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Private equity's $1-trillion question

Private equity's $1-trillion question

Globe & Mail, January 5, 2018

An enormous amount of Canadian capital is lying in wait, pushing global investors to 'nosebleed levels' to put this money to work. Jeffrey Jones and Jacqueline Nelson delve into a competitive climate that hasn't been seen in more than a decade

Canada's biggest investors have a trillion-dollar problem.

A stunning $1-trillion (U.S.) in capital – nearly double the amount available in 2012 – is sitting on the sidelines, waiting to be put to work by private equity investors across the globe. So many firms are chasing deals that it is creating the most competitive investment climate in more than a decade.

In addition to that heap of cash, hundreds of billions of dollars are piling up in funds devoted to other private asset classes. Some of it is destined for infrastructure projects, such as roads, power lines and airports; some of it will be used to buy up real estate, invest in private debt or scoop up timberland or other natural resources. And the fundraising hasn't stopped. At the start of 2018, there were 3,484 private capital funds courting investors for yet more money, according to alternative asset data firm Preqin.

It's enough to remind some people of the exuberant mood right before the financial crisis, when 12 of the largest 15 corporate leveraged buyouts ever were done – not long before the industry, and the global economy, were sideswiped by the end of easy credit.

"There are some ingredients of 2007," said Simon Marc, the London-based head of private equity at PSP Investments, which invests about $140-billion on behalf of federal government workers, including the RCMP.

He said the environment has private equity firms caught between the lure to sell assets and the pull to buy them. On one hand, it's hard to ignore a red-hot market in which where prices often exceed expectations. On the other, strong economic and market conditions have led to robust profits across a large number of industries, creating a compelling case for holding, or making new, investments.

"We're going to be very cautious, very selective about what we do," Mr. Marc said. "But we can't be sitting on the side doing nothing, either."

For many of Canada's private-market investors – which include the major pension funds, insurance companies and other players such as Onex Corp. and Brookfield Asset Management Inc. – there's more at stake than ever before. Over the past decade, the big Canadian funds have gotten bigger, gaining the clout necessary to compete with the world's richest players in private investments. But having a spot at an increasingly crowded investment table presents a new test. Failing would be costly.

The last time the buyout market collapsed, the list of casualties was long. Well-respected, high-profile firms were left holding the bag as deals completed at the fevered peak of the market went bad.

The biggest leveraged buyout of the time, the $45-billion acquisition of Texas utility TXU Corp. in 2007 by a group that included KKR & Co., TPG Capital Management and an arm of Goldman Sachs, turned out to be a spectacular flop. The company, renamed Energy Future Holdings, struggled with falling natural gas prices and a declining retail franchise. Drowning in red ink and $42-billion of debt, it filed for Chapter 11 bankruptcy protection in 2014.

Apollo Global Management and TPG purchased casino operator Harrah's Entertainment Inc. in early 2008 for $30-billion and renamed it Caesars. The odds turned against the buyers – a heavy debt load and fewer gamblers led to the company's bankruptcy filing in 2015 and subsequent restructuring.

And when aftershocks of the U.S. mortgage crisis brought the leveraged finance market to its knees, many buyers were forced to renegotiate or drop out of deals altogether. Canadians will remember the one that got away: the $51-billion (Canadian) takeout of BCE Inc. by a group led by Ontario Teachers' Pension Plan. The peak of hubris for the era, the debt-financed deal collapsed in the crisis of late 2008 following months of uncertainty and drama about the ability of banks to put up the financing.

A decade on, it has become a world of monsters again – monster funds pursuing massive deals. Fundraising for the largest-ever private-equity fund, Apollo Investment Fund IX, closed in the third quarter of 2017, garnering $24.7-billion (U.S.). Others funds are on track to surpass that amount, including China Structural Reform Fund and China State-Owned Capital Venture Investment Fund.

The key questions now are where all of this money will get invested, and how can that cash earn solid returns in a global market where asset values – from corporations to public infrastructure to real estate – are already seen as bloated. Some funds, particularly in the U.S., have opted to park money in exchange-traded funds while waiting for markets to cool and better targets to emerge.

"Valuations are obviously very stretched in many ways around the world. But that doesn't necessarily precipitate a downturn," said Mark Machin, CEO of Canada Pension Plan Investment Board. He said the fund is constantly running stress tests to see how its investments would hold up under more difficult economic conditions.

Asset prices have soared because of a decade of cheap money, thanks to post-crisis policies of the world's major central banks. Public equity markets in many countries, particularly the United States, now look frothy; that is fuelling inflation in private assets, too. In an early 2017 report, Bain & Co. said acquisition multiples are hitting record highs across the US and Europe, at more than 10 times earnings before interest, taxes, depreciation, and amortization. A more recent report from data platform Pitchbook showed that deal multiples for M&A activity in North America had climbed to the highest levels they'd ever recorded.

"We are constantly in auctions where people are surprised how aggressive bids are," said Bruce Rothney, chief executive officer of Barclays in Canada. "Despite what they think is an over-aggressive bid on their own part – they almost push their boards to nosebleed levels, only to discover that somebody was more aggressive than they were."

CPPIB's Mr. Machin said it will be important to be ready to pounce when things become less expensive.

"When there's a downturn, that should be the moment when we're making really good investments at really compelling prices. We want to make sure we have the ability to do that," he said.

How can the Canadians compete and mitigate the risks for their stakeholders? Showing up at the right time with a padded wallet isn't enough anymore. It's time to get creative.

Canada's institutional investors are moving to play to their strengths and develop new ways to stand out from the pack. That includes developing relationships with wealthy families in far-off lands, preparing for an energy transition years into the future, shoring up on infrastructure assets they can hold for decades and looking to more niche investments, such as the burgeoning marijuana industry, for returns.

