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Kevin Birzer, chairman and CEO of Tortoise Capital Advisors LLC |
Kevin Birzer is chairman and CEO of Tortoise Capital Advisors LLC, part of asset-focused investment firm Tortoise Investments LLC. He has led the family of funds — many of which are heavily invested in oil and gas infrastructure — through the rapid changes brought on by the shale revolution.
Tortoise in September released its proposition for lowering carbon emissions, The Teal Deal, which posits that the quickest way to reduce carbon emission and sustain that reduction is to allow market forces to push coal out of the dispatch stack in favor of natural gas and renewables. Tortoise has also added a team of analysts based in London that is charged with finding investments in companies at the leading edge of the transition to a low- or zero-carbon energy economy.
Birzer recently spoke with S&P Global Market Intelligence about natural gas' carbon reduction potential, the tensions between regulations and a free market, and where Tortoise is investing some of its $22 billion in assets under management to profit from coming changes in the globe's energy mix. The following is an edited transcript of that conversation.
S&P Global Market Intelligence: The central thesis of the Teal Energy Deal seems to be that the key to getting immediate gains in reducing carbon emissions is coal-to-gas switching.
Kevin Birzer:
We had been big pipeline investors, and that meant we better understand drillers, we better understand utilities, local gas distribution companies, petrochemical companies, refiners. You keep circling that, and what are substitute products? Well, obviously wind and solar, other forms of electrical generation, so we had to understand those.
Does Tortoise's energy transition team mainly focus on renewables?
That team really is two broad groups: One is energy transition, and the other would be listed infrastructure. The infrastructure is mostly utilities, energy and renewables.
Besides infrastructure, the energy transition group really focuses on: ... What companies are going to benefit? And it can be everything down to a chipmaker that's making chips that go into electric vehicles that are taking market share.
What are the most compelling opportunities the energy transition team is finding?
First, I'd mention some kind of crazier energy transition stories — these tend to be smaller companies ... [such as] the semiconductor company that's doing chips for autos. There are some pretty exciting opportunities in that area and, I'd say. Fairly high risk, high return.
Second, utilities. You're seeing companies — take a [NextEra Energy Inc.] or a [Sempra Energy] — providing good service, they've transformed themselves, they've gotten the energy efficiency story down really well. They've put on a lot of renewables that have dropped the cost curve and they're doing pretty darn well. Obviously, much less risk than the energy transition companies I was talking about.
The third area, and I come from a pipeline background, so you've got to forgive me here, but I still think natural gas pipelines ... have been beaten up. I think they're still considered part of the problem, not part of the solution. [However], pipelines actually still make sense, and natural gas really is very much part of the story. ... My view is [that pipeline companies are] really cheap, they've got a heck of a yield, and they've got a reasonably good growth story. That feels like one heck of a buy for a long-term investor.
We have project opportunities [in Tortoise's portfolio], too. Those would be much lower risk than anything I just said. Even though they're private. This would be where we sign a 20-, 25-year [power purchase agreement or] PPA — usually with a double-A, A counterparty — [to] build solar panels and then you clip coupons for the next 25 years.
Which is riskier: Investing in individual projects or public companies?
If you've got the State University of New York buying your power for 25 years, that's a pretty low-risk investment. As long as the sun shines and you keep your panels clean and they're willing to pay you for electricity at a reasonable [price], the risk is very low there.
I tend to worry a lot more about our publicly traded companies, where I personally think some have gotten beaten up unmercifully because they're out of favor and people don't like them, but they're still really good companies.
You describe energy as a human right and say a lot of regulation is probably required. How do you balance that view with your preference for free markets?
I think there's a really hard balance. I do think in today's society, energy is an essential asset to live. You just have to have it. If you ... can't heat your home, you can't cook food, you've got an issue. So, to me [energy] is an essential asset.
As with all essential assets, I think, philosophically, some degree of regulation has to be there. You can't gouge people for prices. I think the regulated utility industry model in the U.S. actually works pretty well. Perfect? No way. No one's going to say it's perfect, but it is mostly free market, it mostly works, it mostly gets people electricity.
You certainly need some regulation, you certainly need some government help. Do you need to go all the way of the Green New Deal? I don't think that's necessary.
What can U.S. policymakers do to make the Teal Deal happen?
I'd actually say it is happening already. At least on the power generation side, carbon emissions are down 28%, costs for electricity in the U.S. are extremely inexpensive compared to the rest of the world. I'd say it's happening. Could it happen faster? Probably. Could we get off coal faster? I'd like to think we could. But to ramp up solar, to ramp up wind, to get the grid in place, to ramp up natural gas, that all just takes time.
The world's two big coal burners are India and China. Is there enough infrastructure or capital to incorporate more gas in those countries' energy mixes?
I'd say there are different answers for different countries.
India is definitely putting a lot more infrastructure in place, so they announced a $140 billion program ... for natural gas infrastructure. One of the things India has also been is a big proponent of buying propane and butane [liquid petroleum gases, or LPGs]. The infrastructure for that is a lot less onerous. Natural gas can really only be piped or supercooled to ship on a tanker. LPG can go into a canister.
China can get coal out of the ground pretty cheaply, and it works. There are problems with that, though. You just see when they turn on the coal facilities and people can't breathe in the streets of Shanghai or Beijing or Nanjing or pick your city.
What's happening in manufacturing is really interesting. Because so many investors now have signed the United Nations Principles on Responsible Investing, they're trying to focus on companies that are lower carbon, which makes sense and we get it. But the impact is: If someone's building a new manufacturing facility, they're now looking at places like Vietnam or Thailand or Malaysia where the carbon content's lower than China. So what's the competitive response from China going to be?
We're in the early stages of a manufacturing competition. The interesting thing is the robotics on manufacturing have gotten so advanced that the labor content in an iPhone is now 1.5%. So then you have to say, "Where's the lowest cost of energy in the world, and where can we assemble this?" when labor is not as big of an issue. The interesting answer is there are two main countries that are benefiting: the United States and Mexico.