can find in the market that will achieve good risk-adjusted returns for us and focus on executing on that portfolio of opportunities. What we did in the first year exceeded our expectations. Now that we are up and running, we would like to be doing that kind of potential volume – on average – on an annual basis. Some years we will do a lot, and some years we might do nothing.

Q: What is the strategy that has been finalized by the power and renewables group? What are the kind of investments you prefer and the kind you avoid?

A: At CPPIB, given our scale and scope of capital, we can provide very flexible partnership solutions that are attractive to strategic investors in some cases, or management teams or developers. We have the ability to provide capital in scale at very early stages, so we deliberately set our strategy with the expectation that we will look at very early-stage investment in development projects and development companies.

Secondly, we have the flexibility to fund construction. We can provide levered or unlevered capital and all the types of financing required to support the construction of projects. We also then have significant scale and liquidity, which is attractive for larger operating companies, or integrated companies that might be facing liquidity constraints.

In all these cases, the size of our balance sheet means that we can quickly increase the amount of capital we can provide if a partner or management team sees more opportunity. For example, we are seeing this in India where there is an explosion of new development and construction – our ability to rapidly scale up in those markets, and our appetite to be in emerging markets, makes us quite a good fit.

Take the Enbridge transaction – a large integrated energy infrastructure company based in Canada. It was facing capital constraints given the funds required for its Line 3 expansion [$7 billion replacement and expansion of the line linking Alberta’s oil fields to refineries in the U.S.]. Enbridge was looking to monetize a part of its renewables portfolio, and at the same time find a capital partner that would be able to grow with it once Enbridge got through its near-term liquidity requirement. So, we found ourselves incredibly differentiated. We could very quickly provide the C$2.25 billion Enbridge was looking for across multiple markets and we could enter into a long-term funding arrangement to build out its pipeline of offshore wind projects in Europe. We also have a reputation of being a very good and easy partner. So when we put its requirements against us and our capital, we found that, in the end, we were the only entity that really could deliver.

Q: In these investments that you made, did you get a lot of competition from other pension funds, or private equity investors?

A: We generally stay away from situations where there are multiple funds or investors that can provide relatively undifferentiated capital solutions. We haven’t participated in a number of monetizations, because we find other investors are a better fit. Typically, we’re looking for situations where either we are talking to a management team, or developer, or a strategic partner that is looking for a longer-term capital solution. In some situations, we have done things where there may not be a long-term relationship but there is an immediate capital requirement that we can fulfil. The portfolio we bought from NextEra in Canada was a situation where we were able to provide significant capital in a very tight time period. It is a competitive market, and people are always looking at alternative capital sources. That said, we generally find that in most of the transactions that we look at, by the end, it is typically just us or maybe one other investor.

Q: At a given point of time, how many investments is the power and renewables group looking at? Just wanted to get an idea of investment ratio: is it 10 you look at and pick up one or five you look at, and finalize one, or do you just begin dialogue on investments you are 90 percent likely to finalize?

A: I wish it were that easy – it is more the former. At any point of time, we are actively looking at opportunities across the globe – in Latin America, North America, Europe and India. We are also spending more time in Asia-Pacific. We identify situations or partners that we think are interesting, and we will then prioritize them. While we are monitoring a lot of things, and making sure we are building a forward pipeline of opportunities, at any point of time, we typically focus on executing no more than two-to-three transactions, and that is the constraint for us.

Q: Renewables – storage – electric vehicles, they are all interlinked. Was the Power and Renewables group involved with the recent investment in ChargePoint [electric vehicle charging network] as a part of a $240 million funding round led by Quantum Energy Partners?

A: The ChargePoint acquisition was done by separate teams that focus on earlier stage technologies, but there is increasingly an integrated approach at CPPIB to the energy transition – we think the transition to electric vehicles will happen. Our group’s focus is mainly on the generation side, and on renewable energy and storage. Our thematic investing group broadly looks at big evolutionary changes – be they demographic or technology – and takes a firm-wide perspective of things that will be important going forward. There is another group which looks specifically at newer technologies, innovation and services around energy.