As a response to the competitive deal environment, and in an effort to earn higher returns, institutions are building up leadership teams and hiring more deal hunters with experience in far-off places. CPPIB has hubs in Sao Paulo and Mumbai and its CEO, Mr. Machin, spent about 20 years working in Asia-Pacific markets before taking the top job. PSP Investments officially opened a London office this year and is already eyeing its next Hong Kong outpost. Brookfield has been putting more capital into India, where its infrastructure team sees more opportunity in the telecom sector.

The strategy runs far deeper than simply putting boots on the ground. Rather than waiting around to bid at competitive auctions, some Canadian funds are patiently and quietly courting wealthy families overseas as a way to source unique investment opportunities.

This style of deal-making often involves years of meetings to establish trust between family-owned businesses and would-be partners before any deal is inked. But once forged, these blue-chip family relationships can open the door to new webs of private investor contacts across Europe and Asia, as well as opportunities outside the competitive auction circuit.

Wooing these foreign families has become a more important strategy for some pension funds in recent years. They argue that they can be better partners of family offices than traditional private equity firms because of their long-dated investment horizons, comfort with minority ownership positions and friendlier management cultures.

"It's like a private club … It's a different network from the mainstream financial investment network," said Stéphane Etroy, London-based head of private equity at Caisse de dépôt et placement du Québec on a recent trip to Toronto.

The Caisse employs teams of people specifically responsible for building relationships with governments, entrepreneurs and other leaders in their local markets where they speak the language. Mr. Etroy says that once you do a deal with a family you become a part of the group.

In the United States and Britain, there are fewer opportunities to partner with families, since markets are more mature. This has resulted in fewer and less active family funds, investors say.

In continental Europe, however, the fragmentation of the countries and cultures has yielded more such ownership, particularly industrial businesses.

And in Asia, India and China in particular, there has been a surge of wealthy first-generation entrepreneurs, according to the Asia Pacific Centre for Family Business Excellence run by PricewaterhouseCoopers, which opened the consulting centre in 2016. Many of these business owners are motivated to leave a legacy and find the long-term approach taken by pension funds to be more palatable than the model used by other private equity buyers, Mr. Etroy said.

Earlier this year, the Caisse took a 40 per cent stake in Sebia SA, a French medical diagnostic company, that Mr. Etroy said was emblematic of the partnerships the fund looks for. The deal involved bringing in Tethys Invest, an investment fund controlled by the Bettencourt-Meyers family of France, and Caisse CEO Michael Sabia flew to Paris himself to strengthen the bond.

"We think we could potentially be doing more things together," Mr. Etroy said of the relationship. Many of the deals struck with families are less threatening than minority ownership positions in businesses with no planned exit. Where the Caisse may hold a standard private equity position for about three or four years, many of the family deals last well more than a decade.

Other pension funds are also building out their relationship teams. Last year, the Ontario Teachers' Pension Plan launched a department responsible for developing global investment relationships that will co-ordinate the many partnerships the fund has forged through its investment deals around the world. The fund's CEO, Ron Mock, said it's "intended to be the building of a network."

While Canada's big investors are looking abroad for deals, others international buyers are gravitating to Canada in their hunt for investment opportunities, even if their targets are typically smaller.

"You've got a lot more foreign funds recognizing Canada for mid-market companies, particularly U.S. funds," said Jake Bullen, a lawyer for Cassels Brock & Blackwell LLP specializing in private equity deals. "You've got all that interest, you've got a lot of dry powder and the result is a very competitive market for good companies."

Increasing interest in Canada among U.S. funds has its benefits – it can mean opportunity for domestic players to sell businesses at healthy valuations when the time is right, said Brent Belzberg, founder of TorQuest Partners. Torquest sold a majority stake in SCM Insurance Services to U.S.-based Warburg Pincus in August. In 2015, it sold store-display and merchandising company Array Marketing to The Carlyle Group.

"We have an amazing business in basically creating an arbitrage between the time that businesses we know through our relationships in Canada can be built and when we get them mature enough that they can be put into a book and sold through major world-class investment bankers to people who don't see the border as an impediment," Mr. Belzberg said.

The future of energy

Brookfield is buying Westinghouse Electric, a nuclear energy company, from Toshiba.

Canadian private equity is funding a lot of the shift to renewable energy.

Brookfield Asset Management is one of the world's largest investors in the sector, with a major focus on hydro power and holdings in wind and solar. On Thursday, it announced it was leading a $4.6-billion bid to buy Westinghouse Electric Co., the struggling nuclear power giant, from Japan's Toshiba Corp., which was another departure from carbon-intensive power.

The Caisse has also been boosting already-large investments, with a recent $150-million (Canadian) loan to Innergex Renewable Energy Inc. and the purchase of a $288-million stake in Boralex Inc., which operates wind, solar and hydro projects in Canada, France and the United States.

The renewable-energy industry, estimated to be worth as much as $300-billion (U.S.) annually, is becoming a magnet as governments in Canada and elsewhere tighten carbon-emissions regulations, and as the fossil fuel industry exits the third year of a downturn that has caused a major shakeout of investors in both public and private markets.

The difference between today's cleantech world and the one that existed 10 years ago is that it now has the ability to generate real returns without massive government subsidies, said Tom Rand, managing director of ArcTern Ventures, which invests in companies bringing in new technology to aid the integration of renewables into today's energy systems.

The trick for private investors is identifying the technologies that will allow them to get first-mover advantage before crowds of investors show up to fund major expansion.

"The economy's changing. Some people just haven't figured this out yet. We're moving to a low-carbon economy come hell or high water. Those who understand that's inevitable are starting to figure out, how do I put some money in play to give me an advantage as that transition occurs?" Mr. Rand said. "They're busy buying their way to the front of the line to finance those types of projects."

