Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 2: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 1: Tracy, I have to say, there are a lot of
Speaker 1: exciting things happening in energy, decarbonization, electrification of the grid,
Speaker 1: things we've talked about recently with people like Jigger Shaw
Speaker 1: and so forth. But I have to say I keep
Speaker 1: seeing negative headlines about wind.
Speaker 3: Oh my gosh.
Speaker 2: You know, just before we came in studio to record this,
Speaker 2: I was taking a look at the SMP Global Clean
Speaker 2: Energy Index. Yeah, it's down thirty percent this year, more
Speaker 2: than thirty percent this year, and a lot of that
Speaker 2: is thanks to what's been going on in wind.
Speaker 4: Yeah.
Speaker 2: In fact, if you look at Orsted, which I think
Speaker 2: is the world's biggest provider of offshore wind farms, it's
Speaker 2: down fifty percent year to date.
Speaker 1: Yes, So we are recording this November fifth teenth. I
Speaker 1: think just earlier in the week, two top Orsted executives
Speaker 1: departed the company. I think there was a project off
Speaker 1: the shore of I think New Jersey that they that
Speaker 1: recently the plug was pulled on. And it just seems
Speaker 1: that every story everywhere around the world, with the exception
Speaker 1: maybe of China. It seems to be something seems to
Speaker 1: be wrong, whether it's the math doesn't pencil out on
Speaker 1: the actual projects themselves. There are companies, I think Siemens
Speaker 1: wind has had all kinds of manufacturing issues with respect
Speaker 1: to turbines, et cetera. And so just trying to understand
Speaker 1: what is going on with this industry and how bad
Speaker 1: is it in terms of if it's not going as
Speaker 1: planned reaching our decarbonization goals as a country.
Speaker 2: Yeah, So my understanding is there are two things kind
Speaker 2: of happening at once. You could say, two headwinds for
Speaker 2: the wind power industry creating a perfect storm.
Speaker 1: Joe, I'm just going to say, so a perfect storm
Speaker 1: would be good for wind.
Speaker 2: I'm just going to get as many weather puns I
Speaker 2: can into this conversation. But there's higher borrowing costs because
Speaker 2: of surging interest rates, and then there are also higher
Speaker 2: component costs. Yes, And I guess my question is how
Speaker 2: much of all of this is sort of growing pains
Speaker 2: for an industry that, at least in the US is
Speaker 2: still relatively new, although it is true that it's also
Speaker 2: facing problems in places like the UK. Or is this
Speaker 2: a kind of permanent change in the industry's trajection. Basically,
Speaker 2: is wind power a low interest rate phenomenon, like I
Speaker 2: don't know, we work or cheaper ubers?
Speaker 1: Is wind power a lot of hot air? So you know,
Speaker 1: you mentioned the renewable energy stocks and that is sort
Speaker 1: of another I don't know funny is the right word.
Speaker 1: But we're having this great year in the stock market
Speaker 1: so far, and how many people would have bed It's like, Oh,
Speaker 1: the Inflation Reduction Act passed, all this money pouring into
Speaker 1: renewable energy, all these incentives, can't lose betting on these
Speaker 1: and win and I think solar, I mean, it's been
Speaker 1: pretty dismal.
Speaker 2: Yeah, please, doc, absolutely, and wind especially was like a
Speaker 2: much hyped component of the renewable energy revolution, and you're
Speaker 2: right with the Inflation Reduction Act. There is this question
Speaker 2: about how much of this is a temporary hold up
Speaker 2: given permitting issues that we've discussed with people like Chicker
Speaker 2: versus how much of this is the math just doesn't
Speaker 2: pencil out. There is something fundamentally challenging in Win.
Speaker 1: Lots of questions, and we have the perfect guest to
Speaker 1: get the answers. We're going to be speaking with Chelsea
Speaker 1: Jean Michelle she is an offshore wind analyst here at
Speaker 1: Bloomberg n EF, one of our colleagues on a different floor.
Speaker 1: So excited to check Chelsea. Thank you so much for
Speaker 1: coming on odd Laws.
Speaker 5: Thanks so much for having me Joan Jacy.
Speaker 1: Is our premise correct more or less that it's been
Speaker 1: a just dismal year for the industry.
Speaker 5: I think dismal is a bit of a big word
Speaker 5: to use, but you know, it hasn't It hasn't been great,
Speaker 5: and there have been a lot of negative headlines, and
Speaker 5: you guys highlighted a lot of the key issues already.
Speaker 5: I think maybe to highlight at a grander scale, we
Speaker 5: have seen a lot of the impacts, most most saliently
Speaker 5: in the US. And Tracy, you mentioned you know it's
Speaker 5: a very like new industry in the US. For contexts,
Speaker 5: there's only seven operational turbines forty two megawatts installed. However,
Speaker 5: there are two offshore wind farms currently under construction right
Speaker 5: now almost a gigawatt, So the industry is growing. But
Speaker 5: we've also seen over twelve gigawatts of offshore wind projects
Speaker 5: seek to cancel or renegotiate their off take contracts in
Speaker 5: the US. Now, what I mean when I say an
Speaker 5: off take contract is that's typically an agreement that these
Speaker 5: offshore wind developers, their projects will sign with states state
Speaker 5: utilities to essentially guarantee that they're going to buy their
Speaker 5: power for usually around twenty to twenty five years. And
Speaker 5: that's really key for an offshore win project because they
Speaker 5: need you know, you have variable generation, so if you
Speaker 5: can't guarantee your generation, you can guarantee the price at
Speaker 5: which that generation is sold, and that makes it easier
Speaker 5: for these projects to you know, reach financial clothes make
Speaker 5: a business case for them. Now in the US, this
Speaker 5: is interesting because this happens a little bit earlier on
Speaker 5: in a project's process. So in the UK, before you
Speaker 5: bid for an off date contract, you need to have
Speaker 5: a grid connection agreement. You also need to have your permits.