It sounds a little bit complicated from the outside in, but there is a concerted effort as a firm to make sure that CPPIB has one body of knowledge and one body of experts – potentially working from different groups – who think about the energy transition on an integrated basis. So we decide – as a firm – which investments related to renewable energy, storage or electric vehicles are likely to yield the best results and which investment group and type of investment is the best fit: it could be equity, it could be credit, it could be public equity, or could be private equities. It could also be venture capital.

Q: In the whole theme of energy transition, which we track at BNEF too, what do you think could be the big surprises?

A: The biggest thing we are focused on is technology. For me, when I look at the energy transition and evolution in North America versus developments in India and other emerging markets, we are seeing a bit of “leapfrogging”. Different jurisdictions might move very, very rapidly and end up with an energy supply structure which will look very different than the more established energy networks in say North America or Europe, which were built based on technology of the time.

Q: How do you define renewable energy? What sectors are on the blacklist? Are you open to investing in large hydro projects?

A: We have a broader sustainable investing and climate change framework that we think about when making our investments. We think there are certain technologies, such as renewables, which will – for the near term – take the lion’s share of new capital investment. We think that is where we can best provide capital solutions and generate returns for our investors. We don’t draw a black line.

Our focus is typically market-driven. We expect the energy mix to be quite broad. In India for example, there is an evolution from thermal to renewable energy, but the power mix will remain diversified for a long time. I think we are cognizant that, to generate the right investment returns, we are going to have to invest in broader more diversified portfolios.

Q: There were recent reports of CPPIB being interested in acquiring the renewable energy assets of non-banking finance company IL&FS [Infrastructure Leasing & Financial Services Ltd.]. What are your plans for India?

A: While we do not comment on rumors and speculation on specific companies, I can tell you that we have been spending a lot of time in India. We are looking at a number of opportunities. We are figuring out what is the right fit for our capital. We are not in a rush. Given the scale of India – currently and expected – we would like to be a significant investor if we can find the right opportunities.

Q: What is the typical holding period for your investments?

A: We have the flexibility to effectively hold-to-maturity, and we also look at shorter term investments when they make sense. It is important to have a long-term perspective in markets like India, where there will be volatility, and our ability to take a long-term view is incredibly advantageous.
This is a great interview with Bruce Hogg, head of power and renewables at CPPIB (no relation to Cressida Hogg, CPPIB's former head of infrastructure who left the organization back in April).

CPPIB's 20-person renewables team was very active in 2018, 'hitting the ground running', and their high activity explains why the organization issued green bonds back in June, the first pension fund in the world to do so.

As stated in the interview, they're looking at opportunities across the world but are spending more time in India where renewable capacity addition may surge by 50% in 2019:

After a year of relative lull, renewable energy will be back on track in 2019 with new plants being set up and the introduction of the much anticipated policy on battery storage. This will also be the year when floating solar projects will add significant capacity to the country’s generation scene, according to the India RE 2019 Outlook published by renewable energy consultancy Bridge to India.

Total renewable energy capacity addition in 2019 will be 15,860 megawatts (MW), up 50% compared to 2018, when there was a lack of clarity on goods and services tax (GST), safeguard duty and BIS standards, besides slow construction of large parks and poor grid connectivity. “Dictated purely by tender timetables, capacity addition should jump from 10,560MW last year to 15,860MW in 2019,” the report, shared exclusively with Mint, estimates. “Most of the uplift will come from utility scale solar although rooftop solar is also expected to register another year of fantastic growth.”

The renewable energy sector in India had a sobering year in 2018 with the number of new projects slowing down and investors finding that the sector was generating lower power and financial returns than they had expected, Mint had reported in November.

