This week on our Carbon Frontiers series, we welcome Peter Zaman back into the SmarterMarkets™ studio. Peter is a Partner at HFW in Singapore and has been practicing law in climate finance and the environmental markets since 2004.
One year after Peter took us deep into Article 6, we’re circling back to discuss the progress that’s been made — and the work that still remains. SmarterMarkets™ host David Greely sits down with Peter to tackle the legislation and mechanisms allowing countries to voluntarily cooperate with each other to achieve emission reduction targets set out in their NDCs.
With over 20 years of experience across UK, EU, and Asia, Peter’s rare combination of commodities and climate finance expertise provides a uniquely holistic view of the carbon market ecosystem, crucial to support businesses in their energy transition pathways.
We continue our Carbon Frontiers series with Svenja Telle, Director of Origination at Base Carbon.
SmarterMarkets™ host David Greely sits down with Svenja to discuss the vital role of carbon removal in achieving our global emissions reduction targets. Together, they cover the strengths of technology-based carbon removals, the importance of community engagement and co-benefits in project design, and the need for transparent and scalable MRV solutions to ensure the quality of carbon credits.
As the market continues to evolve, it’s becoming increasingly clear that market maturation relies on improved MRV capabilities and project quality to build trust, quantify results, and guarantee the quality characteristics of carbon projects and their resulting credits.
Svenja and David map out the range of opportunities in climate finance and carbon investments, discussing how these investments not only facilitate our transition to netzero, but also mitigate climate and operational risk while improving organizational strength.
For our third installment of Carbon Frontiers, we welcome Nat Bullard into the SmarterMarkets™ studio. Nat is Venture Partner at Voyager Ventures and Senior Contributor at BloombergNEF. He recently collected his thoughts on decarbonization in a 140-page presentation deck, capturing the state of climate and covering how we got to now, where we are going, what’s new, and how to approach what’s next.
SmarterMarkets™ host David Greely sits down with Nat to talk about the long view, trends, and transience in our pursuit of netzero.
We continue our Carbon Frontiers series with Peter Fusaro, the founder of the Wall Street Green Summit, which brings together the leading practitioners in sustainability with the goal of building a more sustainable finance system for responsible investing and the changing role of business.
SmarterMarkets™ host David Greely sits down with Peter to discuss where we are in our decarbonization journey in preparation for the 22nd annual Wall Street Green Summit.
We kick off our new Carbon Frontiers series with David Shukman, a distinguished journalist and the former science editor of the BBC, where he reported from the climate frontlines for over 20 years.
SmarterMarkets™ host David Greely sits down with Shukman to catch up on his continuing experiences on the frontlines of climate, government policy, corporate action, and science.
We conclude our A Smarter Way series with Ben Hunt, author of Epsilon Theory & Co-Founder/CIO of Second Foundation Partners. SmarterMarkets™ host David Greely sits down with Ben to discuss how the narratives and stories we tell ourselves shape our decisions and may be one of our biggest obstacles to finding a smarter way forward.
We welcome Rob Dannenberg into the SmarterMarkets™ studio as we continue our A Smarter Way series. Rob is the former Chief of the Central Eurasia Division at the CIA. SmarterMarkets™ host David Greely sits down with Rob to discuss how understanding how our adversaries think is the first step in finding smarter ways to navigate an increasingly risky geopolitical environment.
We’re joined this week by Liz Hoffman, Business & Finance Editor at Semafor and the author of the forthcoming book Crash Landing: The Inside Story of How the World’s Biggest Companies Survived an Economy on the Brink.
SmarterMarkets™ host David Greely sits down with Liz to discuss how to provide trustworthy financial news to an interconnected world with increasingly divergent and competing viewpoints.
This week, we kick off our new series, A Smarter Way, exploring better paths forward to solve our concurrent crises of commodities and climate.
Our first guest in the series is Craig Pirrong, Professor of Finance at the University of Houston. SmarterMarkets™ host David Greely sits down with Craig to examine both the implications of and alternatives to Europe’s recent decision to move forward with energy price caps.
We kick off the new year with Arjun Murti, the Former Head of Energy Equity Research at Goldman Sachs and the Publisher of “Super-Spiked” on Substack. SmarterMarkets™ host David Greely sits down with Arjun to discuss some of the big issues facing energy investors in 2023.
We close out the year with a two-part Holiday Special with Robert Friedland, Founder & Executive Chairman of Ivanhoe Mines, and Josh Crumb, Founder & CEO of Abaxx Technologies. SmarterMarkets™ host David Greely sits down with Robert and Josh to look back at how the SmarterMarkets™ vision has developed over the past two years and discuss where it’s going next.
We continue our Financing the Energy Transition series this week by welcoming Leah Wieczorek into the SmarterMarkets™ studio. Leah is Vice President of Global Carbon at the Macquarie Group. SmarterMarkets™ host David Greely sits down with Leah to discuss the role that banks like Macquarie play in scaling the carbon markets and in financing the energy transition.
This week, we welcome Adam Bornstein into the SmarterMarkets™ studio as we continue our Financing the Energy Transition series. Adam is the Lead of Innovative Finance & System Change at the Danish Red Cross. SmarterMarkets™ host David Greely sits down with Adam to discuss how ESG, impact investing, and carbon finance can be put to work to fund humanitarian relief and resilience to a changing climate.
We continue our Financing the Energy Transition series by welcoming John Goldstein back into the SmarterMarkets™ studio. John is Head of the Sustainable Finance Group at Goldman Sachs. SmarterMarkets™ host David Greely sits down with John to discuss how ESG and impact investing has evolved over the past two years and where we need to be doing the hard work right now to finance the energy transition.
This week, we welcome Don Casturo and Matt Schwab of Quantix Commodities into the SmarterMarkets™ studio. Don is Founding Partner & CIO and Matt is Head of Investor Solutions at Quantix. Don and Matt sit down with SmarterMarkets™ host David Greely to discuss the role of commodity futures indices in financing the energy transition.
We continue our Financing the Energy Transition series with Nikita Singhal, Managing Director and Co-Head of Sustainable Investment & ESG at Lazard Asset Management. SmarterMarkets™ host David Greely sits down with Nikita to discuss her approach to ESG investing and building investment strategies in public equities.
