Sempra (SRE) Earnings Call Transcript & Summary

And so good morning, and welcome, ladies and gentlemen, to this discussion, which will be covering the future mix of renewable and gas-fired power generation. My name is Aashish Mohan, and I co-head the energy resources and infrastructure group in the Americas at BNP Paribas. Joining me in this discussion today are an esteemed group of panelists, which comprises of David Hochschild, who's Chairman of the California Energy Commission; Mark Voccola, who is the Co-Head of Ardian Infrastructure in the U.S.; Steve Vavrik, who is the CEO of Broad Reach Power; and Kevin Sagara, Group President of Sempra Energy. Given the virtual nature of this year's conference, I would request the audience members to submit questions via the Q&A box at the bottom of your screen throughout the discussion. And I would now like to invite the panelists to give a brief introduction of themselves before we dive into the discussion. Maybe we can start with David. David, over to you. Hello, is David on? Okay. Kevin, perhaps we can start with you then.

Sure. Hey, I'm Kevin Sagara. I'm the Group President at Sempra Energy. My main responsibility is sitting over our 2 California utilities, Southern California Gas Company as well as San Diego Gas & Electric. And I have a bit of a background in renewables as well, where I was the President of Sempra Renewables for 5 years and looking forward to this discussion.

Thank you, Kevin. Mark?

Sure. Thanks, Aashish. Again, I'm Mark Voccola. I co-head the Ardian's infrastructure business in the Americas. And globally, we have about $16 billion under management invested in Europe and in the Americas in infra and is split up between telecommunications infrastructure, transportation infrastructure and then for today, power renewables investments.

Thanks, Mark. Steve?

Great. Thanks. This is Steve Vavrik. I'm the Managing Partner and CEO of Broad Reach Power. We're a privately owned, developer, owner and operator of stand-alone storage as well wind and solar projects. We've got 40 employees and we're based in Houston.

Thanks, Steve. We'll try David one more time. He's on.

Yes. Can you hear me now?

Yes. We can hear you, David. Please go ahead.

Yes. Good morning. I'm David Hochschild. I'm the Chairman of the California Energy Commission. We're the state's energy policy agency, and we're funding a lot of the research and development around the energy and enforcing the 100% clean energy standard for this state.

Great. Thank you, gentlemen. I think we're ready to dive in. So I'll start with the first question and -- which is related to the recent events of our auditors that we've seen in California and Texas. And the question for my panelist is what have we learned about reliability, given these recent power outages. And maybe David, since you are very close to the situation, we could perhaps talk -- start with you and get your perspective.

Yes. So I mean, to begin with, we are in a climate emergency. I think that's crystal clear. Both the events in California in August and Texas in February demonstrate that. Different types of severe weather events, but certainly climated related. Just for perspective, this [ event ] in California was about 1.5 gigawatt hours of load that can be served. The fact that there was 800 gigawatt hours that can be served. So about 500x worth. And I think it's a warning really to all states about building up resilience. I think California, what we're doing is pushing really aggressively on a number of fronts, including improving the efficiency of our existing thermal fleet as well as we're doing a tenfold increase in energy storage this year. We're doing a big push as well on demand response and being more nimble than demand and a number of other measures, but this is our top priority to sustain electric reliability, particularly because so much of our climate strategy and our economies are growing increasingly through electric grid. I mean we're -- we've now sold 800,000 electric vehicles in California and electric vehicles were #1 export last year, obviously, reliable, like I said, it's fundamental to that and so much else.

Thank you, David. And given what we've learned on reliability, Steve, where do you see storage fitting into the situation?

Great. Thanks. Yes, I'll pick up with the theme. I think Roman touched on in the last panel about the Mosaic. I think everyone on the panel realizes it takes a portfolio of resources to keep the grid clean, cheap and reliable. Stand-alone lithium-ion batteries certainly play a role. We had 6 operating projects throughout the freeze in Texas and with 99% uptime. And so the theme here is, again, technology. As we get technological improvements for generation as well as storage resources, how do we fit the new technology that may be already winterized like a lithium ion battery and what's the appropriate role into the mix.

Great. Thanks, Steve. I welcome either Kevin or Mark to chime in if you have -- you want to add your perspective to the discussion as well.

