WEBVTT - Here's What's Going Wrong in the US Offshore Wind Industry 0:00:10.119 --> 0:00:14.480 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.560 --> 0:00:16.880 I'm Joe Wisenthal and I'm Tracy Alloway. 0:00:17.079 --> 0:00:18.919 Tracy, I have to say, there are a lot of 0:00:19.079 --> 0:00:25.320 exciting things happening in energy, decarbonization, electrification of the grid, 0:00:25.840 --> 0:00:28.360 things we've talked about recently with people like Jigger Shaw 0:00:28.520 --> 0:00:31.000 and so forth. But I have to say I keep 0:00:31.040 --> 0:00:32.720 seeing negative headlines about wind. 0:00:33.400 --> 0:00:34.040 Oh my gosh. 0:00:34.200 --> 0:00:36.760 You know, just before we came in studio to record this, 0:00:36.880 --> 0:00:39.160 I was taking a look at the SMP Global Clean 0:00:39.240 --> 0:00:42.760 Energy Index. Yeah, it's down thirty percent this year, more 0:00:42.760 --> 0:00:44.919 than thirty percent this year, and a lot of that 0:00:45.640 --> 0:00:48.320 is thanks to what's been going on in wind. 0:00:48.600 --> 0:00:48.800 Yeah. 0:00:48.840 --> 0:00:50.920 In fact, if you look at Orsted, which I think 0:00:51.000 --> 0:00:54.640 is the world's biggest provider of offshore wind farms, it's 0:00:54.680 --> 0:00:57.240 down fifty percent year to date. 0:00:57.720 --> 0:01:00.600 Yes, So we are recording this November fifth teenth. I 0:01:00.600 --> 0:01:03.920 think just earlier in the week, two top Orsted executives 0:01:04.480 --> 0:01:07.600 departed the company. I think there was a project off 0:01:07.640 --> 0:01:10.760 the shore of I think New Jersey that they that 0:01:10.920 --> 0:01:14.319 recently the plug was pulled on. And it just seems 0:01:14.319 --> 0:01:17.920 that every story everywhere around the world, with the exception 0:01:18.120 --> 0:01:22.280 maybe of China. It seems to be something seems to 0:01:22.319 --> 0:01:25.440 be wrong, whether it's the math doesn't pencil out on 0:01:25.480 --> 0:01:29.399 the actual projects themselves. There are companies, I think Siemens 0:01:29.480 --> 0:01:32.600 wind has had all kinds of manufacturing issues with respect 0:01:32.680 --> 0:01:36.000 to turbines, et cetera. And so just trying to understand 0:01:36.160 --> 0:01:38.640 what is going on with this industry and how bad 0:01:38.720 --> 0:01:41.520 is it in terms of if it's not going as 0:01:41.640 --> 0:01:45.240 planned reaching our decarbonization goals as a country. 0:01:45.400 --> 0:01:48.600 Yeah, So my understanding is there are two things kind 0:01:48.600 --> 0:01:51.120 of happening at once. You could say, two headwinds for 0:01:51.360 --> 0:01:54.480 the wind power industry creating a perfect storm. 0:01:54.720 --> 0:01:56.520 Joe, I'm just going to say, so a perfect storm 0:01:56.560 --> 0:01:57.360 would be good for wind. 0:01:57.480 --> 0:02:00.160 I'm just going to get as many weather puns I 0:02:00.200 --> 0:02:03.760 can into this conversation. But there's higher borrowing costs because 0:02:03.760 --> 0:02:06.880 of surging interest rates, and then there are also higher 0:02:06.960 --> 0:02:11.960 component costs. Yes, And I guess my question is how 0:02:12.080 --> 0:02:15.280 much of all of this is sort of growing pains 0:02:15.360 --> 0:02:18.320 for an industry that, at least in the US is 0:02:18.360 --> 0:02:22.400 still relatively new, although it is true that it's also 0:02:22.440 --> 0:02:26.520 facing problems in places like the UK. Or is this 0:02:26.639 --> 0:02:31.200 a kind of permanent change in the industry's trajection. Basically, 0:02:31.320 --> 0:02:34.720 is wind power a low interest rate phenomenon, like I 0:02:34.720 --> 0:02:37.080 don't know, we work or cheaper ubers? 0:02:37.560 --> 0:02:39.920 Is wind power a lot of hot air? So you know, 0:02:40.200 --> 0:02:43.480 you mentioned the renewable energy stocks and that is sort 0:02:43.480 --> 0:02:45.920 of another I don't know funny is the right word. 0:02:45.960 --> 0:02:48.080 But we're having this great year in the stock market 0:02:48.200 --> 0:02:51.440 so far, and how many people would have bed It's like, Oh, 0:02:51.560 --> 0:02:55.680 the Inflation Reduction Act passed, all this money pouring into 0:02:55.840 --> 0:03:00.320 renewable energy, all these incentives, can't lose betting on these 0:03:00.440 --> 0:03:02.800 and win and I think solar, I mean, it's been 0:03:02.840 --> 0:03:03.480 pretty dismal. 