Speaker 5: In in the US that's not needed, and so you
Speaker 5: might have a couple of years when between when you
Speaker 5: lock in your off date contract until you finally reach
Speaker 5: financial clothes and then you want to construct and build
Speaker 5: the project. So that leads to a certain level of
Speaker 5: risk that's a little bit higher in the US than
Speaker 5: you've see in other parts of the world. And that's
Speaker 5: also why you know we've seen just how much interest
Speaker 5: rates have shifted over the last few years, how much
Speaker 5: inflation has changed, and that has meant that now when
Speaker 5: these projects are looking to reach financial clothes, they're in
Speaker 5: a different macroeconomic environment than when they had initially placed
Speaker 5: their bids and made those assumptions back in twenty nineteen,
Speaker 5: twenty twenty.
Speaker 2: Oh, that's really interesting because I was wondering how higher
Speaker 2: rates are actually feeding into a lot of those given
Speaker 2: you would have assumed that the financing was in place,
Speaker 2: but you're highlighting the discrepancy between the revenue coming in
Speaker 2: the off take agreements and the financing that is still
Speaker 2: coming up in the higher interest rate environment. So, just
Speaker 2: on this note, could you maybe tell us like the
Speaker 2: factors or the calculations that go into creating a wind farm,
Speaker 2: whether it's onshore or offshore. Like, if Joe and I
Speaker 2: were at a bar and we were writing on a napkin,
Speaker 2: here's our rough cost and here's like our rough revenue source,
Speaker 2: what would that napkin actually contain.
Speaker 5: Yeah, So there's a lot that goes into it, and
Speaker 5: it depends on you know, if you're building in the
Speaker 5: US versus if you're building say in the Netherlands.
Speaker 1: Or in Germany, but we're building in the US.
Speaker 5: We're building in the US. Yeah, so if we're building
Speaker 5: in the US right for context, offshore wind development takes
Speaker 5: a really long time. As I mentioned, there's very few
Speaker 5: projects currently operational operational in the US right now, but
Speaker 5: around eight to ten years is what we see globally.
Speaker 5: But in the US, you know, this can take as
Speaker 5: long as fourteen years. We've seen that for some other
Speaker 5: projects that are currently in the process of getting built
Speaker 5: right now. Or when you take a look at that
Speaker 5: really long process, one of the first things you think
Speaker 5: about is, okay, so that's like ten years where you
Speaker 5: have like development costs going in, right, so you need
Speaker 5: the people that are going to help formulate the bids.
Speaker 5: In the US, you have a seabed lease auction. So
Speaker 5: this is usually the first step in the process where
Speaker 5: you're like, I want to acquire my seabed for X
Speaker 5: amount of dollars. We recently saw the New York by
Speaker 5: at lease auction last year millions and millions of dollars
Speaker 5: of revenue for the US government over four billion dollars
Speaker 5: to secure these sites. And that's just step one. And
Speaker 5: then you also have.
Speaker 2: Can I ask really quickly to shore the US government
Speaker 2: own all those sea.
Speaker 5: Beds on the outer continental shelf? They do, Okay, However,
Speaker 5: that being said, I think it's three nautical miles that's
Speaker 5: state waters, but most offshore wind development is going to
Speaker 5: take place in federal waters.
Speaker 2: Ah, yes, I remember those from my offshore gambling days.
Speaker 5: But yeah, So that's like a cost you can expect
Speaker 5: to pay for the seabed. Then you have kind of
Speaker 5: other development costs when it comes to you know, fitting
Speaker 5: into an offshore and off shore wind procurement or bidding
Speaker 5: into an offhr wind solicitation. So this is where you
Speaker 5: go in to say, I will bid X price, I
Speaker 5: will bid Y price, I'll bid Z price for you know,
Speaker 5: this off take contract that we've talked about in state solicitations,
Speaker 5: and so that takes also some costs. Now you have
Speaker 5: costs over the development lifetime. Then let's say you get
Speaker 5: to the point where you need to reach financial clothes
Speaker 5: and actually build that project. So let's talk about the
Speaker 5: equipment costs. This includes your turbines, This includes your foundations.
Speaker 5: This includes your transition pieces, which are kind of you know,
Speaker 5: the pieces that exactly what they sound like transition from
Speaker 5: the foundation into the turbine. You have your rate cables
Speaker 5: which connect the turbines to each other. You have your
Speaker 5: offshore substation which kind of collects all the power within
Speaker 5: the offshore wind farm to then get it ready to
Speaker 5: transmit to shore. Then you have your offer cable, onshore substation,
Speaker 5: et cetera, et cetera. So part of the reason why
Speaker 5: I mentioned, you know, the Netherlands and Germany is because
Speaker 5: these are markets where they pay for offshore transmission. In
Speaker 5: the US, that responsibility falls in the developer. And then
Speaker 5: of course, you know, as you're financing the project, you
Speaker 5: also have different financing costs involved with that. So if
Speaker 5: you're using project finance and you're going to go to
Speaker 5: the bank, then you have, you know, to factor in
Speaker 5: the payments that you're going to be making to pay
Speaker 5: off your loan. And if you're talking about lifetime costs,
Speaker 5: renewable energy is great because you don't have to pay
Speaker 5: for fuel costs. But that being said, you do have
Speaker 5: some O and MS, some operations and maintenance that you
Speaker 5: need to take care of as well.
Speaker 3: This seems complicated, Joe.
Speaker 1: It's so complicated. Also, you know, I have to, you know,
Speaker 1: however long it's in a while with Trace that you
Speaker 1: try to convince me to write a book, you.
Speaker 3: Know, yeah, and meet here with you.