Yes, I have something. So I think with the events in Texas and California demonstrated as well as this interrelationship between electrons and molecules, right? It was -- it's not only ever one or the other. They're really complementary in many ways. And so in Texas, you saw an unavailability of some renewables, but also unavailability of gas. And gas was not able to backfill renewables as we'd like to have it. And so I think we see how these are interrelated. They're also interrelated in the way of kind of looking towards the future, right? As we -- David spoke about this move toward electrification and as we have -- we start to electrify more and more sectors of the economy, we continue to depend upon the clean molecules as well because we need more gas infrastructure to really back up that long duration storage all behind renewables. So if you get more load, more electrification, higher penetration of renewables, you probably don't burn more gas, but you still need the gas infrastructure to back up the intermittence of renewables, and you also need coming back the other way, low cost, like we heard in the prior panel, we need low-cost renewables to allow us to make low-cost molecules, right? So we need low-cost solar power and wind power and help drive low-cost hydrogen, green hydrogen. And you saw that -- we saw a report come out of Bloomberg last week that said, by 2050, green hydrogen could be cheaper than natural gas, and that's largely driven by efficiency and lower cost solar, really. And so it's in a relationship that I find to be pretty interesting.

Maybe just one last word on this. I think echoing what David said before, just looking at this through the lens of an asset owners, is the importance of resilience, right? I mean we own assets in some of these jurisdictions. And the key to getting through that was being able to stay available through that time. So it's like anything, but it's solid maintenance, solid planning and smart management teams, who can -- I don't think anybody foresaw how big of an outage we're going to have in Texas, but just having a little bit of foresight and experience to be able to manage through the process and keeping your assets -- doing what you have to do to keep the assets up and running during something like that is, I think, it's going to change folks, O&M and asset management planning going forward. There's a cost, there's a material cost.

No. Absolutely, Mark, and I couldn't agree more. Just touching on the theme that Kevin was talking about in terms of all these various technologies that we're looking at, maybe we can start with you, Mark, what is your view on disruptive technologies for the future? And which technology is exciting you the most at the moment?

See, as an infrastructure investor, we're usually not at the tip of the spear, looking at the most disruptive technologies, they're generally disrupting the things that we own. But it's probably more -- probably coming sooner, I think, in Europe and in the U.S., but there's certainly hydrogen seems to be the thing everybody is talking about today. I think it's probably a longer -- it's -- as we said in the panel earlier, it's a longer term, much longer term, I think, opportunity in the U.S., maybe more near-term in Europe. But I think just the continued penetration of renewables and the impact that, that could have on natural gas, again, from borrowing some comments from the panel before ours. We've been talking about the natural gas bridge for 10 years now, right, talking about the bridge to a lower carbon economy. And maybe that bridge getting shorter as you're getting more quicker penetration of renewables. So I think it's not even necessarily new technology, it's just the increased pace at which some of these technologies are being installed is -- I think that's -- as an owner of gas assets in certain parts of the country, I think that's something that we're always focused on.

Yes. And Kevin, from your side, you're certainly looking at a lot of technologies at Sempra and California. So what excites you the most?

Yes, obviously. Kind of echoing what Mark said that I think everybody is pretty hyped up on hydrogen. And I think we see hydrogen as a long-term solution to -- especially when we took in -- the prior panel spoke a lot about decarbonizing the power sector, but we've got to -- right now in this country, with the industrial sector and the transportation sector are producing more emissions in the power sector, so we've got to get on industrial and for industrial and long-term and the heavy-duty transportation, I think hydrogen is going to have a big role to play. And that's why at the gas company, we've got at least 10 or 12 small pilot projects going around hydrogen, whether that's hydrogen for the home or hydrogen for transportation, or like I said, eventually moving into the industrial sector. I think that's where hydrogen will definitely play a role. And then kind of building on what Mark said about the gas fleet. I mean, there's opportunities, and we're starting to see this, of the gas fleet eventually migrating to cleaner molecules, right? So first, the gas fleet's got to be focused on -- the gas infrastructure has to be focused on tightening up its own emissions, upstream emissions and all of that. But eventually, over time, moving to cleaner molecules like potentially RNG and hydrogen down the road. And so you see projects like EWP's project out at Delta, Utah, or they're putting in a gas plant, but they plan in about 20 years to shift that gas plant over to hydrogen burning. And I'd note today that gas plants can burn up to -- sometimes up to 30% of hydrogen mix as is with the existing turbines. And one of the projects we're working on at SDG&E is to start injecting a little bit of hydrogen into the gas fuel to see how our -- the gas turbines do it at one of our gas-fired power plants. And so I think hydrogen, clean molecules really promising, not only from the power generation side, but also for decarbonizing the industrial and probably heavy-duty transportation sectors as well.

Yes. Clearly, a team around hydrogen. I think we've been hearing about hydrogen for -- well, early today and for several weeks now. So Steve, any -- do you have a different respective? Any technologies that...

