June 6, 2024 • 52 mins
Last year was a bad one for the US wind power industry, with lots of cancelled projects, writedowns, and an overall reassessment of how the math behind these mega projects might shake out in an era of higher interest rates and supply chain disruptions. But despite all of that, renewable power from wind is still a big part of America's plans to transition towards cleaner energy, with billions of government dollars earmarked to help build out capacity. So what went wrong last year and how is the industry looking now? On this episode, we speak with David Hardy, CEO of the Americas for Orsted, one of the biggest players in wind power. He talks about recent challenges, the potential implications of another Trump presidency, as well as when we might see subsidy-free onshore wind projects in the US.
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Episode Transcript
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Speaker 1 (00:03):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:20):
Hello and welcome to another episode of the Odd Lots podcast.
Speaker 3 (00:24):
I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 2 (00:26):
Tracy, we've been talking a lot of electricity lately.
Speaker 3 (00:29):
Actually, yeah, it's been what energy months here on Odd Lots.
Speaker 2 (00:33):
Not really intentionally, but yes, it's sort of becoming energy
month here on Odd Lots. I find like understanding any markets,
any understanding any commodity markets or whatever is sort of
extraordinarily difficult, But I find power and electricity to be
sort of like orders of magnitude. Like it just sort
of like my mental model how it all works is
(00:54):
so still like in co it and immature, and I'm
just sort of understanding it. Like it feels like so
much more complicated, all these auctions and micro auctions and
mini markets, and you know, it's it feels a lot
more complicated in my mind than say, like trading oil.
Speaker 3 (01:09):
My mental model for how it all works is that
meme from It's Sunny in Philadelphia with the posting notes. Right,
It's like this weird pseudo government private thing where on
the one hand, you have natural monopolies in the form
of the grid and then on the other hand, you
have all these private individual actors who are trying to
(01:30):
do all these new things, and it just it seems
enormously complicated. And in some ways it's becoming more complicated
because you do have efforts to hasten the energy transition
in the form of things like the Inflation Reduction Act.
This network of tax credits and subsidies seems very difficult
(01:51):
to understand to me as well.
Speaker 2 (01:53):
Right, and we had this grid that for years sort
of operated with gas and coal and some nuclear, and
now you know, over the last several years and the
Inflation Reduction Act has tried to accelerate it get more
renewable clean energy on the grid. So we're sort of
putting a new model of production onto an existing model
(02:13):
of distribution. Creates all kinds of new things. One thing
in particular, though, you know, we're here in the northeast
and you know, we don't get a lot of sunlight,
or we do, but you know.
Speaker 3 (02:24):
We get it's erratic.
Speaker 2 (02:26):
It's erratic, and for much of the year there's hardly
any and so if we're going to sort of decarbonize
a lot of the northeastern part of the grid, the
bet is that a big chunk has to come from
wind and in particular offshore win Yes.
Speaker 3 (02:39):
Absolutely, and this is something that we've touched on before
in an episode with Chelsea Jean Michelle, the wind industry
analyst for Bloomberg nef SO, one of our colleagues here
at Bloomberg. And I think, to me, the big question
is we have all these projects and there have been
some hiccups over the past year. So we've seen projects
(02:59):
can sold, We've seen a bunch of big energy companies
take impairments on wind projects. We've seen energy stocks, you know,
fall quite a bit. There's the potential return of a
known wind energy disliker, let's put it that way, in
the form of Donald Trump. All these different headwinds for
(03:20):
the industry, and to me, the question is still, are
these growing pains for something which requires enormous upfront investment
and the creation of a lot of really really big
structures in the form of turbines and complicated supply chains
are needed to build those and huge investment outlays and
all of that. Or is this something more fundamental about
(03:44):
the business that's the big question in my mind, Like,
is this just a question of transition and getting started,
or is this maybe saying something more long term about
the industry.
Speaker 2 (03:55):
I think that's a great way to frame it. And
you know, the only thing I would add is further
complication to this question is that the IRA and this
like particularly aggressive imperative right now is coming at a
time when like every industry saw supply chain disruptions and
every industry saw rising cost of capital thanks to the
(04:16):
raid hikes and inflation, etcetera. You know, you know, we
if we had to do over, maybe we would have
started this done an IRA like act in two thousand
and nine or twenty ten when we had significant unemployment
and commodities were dirt cheap, but we didn't. Can't go
into the past. And so answering these questions, how much
is growing pains, how much is the bad timing with
supply chains?
Speaker 3 (04:35):
How much?
Speaker 2 (04:36):
Very complicated, but that fits the theme of how complicated
the energy markets are, power markets are in general. So
we continue our process of discovery of learning about how
it all works.
Speaker 3 (04:48):
I am excited. We do, in fact have the perfect
guest for this episode.
Speaker 2 (04:52):
We do have the perfect guest. We are going to
be speaking with David Hardy. He is the CEO of
the America's division at ORSTED, which is the huge fish company,
one of the global leaders in wind power. He had
previously been the CEO of the offshore business at ORSTED
after joining the company in twenty twenty, so the right
in the sweet spot to help us disentangle all of
(05:15):
this stuff. So, David, thank you so much for coming
on the podcast.
Speaker 4 (05:18):
Thanks Joe and Tracy. Great to be here.
Speaker 2 (05:20):
Absolutely, So why don't we start off twenty twenty three
I think was sort of overwhelmingly recognized as a very
challenging year, both for offshore wind and also ORSTED specifically.
And we can get into some of the projects, but like,
why do you give us the sort of like high
level summary of like what we saw unfold over the
(05:43):
last year eighteen months or so.
Speaker 4 (05:45):
Yeah, I appreciate, appreciate the question. I also appreciate the
introductory dialogue you had with each other thinking about how
complex it all is, and I have to echo that
it is a it is a complex industry. I actually
enjoy that because you know, with complexity you can differentiate.
It's a lot harder to differentiate if you're selling a
cup of sugar to against the other guy. Who's selling
(06:08):
a cup of sugar. But and likewise, I think the
question from Tracy about, you know, is this growing pains
or you know, what was the cause? I think it
is kind of all of the above, but specifically a
little bit of you know, no one likes to in
business say bad luck, but a little bit of bad
(06:29):
timing I would say is there was a lot of
ambition and expectations and growth expected from from the US
and offshore wind as as the maturity of the industry
overall in Europe reflected an opportunity for America. I remember,
or said, built the world's first offshore wind far more
than thirty years ago, and as the world leader an
(06:51):
offshore wind and has you know, nine gigawatts operating, and
a lot of those were pretty low cost projects prices
in Europe. The US Northeast states especially who you know,
don't have a lot of sun, as you guys said,
and also don't have a lot of space, saw offshore
win as the kind of panacea for how to get
(07:12):
large amounts of green energy you know, onto the grid.
And and so there was a big fast ambition and
growth and orsted as the leader saw the opportunity and
and and took an aggressive position of building projects and
built building, you know, signing up for off take and
and committing to billions of dollars of capital investment in
(07:35):
this market, all as COVID hits were in Ukraine, massive inflation,
rising interest rates, and yes, all industries were affected by that,
but renewable energy in general is very, very susceptible to
rising interest rates, and offshore win even the most of
(07:55):
all of the renewable energy sectors because it's so cap intensive.
Our fuel is free, we say, but our fuel is
really the cost of capital because we put so much
capital out upfront, and so as interest rates rose three
hundred BIPs, it just fundamentally changed the economics of the projects.
And then on top of that, we had you know,
(08:16):
bespoke inflation, not just generic CPI but but industry specific
inflation that led to thirty forty percent cost increases. And
those two factors just basically required a reset, and or
SAT unfortunately, was the most exposed and the most progressed.
