Working together to decarbonize

REMI ERIKSEN

Welcome to Trust and transformations - leaders navigating change, a DNV podcast. I'm Rémi Eriksen, DNV’s group president and CEO.

In this series, myself and our business area CEOs sit down with other global leaders to talk about how they tackle transformations, build trust in their business and people, and what they think is coming next for their industry. Right now, they are experiencing a series of historically significant transformations, making trust more important than ever.

This episode is hosted by Ditlev Engel, CEO of Energy Systems at DNV.

DITLEV ENGEL

Hello and welcome to Trust and transformations, leaders navigating change. I'm Ditlev Engel, CEO of Energy Systems at DNV. I'm very pleased to be welcoming Rui Teixeira, Chief Financial Officer at EDP and EDP Renewables to the podcast today.

More than 40 years ago, EDP started out as a utility company, but is now a global energy major and a leader in the energy transition. The group is present in 29 markets with more than 9 million energy customers, 10,000 employees from 44 different nations, and is the fourth largest producer of wind energy.

Rui, welcome to Trust and transformations - leaders navigating change. Real pleasure having you here.

RUI TEIXEIRA

My pleasure Ditlev and thank you very much for inviting me.

DITLEV ENGEL

Thanks. And to kick this off, probably not many in the audience will know that you actually have been working at DNV very early in your career as a ship surveyor. So it's great to have you back with us even just temporarily.

So if you had to pick one thing that you took with you from your time at DNV and something you've been using in your impressive career, what would that be?

RUI TEIXEIRA

I would say definitely the culture. So it was my second job one year after graduating. It was my first multinational experience, but very much the safety culture that I learned as I joined DNV. Also the multicultural aspect of working at DNV.

Today, we use a lot the words such as inclusiveness but really that was the first time what I experienced what was about working in a multicultural environment with people from all around the world where there was a real care about the individual and about how talent would be managed. So nurturing really that multicultural aspect. So definitely the culture, it stayed with me throughout my career.  

DITLEV ENGEL

Good. Well, that's really good to hear. Thank you. Thank you for sharing that. Now, obviously the main topic today is the global energy transition, which EDP has been a driving force in for many years. When you put on your CFO hat and can you tell our listeners though, how do you think about the investment strategy at EDP?

RUI TEIXEIRA

So today we have a strategic plan to invest 17 billion euros until 2026 and approximately 30% in regulated networks and 70% in renewable assets, new assets and that includes wind onshore, wind offshore, solar, PV and battery storage across five different main regions: North America, Europe, South America, APAC and within Europe we’ll split also to Iberia.

But I would say that what follows us through this strategic thinking is we really believe that we have to work on this energy transition to fight climate change. We really see it as also a strong business opportunity as we think about the targets that either countries or even corporates have for decarbonization and for increasing their green footprint which allows for massive investments to happen on the renewable side.

Obviously, we need the grid to make sure that it copes with all the integration that is required from the different elements of the renewables and the different investments in renewables. And also from a financial perspective, we currently live in a high interest rate environment. We also, you know, we experienced recently a surge in terms of inflation. And many times we thought about would it make sense to keep or even accelerate the investment? And the answer is yes, we need to keep on investing through the cycle because these are long term assets. This is a capital-intensive sector. But as long as we are able to meet our profitability targets, that's breadth of value creation, project return minus the cost of capital.

And on top of that, we are concurrently with that, we are able to meet a low risk profile because these types of assets, they should not have a very high volatile cashflow profile into the future. Then it does really make sense to invest not only because we see the demand for it, but we also definitely see the returns. And again, just to invest through the cycle and capture potentially some additional value as the future cost of capital starts to go down.

So yes, it's something that is key. I mean, it's our strategy really.

DITLEV ENGEL

And you have, I know you have some very ambitious targets for EDP also to get to net zero. How does your roadmap look like and how confident are you in achieving those very ambitious targets?

RUI TEIXEIRA

We are really confident that we will achieve those. In what concerns the strategy itself, the strategy is 100 % aligned with those targets, so it will be a natural outcome of the strategy. As I said, as we invest through renewables and as we invest in the regulated networks, then by default, we are walking toward those.

