The clean energy transition in the U.S. and around the world will require major infrastructure build-outs of all kinds: power lines for renewables, offshore wind, battery storage, pipelines for CO2, hydrogen, port infrastructure, and much more. What investments are needed, how and when they will play out, what’s the role of government vs. private sector--all of this will look different in different parts of the world.
In this edition of Columbia Energy Exchange, host Jason Bordoff is joined by Matthew Harris to discuss what capital allocation and clean technology infrastructure is needed to support a new era of decarbonization.
Matthew is a founding partner of Global Infrastructure Partners, one of the world’s largest infrastructure investors which currently manages $70 billion in assets. Prior to the formation of Global Infrastructure Partners in 2006, Matthew was a Managing Director in the Investment Banking Department at Credit Suisse, where he was Co-Head of the Global Energy Group. He’s a graduate of UCLA, serves as a member of the World Wildlife Fund Board of Directors, and also helps lead the work of CGEP as the chairman of the board.
Jason Bordoff: Hello and welcome to the Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I’m Jason Bordoff. The clean energy transition in the U.S. and around the world will require a major infrastructure build out of all kinds, power lines for renewables, offshore wind, battery storage, pipelines for CO2, hydrogen, port infrastructure, and much more. As my colleague, Julio Friedmann likes to say, if we're serious about climate change, every week needs to be infrastructure week from now on. What investments are needed, how and when they will play out, what's the role of government versus the private sector? That's going look different in different parts of the world. And so for this podcast this week, I wanted to understand what capital allocation and clean energy technology infrastructure is needed to support a new era of decarbonization.
To talk about that, I reached out to my friend, Matt Harris. Matt is a founding partner of Global Infrastructure Partners, one of the world's largest infrastructure investors, which currently manages $70 billion in assets around the world. Prior to the formation of GIP in 2006, Matt was the managing director in the investment banking department at Credit Suisse, where he was co-head of the Global Energy Group. He's a graduate of UCLA, he serves as a member of the World Wildlife Fund Board of Directors and helps me lead the Center on Global Energy Policy, as the Chairman of our Advisory Board. Matt, thank you so much for joining us today in Columbia Energy Exchange.
Matt Harris: My pleasure, Jason, great to be here.
Jason Bordoff: So, as I said, in the intro, you serve as the Chair of the Board at the Center on Global Energy Policy, we are deeply grateful for all your time helping us in that role. But what I wanted to have you on to talk about today was about your day job, which I suspect is also your nights and weekends job, which is as someone putting a very large amount of capital into the energy sector, in infrastructure, and not just the energy sector, other parts of the economy too. How you see that evolving and what it means for a potential clean energy transition. So first, just for our listeners, if you could give people a bit of background for those who may not be familiar with Global Infrastructure Partners, a little bit about you, first of all, in your path to founding the firm, and then a little bit about particularly as it regards to energy, what GIP does, what regions and sectors you're most active in, and then we'll get into a discussion about, well, how things are going to evolve moving forward.
Matt Harris: Sure, happy to do that. So GIP has been around since 2005 and most of the founders came from either the energy world or the transportation world. And our thesis was that infrastructure, which has recently been conceived of as a discrete and separate asset class really had an opportunity to grow dramatically, there was a tremendous amount of embedded infrastructure, but also a tremendous need for infrastructure, both in the developed and the developing markets. And at the same time, there was this huge wall of pension and sovereign fund money that was very interested in investing. And they saw it as something that was differentiated from fixed income with some degree of return upside, but not the same level of risk as say private equity or venture capital, you have these large projects and energy in transportation, roads, water, waste. So, what these pension funds really liked about it was the long duration of the cash flows and the defensibility of these assets.
So, we set up to build a business around this and the business was really focused on two primary areas: energy and transportation. And in the transportation world, we're investing in things like airports, seaports, container terminals, and railroad. In energy, our emphasis has been around crude oil and refined product, natural gas, electricity, including renewables, LNG, petrochemicals, metals and mining, basically, anything that is an enabling piece of infrastructure that would move a hydrocarbon upstream resource to a market. And over the first, you know, 12 or so years of our business, a significant amount of our capital deployment was around fossil fuel infrastructure: pipelines, gathering systems, processing, power generation, LNG, all of these types of things. So as we've looked at our own business, we see a very significant transition that's ongoing as we move from, largely a fossil fuel based global energy economy to one that's got a substantial component of renewables and alternative fuels in order to meet these decarbonization objectives, we have to similarly pivot our business.
