Earlier today, CDPQ announced its power transmission platform Verene Energia acquired a strategic 124‑km asset in Brazil:
SPE 7 will be integrated into Verene Energia, CDPQ’s power transmission platform, expanding its portfolio of existing assets
Acquisition
reaffirms CDPQ’s interest in the transmission sector where it sees
opportunities for further investment to unlock the full potential of
renewable energy projects
Verene Energia, a power transmission platform, and
its owner CDPQ, a global investment group, today announced an agreement
with Equatorial Energia S. A. for the acquisition of SPE 7, a strategic
and modern power transmission network spanning 124 kilometres in the
state of Pará, in northern Brazil.
The transaction, valued at up
to CAD 210 million (BRL 841 million), marks CDPQ’s third power
transmission investment in Latin America in two years, following the
acquisition of power lines extending nearly 1,800 kilometres in Brazil
and Uruguay, which are now part of Verene Energia, a power transmission
platform launched by CDPQ.
Equipped with two high-tension
transmission line segments and one substation, SPE 7’s transmission
network connects the northern and the northeastern parts of Brazil, an
area that predominantly produces renewable electricity. Built in 2020,
with a sound design and operating track record, SPE 7 is well positioned
to continue playing a critical role in meeting Brazil’s national grid
low-carbon standing.
Emmanuel Jaclot, CDPQ’s Executive Vice-President and Head of Infrastructure, said: “This
new transaction reaffirms our commitment to investing in critical
assets that unlock the full potential of renewable energy projects and
accelerate energy transition, particularly in Brazil, a core market for
us. To this end, we will continue to grow Verene Energia, the driving
force for the development and operation of CDPQ’s power transmission
assets in Latin America.”
Financial close is expected by December 2024, subject to customary closing conditions and relevant consents and approval.
ABOUT CDPQ
At CDPQ, we invest constructively to generate sustainable returns
over the long term. As a global investment group managing funds for
public pension and insurance plans, we work alongside our partners to
build enterprises that drive performance and progress. We are active in
the major financial markets, private equity, infrastructure, real estate
and private debt. As at December 31, 2023, CDPQ’s net assets totalled
CAD 434 billion. For more information, visit cdpq.com, consult our LinkedIn or Instagram pages, or follow us on X.
To understand this deal, let's go back to November of last year when Abigail Adriatico of Benefits and Pensions Monitor reported CDPQ acquired central Brazilian power transmission network:
Canadian pension fund Caisse de dépôt
et placement du Québec (CDPQ) has signed a deal to acquire Integracao
Transmissora de Energia SA (Intesa), a 695-kilometre power transmission
network in central Brazil.
Intesa’s power transmission network extends across central Brazil and has two substations in the Tocantins and Goiás states.
With the transaction worth up to $108.5 million, Intesa will be
integrated into CDPQ’s Latin American power transmission platform,
Verene Energia.
CDPQ has been planning to increase the size of its power transmission
business over the next five years, says Eduardo Farhat, managing
director, infrastructure, Latin America at CDPQ, in an article by Valor
International.
“The acquisition of Intesa was a natural step, for operational
synergies and to give Verene scale. The transmission sector in Brazil is
part of our energy transition and decarbonization strategy, as it
connects renewable sources to consumption centres,” he says.
Second power transmission investment
The deal marked the second power transmission investment by CDPQ in
Latin America within the past 18 months. The first was its acquisition
of Terna Group’s portfolio of power transmission assets in Brazil, Peru,
and Uruguay in April 2022, which had nearly 1,100 kilometers of power
lines and an equity value worth over €265 million.
The pension fund expects to complete the transaction by December as
closing the deal will still depend on the approval of Conselho
Administrativo de Defesa Econômica (CADE), Brazil’s antitrust watchdog,
and Agência Nacional de Energia Elétrica (ANEEL), Brazil’s energy
regulator.
“CDPQ really likes the transmission sector in the country. We like
the regulation; it’s a proven sector that requires new investments. In
other words, we are ambitious with Verene,” says Farhat.