Speaker 1: And the reason I can't do a project that's going
Speaker 1: to take two years. That's just too long. And so
Speaker 1: when I hear, oh, the process is going to be
Speaker 1: ten to fourteen years, I can't even imagine thinking about
Speaker 1: starting out a project ten to fourteen years. I can't
Speaker 1: even do a two year project. So just that blows
Speaker 1: my mind. But when you're talking about such long development timelines,
Speaker 1: it really drives home, you know how much financing costs
Speaker 1: can matter. And that's a lot of time where you're
Speaker 1: spending a lot of money on very things without revenue,
Speaker 1: and the whole math changes with the change in financing conditions.
Speaker 1: But why do you talk to us about, Okay, what
Speaker 1: are the conditions for these developers in twenty twenty three
Speaker 1: versus twenty nineteen, both in terms of the rate environment,
Speaker 1: but also just the inflation environment, the cost of labor,
Speaker 1: the cost of construction, the cost of steel for the materials,
Speaker 1: and so forth, like how much have things changed for
Speaker 1: them in four years or three years?
Speaker 5: Significantly? I actually I have those numbers when we're talking
Speaker 5: about the impact that inflation, interest rates, and also you
Speaker 5: mentioned Tracy the Inflation Reduction Act have had on the
Speaker 5: levelized cost of electricity. So what this means is this
Speaker 5: is essentially the price at which electricity must be sold
Speaker 5: in order to kind of break even, make sure your
Speaker 5: returns are met, et cetera. So in twenty twenty one,
Speaker 5: we did some analysis estimating that the LCOE for offshore
Speaker 5: win projects in the US, assuming a thirty percent investment
Speaker 5: tax credit, so this is investment tax credits as allowed
Speaker 5: in the Inflation Reduction Act was around seventy seven dollars
Speaker 5: and thirty cents. So this is assuming a thirty percent ITC.
Speaker 5: If you take into account capex and oppex rise, so
Speaker 5: opex being operational expenditure, this added around seventeen dollars per
Speaker 5: megawat hour. Then take into account interest rate hikes, that's
Speaker 5: around twenty seven dollars per megawa hour. But then we
Speaker 5: also had when the IRA came out, you know, bonus
Speaker 5: tax credits, so developers could also get plus ten percent
Speaker 5: for certain meeting certain requirements. That took down so it
Speaker 5: reduced the levelized cost of electricity by around seven dollars
Speaker 5: per meg on hour, So when we're sitting here in
Speaker 5: twenty twenty three, this means that now the LCOE assuming
Speaker 5: a forty percent investment tax credit, stands around one hundred
Speaker 5: and fourteen dollars and twenty cents per megawat hour. So
Speaker 5: you can see comparing that one fourteen to that seventy
Speaker 5: seven dollars per megawat hour number, just how much that
Speaker 5: environment has changed. And I think to highlight a couple
Speaker 5: of you know, movement pieces in terms of, you know,
Speaker 5: what this has been happened, what has been happening on
Speaker 5: a MACRII economic scale, So US CPI, So this is,
Speaker 5: you know, consumer price index average at around one point
Speaker 5: nine percent before COVID nineteen in twenty nineteen, and then
Speaker 5: if you take a look at how it peaked in
Speaker 5: twenty twenty two, it was at around nine percent, and
Speaker 5: so you can really see how that environment has shifted.
Speaker 5: Also for several projects, the secured overnight financing rate, so
Speaker 5: this is the base rate for interest rates in the US,
Speaker 5: stood at around zero percent, almost nothing in you know,
Speaker 5: kind of end twenty twenty into twenty twenty one. And
Speaker 5: then when you take a look at where it is
Speaker 5: in twenty twenty three, it's you know, around five point
Speaker 5: five percent. And so you can see just how much
Speaker 5: the base rate for you know, barring money has increased.
Speaker 2: Wow, it's like an almost fifty percent increase in the cost,
Speaker 2: which is almost perfectly tallied with the drop in or
Speaker 2: studs share price.
Speaker 1: Oh perfectly.
Speaker 3: Yeah, So if pishient markets right there?
Speaker 2: Okay, So you just laid out wonderfully all the different
Speaker 2: cost pressures that have landed on the wind industry, and
Speaker 2: I guess my question now is what levers can they
Speaker 2: pull to offset some of these? So you know, you
Speaker 2: have fixed rates on the revenue side because of those
Speaker 2: off take agreements, can they renegotiate to try to get
Speaker 2: additional money? And then on the cost side, I imagine
Speaker 2: putting together these massive wind turbines is a pretty expensive
Speaker 2: and complicated endeavor. But we have seen, for instance in
Speaker 2: the oil industry that you can do things like have
Speaker 2: standardization on components and things like that that can bring
Speaker 2: down costs. So which of these is the industry looking at, which,
Speaker 2: in your opinion, might be most effective here?
Speaker 5: So I think what comes to mind are three things.
Speaker 5: So one the first you mentioned being renegotiation. So that's
Speaker 5: what a lot of these developers have been trying to do.
Speaker 5: So far, not really any of the renegotiation attempts have
Speaker 5: been successful. We did see some green lights in New
Speaker 5: Jersey when risted requested basically being able to keep some
Speaker 5: of the upside of their federal tax credits. So traditionally
Speaker 5: in their contracts they're meant to pass down those benefits
Speaker 5: to rate payers if they're going to get any extra access.
Speaker 5: But New Jersey kind of passed a bill saying that no,
Speaker 5: this is okay, or Stead can keep the upside to
Speaker 5: make sure that project goes forward. Now, even though that
Speaker 5: bill passed and Orstad was able to receive the upside,
Speaker 5: that project still did not go through. If we take
Speaker 5: a look at renegotiation attempts in Massachusetts, the regulators had
Speaker 5: also said no, we're not willing to renegotiate, and so
Speaker 5: then we saw fines of around fifty million sixty million
Speaker 5: dollars that these developers were paying to kind of exit
Speaker 5: those agreements so that they could then rebid into future solicitations. York,
Speaker 5: we also saw regulators decline requests to increase off take prices,
Speaker 5: and so for New York. We're still waiting to see
Speaker 5: what exactly might happen. But basically renegotiating kind of opens
Speaker 5: up a whole can of worms because this is a
Speaker 5: competitive process that these developers are competing against each other for.