We had some really late stage projects where we had
(08:37):
already invested you know, up to a billion dollars in
one project for example, and made commitments for more. And
when we we were trying to pull all the levers
and take all of our experience to try to make
these projects go, and and in the end we couldn't
make them all go. And you know, we we had
to make some some tough decisions in twenty twenty three
(08:57):
to cease development on on a couple of projects. One,
like I said, was a really late stage project, and
so it took a big financial impairment and a financial
provision for the cancelation charges for that project. But on
the bright side, and we'll hopefully get to this part.
We have three projects that we're still building which are
(09:19):
one is completed, actually America's first commercial scale offshore wind farm,
the South Fork Wind Farm, was just completed a few
months ago. And we've got two other very large commercial
projects that we've taken our so called financial investment final
investment decision, and we're in construction offshore on one of
them and building the onshore. You build the onshore part
first or in parallel with these projects. But the second one,
(09:43):
we're in full construction mode on the onshore part. So
I think a little bit of being exposed and being overexposed,
you know, in retrospect, could we have slowed earlier, probably
in retrospect, you know, could we have not been as
ambitious and kind of daggered the number of projects we
were building in the US. Probably Obviously there were some
(10:06):
you know, market specific challenges that impacted us. A lot
of these early projects didn't have any inflation protection and
the off take, the permitting process was slow, et cetera.
So there's some US specific things, but a lot of
it is actually global macro supply chain imbalance, global macrol
cost of capital, et cetera. That just impacted us in
(10:26):
a negative way in twenty twenty three. Sorry for the
long answer. I'll be shorter in the future, but.
Speaker 2 (10:30):
That was very helpful. Also, it's good. Could you gave
us like six follow up questions automatically?
Speaker 3 (10:37):
Yes? So, okay, first follow up question, but just on
the idea of rationalizing some projects and even some late
stage ones which you mentioned, and I assume you're talking
about the farms in New Jersey Ocean wind But how
do you decide what to continue with and what to cancel?
(10:57):
Like is it a question of math and the financing
costs and the interest rates that you just outlined, or
is it sometimes a question of physical limitations, so things
like supply chain issues. The lack of this is Joe's
favorite subject. The lack of transformers or switch gears or
the lack of this is another traditional odd lots topic,
(11:18):
the lack of ships to actually build these things.
Speaker 4 (11:22):
Yeah, it's another kind of all of the above answer.
You know, we we look at everything. Of course, you know,
our publicly stated ambition is that we you know, try
to achieve one hundred and fifty to three hundred bit
spread to whack. So and we are wack weighted average
cost of capital. We have a WHACK model basically that
(11:43):
course is funded in our our corporate cost of capital.
But then we we have whack adjustments to kind of
create a project specific whack based on the market, the technology,
project specific risks, et cetera. So we create this whack
model and then we then we try to achieve you
one hundred fifty to three hundred spread to whack against that.
And so when when we're looking at projects, that's kind
(12:05):
of our one of our first hurdles or KPIs that
were that were very very focused on. So as I
alluded to, is your costs are going up, that spread
to whack is being compressed. As your cost of capital
is going up, that whack is going up, and so
you pretty quickly can get upside down on that spread
to whack. If if the ambition has only one fifty
(12:26):
to three hundred and the WHACK went up by three hundred,
it's pretty tricky. But at the same time, you know,
we are also trying to be strategic. We were trying
to make investments in a market, and at some point
we had some sunk cost and so even though our
guiding star is this life cycle spread to whack fully
loaded kind of KPI, we started adjusting a little bit
(12:47):
and saying like, well, if we cancel, we've got these
sunk costs we're gonna have to write off anyway, So
should we just assume them as written off and look
at ford I rrs And so we started changing our
parameters a little bit and barometer a little bit as
we were getting into the tough situation to see if
it strategically made sense to keep going. And we were
constantly looking at the supply chain and seeing, okay, well
(13:09):
what risks are still ahead of us? If we sit
with a with a target today, you know, how realistic
is it? We'll be able to hold that. Of course,
we had our big risk registers, and we have our
modeling of you know, what things are going to cost,
and we had contingencies and all that built in, but
you still kind of have a scientific but not perfect
scientific probability analysis of outcomes. And if you're you know,
(13:34):
P ninety nine outcome is really really bad, and you
know your P fifty looks okay, that's different than if
your your standard deviations are more narrow between your P
fifty and your P ninety nine. And so as we
looked at these projects, there seemed to still be a
lot of challenges ahead, and so again the management team
(13:55):
and the board had a discussion and we decided that
we weren't comfortable with continue to invest in the projects,
and we thought it was better for the company, for
the portfolio to go ahead and cancel, take the big hit,
but hopefully take a little a little bit of risk
out of the system, a little bit of risk out
of the supply chain, and a little bit of you know,
(14:17):
more focus from the organization so that we could make
these three projects that we did want to keep going
forward with successful and that's that's been our target. And
of course this is all from an America's perspective, but
or said it was doing this you know globally, like
looking at projects that had in Asia and Europe, et cetera.
Speaker 2 (14:50):
So, first of all, I'm very appreciative that you've gone
right into things like spread to whack because this is
exactly you know, what we want to understand better, but
just to conception rualized sort of like what was or
is the sort of way to think about like the
difference between say, the South Fork project and the New
Jersey project. What was it about one of them that
(15:11):
it's like, Okay, this makes sense to go ahead and
complete it, and another one is like, no, we're going
to take the hit on this and write off some
of this investment.
Speaker 4 (15:19):
Yeah, without getting into specifics, but conceptually it's about, you know,
how like how negative is the MPV or how you know,
how much more risk was there ahead of us, how
much more unknown? What supply chain challenges were still out there?
And one of the challenges with Ocean Win one in particular,
was that as we were approaching kind of the build
(15:43):
up to this decision, there were new global supply chain
challenges that were emerging. So potentially, you know, delays in
our foundations delays, and our turbines delays and vessels, and
then you have these knock on effects. Right if you're
planning to to start installing foundations and let's say summer
of twenty four, which is what our plan was, and
(16:07):
now you know those foundations aren't going to be ready
until twenty five, or your vessels, you know, your vessels
stuck on another project and it's not going to be there.
Then the whole project has to shift because there's a
sequence of how these things get built. And so then
when we had lined up you know, the literally you know,
hundreds of other contracts to make this whole project sequence,
(16:30):
and the whole thing was going to have to shift.
Then we were pretty concerned that as we reopened, as
we went out to supplier A or supplier B and
said we now need to shift this project from twenty
four to twenty six, that all of their pains that
they were feeling from the macroeconomic challenges we're going to
be on the table because we had locked in some
(16:53):
thing's pre the big inflation, and we had actually had
some very favorable pricing potentially, But as soon as you
reopen up things then then everybody's clawing back, and so
I think that that was one of the big, big
discussions that we had. And at the time, we weren't
sure how the state was going to respond and you know,
(17:14):
if they would work with us to to you know,
to make make the project work. And so we just
decided to make the call. We're with South Fork for example.
Yes it's a tight project, but but we didn't have
those same new supply chain risks that we that we
saw on the horizon with Ocean Wing one.
Speaker 3 (17:34):
Wait, can you talk a little bit more about those
supply chain risks because I kind of alluded to this earlier,
but this is core odd lots thematic content, so things
like switch gears and transformers and then the ships as well.