And so we made a very substantial move into renewable energy generation in our most recent fund and expect to do so in the fund we're investing now. We've now got somewhere between 25 and 30 gigawatts of renewable energy. I believe we're one of the two or three largest private owners of solar and wind generation in the world. And I think that's emblematic of the direction we'll be taking the future in to these alternative sources of energy. How does this impact where the world is today and the opportunity? Well, as we look at the world, in the wake of COVID, we see job creation and economic revitalization as essential to a recovery. Infrastructure can be a very important part of that. It can create a very significant number of jobs that can propel an economic recovery and I think the way we're looking at this is that clean tech, energy infrastructure, green energy infrastructure, however you want to think about it, can drive a substantial amount of that infrastructure spend. So we're actively looking for opportunities, where either our capital alone or in partnership with governments or other institutions can help drive that trend.
Jason Bordoff: And just the overview of GIP that was really helpful and interesting. And regionally, it's everywhere. Is that right? Are there certain regions you focus on?
Matt Harris: Yeah, we are global. We have a very substantial amount of capitalist that is directed towards the OECD markets, which for us are really North America, the UK, the Eurozone and Australia, but we also have country specific funds, we have a fund oriented just towards Australia, we have a fund oriented towards India.
Jason Bordoff: Yeah. So I want to come back and talk about all those things. I know you've recently done solar projects in India, you've done offshore wind projects around the world, want to talk to you about where you see that going. Just to start at a higher level, I know the International Energy Agency in May just released its World Energy Investment report, noting that the flow of energy investments, as you know very well is misaligned, with anything close to what that goals of the Paris agreement would look like that, in their words, market and policy signals are not leading to a large scale reallocation of capital to support the clean energy transition. So from a capital markets perspective, how do you view where we are right now in the energy transition and what's it going to take to put more capital into it?
Matt Harris: Well, I think there's two sides to that story, I do think that we are missing certain elements of a policy framework and investment incentives across the whole spectrum of energy, clean energy infrastructure investment that needs to develop further and implemented further. By the same token, we have seen a massive amount of renewable energy investment over the last decade that was stimulated by excellently, well conceived tax and other incentives that I think have paid off dramatically in terms of the amount of capital in effect that would have been invested by governments versus the return that they're getting on it today in the form of this renewable generation. You're also seeing a very, very dramatic increase in the constituencies and what the constituencies are going to demand from energy companies globally, the ESG pressures that certainly you see evidence of every day and how big oil is changing course.
We're also seeing that too from our investors, who are large pension funds and sovereign funds around the world, who are very focused on what are you investing in, what will you invest in, what won’t you invest in, and tell me about your carbon footprint? What's it going to look like over the next decade, how are you thinking about that in terms of what you're investing in? A lot of what they're focused on, aside from ESG, is also stranded assets or the potential for stranded assets. I think our own view is that because of the complexity, the global energy supply system, hydrocarbons will have unnecessarily long tail. And if you're an investor, they're certainly an opportunity to invest in the cash flows that are associated with that tail. But what is very much in question is what will somebody pay you for that asset, 3 years, 5 years, 10 years from now, and that is changing, and it's changing rapidly. So we are being forced as are any other investor to really think much more broadly about what we're investing in as we look at the potential for how counter parties are going to value assets when we go to sell them.
Jason Bordoff: And you mentioned, so I want to talk about a couple of things you brought up there. But one is, you mentioned policy as something that is going to be needed in order to change the incentives. There's often a lot of discussion of government spending, particularly now as we think about the potential need for stimulus. But as you know, better than anyone, the energy system we have, at least in the US, and we can talk about how that looks different in different parts of the world, is a reflection of private capital and decisions that investors make about where to put that. So, what do you think actually moves the needle the most in changing the decisions that people like you would make about where you would put capital, what the returns would be and trying to move more quickly to put capital into sources of clean energy? Is it a price on carbon, is it like subsidies? What do you what do you think would make the most sense?
Matt Harris: Well, I think it could be you all of the above, certainly, if you talk to most of the relevant players in the energy world, a price on carbon is inevitable. And we're already seeing evidence of that, whether it's 45Q or the LCFS In California, the prospects for the carbon border tax out of the EU, I think these are all things that are moving us in the direction of a price on carbon, I think that will be inevitable. To the extent we could speed that up, I think it would be very, very beneficial. I think we also need further investment, in effect R&D spending into this industry, some of which should come from government, if you look at places where government spending has led to fantastic outcomes, things like the space program, that was a meaningful amount of government investment that was directed towards an objective.
