Exclusive: CPP Investments on investing in renewable and traditional energy

An an exclusive interview with Power Technology, Bill Rogers, head of Sustainable Energies at the Canada Pension Plan’s (CPP) investment arm, CPP Investments, delves into the intricacies of balancing traditional energy – oil and gas – with renewables to support the energy transition.

Rogers highlights the importance of leveraging both sectors to drive sustainable returns and embracing flexibility to navigate the evolving energy landscape. Sharing insights into CPP Investments’ long-term strategy, he offers a guide for pension funds worldwide to optimise their energy investment strategies.

Bill Rogers: ​​​​​​​Canada is an energy rich country and, as Canada’s public pension plan, the energy sector has an important role in our portfolio. We began investing in energy right at the beginning, when CPP Investments was first established, as we held positions in publicly traded energy companies.

We created our Sustainable Energies group in 2021, bringing together previously disparate parts of our portfolio to invest across the energy spectrum as one group.

Now, through the Sustainable Energies group, CPP Investments has an actively invested, globally diversified, nearly C$35bn portfolio of companies developing and operating renewable and traditional energy projects. This includes everything from onshore and offshore wind, solar, geothermal and hydro, to upstream oil and gas, midstream and carbon capture and storage.

Bill Rogers: Within our Sustainable Energies portfolio, the current split is about one-third to two-thirds traditional versus renewables – but this shifts based on market opportunities. For example, a couple of years ago, the renewables market was hot, prices were high, so we leant into traditional energy opportunities. Then, seeing a reset, we allocated more into renewables as prices came back down and we saw a greater opportunity for returns.

Within this blend is our focus on supporting the global energy transition. We are investing in renewable power capacity globally and in companies advancing technologies aiming to reduce greenhouse gas emissions.

As a pension fund, we invest on a longer-term horizon than some of our peers, meaning we can stay invested as change is implemented. Our investment strategy involves partnering with traditional energy players on their transition to lower-carbon business models, as well as backing businesses that benefit from the decentralisation, decarbonisation and digitalisation of the power system.

Bill Rogers: We are excited about the potential for renewables, but as we can only add renewables so fast, we will need to continue to partially rely on some traditional energy to provide grid reliability and meet growing energy demand.

In addition to energy security, there is also the issue of energy cost and competitiveness. Renewables are the cheapest form of new power in some markets, but as the sun isn’t always shining and the wind isn’t always blowing, battery storage is important.

Calls for divestment from fossil fuel companies have grown in recent years. Proponents say this approach would force a more rapid transition to a low-carbon economy. We believe supporting the comprehensive decarbonisation of the real economy requires a different approach – one that supports capital market participants in financing their emissions reductions and investing in more efficient solutions.

Bill Rogers: Traditional energy will be around for a while – 80% of global energy usage is still from traditional sources and overall energy demand is growing. This demand cannot be met without traditional sources. Renewables are being built at pace, but there are some practical limitations including grid availability, planning processes and supply chains.

The key is making sure that traditional energy players have the capital and expertise to both produce and use traditional energy sources as sustainably as possible – this plays an important role in the energy transition. Ensuring that the traditional energy companies we invest in continue to make their businesses more efficient by extracting, transporting and using oil and gas as cleanly as possible has been a big focus for us.

Bill Rogers: Complement! Our job is to identify the investment opportunities across the energy system that will provide the best risk-adjusted returns for the beneficiaries of the CPP – this is integral to maximising sustained long-term returns. We must build a diversified and robust portfolio that can work through the energy transition – traditional energy, renewables and other energy technologies all play a part in this – and meet the demands from data centres, electrification and reindustrialisation.

We see opportunities across the sector. For example, we have got an oil and gas pipeline business and we helped expand its carbon dioxide (CO₂) transportation business to take CO₂ from a refinery to be sequestered underground elsewhere. We also bought a Californian oil producer and used our renewables capabilities to help the business reduce emissions generated in surfacing the oil by rolling out renewable power solutions. In addition, we took older parts of the oil reservoir and received the permitting to turn it into a carbon sink for any residual CO₂ from the process and offered it to local industries.