Speaker 4 (17:48):
You know, offshore wind is growing rapidly across the world, right,
It's not just here where people saw this as a
as a solution to get large renewable energy. And remember
it in Europe, right, Russian invades Ukraine. Europeans want energy sovereignty,
and so offshore wind became like even more important as
(18:10):
they got off Russian gas. And so you all of
a sudden have this huge supply and demand imbalance, particularly
on things like HVDC systems, but also vessels, monopiles, et cetera.
And some of these companies are not you know, super large,
well funded balance sheet companies, so they can't just see
the demand signal and ramp up the way that you
(18:30):
would think they could. And also just the way the
industry works, it's long cycle, so we typically don't want
to like commit in a kind of take or pay
way for whether that's vessels or equipment until we take
our final investment decision to tell the projects to your risk,
how we have our permits, our interconnect agreements, our land
(18:52):
rights are you know, et cetera. Are are a point
of interconnect agreements. And so there's a little bit of
a chicken in the egg on like if the supply
chain builds, it will there be demand or do they
want that demand locked in? But we're not we and
I'm saying we not orsted, but we the industry are
we even though there's a lot of demand signals, are
we committing? So they have business case certainty and so
(19:14):
you kind of have had this challenge on the supply
chain supply chain ramp up and and so definitely there's
a global imbalance I would say on some of these
key offshore when supply chain categories. And you know, the
plan was that in the US, we were going to
build our own capabilities here, we wouldn't need the global
(19:35):
the global supply chain. But then again, the same chicken
and egg problem. Right. We had a bunch of projects
that had promised to help contribute to both demand and
in some cases even contribute to some of the upfront
costs to build out some of the supply chain. But
then when the economics or the project didn't work anymore,
then of course the economics for the supply chain didn't
(19:56):
work anymore. So we're in a reset period for most
of the product in the in the US. Other than
kind of R three and and a couple couple more,
the rest of the whole industry is basically, you know,
had to recontract and push out and and we're you know,
kind of in a re re reset of the macroeconomic conditions.
Speaker 2 (20:17):
I'm going to dive right into a subset of the
supply chain question that speaks to this that also sort
of our one of our core topics. Talk to us
about the Jones Act, how it affects affects your business
and I think Orsted has a you built your own
Jones Act compliant vessel, But I think that's right. But
(20:38):
talk to us about like this particular piece of legislation
that's been around forever and what it means for basically
the industry's capacity to build out US offshore wind.
Speaker 4 (20:51):
Yeah, I mean the Jones Act for for those that
don't know, and I'm just going to make it simple,
it requires a US flagged which means US owned and
operated and built vessel to transport equipment from one US
port to another. These products are built in the US
Outer Continental Shelf and so they're subject to the Jones Act.
(21:14):
In general, i'd say, or said, we're supportive of the
Jones Act. It is, you know, it's it's another challenge
to starting up the industry and we would love to
have some you know, some waivers in the beginning and
then you know, work with with the shipbuilding industry and
others to build out the fleet because it's difficult to
(21:35):
build off shore wind with Jones Act requirements when there
are no Jones Act vessels that exist. We were first
movers in working with another company to invest in and
commit create demand for a Jones AC wind turbine installation vessel,
which is one of the really big expensive spoke vessels
that actually installs the wind turbines. But there's actually a
(21:57):
whole lot of other vessels. There's cable laying vessels, dumping vessels,
foundation installation vessels, service operation vessels, et cetera, et cetera.
So we were, we were and are committed to trying
to help build out that fleet. But in the beginning,
wed they vessels don't exist. It's hard to comply, and
so we we in the industry have built workarounds where
(22:20):
we you know, either stage stuff outside of the US,
or we bring it directly over from Europe, or we
barge things out with US flagged tugs and barges and
transfer equipment to European flagged or other than US flagged vessels.
And so it's been a it's been a it's been
(22:41):
a hindrance, I would say in at least being able
to get the most cost effective offshore wind in the
US on early projects. And so yeah, we're still just
working through it, both getting first projects built and trying
to support the maritime industry. You did allude to, like
I said, we were the first charter for a vessel
(23:06):
called the Caribdas which Dominion Energy was building for their project,
and we helped secure the business case for the vessel,
but the vessel was very very late in being completed,
and so we had to pivot to this bargin tug
solution for our three Northeast program projects. So we're not
using the Charybdis for those. But we have built a
(23:27):
handful more than a dozen I think crew transport vessels,
and we just a few weeks ago I was alluded
to the celebration we're having in Louisiana with Leader Scalise
where we built a large service operation vessel there which
is Jones Act compliant, and we're contracting other vessels that
are under construction for other parts of the offshore wind
(23:50):
set up.
Speaker 3 (23:51):
So just on this note, you know, building some of
your own transport vessels. I sometimes wonder is this the
solution for off shore wind? Is it just that you
guys become more diversified in terms of what you're doing
and end up building out your own supply chain of
the necessary components and tools and transportation that's needed to
(24:13):
actually build these huge wind turbines.
Speaker 4 (24:16):
Yeah, it's a discussion that we have internally a lot.
Remember these are super capital intensive projects. You know, a
gig at twelve hundred megawatt project in the US today
in the order of magnitude of six billion dollars, I
would say, just for us to buy all the stuff
we need and pay for all the stuff we need
to build a project. So if then we have to
(24:36):
spend billions of dollars building ships and building factories and
doing everything ourselves, it starts to become you know, very
few companies that have the balance sheet to do that,
And so I don't think that we want to necessarily
be completely vertically integrated, but there's certain times where maybe
(24:57):
it could make sense for us or others in the
end street to do that. What we what we want
to do is be able to give strong demand signals
so that the supply chain has the you know, the
wherewithal to make their own investments and to meet the
demand for all the components and infrastructure that we need
for these projects. But it's to be determined still, how
(25:19):
that you know what the best way forward is to
do that. Again, we don't want to be a turbine
manufacturer or a monopile manufacturer. We're an energy company that
develops projects and operates them and sells electrons. But we'll
see we've definitely make financial investments to support the supply chain.
So that's a big part of what we're doing to
try to secure our own success.
Speaker 2 (25:41):
I feel like in all of the conversations we have
about energy, and in particular it seems to be renewable energy,
but energy in general, it's just like off take off,
take off, take the consistency, the importance of that the
demand and that demand signal, and so whether it's the
demand for electrons that are produced by wind and then
(26:01):
the demand from companies like ORSTED for the Jones Act
compliant vessels or the infrastructure for the foundations, just like
that sort of continuity of the demand signal seems to
be really critical. I just want to go back to
one thing you said, just real quickly. I think you
said you're supporters of the Jones Act. But why it
(26:22):
does not sound like it's been helpful. What did you
did you? What did you mean by that?
Speaker 4 (26:27):
I think we're supporters of building an American supply chain
which includes vessels which then inherently would be Jones Act compliant.
So even though we're a Danish company, even at the
very top of the organization, but definitely at my level.
We're trying to build an American industry, not just build
(26:47):
offshore projects with you know, Asian or European supply, and
so to the extent that we can help build more
Jones Act compliant vessels and create you know, that part
of the economy, the economic stimulus et cetera for Americans,
or support of that, it is difficult. You know, the
(27:08):
Jones Act makes it difficult to get this industry off
the ground. For sure. I won't say that that's not true,
but in the end we know that, you know, part
of the value proposition of offshore wind is the economic
benefits to Americans and job creation, et cetera.
Speaker 3 (27:39):
So, just on the question of off take and sort
of persistent sources of long term demand, Joe and I
recently had a conversation with Brett Christophers, who just published
a book called, what is it called The Price is Wrong? Yeah,
The Price is Wrong basically about why the current market
mechanisms being used to courage the green energy transition aren't
(28:02):
necessarily working. And one of his points is that there's
a difficulty here. You know, if you're trying to finance
a renewable energy project. There's a lot of uncertainty around
future pricing and future demand, and so it makes securing
that funding very difficult. People in traditional finance might be
(28:23):
a little bit reluctant to give money to something that
is more than likely going to be volatile in the
future and might be difficult to model for various reasons.