And if you look at R&D spending in the energy world today and this is this is effectively private energy companies versus pharmaceuticals or computers and electronics, aerospace and defense, it's about 1% versus 10 to 15% for those other industries. So we're significantly under investing in areas that could be essential to progress around this issue. I also think we need to look at and we can take the U.S. transmission grid as an example of this, we need to look at how some of these assets are regulated. The utility system in this country was set up to accomplish a certain set of objectives. It's not necessarily set up to accomplish or stimulate investments in transmission grid capacity additions, flow controls, smart grid, storage edge, transmission, all projects that utility companies, and even folks like us are very keen to do. But we need a system, a framework through which to do that. So I think some updates and encouragement about taking the private capital that is out there and is already, if you talk to any utility CEO out there, they'll tell you inevitably, this is where we're going. And they're very keen to make that transition.
So I think it's a combination of things, Jason. It's obviously different by each jurisdiction, but it starts with, my way of thinking, a price on carbon and how we get to that, but also a series of investment and other regulatory or policy changes that can stimulate the investment required to move this forward. And it needs to happen in a way that reflects the complexity of the problem. I don't think it's realistic to simply say, okay, we're going to turn off all of the hydrocarbons and all the power that supplies to communities and nations around the world and say, Okay, we're going to turn that off. And we're going to do it with renewable power. First of all, we don't have enough renewable power to do that.
And it also doesn't reflect the importance of energy to social and economic status and everybody's desire around the world for rising standard of living as those things are incredibly complex and intertwined. And so it has to be, by my way of thinking, a multifaceted solution where you're bringing the different forms of energy, different forms of energy infrastructure to the table. It's very different where we've effectively over the last hundred years thrived and built our global economy off of crude oil. Now we're talking about doing it across multiple different forms, whether that's the legacy tail of oil, obviously, natural gas as a bridge fuel, but renewables, hydrogen, obviously, other forms of carbon abatement, carbon capture and storage director capture lots of different things that need to be incentivized to be brought into the mix.
Jason Bordoff: And when you say it, this takes time, the world still needs energy, you can only scale certain sources, zero carbon sources so quickly and, of course, the history of energy transitions is that they do take a very long time, and that what some may hear when you say something like that is therefore, we can't move as quickly as the Paris climate goals would suggest, is needed. That's just a pace that is too fast to move on. Is that sort of, and there's a lot of pressure, as you know, on financial institutions and investors to show that their plans are aligned with the goals of the Paris Agreement, something like two degrees, keeping temperature increased to two degrees Celsius. So given that that's not the pathway we're on now, how does that affect people who are putting capital into this space and trying to meet the needs of the energy system, meet the needs of the world for energy, but make sure that we're putting ourselves on the pathway, we need to and recognize that the carbon budget is what it is, if you want to take those goals seriously.
Matt Harris: Yeah, I think in order to take those goals seriously, you need to open up more opportunity for investment and more opportunity for private capital. I mean, today, we have significant opportunity to invest in solar and wind generation. And largely through the incentives that have been provided and the technology advances that have been made, today, the levelized cost of energy of those two generation sources is as cheap as anything else in the world on a new build basis. So, as we look at country's efforts to create cleaner energy, there's an immense pressure on big companies like Amazon and Google and Apple to power their data systems, their global data centers on renewable and green energy. As we've seen, not only the rise of utility, PPAs, but direct corporate PPAs, as many of these corporates want and desire green clean energy. There's lots of opportunity to invest in those areas. But we could increase that significantly if we started to create some incentives or some policy frameworks around some of the other things that I've mentioned. Biofuels, hydrogen, battery storage, these are all things where the technology over time, we believe will be competitive, each year, it'll get better and better. But we could accelerate that through some incentives and policy decisions that would, in fact, in my opinion, get us closer to being on track to Paris.
Jason Bordoff: You mentioned the policy changes we need and one of the ones I wrote about recently in a New York Times Op-Ed was if we're serious about the pace of change, we need to meet these climate goals, sitting around the Energy Center we often say, between now and 2040, every week is infrastructure week. We just need to build a huge amount of infrastructure. And I noted that, whether it's for hydrocarbons infrastructure or clean energy infrastructure, permitting challenges, environmental review, the NEPA process, it takes a long time, it's hard, it's subject to legal challenge, and often for good reason, because NEPA serves a purpose to make sure you're considering the environmental impacts of what you're doing. How do you view and I'm talking about the U.S., we'll come to the rest of the world in a minute. But how big a challenge is it to build infrastructure at a very large scale because of the environmental review and permitting issues, and how would you would you think about improving those.