0:03:03.639 --> 0:03:06.560 Yeah, please, doc, absolutely, and wind especially was like a 0:03:06.760 --> 0:03:11.000 much hyped component of the renewable energy revolution, and you're 0:03:11.080 --> 0:03:13.920 right with the Inflation Reduction Act. There is this question 0:03:14.120 --> 0:03:16.920 about how much of this is a temporary hold up 0:03:17.080 --> 0:03:20.440 given permitting issues that we've discussed with people like Chicker 0:03:20.960 --> 0:03:23.959 versus how much of this is the math just doesn't 0:03:23.960 --> 0:03:30.040 pencil out. There is something fundamentally challenging in Win. 0:03:30.360 --> 0:03:33.320 Lots of questions, and we have the perfect guest to 0:03:33.360 --> 0:03:35.880 get the answers. We're going to be speaking with Chelsea 0:03:36.000 --> 0:03:39.520 Jean Michelle she is an offshore wind analyst here at 0:03:39.520 --> 0:03:42.440 Bloomberg n EF, one of our colleagues on a different floor. 0:03:42.920 --> 0:03:45.360 So excited to check Chelsea. Thank you so much for 0:03:45.440 --> 0:03:46.760 coming on odd Laws. 0:03:46.720 --> 0:03:48.320 Thanks so much for having me Joan Jacy. 0:03:48.600 --> 0:03:51.600 Is our premise correct more or less that it's been 0:03:51.640 --> 0:03:53.920 a just dismal year for the industry. 0:03:54.320 --> 0:03:56.440 I think dismal is a bit of a big word 0:03:56.480 --> 0:03:58.960 to use, but you know, it hasn't It hasn't been great, 0:03:59.040 --> 0:04:00.880 and there have been a lot of negative headlines, and 0:04:00.920 --> 0:04:03.160 you guys highlighted a lot of the key issues already. 0:04:03.680 --> 0:04:07.080 I think maybe to highlight at a grander scale, we 0:04:07.160 --> 0:04:10.720 have seen a lot of the impacts, most most saliently 0:04:10.800 --> 0:04:13.240 in the US. And Tracy, you mentioned you know it's 0:04:13.240 --> 0:04:15.760 a very like new industry in the US. For contexts, 0:04:15.760 --> 0:04:19.680 there's only seven operational turbines forty two megawatts installed. However, 0:04:19.720 --> 0:04:22.760 there are two offshore wind farms currently under construction right 0:04:22.800 --> 0:04:25.719 now almost a gigawatt, So the industry is growing. But 0:04:25.760 --> 0:04:29.840 we've also seen over twelve gigawatts of offshore wind projects 0:04:29.920 --> 0:04:33.200 seek to cancel or renegotiate their off take contracts in 0:04:33.240 --> 0:04:35.240 the US. Now, what I mean when I say an 0:04:35.240 --> 0:04:39.159 off take contract is that's typically an agreement that these 0:04:39.320 --> 0:04:43.200 offshore wind developers, their projects will sign with states state 0:04:43.279 --> 0:04:46.040 utilities to essentially guarantee that they're going to buy their 0:04:46.080 --> 0:04:48.680 power for usually around twenty to twenty five years. And 0:04:48.720 --> 0:04:51.360 that's really key for an offshore win project because they 0:04:51.440 --> 0:04:54.040 need you know, you have variable generation, so if you 0:04:54.080 --> 0:04:56.240 can't guarantee your generation, you can guarantee the price at 0:04:56.240 --> 0:04:58.720 which that generation is sold, and that makes it easier 0:04:58.760 --> 0:05:01.440 for these projects to you know, reach financial clothes make 0:05:01.480 --> 0:05:04.320 a business case for them. Now in the US, this 0:05:04.440 --> 0:05:07.480 is interesting because this happens a little bit earlier on 0:05:07.560 --> 0:05:10.760 in a project's process. So in the UK, before you 0:05:10.760 --> 0:05:12.600 bid for an off date contract, you need to have 0:05:12.640 --> 0:05:15.200 a grid connection agreement. You also need to have your permits. 