I'm curious from your perspective, how do you model out
that demand picture? And then do you feel like in
terms of the federal government or maybe some states that
(28:46):
you're getting support for that sort of long term demand outlook.
Is there a recognition that people have to provide that
demand signal to you as well as maybe help with
some of the initial financing.
Speaker 4 (29:02):
Yeah, I'm going to actually start with the latter question
first and then come back to the first question if
that's okay, because you know the demand and I'm talking
about offshore wind now, but in onshore renewables, they've been
around for a while. There's a big, big marketplace, and
the financing is working right, and we've built probably over
(29:22):
two hundred gigawatts of onshore wind and solar in the US.
So so I'm not sure I one hundred percent agree
that that it's hard to finance renewable energy. Obviously, that's
been on the back of some incentives, federal incentives that
have been in place throughout the whole period of time,
which eventually we need to wean off of. And likewise
(29:43):
it's been on the backs of some you know, kind
of probably state state policies, rps's renewal portfolio standards, et cetera, right,
that have driven this. But it increasingly it's CNI customers
that are providing the off take and they're in their
desire to have green electrons. When I pivot off shore win,
it's really the same, except that it's just more immature
(30:07):
and so you don't have like a third party CNI
market yet. And the price the prices are higher still
because we're making all these upfront investments in infrastructure that
need to be carried by the by the megawatt hour
price embedded in a project. And so again it's the
states demand and the states off take that are driving
(30:29):
the surety that we've got a revenue stream that then
we can finance. But also it's the tax incentives that
are all offsetting some of the of the cost. And
so I think between the the IRA and the federal
incentives that we have and the states that are driving
the demand for offshore win that we can we can
(30:52):
finance these these projects. Unfortunately, it's the tax credits are
pretty large because they're itcs on this big six billion
dollar project. I'm just using that a round number. But
then you know, it's a tax credit that we can't
self monetize because we don't have enough taxable income. Or
(31:12):
we could, but it would take a long time to
work that off, and so typically you have to use
a third party monetization method and then there's you know,
intermediators who are making some money along the way, so
it's not always the most efficient way. We were advocating
for direct pay, which could have cut out, you know,
some of the cost to have third party monetization of
(31:35):
tax credits, but that's probably a whole another topic we
could spend a different podcast on.
Speaker 2 (31:39):
Yeah, we've been meaning to do a tax credit episode.
So at some point, well but anyway, keep going because
that market seems interesting, but keep going.
Speaker 4 (31:47):
Yeah, but the it wasn't necessarily the lack of off
take that has caused these projects to have to stop
or to be unfinanciable. It was the change in the
cost of capital, and it was the change in the
cost quite frankly. So now we just need an adjustment
to the off take, you know, willingness to pay what
(32:08):
it will take for someone like us to earn a
return or not trying to be greedy, but we need
to earn a return for our investors. And is our
states willing to pay the cost and make the investment.
The federal government is doing its part, or you know,
maybe the states would say they need to do more still,
but you know, everybody needs to do their part to
(32:30):
get these first projects off the ground, get the supply
chain bilk at the upfront cost bilk at the ship's built,
and then I'm very confident the levelized cost of energy
will come down because you can see when you look
across the Atlantic, you can see much much lower cost
offshore wind than we have. But they've got thirty years
of investment in supply chain ships ports that we're trying
(32:52):
to to do it at much faster pace, and those
costs need to be born somewhere and carried somewhere, so
they're being carried in the megawatt hour price that that
you see for offshore win?
Speaker 3 (33:04):
Is there a point at which we could see subsidy
free projects in the US like the ones we've seen
in Europe and I guess specifically the Netherlands. How far
away would that be.
Speaker 4 (33:17):
For on shore I think it could be relatively quickly.
I mean, some of my colleagues in the industry, you know,
don't don't want me to say that, but I mean
the industry is fairly mature. The price of solar and
wind are very competitive with the incentives still and would
still be reasonably competitive without them. For offshore win, Yes,
(33:37):
eventually we can get there as well, but we've got
we've got a ways to go, you know, just because
there is so much upfront investment that needs to be made.
For example, you know, we invested we in our JV partner,
ever Source and the state of Connecticut jointly invested over
two hundred million dollars to build one port. Others in
the industry are investing in ports and massive use. It's
(34:00):
New York, you know, we invested before we left New
Jersey it's over one hundred million dollars into a monopile
manufacturing facility. One ship the Dominion built. I don't know
the exact number, but half a million plus minus I
mean sorry, half a billion plus minus on that ship.
So there's a there's a lot of upfront startup costs
(34:22):
in this in this industry, which you could say, hmm,
that's going to be expensive, but in it and it is.
But it's also it's also creating economic development, right, all
this all this investment in these factories and these ships,
in these infrastructures creating jobs and and and actually making
the US you know, more robust. This port that we
(34:44):
invested is not just for offshore win it's now a
much better port for other things, for multimodal asset for
for the state of Connecticut for example.
Speaker 2 (34:55):
Real quick question. You know you're talking about the higher
higher interest rates or high cost of capital, particularly I
don't know if lethal is the right word, particularly damaging
to the renewable sector. Is it less? Just to sort
of conceptualize why that is, is the European wind industry
or offshore industry less sensitive by virtue of the fact
(35:18):
that it's been around so long and thus has less
core infrastructure that needs to be built out right now, I.
Speaker 4 (35:25):
Would say that yes, because the same you know, twelve
hundred MEGAWAP project in Europe doesn't cost six billion, it
costs less. And so the reason it's so susceptible is
because of the high the high upfront costs. The more
the more you need to invest upfront, the more interest
rates matter, right, And so you can build a project
(35:46):
for less CAPEX in Europe than here. And part of
it is the infrastructure difference, as part of it is
scope difference. We build you know, the we build the
generating plant, but we also build the bespoke transmission from
the generating plant to shore. Then we also are upgrading
the onshore grid, the existing grid in order to accept
the offshore win. And then we're building the infrastructure, the ports,
(36:08):
the vessels, the supply chain. And then we also are
having to import everything from Europe, so just cost more.
The transportation, installation costs are significantly higher. And then we've
got you know, our Jones Act, which is not super efficient,
and we've got other things that make it more expensive
to build here. So the interest rates affect us more,
but the interest rates affect them too. I mean, the
(36:30):
cost of offshore WIN has gone up in Europe as well,
it just was much much lower, and so it's gone
up to a point it's still significantly attractive from my perspective,
especially compared to US.
Speaker 2 (36:42):
I want to go back to something you said early on.
You know, almost the day after the Inflation Reduction Act
was passed, then a bunch of people was like, oh, well,
it's great, all this money is going to build things,
but permitting and you mentioned permitting, and you know, in
my mind is like, guys, you should have put that
in the bill itself some way. What specifically with permitting,
(37:03):
How is that impaired timeline? Like what comes up in
the permitting process that slows down these projects.
Speaker 4 (37:11):
I think there's a couple different ways I could answer that.
One is that you had an administration that wasn't so supportive,
and so I think, you know, maybe there were delays
that were happening by design for prior prior to the
current administration. Then you have a really ambitious and supportive
(37:32):
administration who wanted to see everything go, but they they
had a huge backlock they had to work through, probably understaffed,
and it's new they had to you know, no one
had permitted offshore wind projects in the US, and so
people are trying to figure it out, and so you
know that's caused some delays. In general. I'm I'm a
big fan of you know, current current administration and Boehm
(37:55):
and everything they've done. They've completely one eighty degree. You know.