Speaker 5: And then the second you reopen that up to say, oh,
Speaker 5: I want a higher off take price, then that kind
Speaker 5: of calls into question the competitive nature of the award.
Speaker 1: Wait, sorry, explain that further. When you say calls into question,
Speaker 1: can you clarify that.
Speaker 5: Yeah, So, essentially, when we see something like an offshore
Speaker 5: wind solicitation, I've been using a lot of different words, solicitation, procurement.
Speaker 5: They're also known as requests for proposals RFP. Some people
Speaker 5: might call them an auction. So these are essentially developers
Speaker 5: coming in the state says I want to procure let's say,
Speaker 5: four gigawatts of electricity of offshore wind power. And so
Speaker 5: then you'll have multiple developers kind of develop a proposal
Speaker 5: with different projects. They'll say I'm developing a one gigawat project,
Speaker 5: I'm developing a five hundred megawat project, et cetera. They'll
Speaker 5: then say I'm willing to provide this project at say
Speaker 5: one hundred dollars per Mega one hour, and this project
Speaker 5: is going to commission in twenty thirty and so then
Speaker 5: you'll have all of these different elements. Now, usually in
Speaker 5: the US they'll take into account the bid price. So
Speaker 5: the lower your price, you know, the more that you
Speaker 5: can save rate payers money, and so then the better
Speaker 5: that looks. So that's usually around maybe seventy percent of
Speaker 5: the evaluation, and then you'll have thirty percent be attributed
Speaker 5: to things like environmental attributes, economic development opportunities, how much
Speaker 5: are you investing in the state, also things like project viability,
Speaker 5: developer experience, different pieces like that, but the big portion
Speaker 5: is how cheap can you sell electricity to me? And
Speaker 5: so when you have these different developers essentially saying, I
Speaker 5: can you know, sell it at this price and this
Speaker 5: is the lowest one that or this is the most
Speaker 5: attractive one that the state selected, you award it, and
Speaker 5: then a couple of years later you say, oh, I
Speaker 5: need an increase. Then that calls into question, Okay, what
Speaker 5: about the previous developers that lost out in the auction?
Speaker 5: Were they bidding at a price because perhaps they had,
Speaker 5: you know, less optimistic assumptions about what the future would
Speaker 5: be like and other math was better exactly right. So
Speaker 5: when you think about contingency planning things like that, it's
Speaker 5: good to have an optimistic view of the future. But
Speaker 5: when the optimistic view doesn't actually end up happening, then
Speaker 5: that kind of, you know, makes it a little bit
Speaker 5: more more difficult.
Speaker 2: And what about on the supply side, like the component idea,
Speaker 2: how much can be squeezed out of costs there?
Speaker 5: That is a great question. So a lot of the
Speaker 5: cost declines we've seen in offshore wind has been due
Speaker 5: to increasing sizes in turbines. And so what that means
Speaker 5: is that as a turbine gets bigger, that means that
Speaker 5: oftentimes you need less turbines for the same amount of output.
Speaker 5: So for you know, a one gig go out wind farm,
Speaker 5: you need less turbines. If you have bigger turbines at
Speaker 5: higher rated capacities, you also need less array cables to
Speaker 5: interconnect them, less foundations, oftentimes less vessel trips needed to
Speaker 5: you know, go in and install the turbines because there's
Speaker 5: fewer of them. So with that being said, you know,
Speaker 5: sometimes when you have this longer runway for offshore wind development,
Speaker 5: and that means oh okay, well, I have a little
Speaker 5: bit longer time to kind of pick the biggest, newest
Speaker 5: technology that is going to allow for cost savings on
Speaker 5: a permegawap basis. Now that being said, a lot of
Speaker 5: these projects that have been raising red flags are a
Speaker 5: little bit more in the later stages and so kind
Speaker 5: of you know, reconfiguring and getting the newest and biggest
Speaker 5: turbine or signing new supplier agreements and you know, trying
Speaker 5: to figure out where to squeeze can be a little
Speaker 5: bit more challenging because oftentimes a lot of these supplier
Speaker 5: agreements are already being put in place or have already
Speaker 5: been put in place. So this was the case for
Speaker 5: ocean Wind one and two, where if you take a
Speaker 5: look at orsted's impairment, the vast majority of it was
Speaker 5: due to supply chain complications, mostly in Ocean Wind one,
Speaker 5: and this is because they experience kind of knock on
Speaker 5: effects from delays and kind of scheduling issues that they
Speaker 5: were having with suppliers, predominantly with vessels, and so there
Speaker 5: is some wiggle room that you can do with reconfiguration
Speaker 5: and redesigning. You know, the project we have seen you know,
Speaker 5: I mean or stead mentioned for their skins Jack projects
Speaker 5: in Maryland that they are revisiting some reconfiguration to see
Speaker 5: if they can, you know, make the project as valuable
Speaker 5: as possible. But that being said, for some projects it's
Speaker 5: not always possible. Sometimes you reconfigure as much as you
Speaker 5: can until you kind of have to make a final
Speaker 5: investment decision. And for some projects you you have less runway.
Speaker 5: So if you're early on in the development process, then
Speaker 5: you have more leeway to shift, you know, your designs
Speaker 5: and change your suppliers. But if you're later on, it's
Speaker 5: a little bit more challenging.
Speaker 1: So you mentioned the supply chains, and the big stress
Speaker 1: point has actually been the vessels.
Speaker 5: For Orsted's Ocean Win one and two.