Today's biggest breakthroughs are in technology that allows the grid to operate with increasing amounts of renewable power. They mesh well with the major investments being made by the largest pension and private-equity funds.

"So that's where the Brookfields and so on of the world are creating a market for us – not simply more solar, but smart grid, energy storage, power electronics – all the stuff that comes in later," he said.

ArcTern has co-invested with such diverse players as the Kuwaiti Investment Authority, Enbridge Inc. and Canoe Financial and expects to close a new $150-million (Canadian) cleantech fund this month.

Building on an infrastructure boom

A Brookfield Infrastructure deep-lake cooling pipeline project near Toronto.

It's not enough to be a world leader in owning and operating toll roads, bridges and power lines anymore – Canada's top investors in infrastructure have been forced to become more inventive.

Two decades ago, infrastructure was just coming alive as an asset class. Governments in developed economies began to change their thinking on public works projects and became more comfortable with offloading some responsibility to the private sector.

This trend accelerated after the financial crisis, as cash-strapped governments looked further afield for financial partners. Big investors stepped up, drawn to the fact that infrastructure investing tends to have less competition, lower volatility, inflation protection and longer-term holding periods than other assets.

Canadian funds were big buyers and are now known for their expertise. It's a good place to be, given that governments around the world are building at a record pace and the need for capital to fund construction and maintenance of critical infrastructure is high. But also rising is the amount of money that flooded into the asset class in the wake of the financial crisis. Cash available to be spent by fund managers stands at a record $160-billion, according to Preqin Ltd., which tracks private equity deals and fundraising.

"There are clearly some asset classes that, given extremely low interest rates and what would seem to be unending sources of capital to pursue investment … have probably been chased pretty aggressively," says Mr. Rothney of Barclays, citing infrastructure as a key example. "And therefore the valuations have become quite lofty and returns quite difficult."

Last year was a banner year for infrastructure funds. New York-based investment firm Global Infrastructure Partners set a record when it secured $15.8-billion (U.S.) in capital commitments for its latest fund.

All that competition is putting pressure on the returns that can be earned through typical infrastructure building, while encouraging experienced players to move up the risk spectrum, or specialize in unique holdings.

Case in point: Brookfield's infrastructure group, which was founded just 10 years ago and now manages $41-billion in assets. The firm is looking to some new strategies to spur growth this year, including the launch of its first infrastructure debt fund. It bested its target of $700-million by raising $885-million right out of the gate. Infrastructure debt would be attractive to pension funds and insurers because of their long-dated contractual cash flows backed by secure infrastructure assets.

It's not the only way that the Brookfield team has sought to stand out. The firm also has a backlog of capital projects – investments needed to maintain or improve its assets – billions of dollars deep. Brookfield Infrastructure Group CEO Sam Pollock said last year that these investments are typically where the business earns its highest returns because "we're not competing to the same degree as we would an M&A opportunity where we have to go up against a number of pension plans."

And investors are getting more creative with the definition of infrastructure. At Brookfield, a big theme for the coming decade is data infrastructure. "Data is the fastest growing commodity in the world," Mr. Pollock wrote in a recent letter to his investors. "This growth is driving the need for massive investment in the networks that transmit and store data."

Some funds have also pushed the boundaries of what constitutes an infrastructure buy. After a particularly lengthy due diligence, Teachers' infrastructure group and a partner bought Britain's second-largest private crematorium operator, Westerleigh Group for its portfolio in 2016, deciding the land ownership element and revenue stream from more than 30,000 funerals each year qualified it for the portfolio.

Smoking out new opportunities

The marijuana boom is attracting a private equity sector, hungry for new asset classes.

With the world's private equity sights set on the largest targets, Canada's expertise in mid-market niches has become a competitive strength. Until the oil patch downturn, the country's massive energy and materials riches were sought after by Canadian and U.S. funds alike.

Now, the country is becoming synonymous with other fast-growing fields outside traditional commodities. The cannabis boom making headlines in the stock market, for instance, is attracting private-sector money, too.

It's the latest example of private-market investors expanding their interests into areas they previously avoided. The venture-capital arm of the pension fund OMERS, for example, was launched in 2011 and now has $800-million (Canadian) of assets under management. CPPIB invested in the development of high-end student housing and recently bought 24 properties in the United States for $1.1-billion alongside a partner.

At the same time, hedge funds looking to tap burgeoning – yet untested – sectors in pursuit of higher returns at a moment when fees are compressed. Along with cannabis, investors have similarly turned to artificial intelligence and more byzantine private debt deals and even bitcoin, as the first cryptocurrency investment fund launched in Canada.

Fundraising and investments in marijuana companies – from growers to makers of everything from tracking software to vape gear – is quickly becoming mainstream in the economy. Canada is attracting money and generating deals with acceptance of the recreational cannabis industry as legalization approaches, making the country the first in the Group of 20 to fully legalize marijuana. The market could be worth more than $8-billion within two years, according to Canaccord Genuity.

"I kind of see it as the day after Prohibition. It's the legalization of alcohol all over again, only on a bigger scale," said Ranjeev Dhillon, a lawyer at Bennett Jones in Toronto specializing in cannabis and private equity. His firm hosted a sold-out seminar on private investment in the cannabis sector in early November.

"There's a general view that Canada has a market-leading edge and first-mover advantage, and because of that people are looking to Canada as a place to park money," Mr. Dhillon said.

Canada is already home to 74 growers licensed to sell medical marijuana and more have applications in the works. When Ottawa legalizes recreational pot this year, the industry is expected to undergo massive expansions in production, wholesale, retail as well as commercial property and other services.

Doventi Capital, Nesta Holding Co., Cronos Group and Green Acre Capital are among a growing roster of cannabis-focused private equity players looking to capitalize.

