Welcome to zero I am Akshatrati this week, sun wind and making money. The COP twenty eighth meeting that ended in December led to many big announcements. That's the nature of these global climate diplomacy shindix. Lots of countries make big promises, such as tripling renewable energy, transitioning away from fossil fuels. It's only really years after that you can tell whether these countries were serious and delivered on those
promises or it was all just good sound bites. However, there was one achievement on the first day of COP twenty eight in Dubai that is delivering results. The United Arab Emirates, the host country, pledged to put thirty billion dollars into a new climate finance fund named al Terra, and some of that money was immediately allocated to scaling up renewable energy projects in developing countries where the need
for finance is the greatest. One of the firms that's going to put some of those billions to work is the Canadian asset management firm Brookfield. Brookfield already manages more than eight hundred and fifty billion dollars worth of assets, everything from real estate to private equity. About a tenth of its total assets are in renewables and the climate transition. In twenty twenty one, its renewable division launched the fifteen
billion dollar Brookfield Global Transition Fund. At the time, it was the world's largest private fund of its kind dedicated to financing the energy transition. Brookfield is now raising a second fund of the same kind, and Alterra will invest two billion dollars in that fund. More importantly, and separately, Altera will invest one billion dollars in a new fund that's supposed to only invest in developing country Yes, so, how exactly will it work? To help me understand, I
spoke to Connor Tesky. He started his career at Brookfield eleven years ago in private equity and became the CEO of Brookfield Renewable Partners in twenty twenty. I spoke with Connor at COP twenty eight in December to ask how to invest big money in developing countries, how to make a good return on renewables, and how to transition fossil fuel assets into clean energy.
Connor, welcome to the show.
Thank you, thank you for having us.
Now at Brookfield. You do a few things, but you do head the renewables section, and here at COP twenty eight there is a lot of talk about renewables. There's a global goal to try and trip renewables by twenty thirty. Seems Brookfield's target is much more than just tripling, isn't it?
I would say so yeah, And when we hear the global target of tripling renewables by twenty thirty, that seems very achievable. When we look across our business today, almost across asset classes and across geographies, the one thing that is overwhelming today is simply the amount of demand for clean power, in particular from corporates. And this has been accelerating for years and is at its highest level today and only expected to continue to accelerate going forward.
As is in the management for renewables for you, were fifty seven billion dollars in twenty twenty, sixty nine billion dollars in twenty twenty one, and seventy seven billion dollars in twenty twenty two. Clearly it's gone up, but it's slowed down a little bit.
I wouldn't read too much into that trajectory. I would say our our business is growing faster today than ever before. And assets under management. There's a lot of things that go into that. What assets are we building, what assets are we buying, what assets are we selling. But if there was a number to focus on that is illustrative of the growth in our business and the growth of the renewables market going forward. Is our run rate on a global basis is? Today we bring online about seven
thousand megawatts of new capacity every year. That number is up significantly versus three or four or five years ago.
Now we're talking renewables, but of course there are different forms of renewables, and solar deployment globally is at a record base. Wind is struggling. So can we just talk through the different technologies. Where do you see progress and where do you see challenges?
You're highlighting a great point. Today's solar is the fastest growing tech technology on a global basis, and it's important to recognize why. Twenty years ago, if you were developing renewables, you were likely developing a hydro electric facility. That's millions and tons of steel, millions and tons of concrete, multi year construction period, usually somewhere out in the wilderness. You
need to camp workers there overnight, et cetera. Go back maybe twelve to fifteen years ago, if you were developing renewables. You're developing wind that is far easier than hydro, but it's still special ships to transport the equipment. You've still got to shut highways at night. If something breaks, you got to get a crane. And then came a long solar. The majority of solar is built between three and twelve
feet above the ground. The equipment is modular. You can start a construction program on all four sides and meat in the middle. And therefore, if you can generate the same financial return building solar versus building wind or hydro, you will naturally pick solar because it is the least operationally intensive. Now that being said, the whole world can't
run on solar. The nature of intermittent renewable technologies is we need different forms of energy that have differentiated load patterns to provide a complete energy solution to the grid. So while solar is accelerating now and wind perhaps accelerated a few years ago and is plateauing off, they all
need to grow going forward. And our view is some of the headwinds being felt in the wind space are quite discrete in nature and the industry will move past them and you will continue to see very significant growth in the wind asset class.