Secondly, we still have some thermal assets that we have committed to the market that will phase out. We will be coal free by 2025 and effectively, as of now, we don't consolidate any coal asset. We do have some gas plants that we know will be a transition fuel, but our view is that until 2030 they will work less and less. By the way, this year already first quarter, we had 97% of our generation was renewable. So I mean it’s basically 100%, we're just meeting the last marginal 3%.

But beyond that, we know that to achieve it, we'll need to work obviously on the scope 3 emissions, and that's probably where we see the challenges lying ahead, because it means that the entire supply chain has to work towards meeting these goals. But what we experienced over the past, I would say two, three years, but maybe two years, was an acceleration of that understanding from the supply chain that they themselves will have to meet their customers' goals.

So more and more as we work with the turbine manufacturers, the panel, the solar module manufacturers, the storage manufacturers, and the different elements of the investment in the grid, we are seeing that all of them, they are working on also decarbonizing. And therefore, the way really to get us to those targets by 2040, as I said, I'm really confident and we know where we will need to focus so that we effectively meet those over the next two, less than two decades effectively.  

DITLEV ENGEL

So maybe Rui, could you talk a little bit about with the investors, is it more difficult now to convince them of this journey or is it the same enthusiasm in the investor community that you have seen over the years?

RUI TEIXEIRA

Maybe enthusiasm as an expression is not the one that I find most often right now in some of the investors. But one thing is for sure, we went through a, I would call it more a peak moment, end of 2020, 2021. And then in 2022, we saw also a significant pool of investors really looking at the space and that was particularly the case in Europe as we had an energy crisis going on. So many corporates were also looking to renewables as a way to mitigate their energy costs.

Governments were looking and are looking to renewables as a way, really from a strategic perspective, to reduce the dependence of exogenous energy sources. And again, that is, I would say, very much the case in Europe.

So I do see, and then when we talk to investors, they understand that there is this latent, very robust demand going forward. Again, either because the security of supply, rationale from some governments, or because you have, of course, the green targets, the energy transition targets. And again, from a government perspective, but also from a corporate perspective. So I think there is a quite significant latent demand that investors know will have to be addressed.

Nowadays, even with the discussions about artificial intelligence and the data centers that will be required to cope with Gen AI and the volume of power that will be needed to feed those data centers, I think there is no question related to the demand and strategically how this market has to grow and all the capital that will be required to be deployed.

So that of course attracts investors. What some investors have been at least challenging us, and rightly so, is to make sure that the profitability of those capital deployments is effectively what we are estimating in the first place. Because then there is a value creation thesis for all that growth in renewables to happen and to meet that demand.

And typically when you have environments of high interest rates and inflation into the capex elements, then you'll start having some compression of that value creation and that's where some investors will say, you know, really make sure that you have a flawless execution, that the way that you're thinking about your offshore investment, your onshore investment, they really will make money throughout the cycle.

And that I think, you know, the sector right now, as I talk to investors, we are coming from perhaps a moment where they were just questioning how fast interest rates might go down and taking and absorbing that they will remain higher for longer. And that on the other hand, the, as I said, that structural demand is allowing for the returns to be met. And that from a company and the sector perspective, then that execution is really happening.

So my view, or at least the experience that I'm having with investors, is that perhaps throughout this year, we have a moment in the beginning of the year where some investors were being a bit reluctant, but then the demand is also picking up again. One thing is for sure, I mean, investors will need to see the economic value beyond, I mean, there is an ESG value, so there is a value to be captured just given the fact that we are investing in sustainability and transition. But they also need to see that economic value so that they are comfortable that capital has to be deployed.  

DITLEV ENGEL

And just on, we talk now a bit about, you know, the generation, but let's also talk about the grid. And, you know, people say without transmission, there will be no transition. So I'll be keen to hear, and we have recently published a study that shows that we need to invest significantly in upgrades in order to have a successful energy transition.

What is your assessment of current investments in the energy infrastructure in Europe, Brazil, globally, and how do you see that and the need for that to happen?  

RUI TEIXEIRA

Sure. So I think the answer is I do see less investment than what we should have as of now on the transmission side. If I think about some of the bottlenecks that the renewable projects have in either Europe or US, more often than not, they are related to grid connection and the time that it will take for that grid to be expanded or upgraded in order to accept these additional projects. And we hear about this queue positioning in the different markets in the US. If you go around Europe, you'll see that, as I said, more often than not, grid connection is an issue in large markets like Spain, for example, but even in other markets.