Now there's I think six or seven permitted offshore win
projects and so you have to really give them, give
them credit for that. But it's it's not running, you know,
like a Swiss Swiss watch yet. Right there's still ideally
supposed to be a twenty four month process. That's more
(38:15):
like a forty eight month process. So and that's you know,
hope hopefully can improve if we can keep some consistency,
but we'll have to see.
Speaker 3 (38:24):
You mentioned gaving out the probability of outcomes earlier, and
I think you were mostly talking about that in the
context of interest rates. But I have to imagine the
political landscape must be on your radar, and so I'm
curious how you're thinking about, you know, the potential return
(38:45):
of Donald Trump to the US presidency and how you
would begin to calculate how that would impact your business.
How do you actually think about that type of policy risk.
Speaker 4 (38:57):
We always start with the with the macro and we
all also obviously overlay the political side to things, and
so from the macro, which we haven't spent a lot
of time talking about, but you guys alluded to it
in the beginning. I think there is a significantly increasing
electricity demand happening in America between ev adoption, electric heating,
(39:21):
reshoring of manufacturing and probably the biggest thing of all
AI and data centers required for that. There's a lot
of electricity demand anticipated in the US. And where is
that electricity going to come from? And whether you're on
the left or the right, one of the big waste
to get big chunks of electricity is through renewables and
(39:45):
in certain parts of the country offshore wind. Even if
you don't care about green it's a way to get
a lot of near boat base load electrons onto the grid,
which we need as a country. Then you think about
all the stuff that we have spent a lot of
time on the job creation, the infrastructure and its core
(40:06):
things like steel and ports and ships and factories, and
these are things that are bipartisan right Just in our projects,
we can trace the supply chain to forty different states
that are contributing, So it's not just benefiting Rhode Island
or New York. It's the supply chain goes across most
(40:28):
of America, and so that's red states, Purple states, Blue states,
and most Americans value job creation, economic progress. And last
I would say is that you've got a strong energy
security argument here, where we want to be a net
exporter of energy and we are today with L and G,
(40:50):
but we want to maintain that position. And the more
renewable energy that we build in America, the more opportunity
we have to maintain that energy security and that net
exporter of energy position. And so to me, offshore wind
renewables is much more bipartisan than than maybe people are
(41:14):
making it out to be. And of course we're not
just pushing the hope button. We we've we've got mitigation
plans regardless of any outcome. But we're you know, we
we I talked to Republicans all the time, and many
of them understand everything that I just said and understand
the importance of this sector. And so yeah, we're we're
(41:36):
weighing out the the outcomes. We've you know, written board
papers and had lots of discussions and you know, have
third party inputs on things. But we believe in the
in the fundamentals of the industry, and we're confident that
that offshore winds here to stay.
Speaker 2 (41:53):
Just on this politics point real quickly, or that maybe
not politics point, but the policy question. You know, we
talk about the Inflation Reduction Act, and we usually sort
of talk about it in vague terms tax credit, subsidies,
et cetera. But actually, can you just give us a
sort of succinct summary of the specifics what you get
and how the Inflation Reduction Act changes the math for
(42:16):
you on any given project. What specifically you know you
go into a project today in twenty twenty four versus say,
twenty nineteen, what's different about it today post di ray.
Speaker 4 (42:27):
Yeah, First off, the longevity of it is good. It
was kind of oftentimes one year or two year kind
of extension of an existing tax credit historically primarily the
production tax credit, which was a certain two point three
cents per megawatt hour of sorry per kill a what
hour of production? But you you know, you're trying to
(42:48):
get your start of construction, so you qualified in the
year that the tax credit was still eligible, and then
it would get renewed and it was like the stop start,
you know, drama for the industry, and even in Onshore
it's it's a medium cycle business and that was really
disruptive and offshort it's much longer cycle, so it would
never work. So having the kind of the tenure horizon
(43:09):
I think was a big big factor. Then in addition
to the traditional PTC and ITC, the difference Production tax
credit was this you know, kind of incentive that was
added that you get for every mega what hour you produce,
you get an extra tax credit that you can monetize.
ITC is a percentage of the eligible basis of the
(43:32):
investment that you make. So there's a certain portion of
the infrastructure that is eligible for the ITC for the
investment tax credit, and then you could get the base
ITC is thirty percent, so you could get the equivalent
of a thirty percent tax credit for whatever portion of
your investment qualified. And then you have to go again
(43:54):
third party monetize that most companies do, so you might
not get the full thirty percent. You get some hair
cut on that because there's you know, a bank in
the middle or or somebody that was you know, taking
some of that value. And then after the IRA that
was always a bank typically in the past, but now
the IRA has something called transferability, So basically any taxpayer
(44:16):
now can take advantage of these helping monetize these tax credits.
So you could be a toothpaste company and you can
basically negotiate with us, and if you've got a tax
liability and you want to offset that with tax credits,
you can negotiate with us. Is that ninety nine cents
on the dollar, ninety cents on the dollar, whatever, we
(44:37):
can negotiate and they can monetize those tax credits for us.
So that's that's nice. It creates a larger pool of
tax investors. And then there are two additional we'll call
bonus tax incentives. One related to something called energy community.
So if a project is built and this goes for
onshore and offshore, but if a project is built in
(44:58):
a community that's deemed to be an energy community, either
primarily like a historically X traditional energy community like an
X coal mine or an X coal coal factory or
an X oil and gas you know location. Also there
are some definitions around if it's a contaminated brown filled area,
(45:21):
if it had certain contaminations, then it qualifies as an
energy community. So this is all across America. There's these
energy communities that you can qualify for, and if you
build a project in those communities, you can get an
extra ten percent tax benefit. And then the last one
is an extra ten percent bonus for domestic content. And
again the domestic content definitions vary from entoursolar and wind
(45:44):
and offshore, but there's a certain requirement of what percentage
of the project needs to be produced domestically. You know,
in some cases it's there's some other provisions one hundred
percent US steel this or that. There's also some other
a lot of a lot, a lot a lot of
little nuances of about using US labor and having apprenticeship
programs and other things that they all go into this,
(46:06):
but it's all designed to help create more of a
domestic industry. But I guess to sum it up, you
can get up to fifty percent of your let's say
ITC's of your eligible basis tax credits, and then you
need to go monetize that.
Speaker 2 (46:21):
So, David Hardy, that was a fantastic conversation. Really appreciate
the detail and the explanation. I actually feel like I
learned something in that. So thank you so much for
coming out of lock.
Speaker 4 (46:32):
Heh, you're welcome. I'm glad that you think you learned something.
Speaker 2 (46:35):
No, I definitely did know that we continue our process. Yeah,
we continue our learning group. No, that really was that
really was excellent and exactly what we're looking for. So
I appreciate it. Now let's stay entire absolutely Tracy. I
(47:00):
thought that was great. As soon as like David went
into like spread to whack in the beginning, I was like,
all right, we are going to get a good granular conversation.
That's really good. It's going to be a good conversation,
totally right.
Speaker 3 (47:11):
No, it was really nice to hear from We've been
talking a lot about I guess the structure of the
US energy market from you know, academics or people who
take an interest in it, but it was good to
hear from a practitioner of the market. Let's put it
that way.
Speaker 2 (47:27):
There were many interesting things in there, particularly in the
supply chain aspect of the conversation that I think, you know,
sometimes we talk about like the world isn't a neoclassical world,
like market signals. You know, you have demand for something,
but the supply doesn't just arise, and you know, he
had a line about the balance sheet of the suppliers
(47:48):
to his own company, and how few of them, et cetera.