In the United States, a handful of large specialist funds and large general institutional investors are also showing interest in Canada's weed sector, Mr. Dhillon said.

"As more money comes in you see more people who are coming in from outside the industry – people with backgrounds in agriculture, or pharma or retail, people with capital-markets experience. That professionalization has quelled investor concerns including in the private-equity space," he said.

Private equity has avoided some of the ballooning valuations that have characterized publicly traded cannabis companies, though some entrepreneurs are expecting to get similar bumps in the value of their companies. To show how hot the market is, the Horizons Marijuana Life Science Index, an exchange-traded fund that tracks the performance of the North American marijuana index, has surged more than 150 per cent since the start of September.

"Definitely on the grower side, it makes it more difficult because the public [licensed producers] are so inflated now and moment-driven that the private guys all feel like they should be getting the same valuation. If they don't get it they'll just threaten to go public," said Tyler Stuart, managing director of Green Acre Capital, a cannabis fund started early in 2017. As a result, Green Acre has focused more on ancillary businesses, which he calls "the picks and shovels," more than growers.

"It's less crowded, less competitive, there aren't as many institutional funds chasing those deals. So oftentimes we'll show up on a small financing and we'll be the only institution in the deal, or one of a very few."

Toronto Star: Canadian Cleantech's Trump Dividend

Toronto Star: Canadian Cleantech's Trump Dividend

What Trump is doing on climate is morally reprehensible, yet offers a clear advantage to Canadian cleantech companies looking to scale. Canada's government is stepping up just when Trump steps down, providing liquidity and risk capital to Canadian companies who demonstrate an ability to compete in global markets.

Caveat: while Rand's quote is "for any industry to grow, it needs government support" the real point is is "all industries of any size today had the benefit of government support, cleantech is no different" ...

Full article here.

Rand Discusses China's Gasoline Engine Ban

Rand Discusses China's Gasoline Engine Ban

China has joined a number of other countries that aim to reduce, or even eliminate, gasoline-powered cars. Feasible? What does this mean for Canada? Tom Rand discusses issue (w Ken Green) with Peter Armstrong on CBC's On the Money.

Rand Talks Climate Mitigation vs Adaptation

Rand Talks Climate Mitigation vs Adaptation

As recent hurricanes focus attention on climate risk, some debate a question of priority: adaptation vs mitigation? Rand argues there is no reasonable notion of adaptation without a prior assumption of deep mitigation. Discussion (w Ken Green) with CBC's Peter Armstrong.

GreenMantra™ Receives $2.2 Million for Polystyrene Recycling Technology

GreenMantra™ Receives $2.2 Million for Polystyrene Recycling Technology

BRANTFORD, Ontario, Aug. 9, 2017 /PRNewswire/ -- GreenMantra Technologies, a rapidly growing clean technology company that produces high-value polymers from waste plastics, will receive $2.2 million from Sustainable Development Technology Canada (SDTC) to be used toward construction of a demonstration plant that will convert waste polystyrene into modified styrenic polymers for use in inks, foam insulation and other applications.

GreenMantra team, local Members of Parliament Bryan May and Marwan Tabbara, and the Honourable Navdeep Bains, Minister of Innovation, Science and Economic Development

The Honourable Navdeep Bains, Minister of Innovation, Science and Economic Development, announces $15.5M in funding for six companies, including GreenMantra Technologies, through Sustainable Development Technology Canada (SDTC)

The funding was announced yesterday by the Honorable Navdeep Bains, Minister of Innovation, Science and Economic Development, during a ceremony at GreenMantra's headquarters in Brantford, Ontario.

"We are thrilled that SDTC will provide a portion of the capital necessary for this important project," said Kousay Said, GreenMantra president and chief executive officer. "This pilot plant will enable us to scale up our patent-pending process for sustainably reusing of one of the world's least recycled plastics."

"As part of our government's investments in clean technology and commitment to protecting the planet, we are pleased to support this next generation of GreenMantra's sustainable technology," said Minister Bains. "Transforming plastic waste into commercially viable products will not only drive innovation in sustainable reuse of waste materials, it also creates middle-class jobs in Ontario's growing clean technology sector."

Polystyrene plastic in foam and solid form is commonly used in consumer products, food and product packaging and many other applications. It is one of the world's fastest growing solid wastes, yet has one of the lowest recycling rates of all plastics with an estimated 95 percent either disposed of in landfills or incinerated.

Using a proprietary catalyst and unique conversion process, GreenMantra Technologies has converted waste polystyrene foam into useful polymers on a laboratory scale. The demonstration plant, to be constructed at GreenMantra's existing manufacturing complex in Brantford, will have an anticipated initial annual capacity of 1,000 metric tons per year. This will provide an ample supply of converted modified styrenic polymers for trialing in end-use applications and potential initial commercial sales. The design and engineering of the new facility will begin this year, with construction starting in 2018.

GreenMantra currently converts waste polyethylene and polypropylene plastics, such as film, bottle caps and food containers, into specialty synthetic waxes. These waxes are used in various applications in the coatings, plastics processing, adhesives, roofing and paving industries.

SDTC in 2014 provided GreenMantra Technologies with a $2 million funding to help fund construction of the plant that produces these waxes.

GreenMantra is actively designing new technologies, processes, and products with a focus on driving the circular economy of plastics. It has received significant industry recognition for its revolutionary technology. It was recently named one of the world's top 100 companies in clean technology by CleanTech Group, a leading industry research firm, and last year received a Gold Award for Green Technology as part of the R&D100 Awards program.