Matt Harris: Yeah, it can be challenging, particularly so around access to the grid and making investments in the grid. And again, I think a lot of the legislation and a lot of the regulatory frameworks were not developed in anticipation of what we need to undertake right now. They were developed in a very different era with a very different set of objectives in mind. And what we need to do now are things like move electricity from the wind belt or the solar belt to places where it is needed. That requires significant investment in the grid, it requires significant investment in the capacity of the grid and the system isn't necessarily set up to do that. So, I think there's plenty of price signals, you've got the lowest cost energy in the world, plenty of price signals that suggests it's needed, I think where we need some help is how to move that energy around.
Obviously in the in the U.S., we have a whole framework that you have to work with to do that. In some other countries, frankly, it's easier if you can get to that point, because in some countries, the legislation is just put in place by the government on day-1 and say, Okay, go do it, go build it and connect it up. You don't have to go through this long process with FERC or NEPA or other players, like you do in this country or some other countries in Western Europe. But I do think that the momentum is pointed in the right direction, I think more and more the people, who are developing this clean energy, whether it's us or utilities, this is where the dollars are going to be spent. And so the pressure on the regulators and others to accommodate and make changes that help us do this will continue to grow and I think will ultimately lead in the right decisions being made. But it's going to be challenging in the interim.
Jason Bordoff: We've been talking about the U.S. and what sorts of policy changes would be permitting, obviously, that looks different in different parts of the world, where regulatory and legal structures are different and where the role of the state in all these infrastructure investments is much different than it is in the U.S. You just did a large deal, for example, in Abu Dhabi with ADNOC, Abu Dhabi National Oil Company. Which regions of the world do you see the greatest opportunities and which ones are going to be sort of moving the fastest to deploy some of the infrastructure we've been talking about?
Matt Harris: I think our two areas of focus there would be Southeast Asia, where, certainly China and the commitments that it's made, both recently to net zero by 2060, but also the significant commitment they've made, not only to using natural gas and the LNG infrastructure that they're investing in, but renewables, and all the renewable infrastructure that they have put in place. Now they still have a significant commitment to coal. I think over time, they're going to have to moderate that in order to comply with their objectives. But China would be at the top of the list, but also a whole series of other countries in Southeast Asia, who are moving in the same direction. That's going to include Vietnam, the Philippines, Indonesia, and certainly India, where there's huge opportunity.
They have an excellent solar resource and certainly huge demand on both the consumer side and the commercial industrial side. But then similarly in Latin and South America, we think that Brazil is a big opportunity, Colombia, and we're also very, very bullish on Mexico. I think, despite the current political situation there where the government is, I think understandably, from their perspective, protective of all the investment they've made in their natural gas infrastructure in Pemex, there still is no denying the quality of, in particular the solar resource. And that bodes I think very, very well for investment in that country over time.
So those two jurisdictions are where we are quite focused. You mentioned the deal that we did do in the Middle East, I think there's significant opportunity in the Middle East, despite the traditionally hydrocarbon-based economy, I think all of the countries in that part of the world see the energy transition and they have the potential for an outstanding solar resource, both as it relates to their own countries, but also the ability to export some of that and monetize that for their own economies.
Jason Bordoff: You mentioned South Asia and what China's doing their net zero by 2060 targets, we'll want to look closely, I think of the 14th five-year plan to see some signal that in the near term that it's putting them on a different trajectory and they're taking those targets seriously. So the promises are being met with actions. And as you know, they are also criticized not just for what they're doing at home, but what they're doing through their Belt and Road Initiative and how many of those projects are hydrocarbon projects or coal projects. You said, a few minutes ago that renewables really compete quite favorably in many cases, they are now the cheapest form of energy. So, we do still see a lot of coal projects being built around the world. You see a lot of South Asian countries that are developing coal projects in order to meet rapidly growing power needs that they have and electricity shortages that they have, what's missing in trying to change that trajectory to do more zero carbon energy and less very carbon intensive energy because as you know, once you build these assets, they're there for decades.
Matt Harris: There are there for decades and one of the reasons you see the U.S. and the Western European countries exiting out of coal more rapidly is because the fleet age is much older. So it's much easier to retire a depreciated asset that looks like what we have here in Europe than it is something that's built in the last five years in Southeast Asia. I think there's a couple things that are instructive around that. The first is the infrastructure around coal is still very much resonant in many of these countries. That's the traditional mode of generation and how power is produced, there still is a significant amount of infrastructure. And, frankly, although solar and wind are cheaper and at zero marginal cost, there still is a lot of cheap coal available out of places like Australia and South America. And when you are trying to address the energy and electrification needs of your population, I can see how governments can be agnostic about how they're going to do that.