And so you think about like this sort of like
sequence of off take agreements, the demand for the electricity,
the demand for the ships, et cetera. And then you
think about, Okay, there's some companies somewhere, maybe probably in
Europe or somewhere that makes a key component. But they
don't have unlimited amounts of money. They can't just ramp
(48:09):
up instantly, or they can't just have excess supply excess
inventory if they don't know. And so you could see
how like fragile it is and how important it is
to get that sequencing right to actually get these things
done in time.
Speaker 3 (48:22):
Well, it also seems to me that traditional economics is
especially ill equipped to deal with I guess, industries with
incredibly long timelines, right. It seems like that's where you
sort of get the lag between the demand signal and
the actual supply increase. And as far as I remember
from like AP microeconomics.
Speaker 2 (48:43):
It'sok AP.
Speaker 3 (48:44):
Yeah, actually I still have grievances about microeconomics AP, but
as far as I can remember from that, it was like,
you know, you draw the little demand supply chart and
the lines cross, and like there's very little discussion of
the actual like physical constraints around building up that production capacity.
(49:04):
The companies are supposed to hear like, oh, we want
more of this thing, and so prices go up and
they immediately start building it out. But as we've seen
time and time again since twenty twenty, it doesn't always
happen that way in practice.
Speaker 2 (49:18):
No, it definitely doesn't. And all I always say is
I wish we had done the IRA in twenty ten. Well,
we had abundoned all that stuff. But it does seem
like I kind of came away from the conversation, so
actually two things I kind of now come on the
side of, Like, it does seem to be like a
mix of bad timing and bad luck and growing pains.
(49:41):
And I think the best argument for that as simple
as like, there is a booming offshore business in Europe,
and it can be done. It can be done cheaply,
and it can be done economically. But if you're starting
from zero and you're trying to build an US and
you have the Jones Act, and you have various incentives
for domestic steal and domestic labor, and maybe those get
(50:02):
in the way. I don't know, like this is a
ramp up process. That.
Speaker 3 (50:06):
Yeah, I was going to say the exact same thing.
So there was a time, and I think we spoke
about it with Chelsea and I kind of mentioned it
in the intro where I thought, maybe wind is basically
a low interest rate phenomenon like cheap ubers or we
work or something like that. But speaking to David, I've
(50:27):
sort of come away thinking it was that extraordinary combination
of really bad timing in the form of both supply
chain disruptions and the ramp up in interest rates, and
the fact that you're at the very beginnings of this
particular technology, at least in the US, and that, as
you said, there is a comparative model in the form
of Europe where there is some subsidy free wind and
(50:50):
the cost is much much lower.
Speaker 2 (50:53):
So yeah, maybe there's hope.
Speaker 3 (50:56):
All right, shall we leave it there.
Speaker 2 (50:57):
Let's leave it there.
Speaker 3 (50:58):
This has been another episode of THEOS podcast. I'm Tracy Alloway.
You can follow me at Tracy.
Speaker 2 (51:03):
Alloway and I'm Joe Wisenthal. You can follow me at
the Stalwart. Follow our guest David Hardy. He's at David
Hardy us follow our producers Carmen Rodriguez at Kerman armand
dash Ol Bennett at Dashbot and Kelbrooks at Kelbrooks. And
thank you to our producer Moses Ondem. For more Oddlots content,
go to Bloomberg dot com slash odd Lots, where you
have transcripts, a blog and a newsletter. And if you
(51:26):
want to chat about all of these topics, you can
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Speaker 3 (51:33):
And if you enjoy ad thoughts, if you like it
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(51:53):
find the Bloomberg channel on Apple Podcasts and follow the
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Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:20):
Hello and welcome to another episode of the Odd Lots podcast.
Speaker 3 (00:24):
I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 2 (00:26):
Tracy, we've been talking a lot of electricity lately.
Speaker 3 (00:29):
Actually, yeah, it's been what energy months here on Odd Lots.
Speaker 2 (00:33):
Not really intentionally, but yes, it's sort of becoming energy
month here on Odd Lots. I find like understanding any markets,
any understanding any commodity markets or whatever is sort of
extraordinarily difficult, But I find power and electricity to be
sort of like orders of magnitude. Like it just sort
of like my mental model how it all works is
(00:54):
so still like in co it and immature, and I'm
just sort of understanding it. Like it feels like so
much more complicated, all these auctions and micro auctions and
mini markets, and you know, it's it feels a lot
more complicated in my mind than say, like trading oil.
Speaker 3 (01:09):
My mental model for how it all works is that
meme from It's Sunny in Philadelphia with the posting notes. Right,
It's like this weird pseudo government private thing where on
the one hand, you have natural monopolies in the form
of the grid and then on the other hand, you
have all these private individual actors who are trying to
(01:30):
do all these new things, and it just it seems
enormously complicated. And in some ways it's becoming more complicated
because you do have efforts to hasten the energy transition
in the form of things like the Inflation Reduction Act.
This network of tax credits and subsidies seems very difficult
(01:51):
to understand to me as well.
Speaker 2 (01:53):
Right, and we had this grid that for years sort
of operated with gas and coal and some nuclear, and
now you know, over the last several years and the
Inflation Reduction Act has tried to accelerate it get more
renewable clean energy on the grid. So we're sort of
putting a new model of production onto an existing model
(02:13):
of distribution. Creates all kinds of new things. One thing
in particular, though, you know, we're here in the northeast
and you know, we don't get a lot of sunlight,
or we do, but you know.
Speaker 3 (02:24):
We get it's erratic.
Speaker 2 (02:26):
It's erratic, and for much of the year there's hardly
any and so if we're going to sort of decarbonize
a lot of the northeastern part of the grid, the
bet is that a big chunk has to come from
wind and in particular offshore win Yes.
Speaker 3 (02:39):
Absolutely, and this is something that we've touched on before
in an episode with Chelsea Jean Michelle, the wind industry
analyst for Bloomberg nef SO, one of our colleagues here
at Bloomberg. And I think, to me, the big question
is we have all these projects and there have been
some hiccups over the past year. So we've seen projects
(02:59):
can sold, We've seen a bunch of big energy companies
take impairments on wind projects. We've seen energy stocks, you know,
fall quite a bit. There's the potential return of a
known wind energy disliker, let's put it that way, in
the form of Donald Trump. All these different headwinds for
(03:20):
the industry, and to me, the question is still, are
these growing pains for something which requires enormous upfront investment
and the creation of a lot of really really big
structures in the form of turbines and complicated supply chains
are needed to build those and huge investment outlays and
all of that. Or is this something more fundamental about
(03:44):
the business that's the big question in my mind, Like,
is this just a question of transition and getting started,
or is this maybe saying something more long term about
the industry.
Speaker 2 (03:55):
I think that's a great way to frame it. And
you know, the only thing I would add is further
complication to this question is that the IRA and this
like particularly aggressive imperative right now is coming at a
time when like every industry saw supply chain disruptions and
every industry saw rising cost of capital thanks to the
(04:16):
raid hikes and inflation, etcetera. You know, you know, we
if we had to do over, maybe we would have
started this done an IRA like act in two thousand
and nine or twenty ten when we had significant unemployment
and commodities were dirt cheap, but we didn't. Can't go
into the past. And so answering these questions, how much
is growing pains, how much is the bad timing with
supply chains?
Speaker 3 (04:35):
How much?
Speaker 2 (04:36):
Very complicated, but that fits the theme of how complicated
the energy markets are, power markets are in general. So
we continue our process of discovery of learning about how
it all works.