About GreenMantra

Based in Brantford, Ontario, GreenMantra™ Technologies utilizes a proprietary thermo-catalytic system and patented process to cost-effectively convert and "up-cycle" waste plastics, including hard-to-recycle materials such as grocery bags and film, into high-value waxes and other specialty chemicals. These materials have a broad range of applications in the coatings, plastics processing, adhesives, roofing and paving industries. More information on the company, its products and its innovative technology can be found at www.greenmantra.ca

Rand Talks Diesel on CBC's On the Money

Rand Talks Diesel on CBC's On the Money

VW, and others, got caught cheating on diesel emission tests. Paris seeks to ban diesel cars. Meantime, heavy-duty trucks continue to roll on North American Highways and Canada will soon see the opening of first new refinery in decades: a modern CO2-sequestering behemoth in Edmonton. 

Given these contradictory signals, what's the future of diesel?

How Canada Can Lead on Global Cleantech

How Canada Can Lead on Global Cleantech

Bloomberg TV Canada talks to Murray McCaig, Managing Partner at ArcTern Ventures about what Trump’s withdrawal from the Paris climate agreement mean for Canada and it’s position in the global clean tech market.

Hydrostor on BNN: Goderich is a go ...

Hydrostor on BNN: Goderich is a go ...

Hydrostor CEO Curt VanWalleghem discusses the Goderich project, converting old coal plants, and the basics of Hydrostor's compressed air energy storage solution - including the new Terra(tm) design.

 

A Plan to Turn Shuttered Coal Plants Into Cutting Edge Compressed Air Storage

A Plan to Turn Shuttered Coal Plants Into Cutting Edge Compressed Air Storage

as published in Greentech Media here

Canadian firm Hydrostor has already lined up warranties and project financing to make the new system bankable.

Canadian firm Hydrostor revealed a new compressed air storage solution it says can compete with both batteries and natural gas plants to provide hundreds of megawatts of power.

The company adapted compressor technology well honed by the oil and gas industry to squeeze air down into custom-built tunnel shafts, using water to maintain constant pressure. It dubbed the resulting product Terra: a grid scale, long duration storage asset that lies mostly underground, with a visible footprint no bigger than a small industrial building.

By leveraging proven technologies and confronting the challenges posed by the physics of air compression, the Hydrostor team convinced Fortune 500 engineering firm AECOM to sign on as project developer partner, and backstop the systems with a cost and performance guarantee. Canoe Financial has committed to project financing. This puts Hydrostor in the rare position of rolling out a new storage technology with key bankability measures already in place.

That's crucial for the kinds of customers the firm is courting: primarily large, traditional utilities. Specifically, Hydrostor wants to use Terra to convert shuttered coal-powered generating facilities into peaking power plants that charge up on cheap grid electricity and discharge when needed, said President and CEO Curtis VanWalleghem. It can also perform transmission decongestion and renewables integration roles.

Lithium-ion batteries enjoy a near-strangehold on the U.S. storage market. Any upstart device challenging their dominance has to show customers a very good reason to diverge from the conventional path. Plenty of storage companies have offered longer duration batteries, but they struggle at beating lithium ion on price.

The Terra solution is highly customizable and allows customers to pick the power to energy ratio. For systems of 200 megawatts or more, VanWalleghem said, Hydrostor can deliver six to eight hours of duration on a turnkey installed basis of $150 per kilowatt-hour.

In its Q1 report on the U.S. storage industry, GTM Research calculated the median price for four-hour, utility-scale systems was $550 per kilowatt-hour. That's expected to drop to $450 in 2019. It's not an exact comparison on energy capacity, but it's safe to say that the price point quoted for Terra (assuming it's accurate) is several years ahead of the rest of the advanced storage industry.

A new take on familiar ideas

The Terra concept responds to and reenvisions several things simultaneously: compressed air storage, grid scale battery storage and the use of coal power plant sites. Here's the breakdown:

With all the hubbub around emerging storage technologies, it's rare to hear news of compressed air energy storage (CAES). This technology, like pumped hydro storage, was proven years ago but has been hobbled by the vagaries of geology.

Traditional CAES seals air inside pressurized salt caverns. So to build one, you have to go find a cavern big enough for your needs and strong enough to withstand the pressure without leaking. It's not exactly a buyer's market.

More recent attempts to modernize the concept have focused on manufacturing sophisticated tanks that can hold the air. Lightsail raised $70 million to pursue this and, as Eric Wesoff reported, didn't get much further than producing a sophisticated tank. SustainX raised $30 million for aboveground CAES, but had to abandon those plans. It attempted to merge with General Compression to improve below ground CAES, but both have wound down.

Hydrostor addressed the siting issue by creating caverns on demand. The company digs what look like mine shafts (more on that later) customized to the needs of a given project. The basic design goes down about 1,200 feet. A structure on the surface houses the equipment to suck air in, pump it down to charge the system and suck it back out to discharge. The team installs silencers on the vents to cut out noise pollution.

"We built one in downtown Toronto right next to a school, and it complies with all the noise ordinances," VanWalleghem said. Permitting involves different questions than a typical storage facility; it's more like getting mineral rights to dig on a piece of land, or excavating a city block for an underground garage. 

Another challenge with CAES derives from physics: if you reduce the volume of a gas, the procedure produces heat. You have to deal with that heat, and then find a way to reintroduce heat when you discharge the air to spin a turbine.

Traditional CAES facilities burn natural gas to heat the cold air as it gets pumped back out of the system, but Hydrostor wanted to keep its operation clean and self-contained. The designers threw in several types of thermal storage to catch the heat given off by the initial air compression and save it for use when the system discharges. Omitting natural gas burn also makes it possible to slip into urban settings -- the only emission here is air.

Lastly, the equipment operates best at a certain pressure level. Pumping more air into a confined space increases the pressure, so previous CAES designs used massive caverns to offset the additional pressure from charging.