When do you see that happening very readily?
A number of the issues that took place in wind are discrete. They can be attributable to disruptions in shipping and a cohort of contracts in a number of wind farms around the world, in particular offshore wind that we're struck, I would say with unfortunate timing and unfortunate economics for
those across the value chain. We are already seeing the industry react very quickly, not only to adjust those economics to enable the greater build out of wind going forward, but also more appropriate risk sharing across the value chain. That will ensure we've learned our lessons from those experiences and the whole industry will be better equipped to not repeat those going.
Forward, which is going to cause prices to go up for wind deployment. Our customers, the off takers ready for it. Are governments ready to ensure that those prices are reflective of an industry that needs to grow. Absolutely, the wind industry has suffered critical setbacks in recent years. The pandemic caused disruptions in the global economy and trade, pushing up
the cost of coodities, labor and borrowing. That's a problem because a lot of wind farms are locked into contracts agreed two years ago, and that means produces a bound to projects that sell power at fixed rates, which, given today's cost structure, makes the project unprofitable. As a result,
developers have been forced to walk away from contracts. The long list of cancel projects is causing a headache for governments across Europe and the US that have set targets to reach a certain amount of wind power in their mix. Now these governments are going to have to pay more than they previously thought.
And this is probably one of the most dramatic things that we are seeing across our business around the world today. Is yes, due to financing costs increasing, capex costs increasing as they have over the last twelve to twenty four to thirty months, you have seen corporate off take contracts appropriately adjust to ensure that renewable developers can continue to earn an appropriate margin and capital can continue to be attracted to the sector. But what's important to recognize as well,
there's two dynamics. One they still are typically at a significant discount to retail costs, so the end customer is still getting a energy price discount a cost savings by using renewable power. And two, the demand for green power today is higher than it has been at any point in history. There has long been a supply demand imbalance, meaning there is more demand for new green power off takes and there are ready to build projects available. That
supply demand imbalance today is stronger than any before. We don't struggle to find demand and off take to pull projects out of the ground. Well.
One example played out in the UK where I live, where the gun brought in a bid to get offshore wind deployment a lower price than had ever been set, and the government was pretty confident there would be bids coming in. Zero came in and so they've had to change and increase their bid for the next round.
That sounds about right, yeah, and.
They had to increase their price by forty percent. The next auction hasn't happened, so we'll see if new bids come in, but the industry says they are interested in it now. Tripling renewables by twenty thirty is as we've looked from other analysts to quite doable. The bottlenecks that they see isn't really deploying the assets for wind and solar, it's really grids and permitting. How are you thinking about them?
You nailed it. Depending on the region around the world, there tends to be three bottlenecks to the development of renewables, securing land, securing grids, and securing permits. And I would say in different regions around the world it's a different one of those three. The vast majority of the bottlenecks are permits and interction. What I would say as well, these are real limitations. Today, there is a very cohesive effort, I would say, in almost every major market around the
world to accelerate and overcome some of these bottlenecks. One of the very positive outcomes over the European energy crisis over the last two or three years, if you've seen concerted efforts across the EUS to accelerate the permitting process, that had a noticeable impact on the ground at the local development level. It was immediately felt and allowed more projects to get into planning and construction than at a
faster rate than before. When it comes to interconnection, there is going to need to be significant grid enhancement going forward to support the build out of renewables. Grids around the world are attracting that capital. It will continue to be a bottleneck for some period of time, but it's also important to recognize that many of the solutions are accelerating equally. As fast storage is being built out even
on a relative basis, growing faster than renewables. That helps address some of the interconnection concerns, as well as the growth of asset classes like distributed generation where you can produce the electricity right at the point of the end consumer and not be as reliant on the grid. So you're absolutely right, those are the limitations today. They are
getting better. There is still work to do. I would say the investors and operators who will drive the greatest amount going forward are the ones most well positioned to navigate those issues because there are not immediate fixes.