I think that renewables also can only be scaled at a certain pace. As nice as it is to say that we'll just add all this renewable energy, it takes time, it takes time to find the sites to permit, the manufacturing of the panels of the blades and we've had huge progress in the technology around the quality of the panels, the efficiency, also our ability to do offshore wind and get bigger blades, more powerful turbines that increase the efficiency and lower the cost of that energy. But you can only do so much of that at a time and what we were talking about earlier is another big piece, which is transmission, you can put up the solar farm, you can put up the wind farm, but you need investment in transmission infrastructure to move it to where it needs to be. And it takes time to develop that infrastructure, develop that grid.
Coal had a huge head start. So incentives are a big part of it. I think continuing to think about how we price carbon and how that can be done respecting the desires of many of these developing countries to use energy to increase the prosperity of their populations, but at the same time trying to do that in a way that's sensitive to this transition we need to make. I think it is complicated, but nonetheless, we continue to believe it's doable. And I also think there's a huge piece of it, that is a partnership between governments and bringing private capital into many of these places, with a well thought through regulatory regime, with a well thought through plan to deploy capital allows some of this investment to be made by private, you know, private investors.
Jason Bordoff: Well, and that role of government sort of plays into the other region you mentioned a minute ago, which is Latin America, which has some wonderful renewable resources. But I think in some of the countries you mentioned, Brazil, Mexico, you know, really hasn't prioritized the issue of climate change as much as people would like, at least in their economic recovery now still have strategies that emphasize the role of hydrocarbons. How do you think about that, as someone looking to put capital into infrastructure in those places, how does that affect the decisions you make about where you deploy capital over a long term?
Matt Harris: Yeah, you know, it causes us to have a very sharp pencil, if you will, around what kind of returns we can generate under a scenario that looks like, what, where they're operating today, you can make lots of assumptions about how they might move. And I think they will move in a direction that is much more accommodating to clean energy and clean energy infrastructure, but you have to really look at the environment you're in today. And if a country or government is operating where they are using the legacy of hydrocarbons or fossil fuels to power their economy, particularly in the wake of this pandemic and the economic devastation that it's wreaked around the world, you have to go with what you're seeing in front of you.
So we'll adjust our returns to reflect that. You know, the irony of it all is I think that clean tech really has a major role to play in this recovery. And we're seeing the potential to drive $1 to $2 trillion annually of green infrastructure investment if countries would embrace it. It has the opportunity to create a tremendous number of jobs worldwide. The cost of capital advantage today that renewables has relative to where oil and gas is, is very dramatic, there's tremendous amount of private capital. And even if you think about the multilaterals, whether it's the World Bank or the IFC, they're seeing the same numbers we are. So there's a lot of capital out there. If some of these governments would really think through how to deploy it, I think you could find that this transition could actually and we'll actually energize, “the economy” of any specific country more rapidly than legacy hydrocarbons right now.
Jason Bordoff: You talked about some of the factors that affect where the private sector is putting capital like policy and the cost of capital. Earlier, you mentioned stranded assets and the rising ESG pressures that many in the financial sector are facing right now. And I just want, could you talk a little bit, both about, how global infrastructure partners thinks about that, but more broadly, how much of an impact is that having, is this sort of like a few large U.S. and European financial institutions that or pension funds that sort of are susceptible to that, but there's a lot of capital out there, there's private capital, there's sovereign capital, if there's money to be made, capital will go in or do you think that this really is causing a significant shift that's going to change the trajectory of where we see, what kind of energy sources we see being built around the world in the years to come?
Matt Harris: I think it is going to cause a very significant shift and my own view is that it will happen more rapidly than you think. As it pertains to GIP, we see it from our investor base globally and that’s Australian investors, it's investors in Singapore and China, you know, all throughout Europe, the U.S. pension funds, both private and public, there's an incredible emphasis on how are you thinking about buying fossil fuel assets. How are you thinking about the value of those assets over time? If you are going to make investments in fossil fuel infrastructure, what assumptions are you making about your ability to maintain the value that you're buying in at?
Will somebody who's going to buy it from you in five or 10 years, because we typically hold our assets for, you know, seven to 10 years, tell me why you think somebody who you're going to sell that to is going to pay the same multiple for today? And frankly, it's very hard to answer that in the affirmative. I think all of the people I talk to are saying that we are very, very cautious about fossil fuel infrastructure. We've actually seen in some of our recent fundraising, some institutions who have requested that they be able to opt out of any investments that we would make in fossil fuel infrastructure. And I think, you know, the top of that is coal or we do not invest in coal, but close behind are the oil sands in Canada, and then crude oil is next. So this is all, occurring as we speak, you can certainly see it in the recent actions at BP, Shell and Total, who are making major changes to their business plans and their strategies. I actually had in the last two or three weeks, the opportunity to go through each of the investor presentations that those firms made.