Hydrostor cuts the cavity size and maintains constant pressure using water. Additional air displaces the water instead of more air, so the pressure doesn't vary and the machinery can run optimally.

The 1 megawatt Toronto test facility the company built uses an earlier marine design, which pumps the air into underwater balloons. Hydrostor is currently constructing a project for Ontario's Independent Electricity System Operator that will attach its compressor array to an existing salt cavern, and it's finalizing the first fully-realized commercial application of the Terra concept.

A non-mythical energy plan for coal country

While Hydrostor can feasibly deploy its technology next to schools in city centers, it has another type of location in mind: the sites of retired coal plants. 

When a coal fired power plant shuts down, it leaves a large industrial site with a powerful transmission connection and ample supply of water. Those are all the ingredients Hydrostor needs to get a Terra installation up and running with minimal friction.

Those sites are useful for other energy assets too -- battery storage, solar or wind could make use of the transmission hookup. Hydrostor's pitch goes a little deeper by leveraging a different facet of the coal industry: the miners.

"We’ll be putting hundreds and hundreds of miners to work for many, many years," VanWalleghem said. "We’ve got trained miners who are great at what they do, oil and gas companies that have perfected compressors. We just add a couple bells and whistles to it, we don’t reinvent that other stuff."

Not all former coal power plants sit in regions with a coal miner workforce, but plenty of them do. Hydrostor will have to see whether this cultural and economic development pitch helps close deals. At the very least, it puts the company in the position of speaking the same language as the thermal power industries in a way that solar and wind do not.

President Donald Trump has argued that his efforts to cut environmental protectionswill bring back the coal industry. He has not supplied evidence that this is the case. A large-scale construction project utilizing the coal miner workforce, on the other hand, could provide real economic opportunities in a growing clean energy industry.

Going to battle with batteries

Given the near-total market dominance of lithium-ion, and new contender faces a high bar. VanWalleghem acknowledges that there are certain areas where his technology won't beat the incumbent.

Modern batteries can respond to commands in a matter of miliseconds; the Terra needs a few minutes to get from cold start to full power.

We saw with the Aliso Canyon procurements that grid-scale lithium-ion systems can be deployed on the grid in just six months. Given the physical construction involved in Terra, it takes more like two to three years from contract to service.

Terra facilities offer 60 percent roundtrip efficiency on a single day charge/discharge cycle, which is lower than flow batteries, and considerably lower than lithium-ion.

But on the other hand, the company claims the efficiency does not degrade over time the way batteries do. There is no flammable chemical concern of the sort that has stymied the advance of lithium systems into dense cities like New York.

The latter has a fixed ratio of power to energy; expanding duration means adding more lithium-ion cells. Terra allows the customer to choose exactly what performance specifications are desired: the compressors govern the power intake capacity and the volume of the underground cavity corresponds to energy capacity.

The scale here can get pretty massive. If Hydrostor builds the 200 megawatt system VanWalleghem quoted, that would exceed any advanced battery system that exists. AES has a contract with Southern California Edison to deliver a 100 megawatt/400 megawatt-hour system in Long Beach by 2021 that's slated to be the largest battery of its kind. Hydrostor says it can beat that.

When you're dealing with such massive amounts of electricity, Terra can arguably afford to lose 40 percent of the electrons that go in, because it can still produce more than any other battery.

The right kind of friends

Hydrostor has an alluring and detailed pitch, but clever engineering doesn't guarantee success in the world of energy storage. The company has increased its odds, though, by laying a strong business foundation before launching the new product.

The group has raised about $10 million in equity and garnered another $10 million in government grants, and has begun earning revenue on the Ontario project, which contracted for close to $10 million as well.

That's a promising start, but not enough of a balance sheet to guarantee a large and expensive system for a utility client that needs assurances it will work. That's where AECOM comes in. 

That firm, which operates in 150 countries and drew $17.4 billion in revenue last year, partnered with Hydrostor after an extensive review of operational data from the pilot project and market analysis. AECOM serves as the project developer, and guarantees the projects for 30 years or more, several times the life expectancy of a lithium-ion battery.

Even before the official marketing for Terra has begun, AECOM has been hearing positive feedback from multiple stakeholders, wrote Travis Starns, principal engineering manager there, in an email Wednesday.

"We believe once this technology is known within the energy storage landscape and stakeholders are able to add the Hydrostor Terra technology into the evaluation process, the value proposition for this technology will become clear," he said.

That connection is a big deal for a new storage technology, said Ravi Manghani, energy storage director at GTM Research.

"Getting a partner like AECOM is going to make their jobs much easier," he said. "It’s easier to get on meeting calendars with big utilities and big financial institutions."

The backing from AECOM makes Terra projects financially bankable. The strategy of using off-the-shelf mechanical equipment likewise reduces the risk associated with deploying new technology. That said, the configuration of the equipment is new.

A key challenge for Hydrostor will be to convince customers to try out a product that relies on complex mechanical systems and a great deal more physical labor than a straightforward container of batteries.

"It's not like electrochemical batteries don't have their own issues, but they do have fewer moving pieces and hence fewer points of failure," Manghani said. "Compresed air, with so many moving parts and dealing with high pressure environments, adds on a number of potential points of failure."

For companies used to dealing with all the moving pieces of a coal or gas plant, the Terra won't feel all that foreign. If even a few of them sign on, Hydrostor could have its hands full with a few hundred megawatts to install.

Federal Budget Sets New Standard for Canadian Cleantech

Federal Budget Sets New Standard for Canadian Cleantech

as published in the Globe & Mail here

The latest federal budget could prove to be a watershed moment for the clean-technology industry in Canada, and signals that the transition to a low-carbon economy remains a national priority.