More from the conversation after the break. Now, developed markets are places where you have less risk of all kinds and you're able to invest heavily. What is the split for Brookfield between developed economies and developing countries Globally?
We like to think we're generally about three quarters in develop markets. Around the world and twenty to twenty five percent in developing markets. We have a long history in developing markets, in particular large businesses in Brazil, India and Latin America, and we are actually in the process of expanding that mandate to take some of our capital and our operating capabilities to address transition investing in a wider spectrum of developing market.
Can you talk a little more about what new markets are you looking at in the developing countries?
Certainly absolutely a greater reach within Latin and Central America, and then Eastern Europe and then the last one I would highlight being Southeast Asia. Those are three markets that we see tremendous operation tunity, and in fact what's important to recognize is we have a global platform and when we look to invest in these countries, in these regions,
we need two things. We need one to see a market opportunity there, and then two we need to have an appropriate pool of capital that matches that market opportunity. We've just recently announced a vehicle that will focus specifically on those developing and emerging markets with a mandate of accelerating the transition in those regions. So we're now very excited to have that second component, which is that pool of capital to appropriately direct to that investment opportunity set.
You're hinting at a new fund that was announced here at COP twenty eight, the al Terra Fund, which at least as plans go, is supposed to have thirty billion dollars in it, where twenty five billion dollars would be invested in developed countries and five billion dollars would be used as concessional finances attract more capital and specifically targeted in developm in countries. How much of that is Brookfield going to be participating in and how exactly.
Al Tara and Brookfield are going to partner in two different ways. Al Tara is making a very meaningful commitment to our Global Transition Fund, which is currently on its second vintage. And then, perhaps more interesting to the comments you just made, Altara will also be committing one billion dollars to what we call the Catalytic Transition Fund, which we'll focus on accelerating decarbonization and transition investing in emerging markets.
And what's very exciting about the one billion dollars that al Tara will commit to that fund is it comes in the form of catalytic capital that enhances the returns to other LPs in the fund, with a view of crowding in more institutional capital and really scaling up the pool for investment in those markets.
Let's break down that jargon. What Connor is saying is that at Brookfield will use al Terra's billion dollars to bring in other investors and perhaps launch a four billion dollar fund dedicated to investing in renewable projects in developing countries. Why would other investors join It's because the profits on the billion dollar investment will be capped, and so the other investors joining in the fund can take more of
the profits. And that's important because most private investors putting money in, say a solar farm in Kenya, see it as a riskier investment than a solar farm in France.
That's because developing countries can often have currencies that fluctuate, a lot of bureaucracies that can mean payments are delayed or myriad other problems, and so the private investors want higher returns from a Kenyan solar farm than they would from a French solar farm, and that's what all Terra's billion dollar is promising to deliver.
But you just said that there are billions being invested in developing countries already. Is it just more billions going in or is it actually opening new marks?
Great? Great question. To date, the majority of the capital going into emerging markets has it has gone towards transition or decarbonization investments, But I would say ones that are more de risked, and therefore within those markets, it is a somewhat limited opportunity set that most investors are allowed
to target within these markets. With now the benefit of the Catalytic Transition Fund and its differentiated investment profile and return mandate, there are different things we can look at, and I'll give you an example to make this play out.
If we go to large developing markets like India and Brazil and we use our large global corporate off take relationships and we partner with some of the biggest global corporates simply to build wind and solar farms there with twenty year inflation link corporate off takes, we add absolutely we're already doing that in markets like India and Brazil and Columbia to date.