“In the next five years, we want to make it one of the top 10
companies in the sector in Brazil. Whether this happens or not will
depend on our ability to make the right transactions, both in terms of
buying operating assets and assets to be developed.”
CDPQ has been investing globally in private equities, private debt,
infrastructure, and real estate markets. It began its investments in
Brazil’s infrastructure in 2019 with its purchase of Transportadora
Associada de Gás (TAG), a provider of natural gas transport and storage
services, in partnership with ENGIE, a private power producer.
The fund’s net assets have totaled to $424 billion as of the end of June 2023.
There you have it, Brazil is growing nicely and CDPQ wants a slice of its electricity transmission via its Verene Energia, CDPQ’s power transmission platform.
Of course, CDPQ isn't the only major Canadian pension fund that likes transmission assets. OTPP and others have also invested large sums in this sector and as long as regulations are tight and benefit them, and they hedge foreign exchange risk, why not invest in these projects?
Today, I read this interesting comment on LinkedIn from Mackenzie Investments on the global electricity grid:
Recently, the Mackenzie Greenchip Team was in Madrid visiting
Iberdrola, the largest power utility in Spain, when the lights literally
went out. Power was restored within seconds, but the regional outage
was clearly an embarrassment for the executives sitting around the
table. More serious outages, such as during the Texas deep freeze of
2021, left 4.5 million homes and businesses without heat, resulted in
almost $200 billion in damage and was responsible for at least 200
hundred deaths.¹ It is impossible to overstate the importance of robust
and reliable regional electricity delivery. In coming decades, the
global “grid” will either become the linchpin of the energy transition
or its greatest bottleneck. This note will explore the breadth of grid
investment opportunities and why Greenchip believes investors should
increase exposure.
Thomas Friedman once described the global electricity grid as the
“largest machine ever built.” According to the International Energy
Agency (IEA), there are about 80 million km of overhead and buried
cables worldwide, roughly 100 trips to the moon and back.² Reaching
countries’ national energy and climate goals by 2040 will require at
least doubling this length of wire. In their landmark report,
Electricity Grids and Secure Energy Transitions, the IEA argues current
annual investment of about $300 billion USD will need to increase to
about $600 billion by 2030 and then reach $800 billion per annum between
2040 and 2050.³
Average annual investment spending on electricity grid, IEA Net Zero scenario, 2015-2030
It is all based on growing demand. In its base case scenario, the
IEA projects that total global electricity demand will more than double —
from 25,000 TWh in 2021 to 54,000 TWh in 2050 (IEA Net Zero scenario is
higher).³ This equates to a compound annual growth rate (CAGR) of 2.7%
—similar to the growth experienced in the 1991-2021 period. While the
last few decades were defined more by developing economies bringing
electricity to formerly unconnected households, the drivers of future
growth are electrification of sectors that previously used other sources
of energy, like transportation (oil) or industrial and residential heat
(natural gas), and the intensification of modern electricity-based
digital services. In the latter category, there is no greater source of
demand than the explosion of investment in artificial intelligence (AI)
and, more generally, in data centres.
The enthusiasm for AI set off by the release of ChatGPT and by the
massive gains in the NVIDIA stock price has launched a global arms race
to accelerate the already rapid build out of data storage and
processing capacity. Bank of America expects that an additional 0.5% of
electricity demand CAGR will be attributable to data centres in the
coming decade, equivalent to what they expect to be added by the
transition to electrified transportation.⁴Market research group
Dell’Oro estimates annual global data center CAPEX to nearly double from
$240 billion to more than $400 billion between 2022 and 2027.⁵
Considering recent announcements from dominant tech companies, these
estimates could be low. Amazon is projecting $150 billion in data center
investments over the next 15 years, while Microsoft, in combination
with OpenAI, is planning a single next-generation super data center
project with a price tag of more than $100 billion.⁶𝄒⁷
"When the dust settles, America's power needs and the consequent capital expenditure will be staggering." – Warren Buffet⁸
We’ll leave questions of the investment returns — or benefits to
humanity — from AI to businesses that could justify such massive
allocation of capital to future commentaries. Regardless of AI,
Greenchip expects that the enormous capital investment required to
rebuild and expand the grid will in fact materialize. Politicians
realize that electricity blackouts are potentially fatal to their
incumbency. In the past year, we have observed that large power
utilities are already shifting CAPEX from renewable installations to
transmission and distribution. Our belief that the risk adjusted return
on grid investments can be very attractive is shared by utility
executives.
