BCI’s Jon Perry: ‘renewables are moving past recent challenges’

British Columbia Investment Management Corporation (BCI) is among the largest institutional investors in Canada with C$233bn in gross assets under management. Based in Victoria, British Columbia, with offices in Vancouver, New York City, and London, BCI manages a portfolio of public and private market investments on behalf of 32 British Columbia public sector clients, including 11 pension plans, three insurance funds, and various special purpose funds.

The organisation has been active on climate change for more than 20 years, and investing in opportunities generated by the transition to a low-carbon economy is no exception. Net Zero Investor sat down with Jon Perry, BCI's director of infrastructure & renewable resources, to find out more.

Could you talk about a recent capital allocation to a green infrastructure project and why it was made? What factors went into the investment decision?

BCI’s $22bn infrastructure & renewable resources program invests in sectors critical to the growth and development of economies and communities, including green infrastructure. We target private assets with high barriers to entry, potential for strong cash flows, and favourable risk-return characteristics. We also focus on meaningful ownership positions with governance rights that allow us to actively manage our investments.

Last year, BCI invested in Eku Energy, a company that develops, builds, and operates a global portfolio of utility-scale battery storage projects, which has 458 MWh of operational and under-construction projects and a pipeline of over 4.5 GWh across Europe, Asia, and Australia.

Another recent investment is Reden Solar, which was our first direct investment in solar energy. Reden Solar develops, finances, builds, and operates solar power plants across Europe and Latin America with an operating portfolio of roughly 1 GW and a development pipeline of more than 10 GW. It focuses on ground-mounted and agrivoltaic projects.

Attractive financials together with the strength of the management teams and our investment partners top the list of factors we consider. We carefully evaluate each investment to understand how it will diversify our exposure to transition opportunities, key markets, and fast-growing sectors.

Both Eku Energy and Reden Solar align with our infrastructure & renewable resources program’s focus on investing in real assets with predictable, long-term demand while also playing a vital role in decarbonisation and advancing the ambitions of BCI’s Climate Action Plan. These types of investments also position us to benefit from future robust national climate policies and clean energy goals, adapting for the world of tomorrow.

Renewables have faced significant economic headwinds with high interest rates and inflation. Is the worst now over? What’s the outlook for renewables in 2024?

It appears that the renewables sector has largely been able to internalise recent challenges as developers and sponsors have become more cautious about advancing projects. As well, we are now seeing finance rates normalising and capital project costs coming under less pressure. In certain segments of the project equipment space like solar panel modules, costs have even started to go down in some markets.

Despite these positive indicators, access to capital is scarcer. Developers are more capital-constrained, partly due to rising rates, incentivising equity sponsors to seek higher returns and support fewer projects overall.

The increasing volume of planned renewable projects is also creating competition. Many developers are forecasting a two to three-times increase in their build-out programs in the next five years compared to the prior five years, resulting in significant capital needs. Sponsors expect this tremendous growth to lead to larger platforms than expected and are looking at means to rebalance. We may see additional and potentially new sponsor support in the space, particularly where returns match hurdle rates.

With a long-term view and patient capital, BCI’s conviction in renewables is supported by the sector’s diversification potential, growing demand, supportive policy environment, and potential for inflation hedging through long-term contracts. We believe that renewables are moving past recent challenges and expect a more stable yet guarded year ahead.

Renewables aside, what other climate tech investments are you making? For example, what are your thoughts around hydrogen and CCUS?

Our team has primarily focused on conventional energy transition investments. These typically have lower technology, project development, and regulatory risk and include wind, solar, and hydro power, as well as energy storage systems. As carbon capture, utilisation, and storage (CCUS) and hydrogen are becoming more mainstream, we are increasing our exposure through portfolio companies where hydrogen or CCUS projects are part of a broader investment.

A hydrogen-related example from our portfolio is our investment in Open Grid Europe (OGE), an energy transmission company that is developing a Germany-wide hydrogen grid by repurposing its existing network of natural gas pipelines and building new pipelines as part of a Germany-wide initiative. The hydrogen network is currently unique in Europe. It is designed in such a way that it can transport hydrogen via import routes from Europe and the rest of the world.

Similarly, a timberland company in our portfolio, Caddo Sustainable Timberlands (CST), is evaluating the potential development of a CCUS project on a part of its Texas timberlands. This project aims to permanently store more than nine million tons of carbon dioxide annually.

Supporting energy transition projects through investments in our portfolio companies allows us to participate in the deployment of new technologies and positions us to consider direct investments in the future. It is also one of the ways we can indirectly support hard-to-abate sectors while maintaining a risk profile that aligns with our investment strategy.

Has the US Inflation Reduction Act helped your net-zero related investments?

The US Inflation Reduction Act (IRA) has provided strong support for renewable power, as well as CCUS and hydrogen projects. Beyond these benefits, we believe a significant impact of the IRA is the positive signal it sends on the future of renewable energy and transition sectors. Other countries, including Canada, have now implemented similar tax and support mechanisms and we expect more to follow.

Nature and climate are increasingly seen as inextricably connected. How does nature factor into your net-zero strategies?

An example of the intersectionality between climate and nature in BCI’s infrastructure & renewable resources portfolio is the BigCoast Forest Climate Initiative (BigCoast Forest) recently launched by Mosaic Forest Management. It is the largest project of its kind in Canada and includes deferring timber harvesting to increase natural carbon storage and delay operational emissions, while generating reliable, high-quality carbon offsets.

The initiative contributes to five UN Sustainable Development Goals, including Clean Water and Sanitation, Climate Action, and Responsible Consumption and Production, and a portion of revenues support cultural and scientific research through the Indigenous Protected and Conserved Areas Innovation Program and the Pacific Salmon Foundation.

BCI has also purchased verified carbon units from BigCoast Forest to offset our own operational carbon footprint.

Anything else relating to the climate or nature investment environment that you would like to mention?

As a long-term investor, incorporating ESG considerations into our investment process is an essential part of who we are and what we do. It is also integral to how we meet our responsibility to manage our clients’ funds. From asset allocation to individual investment decisions and asset management, responsible investing is deeply ingrained across our organisation.

The evaluation of our investments’ sustainability policies and practices is embedded into our underwriting, asset management, and monitoring processes. For direct investments, BCI takes an active governance approach through board involvement where we have oversight of our portfolio companies’ ESG strategies and performance.

We continue to look for ESG and climate-related opportunities, including green infrastructure, and teams from every asset class at BCI are engaged in exploring and identifying investments arising from the global transition to a low-carbon economy. This work is key to advancing the ambitions set out in our Climate Action Plan and meeting the long-term return objectives of our clients.