Maybe a little bit. I think a lot of panels, it's -- you focus on technology, is the question you ask, but we may be missing the obvious biggest lever is just we've got a real good toolkit full pool of tools right now, existing technologies. So when it gets back to what might be surprising to investors of the change of the grid. I think how quickly the transport sector, especially is going to adopt electric vehicles. Let me put it another way. I think folks who have been in this industry for a while were surprised how quickly wind costs decreased and the technology improved. Solar is even faster. So we continue to kind of be surprised by the pace of adoption. And I think the same thing is going to happen here with lithium-ion and then electrification. So if you fast forward that, my point here is I think the transport sector, especially the short and medium-haul vehicles, the solution there, the technology there, that's electric vehicles. And so I think just the market itself will adopt that and increase the load and the electrification of the fleet by itself. So that leaves for hydrogen, as Kevin was saying, I think the industrial, the thermal applications, that might be the most direct application. In other words, I don't know if we have to focus on a new technology to increase the pace of decarbonization. I think we've got plenty of really good proven technologies now with a combination of a right market and strong investor interest to accelerate at the pace of decarbonization. So maybe just a little different approach to the technology question.

Right.

Yes. Yes, I'd like to build on that. I think we -- I agree with that comment worth noting, by the end of next year, there'll be 167 models of electric vehicles on the market in North America, 8 models of fuel cell vehicles. The investment is going overwhelmingly to electric and including brands, we would not have expected a year ago, I mean the Chevy Silverado is coming out, electric 400-mile range vehicle, Ford F-150, like that's coming out at 200 or 300 mile range. And yes, I think he makes a great point. It feels a little bit like the projections were made for solar and wind. 15 years ago, they were a little bit low. And then all of a sudden, it's kind of a [indiscernible], that's what we're seeing now. And really, those are moving [indiscernible].

Yes. I guess, to me, it seems like with the technology question, sometimes is a -- maybe used as an excuse for investors or lenders to like, well, it's not quite there yet. Is it? So we don't really have to be aggressive here. We're going to wait. And I guess to my point is, no, it is there. I mean, the wave is huge, and it's which wave -- how much of the wave you want to catch. So I don't think we need to wait for technology. It is -- all the ingredients are there. Now it's just really execution on projects and fleets, and we know what to do. I think it's just really execution phase.

Yes. And on those lines, Steve, and I know we've had this discussion in the past, like what can we do to accelerate the pace and adoption of these new technologies? Whether they're current or in the future? Are there specific policies or mechanism that will unlock the innovation needed to move us forward? Can you just build on those themes?

Yes. I'll start, and I'd love to hear David's view on it because he's in that seat, but tons of things. Roman talked about it on the last panel, just top down. But look at the corporate procurement. And frankly, that's an internal carbon price. One way or another, they set a goal they didn't need to and for various reasons, and they're hitting it. Google wants to be true 24/7 hourly renewables and by 2030, and that's 8.5 years from now. So you can set a goal and do it. So I think one way or another, private sector is sending internal goals, either inter-material carbon price or some other metric. We're seeing the rewards they're reaping in the capital markets with the attraction of ESG. And now you're seeing ESG index bonds. So now you can actually point to EBITDA savings due to what otherwise is probably more of a qualitative push or it has been. But that, we all see that, that momentum is just going to accelerate. So there's an example of some policies that companies can do right now without any sort of government action.

Yes. I would just add to that. I think it is time for our country to get boots on and build this infrastructure for EV charging. In California, the governor is pushing $1.5 billion for investments in zero-emission vehicles and $1 billion of that will be for electric vehicle charge and we just testified on Friday the state legislature on that. And I think it's a huge opportunity and something, I think, if we get an infrastructure package through Congress to help support that, that's going to unlock a lot of new technology and help lead. Amazons ordered 100,000 electric vehicles. There's a whole bunch of other corporate investments that can be unlocked, but their charging infrastructure is very fundamental to get that right and do that early.

And David, just to add to that. I think in addition to the public capital that's looking for that. I mean, I think there's tens of billions of dollars in private capital that's looking to invest in that same place. So I think that there's investment appetite there for it. And I think we're getting kind of past the chicken and the egg issue with it, but there's -- I mean there are examples of it now with some of our friendly competitors who have invested in those companies and there's a line out the door of others who sit in my seat, who would like to do the same thing. So I think there's -- the lack of -- I think there's plenty of capital that's looking to do that. It's a structure that would fit for that capital to get it done.