Segmenting grid opportunities
At Greenchip, we have been investing in grid suppliers and
operators since the foundation of the company, seeing it as essential to
integrating new renewable electricity supply and to the environmental
case for electrification of transport and other energy-intensive
industries. Unsurprisingly, such a complex machine has numerous
suppliers and operators and numerous ways to invest. “The grid” is much
more than just wires, though the wire itself is an interesting
investment opportunity.
One way to explore the investment opportunities is to divide them into three buckets based on voltage:
High voltage transmission, roughly 345 kV to 1,100 kV;
Medium voltage productsfor distribution and commercial/industrial applications, 2.4 kV to 230 kV; and
Low voltage productsfor residential and small commercial consumers, 240 V to 600 V.
In each of these buckets there are numerous roles in the supply
chain: the engineering, procurement and construction (EPC) contractors;
equipment manufacturers (transformers and switch gear); materials
producers (primarily copper and aluminum) and the operators (utilities).
Equipment providers
Private investment in data centres, warehouses, charging stations,
new automated factories and other construction has driven spending in
low/medium-voltage products to over 20% growth rate in recent years,
especially in the US. Since much of this spending has been driven by
aggressive capital markets and government subsidies such as those in the
Inflation Reduction Act, there has been relatively little price
sensitivity attached to this growth and margins have exploded.
For example, net margins at each of Hubbell and Eaton, US
low/medium voltage equipment manufacturers, have increased from
approximately 10% to 15% since 2019. Multiples have also expanded — from
less than 20 times earnings to nearly 30 times for the same two
companies. Share price performance has been dramatic, more than doubling
over the time frame, and valuations seem commensurately stretched.
“Investments into high, medium and low voltage infrastructure must
keep pace with each other to avoid exacerbating system imbalances.
Unfortunately, investor attention has disproportionately focused on low
and mid voltage opportunities so far.” – Gregory Payne, PhD, CFA, Senior
Vice President, Portfolio Manager, Team Co-lead Mackenzie Greenchip
Team
While we have owned Eaton and Schneider Electric in the past,
price has steered us to more attractively valued companies, mostly
focused on the higher voltage space. Companies like Siemens Energy,
Hitachi and Mitsubishi Electric Corporation all manufacture high voltage
power supplies. In the case of Siemens Energy, the world’s second
largest provider of such equipment (after Hitachi-ABB, both of which are
Greenchip investments), backlog has more than doubled since 2021 and is
equivalent to four years of sales at current rates. The company
recently raised its guidance for revenue growth in its grid division to
20% and is investing in a new transformer manufacturing facility in
Charlotte, North Carolina. Meanwhile, Hitachi-ABB and GE Vernova (world
#3) are following suit.
Utilities
Global power utilities and their regulators are also turning in
the direction of higher voltage projects driven both by investment
opportunity and necessity. Greenchip holds several diversified utilities
such as Engie, EDP, Enel, SSE, Avangrid and Eletrobras. While they are
all major developers and operators of generating plants, about 40% of
their earnings, on average, comes from transmission and distribution.
Business division success is symbiotic. The IEA estimates that there is
nearly 1 TW of advanced-stage wind and solar projects around the world
currently waiting for a grid connection — about three years of backlog.
Grid congestion costs more than tripled between 2019 and 2022.