0:05:15.240 --> 0:05:17.280 In in the US that's not needed, and so you 0:05:17.360 --> 0:05:20.000 might have a couple of years when between when you 0:05:20.040 --> 0:05:22.080 lock in your off date contract until you finally reach 0:05:22.160 --> 0:05:24.799 financial clothes and then you want to construct and build 0:05:24.800 --> 0:05:27.479 the project. So that leads to a certain level of 0:05:27.560 --> 0:05:29.320 risk that's a little bit higher in the US than 0:05:29.320 --> 0:05:31.279 you've see in other parts of the world. And that's 0:05:31.279 --> 0:05:33.520 also why you know we've seen just how much interest 0:05:33.600 --> 0:05:35.800 rates have shifted over the last few years, how much 0:05:35.800 --> 0:05:39.080 inflation has changed, and that has meant that now when 0:05:39.120 --> 0:05:42.000 these projects are looking to reach financial clothes, they're in 0:05:42.040 --> 0:05:45.159 a different macroeconomic environment than when they had initially placed 0:05:45.160 --> 0:05:47.440 their bids and made those assumptions back in twenty nineteen, 0:05:47.480 --> 0:05:48.039 twenty twenty. 0:05:48.240 --> 0:05:50.840 Oh, that's really interesting because I was wondering how higher 0:05:50.920 --> 0:05:53.760 rates are actually feeding into a lot of those given 0:05:54.000 --> 0:05:56.480 you would have assumed that the financing was in place, 0:05:56.520 --> 0:05:59.839 but you're highlighting the discrepancy between the revenue coming in 0:06:00.160 --> 0:06:03.120 the off take agreements and the financing that is still 0:06:03.120 --> 0:06:06.240 coming up in the higher interest rate environment. So, just 0:06:06.320 --> 0:06:09.479 on this note, could you maybe tell us like the 0:06:09.520 --> 0:06:14.360 factors or the calculations that go into creating a wind farm, 0:06:14.400 --> 0:06:17.200 whether it's onshore or offshore. Like, if Joe and I 0:06:17.600 --> 0:06:20.400 were at a bar and we were writing on a napkin, 0:06:20.600 --> 0:06:24.080 here's our rough cost and here's like our rough revenue source, 0:06:24.240 --> 0:06:26.880 what would that napkin actually contain. 0:06:27.920 --> 0:06:30.000 Yeah, So there's a lot that goes into it, and 0:06:30.080 --> 0:06:32.359 it depends on you know, if you're building in the 0:06:32.480 --> 0:06:35.800 US versus if you're building say in the Netherlands. 0:06:35.520 --> 0:06:37.800 Or in Germany, but we're building in the US. 0:06:38.000 --> 0:06:43.320 We're building in the US. Yeah, so if we're building 0:06:43.360 --> 0:06:46.279 in the US right for context, offshore wind development takes 0:06:46.320 --> 0:06:48.400 a really long time. As I mentioned, there's very few 0:06:48.440 --> 0:06:52.599 projects currently operational operational in the US right now, but 0:06:52.960 --> 0:06:55.040 around eight to ten years is what we see globally. 0:06:55.320 --> 0:06:57.080 But in the US, you know, this can take as 0:06:57.080 --> 0:06:59.080 long as fourteen years. We've seen that for some other 0:06:59.080 --> 0:07:01.680 projects that are currently in the process of getting built 0:07:01.760 --> 0:07:03.760 right now. Or when you take a look at that 0:07:03.839 --> 0:07:06.840 really long process, one of the first things you think 0:07:06.839 --> 0:07:09.040 about is, okay, so that's like ten years where you 0:07:09.040 --> 0:07:12.120 have like development costs going in, right, so you need 0:07:12.240 --> 0:07:14.560 the people that are going to help formulate the bids. 0:07:14.600 --> 0:07:16.400 In the US, you have a seabed lease auction. So 0:07:16.440 --> 0:07:19.200 this is usually the first step in the process where 0:07:19.240 --> 0:07:22.640 you're like, I want to acquire my seabed for X 0:07:22.680 --> 0:07:24.600 amount of dollars. We recently saw the New York by 0:07:24.600 --> 0:07:27.480 at lease auction last year millions and millions of dollars 0:07:27.520 --> 0:07:29.880 of revenue for the US government over four billion dollars 0:07:29.920 --> 0:07:32.480 to secure these sites. And that's just step one. And 0:07:32.520 --> 0:07:33.320 then you also have. 0:07:33.440 --> 0:07:35.520 Can I ask really quickly to shore the US government 0:07:35.600 --> 0:07:36.920 own all those sea. 0:07:36.800 --> 0:07:40.360 Beds on the outer continental shelf? They do, Okay, However, 0:07:40.400 --> 0:07:42.840 that being said, I think it's three nautical miles that's 0:07:42.920 --> 0:07:45.120 state waters, but most offshore wind development is going to 0:07:45.200 --> 0:07:46.840 take place in federal waters. 