Okay. I think coming in behind here, I think electric vehicles are definitely coming. I was -- I'm on the Board of EEI and CEO of Ford King the other day, and he was talking about Ford's commitment to electric vehicles, and it's real and it's happening, and they're all going in that direction. And when you look at what SDG&E has been doing in our service territory to allow for electric vehicle charging, we've invested millions and hundreds of millions of dollars in electric vehicle charging infrastructure, and that's really because we're seeing an uptick of adoption, and we expect to see really kind of a tipping point coming in the next few years, kind of like around that 2025 time frame, we think a lot -- most people are to be buying electric vehicles, frankly, because they're going to be cheaper and they're better. And those of you that drive electric vehicles probably know that they're better. So I think that's happening and at SDG&E, we have about 4,000 employees and about 20 -- I think almost 800 of them drive electric vehicles. And so it's happening, and it's real, and it's a good thing.

I agree with Kevin on that. And one other point I would make is that the opportunity, when you look ahead, at the role lithium to play, I think lithium is the oil of the clean energy future. And in California, we're blessed that we have actually a really substantial lithium supply in the Salt Seas. That's one of the big initiatives we've been investing research money in to build out that lithium ecosystem. Opportunity for further cost reduction in lithium-ion is very real. Lithium ion has come down and it costs 90% in the last decade, and there's a lot more innovation there and a lot more energy density improvements. So I think that is why when you look at what's happening with the OEMs on the automobile sector, the valuations, right, are so heavily correlated to put forth this along in EV evolution. So Tesla are those guys who are talking with the world. They're more valuable than Fiat Chrysler, Ford or General Motors combined by 4.5x. And that's a reflection, I think, the market has really seen is going to EVs and the companies that are further along there are most advantaged. But I believe we can get the cost down a lot. I mean the matter fact of half the cost of vehicle, 90% fewer components than a conventional car. So when that pack continues to improve and the energy density in costs, I mean it's going to win on its own merits and cost.

Yes. If I can add to that, David, I'm glad you brought that up. But part of the thing that -- I mean, we've all been part of the utility sector for a while, and it's very much a service-based interest, a service-based industry where we're kind of behind the scenes, we create the infrastructure. But let's not forget the economic driver that we represent. In this change out of infrastructure, the opportunities for domestic supply, billions of dollars, lithium supply or cell manufacturing or you name it, the panel installation change out. Imagine all of the gas burner chips being changed out to electric, right? How many jobs that's going to create? So a lot of times, that doesn't get enough attention about how profound this transition is going to be across the entire economy.

I think we...

Yes. And to reconnect it to question related to reliabilities, I was just going to say one more thing, which is I think the more the electrified transportation, the better that is for grid reliability. Because as you get longer and longer-range vehicles, people can be actually flexible to some degree when they charge. So Kevin's employees at Sempra, who are charging electric vehicles, you can actually flex when you're charging. You want sort of an electric vehicle happy hour when we have surplus solar on the grid to soak that up. And during times of more constraint, when you have millions of electric vehicles, actually that becomes a tool to support grid reliability.

Very interesting point there, David. And I knew this would be a lively and engaging discussion. And it seems like we're already at the point where we based the Q&A session. So at this point, I will like to prompt the audience members if they have any questions, and they should enter it into the Q&A box that you see on this screen. And it takes a little bit of time for us to compile those questions. But in the meantime, while we're waiting for those questions to come, perhaps a question for Mark and others should feel free to chime in, is that there is -- in the investor community, there is an increasing focus on ESG. And how do you think when investing in natural gas power generation in the U.S.? Are there return considerations? Or is the ESG consideration as you think about investment ideas overwhelming that even if you see a very attractive natural gas-powered investment that you would think very hard about the ESG consideration.

Yes, sure. No, I think we have that discussion all the time. And as you can imagine, there is a European-based fund with a good base of European investors. ESG is always on top of mind, and it has been -- my bad joke has been in Europe, they're doing ESG before it was cool. So that's now everyone -- but I still do think that there is a place for natural gas in -- I mean, new natural gas projects can be a very solid ESG story. I mean, just -- simply, I mean, depending on the geography where you're sitting, I mean, you're generally displacing, if you're, call it, in coal country, you're displacing older, less efficient, more emitting assets when you come online. The S&G piece are just as important. When you're thinking you gave 500, 600 guys or people have solid jobs for a few years, you're increasing the tax base for the next 20 or 30 years in investments. So I think it can still be you're producing net emissions in the area. You're providing good jobs and you're being a good corporate citizen when you're there. I think that's still a very good story and it hangs together. And I think if you just think about gas generation over the past 10 years, right? I mean, gas has picked up market share. Right, gas has gotten over the past 10 years. I do agree longer term because it'll more likely be displaced by renewables or a technology that we're not using yet, but it's 40% of the -- it was 40% of the energy generated in the United States in 2020, right? So that's a big number that's going to take a while to eat through, and you still have, I think, a nice leg of coal. It's about 18%, 19%, 20% below that, that needs to go away first. So I think that you could still be a good ESG investor in investing in gas-fired assets. But it's part of a portfolio of -- it's part of a portfolio of investments. That's -- you have renewables, you have natural gas, you have storage. There's some new transportation options when you're looking at a diversified fund like ours. So I think that a very long rambling way of saying, I do think you can be a solid ESG investor and still make investments in clean burning natural gas projects.