 So having that investment to accelerate either the grid expansion or the grid reinforcement would obviously support the renewables. And I think a good example of that is if you look to Brazil and you see how the Brazilian government decided to promote or to foster the investment in grid through auctions where they will basically auction a line or substation or a number of these elements. And then there is a tender process through which you either be awarded or not. So it's very competitive, but it's very well planned and thought through, so there is some central planning behind that.

I actually say that typically, you may be more or less comfortable about affects risk in Brazil or the political cycles in Brazil, but from a regulatory perspective in the energy space, either renewables on the transmission and across the different energy space, it's actually well thought through and quite sophisticated. So the answer to that question is yes, we will need more investment in the grid.

I would just maybe add one final element, because at the end of the day, and as we see these massive numbers in terms of investment opportunity in the grid, we should also consider what is the total system cost because this will have typically the transmission, particularly again, particularly the case in Europe, given those are regulated assets and they will be ultimately passed through to the end consumer, those costs will be passed through.

It really needs to be well thought via sort of total system costs because it's not only about investment in grid, it's also about there will be opportunities to invest in storage, there will be opportunity to invest in some backup technologies and we really need to think about what are the different elements of cost that comes from a battery, that comes from a transmission line, that comes from even interconnections between markets and between countries. Because otherwise, I think that just looking at the volumes of capital, if we don't do this, then we will not be mitigating some future regulatory risk that we should account for. So looking into the total system costs, I think it's really key as we think about the investment in the different markets.  

DITLEV ENGEL

When we talk about the transition, we are of course also talking a lot about change and we know when we have a lot of change to undertake, it also requires trust. If you should speak from kind of how do you in EDP try to create trust around the transition, both internally and externally?  

RUI TEIXEIRA

So I would take it perhaps at different levels or at least with different stakeholders. Well, first and foremost, with our shareholders, our investors, as I just said earlier, we need to show them that this transition actually creates value. So there is an economic benefit over the long term that will be created by the fact that we keep this investment flowing into the future.

So there is a strong business case to support the capital location, which is ultimately their capital. I mean, we manage their capital. So that's probably the first one. A second one, which has to do with internally, how we make sure that people are motivated and they actually see the purpose of what they're doing. And in that, I think, you know, we are lucky to be working in a sector where it's easy for the people that work there to really see, I mean, that there is even beyond the economic value, there is an ultimate benefit to really be working and investing their hours, I mean, their life, their professional life in the sector, which is good because then it means that we attract talent, but it is really important.

Obviously, there is a number of stakeholders that are typically related to either central governments or regional governments. They will have to address their constituencies' challenges and that we need to be mindful as we develop the project because it ultimately ends up either being a discussion about the system costs or the regional or even the local more than the region, the local needs or the local concerns about having some of these projects in their backyards.

And last but not least, the supply chain. And I think here is where we do believe that keeping long term relationship throughout the supply chain, it creates value over the long-term. As any business, there will be some ups and downs, there will be some challenges, there is this project that goes extremely well, there's some project that may not go as well as we would like to, but if we keep this long-term perspective and keep this relationship in place, this is really what ultimately enables us to go and steer through the cycle. So having this broader concept of partnership or relationship or long-standing relationship, I think is really key. And ultimately, I can apply that to every single, you know, stakeholder that I just mentioned in just previously.  

DITLEV ENGEL

Now, another important part of the transition is digitalization and AI and advances in digital technologies and services, declining costs and all-round connectivity is something that is just accelerating in the energy transition. And I know that EDP plans to invest 1 billion euros in digital CAPEX by 2025.

So what is the, from your point of view, the desired impact you want to have from these investments and which segments are you prioritizing in this expansion?  

RUI TEIXEIRA

So the way we look at it is really to optimize either the value that we can extract from specific investments and obviously to bring additional efficiency to the operations. And maybe just two quick examples.