We kick off our new series, Financing the Energy Transition, with Nat Bullard, Senior Contributor at BloombergNEF and a Venture Partner at Voyager Ventures. Nat writes weekly for Bloomberg Green on energy, transport, technology, climate, and finance. We start our new series by exploring with Nat the size of the investment that’s happening in the energy transition, where it’s coming from, and where it’s going to.
The following Q&A is created using slightly edited excerpts from the episode transcript, optimized for readability. Download full transcript.
NB: Certainly, let’s start with the scope and scale. Last year was about $750 billion, give or take, of investment in the energy transition. The investment went into power generation, renewables, electrified transport, and in a fairly long tail of other things such as hydrogen, heat, some sort of circular economy-related investment, and even nuclear power goes into that category. It has grown significantly over time. When I began doing this, it was more in the range of about $50 billion mid-2000s and, late 2000s. Now, we’re at about $4 trillion invested over the last 15 years or so, and it’s becoming a significant number. I think what’s important to do is to separate it into a couple of planes.
NB: The first is how much of that money is flowing into renewable power versus everything else. Renewable power has been bouncing around $400 billion for several years. It has hit a plateau, at least in the meantime, not necessarily in a bad way, and I’ll get to that. On the other hand, is approaching $300 billion a year, almost entirely electric vehicles. There’s also a small component underneath that of energy storage, and then all of that stuff is more in the range of about $100 billion in total. It’s not an insignificant number, but it needs to grow substantially if we want to do a deep decarbonization. Let’s think of it as an energy transition set of strategies in companies and towards real decarbonization of the global economy. You probably want to triple or even quadruple the top line of all those things.
NB: You’re going to need like 2.7x times more renewables, like 3x times more transport, and you’re going to need almost 10x times more of everything else that has historically been very difficult to do for technical reasons, specifically how to decarbonize steel, cement production, the electrification of heat, and other things of that nature. So that’s where the numbers go. Where it comes from is also worth looking at because you see a lot of attention to the early-stage elements of capital raising. So that’s like climate technology at the venture stage; private equity is about $50 billion yearly. You look at the activity in specs, pipe deals, and IPOs, and that’s the year the market is fairly active, but $110 billion. Equity at the company level flows into most of what’s happening in these different sectors. But two things are important to note. One is that almost all the money finances assets by financing the physical build of something, and two, most of that follows a fairly established project finance modality. So you’ve got a component of equity, a much larger component of debt, and that’s how long-dated assets with fixed contracts get built. So hopefully, that sketches a little bit about where it goes, but also how it goes in terms of flows into energy transition and decarbonization.
NB: It’s roughly about $9 out of every $10 in the investment realm for these assets is going towards building something; it’s going towards creating an asset that goes into the ground. That’s where most of the capital flows. And about half of it is going towards just renewable power generation; within that, almost all of it is going to wind and solar. So we’ve got a continually narrowing funnel regarding where money is typically going. What’s interesting about that is that figures are tapping out, which is not necessarily bad. In the long run, you want that number to be probably in the order of more than a trillion dollars a year. The declines we’ve seen have been this sort of combination, the triangulation of the falling capital cost of assets and money deployed. So you’re getting more out of every dollar deployed, which means that even if you have relatively flat or not hugely growing dollars in terms of deployment, the dollars invested instead, you see more assets deployed for that same money.
NB: So transport sort of quasi-fixed asset, in this case, they’re at least longer dated than consumer packaged goods or white goods. It transports where things are taking off and to game out at what point we would have more dollars invested in transportation than investing in clean energy. It’s fairly elastic depending upon the demand for electric vehicles, but we’re probably not far off in a year or two, maybe three before most of the dollars that are flowing are going into EVs and some of the related energy storage investment that goes with it. As far as where we’re probably not devoting enough, the early stage of things that were considered kind of science experiment or maybe science fiction level decarbonization is where we need to see more money if we want to see a lot of activity.
NB: And that’s what you would call hard-to-abate sectors. So that’s things like cement production chemicals, steel, aluminum production, places where you start to run into chemistry problems, not just physics problems, where you have molecular balances that you have to maintain, where you have incredibly high needs for heat and the quality of that heat, things like that. There’s another area, and this is becoming very apparent right now in Europe in the current series of crises kicked off by Russia’s invasion of Ukraine, which is in the heat of all sorts as something that needs to be decarbonized. Some of it is as prosaic is just replacing the home boiler with a heat pump. Other elements of it are going much further into industrial heat production, which is an extremely big proportion of global energy demand, but it’s also a very demanding portion of demand like you need to hit certain qualities of heat for certain durations with certain stability in ways that really cannot be converted into intermittency or variability. And so that’s where structurally we need much more investment to come.
NB: It’s a really good question. It’s like running a theme for anybody investing in climate, specifically, to look at a portfolio, asset, or company business model and verify whether this business is a climate investment. So the venture landscape is very healthy in terms of active fundraising. There’s a great deal of inbound interest from founders, and there’s a lot of limited partnership interest, which is where you want to be if you’re on the front and sharp end of things; there’s plenty of interest in creating new technologies addressing these challenging questions.
NB: What’s important is that we’re starting to see the money that gets laddered on top of that; to step these assets from experiment lab bench to massive deployments. Such things as Brookfield or Copenhagen Infrastructure Partners launching an energy transition fund; it’s something sort of the deployment capital for the long-run of building assets that one way or another are going to decarbonize; you’ve got interested from sovereign funds to Masek, in particular, has a big play here; in addressing not just challenges around infrastructure, but even increasingly challenges around things such as recycling or even trying to decarbonize or demethanizer rather the production of rice, which is both, a huge source of emissions and a huge source of calories in particular in Southeast Asia. And then you’ve got things such as the loan programs office at the Department of Energy here, which has been revivified, at scale, thanks to both the activities of its director and the new funding that has come from it the Inflation Reduction Act.
NB: So you’re starting to see money capable of carrying something from an idea to gigaton scale deployment, moving through steps and phases of capital in various tranches with various risk appetites, with various abilities to de-risk those technologies as time goes on. What I wrote in my piece that is important to mention is that if you want to address something as a climate investment, then it needs to, as a first principle, talk about its climate benefit, and that probably is in the range of what emissions is it avoiding, what process is it improving to what degree that we can measure in a climate way, and what kind of scale does it hope to achieve. So I think that’s a very important thing to put in because otherwise, we have the potential for looseness in defining whether or not something counts as climate. After all, if it in any way has something to do with emissions, you could consider it to be a climate investment. If we’re going to call all these new pools of capital when their investment approach is a climate investment approach, then it needs to address that element of what those companies intend to do.