At the very time that the Trump administration is backtracking in the United States, the Trudeau government is moving forward with a clear commitment to increase clean tech's contribution to GDP, which is good news for economic growth and job creation.

Backing it up with more than $2.2-billion in new clean-tech spending, the budget shows Ottawa is moving beyond a focus on research and development and now is seriously committed to taking the next step: boosting the demonstration, adoption and export of Canadian energy and environmental technologies.

In clean tech, R&D is tremendously important, and Canada's support for it has been good, if not consistent, over the years. Smart people in labs, garages and basements have invented and innovated, assisted by provincial and federal grants. Innovation hubs and incubators helped nurture the entrepreneurs that emerged. Private venture-capital firms invested early in companies that have worked to become market-ready.

The result is a clean-tech "farm team" that Canada has been growing for about a decade. But, as coaches often say, we didn't come this far to only come this far.

Clean tech is now a $1-trillion global game – and growing. Spending on R&D is always welcome, but won't get us into the big leagues on its own; it doesn't magically transform innovations into commercial winners.

Customer orders are what matter, as well as having enough capital to fill those orders and kick-start the early revenues required to drive growth and enter new markets.

Herein lies clean tech's chicken-egg problem: Customers and funders won't come to the table if a technology hasn't been successfully demonstrated on a commercial scale, but getting those first commercial deployments requires customers and private investors who are willing to take on daunting first-time risks.

The budget tackles this conundrum head on, recognizing that clean tech is a hard, capital-intensive journey that's too risky and takes too long for traditional venture capitalists.

So on top of committing $430-million in R&D toward clean energy, transportation and natural resource innovation, the budget is putting nearly $1.4-billion over three years into the hands of the Business Development Bank of Canada and Export Development Canada. About $450-million of the new money will be used to finance first-of-kind clean energy and technology projects. Another $380-million will go toward equity financing for clean-tech firms, with the rest available as working capital to help firms buy inventory, hire talent, accelerate sales and boost exports.

And remember, these are strategic investments – not handouts. By using public dollars to shoulder more risk, the new money is expected to leverage private-sector investment that might otherwise flow elsewhere. The end effect, according to the budget, will be to "increase the amount of capital available to Canada's clean-technology firms as they grow their businesses and create more good, well-paying jobs for all Canadians."

The budget goes much further. Sustainable Development Technology Canada, which for a decade has used grants to attract private-sector investment in demonstration projects, is getting $400-million over five years to continue its mission. The clean-tech sector will also get support through a $1.2-billion Strategic Innovation Fund, which has traditionally only been accessible to the aerospace and automotive sectors.

Another $40-million will be spread between the creation of a national clean-tech database for more accurately tracking the health and growth of the sector, and efforts to promote the adoption of Canadian clean tech in other countries. The government will also streamline and simplify federal support programs and establish a "clean growth hub," which is still to be defined.

To stimulate domestic demand for clean-tech innovations, nearly $400-million will support efforts to get rural and remote communities off diesel fuel and boost adoption of "smart city" technologies. This comes on top of the government's commitment to purchase low-carbon technologies for its own use, and the spread of carbon pricing across the country – including Ontario's cap-and-trade program, which recently held its first carbon allowance auction.

Having come this far, it's now time for the industry to step up to the plate. All stakeholders – ventures, private investors, innovation support organizations – need to be at the table as the federal government works to put its plans into action.

Ottawa has been listening, and over the coming months it will seek industry advice on how new programs and initiatives supported through the budget should be structured for success. It shouldn't alone have to shoulder the responsibility of an effective roll-out.

It's now up to industry to live up to the high expectations that this budget sets.

Tom Rand is a Managing Partner at ArcTern Ventures, and Tyler Hamilton is business development manager of cleantech at MaRS.

Canadian Clean Energy Opportunities

Canadian Clean Energy Opportunities

As U.S. climate progress takes a turn, the time is ripe for Canada to capture a piece of a growing global clean energy industry. But are Canadian innovators and the federal government ready?

Canadian firms NRStor and Hydrostor partner up on utility-scale adiabatic compressed air storage

Canadian firms NRStor and Hydrostor partner up on utility-scale adiabatic compressed air storage

as published in Energy Storage News

Compressed air energy storage plants could be rolled out across Canada from energy storage project developer NRStor and advanced adiabatic compressed air energy storage (A-CAES) firm Hydrostor.

The two companies announced this week that they have formed a partnership to “jointly develop utility-scale energy storage projects across Canada”. Hydrostor’s technology converts electricity into compressed air, as with other compressed air storage solutions, however A-CAES goes a step further and also removes the heat generated by the compression process and stores that as energy to be used later. Therefore A-CAES is considered to increase the round-trip efficiency of storing energy as compressed air.

NRStor and Hydrostor are already working together on a 1.75MW / 7MWh A-CAES project in Goderich, Canada for the Independent Electricity System Operator (IESO) of Ontario which is expected to be completed and online during 2018. The project pumps a salt cavern full of compressed air, with the salt naturally sealing the cavern’s walls of cracks that could let the air escape.

NRStor has also worked with numerous other energy storage technologies, including flywheels and batteries, having been founded in 2012. In February it closed a deal with a union-backed pension fund, Labourers’ Pension Fund of Central and Eastern Canada (LiUNA), which committed $200 million of project financing towards NRStor projects. While pension funds and other institutional investors are growing their renewable energy portfolios, involvement in energy storage from such investors has been limited to date due to the technology being newer and having a higher perceived risk profile.

NRStor finances, owns and operates energy storage projects and now becomes Hydrostor’s Canadian ‘preferred development partner’. Elsewhere, Hydrostor has a global partnership with major EPC firm AECOM. At this stage neither company has given an indication of the future scale of their Canadian partnership in terms of pipelines or forecasted expectations.   

