Stewart (00:00): Welcome to another edition of the InsuranceAUM.com podcast. My name's Stewart Foley, and I'll be your host. Sometimes I think I forget to mention this, but InsuranceAUM, this podcast is intended for insurance investment professionals as an educational tool. And so that's always our goal is to be teaching you about a particular asset class and that's also the goal of our events. Just as a reminder, if you are in ABF land, if you are in real estate land or infrastructure land, and you work in an insurance company, we are having a ABF real estate infrastructure event May 7th and 8th in Philadelphia. If you're interested, we can send you a registration packet at events@InsuranceAUM.com. And on to today's topic, which is a good one, and the name of the podcast is Plugging into the Energy Transition Opportunity, and we're joined today by Edward Levin, Managing Director, Co-Head of Direct Infrastructure at Voya Investment Management. Edward, thanks for taking the time, thanks for being on today. 

Edward (02:32): Thank you for having me. 

Stewart (02:34): I'm reading your bio and you have a long, long history in this asset class. You have a JD from New York University School of Law, and a BS summa cum laude from Babson College, so impeccable credentials, congratulations on those. What I want to start talking about is, where did you grow up, and what was your first job, not the fancy one? And tell us a little bit about how you got from there to your current position now. 

Edward (03:09): Well, I actually grew up in former Soviet Union and I came to United States when I was 15, in late '80s, early '90s. Went to school here, went to university here, went to law school here. I practiced law for a while coming out of law school with a large New York law firm, and I spent some time during those years with the World Bank IMC, which is a subsidiary of the World Bank, doing a lot of interesting deals in emerging markets, specifically energy deals. And eventually, I got hooked on the energy bug, so to speak, or I got the energy bug and eventually joined Morgan Stanley, where I was part of the desk that started looking into renewables as an asset class in the beginning of 2000s. Spent a few years at Morgan Stanley, eventually worked for other lending institution, Rabobank, which is a very well-known Dutch bank where I was a part of the team that was lending into renewables. And eventually joined Voya, where me and my partner Tom Emmons, have raised a commonwealth platform that is designed to invest in the energy transition of the United States and all forms of renewable generation and other sub-sectors of the energy transition infrastructure class. 

Stewart (04:29): That's super helpful, thank you. I think it's always nice to get to know the guest just beyond your subject matter expertise. And in your case, you've been lending to energy transition projects for 20 years, which gives us the opportunity to take a look back and see how things have evolved. Right? So, how has the project and financing landscape evolved over the past, call it decade? 

Edward (04:56): Yeah, obviously it's a very broad topic. We can spend hours just talking about this very topic, but it has been really an amazing ride for the industry, and together with the industry, obviously for all the financing parties that are involved in making it go. If you look back 20 years ago, the industry was an afterthought. I remember going to some of the early energy conferences and anybody who had been looking at renewables was dismissed by the fossil fuel industry as a gimmick. Fast-forward 20 years and the situation couldn't be different. If you think about it, in 2005, we had almost no generation that could be attributed to renewables. Now, about 20% of all our power comes from renewables if you count hydro, and it's a $60 billion a year financing marketplace. So, certainly that is one of the bright spots of our economy over the course of the last couple of decades. And that really, during that time, we have seen evolution of capital providers and what types of capital that's available for these projects. From traditional senior debt to tax equity monetization vehicles, be that traditional tax equity or preferred equity structures, and certainly mezzanine and whole code debt, which is where we operate most of the time. Certainly, sponsored capital requirements have grown over time. It used to be that a large project was a 20 megawatt project, 10 megawatt project. Now a large project is a 500, 600, 700 megawatt project. So, with the size of the projects, obviously the capital requirements have grown and sponsors need more and more capital to make these projects go. And then it's very important to understand that the sector went through a number of different cycles and has grown through a number of different cycles over the course over the last 20 years. And if you think about it, we went through various financial crises, interest rate cycles, low interest rate environment, relatively high interest rate environment. We went through various federal and state administrations, either Republican or Democrat, various- at the state level, sometimes, things change as well. And other unexpected developments along the way like COVID that nobody has ever thought about. And during this time the industry kept on growing, kept on really displacing fossil fuel because it was economic, because it made sense, despite of some of the rhetoric that you hear sometimes on TV. So during that time, lenders learned a lot about reliability of the technology, whether it's wind, solar or anything else, storage, what have you. Reliability of the resources, other risks that are embedded in the projects like for example, insurance, some of the weather events that have been fairly well publicized that affected some of the projects. So, we understood the risk a lot better over the years. So, we've started first with the project level, only senior facilities, now people on that side now people have gone more comfortable with some kind of whole core portfolio approaches and single asset financings. The credit spreads for senior debt financing have come down over time, as people understood the risk better and better. For the tax equity it was fairly, fairly stable over the years. For massive whole code debt also stayed pretty stable. Equity has gone up and down, reflecting the various market cycles. But overall, it's plentiful and it's still available. So look, it's a long journey, it's a successful journey, and it's really has been something else to be a part of over the last 20 years. 