NB: So there’s a series of different things that we can talk about for reducing carbon, one is probably the simplest to measure but is also one of the hardest to do, which is build a physical system that withdraws atmospheric carbon dioxide and one form, or another secures it on an ideally multi-century timeline so that it no longer enters the atmospheric carbon cycle. It’s relatively easy to measure, tough to do, and if it can be done, it’s generally quite expensive. Then there would be something like using a natural carbon sink such as afforestation or reforestation, wherein you can measure the uptake of carbon into the living things, into wood biomass, and with some assumptions, make the case that it’s absorbed this much carbon.
NB: Now that, unfortunately, can be highly contingent upon things outside the developer’s control, such as a drought and a wildfire that causes that ostensibly sunk carbon to go back up and smoke. And then there is probably the next phase looking at what in the UN language they would’ve called additionality, more or less, which is if I am building an offshore wind farm in the North Sea. What is the counterfactual to that? What would’ve happened otherwise to create that same 200-gigawatt hour of power per year? You would probably look at the grid and assess it as a delta based on that. So the grid is a small percentage of coal; it’s a lot of nuclear, natural gas, and renewables. So you would be evaluating it based on what otherwise would’ve happened in this counterfactual fashion.
NB: In the early stage, there is inherently an interest in things that can grow and scale quickly. So there’s interest in process improvements, a lot of interest in software that directly impacts operating systems. There’s also interest, frankly, in software as software. So things such as accounting or management of flows and carbon flows and things like that. So that’s within the realm of traditional venture scaling up a bit; there’s a lot of interest in relatively light infrastructure, the endpoint infrastructure of advanced transportation and energy storage wherein there’s a play that has a technological basis to it or a specific business model approach. Interestingly, we see quite a lot of funding interest at the institutional level now for things such as nuclear. We do not see enough interest because it’s highly contingent on policy, regulation, planning, and permission in transmission and building a connective network that will bring all of this new capacity to the market.
NB: Another area attracting interest and needs to attract a lot more is the intersection of climate and food, and agriculture. This part of the global emissions pie is very hard to address. It’s very highly distributed, and that data is not necessarily great. It is mission-critical to get it right to make sure that things are edible and sustainable, and so we’re beginning to see a lot of interest there, but I think it’s still fairly nascent. You could argue that some synthetic protein in the meats up where the meat substitute foods that we’ve seen are in one way or another something climate-related because they’re very directly avoiding the emissions that would come from a similar quantum of ground beef or of ground pork. But there’s much more to do and many more things to address.
NB: No, this is a really important thing for us to query a little bit, and I always start by saying that, if we were to build brand new risk screens today, knowing what we know and with the data we have available, would we somehow group environmental things that are inherently measurable with social things that are harder to measure and not necessarily as related with governance, which in a sense should be a component of all good corporate operations and the answer is that I don’t think that we necessarily would. I think we would be atomizing these into separate groups. It’s very complex to try to analyze all of these things together. It leaves apparent climate-related risk screening one way or another, grouped in with stuff that can become quite a bit of a political football.
NB: And that is where you find institutional fund managers in this challenging position. They could be set up in one element, a very rigorously defined asset and infrastructure investment thesis that doesn’t need ESG within it to exist at all. It’s simply going to have risk-adjusted returns above whatever baseline they’re assuming. It happens to be invested in things that are largely decarbonization related versus all the other activity that it might be measuring that is far more social and contentious, certainly, publicly. It would benefit in a way to sort of have these atomized again so that this is a fund that isn’t predicated upon ESG, it’s simply predicated upon risk-adjusted returns above your benchmark that happen to be best met from doing these kinds of activities that happen to be decarbonization related.
NB: Now, is it impairing capital flow? I don’t think so because you simply have a lot of institutional investors further up the ladder. You have the limited partners of these institutions, or you have pensions that have their own mandates that see this as doing good business for themselves, and are willing to ride through it. I think what’s going to be important for us to watch is the portfolio performance impact of making these large divestments at the moment. Blackrock has an ESG fund if you want to buy it. They also have funds such as the shale patch, and you can invest in those as you like and see your return or your particular stance reflected in that decision. I don’t think that it’s materially impacting inflows yet, but it is complicating the thought process and injecting political complications in a way that most big investment managers are not interested in having to entertain.
NB: I’d like to emphasize that there is no such thing as a free energy market anywhere. It is simply a neutral statement too large, too embedded, and too strategic in any economy for it to be left purely to market forces. Whether that’s the Texas Railroad Commission back in the day determining how much oil could be sent so that you don’t have price wars forever or it’s a public utility commission regulating rates of return or setting rules for interconnection or making determinations on the proper mix and an integrated resource plan. We have always had a strong hand in policy and regulation in markets. I think that that’s just a feature of theirs rather than a bug. I think that we are entering a period of a much more muscular approach at the highest level of policy for several reasons in markets.
NB: One is that the strategic element of this is just brought much more to the fore by what is happening in Europe, certain decisions that were made by themselves generally out of some kind of notion of national security; Germany importing gas from Russia to ensure that there would be peace between parties is now being inverted quite a bit to having to meet demand so far as possible without disrupting regular everyday life and industrial business, while also trying to decarbonize and while also trying to minimize importation. It’s just a case where governments have to come roaring back into play. I think it’s also a place where I don’t know that we would expect a private market to ever fully embody all of the things that need doing because they exist at a level beyond the ring fence of how a board of directors is going to make its own decisions.
NB: You can talk about policies to set emissions targets in Europe that fit $55 in the EU, which was passed a little while ago. You then have more near-term things than just policies to flood the zone with heat pumps so that you aren’t relying on gas heating at home, and you can save whatever gas is available for the industry until you decarbonize that. And then in the United States, we have things like not just the Inflation Reduction Act, but the Chips and Science Act that are industrial and decarbonization policy and economic redistribution to some extent, and jobs policy all wrapped into one in a complex way. But I think in an accretive and sensible way, a lot of implementation is to come with the devil in a lot of details.
NB: By spurring on a great deal of infrastructure build, which is mostly in the form of transmission, it allows what developers of assets want to happen. It gives them the way to work to fruition. There is just an insane amount of clean power planned in the national interconnection queues in excess of 600 gigawatts, which is about half as much capacity again, as exists in all of the US right now of everything; most of which will never get built unless you find ways to connect it. So that is one way of changing the game. The other is somewhat a bit animal spirits, and I’m sure you’ve already noticed this, which is that the passage of the IRA has given license to expand to companies that might previously have been in a wait-and-see mode for elements of the US market.