Connor refers to corporate opt takes or corporate PPAs interchangeably. PPA basically stands for power purchasing agreements, and global companies are one of the biggest reasons for signing these power
purchasing agreements for renewable deployment across the world. It's because companies like Amazon or Google want their warehouses and data centers to be only powered by renewables, regardless of where they operate in the world, and so they signed contracts with utilities that build solar wind farms, with almost all the electricity generated being fully consumed by these companies. It's a good deal for the utilities because they know these
global companies will pay them on time. And it's a good deal for the global companies because they get clean energy in a country whether grid is typically powered by fossil fuels. And from an investor perspective, it means this type of solar farm asset is risk free, lower risk, or as Connor says, de risked.
But in some of the emerging markets, maybe there isn't that well defined robust revenue construct. Maybe the corporate ppa market isn't as long in term, and therefore things like the catalytic capital appropriately adjust the risk return profile to make it more attractive. Maybe in even more mature developing markets like Brazil and India. It's not necessarily the down the fair Way wind and solar, but maybe it's getting into things like building out hydrogen or equipment supply chains
and things like that. So while there is capital flowing into some of those developing markets already, there is no doubt that the Catalytic Transition Fund, with its differentiated risk return profile, certainly one increases the number of geographies, but even within those geographies increases the spectrum of investible opportunities.
We do not name any new geographies that you have not invested in which could open up with.
This, So today we are not invested in Southeast Asia, so that is a market that will open up as a result of this. We are quite active in Latin in Brazil that goes very long to Brookfield's history. But I would say there are more geographies we can now go to, particularly in and around Central America where perhaps we haven't gone in the past, as well as Eastern Europe, where we have a modest presence but not in all countries. And with this fund, we now have the mandate to
go into more countries in those regions. So I would expect to see the Catalyic Transition Fund lead to us bringing our global platform and its operating capabilities and its capital to a large number of new countries.
Well, the all Terra Funds catalytic portion has been pitched as never done before, is going to make a revolutionary difference. Now, we as journalists haven't really got to details, and so we are taking this claim on face value. But it's difficult to make this capital work. How serious do you think EUAE is when it's making this investment?
Very serious, and I would perhaps put it in three buckets. The first is simply the size of the commitment they are making, which is truly transformational and well, a significant amount of that out capital has been allocated today, much of it will be allocated in the future, but the sheer size of it and the multiplier effect it will have on crowding in other institutional capital, it should not be dismissed. This is quite transformative and very commendable what
they've done. From that perspective, the second thing, which I think can be taken to demonstrate the seriousness of it and how it will have an enduring impact, is they have partnered with the leaders of this type of investing around the world, have sought out council from the leading transition platforms, all that have slightly different mandates and invest slightly differently, but they have worked with those and supported those and picked very strategically who their partners are in
order to have the best effect. And then the third point we would make is what we have experienced in working with the team at all Terra is this is something they are very committed to. They are not simply
committing capital, they are committing human capital. They have dedicated significant time and resources to working alongside those partners to structure these vehicles to ensure that they're not only going to be successful today at announcement, but will be successful as they are executed in years to come.
The total amount that is needed to be invested in the transition in developing countries needs to be three to four times as it is today. Developed economies are getting much of that money. But let's look at the fact that you painting a picture which is yes, there's some problems, but it's really rosie. There is just so much to build, so much support and lots of profit on the table. If that's the case, why is it that oil and
gas companies are trying to shrink their renewables portfolio. Right, these are companies that know how to do large infrastructure projects. What causes them to step back?
So I would maybe come at that dynamic this way. In the last few years, there are three things that we have really seen in the developed transition market. The first one is a larger and more attractive opportunity set than both a commercial opportunity set and a more impactful decarbonization opportunity set then I think almost anyone imagined. The second one is in recently around the world we are seeing energy transition is more of a corporate pull than
a government push. And what we would say is the trend line on decarbonization is being driven by corporates, the EBB and flow above that trend line is being driven by government policy. And then the third deal that's specifically renewables, renewables and other decarbonization solutions, whether it be biofuels or carbon capture, things like that.