Thanks. I don't know, Kevin, you have a view as well on some of these topics. And when you talk about clean molecules, et cetera, and I'd just like to get your perspective as well. The new hearing things from the investor community that is also advancing this utility.

Playing off what Mark said, well, number one, our utilities have been doing ESG for decades before there even was a such thing as ESG. So being good environmental -- respectful environmental participants and good corporate citizens and focusing on issues around racial equity, diversities, social and justice, those have been issues that have been at the forefront for our utilities for decades now. And so ESG is very important, and it's really how we operate our business. But kind of taking a little bit off this gas play. When you think about it, we're mainly a California focused company with a big utility in Texas. But when you think about what we're doing in California, we can do what we want to do. We can get it done for California, but that's not really going to solve the big issue of climate change. We've got to be understanding that this is open system, the atmosphere, the earth. And what we do in California matters to some level and especially matters on the leadership level and showing the world the way, but it's not going to get it done in these developing countries where they really have energy poverty, right? And they're burning coal, stone, wood, charcoal, all kinds of other things for the further energy. And so there's clearly a role to play for gas in those kinds of economies of helping bridge them to renewables, bridge them to hydrogen, bridge them to cleaner forms of energy. And I'm not -- and so I think there is definitely a role for gas out there as still a transition, maybe not as much as in California or somewhere like that when you look abroad, if, my God, if we can get these -- we can get China and India to stop earning coal and start bringing more natural gas, that's a huge win for the climate. And then over time, we move the natural gas to cleaner molecules or renewables or some combination of renewables with the cleaner molecules, that's a win. That's how we get there. Just forcing developing countries to just go straight to solar plus lithium-ion batteries, and I don't think it's probably practical.

Now you bring an interesting point regarding climate change and energy poverty in other parts of the world. And along those lines, one of the questions that I have for the panelists is how realistic are zero carbon targets? And perhaps, we can start with Steve.

I just think they're an imperative. And so we've got to make it so. I live in California. I'm from California. My whole life, we've never had a smoke like we did the last 3 years. And just last year, there was 1 day on a Wednesday in the middle of September when it was so black in the sky from the smoke. As it was noon, there's a huge [indiscernible], right? So my kids were having trouble with their lungs. I was having trouble with my lungs. And this is at a level of urgency that we're seeing effects now that we thought would be a generation or 2 down the future. So I just think it is not business as usual. And so we have to move beyond fossil fuels long term, that's an imperative. I do think it gives me hope that I see incredible momentum in the innovation sector for a suite of technologies that can really help us do this. I think the question is whether we can scale those things effectively. And I think long term, I think we don't get environment repair until we have democracies there too and the ability to have a successful Congress that can -- infrastructure package is a great example of something that should be a mom and apple pie area of agreement to put a bunch of money on the upgrades, including clean energy and climate friendly infrastructure. And that will certainly put forth what we're doing with the data and those many other states are working on. But I do see a lot of hope on the innovation sector. One bright spot for us in August, we've got a 10-year extension of our research program, which is $1.5 billion in the next 10 years. And after we're funding, obviously we'll do -- chemistries and technologies come to solution. And so we're going to -- we're all in on this. And so it's not a question of whether we should do. I mean, it's really like how do we get there and it is so imperative that we achieve that goal.

And that's a pretty normal goal at that. So Steve, I think you'll get the last word in before we conclude today's session. So anything, you'd like to add Steve?

Thanks. We'll make it succinct. 50 years ago, we thought clean water and clean air goals were silly and unattainable, and we got it done. So I think we have to have the same sort of vision and resolve when it comes to carbon.

Great. Thanks, Steve. And on that note, I'd like to thank Mr. Hochschild, Mr. Voccola, Mr. Vavrik and Mr. Sagara for joining us today. I would like to tell the audience members to return to the auditorium and click on the session link to join the next panel discussion, which is on decarbonization of the global grid. Thank you very much, everyone. Good bye.

Thank you.

Thank you, Aashish.

Thank you.