NB: So that’s the case for battery manufacturing expansion in the US, relatedly auto electric vehicl manufacturing in the US but also things that are in those difficult and harder to abate parts of the world. Things where you’re dealing in the world of chemistry more than you are dealing in the world of electrons, and so it has sort of widened what we would call the Overton window sort of acceptable to be viewed and approached. It has widened the lens on what is possible. So I do think that it is already changing the game, but the implementation of this is going to be extremely important. Like if funds don’t flow efficiently, if there’s a great deal of capture by one group or another, that is a sort of unintended consequence of who lobbies best. I think that would be a little bit unfortunate. But I think that it has changed the engagement and changed the sense of the scale of what’s going to be possible, certainly from an emissions perspective, if do all the things that are allowed through the inflation reduction act, we’ll find ourselves not quite on target for where our Paris agreements, but much closer than we would be otherwise.
NB: China’s policy is so generous. It is hard to separate from the larger economic goals of the five-year plan or whatever the government’s own larger goals for not just infrastructure, but technology deployment; definitely, it’s an extraordinary success in terms of what it’s been able to deploy in its own. I think India has done very well. It’s probably going to miss its nearest-term targets for renewable deployment but will move ahead further. It would be very interesting to see what India commits to at the upcoming COP 27 in Egypt because it was last holdouts to avoid making an emissions peak or a net zero target commitment for a defensible reasons of its development. But I’m curious to see how that plays in particular, the spike in commodity prices has the knock-on effect of making renewable power, in particular, more in the money, even if its costs are going up.
NB: Something we observed over the summer when BNEF ran the research, which upticks thanks to the cost of capital and capital equipment for wind and solar at about a global benchmark level. But at the same time, the rising cost of gas and the rising cost of coal meant that the delta, the positive delta for renewables was never wider against gas in particular than throughout the summer. It’s given, I think it’s given a lot more room for the deployment of zero marginal cost, zero fuel power generation in particular, to the kind of come in and occupy a bigger and bigger chunk of global power demand on an economic basis, not so much a policy basis. So that’s something that we’re observing closely.
NB: Transportation too is very interesting though in ways that are hard to see sitting where we are. So there will be a little under 2 million barrels a day of displaced oil demand thanks to EVs in 2022. More than half of that comes from two and three-wheeled vehicles in Asia. So it’s not coming from buses or trucks or Teslas or ID 4s. It’s coming from little things that we can’t even buy here if we want to. I think of this as sort of like a bit of a sleeper for most people who look at these markets in the sense that I’m trying to imagine what today’s oil market would be like if we had to meet another almost 2 million barrels per day of oil demand in the current market as it is.
NB: I think that we’re approaching moments, and I’m channeling a bit with the IEA that I wrote the other day last week, which is that we’re kind of beginning to dance around the peak for demand for a number of inputs. In fact, pretty much all of them to an industrial economy that needs hydrocarbons, oil, coal, and natural gas. The IEA called last week in its conservative scenario for what I think they called a definitive peak in fossil fuel demand, which is pretty important when you consider that this is not coming from it’s ultra decarbonization scenario, or even its countries are going to do what they say they’re going to do, announce the pledges scenario. This is in a sort of closest as we can get to business as usual—no major technological changes. The major policy changes. Simply, at the moment, we’re close to the peak and we’re at the peak, rather in emissions from the power sector, we’re going to approach peak demand for coal, oil and natural gas as well though that is expected in their scenario to hit a plateau and stay there probably.
NB: But this is very significant, in particular coming from the IEA, which if we think about it from its charter, was simply designed to sort of maintain the mechanics of energy security largely in the rich world in the OECD.
NB: You’re right that this is sort of like oddly complex that depending on what set of glasses you put on. You either see an extraordinary amount of progress, an amazing plateau nobody was expecting a few years ago, especially not to be compounded by the IEA or a dismal state in which we’re not doing anything right. So I’ll work backward from the dismal one. This is entirely true that we are not on track from the many different measures that you could use specific to each sector to reach 1.5-degree scenario. Now we are at the point where you need almost like economic collapse level of typical decarbonization to happen year on year for that to happen in a near term. So even COVID-19 in 2020 didn’t drive emissions down that much, it’s awful not to ask of the technologies and the capital suite that we have available today to do so.
NB: That’s one thing. But the other is that the scale of change that we’re approaching right now is something that people don’t often apprehend in particular because we’re at that point where all of this activity that’s happening in decarbonization has simply bent somewhat invisibly; the increasing curve that has been existing to date, world’s going to have, according to IEA numbers, around 460 terawatt hours of new solar and wind generation this year. This is part of why they said that emission is about 1.9 billion tons in the last year. This year they’re only going to be about 300 million. But that 460 or so terawatt hours is the same amount of power as France consumes in a year, and France is the 10th biggest power economy in the world.
NB: Next year if you factor in the installation of 251 gigawatts of solar PV this year, plus about 93 gigawatts of wind power plus about 13 gigawatts of offshore wind power, it’s closer to 650-gigawatt hours or terawatt hours rather, that’s going to be added to the power system next year. That’s more than Brazil, which is the sixth largest power economy in the world. We are to the point where the incremental year on year is now more than 1% of global power demand that is being decarbonized,. It’s really important because at a certain point, those rates of increase if they’re not matched by a subsequent top-line rate of increase, mean that you have to start eroding a market somewhere else for something. So you’re going to, you’re going not only hit the peaks, but you’re going to have very stiff competition for each of these resources on its own that has peaked for the declining share of the fossil fuel margin of generation in any given system.
NB: Are we there yet for oil? Very hard to say, but again we’ll be able to calculate by the end of this year what the 2023 demand displacement in oil is from electric vehicles, and it’s a number that the top line is still growing. It’s simply reducing the rate of growth makes it hard to see, but when it tips things into actual system change, it’s going to become very dramatic. So I’m not as negative as the UN report is, though, I understand the purpose that it’s trying to meet, which is that we have set ourselves this goal in this target, and we are nowhere close to meeting it. That’s true. What I tend to spend my time looking at is what are we doing and how might we expect that to go forward in the future.