Surely that's not true given the fact that Inflation Reduction Act the European Green Deal were necessary for these things.
To move on to.
That renewables, I may let you have that case. These tax crisers in the US have been around for a while, but really is the corporate ppa market that's driving the transition. Those numbers make sense, but other solutions.
Let me frame it a different way, and let's see if we agree, which is things like biofuels in carbon capture. Without question, IRA has accelerated their growth. Nobody disputes that they would still have been growing and still have been accelerating in the absence of IR right. And then maybe just the third one to round it out is the last thing we've seen is not on the investment opportunity side, but rather on the investor side. And in that bucket
we've seen really two or three things. One more and more investors around the world having a transition or decarbonization investing allocation. And I think that's because the commercial opportunity
set is large and growing. And then secondly, an increased pragmatism amongst those investors that it isn't all about simply what's building out more of what is already perfectly green and clean and pristine, but also a willingness to sometimes go where the emissions are in order to decarbonize something.
I highlight those three dynamics. Corporate demand, large and attractive opportunity set, and growing investor momentum, and investor pragmatism because we see I see all three of those things happening in emerging markets very similar to how they have happened in developed markets, but on a slightly lagged basis. And that's why as we look to investing in those markets going forward, we do think one, it's an attractive opportunity
set today. Now let's get back to the oil question. This, I would say comes down to a very specific question of who are your stakeholders and what do they want. There is no question that if you look at the investment profile of a new build twenty year contracted wind or solar facility, it is a lower return. But if you have a twenty year inflation linked off take with Microsoft, you could argue it's a very de risk return. It's
slightly lower on the risk return spectrum. I am not a oil and gas engineer, but I understand that if you drill for oil, and you do it well and you hit a good reserve, your short returns can be
a lot higher. And you are seeing some leading energy companies either invest in renewables or invest in things like e fuels or hydrogen where they feel their skill set is more appropriate, or invest in other decarbonization solutions where they feel that is more in line with the investment profile that their investors want them to take.
Now, wearing the President's had seventy seven billion out of the eight hundred and fifty billion dollars is renewables, you have a lot of other assets and they are carbon generating. What are you doing about those?
So I think it's an important thing to recognize and it's something we say proudly at Brookfield, even those within the Renewable Power in Transition platform. It's important to recognize that every asset at Brookfield is decarbonizing, not just the ones in the Renewable Power and Transition platform, because we have a fundamental belief across our organization that by decarbonizing our investments, we are de risking them going forward and enhancing their value. So it doesn't matter if you're in
real estate or infrastructure or private equity business. This is a value lever to enhance the returns of our portfolio companies.
Yes, you have a zero by twenty fifty target for all your assets, but real estate is a really difficult asset to decarbonize. What's short term looking like, are you able to hit the powers goals of being able to havelff your asset emissions by twenty thirty.
You picked real estates one where I would say we feel most confident about hitting those goals because of there are such well established ways to reduce the carbon emissions in real estate. Most notably the biggest thing is sourcing and procuring green power. And then secondly, the other obvious one when it comes to real estate is improving the energy efficiency within the buildings, whether it be a facts
or smart meters, our products and solutions like that. One of the key differentiators of those good versus bad dynamics is how energy efficient is you're building and how well is it set up. As those energy efficiency standards increase going forwards, We're not doing that just to get a certification. We're doing that because our end customers, the tenants are demanding it when they pick the next place that they're
going to lease retailer office space. So I would say this is front of mind, not simply as a philosophy, but as a key commercial initiative to drive returns in our investments.
One other thing that Rupield is trying to do hasn't quite succeeded yet is trying to get brown assets fossil assets and then trying to turn them into green assets. You tried that with the Australian Utility AGL, didn't work out. You are trying it and again there's failure today of trying to or Origin and that didn't work out. Could you just talk through the philosophy and why has it been so hard?