Stewart (08:42): That's super cool. Let me ask you a dumb question, maybe a dumb question. Is the increase in the size of the projects related to AI and the electrification of vehicles? In other words, is the demand for electric power that much greater or is it something else? 

Edward (08:59): Well, it is partially so, but I mean, it's a little bit more complicated than that because the size of the projects reflect the appetite of the utilities, of the corporates, to procure renewable power. And that's a function of, again, the load growth that you're referring to, and we can talk a little bit more about it later, what's driving it. It's also a function of state level mandates that I think 31 states now require the utilities to procure renewable power to some degree. And also on the corporate side, corporations are conscientious of where their power comes from. And tech specifically cares about where the power comes from. If you think about it, it doesn't make sense to power the AI revolution with coal, right? It's kind of a weird way of going forward. So, there's a demand for these projects and as we have more and more opportunity to solve this power, the projects grow. 

Stewart (09:55): That's super interesting. So, I've got a feeling that there's a couple of my buddies that are judging me for asking a dumb question right now, but forget about that for a minute. 

Edward (10:04): The only dumb question is the one that doesn't get asked. 

Stewart (10:05): Thank you so much, I appreciate your support. I won't name names on who I think is giggling at me. So as you know, this isn't my world, and so it would be really helpful if you could talk me through the life cycle of a project. So, if I wanted to build a generation plant, fossil fuel or renewable, I started today. About how long would it take me to get it up and running, and at what stage does the renewable energy component come in? 

Edward (10:36): Yeah, so I mean, the answer is, it depends on really where you're building it. There are some jurisdictions where the timeframe is more compressed than the others, but it would generally take you two to four years to develop a project. Now, there's some interconnection delays that can even elongate within the four-year timeframe, particularly in some states that are congested, like for example, California and elsewhere. But typically, you can still develop projects in this country by being a competent developer with fairly manageable outlay of capital at the early stage of the development cycle. So that's where you go, you get your site control, you do your fatal flow analysis. Again, you spend relatively low amount of capital to understand whether you have a project that can be interconnected eventually into the grid and build out. It makes sense economically. Now, then it enters into this mid to late stage development cycle where the developers have to stop thinking about procurement, where they're going to get the equipment, who's going to be building it for them. They may enter into conversation with the utilities about interconnection, they're going to have to put up interconnection deposits. They're going to think about where they're going to sell the power and start negotiating power purchase agreements. That's when also they're going to need capital, more capital because a lot of PPA providers require some kind of a cash collateral to be put up against this obligation to sell power eventually because they count on it. And that's when you finish your permitting work and make sure that there's nothing that you haven't really thought about as you go about permitting the project. And then your debt goes into a late stage where the banks come in and they provide senior debt financing or in tax equity commitments and the project can start getting built. For us, we typically come in this mid to late stage development cycle. We tend to look at it at the later stages of that middle to late age stage development cycle, where all the binary risks have been addressed in the project. We like taking that risk. We think we're now financing markets pretty well, and you get a lot of pick up, in terms of your return because this capital is really precious for the developers, it's very expensive. And we're one of the few providers that are able to fill that gap. 