Speaker 1: That's what they mentioned that It was that the one
Speaker 1: off of that was going to be off of New Jersey. Yes,
Speaker 1: and wait, what's the vessel constraint? Is it actually the
Speaker 1: number of ship?
Speaker 3: Yeah?
Speaker 1: What's going on there?
Speaker 5: Yeah?
Speaker 3: So the US.
Speaker 5: Has essentially this law called the Jones Act. I'm not
Speaker 5: sure you guys familiar.
Speaker 4: Yes, we love it.
Speaker 2: It always comes back, It always comes back to the
Speaker 2: Jones Act.
Speaker 3: No, we've done I've done a couple episodes.
Speaker 1: I had no idea this is going to turn into
Speaker 1: a Joneses Act episode.
Speaker 5: Now I'm reallycas so I have my own personal feelings
Speaker 5: about it, but that aside.
Speaker 1: I've noticed, by the way, like on social media, that's
Speaker 1: one of the most hot button topics that you can
Speaker 1: talk about. So you never never say anything about the
Speaker 1: Jones Act online whatever. People have a really strong opinion.
Speaker 5: Okay, sorry, I mean it's a hot button topic. So essentially, basically,
Speaker 5: if you are traveling between two points in the US,
Speaker 5: then that ship has to be US built, US crewed,
Speaker 5: US flag, and what that means for offshore wind is
Speaker 5: that that offshore wind farm counts as a point. And
Speaker 5: so the US has you know, I mentioned seven turbines
Speaker 5: currently installed, two projects currently under construction. But what happens is,
Speaker 5: because of the Jones Act, you either have to have
Speaker 5: a Jones Act compliant you know, vessel that can do
Speaker 5: that transportation. That doesn't exist in the US right now.
Speaker 5: Currently there's only one wind turbine installation vessel that Dominion
Speaker 5: is building right now.
Speaker 3: I'm getting dredging.
Speaker 1: Oh my god, this is so amazing. It all comes
Speaker 1: full circle.
Speaker 5: So, yeah, there's only one vessel currently under construction right now,
Speaker 5: and that's not going to be ready until a few
Speaker 5: years from now. And Dominion's planning on using that on
Speaker 5: their two point six Gagua Coastal Virginia afsher wind projects.
Speaker 5: That's set to be the largest in the US when
Speaker 5: it commissions, one of the largest in the world, which
Speaker 5: is great for them, but for other projects. Orstead was
Speaker 5: actually hoping to use this for their Sunrise Wind and
Speaker 5: Revolution Wind projects, but now that the vessel has been delayed,
Speaker 5: they are no longer able to use that Jones Act
Speaker 5: compliant winterbine installation vessel. So another thing that you can
Speaker 5: consider doing is using a European wind turbine installation vessel
Speaker 5: and then using a kind of like feeder barge method,
Speaker 5: and so this is what a lot of US austr
Speaker 5: WIN projects are hoping to do. Essentially, the feeder barges
Speaker 5: are Jones ACT compliant and you feed in the components
Speaker 5: to the European vessel that stays at the offshore wind site.
Speaker 5: This is traditionally not how projects are installed in Europe
Speaker 5: as you might imagine. Usually the European WTIV will go
Speaker 5: to the port, pick up the components loaded up, go
Speaker 5: to site and then install the component, and so you
Speaker 5: kind of have this mish mash way of doing things.
Speaker 5: And then the last one that we don't really expect
Speaker 5: to see because it's super expensive, but you might stage
Speaker 5: your components in say Canada, and then use EUROPEANATIV and
Speaker 5: then go get the components and then install them. So
Speaker 5: the Jones Act has essentially created a situation where so
Speaker 5: many vessels involved in the Austra wind installation process need
Speaker 5: to be built here and right now there's only one.
Speaker 5: So that's a huge constraint.
Speaker 2: Joe, I dare you to tweet that the Jones Act
Speaker 2: causes pollution and adds to the US's carbon load by
Speaker 2: denying wind energy.
Speaker 1: I'll tweet it from my out locked all too account
Speaker 1: that nobody knows about.
Speaker 2: Okay, but this actually leads nicely into another question. Just
Speaker 2: going back to the IRA, A lot of this sounds
Speaker 2: like difficulty with how the US system is set up
Speaker 2: for wind power. So you have the ship constraints via
Speaker 2: the Jones Act that you just described, and then you
Speaker 2: have the permitting process, which can all be difficult. You
Speaker 2: have the sort of time discrepancy between when the off
Speaker 2: take agreements are agreed and when the financing is actually secured,
Speaker 2: which is different to other countries, different types of subsidies
Speaker 2: and things like that. How much can the government do
Speaker 2: to alleviate some of these pressures? And then on the
Speaker 2: IRA specifically setting the griping aside about the permitting process,
Speaker 2: what does it actually do to help win power here?
Speaker 2: Does the existence of a very large underwriter in the
Speaker 2: form of the US government provide some certainty to the
Speaker 2: industry at a time when it seems like there are
Speaker 2: a lot of challenges.
Speaker 5: Yeah, so I think that you mentioned like what can
Speaker 5: governments do? So I think going back to one of
Speaker 5: your initial questions that I think that I'd ended up
Speaker 5: missing at some point. Starting at the state level, what
Speaker 5: states have begun to do is starting to introduce inflation
Speaker 5: adjustment mechanisms in their off take contracts. And so the US,
Speaker 5: I mentioned having that timeline between being so long between
Speaker 5: you know, when you agree with that off take to
Speaker 5: the off take price and then when you actually finance
Speaker 5: the project being really long. That makes it really risky.
Speaker 5: But also another piece is that the US off take
Speaker 5: contracts are not indexed to inflation, and so what that
Speaker 5: means is that in the UK, in Poland partially in Ireland.