So we have been recently working on some Gen AI to see how it would help us optimize the design of some standard solar PV plants onshore. And if we are actually successful, that would decrease significantly the time of all the engineering process and really how it would optimize the different systems and system interaction so that we, again, would be optimizing the cost of that facility, which would then mean that we would be more competitive as we bid for those long-term contracts.

A second example is, and this is already a couple of years old, but we invested significantly in creating digital twins for our operating assets, or at least the large operating assets. And through that, we obviously benefited from higher efficiency because then we could work much better into predictive maintenance and really just optimize where we should stop and how much we should be spending within those activities.

Again, as we think about Gen AI and we try to explore what additional value can we extract from bringing Gen AI, I think it's just unclear yet to us, you know, really the true potential of that. So we do see digital as an important element in how we develop our business, how we then execute our business, both from an investment perspective, but then from an operational perspective.  

DITLEV ENGEL

And on that note, when you look into the investment, into the overall transition, do you think we are good enough in realizing the potential of all the gains we are making or how do you think about the need for how to scale if you're really going to deliver on our, let's say, Paris Commitment target as an industry?  

RUI TEIXEIRA

I do believe that we should work much more and I go back maybe to that, you know, to that partnership or collaboration, concept that I just mentioned about how we, you know, think long-term on the transition.

This sector has been characterized or is characterized by being really fragmented and that I think is more a case in the solar than in the wind, which means that you have a very large number of players. Some are just local or regional. Very few are multinational. That creates some additional complexity in how to think about the sector, because it's just a number of different actors, a substantial number of different actors that you have to work with and get an alignment.

But what I truly believe is that particularly those that have a larger presence and have quite ambitious goals, the more we see ourselves as peers and the less we see ourselves as competitors, the better. In terms of, of course, we will be competing for the projects and that is key to make sure that we always drive costs down and we get the best investment, so we'll all be competing for projects. But one, as we think about, you know, how should the sector evolve strategically?

What sort of, you know, rationale should we have for the investment in the grids to happen? Should a market be more, you know, marginalist or more long-term? Should we have structures that promote this long-term contracting as auctions, you know, CFD auctions or tariff auctions by governments? I mean, those are the sort of discussions that as a sector, it's really key to have an alignment as much as possible because that is what ultimately can create sustainable, you know, value creation for the long -term, and this is a sector that is here for the long-term, I have no thought about that.  

DITLEV ENGEL

Time flies when you're in good company. So I would like to end on a bit on the people side and maybe a good advice. I think last you work at DNV was back in 2001 and your career has taken you all over the world in various roles, including both CFO and CEO. And throughout your career, you have shown dedication to the global energy transition and a passion for sustainability.

For those looking to follow in your footsteps and make a difference in the industry and support the transformation of this energy sector, and then we know we all need a lot of good people going forward. What advice would you give them and how would you best say this is how you remain really dedicated to the global energy transition as you have experienced it in your impressive career?  

RUI TEIXEIRA

I think that's a hard one. But maybe just some food for thought. I mean, this is a long-distance run, which means that the projects do take time to develop and to mature and ultimately go to investment decision. If you are in the offshore space, it will even take a long time to build it. And then we'll take the next 30, 35 years to operate it.

So it's really, and as you think about the energy transition, if you're on top of, if you're on that, you add the fact that there will be a lot of policy discussions that take time themselves. This is really a long-distance run. So my only appetite, the food for thought that I would live is if someone really is really keen to be part of this energy transition. And again, not only because he or she believes on the economic value, but really the purpose. I mean, why do we do this? Does it make me fulfilled?

One needs to be resilient and one needs to be optimistic, but resilient because cycles will come and therefore you need to take this really long-term view.  

DITLEV ENGEL

What a great note to end on as a DNV turned 160 years old this year and I think I heard from so many people that what drives people the most is the purpose of the company of safeguarding life, property and environment. So I think that's great advice. Rui, thank you so much for joining our podcast today and the best of luck to you and EDP.  

RUI TEIXEIRA

Thank you very much Ditlev and happy birthday to DNV.  

DITLEV ENGEL

Thank you.

REMI ERIKSEN

You've been listening to Trust and transformations - leaders navigating change, a DNV podcast. Head to DNV.com to hear more episodes of Trust and transformations or subscribe on your favorite podcast platform so you'll never miss an episode. Thanks for listening.