NB: How can we watch the fact that we’re going to be in a couple of years 15% renewable power globally, which means that’s more than any given country besides China in its share of global power generation. And how are we going to match the fact that growth without the same top-line growth and power means that it’s got to erode demand for something else with another possibility, which is that if we want to decarbonize, we probably need to more os less triple the amount of power generated globally by the minimum of the century. That means you could either build more coal and use it to energize your electric vehicle, or you can build just orders of magnitude more of the things that are already on the way to decarbonizing power. And working their way into all those sectors that have been hard to do in the past for all the reasons we’ve already discussed.
NB: I think it’s really important, if you think about industries as growth and how they’re valued and how capital planning goes to consider the implications of that. If you’re going to make a deep water offshore final investment decision for oil, what is it predicated on? Is it predicated on rising demand on that resource being the cheapest barrel on the margin in the market? Is it predicated upon other sets of things we could layer in there? Is it more secure, more ethical? Is it more secure as supply? Is it diversifying one’s global supply? Or is it consolidating among friends? But it all requires, if the market is not growing, a much more enhanced focus on any one of those particular aspects in a way that when demand was growing more than a million barrels a day, which is not really a concern.
NB: You’re planning an asset into a growth cycle that you anticipate will continue to pay literal and figurative dividends for a very long time. When that’s not the case, then we have a cram down essentially in terms of operation economics. We see that in periods of relatively smack demand and how challenging it is for much of the high-cost production as some of it gets curtailed, gets shut in, but you’re going to face that possibility becoming more, more acute every year and I think that’s going to be very challenging for any number of different reasons. How do you plan your new assets? How do you run the ones you have? What do you run them for? Do you run them for growth? Do you run them for cash? All these sorts of things.
NB: So what are we doing well? We are doing well at giving money to stuff that works, sounds like a bit of a circular argument, and is a bit of circular logic. Why are these things receiving money? Because they’re bankable. Why are they bankable? Because they generally receive money. So that’s one thing we do well is we have a very good sense of following a trend once it has reached an established point. People buy EVs because they’re passed. They’re now past 10% of global new auto sales, and they’ve been sort of de-risked collectively in people’s minds. Not that there aren’t risks, not that there won’t be complications, but people have sort of collectively decided that this is a path we’re going to go down, whether it’s from the personal buying decision to the capital equipment and tooling decision for the automakers themselves.
NB: In power renewables tend to be the cheapest in most new grids. They also deploy quickly, they deploy relatively smaller if they want tranches of capital deployed. So that has a way of maintaining its own gravity while also offering the chance for acceleration. What we can do better? So one thing is to really be dedicated to solving hard problems. And that means looking past cycles and into the imperative of deeply decarbonizing steel, aluminum, cement production. These things on their own are like large country-size greenhouse gas emitters. They’re relatively concentrated. The companies that operate them are generally very big. They have an interest within both their financial and their social license to operate to decarbonize, but they’re going to need help, they’re going to need government commitment, they’re going to need R&D.
NB: The final thing, and I’m drawing on some very good research that I would urge any listener to find, which is from the Oxford Institute for New Economic Thinking. It was an examination of basically 50 years’ worth of experienced curves for technologies like wind, solar, lithium batteries and hydrogen electrolyzes matched up against the assessment models that the large canonical institutions, governments, and for the most part, oil majors have done to forecast the future. And this research does an extremely nice job of squaring a circle for me, which is that historically all models tend to assume that like the present can’t go on forever. The current conditions of growth or wherever we are; they are reliable but not indefinite, and we should probably apply some kind of floor cost to assets on a unit basis and a sort of ceiling on deployment based on whatever Gim Crackery you have in the model that says there’s no way we’re going to be able to deploy this much of that. So let’s just assume.
NB: Let’s just assume it flattens out. So Oxford went through this research and, and they attacked the first part which is about the four costs first and that five decades worth of analysis, there’s no evidence for four costs. This is now peer-reviewed research we do not see evidence for four costs for these distributed technologies, and we will not apply them. Now it’s a bit bonkers if you’re used to sort of assuming that things eventually have to hit some layer at which they no longer get cheaper. So the rate at which they’re getting cheaper slows down, but the research would suggest that we shouldn’t arbitrarily say that it’s not going to get any cheaper than where we are right now.
NB: And they also urge us not to artificially constrain what the market could be. Because 251 Gigawatts of solar this year is much more than has ever been built of any one technology in a year ever, for power generation. It’s also nowhere close to what the market itself is planning to do. It’s a matter of where we look. Let’s look at polysilicon production, which is the rate-determining production element for making solar panels. By 2025. We’ll have somewhere north of 900 Gigawatts worth of annual production capacity available. The market companies are already planning to do that. They’re planning to be capable of meeting that. You have to suspend disbelief a little bit if you want to follow what, otherwise, it’s pretty evidentiary and logical chain of events to get us to a future where we can be doing double or triple the amount of somewhere that we’re doing right now.
NB: Because to an extent, companies have willed that into being, provided there’s capital notable and the rest of the economy is stable enough for things to deploy. Provided you have all of these other assisting or determining steps such as transmission, planning, permission and trade and everything in place, then this is definitely within the realm of possibility. And finding an arbitrary reason to shut it down has been viewed almost as like a good practice back in the day. But I would urge us not to preemptively apply such things because these markets have traditionally blown right past them with no disregard for what the integrated assessment model says and companies themselves are in their own interest to expand as much as possible, try to grab market share, and allow us this ability to really move down the curve, in 2%, 3%, 4% per year decarbonization of the global power system.
This week, we welcome Greg Sharenow into the SmarterMarkets™ studio. Greg is the Managing Director and Portfolio Manager for Commodities and Real Assets at PIMCO. SmarterMarkets™ host David Greely sits down with Greg to discuss the European energy crisis, commodity markets, inflation, and what it all means for investors.
The following Q&A is created using slightly edited excerpts from the episode transcript, optimized for readability. Download full transcript.
GS: I think it’s the FED versus OPEC that has been a very challenging dynamic when you’re formulating a view because it is hard to look at the actions of the FED and not notice that this will lead to a slowdown of economic activity. You’re already seeing it in some of the data that’s regarding housing, and you would expect to see the actions of higher Central Bank rates, not just in the US but globally, having a negative impact on real spending capability ultimately over time. Ironically, higher rates also increase the cost of capital to the energy space, reducing potential investment.