Speaker 5: Over the twenty you know, fifteen twenty twenty five year
Speaker 5: off take contract lifetime, the price might go up by
Speaker 5: a certain percentage that is usually up by inflation. In
Speaker 5: the US, these projects bid at like a flat price
Speaker 5: or at a set escalator, say two or three percent.
Speaker 5: And so again, given the shifts that we've seen in
Speaker 5: the environment over the last few years, this means that
Speaker 5: these projects are not nearly as protected as they are elsewhere.
Speaker 5: And so states have been starting to say, Okay, we're
Speaker 5: not necessarily going to index this price over the lifetime
Speaker 5: of the contract, but we will say we'll give you
Speaker 5: a one time and adjustment mechanism. And so in New York,
Speaker 5: what this means is from the time that you bid
Speaker 5: until the time you receive your final f federal permits,
Speaker 5: your price will be indexed to metrics like steal labor, fuel, copper,
Speaker 5: different pieces like this to help kind of protect the
Speaker 5: developers a little bit more and stave off a little
Speaker 5: bit more of that risk. So that's one beneficial thing
Speaker 5: that we've seen kind of help in this way at
Speaker 5: the state level. Now the federal level, for the Inflation
Speaker 5: Reduction Act, a lot of the big drivers for offshra
Speaker 5: wind have you know, has been at the state level.
Speaker 5: And so you know, the Biden administration came out with
Speaker 5: a thirty gigawatts offsh win by twenty thirty goal a
Speaker 5: few years ago, and that's a good sign for the industry.
Speaker 5: But in reality, these off take agreements that are really
Speaker 5: what you know, these developers need a guarantee of like
Speaker 5: route to market and you know, a future for like
Speaker 5: how much build is going to be is there going
Speaker 5: to be in the future, you know, that kind of
Speaker 5: long term certainty, that's what the states have really been giving.
Speaker 5: And so the Biden administration's goal, while a good sign
Speaker 5: also just for contexts at Bloomberg NIF in our.
Speaker 3: Class, didn't one of your colleagues call it a pipe dream.
Speaker 5: One of my colleagues did call it of vibreed. And
Speaker 5: you know, part of the reasons for that is because
Speaker 5: we've never once forecasted that the US was going to
Speaker 5: meet this goal even before it came out. But it
Speaker 5: is a good sign for the industry just to kind
Speaker 5: of you know, hammer that home. The ambition is good,
Speaker 5: but it doesn't look like it's realistic. And in our
Speaker 5: latest forecast, it looks more likely that it's going to
Speaker 5: be half of that.
Speaker 2: Wow.
Speaker 5: And for the Inflation Reduction Act, I think that the
Speaker 5: tax credits that are included in it are a very
Speaker 5: good sign. They help kind of decrease the price of
Speaker 5: offter wind, on ture wind, entre renewables in general, right,
Speaker 5: and so it becomes a more attractive space to certain investors.
Speaker 5: Let's say, but offshore wind is one of the most
Speaker 5: expensive renewable energy technologies out there, and so when we
Speaker 5: take the look at why developers and countries are building it,
Speaker 5: it's not necessarily because you know, it's the cheapest, you know,
Speaker 5: form of electricity. Offter wind has super high capacity factors.
Speaker 5: And so what that means is that essentially, if you
Speaker 5: take the entire year and assume a wind farm is
Speaker 5: generating at one hundred percent, the wind speeds are like
Speaker 5: ideal generation is at one hundred percent. But then you
Speaker 5: actually take the actual generation, so you know, sometimes wind
Speaker 5: is variable and wind speeds are lower, and the turbines,
Speaker 5: you know, aren't spinning always at high speed all the time.
Speaker 5: There's some curtailment. Perhaps that percentage of the year which
Speaker 5: it's like fully operational is the capacity factor. And so
Speaker 5: for solar, where you might have a capacity factor like
Speaker 5: twenty percent, and that makes sense given that you know,
Speaker 5: it's only really generating when the sun is out. Onsure
Speaker 5: wind you might have something like thirty percent or so
Speaker 5: thirty five percent offshore wind in the US you can
Speaker 5: get you know, forty forty five percent, and so it's
Speaker 5: a lot higher. And so when you're looking at renewable generation,
Speaker 5: as it gets more and more integrated into the grid,
Speaker 5: having higher capacity factors, you know, having technology which is
Speaker 5: able to generate a lot more is more beneficial for
Speaker 5: the system. And then also scale, so you have gigawatt
Speaker 5: scale projects that are offsru wind projects. You know, for context,
Speaker 5: you might see one hundred two hundred megawat on sure
Speaker 5: wind project in the US, but that turns to a thousand,
Speaker 5: sometimes two thousand megawatts when you go offshore. And so
Speaker 5: you have things like scale, higher capacity factors. Also they're
Speaker 5: huge economic development opportunities really kind of being the driver
Speaker 5: for offsher wind more so than it is the price
Speaker 5: of that electricity. And so I think the IRA is
Speaker 5: great for you know, taking the impact off you know,
Speaker 5: the price of that electricity and the amount that like
Speaker 5: states are going to have to be paying and you know,
Speaker 5: kind of putting that on the federal budget side of things.
Speaker 5: But in terms of actually spurring on that build and
Speaker 5: making it, you know, essentially being a driver for more
Speaker 5: offshore wind growth, I think that that's really lying more
Speaker 5: so with the states than it is with the federal
Speaker 5: government and the IRA.
Speaker 2: Just to hammer this point home, how much of the
Speaker 2: challenge cheer is the physics of wind power versus financial conditions,
Speaker 2: the increase in borrowing costs and the higher you know,
Speaker 2: cost of physical components like labor, like ships, things like that.
Speaker 2: In other words, could there be an argument that unless
Speaker 2: those costs come down really significantly, that wind power just
Speaker 2: isn't I guess energy dense enough to make financial sense.