Supporting traditional energy companies and helping them transition into new energy assets is an important part of our approach as a long-term investor to drive returns for our beneficiaries. The carbon intensity of our traditional energy portfolio has dropped over the past five to ten years, and this is something we continue to focus on.

Bill Rogers: Solar, hydro and wind – both onshore and offshore – have been our three core technologies for a long time.

More recently, a particular area of focus has been building up our battery and storage portfolio. With an increased reliance on renewables comes more intermittency and volatility on the system. To help address these issues, batteries have an increasingly important role. We have been investing in battery storage in India, Europe, North America and Latin America. These are markets with huge potential.

The other area that we are cautiously investing in is green hydrogen. We think there will be more use cases where green hydrogen and green molecules are important. Alongside some of our renewables platforms, and with a stand-alone business in Europe that we backed, this is an area that we continue to explore as we try to develop projects for what we think will be relevant over the long term.

Bill Rogers: This is an important topic, one which has required significant effort over the past four to five years, and it is not going to get simpler over the coming years.

To manage the risks of supply chain disruption, we help businesses diversify their supply chains; for instance, by helping our portfolio companies identify alternative suppliers and reduce reliance on a single jurisdiction.

We have also worked with portfolio companies to help build their own supply chain or localise suppliers. For example, we have an Indian renewables developer that is now building its own solar manufacturing plants. This shift, partly driven by Indian tariffs on Chinese imports, has prompted efficiencies.

We also bring our global scale. We have six renewables businesses across the world; they can each have individual conversations with suppliers, or we can help streamline this dialogue by flagging to the suppliers that when they are talking to one of those companies, they are actually doing business with a much bigger group. This can help these renewables businesses secure the services they need.

Bill Rogers: It is an important balance, and we must be successful with both. As an investor we are returns driven – our mandate is to identify investment opportunities that will provide the best risk-adjusted returns for our beneficiaries without undue risk of loss. We are also investing on behalf of future generations, so we work to ensure that the business’ energy transition goals align with our long-term focus.

In terms of tracking environmental impact, we closely track how our investments in traditional energy are improving their carbon intensity, while for our renewables businesses, we track the carbon reduction impact of new energy.

Bill Rogers: Across the whole portfolio, we have a long-term perspective. We invest for the next quarter of a century, rather than the next quarter, which is critical for the energy transition.

Another advantage is our scale. We are looking to grow our energy portfolio from over C$35bn [$50.13bn] right now to more than C$60bn in the next five or so years. For the right management team with the right ambition and opportunity set, we are a partner that can grow with them and could potentially remove the need for them to seek additional capital with a new partner. By comparison, a closed-end private equity fund might need to sell, but the business may not be in the right state to be sold, creating some disconnect.

Lastly, we benefit from the network and insight we have within CPP Investments. Our total portfolio covers nearly all asset classes, meaning we have a lot of knowledge. With our portfolio spanning the energy sector, traditional and new energy assets as well as other energy technologies, we see the bigger picture, enabling us to spot trends, pick the right businesses and support them to be as valuable as possible. The CPP Investments platform brings insights from our colleagues in private equity sectors, public markets or credit, which is helpful for us in both picking the right companies to invest in and helping those companies identify opportunities and manage risks.

Bill Rogers: It is important to take a holistic view of the energy sector. We are focused on the energy transition, approaching it from building new, cleaner assets and looking at assets with emissions and trying to improve them. Flexibility in a portfolio is important.

Additionally, ensuring the team has the right knowledge and insight – you need a team focused on the sector. We consciously built a team that has expertise in energy investment and is focused on the energy transition. This focus has enabled us to build a scaled and attractive portfolio.

Having integration within the whole CPP Investments team has also been helpful. Making sure we leverage the expertise and insights of different teams across the organisation, stay connected and can learn from one another, is a big advantage. A good example is Octopus Energy. When we made this investment, we underwrote it by combining our energy expertise with the knowledge and experience of our private equity colleagues who have expertise in underwriting software investments. Octopus Energy’s Kraken product – which manages customer service, forecasts energy demand and monitors power usage – was very much a technology play, so the knowledge we gleaned from our private equity colleagues was important from underwriting and supporting value creation for this business.