0:07:46.920 --> 0:07:49.440 Ah, yes, I remember those from my offshore gambling days. 0:07:51.080 --> 0:07:53.200 But yeah, So that's like a cost you can expect 0:07:53.240 --> 0:07:55.600 to pay for the seabed. Then you have kind of 0:07:55.680 --> 0:07:58.480 other development costs when it comes to you know, fitting 0:07:58.600 --> 0:08:01.840 into an offshore and off shore wind procurement or bidding 0:08:01.840 --> 0:08:04.240 into an offhr wind solicitation. So this is where you 0:08:04.280 --> 0:08:06.320 go in to say, I will bid X price, I 0:08:06.360 --> 0:08:10.040 will bid Y price, I'll bid Z price for you know, 0:08:10.080 --> 0:08:12.880 this off take contract that we've talked about in state solicitations, 0:08:13.440 --> 0:08:16.080 and so that takes also some costs. Now you have 0:08:16.160 --> 0:08:18.280 costs over the development lifetime. Then let's say you get 0:08:18.320 --> 0:08:21.200 to the point where you need to reach financial clothes 0:08:21.280 --> 0:08:23.720 and actually build that project. So let's talk about the 0:08:23.760 --> 0:08:27.520 equipment costs. This includes your turbines, This includes your foundations. 0:08:27.520 --> 0:08:30.200 This includes your transition pieces, which are kind of you know, 0:08:30.280 --> 0:08:33.080 the pieces that exactly what they sound like transition from 0:08:33.160 --> 0:08:35.920 the foundation into the turbine. You have your rate cables 0:08:35.920 --> 0:08:38.480 which connect the turbines to each other. You have your 0:08:38.600 --> 0:08:41.760 offshore substation which kind of collects all the power within 0:08:41.800 --> 0:08:43.439 the offshore wind farm to then get it ready to 0:08:43.480 --> 0:08:46.840 transmit to shore. Then you have your offer cable, onshore substation, 0:08:47.000 --> 0:08:48.920 et cetera, et cetera. So part of the reason why 0:08:48.960 --> 0:08:51.800 I mentioned, you know, the Netherlands and Germany is because 0:08:51.880 --> 0:08:54.600 these are markets where they pay for offshore transmission. In 0:08:54.640 --> 0:08:58.240 the US, that responsibility falls in the developer. And then 0:08:58.240 --> 0:08:59.920 of course, you know, as you're financing the project, you 0:09:00.000 --> 0:09:02.880 also have different financing costs involved with that. So if 0:09:02.920 --> 0:09:04.640 you're using project finance and you're going to go to 0:09:04.679 --> 0:09:06.640 the bank, then you have, you know, to factor in 0:09:06.920 --> 0:09:08.960 the payments that you're going to be making to pay 0:09:08.960 --> 0:09:11.280 off your loan. And if you're talking about lifetime costs, 0:09:11.280 --> 0:09:13.439 renewable energy is great because you don't have to pay 0:09:13.480 --> 0:09:15.679 for fuel costs. But that being said, you do have 0:09:15.720 --> 0:09:18.160 some O and MS, some operations and maintenance that you 0:09:18.160 --> 0:09:19.160 need to take care of as well. 0:09:19.760 --> 0:09:21.640 This seems complicated, Joe. 0:09:21.679 --> 0:09:24.080 It's so complicated. Also, you know, I have to, you know, 0:09:24.120 --> 0:09:25.439 however long it's in a while with Trace that you 0:09:25.520 --> 0:09:27.520 try to convince me to write a book, you. 0:09:27.480 --> 0:09:30.720 Know, yeah, and meet here with you. 0:09:31.160 --> 0:09:33.920 And the reason I can't do a project that's going 0:09:34.000 --> 0:09:35.840 to take two years. That's just too long. And so 0:09:35.880 --> 0:09:38.640 when I hear, oh, the process is going to be 0:09:38.640 --> 0:09:42.840 ten to fourteen years, I can't even imagine thinking about 0:09:43.080 --> 0:09:45.200 starting out a project ten to fourteen years. I can't 0:09:45.240 --> 0:09:47.600 even do a two year project. So just that blows 0:09:47.600 --> 0:09:51.960 my mind. But when you're talking about such long development timelines, 0:09:52.080 --> 0:09:56.520 it really drives home, you know how much financing costs 0:09:56.640 --> 0:09:58.520 can matter. And that's a lot of time where you're 0:09:58.520 --> 0:10:02.000 spending a lot of money on very things without revenue, 0:10:02.040 --> 0:10:06.319 and the whole math changes with the change in financing conditions. 