Speaker 5: That's a really interesting question. I think that one thing
Speaker 5: that's important to contextualize is that these things that we've
Speaker 5: been talking about in terms of inflation, interest rates, it's
Speaker 5: not just relegated to wind right like we have been
Speaker 5: seeing this hit other renewable technologies, We've been seeing it
Speaker 5: hit other sectors. I know, I go to the grocery
Speaker 5: store now and say, oh, my goodness, what like this
Speaker 5: has gone up by x amount. This is a ridiculous
Speaker 5: amount of money. Or now when you know you try to,
Speaker 5: you know, go for a loan. I think my parents
Speaker 5: were saying the other day, the interest rates are are
Speaker 5: crazy nowadays. And so this is something that's hit a
Speaker 5: lot of industries, and it's not necessarily just wind power.
Speaker 5: If we take a look at offshriwind in particular. I
Speaker 5: think that one of the reasons why we've been seeing
Speaker 5: so much news around it is because these are large
Speaker 5: infrastructure projects. You know, they're billions of dollars. The second
Speaker 5: one project says, you know, I can no longer develop.
Speaker 5: It's huge news because that's like a gigawatt of clean
Speaker 5: electricity versus you know, if one solar project doesn't move forward,
Speaker 5: you know, maybe that's fifty megawats and it's gone. So
Speaker 5: it's a smaller fraction. These are also, you know, huge
Speaker 5: government initiatives, so you might have government back contracts now
Speaker 5: being called into question, versus you know, if you have
Speaker 5: like a corporate bilateral ppa at a smaller scale, you know,
Speaker 5: that's a little bit easier to renegotiate, perhaps have a
Speaker 5: little bit more wiggle room. And so I think that
Speaker 5: a big portion of it is on you know, the
Speaker 5: financing side of it and the macroeconomic situation that's impacting
Speaker 5: you know everything. But also if we take a look
Speaker 5: at wind and offshore wind in particular, there are some
Speaker 5: unique pieces to it that I think make it a
Speaker 5: little bit more susceptible to say. I'm trying to figure
Speaker 5: out the right words, but let's say grandioseness or like
Speaker 5: bigger news, because they are larger projects, they are billions
Speaker 5: of dollars. They are huge when it comes to like
Speaker 5: amount the amount of clean energy that you see it
Speaker 5: can contribute to countries' portfolios, but also from a company
Speaker 5: level as well. Right, we've seen a lot of oil
Speaker 5: and gas majors get into offshore wind, and it's because
Speaker 5: you know, they've been starting to integrate, you know, renewable
Speaker 5: energy goals into their strategies. An offshore wind, you know,
Speaker 5: you win a huge seabed lease, a seabed lease auction,
Speaker 5: you get gigawatts immediately added to your clean energy portfolio.
Speaker 5: And so I think the bigness of the project's bigness
Speaker 5: is not a word, but we'll go with it. How
Speaker 5: expensive they are. But also you know, these longer timelines,
Speaker 5: I think I mean, I don't know about you guys,
Speaker 5: but I'm a lot more upset when I've been working
Speaker 5: on something for a really, really long time and it
Speaker 5: doesn't work out. Then, you know, when you've been working
Speaker 5: on it for you know, you know. A couple of.
Speaker 2: Show just admitted that he doesn't work on any.
Speaker 4: Long term pa I don't don't.
Speaker 1: I don't do long term projects. So I completely agree.
Speaker 1: I have one last question, which is, Okay, there are
Speaker 1: all these challenges, from interest rates, to statewide legal issues,
Speaker 1: to the Jones g to whatever. If things don't get
Speaker 1: figured out, how important is the wind component to overall
Speaker 1: clean energy goals? Especially I know in the Northeast we
Speaker 1: don't get a ton of sunlight. There aren't a ton
Speaker 1: of other alternatives for decarbonization. Just talked a little bit
Speaker 1: about the significance of somehow getting this right in terms
Speaker 1: of the US's bigger strategy.
Speaker 5: Yeah, I mean, I think it's huge. For context, are
Speaker 5: you at PENF is that this is more of a
Speaker 5: bump in the road than anything. So for years we've
Speaker 5: seen cost declines, cost declines, cost declines, cost aclients, especially
Speaker 5: in solar, and now is one of the first time
Speaker 5: in years where we've seen a little of a bump
Speaker 5: in costs, and so a lot of it in part
Speaker 5: is due to the inflationary pressures and higher cost of
Speaker 5: capital that we've been seeing. Now, we do think we're
Speaker 5: going to see a return to normal, whatever that means
Speaker 5: to you, in the next few years, and so then
Speaker 5: we should come back to seeing some cost declines. And yes,
Speaker 5: there are bigger components, and I think that there are
Speaker 5: some structural issues that the industry needs to work out.
Speaker 5: I mentioned bigger turbines being like a huge push, a
Speaker 5: huge reason why we've seen cost declines in offher Win.
Speaker 5: Then there's also the question of how big can those
Speaker 5: turbines get.
Speaker 2: Yeah, I saw like one of them or some of
Speaker 2: them are now like three hundred and fifty feet or
Speaker 2: like one hundred meters something like that.
Speaker 5: The blank I think in meters. Yeah, so the Vestus
Speaker 5: fifteen megawat turbine has a two hundred and thirty six
Speaker 5: meter rotor dice.
Speaker 3: Oh my gosh.
Speaker 5: Yes, they're really vague. But yeah, as they get bigger,
Speaker 5: you need vessels that are going to be able to
Speaker 5: install them, ports that can house them, you know, factories
Speaker 5: that can manufacture them. The entire supply chain has to
Speaker 5: grow with it, and so there's some structural issues there
Speaker 5: that also need to be worked out. And turbine makers
Speaker 5: have differing strategies on whether or not it's better to
Speaker 5: keep going big or to you know, kind of maintain
Speaker 5: a you know, one turbine size. Now, Now that is
Speaker 5: aside in terms of like how important it is your question, Joe, Yeah,
Speaker 5: we can't necessarily just have an energy system that's made
Speaker 5: completely of solar panels. Right, the sun's going to rise,
Speaker 5: You're going to have lots and lots and lots of
Speaker 5: solar energy, and then it's going to set and then
Speaker 5: everyone's in a blackout. You know, that doesn't really make sense.