And they all are front and center focused on how am I going to invest smartly in the hydrocarbon tail to meet the demand needs, how am I going to deploy capital in a way that generates higher returns than I would have been seeking in the past because of the outlook for that business, but at the same time, the first thing they're talking about in all these presentations is how am I going to transition from an oil and gas company to an energy company. How am I going to take advantage of this trend towards electrification? What am I going to use in terms of the attributes that are important to me or that are my strengths is it my customer interface, is it my global reach and brand, is it my trading, is it my ability to take the expertise that I might have in offshore oil and gas and apply that to offshore wind, as we saw on the recent partnership between BP and Equinor?
They're all under a huge amount of pressure. I think that the capital markets are driving this transformation in many ways. There's, a statistic that somebody showed me the other day, I think that the number of climate related shareholder resolutions has doubled since 2011 and the percentage of institutions that are voting in favor of these resolutions has tripled. And it was around a third last year, which are all record highs. So, I think that you don't want to be the CEO who didn't take advantage of the footprint you have and make a transition. You don't want to be left with oil and gas assets that may be producing an admirable year to year cash flow, but by the same token are losing their residual value or losing their long-term value.
I guess it is a strategy for some of these companies. I mean, Philip Morris did this in cigarettes, right, which is they sort of rode the horse as long as they could. I'm not sure that's a strategy that if I were a CEO of a oil and gas company, I would be banking on. I'd be using the capital and the returns that I'm generating to transition my business to something that looks like a 21st century company, an energy company that's focused on things like customer interface, brand, mobility, charging infrastructure, all the things that you could see being potential strengths of these big companies and we need these companies to play a major role and an example in terms of how capital is being deployed into these into these sectors.
Jason Bordoff: Yeah, it's interesting to hear you say that, because you sort of started the discussion by talking about how there still is significant demand around the world, when 80% of the world's energy mix comes from hydrocarbons today, that's changing over time. But it does take some time, there still is investment needed. And yet what I also hear you saying is that there’s a higher hurdle, there's going to be potentially a higher cost of capital, there's going to be more skepticism because people are concerned about what these assets will be worth moving forward. It's not just activist pressure, protesters, it's a real concern over the financial longevity of those assets.
Matt Harris: That's absolutely right. And if you look at where oil is today, it requires a different return profile, you can't make an investment in $40 oil that you could have in 60 or 80 or $100. Oil, so…
Jason Bordoff: Is it becoming un-investable? I mean, coal for many investors has, what I see, tell me if you agree is with oil, people are sort of trying to figure out where to draw lines, the Arctic, the oil sands, there are certain parts that are not, we're not going to go near those, but we know the world still consuming 100 million barrels a day. So, we're going to still put capital into some parts of this, trying to figure out how to navigate and then you know, natural gas will have a bit of a longer tail, I think in a transition, at least the analysis shows that. But is that line shifting, I mean, do you see the oil and gas like coal sort of moving to a place where it's going to be much harder to be investable in.
Matt Harris: I think over time, yes. I don't think we're there yet. I think you're right about coal, and I think oil sands is not where coal is, but it certainly is amongst the most controversial of the remaining hydrocarbons. Crude oil would be next, but I think that again, it gets to -- some investors will take the view that I'm not going to do it. But others will take the view that this has got to be an integrated solution. And so, you look at things like, what is the overall plan for decarbonization and how can we continue to supply the demand needs that crude oil fulfills, while at the same time making the transition. And there's lots of ways to do that. And it gets back to some of the things we were talking about.
Whether they be direct air capture or carbon capture. I mean, the whole issue around methane and how much methane is released in North America from the shale companies. You know, these are things that can be addressed and should be addressed that can help make this transition easier and help create a better line of sight for some of these companies to making an effective transition. So I think the direction of travel is, as you suggested, it's going to be institution and geographically specific.
I think it also will lead to more and more resource traditional hydrocarbon resource being placed in the hands of the national oil companies, whether it's those in the Middle East or Rosneft or Petronas or Petrobras, these institutions that I think will also come under increasing pressure to decarbonize and make a transition. And at some point, you're going to need to make a transition. If you're a national oil company, is as big a part of the economy as it is in some of these countries, you can't afford to just sit by and let that tail run out over the next 50 years, you have to figure out how to redeploy some of that capital in ways that can provide opportunity that you need into the next century.
Jason Bordoff: Yeah, very challenging to do, as you know, and see what vision 2030 and different economic reform programs in some of these countries. You're building infrastructure, airports, terminal ports, shipping ports, lots of pieces of large, costly infrastructure that are there for decades. How do you think about the impacts of climate change, about the impacts of climate risk, rising sea levels, more frequent storms, how do you incorporate those and what kind of analysis as a firm do you look to help you understand how to make sure you're investing and things are going to be resilient to the impacts we're going see from climate change?