GS: So there is a bullish aspect to the FED policy that will be more impactful over a longer term horizon than a short term because investors now have more places to put their money. To places where they’re earning some risk-adjusted return. After many years of interest rates being so close to zero, which was made to facilitate more money going to more places and is now working in the other direction. I think that points to one of the challenges we’re facing right now, that this cycle that we’ve been in higher commodity prices hasn’t been a demand-side cycle. If you look at the last super cycle, the emerging market growth rate, particularly centered in China, really strained global supplies; demand for many of these commodities isn’t much different than where they were in 2019, and if anything, they’re not on the trend where they would’ve been, but we’re seeing extreme tightness and very strong markets in part because of the constraints on the supply side.
GS: If the FED were to move rates much higher, reducing capital availability further to upstream investment and investment in the power sector, it could have a positive long-term impact. Regarding OPEC’s action, they had some concerns about short-term demand, and there is an interest in supporting prices long term. And if you’re OPEC and you’re producing at near max capacity, if you look at Saudi, they were producing 11 million barrels per day recently. From a consumer standpoint, if you believe we need to get that CapEx invested, that we have been shy to do up to now, but I don’t think that’s the only reason. Another part of their view was that if you think about driving your car and you have your pedal down to the metal, you will start getting vibrations.
GS: They’ve never sustained that for two consecutive months. Sure, their surge capacity is still higher, but we haven’t proven that they’ve had meaningfully higher sustainable capacity. So seeing a reduction in output from OPEC also probably has a lot to do with creating flexibility in the system and reducing that vibration. Now the one other piece that has happened since then is also some guidepost from SPR, which has the same sort of guidelines as what you were saying that OPEC Plus was trying to do, which is creating price stability, which over the long term is arguably going to facilitate more investment if the SPR now can commit to forward buying oil around $70. OPEC is willing to adjust its output, at least for right now. Policies have changed a lot in OPEC over the last 20 years.
GS: Their response function today is not necessarily what the response function will be tomorrow, but as of right now, SPR, as well as OPEC, are working to put a floor under our backend oil prices. That leads us to have a constructive view on oil over the next 6 or 12 months or certainly that the market is discounting a lot of demand weakness that could come potentially from the FED tightening, particularly if the FED tightening leads to lower CapEx. Now about China, what’s remarkable about these commodity markets, and in the last cycle up in commodities was very much led by China, and it used to be that if the US sneezes – the world caught a cold. The response function of global growth that changes in China’s growth is becoming like a three-month lag, and it is not just the US now; it is also China’s impulse function.
GS: And that’s even more true for commodities, given their large share of not only growth but also their large share of absolute demand, given how much they’ve grown over the last 15-20 years. Almost all commodities are in a state of backwardation, consistent with low inventories and tight fundamentals where people are willing to pay a premium for prompt delivery. So we’ve had incredibly tight commodity markets across the whole chain. You’ve managed to have this, with China being a negative impulse. Next year, I would love to know what exactly China will grow; they will still grow at a slower rate than they have been and probably decelerating, but if they’re growing. They started changing their COVID policies, which could be a positive catalyst. But up until they make that decision, there are headwinds to commodities, and that’s the challenge for prices, and if not, I don’t know where prices would’ve been. It would’ve been a lot higher and a lot more painful.
GS: For sure. We had the Twitter wars also for four years before, and we’ve had COVID, so there have been many policy shifts and challenges. When you and I were working together, we were trying to get supply and demand down to a couple hundred thousand barrels daily. Now all the inputs could be half a million to a million barrels a day – easily! With China’s demand, if they reaccelerate, that could be $more demand for 500,000 barrels per day next year. The uncertainty bands are wide, and I think that’s part of what is also contributing to a lot of the constructive nature of the market because it challenges CapEx if you’re sitting there looking at this environment. You’re looking at policy uncertainty, demand uncertainty, and the policy being China’s COVID as well as fiscal policy, which is a huge deal in Europe right now. And it has had a big outsize impact on the market, the political future of some European leaders, and the rising concerns leading to protests in the street.
GS: Like there’s a lot of uncertainty. It makes one have to be more nimble, but it also makes the CapEx decisions to solve some of the supply-side challenges even more difficult because of all these uncertainties.
GS: Well, I can also widen that and say the ripple effects across the economies in the politics because Europe is the epicenter, but the echo has been global. And in the real wage contraction, you’re seeing that is very sharp in Europe, in particular, but elsewhere, the European energy crisis has many impacts on other commodities; for example, high natural gas prices are leading to higher coal prices, higher power prices, which has the implications for creating higher coal prices elsewhere as well, which has the feed through to higher power prices. It has a substitution effect on oil. Now I’m a little less alarmist than others on the outlook for winter in Europe. There’s been a bit of migration to that view recently because cash prices in Europe are trading down from €350 per megawatt hour.
GS: This weekend, it traded for $50 or $60. That’s a pretty big change now. The forward curves are still pricing a big premium. We all have the challenge of figuring out the demand response functions when we’ve never seen prices in this neighborhood. And if you look in the past, you’ve seen price spikes, and you kind of get a sense of how the demand responded on a short-term basis, but in almost all those cases, the forward curve was largely unmoved. It was viewed as a transient effect, and today it is the full forward curve at a huge premium to what anything would’ve been expected historically. So I’ve been a little less alarmist because we have so much excess consumption in our energy systems, and there are a lot of actions people can do to save.
GS: One of the ironic things we’ve seen this year is how weak gasoline demand may have been in the United States. It’s been much better in Europe, but it’s been weakish in the United States. Part of that concerns when your real wages are contracting; you start looking at ways of saving energy. Now, if you’re a European energy consumer, you cannot heat your whole home, but you can move back in with your parents, work from the office more, and let your firms pay your heating bills. Like there are a lot of actions, the awareness can lead to a material change. For instance, changing your thermostats by one or two degrees has a huge implication for energy consumption as well as, and curtailing peak power demand has a material impact on thermal generation because thermal is your marginal generation.
GS: What’s going to happen in Europe, it’ll have meaningful implications on the fiscal stress in Europe and their ability to manage through the needed subsidies that they’re planning or the planned subsidies. Whether or not that’s a good idea and if it’s needed, as Europe consumers go, a lot will go in the global market. Suppose we end up getting the 15% consumption out of the consumers. In that case, that’ll be a meaningfully lowered tax on industrial output and lower energy prices that you could expect in Europe, Asia, and elsewhere, big energy importers competing with Europe. Oil could have independent issues because of Russian sanctions and OPEC’s decisions. There’s a variety of things that can make that market different, but certainly, when it comes to gas and coal, it’s Europe that controls and holds a lot of the outcomes cause we’ve seen weaknesses in other places from the high prices that are causing real strains for Asian importers in some of the lower income countries. If Europe can figure out how to contain its demand, that will be very helpful in relieving some of the pressure elsewhere.