But the tide is about to turn. In fact, the recent report estimates that 2019 will, for the first time, cross the 10,000MW of generation capacity in utility scale solar, that is, large solar farms. More than 75% of new capacity is expected to come up in Rajasthan (over 2,000MW), Andhra Pradesh (1,950MW), Tamil Nadu (1,872MW) and Karnataka (1,555 MW). More than 30 developers are expected to commission utility scale solar projects in 2019, with Azure Power and ACME Solar leading the pack, while Ayana Renewable Power Pvt. Ltd, Raasi Green Earth Energy Pvt. Ltd, Asian Fab Tec Ltd, Think Energy Partners (TEP) and Technique Solar Ltd are expected to commission their first ever projects in India.

Floating solar is expected to make major strides as well in 2019. Recent tender results indicate a sharp dip in tariff premium over ground-mounted plants, while the falling cost and constraints in land and transmission capacity will force policymakers to prioritise floating solar. “We expect a surge in floating solar tenders with an aggregate issuance of up to 5GW. Our estimates include 83MW of floating solar capacity addition (33MW, NTPC Kerala tender and 50MW, SECI Uttar Pradesh tender).”

Rooftop solar capacity addition in 2019 is expected at 2,368 gigawatts (GW), 49% higher than in 2018, while about 290MW will come from off-grid capacity, mostly from solar pump installations. The report estimates that the new year will also witness greater adoption of new technologies such as mono-type modules, micro inverters and storage, with the likely announcement of a national storage mission.

For wind energy, the report expects that projects will be commissioned by Adani, Orange Renewable, Engie, Sembcorp Industries Ltd and Torrent Power Ltd. The sector will add about 2,300MW capacity in 2019, up 18% over the previous year, all of which will come up in Tamil Nadu and Gujarat.

The report, however, warns against overt exuberance by the government in announcing new renewable energy projects. In December 2018, the ministry of new and renewable energy had announced that it plans to issue 80GW (60GW solar and 20GW wind) of tenders by March 2020. “We believe that such large issuance is implausible and not consistent with the overall power demand-supply situation, or actual land and transmission infrastructure available. A pressure to issue more tenders would see a recurrence of problems witnessed last year—lack of planning, poor tender design, arbitrary tariff ceilings—resulting in under subscription and cancellations.”

Tariffs in the renewable energy sector will also remain the same, within the current ₹2.50-3.00/kWh range, depending on project location and offtake risk profile, given no major change in input costs, the report added.

Overall, the sector is bound to continue its struggles with GST, safeguard duty, funding availability and transmission connectivity, Vinay Rustagi, managing director, Bridge to India, said in a note.

With the general elections around the corner, “politics is likely to dominate over reforms and the swift resolution of sector problems is unlikely,” Rustagi said. “On the plus side, we don’t expect any retreat in the push for RE, irrespective of who comes to power.”

The Indian government has set an ambitious target of generating 100GW of solar power by 2022 from the existing installed capacity of 21.65GW. However, the likelihood of achieving the target has repeatedly been questioned by industry insiders.
Interestingly, during a recent trip to India CPPIB CEO Mark Machin met with the Indian Prime Minister Shri Narendra Modi to discuss CPPIB’s strategic vision to invest up to a third of the Fund in emerging markets, including India:

Mark is developing relationships at the highest levels in India, China and elsewhere because let's face it, in these emerging markets, if you don't have political ties at the highest level or aren't partnering up with groups that do have them, good luck getting a seat at the table for major deals (also, truth be told, I'd rather have Mark Machin representing Canadians than our own PM who bungled up his trip to India).

Anyway, whether it's India, China, Mexico and other Latin American countries, CPPIB is busy developing its relationships across the world trying to find the very best opportunities across public and private markets.

I invite you to stay abreast of the latest news at CPPIB here and follow the organization on Twitter and LinkedIn here and here (I don't do Facebook).

CPPIB recently announced it started managing additional CPP contribution amounts affecting millions of future beneficiaries.