Matt Harris: Yeah. We look at all of that, we have a meaningfully-sized ESG team now that's looking at, all those risks thinking about the impact of these types of things, whether it is sea level rise, whether it is the potential for, if you look at first, second and third order carbon emissions and how there's the potential for those to be taxed. I've asked everybody in our investment team to look at an investment and show me the analysis that prices that, show me what that does to our return over time.
Jason Bordoff: So it's not only resilient to climate impacts, it's resilient to climate policy.
Matt Harris: Exactly. And I think the easiest way for us to quantify that is to price carbon. Now, we won't necessarily get that right today, because there's so many specific factors driving each region in the world, but to attempt to quantify that we'll get better at it over time so that we effectively price in not only the decarbonization objectives of Paris, but also what this is going to mean to these assets in terms of how they will hold their value. I think airports will continue to be a very critical piece of infrastructure, but it's logical to me and over time, they're going to need to kind of pay their fair share of the of the freight, if you will, when it comes to decarbonization. And so we want to be taking that into account now, same with rail, same with ports. Energy, I think is where it's the most significant for us today, but we try to factor that into everything we look at, both in terms of the economics, but also in terms of social and governance aspects of it.
Jason Bordoff: In talking about the clean energy transition so far, we've done I think, what is often done in these conversations, which is mostly talking about solar and wind and batteries to some extent, but the analysis we've done at the Energy Center consistent I think with many others is in a world of deep decarbonization, there's a lot more to it than that, obviously, as much solar and wind as we're going need, which is a lot, whole new sectors and massive capital investments in infrastructure and ports and shipping for low carbon shipping fuels for hydrogen, blue or green, and pipelines to move and capture and store CO2. Is that sort of way off in the future or do you see opportunities to put capital into those sorts of clean energy technologies today?
Matt Harris: I think that there is significant opportunity today. Certainly, wind and solar generation is the dominant area today, but we're seeing that change quickly. There's a lot of traditional extensions of the generation fleet that are abounding right now. I mean, this whole idea of what kind of grid upgrades do you need to manage this load, both in terms of the amount of the load, but also where it's coming from is a huge opportunity. And, part of what we're trying to do is to leverage ourselves into that through the significant investment we've made in wind and solar. Similarly, if you're talking to a big corporate who needs an off take agreement for a data center or some other significant piece of infrastructure in its own right, what infrastructure is needed to do that? Obviously, the grid but also substations, transition from high voltage to low voltage, land, real estate, these are all interrelated.
And so part of what we're trying to do is use the footprint that we have in terms of our development capability on wind and solar generation and leverage ourselves into other opportunities. Then you've got all kinds of things around mobility. If you look at one of the big competitive advantages, I think, that a big oil company has today is they have a significant customer facing business in their petrol stations. And I know if you just look at what their public investor presentations talk about, it talks about how do I use that customer network and that customer interface to provide mobility solutions, both in terms of charging and in terms of other options around that, so that the EV infrastructure and what that looks like is a huge opportunity, something we're looking at closely, I think there are rapid developments being made around carbon capture and direct air capture.
And while, I think that those may not quite be infrastructure today, at least as it relates to our definition, because there still is some demonstration that needs to occur around building those at scale. If you look at a big LNG plant, which is something that we would invest in all the time today, the process of building that and the technology associated with it is tried and true. And there's always risk in development, but there's not risk in building that technology at scale. In carbon capture, utilization and storage and also DAC, there's still in our way of thinking, there's risk in the scale of the technology build, the scale of the build that’s required, but there is no doubt in my mind that that will be solved and that will become infrastructure that will be hooked up, whether it be to power plants or whether it be directly out of the air to a network or a system of infrastructure that takes that out of the air or takes it out of a power plant and then figures out what to do with it and how to monetize it.
Batteries are another area that we are looking at very closely today, it's very attended to the kind of value chain that we're involved with around renewables and solar. And can I, rather than having the battery be, in effect a trading function and have a lot of volatility attached to it, where it's meeting demand at peak periods, but I'm taking the risk on that, how do I incorporate that into something that's got less volatility, where I can give away some of the upside, but have less downside and that is happening, we're looking at something now where a significant battery storage business would be embedded in a wind and solar generation asset that we're buying.
And then lastly, there's the whole question around hydrogen, biofuels, I think those are things that we are watching and investing time in. I think if we did one of those today be a bit early. But those two, I think will be deployed over time and will become infrastructure. How it all plays with the solar and wind fleet, how you think about green hydrogen versus blue, where those investments are made, I think there's still some road to travel on that. But these are all things that we believe over the next decade will become infrastructure, at least by GIP’s definition.