We do feel that one of the most impactful ways to drive the energy transition is that willingness to go where the emissions are in order to make carbon intensive but critical industries more sustainable going forward. And the nature of these businesses is they need not only large capital providers to effectuate that significant transition, but they also need
people with very large operating capabilities. This isn't necessarily a problem you can just throw money at capital is a big part of the solution, but it's also having the know how of how to transition those large, critical, somewhat complicated businesses to more sustainable business models.
Just a little bit of context here. AGAL and Origin are some of the biggest electricity producers in Austria, with many power plants burning fossil fields. Brookfield and a few other like minded investors have tried to buy out these public companies, make them private, and then accelerate their transition to clean energy. The trouble is that it would mean Brookfield will have to take on the additional emissions from these companies when advise them, and then keep them on
its books until the clean energy transition is complete. In accounting terms, it would look like Brookfield is going in the wrong direction on its net zero goals, even as it is helping the world get to net zero faster. It's a tricky accounting problem that investors trying to speed up the transition will have to deal with. For now. Brookfield didn't succeed in Australia with AGL or with Origin, but it has examples of making this kind of transition work for other big companies.
We have a very successful investment in Central America called inter Energy. This is a multi asset, class, multi jurisdictional utility across five or six different countries in Central America and we are currently working to get it off of heavy fuel oil and diesel onto strictly natural gas and renewables. And it's one of these great examples where doing so not only very materially decarbonizes the business, but also enhances
the margins of the company as well. Many years ago, we invested in a company called TransAlta in Canada where we provided a very large structured investment into their portfolio of operating assets, and that capital was used to transition some of their coal facilities to more cleaner forms of power generation and retire others while building out its renewable fleet.
So and today I would have to check the stat but I believe the emissions of TransAlta are off seventy eighty percent versus the time when we invested in that company, and.
Both of those have provided good returns.
At or above our targets.
And that's what's powering your interest in trying to go to Australia and try and make that transition faster. Absolutely, And what is in Australia? What is your philosophy? Is it that Labor government has come through has set a really ambitious renewables target and you see clearly if they're going to have to meet this target, they're going to have to clean up their utilities.
I would say that some of it, but I would say when we look at these types of investments, the investment philosophy and the investment thesis tends to be a lot more micro in that when we looked at some of the gen tailors in Australia, we thought they had a very strong base of infrastructure that as you retired the more carbon intensive power generation assets, you could leverage some of that existing infrastructure to build out some of
the renewables. The other thing that was interesting about some of the opportunities in Australia, but was equally interesting about let's say our inter energy opportunity, is it paired not only the generation asset with the off take, and therefore, as you built out more of those renewables, there was a clear off taker for that green power as well.
In doing so in the short term, at least, if these assets are to be decarbonized faster than they were previously, in the short term, you're going to take on emissions as a result. How are you going to deal with that accounting problem which is a real one.
We will take on those emissions in our accounting. We do truly feel that this is some of the most
impactful and powerful decarbonization investing you can do. But you do get that short term spike in your emissions, and therefore we feel that people do recognize the benefit of this type of investing, but you need to be very transparent about what you're doing, and what we have generally seen is you do have to take those emissions on absolutely, but typically if you break them out from your broad portfolio and show that these are emissions, we are going
to rationalize very quickly, and we are going to be upfront and transparent. This isn't buried on page seventy of your annual report. This is right up front in your shareholder letter, tracking the progress you are making and being transparent about how quickly you are decarbonizing, whether you're behind schedule or ahead of it, then people are understanding if you took some of those emissions on day one.
Thank you, conor, thank you, it was great to be here.
Thank you for listening to Zero. If you liked this episode, please take a moment to rate or review the show on Apple Podcasts and Spotify. Share this episode with a friend or with a green investor. You can get in touch at zero pod at Bloomberg dot Net. Zero's producers are Tiffany Troy Magnus, Henrickson and Sommersadi. Our team music is composed by Wonderley Special thanks to Kurepindrum. I'm Ashatrati back next week.