Speaker 5: Then you add storage. How many batteries can you add?
Speaker 5: You have wind? You want to have different sorts of
Speaker 5: electricity sources with differing profiles so that your system can
Speaker 5: be a little bit more flexible. You can be a
Speaker 5: little bit more nimble with you know, moving your resources
Speaker 5: around so that you can actually go where demand is needed.
Speaker 5: So that includes investments in the grid, right and making
Speaker 5: sure that that is upgraded to a point where electrons
Speaker 5: can flow a little bit more easily, and in the Northeast,
Speaker 5: as you mentioned, there's not a lot of sun, and
Speaker 5: it doesn't always make a whole bunch of sense to
Speaker 5: build solar, even if it might be you know, cheaper
Speaker 5: on a levelized cost of electricity basis than on sure
Speaker 5: offshore wind. And so the big push in the Northeast
Speaker 5: for offure wind has to do with you know, we
Speaker 5: see these really high electricity price spikes in the winter
Speaker 5: because you know, gas due to gas constraints and high
Speaker 5: prices for gas, and so offter wind kind of helps
Speaker 5: offset that a little bit. More so, those kind of
Speaker 5: tie into some of the other benefits that I mentioned,
Speaker 5: not necessarily environmental astrobotes and economic benefits, but when you
Speaker 5: look at the electricity system as a whole and kind
Speaker 5: of trying to reduce you know, those price spikes and
Speaker 5: price drops, offter wind can kind of help add swin
Speaker 5: that way. So there are benefits there that I think
Speaker 5: are good for the industry, and I think wind is
Speaker 5: a really big necessary part of the energy transition.
Speaker 1: Chelsea Jean Michelle, that was amazing, that answered so many questions.
Speaker 1: Really appreciate you coming on the podcast.
Speaker 5: Noah for sure, happy to be here.
Speaker 2: Thank you guys.
Speaker 4: Yeah, that was great, Tracy. I thought that was great.
Speaker 1: That entered so many questions, and the fact that it
Speaker 1: ended up coming back around to being a Jones episode
Speaker 1: two just it was like a classic interview. From my perspective,
Speaker 1: we should have seen it coming.
Speaker 4: I didn't. I had no idea. I had no idea.
Speaker 1: That was a big part of the story.
Speaker 2: Yeah, so there was so much packed into that. Chelsea
Speaker 2: got so much, and I'm struggling to think about where
Speaker 2: to start. But so one thing I'm thinking is like,
Speaker 2: on the one hand, a lot of this sounds really
Speaker 2: complicated to solve. So these are huge infrastructure projects, as
Speaker 2: she laid out, working on very long timelines, and so
Speaker 2: you would imagine that the macro environment might change, you know,
Speaker 2: as the project actually matures and comes to fruition. But
Speaker 2: on the other hand, it does seem like there are
Speaker 2: some little things that could be kind of fixed almost immediately.
Speaker 2: So the idea of off take contracts actually being indexed
Speaker 2: to inflation, I'm sure that would be an extremely politically
Speaker 2: unpopular move, but I guess if other countries are doing it,
Speaker 2: maybe you could make the argument. And if wind power
Speaker 2: is a necessary source of energy to get us to
Speaker 2: our carbon goals, like maybe there is some political appetite
Speaker 2: for making the projects more financially.
Speaker 3: Sound, but yeah, it seems like it's complicated.
Speaker 2: It seems like there are like multiple things happening here
Speaker 2: and multiple levers you could pull, and the question is
Speaker 2: again like which are the most efficient And at the
Speaker 2: end of the day, if you do all of them,
Speaker 2: is wind power still efficient and financially viable?
Speaker 1: Yeah, and you could see though too, like even with
Speaker 1: all of these challenges from engineering to financing, the prize
Speaker 1: is great, right, And I think I saw some stand
Speaker 1: one that all it takes is one spin of the blade,
Speaker 1: literally just one, and that powers multiple houses for a
Speaker 1: few days or something like that. And there's just so
Speaker 1: much potential energy out there a couple miles off the
Speaker 1: show or that you could see why there's this pursuit.
Speaker 1: But then also, you know, there were so many different
Speaker 1: follow up conversations that we can now have related to
Speaker 1: questions about well, what is the optimal size of the
Speaker 1: blade or the optimal size of the turbine and all
Speaker 1: these different things that you can see, or the ultimate
Speaker 1: the optimal bidding process as you described.
Speaker 2: Oh yeah, that was really interesting also, like the idea
Speaker 2: the renegotiation of the off take agreements, and the idea
Speaker 2: that like, obviously, the environment has changed. So if you're
Speaker 2: an energy provider, you might want to get additional revenue
Speaker 2: to cover your costs, but given the way those auctions
Speaker 2: are structured, you can't really do that in a fair way.
Speaker 1: Electricity markets future episodes for sure.
Speaker 2: Yeah, and probably a jones Ac debate in our future, yes,
Speaker 2: for sure.
Speaker 3: All right, shall we leave it there for now?
Speaker 4: Let's leave it there.
Speaker 2: Okay, this has been another episode of the All Thoughts podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy.
Speaker 1: Alloway and I'm Jill Wisenthal. You can follow me at
Speaker 1: the Stalwart. Follow so our producers Carmen Rodriguez at Carman
Speaker 1: armand dash Ol Bennett at Dashbot and Kelbrooks at Kelbrooks.
Speaker 1: Thank you to our producer Moses Ondam. For more odd
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