0:10:06.480 --> 0:10:08.440 But why do you talk to us about, Okay, what 0:10:08.640 --> 0:10:12.200 are the conditions for these developers in twenty twenty three 0:10:12.640 --> 0:10:16.160 versus twenty nineteen, both in terms of the rate environment, 0:10:16.240 --> 0:10:18.680 but also just the inflation environment, the cost of labor, 0:10:18.720 --> 0:10:21.120 the cost of construction, the cost of steel for the materials, 0:10:21.160 --> 0:10:24.760 and so forth, like how much have things changed for 0:10:24.840 --> 0:10:26.400 them in four years or three years? 0:10:27.360 --> 0:10:31.240 Significantly? I actually I have those numbers when we're talking 0:10:31.320 --> 0:10:35.280 about the impact that inflation, interest rates, and also you 0:10:35.360 --> 0:10:38.160 mentioned Tracy the Inflation Reduction Act have had on the 0:10:38.240 --> 0:10:40.959 levelized cost of electricity. So what this means is this 0:10:40.960 --> 0:10:44.360 is essentially the price at which electricity must be sold 0:10:44.400 --> 0:10:46.600 in order to kind of break even, make sure your 0:10:46.600 --> 0:10:49.439 returns are met, et cetera. So in twenty twenty one, 0:10:49.480 --> 0:10:52.880 we did some analysis estimating that the LCOE for offshore 0:10:52.920 --> 0:10:56.160 win projects in the US, assuming a thirty percent investment 0:10:56.200 --> 0:10:59.640 tax credit, so this is investment tax credits as allowed 0:10:59.640 --> 0:11:03.200 in the Inflation Reduction Act was around seventy seven dollars 0:11:03.240 --> 0:11:06.840 and thirty cents. So this is assuming a thirty percent ITC. 0:11:07.480 --> 0:11:10.880 If you take into account capex and oppex rise, so 0:11:11.040 --> 0:11:15.200 opex being operational expenditure, this added around seventeen dollars per 0:11:15.240 --> 0:11:18.840 megawat hour. Then take into account interest rate hikes, that's 0:11:18.840 --> 0:11:21.400 around twenty seven dollars per megawa hour. But then we 0:11:21.440 --> 0:11:24.280 also had when the IRA came out, you know, bonus 0:11:24.320 --> 0:11:27.040 tax credits, so developers could also get plus ten percent 0:11:27.840 --> 0:11:31.480 for certain meeting certain requirements. That took down so it 0:11:31.520 --> 0:11:34.080 reduced the levelized cost of electricity by around seven dollars 0:11:34.120 --> 0:11:36.000 per meg on hour, So when we're sitting here in 0:11:36.040 --> 0:11:39.560 twenty twenty three, this means that now the LCOE assuming 0:11:39.600 --> 0:11:42.640 a forty percent investment tax credit, stands around one hundred 0:11:42.679 --> 0:11:46.120 and fourteen dollars and twenty cents per megawat hour. So 0:11:46.160 --> 0:11:48.480 you can see comparing that one fourteen to that seventy 0:11:48.520 --> 0:11:50.800 seven dollars per megawat hour number, just how much that 0:11:50.920 --> 0:11:54.240 environment has changed. And I think to highlight a couple 0:11:54.320 --> 0:11:58.000 of you know, movement pieces in terms of, you know, 0:11:58.040 --> 0:11:59.600 what this has been happened, what has been happening on 0:11:59.600 --> 0:12:03.400 a MACRII economic scale, So US CPI, So this is, 0:12:03.520 --> 0:12:05.959 you know, consumer price index average at around one point 0:12:06.040 --> 0:12:10.240 nine percent before COVID nineteen in twenty nineteen, and then 0:12:10.400 --> 0:12:12.200 if you take a look at how it peaked in 0:12:12.320 --> 0:12:15.240 twenty twenty two, it was at around nine percent, and 0:12:15.280 --> 0:12:17.280 so you can really see how that environment has shifted. 