However, Hydrostor president and CEO Curtis VanWalleghem said the agreement would “dramatically accelerate the deployment” of the company’s A-CAES systems and referred to NRStor’s “proven development expertise”.

“Canada needs clean energy storage to efficiently operate the modern electric grid. We are two Canadian companies partnering to deliver just that,” NRStor founder, chair and CEO Annette Verschuren said.

Booming MaRS repays $290M government loan three years early

Booming MaRS repays $290M government loan three years early

as published in the Toronto Star here

The Ontario government’s rescue mission to MaRS has proven successful — the medical-and-related-sciences hub is repaying a $290 million loan three years early.

he Ontario government’s rescue mission to MaRS has proven successful — the medical-and-related-sciences hub is repaying a $290 million loan three years early.

MaRS Discovery District will announce Thursday that new investments from Manulife, Sun Life Financial, and iA Financial Group are enabling the repayment to Queen’s Park.

“Kathleen Wynne and the Liberals … haven’t had a lot of good news lately, but they certainly deserve a victory lap on this one,” MaRS chair Gord Nixon said in an interview Wednesday.

“We made the point that this was not a bailout, but in the midst of politics — with the opposition parties — it sort of took on a life of itself,” said Nixon, a former Royal Bank of Canada chair.

The 20-storey research and development complex at the corner of College St. and University Ave. received $395 million in loans from the province over the years.

During the 2014 election, the opposition Progressive Conservatives and New Democrats charged the project was a boondoggle because it was more than two-thirds vacant at the time.

But now there’s a waiting list of prospective tenants and blue-chip firms — including Facebook, Johnson & Johnson’s JLABS, PayPal, Merck, and Autodesk — are paying market rents.

“It’s been a bumpy road to get here,” said Nixon, noting that after about three-quarters of the loans were repaid, the government still has a stake in a prime property that has increased in value.

Economic Development Minister Brad Duguid wryly recalled how “the opposition were all over us on this issue and didn’t want us to make these investments.”

Duguid said the Liberals couldn’t abandon MaRS, because the innovation hub is a key part of the government’s strategy to attract and incubate high-technology businesses.

“Frankly, it’s time our government got a little bit of credit for some of the challenging decisions we’ve taken on and the bold decisions we’ve made to make this happen,” the minister said.

“MaRS was challenged because of a partnership with a U.S. company (Alexandria Real Estate) that had been hurt by the global recession and it impacted its ability to lease up its space,” he said.

“Rather than take the easy political out, which was to call in the loan and take our licks, we determined that this was still a really important project for Ontario and … doubled down. We knew it was going to work. Our investment was fully secured.”

Former OMERS pension plan CEO Michael Nobrega, brought in to advise the government on MaRS’s real estate arrangements, agreed it was a shrewd move.

“These guys took a calculated risk and, most importantly, they saw it through,” Nobrega said of the province helping MaRS with bridge financing.

“There was a lot of heat and to some extent it was not good heat, because people didn’t understand what was going on and didn’t appreciate what was going on,” he said.

Ilse Treurnicht, CEO of MaRS, said the deal allows “us to pay back the taxpayers of Ontario as quickly as possible.”

“We’re incredibly grateful that the province stepped in when that unexpected bump in the road occurred,” said Treurnicht, adding the new private investors are “conservative,” which sends the market a message that MaRS is a safe long-term bet.

Candace Shaw, head of private fixed income at Sun Life, said the deal fits in well with the firm’s investment objectives.

“The West Tower is an impressive state-of-the-art research complex with an exceptional roster of tenants, in one of the most desirable locations in Toronto,” said Shaw.

Canada's Hydrostor eyes role in $1-billion U.S. peak power market

Canada's Hydrostor eyes role in $1-billion U.S. peak power market

as published in the Globe and Mail here

Canadian underwater energy storage company Hydrostor is eyeing $1-billion of contracts to replace decommissioned U.S. peak power plants in the next two or three years, its chief executive said.

So-called “peakers,” electrical generators which are turned on only when demand is highest, are a critical but expensive element of the electricity grid.

Hydrostor and its engineering partner AECOM are targeting dozens of mostly coal-powered facilities of at least 100 megawatt capacity across the U.S. that either shut down in 2016 or will shut this year.

Hydrostor buys off-peak electricity to compress air it stores underwater in balloon-type accumulators. It then reverses the process to generate power and feed it back into the grid when demand is high.

“We are now by far the lowest cost storage solution, we can be built at scale, we’ve got our partnerships in place and we’re going to start marketing it here in the next month or two,” Curtis VanWalleghem, Hydrostor’s chief executive, said.

Hydrostor will compete for the attention of utilities against battery companies and new, more efficient gas-powered facilities.

“Most of the utilities in the U.S. that are starting to get their feet wet with storage are typically going with these battery plays, mostly because they’re a little more flexible,” said Craig Sabine, a strategic advisor for utilities at Navigant, a consultancy.

Utilities may also prove reluctant to turn away from gas given years of record shale production which pushed prices in 2016 to their lowest since 1999.

“The silver bullet has yet to be defined,” said Richard McMahon of the Edison Electric Institute, which represents U.S. investor-owned electric companies. “There’s a place for a lot of these technologies and certainly there remains a place for gas peaking when you’ve got those conditions, low gas prices,” he said.

VanWalleghem said Hydrostor’s capital cost of between $1,000 and $2,000 per kilowatt compares to at least $3,500 per kilowatt for batteries, and makes it comparable to the cost of a new gas-fired plant, although with lower operating and maintenance costs.

He says the company, which had only built or contracted for projects of less than 2 megawatt capacity before inking the AECOM deal last year, can build facilities of up to 200 megawatts. One megawatt can power about 1,000 homes.