"It has not surprised us that our utility holdings are directly
more CAPEX to high voltage equipment — equipment that is increasingly
backordered, in some cases as much as four years.” – Jonathan Prestwich,
Investment Analyst Mackenzie Greenchip Team
Cables and wires
In addition to purchasing transmission equipment, utilities need
heavy duty cabling to connect offshore wind developments, replace
overhead transmission corridors, bury lines to reduce weather-driven
outages, and for interconnections between different electric grid
systems. Interconnections enable more import/export of electricity and
are utilized for balancing regional variation in intermittent renewable
production (for example, bringing North African solar power to Europe by
way of the Mediterranean). Leading players in the cable manufacturing
and installation industry are all European, led by Prysmian out of Italy
with France’s Nexans following closely behind. Both have net margins
just under 5%, and given long-term demand drivers and barriers to entry,
we envision margin expansion opportunity.
As commoditized as cabling sounds, we are watching several
technological developments closely. For example, high voltage
transmission cables constructed with smaller and lighter carbon fiber
(instead of steel) cores enable more of the conducting aluminum to be
wrapped around the cores. Replacing existing transmission lines with
this newer technology can increase current and potentially reduce the
brutal slog of getting new corridors approved. High temperature
superconducting cables are another opportunity. These are composed of
wires constructed from composite conducting materials, encased in a tube
of liquid nitrogen, or some other super cooling liquid, that enables
electrons to flow with almost zero resistance.
According to the New York Times, the US added just 403 kilometers
of high voltage transmission lines in 2023. This in mind, it seems
unlikely that the adoption of theoretically possible, but prohibitively
expensive, cabling will replace aluminum and copper anytime soon. Copper
itself is a more interesting investment opportunity to Greenchip than
superconducting materials. We already see that the 25 million tons of
copper produced annually is about half of what will be required to meet
the growing needs of the energy transition.
Engineering and construction
Historically, transmission and distribution have been small
divisions in larger engineering firms (EPC). Increasingly, grid EPC work
is covered by highly specialized firms with significant barriers to
entry. Companies like Quanta Services and Mastec (a current Greenchip
holding), are consolidating the industry. While the business drivers are
similar to transmission utilities, EPC returns are earned up front and
can come with significantly higher profit margins. That said, these
earnings can be more volatile, and diversification is important.
Conclusion
Rebuilding and expanding the global electricity grid are essential
to a successful energy transition. It also represents an incredibly
rich and diverse set of investment opportunities with multiple entry
points and the potential to diversify risks and potential returns. About
one-third of the Greenchip portfolio is currently exposed to direct
grid investment.
Sources
¹ Source: Texas Tribune (February 2021), New York Times (February 2021).
² Source: IEA Electricity Grids and Secure Energy Transitions, November 2023.
³ Source: Net Zero by 2050 – Analysis – IEA.
⁴ Source: Bank of America Research Report.
⁵ Source: Data Center IT Capex – Dell’Oro Group (delloro.com)
⁶ Source: Amazon Bets $150 Billion on Data Centers Required for AI Boom – BNN Bloomberg.
⁷ Source: Microsoft’s $100 billion ‘Stargate’ datacenter for OpenAI may be AI’s ‘Star Wars’ moment – Fortune.
⁸ Source: Berkshire Hathaway 2024 Annual Letter.
I like this comment because it discusses how rebuilding and expanding the global electricity grid presents diverse set of investment opportunities with multiple entry points and the potential to diversify risks and potential returns.
As far as CDPQ, OTPP and others investing in transmission through their platform companies, they know what they're doing, capitalizing on a long-term trend.
Below, China’s Ultra-high voltage (UHV) technology recently won a major project in Brazil. Chinese giants such as State Grid and China Southern Power Grid allow convenient power supply across China's vast territory.
Now, China's power technology is gaining global attention through projects overseas. State Grid recently signed the largest power transmission concession project in Brazil's history which will supply energy to 12 million individuals.
This adds to a series of successful projects in Brazil, demonstrating China's power capabilities and contributing to global electricity equality. China's UHV transmission projects continue to set global records, aiding countries with large terrains and significant disparities between power generation and consumption areas.
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