Stewart (12:52): So let me ask you a little different, this is maybe dumb question number two, if you're keeping score at home. What is a fatal flaw analysis? Part of your answer had to do with, and you do a fatal flaw analysis. Can you just, like with the big crayons, what is that? 

Edward (13:09): Well, you got to sit down at the desktop and do an analysis of, do you have enough land? Is it contiguous land? How are you going to eventually interconnect your project to the grid? How much interconnection upgrade do you think you're going to have to ask utility to undertake to run it to the place where it could be interconnected? Are you for some reason on the land that you'll have environmental issues with? Is the soil good enough? There's a checklist of, I'm sure I'm not doing this a good service, that good developer will have a long checklist of things that they can assess even before they spend any money to think whether that side will eventually make sense or not. 

Stewart (13:48): Perfect, thank you. So let's dig into forward electricity demand for a moment. Again, this isn't my world, right? But my notes say that the North American Electric Reliability Corporation upped its 10-year summer peak demand forecast by 50% this past December. Where is that spike in demand coming from and how are we caught on the back foot by it? Talk to us about our audience about what was driving the spike and what do we do? Obviously, it seems like it creates a tremendous amount of demand for this kind of a project. 

Edward (14:31): Yeah, so this is talked about a lot nowadays. It's a topic du jour. I think it's important before we go into the numbers, projections, and what we do about this, to understand the history because it's critically important. And the history of this topic is an interesting one. For the last 20 years, give or take, utilities have projecting that the load of this country will grow together with the GDP because generally those things are correlated. It makes sense, right? To the extent that the economy grows, the extent that the population grows, your electricity demand should grow as well. What has happened over the course of that period of time is that it didn't really prove out to be true because together with the slow, the growth in the economy and the GDP, we also had energy efficiency efforts that were underway, that cut down on the demand quite significantly. And those two things generally offset each other. So what happened? Utilities went to their regulators and were asking to get an approval for new forms of generation and they were granted those approvals, but the load wasn't there. And regulators were disappointed over time that they were kind of hoodwinked into approving new power purchase agreements and they didn't really see a lot of demand. Now, what happened is that the industry as a result of that got caught completely flat-footed by this AI revolution that we're seeing and the data center build-out that is taking place. And if you tune into just about every utility earnings call out there, you'll hear talk about being short generation and how do we address this expected load growth that's coming down our way from all of this again, data center and AI revolution that we're seeing out there? Look, even if you think that it's only half true and there's a lot of hype in the area for sure, we're going to get better, we're going to get more energy efficient when it comes to AI. The data tells us that it's still going to be a very compelling story, in terms of a load growth and demand growth in this country for power. Now, not only is that driving the demand for power, that's only half of the story. Another half of the story is onshoring of the manufacturing because we are seeing, and you can argue that this is obviously a big positive for our country, but to the extent that manufacturing comes back one shore, we are going to need more and more power in this country. And a lot of the plans for onshoring of these manufacturing facilities or build out of the data centers, the first question that developers ask generally or corporate sponsors ask, where am I going to get the power? And that's where we have to think about it and plan for it. So despite again, a lot of rhetoric out there, the most viable place to source this power is renewables. We have, as a result of IRA, we have tremendous pipeline of projects that is coming alive in the next few years, solar, wind, what have you, in places where we need generation. And they're ready to go, so to speak. They're shallow already or they're close to shallow already, and that's a low-hanging fruit to meet that demand. Now, if you're looking at other alternatives, where else can we get this power? Because the renewables will not be the only answer. It makes no sense to answer this power demand issue with only renewables. We can certainly build out more gas generation, but that isn't expected to make a meaningful impact until 2030, so it's not immediate. It's going to be growing industry, but it will take quite a bit of time to come back. We can certainly consider nuclear, but nuclear will make gas look like roses. Nuclear, it takes it 10 years to develop a new nuclear power plant. We have built, I think one or two over the course of the last 20 years. It is really a difficult one to do. And you can stop decommissioning, of course you can stop decommissioning old coal, which is generally expensive to operate in almost obsolete. The average age, I think of a coal plant in this country it's 35 years. You can stop decommissioning other forms of generation. Maybe that will be one of the answers. But overall, if you look at what we need and where it can come from, I think the answer is going to be, renewables will have to be a part of that solution. 