0:12:17.679 --> 0:12:20.760 Also for several projects, the secured overnight financing rate, so 0:12:20.800 --> 0:12:23.360 this is the base rate for interest rates in the US, 0:12:23.720 --> 0:12:26.800 stood at around zero percent, almost nothing in you know, 0:12:27.160 --> 0:12:30.080 kind of end twenty twenty into twenty twenty one. And 0:12:30.080 --> 0:12:31.320 then when you take a look at where it is 0:12:31.320 --> 0:12:34.160 in twenty twenty three, it's you know, around five point 0:12:34.240 --> 0:12:36.160 five percent. And so you can see just how much 0:12:36.200 --> 0:12:39.360 the base rate for you know, barring money has increased. 0:12:39.520 --> 0:12:43.440 Wow, it's like an almost fifty percent increase in the cost, 0:12:43.520 --> 0:12:46.760 which is almost perfectly tallied with the drop in or 0:12:46.760 --> 0:12:47.640 studs share price. 0:12:47.720 --> 0:12:48.319 Oh perfectly. 0:12:48.400 --> 0:12:50.520 Yeah, So if pishient markets right there? 0:13:06.960 --> 0:13:10.960 Okay, So you just laid out wonderfully all the different 0:13:11.240 --> 0:13:14.520 cost pressures that have landed on the wind industry, and 0:13:14.640 --> 0:13:18.560 I guess my question now is what levers can they 0:13:18.600 --> 0:13:22.120 pull to offset some of these? So you know, you 0:13:22.240 --> 0:13:25.720 have fixed rates on the revenue side because of those 0:13:25.760 --> 0:13:28.880 off take agreements, can they renegotiate to try to get 0:13:29.080 --> 0:13:33.640 additional money? And then on the cost side, I imagine 0:13:33.720 --> 0:13:38.920 putting together these massive wind turbines is a pretty expensive 0:13:39.120 --> 0:13:43.120 and complicated endeavor. But we have seen, for instance in 0:13:43.160 --> 0:13:46.559 the oil industry that you can do things like have 0:13:46.640 --> 0:13:50.640 standardization on components and things like that that can bring 0:13:50.800 --> 0:13:55.600 down costs. So which of these is the industry looking at, which, 0:13:55.640 --> 0:13:57.880 in your opinion, might be most effective here? 0:13:58.320 --> 0:14:01.000 So I think what comes to mind are three things. 0:14:01.080 --> 0:14:04.480 So one the first you mentioned being renegotiation. So that's 0:14:04.480 --> 0:14:07.240 what a lot of these developers have been trying to do. 0:14:07.920 --> 0:14:10.959 So far, not really any of the renegotiation attempts have 0:14:11.000 --> 0:14:14.760 been successful. We did see some green lights in New 0:14:14.840 --> 0:14:18.080 Jersey when risted requested basically being able to keep some 0:14:18.120 --> 0:14:20.880 of the upside of their federal tax credits. So traditionally 0:14:20.920 --> 0:14:24.120 in their contracts they're meant to pass down those benefits 0:14:24.400 --> 0:14:27.520 to rate payers if they're going to get any extra access. 0:14:27.760 --> 0:14:30.680 But New Jersey kind of passed a bill saying that no, 0:14:30.840 --> 0:14:33.120 this is okay, or Stead can keep the upside to 0:14:33.240 --> 0:14:36.360 make sure that project goes forward. Now, even though that 0:14:36.400 --> 0:14:39.800 bill passed and Orstad was able to receive the upside, 0:14:39.800 --> 0:14:42.560 that project still did not go through. If we take 0:14:42.600 --> 0:14:47.000 a look at renegotiation attempts in Massachusetts, the regulators had 0:14:47.000 --> 0:14:49.440 also said no, we're not willing to renegotiate, and so 0:14:49.480 --> 0:14:52.680 then we saw fines of around fifty million sixty million 0:14:52.720 --> 0:14:55.120 dollars that these developers were paying to kind of exit 0:14:55.160 --> 0:15:00.280 those agreements so that they could then rebid into future solicitations. York, 0:15:00.320 --> 0:15:04.440 we also saw regulators decline requests to increase off take prices, 0:15:04.800 --> 0:15:06.920 and so for New York. We're still waiting to see 0:15:06.920 --> 0:15:11.080 what exactly might happen. But basically renegotiating kind of opens 0:15:11.160 --> 0:15:12.600 up a whole can of worms because this is a 0:15:12.600 --> 0:15:16.320 competitive process that these developers are competing against each other for. 0:15:16.480 --> 0:15:18.440 And then the second you reopen that up to say, oh, 0:15:18.480 --> 0:15:20.440 I want a higher off take price, then that kind 0:15:20.440 --> 0:15:23.000 of calls into question the competitive nature of the award. 