Jason Bordoff: Well, I know you know, that we just put out this Energizing America Roadmap for Energy Innovation, which talked about the need and how to scale up investment in clean energy R&D not just early stage technology, but sort of demonstration as well, to try to get some of these technologies to the point when we could have large amounts of private capital, like GIP come in and help support and deploy and expand them. We're just about out of time. But I just want to, I haven't asked you one thing yet. But I want to get your thoughts about as the last question, which is the pandemic and given the impact it's had on economies around the world, how GIP has adjusted its investment approach at all, either geographically or sectors of interest? And what longer term impacts do you think it's going to have on changing the outlook for investment where capital gets deployed the pace of this transition or in any other way?
Matt Harris: Sure, we've had to make our own set of adjustments. We have a number of passenger facing businesses and I can honestly tell you that when we run all of our downside scenarios for an airport or a passenger rail business, there definitely was not a downside scenario that included one of those assets shutting down for six months due to a global pandemic. So, we’re all learning on the job here. As it were, I think we've taken a new look at our passenger facing businesses that historically have been predicated on density and trying to get as much density as you can, because that drives load factors, which drives the economics to realizing how are we going to operate on a model that's going to place a premium on less density.
Passenger safety is paramount, it’s the number one priority. So how are we going to run a business that operates on less density and gives passengers whether it's on a rail or through an airport, the comfort that their health is going to be safe and secure. So we're having to reinvent all of those different ways of thinking. Obviously, the oil price volatility has fundamentally changed how we're looking at anything in the hydrocarbon space, what that means for not only the assets we own, but also the assets that we might invest in in the future. And it's a very different set of answers you get when you're looking at $40 oil versus $60 or $65 oil.
I do think that the underinvestment in the oil and gas industry, will lead over the next three to five years, to a price spike that's needed to stimulate the investment to meet the demand that resides in this particular sector. And that may or may not be an opportunity, but we're cognizant of the fact that for 2021, I think we're going to see that renewable power is going to be the largest area of spending in the energy industry for the first time in history, it's going to be something like 25% of the supply capEx and that's a function of oil prices being down, but also, what we have seen is kind of the march forward in all our renewable businesses during this pandemic. And it's one of the reasons why I'm so convinced that clean energy and clean energy infrastructure has a real role to play in coming out of this economic downturn.
I think, when in the early days of the pandemic, and I know, you know I talked a little bit about this, I had a real concern that across the globe, people would sort of forget about the need and the opportunity to invest in this clean energy and clean energy infrastructure and kind of the legacy hydrocarbons would be the default, because what we needed to do was get economies back on track once people could be assured of their health and safety, that we get economies back on track. I actually am very encouraged that all the signs suggest that the boost that we'll get from investing in this clean infrastructure and clean energy will be hugely additive to the big job we have to get these economies back running at levels that they were before the pandemic hit.
So, we've adjusted, we're obviously taking into account reduced levels of travel. I don't know, I myself, have thought many times over the last decade or two decades, I got on a plane on a Sunday night and went to one meeting in London, do I really need to do that anymore? There definitely is a need for building relationships and that's best done in person. But, will we have as much business travel? I do think that once we can secure the airports and the airlines, leisure travel is not something you can do over zoom, so that will return. But, we could well see for an extended period of time, a much lower level of capacity in our global air traffic system. And we've tried to take all that stuff into account. At the same time, we are very, very bullish on clean energy and the opportunity to invest there. So, we're spending a lot of time on that.
Jason Bordoff: Yeah, I guess we'll end the year something like 5, 6, 7 million barrels a day down from pre-COVID levels and it'll take some time to get back to where we were before, particularly in aviation.
Matt, this was great, thank you, most, especially thank you for all the time and advice and counsel you've given to me and everyone helping us grow the Center on Global Energy Policy. But thanks for making this time available to us today. For me, and all our listeners to talk about what the outlook is for the energy transition and the role that capital markets are going to play in it. So thank you, appreciate it.
Matt Harris: Thank you, Jason. It's a real pleasure to work with you and your team. And I know for sure we're going to be very busy over the coming years as all this plays out. So thank you. Thank you very much.
Jason Bordoff: Thanks and thanks to you all of our listeners for joining us on this episode of Columbia Energy Exchange. For more information about the podcast or the Center on Global Energy Policy, visit us online at energypolicy.columbia.edu or follow us on social media @columbiauenergy. I'm Jason Bordoff, thanks for listening. We'll see you next week.