Stewart (19:02): And I think it's fair to say, Edward, I mean, you're obviously very plugged into the renewable energy scene. You've been lending to it for over 20 years. I know it's early days, but are you hearing anything about renewable projects being postponed or canceled by the developers in light of President Trump's raft of executive orders freezing grants and distributions?

Edward (19:28): Yeah, look, I mean, I think we're still in the early days. We have not seen any projects being delayed yet or postponed or affected. We deal mostly with projects that are financed by banks and prior institutions. We don't really deal a lot with projects that get federal loan guarantees, that's a separate subset of projects. I imagine they could be affected to some degree. So we have not seen it. We've seen at the end of the year, a number of pipelines and projects come to market for M&A market looking for buyers. I think it's a fairly natural risk allocation and shift of risk from folks that don't want to maybe take the risk, to folks that are willing to take the risk. And there's a healthy M&A market and price discovery, which pretty, is holding up. I mean, I don't see any fire sales, I don't see any kind of distrust buying. I think there's a very deep market that wants to own generation in the United States. It's comprised both of domestic buyers and foreign buyers. I mean, everybody who I talk to, we're not seeing any slowdown in that trend. Again early days, but we have not seen any effects so far. 

Stewart (20:43): One of your post answer, you kind of said quickly the term IRA, and I think that you're referring to the Inflation Reduction Act, which some on this podcast have said is actually a clean energy bill or clean energy legislation. If the tax credits go away that the Inflation Reduction Act has brought us, how does that affect the economics of the renewable generation space? 

Edward (21:15): Yeah, and look, I'm on the record saying that I absolutely despise the name of that act. It's Inflation Reduction Act. I think it's, I'm not sure it necessarily decreases the inflation. But look, it was one of the most powerful environmental legislations. Well, it was the most powerful environmental legislation in this country, certainly in our lifetime probably ever. It provided visibility for the tax portion of these projects and really tax, hate the word to use, subsidy, but it surely is subsidy tax component of the capital structure of these projects for a number of years, up until 2030. But what is important to understand is, it's a legislative act. When we say tax credits going away, it would take a legislative act to pare down this law obviously, which I'm not sure has the support in the Congress or the Senate, because a number of Republican legislators like IRA and I can go into those details a little bit later, but it will take an act of Congress to change it. Now, what could be done is eventually, and certainly the projects that are under construction or have qualified for the start of the construction under the IRS rules should not be affected by any kind of change to IRA, even if it's undertaken. And that's really where we play as an investor, because there's a long, long history of, how do you qualify the project for the tax incentives? But certainly to the extent that we will lose tax credits after 2028 or 2029 or 2030, what happens is the power purchase agreements will adjust and the power prices will go up. If you think about the tax component of these projects, what you're doing is you're subsidizing rate payers at the expense of the taxpayers. So if you stop that, what will happen is the rate payers in the particular jurisdictions or corporates will have to pay more for power and you will have more cash that is available for the debt to lend against. And typically, debt is, or senior debt is the cheapest part of the financing structure here. Tax equity is the most expensive, so people that monetize these tax benefits are very expensive capital. So to the extent that you replace it with cheaper debt capital, it will relieve some of the pain. So the combination of the two, again, the availability of more and cheaper debt and power purchase agreement prices going up, will basically compensate for the tax credits going away. 

Stewart (23:54): And that explanation is really helpful, thank you. My notes say that you recently had a successful exit from a portfolio of generation assets in Virginia, West Virginia, and Arizona, and that you've also invested in a number of successful projects in my home state of Texas. Those are some pretty red states, and is it true what they say about Republican leaning states actually being big beneficiaries of renewable energy? And maybe if you want to bring it in, how did renewable energy or how did renewable generation grow under Trump's first term? 