0:15:23.440 --> 0:15:27.120 Wait, sorry, explain that further. When you say calls into question, 0:15:27.480 --> 0:15:28.600 can you clarify that. 0:15:28.760 --> 0:15:31.080 Yeah, So, essentially, when we see something like an offshore 0:15:31.120 --> 0:15:34.080 wind solicitation, I've been using a lot of different words, solicitation, procurement. 0:15:34.080 --> 0:15:36.640 They're also known as requests for proposals RFP. Some people 0:15:36.720 --> 0:15:40.840 might call them an auction. So these are essentially developers 0:15:41.040 --> 0:15:43.880 coming in the state says I want to procure let's say, 0:15:43.880 --> 0:15:47.480 four gigawatts of electricity of offshore wind power. And so 0:15:47.560 --> 0:15:50.840 then you'll have multiple developers kind of develop a proposal 0:15:51.200 --> 0:15:53.840 with different projects. They'll say I'm developing a one gigawat project, 0:15:53.840 --> 0:15:57.040 I'm developing a five hundred megawat project, et cetera. They'll 0:15:57.080 --> 0:16:00.240 then say I'm willing to provide this project at say 0:16:00.240 --> 0:16:02.720 one hundred dollars per Mega one hour, and this project 0:16:02.760 --> 0:16:05.760 is going to commission in twenty thirty and so then 0:16:05.800 --> 0:16:07.880 you'll have all of these different elements. Now, usually in 0:16:07.920 --> 0:16:10.160 the US they'll take into account the bid price. So 0:16:10.280 --> 0:16:12.680 the lower your price, you know, the more that you 0:16:12.720 --> 0:16:14.760 can save rate payers money, and so then the better 0:16:14.800 --> 0:16:17.560 that looks. So that's usually around maybe seventy percent of 0:16:17.560 --> 0:16:20.880 the evaluation, and then you'll have thirty percent be attributed 0:16:20.880 --> 0:16:24.880 to things like environmental attributes, economic development opportunities, how much 0:16:24.960 --> 0:16:27.600 are you investing in the state, also things like project viability, 0:16:27.760 --> 0:16:31.240 developer experience, different pieces like that, but the big portion 0:16:31.440 --> 0:16:35.080 is how cheap can you sell electricity to me? And 0:16:35.160 --> 0:16:39.760 so when you have these different developers essentially saying, I 0:16:39.880 --> 0:16:42.640 can you know, sell it at this price and this 0:16:42.760 --> 0:16:44.560 is the lowest one that or this is the most 0:16:44.600 --> 0:16:47.600 attractive one that the state selected, you award it, and 0:16:47.600 --> 0:16:50.000 then a couple of years later you say, oh, I 0:16:50.080 --> 0:16:52.960 need an increase. Then that calls into question, Okay, what 0:16:53.000 --> 0:16:55.120 about the previous developers that lost out in the auction? 0:16:55.360 --> 0:16:57.680 Were they bidding at a price because perhaps they had, 0:16:57.880 --> 0:17:00.920 you know, less optimistic assumptions about what the future would 0:17:00.920 --> 0:17:03.680 be like and other math was better exactly right. So 0:17:03.840 --> 0:17:06.880 when you think about contingency planning things like that, it's 0:17:06.920 --> 0:17:08.719 good to have an optimistic view of the future. But 0:17:08.760 --> 0:17:12.040 when the optimistic view doesn't actually end up happening, then 0:17:12.119 --> 0:17:14.639 that kind of, you know, makes it a little bit 0:17:14.680 --> 0:17:15.720 more more difficult. 0:17:15.960 --> 0:17:19.520 And what about on the supply side, like the component idea, 0:17:19.600 --> 0:17:22.280 how much can be squeezed out of costs there? 0:17:23.320 --> 0:17:25.480 That is a great question. So a lot of the 0:17:25.480 --> 0:17:28.920 cost declines we've seen in offshore wind has been due 0:17:28.920 --> 0:17:33.320 to increasing sizes in turbines. And so what that means 0:17:33.440 --> 0:17:35.560 is that as a turbine gets bigger, that means that 0:17:35.760 --> 0:17:39.359 oftentimes you need less turbines for the same amount of output. 