Millions of Canadians watched CTV News last night and saw a report where a $300,000 ad campaign from the Canada Pension Investment Board landed in some prime-time slots on Canadian television, but critics are decrying it as a waste of taxpayer money:
The two-month campaign is designed to promote the work of the Canada Pension Plan Investment Board, using slogans like “investing today for your tomorrow” as a cover of Great Big Sea’s “Ordinary Day” plays in the background. The spots have appeared during breaks in the NFL playoffs and during the IIHF World Junior Hockey Tournament.

Canadians are required by law to contribute to the CPP, which has critics questioning the need to advertise something they are forced to participate in.

“I think it’s a waste of money,” Aaron Wudrick, the federal director of the Canadian Taxpayers Federation, told CTV News’ Kevin Gallagher. “Canadians pay their CPP premiums because they want a return when they retire. They're not paying for ads to run during football games.”

In the new year, the federal government increased the amount for CPP docked off paycheques to 5.1 per cent as part of a one-per-cent increase to be phased in over the next five years.

The investment board insists that it is arm's length organization from the government and that the ad campaign has nothing to do with the increasing CPP deduction or the upcoming federal election.

Instead, they say it’s needed to change the public perception of the organization, as internal polls suggest 41 per cent of Canadians believe there won’t be any money left for them when they retire.

"Our public awareness effort simply aims to set the record straight,” Michel Leduc, the CPPIB senior managing director, wrote in a statement.

Still, some advertising experts believe the campaign could backfire.

“It has lovely production values, but it doesn't reassure me that CPPIB is investing wisely,” said Jonathan Rose, a government advertising expert at Queen’s University.
Now, I have mixed views on these ads. On the one hand, I agree with people who think it's a waste of money. A friend of mine put it this way to me earlier today:
"How much money did CPPIB spend for these ads during prime-time slots? $300,000+ dollars? I'd rather if the money stayed in the Fund and grew over many decades so my children can have decent CPP benefits. I also don't think the Canadian government should do any ads on the Canada Pension Plan, it's a total waste of money, it should advise employers who can then explain it to employees, it can just post material online for additional resources. I feel the same way about these dumb ads on the Federal Deposit Insurance Corporation (FDIC). Why do Canadians need to know the FDIC's role? Most couldn't care less just like they couldn't care less about CPPIB as long as they're doing a good job and being good stewards of the money they're managing on behalf of all Canadians. Also, I'd be curious to know which advertising firm is behind CPPIB's ads and whether it's the same one the FDIC uses and even if it's a different one, whether they're big backers of Trudeau's Liberals."
Now, my buddy is a cynical Greek-Canadian like me but if he's thinking this way, I guarantee you a large cross-section of the population in Canada is thinking the exact same way ("Liberals, they love spending other people's hard-earned money!").

On the other hand, I agree with Michel Leduc, CPPIB's Senior Managing Director & Global Head of Public Affairs and Communications, the organization needs to raise awareness efforts and set the record straight. Other large Canadian Crown corporations regularly have ads on television, why can't CPPIB, the largest and most important one of them, also place ads to inform Canadians of its operations and success at managing the assets of the Canada Pension Plan?

Also, if you think about it carefully, CPPIB creates many direct and indirect jobs and by being a good steward of capital, managing Canadian retirement contributions, it's actually saving taxpayers millions over the long run.

But as you can see from the public backlash, it's a bit of a touchy situation, CPPIB has 22 million + captive clients who scrutinize all expenses and public perception matters.

Unfortunately, this latest campaign seems to have backfired but I too am frustrated with clueless Canadians who don't understand the difference between CPPIB and the Canada Pension Plan and how lucky we are to have our retirement contributions managed by an organization which operates at arm's length from the government and whose sole focus is to maximize returns over the long run without taking undue risks.

Update (January 28, 2019): Barbara Shecter of the National Post reports The Canada Pension Plan Investment Board is poised to become the first global pension fund to issue a euro-denominated green bond. You can read the article here and see CPPIB's press release here.