Edward (24:37): Well, yeah, I mean, I can start with that. I mean, it grew, it had tremendous four years under the first Trump Administration. It grew just swimmingly. What I can say about this is the following. Look, the IRA was a $400 billion legislation IRA, IRA, it depends how you spell it. 92% of the benefit went to the red states. Texas, your home state is the largest solar and wind market in the country, and it's obviously a tribute to how easy it is to get projects permitted and built in your state versus some of the jurisdictions where it's very, very difficult. As a matter of fact, Texas took the baton away from California, when it comes to renewable power generation. The second largest market, I believe is Oklahoma, wind market is Oklahoma, Iowa is right up there. It's really a bipartisan issue, renewables, and the benefit of the renewables historically has been a bipartisan issue. As a matter of fact, right before the end of the year, I think I believe 18 members of the House wrote a letter to the incoming administration expressing their support for the IRA and how many benefits they've seen from it in their home states. So, climate change is obviously a highly partisan issue. Renewables has a pretty broad base support in both blue states and red states, and a number of the RPS mandates that I alluded to earlier where utilities are required by the state legislators to buy renewables, a lot of those RPS standards are in the red states as well. So, we feel pretty good about the overall political climate when it comes to the core support for the kind of renewables generally. Obviously, anything can happen. We'll see what the next four years bring, but historically, it enjoyed bipartisan support. 

Stewart (26:30): I have had such a great time having you on the show today. I've learned so much. I've got a couple of fun ones for you on the way out the door, if you'll entertain me. The first one's more geared toward the folks who are younger in their career or coming out of school, which is, you've been at this for a minute. You're a very senior person in a very successful firm. What qualities do you look for when you're hiring members of your team? 

Edward (27:01): Good question. I found the drive and the desire to be number one reason for somebody's success. We've hired both from the top schools and from the schools that are maybe a little bit less well-known. And across the board, the successful candidate would be somebody who wants to succeed, somebody who's hungry. We've found sometimes people that come from very well-known places, they lag, they expect certain things. They don't want to put in the time to learn the ropes and be successful, expect too much too soon. Your career, your professional career is a journey and it takes patience, hard work, and again, drive. So, I would say that is probably the most important thing. We can teach you everything else, but if you have the drive and certainly the intellectual capability, you'll be successful. 

Stewart (28:01): Yeah, I mean, it is a working in class deal to be an analyst at a big place. I mean, you're going to work hours and there's a lot expected of you, and I can completely see how a student's passion and hunger for the business is an important factor. So, the last one is purely fun, which is, you can have lunch with up to three people. You and three guests. Lunch or dinner, either one. Who would you most like to have lunch with, alive or dead? 

Edward (28:33): Three. Only three? 

Stewart (28:35): Yeah. Well, we can rewrite the rules. It's okay. But usually this part of the podcast, it's usually you get three. You don't have to have three. It could be just one or two or three, yeah. 

Edward (28:46): Lunch is maybe I have a drink. Lunch is a different, different question. Certainly Churchill sounds like he would be fun. Stewart (28:54): There you go. 

Edward (28:55): I would love to find out whether Napoleon, half of the stories about Napoleon were true and meet him in person and to understand his personality. He was certainly a fascinating historical figure. The third one, I have to think about it. Third one, who would be the most interesting person? You know what? Hanging out with Moses may be interesting. 

Stewart (29:17): Wow, there you go. 

Edward (29:19): I would love to find out what happened on that mountain and how he made it down. That would be an interesting one. 

Stewart (29:26): That's really cool. Very, very cool. Good choices. Thanks so much for a terrific education on renewable infrastructure today, and certainly appreciate your expertise and your time today. So, thank you so much. 

Edward (29:40): Thank you very much. I really appreciate you. 

Stewart (29:42): We've been joined today by Edward Levin, Managing Director and Co-Head of Direct Infrastructure at Voya Investment Management. Thanks for listening, if you have ideas for a podcast, please shoot me a note at Stewart@insuranceaum.com. Please rate us, like us, and review us on Amazon, Apple, Spotify, or wherever you listen to your favorite shows. My name's Stewart Foley. We'll see you next time on the InsuranceAUM.com Podcast.