0:17:39.640 --> 0:17:41.720 So for you know, a one gig go out wind farm, 0:17:41.760 --> 0:17:43.840 you need less turbines. If you have bigger turbines at 0:17:43.880 --> 0:17:46.639 higher rated capacities, you also need less array cables to 0:17:46.640 --> 0:17:51.199 interconnect them, less foundations, oftentimes less vessel trips needed to 0:17:51.720 --> 0:17:53.520 you know, go in and install the turbines because there's 0:17:53.520 --> 0:17:56.119 fewer of them. So with that being said, you know, 0:17:56.359 --> 0:18:00.000 sometimes when you have this longer runway for offshore wind development, 0:18:00.000 --> 0:18:02.120 and that means oh okay, well, I have a little 0:18:02.160 --> 0:18:05.000 bit longer time to kind of pick the biggest, newest 0:18:05.000 --> 0:18:08.159 technology that is going to allow for cost savings on 0:18:08.200 --> 0:18:10.840 a permegawap basis. Now that being said, a lot of 0:18:10.880 --> 0:18:13.520 these projects that have been raising red flags are a 0:18:13.560 --> 0:18:16.120 little bit more in the later stages and so kind 0:18:16.119 --> 0:18:18.840 of you know, reconfiguring and getting the newest and biggest 0:18:18.880 --> 0:18:22.440 turbine or signing new supplier agreements and you know, trying 0:18:22.440 --> 0:18:24.120 to figure out where to squeeze can be a little 0:18:24.119 --> 0:18:27.480 bit more challenging because oftentimes a lot of these supplier 0:18:27.520 --> 0:18:30.720 agreements are already being put in place or have already 0:18:30.800 --> 0:18:32.560 been put in place. So this was the case for 0:18:32.680 --> 0:18:34.680 ocean Wind one and two, where if you take a 0:18:34.720 --> 0:18:37.639 look at orsted's impairment, the vast majority of it was 0:18:37.720 --> 0:18:41.080 due to supply chain complications, mostly in Ocean Wind one, 0:18:41.400 --> 0:18:44.000 and this is because they experience kind of knock on 0:18:44.080 --> 0:18:47.679 effects from delays and kind of scheduling issues that they 0:18:47.680 --> 0:18:51.280 were having with suppliers, predominantly with vessels, and so there 0:18:51.400 --> 0:18:54.199 is some wiggle room that you can do with reconfiguration 0:18:54.640 --> 0:18:58.240 and redesigning. You know, the project we have seen you know, 0:18:58.680 --> 0:19:00.960 I mean or stead mentioned for their skins Jack projects 0:19:00.960 --> 0:19:03.880 in Maryland that they are revisiting some reconfiguration to see 0:19:03.880 --> 0:19:06.520 if they can, you know, make the project as valuable 0:19:06.560 --> 0:19:09.199 as possible. But that being said, for some projects it's 0:19:09.240 --> 0:19:12.320 not always possible. Sometimes you reconfigure as much as you 0:19:12.359 --> 0:19:14.560 can until you kind of have to make a final 0:19:14.600 --> 0:19:17.639 investment decision. And for some projects you you have less runway. 0:19:17.680 --> 0:19:19.479 So if you're early on in the development process, then 0:19:19.480 --> 0:19:21.760 you have more leeway to shift, you know, your designs 0:19:22.240 --> 0:19:25.000 and change your suppliers. But if you're later on, it's 0:19:25.040 --> 0:19:26.000 a little bit more challenging. 0:19:26.320 --> 0:19:29.760 So you mentioned the supply chains, and the big stress 0:19:29.760 --> 0:19:31.640 point has actually been the vessels. 0:19:31.880 --> 0:19:33.800 For Orsted's Ocean Win one and two. 0:19:33.800 --> 0:19:35.920 That's what they mentioned that It was that the one 0:19:36.040 --> 0:19:38.080 off of that was going to be off of New Jersey. Yes, 0:19:38.280 --> 0:19:41.399 and wait, what's the vessel constraint? Is it actually the 0:19:41.480 --> 0:19:42.120 number of ship? 0:19:42.560 --> 0:19:42.760 Yeah? 0:19:42.800 --> 0:19:43.520 What's going on there? 0:19:43.880 --> 0:19:44.200 Yeah? 0:19:44.240 --> 0:19:45.320 So the US. 0:19:45.359 --> 0:19:48.359 Has essentially this law called the Jones Act. I'm not 0:19:48.359 --> 0:19:49.480 sure you guys familiar. 0:19:50.080 --> 0:19:50.959