Speaker 3 (04:48):
I am excited. We do, in fact have the perfect
guest for this episode.
Speaker 2 (04:52):
We do have the perfect guest. We are going to
be speaking with David Hardy. He is the CEO of
the America's division at ORSTED, which is the huge fish company,
one of the global leaders in wind power. He had
previously been the CEO of the offshore business at ORSTED
after joining the company in twenty twenty, so the right
in the sweet spot to help us disentangle all of
(05:15):
this stuff. So, David, thank you so much for coming
on the podcast.
Speaker 4 (05:18):
Thanks Joe and Tracy. Great to be here.
Speaker 2 (05:20):
Absolutely, So why don't we start off twenty twenty three
I think was sort of overwhelmingly recognized as a very
challenging year, both for offshore wind and also ORSTED specifically.
And we can get into some of the projects, but like,
why do you give us the sort of like high
level summary of like what we saw unfold over the
(05:43):
last year eighteen months or so.
Speaker 4 (05:45):
Yeah, I appreciate, appreciate the question. I also appreciate the
introductory dialogue you had with each other thinking about how
complex it all is, and I have to echo that
it is a it is a complex industry. I actually
enjoy that because you know, with complexity you can differentiate.
It's a lot harder to differentiate if you're selling a
cup of sugar to against the other guy. Who's selling
(06:08):
a cup of sugar. But and likewise, I think the
question from Tracy about, you know, is this growing pains
or you know, what was the cause? I think it
is kind of all of the above, but specifically a
little bit of you know, no one likes to in
business say bad luck, but a little bit of bad
(06:29):
timing I would say is there was a lot of
ambition and expectations and growth expected from from the US
and offshore wind as as the maturity of the industry
overall in Europe reflected an opportunity for America. I remember,
or said, built the world's first offshore wind far more
than thirty years ago, and as the world leader an
(06:51):
offshore wind and has you know, nine gigawatts operating, and
a lot of those were pretty low cost projects prices
in Europe. The US Northeast states especially who you know,
don't have a lot of sun, as you guys said,
and also don't have a lot of space, saw offshore
win as the kind of panacea for how to get
(07:12):
large amounts of green energy you know, onto the grid.
And and so there was a big fast ambition and
growth and orsted as the leader saw the opportunity and
and and took an aggressive position of building projects and
built building, you know, signing up for off take and
and committing to billions of dollars of capital investment in
(07:35):
this market, all as COVID hits were in Ukraine, massive inflation,
rising interest rates, and yes, all industries were affected by that,
but renewable energy in general is very, very susceptible to
rising interest rates, and offshore win even the most of
(07:55):
all of the renewable energy sectors because it's so cap intensive.
Our fuel is free, we say, but our fuel is
really the cost of capital because we put so much
capital out upfront, and so as interest rates rose three
hundred BIPs, it just fundamentally changed the economics of the projects.
And then on top of that, we had you know,
(08:16):
bespoke inflation, not just generic CPI but but industry specific
inflation that led to thirty forty percent cost increases. And
those two factors just basically required a reset, and or
SAT unfortunately, was the most exposed and the most progressed.
We had some really late stage projects where we had
(08:37):
already invested you know, up to a billion dollars in
one project for example, and made commitments for more. And
when we we were trying to pull all the levers
and take all of our experience to try to make
these projects go, and and in the end we couldn't
make them all go. And you know, we we had
to make some some tough decisions in twenty twenty three
(08:57):
to cease development on on a couple of projects. One,
like I said, was a really late stage project, and
so it took a big financial impairment and a financial
provision for the cancelation charges for that project. But on
the bright side, and we'll hopefully get to this part.
We have three projects that we're still building which are
(09:19):
one is completed, actually America's first commercial scale offshore wind farm,
the South Fork Wind Farm, was just completed a few
months ago. And we've got two other very large commercial
projects that we've taken our so called financial investment final
investment decision, and we're in construction offshore on one of
them and building the onshore. You build the onshore part
first or in parallel with these projects. But the second one,
(09:43):
we're in full construction mode on the onshore part. So
I think a little bit of being exposed and being overexposed,
you know, in retrospect, could we have slowed earlier, probably
in retrospect, you know, could we have not been as
ambitious and kind of daggered the number of projects we
were building in the US. Probably Obviously there were some
(10:06):
you know, market specific challenges that impacted us. A lot
of these early projects didn't have any inflation protection and
the off take, the permitting process was slow, et cetera.
So there's some US specific things, but a lot of
it is actually global macro supply chain imbalance, global macrol
cost of capital, et cetera. That just impacted us in
(10:26):
a negative way in twenty twenty three. Sorry for the
long answer. I'll be shorter in the future, but.
Speaker 2 (10:30):
That was very helpful. Also, it's good. Could you gave
us like six follow up questions automatically?
Speaker 3 (10:37):
Yes? So, okay, first follow up question, but just on
the idea of rationalizing some projects and even some late
stage ones which you mentioned, and I assume you're talking
about the farms in New Jersey Ocean wind But how
do you decide what to continue with and what to cancel?
(10:57):
Like is it a question of math and the financing
costs and the interest rates that you just outlined, or
is it sometimes a question of physical limitations, so things
like supply chain issues. The lack of this is Joe's
favorite subject. The lack of transformers or switch gears or
the lack of this is another traditional odd lots topic,
(11:18):
the lack of ships to actually build these things.
Speaker 4 (11:22):
Yeah, it's another kind of all of the above answer.
You know, we we look at everything. Of course, you know,
our publicly stated ambition is that we you know, try
to achieve one hundred and fifty to three hundred bit
spread to whack. So and we are wack weighted average
cost of capital. We have a WHACK model basically that
(11:43):
course is funded in our our corporate cost of capital.
But then we we have whack adjustments to kind of
create a project specific whack based on the market, the technology,
project specific risks, et cetera. So we create this whack
model and then we then we try to achieve you
one hundred fifty to three hundred spread to whack against that.
And so when when we're looking at projects, that's kind
(12:05):
of our one of our first hurdles or KPIs that
were that were very very focused on. So as I
alluded to, is your costs are going up, that spread
to whack is being compressed. As your cost of capital
is going up, that whack is going up, and so
you pretty quickly can get upside down on that spread
to whack. If if the ambition has only one fifty
(12:26):
to three hundred and the WHACK went up by three hundred,
it's pretty tricky. But at the same time, you know,
we are also trying to be strategic. We were trying
to make investments in a market, and at some point
we had some sunk cost and so even though our
guiding star is this life cycle spread to whack fully
loaded kind of KPI, we started adjusting a little bit
(12:47):
and saying like, well, if we cancel, we've got these
sunk costs we're gonna have to write off anyway, So
should we just assume them as written off and look
at ford I rrs And so we started changing our
parameters a little bit and barometer a little bit as
we were getting into the tough situation to see if
it strategically made sense to keep going. And we were
constantly looking at the supply chain and seeing, okay, well
(13:09):
what risks are still ahead of us? If we sit
with a with a target today, you know, how realistic
is it? We'll be able to hold that. Of course,
we had our big risk registers, and we have our
modeling of you know, what things are going to cost,
and we had contingencies and all that built in, but
you still kind of have a scientific but not perfect
scientific probability analysis of outcomes. And if you're you know,
(13:34):
P ninety nine outcome is really really bad, and you
know your P fifty looks okay, that's different than if
your your standard deviations are more narrow between your P
fifty and your P ninety nine. And so as we
looked at these projects, there seemed to still be a
lot of challenges ahead, and so again the management team
(13:55):
and the board had a discussion and we decided that
we weren't comfortable with continue to invest in the projects,
and we thought it was better for the company, for
the portfolio to go ahead and cancel, take the big hit,
but hopefully take a little a little bit of risk
out of the system, a little bit of risk out
of the supply chain, and a little bit of you know,
(14:17):
more focus from the organization so that we could make
these three projects that we did want to keep going
forward with successful and that's that's been our target. And
of course this is all from an America's perspective, but
or said it was doing this you know globally, like
looking at projects that had in Asia and Europe, et cetera.