GS: We spend a lot of time with the corporates trying to understand their decision functions, trying to get a handle on what dollars are going back in, and at one point, they were spending 120% of free cash flow and now spending 40% or 50%. You look at the changes in oil production relative to what you would’ve expected at similar prices, and you look at changes in investment in terms of rigs; it’s meaningfully lower, and if you look at the international energy agencies’ investment outlook that was published a few months ago, they were also commenting that 50% of your increase in global energy expenditures this year is all cost. So when you look at an inflation-related company, they are more concerned about their cost and cost management because of how investors view and treat their equities when they increase CapEx and have higher costs associated with it. It’s very negative.
GS: When you look at the oil and gas side, we’re investing about 15% below where we were in 2018 and 2019, despite prices about 30% higher. On a real basis, it’s like 25% below. Meaning companies are just being more disciplined now. I think it’s a function of a few things. One, investors demand it after a very long period of subpar returns, and they want to be paid for the risk they’re taking. The second part, think about anything long-term CapEx-related. You don’t just have the demand uncertainty associated with the energy transition; you have liabilities that the environmental policies will change. What is your carbon exposure? What is your remediation exposure? Have you started expanding your time? The uncertainty bounds around these policies, and the demand outlook gets wider.
GS: And that’s very challenging for companies to justify and operate in that environment, and that’s why you see a lot of investments more likely to be green-lighted in renewable diesel, which with LCFS markets down here, it has to be challenged, but at least they can make a justification that in the long term it’s aligned where the puck may be going. The problem’s a long skate between now and then in the energy markets, and that’s not just true in oil and gas exchange but also in power. And while in the long term, more growth in renewables and more growth in storage for renewable, associated renewables are the grid that will lead to lower prices. The problem is we’ve done such damage to the base load generation that we’ve added intermittent sources that aren’t able to meet the full spectrum of our needs.
GS: I think we’re going to end up in a situation where the next three to five years, there will be higher and more volatile energy prices because of the CapEx decisions and the challenges of making incremental CapEx improvements on base load capacity whether it’s thermal related or even nuclear in many places. Even though nuclear is having a bit of a renaissance, it’s still a two-track system where some are going in the opposite direction. It will be very challenging to meet the energy needs when the economy begins to grow again meaningfully.
GS: I think the policy uncertainty is what you’re referencing there. If you look at clean diesel, for example, it relies on policy incentives, and if you look at some of the other investments, it’s all about policy, and if the policy is going to change with different political wins, it does make the challenges harder. Certainly, consumers and governments are willing to look at the next 3-5 years and make that decision, but it’s harder to make that decision over a 20-30 year period. Now we’re moving into a peer with higher LNG FIDs going to be made. Even if it’s the lesser of all the evils, it’s one that markets are paying for. So I think you’ll see more LNG projects, but when you start looking at other projects that would otherwise go, you can easily say that some of the challenges are real.
GS: My concern about LNG is that everyone might want to build an LNG import terminal, and many US builders want to be LNG export terminals. We have to accompany that with upstream. Now, if you’re in East Africa, they are paired, and there are some other areas of the world where they’re going to be paired, like in Qatar, but in places like the US, we have to be able to invest to keep up with the LNG export capacity that could come down the line and permit is a big portion of the challenges in doing so.
GS: I would expect that you’ll see compression in the ERBS because the incentives are there, just like dollars will flow through the highest margin over time. It’s not a grand philosophical statement of insight. Investors go for returns, LNG arbitrages are high, and we should invest in rectifying that.
GS: Yes, but it’s fairly nuanced. Suppose you look at the 60/40 portfolio. In that case, there’s a time with a large historical sample where the correlations between fixed income and equities aren’t negative. Usually, that environment tends to be associated with inflationary environments. You’ve seen that in the past year, inflation has picked up, growth rates are coming down, and nominal rates are going up, creating a problematic time for investors. So owning inflation assets are more important than maybe other periods where growth is a dominant factor when inflation’s dominant, inflation-related assets are in higher demand for portfolio diversification. So there are a lot of clients who are interested in hedging their inflation risk in their portfolios. The thing is that there are a lot of scars, particularly in the United States, from long periods of poor commodity returns and low inflation where it wasn’t the best use of the dollar.
GS: Now the problem is when we have the regime shifts, and you have had the investment, and while
there’s some regret from a lot of the US investor base who weren’t actively engaged like they may have been 10 or 15 years ago. The challenge many are debating now is whether you can buy commodities today if the forward economic ALEC is lower? So there’s a tug of war between those who can get over that hump and view it from a portfolio diversification standpoint versus those who think with a bad economic outlook. Do you want to own commodities in a dire situation? They’re at a higher nominal price than they’ve been, so they think they shouldn’t be interested. It’s a two-way conversation; the other part is for those who were invested because your 60-40 went down so much, and commodities are up; if you had a 3% allocation now, you might be at 4.5% or 5% today.
GS: Portfolio rebalancing, take the cash from here to finance other ills in your portfolio, but the interesting part is that the global investor, particularly in Asia, and Latin America, these are places that historically have had high leverage to EM growth and, as a result, would’ve felt more insulated in an inflationary cycle, a commodity cycle than they have been this time. All of a sudden, they’re finding themselves very subject to changes in inflation globally and changes in the US FED policy. They have found themself on the tail end of the inflation cycle and have become increasingly interested in hedging their inflation. I never had that EM virtual demand growth and never had the EM growth story, I mentioned before about China. You never had the growth, but you still got the commodity, inflation, because of the supply exchange.
GS: So while the US, what our perception is, the US investors are very much split, and some are reducing for various reasons or some have just missed it, and they’re now concerned because of demand. The global investor has been much more interested than they have been in past cycles in part because of the nature of this, rise in prices has been much more on the supply rather than the virtuous economic boom EM-led cycle that we had before. So everyone has a different experience regarding how, or rather everyone has a shared understanding and has different wrong conclusions on how to manage it. There’s no rock you can hide under that’s big enough.
GS: The part of the commodity complex with the best medium-term outlook is the oil space, partly because of the real limitations on the growth and production sides. When I look at other commodities such as agriculture, while the environment is very tight at the moment and we’ve had two years of some fairly unfavorable weather conditions, ultimately, every year, this volatility on the supply side is meaningfully higher than the volatility on the demand side. So if you have good growing conditions, you can start seeing a rebuilding of stock. So it’s hard to strongly believe these prices are sustainable in agriculture without knowing the weather. There have been higher inflationary pressures that will likely limit the ability to bring in additional marginal acreage.
GS: We’ve seen some plateauing or definite slowing of the ability of places like Brazil to bring in additional acreage. There is inflationary potential in the AG space, but I would describe it more as we have much like power and gas and a much more brittle system. If you believe the climate is becoming less stable and more volatile, AG will have a higher likelihood of seeing price spikes than you would’ve seen maybe 10 or 15 years ago if you think this is a fundamental structural change. We had a speaker from Nassau who talked to us about this, and what I concluded from that is you would expect higher average prices but higher volume than you would’ve expected before.
GS: The starting point on the AG market, in the near term, is on the constructive side because of where inventories are and where the harvest has been, but at least the worst has been avoided in the US for corn and soya, but still it wasn’t a great year. When I look at metals, a lot of it has to do with as China goes – the metals markets will go; we see some reductions in CapEx on the metal side as prices have come down, and they’re doing it at higher price levels than you would have expected in the past, but again, related to inflationary pressures. However, still, China is the biggest mover. The energy transition has positives for the metal space, but it’s hard to offset the size and scale of China’s growth to their implications for the metals markets.
GS: Yes, that will ultimately drive much of what happens in other commodities. For example, suppose the oil has the investment. In that case, the cost of investing in other upstream production, whether in metals or agriculture, becomes less challenging, and high fertilizer and ammonia prices result from what’s happening in Europe. If that reverses, that certainly reduces some of the pressures in the system. But I do think oil is the one that has the greatest constraints. Certainly, natural gas has been very tight, but Russia’s ability to shock Europe has now gone; there were 400 million cubic meters a day, and now 40% into Northwest Europe. There’s always zero, and that wouldn’t be an easy adjustment, but in the oil market, their potential drop in exports alone can dramatically keep this market tight for a very long time. So we think oil health’s a better outlook right now.
GS: We’re not going to see a phase-out or retirement of trading and investing opportunities in traditional energy because we have yet to prove that the world can move off of any. We’ve seen lower shares over time for different commodities, but we’re always adding our wood, coal consumption, and so on because of the high demand in the global energy market. So I think we expect that in five years, the investment in space will still be very similar to today with additional opportunities. Carbon, for example, is an area of growing interest. Let’s talk about a market that has big policy-driven views. Europe going for a 50-55% reduction had a meaningful impact on the forward supply of European emissions allowances. US California policy is another market that is potentially going to change, given the new carbon neutrality goal by 2045.
GS: That was just brought into law, but these markets are going to be very interesting because one of how the globe is going to try to make that transition is through bringing in carbon prices, and carbon is almost like a way for the market try to solve the way hopefully forward, but some places will be more command and control, and some other places will be carbon taxed and assume that they know the right place to get the outcome they want, but it’s going to be an area where you’ll have greater opportunities for investing. Now, suppose I think more broadly across asset classes. In that case, it argues for a very flexible approach because you are going to have periods where different areas are going to have higher rates of return, and just being in the energy transition sector and not investing in the old-line energy markets could leave pretty big gaps in one’s portfolio.
GS: Particularly if you’re considering this area as part of your inflation hedging basket. It’s not just a return center, but a return and inflation that needs to have what drives inflation. Core inflation has had its year and a half right now, where volatility is certainly picked up, but if you want to hedge and have your view about that as inflation related, you can’t ignore old-line commodities. Oil and food in emerging markets and elsewhere are still the biggest contributors to the volatility of inflation. In terms of being investible, the capital markets are ignoring some of the challenges with the higher rates, reduced ability for the market IPO, and new technology sector’s kind of the epicenter of some of those challenges; it’s going to continue to grow, and there are opportunities in companies that will take advantage of some of the growth industries.
GS: The challenge I have is if I want to invest in a company that’s going to build batteries; for example, for the grid, they’re all going to target the same hour or two or three a day. So you always have to be very careful with how much you expect current margins to sustain. So I think knowing the history of the challenges and investing in solar globally, investing in wind, investing in some of these technologies is going to be important for investors to take those lessons and learn them because you don’t want to put money behind an investment theme and you’re relying on something very challenging.
GS: I commented before about renewable diesel; look at the LCFS market, we looked at a bunch of projects two years ago, and we got called to sell puts to hedgers because they all needed to have $125 or $120 to generate a good return for their investment and we’re trading $65 or $70 now. It’s challenging because of the growth in projects that we’re looking at over $200; commodity markets are very volatile. I suggest having a very broad approach and a very flexible approach because you have to appreciate just how volatile they are.
GS: Policy, certainty, and clarity would all be very helpful, but I am optimistic we’ll get there. If you look at Europe and United States, the western world is struggling with that. China probably has slightly greater ease in imposing policy certainty, but even there, we’ve seen changes in how they approach their heavy-emitting industries. The big challenge is to deal with that. I think the other challenge is to deal with a lot of the efforts in deglobalization and some of the challenges that a lot of countries don’t want to rely on energy or mineral suppliers from other countries and view it as a zero-sum game. I think that also threatens to reduce the amount of money that will float to the upstream or energy supply. When I say upstream, I do not just mean oil and gas from that standpoint.
GS: The energy transition will require a massive amount of capital, and some of these hurdles are just a real challenge at the very least; one would say we can control policy a little bit better than we have and put some good policy in place. If you look at the political outcomes in Europe with people in the streets and the pressure of rising populism, you can see the imperative of doing so. I’m afraid these events cause bad outcomes as a short-term and political imperative, which reduces the incentive and ability to invest. The other thing is hedging is hard as you go into less liquid commodities, and many banks face different tiering on their capital. So if you trade something that’s highly ill liquid or something long-dated, they have to have higher capital charges and greater reserves against it, which is probably good for the overall financial stability of the system, but also makes hedging very challenging. So there’s a bit of a dearth of capital dedicated to helping facilitate that. I think that’s an opportunity for investors, but it’s an obstacle to the growth of that CapEx.