Speaker 2 (14:50):
So, first of all, I'm very appreciative that you've gone
right into things like spread to whack because this is
exactly you know, what we want to understand better, but
just to conception rualized sort of like what was or
is the sort of way to think about like the
difference between say, the South Fork project and the New
Jersey project. What was it about one of them that
(15:11):
it's like, Okay, this makes sense to go ahead and
complete it, and another one is like, no, we're going
to take the hit on this and write off some
of this investment.
Speaker 4 (15:19):
Yeah, without getting into specifics, but conceptually it's about, you know,
how like how negative is the MPV or how you know,
how much more risk was there ahead of us, how
much more unknown? What supply chain challenges were still out there?
And one of the challenges with Ocean Win one in particular,
was that as we were approaching kind of the build
(15:43):
up to this decision, there were new global supply chain
challenges that were emerging. So potentially, you know, delays in
our foundations delays, and our turbines delays and vessels, and
then you have these knock on effects. Right if you're
planning to to start installing foundations and let's say summer
of twenty four, which is what our plan was, and
(16:07):
now you know those foundations aren't going to be ready
until twenty five, or your vessels, you know, your vessels
stuck on another project and it's not going to be there.
Then the whole project has to shift because there's a
sequence of how these things get built. And so then
when we had lined up you know, the literally you know,
hundreds of other contracts to make this whole project sequence,
(16:30):
and the whole thing was going to have to shift.
Then we were pretty concerned that as we reopened, as
we went out to supplier A or supplier B and
said we now need to shift this project from twenty
four to twenty six, that all of their pains that
they were feeling from the macroeconomic challenges we're going to
be on the table because we had locked in some
(16:53):
thing's pre the big inflation, and we had actually had
some very favorable pricing potentially, But as soon as you
reopen up things then then everybody's clawing back, and so
I think that that was one of the big, big
discussions that we had. And at the time, we weren't
sure how the state was going to respond and you know,
(17:14):
if they would work with us to to you know,
to make make the project work. And so we just
decided to make the call. We're with South Fork for example.
Yes it's a tight project, but but we didn't have
those same new supply chain risks that we that we
saw on the horizon with Ocean Wing one.
Speaker 3 (17:34):
Wait, can you talk a little bit more about those
supply chain risks because I kind of alluded to this earlier,
but this is core odd lots thematic content, so things
like switch gears and transformers and then the ships as well.
Speaker 4 (17:48):
You know, offshore wind is growing rapidly across the world, right,
It's not just here where people saw this as a
as a solution to get large renewable energy. And remember
it in Europe, right, Russian invades Ukraine. Europeans want energy sovereignty,
and so offshore wind became like even more important as
(18:10):
they got off Russian gas. And so you all of
a sudden have this huge supply and demand imbalance, particularly
on things like HVDC systems, but also vessels, monopiles, et cetera.
And some of these companies are not you know, super large,
well funded balance sheet companies, so they can't just see
the demand signal and ramp up the way that you
(18:30):
would think they could. And also just the way the
industry works, it's long cycle, so we typically don't want
to like commit in a kind of take or pay
way for whether that's vessels or equipment until we take
our final investment decision to tell the projects to your risk,
how we have our permits, our interconnect agreements, our land
(18:52):
rights are you know, et cetera. Are are a point
of interconnect agreements. And so there's a little bit of
a chicken in the egg on like if the supply
chain builds, it will there be demand or do they
want that demand locked in? But we're not we and
I'm saying we not orsted, but we the industry are
we even though there's a lot of demand signals, are
we committing? So they have business case certainty and so
(19:14):
you kind of have had this challenge on the supply
chain supply chain ramp up and and so definitely there's
a global imbalance I would say on some of these
key offshore when supply chain categories. And you know, the
plan was that in the US, we were going to
build our own capabilities here, we wouldn't need the global
(19:35):
the global supply chain. But then again, the same chicken
and egg problem. Right. We had a bunch of projects
that had promised to help contribute to both demand and
in some cases even contribute to some of the upfront
costs to build out some of the supply chain. But
then when the economics or the project didn't work anymore,
then of course the economics for the supply chain didn't
(19:56):
work anymore. So we're in a reset period for most
of the product in the in the US. Other than
kind of R three and and a couple couple more,
the rest of the whole industry is basically, you know,
had to recontract and push out and and we're you know,
kind of in a re re reset of the macroeconomic conditions.
Speaker 2 (20:17):
I'm going to dive right into a subset of the
supply chain question that speaks to this that also sort
of our one of our core topics. Talk to us
about the Jones Act, how it affects affects your business
and I think Orsted has a you built your own
Jones Act compliant vessel, But I think that's right. But
(20:38):
talk to us about like this particular piece of legislation
that's been around forever and what it means for basically
the industry's capacity to build out US offshore wind.
Speaker 4 (20:51):
Yeah, I mean the Jones Act for for those that
don't know, and I'm just going to make it simple,
it requires a US flagged which means US owned and
operated and built vessel to transport equipment from one US
port to another. These products are built in the US
Outer Continental Shelf and so they're subject to the Jones Act.
(21:14):
In general, i'd say, or said, we're supportive of the
Jones Act. It is, you know, it's it's another challenge
to starting up the industry and we would love to
have some you know, some waivers in the beginning and
then you know, work with with the shipbuilding industry and
others to build out the fleet because it's difficult to
(21:35):
build off shore wind with Jones Act requirements when there
are no Jones Act vessels that exist. We were first
movers in working with another company to invest in and
commit create demand for a Jones AC wind turbine installation vessel,
which is one of the really big expensive spoke vessels
that actually installs the wind turbines. But there's actually a
(21:57):
whole lot of other vessels. There's cable laying vessels, dumping vessels,
foundation installation vessels, service operation vessels, et cetera, et cetera.
So we were, we were and are committed to trying
to help build out that fleet. But in the beginning,
wed they vessels don't exist. It's hard to comply, and
so we we in the industry have built workarounds where
(22:20):
we you know, either stage stuff outside of the US,
or we bring it directly over from Europe, or we
barge things out with US flagged tugs and barges and
transfer equipment to European flagged or other than US flagged vessels.
And so it's been a it's been a it's been
(22:41):
a hindrance, I would say in at least being able
to get the most cost effective offshore wind in the
US on early projects. And so yeah, we're still just
working through it, both getting first projects built and trying
to support the maritime industry. You did allude to, like
I said, we were the first charter for a vessel
(23:06):
called the Caribdas which Dominion Energy was building for their project,
and we helped secure the business case for the vessel,
but the vessel was very very late in being completed,
and so we had to pivot to this bargin tug
solution for our three Northeast program projects. So we're not
using the Charybdis for those. But we have built a
(23:27):
handful more than a dozen I think crew transport vessels,
and we just a few weeks ago I was alluded
to the celebration we're having in Louisiana with Leader Scalise
where we built a large service operation vessel there which
is Jones Act compliant, and we're contracting other vessels that
are under construction for other parts of the offshore wind
(23:50):
set up.
Speaker 3 (23:51):
So just on this note, you know, building some of
your own transport vessels. I sometimes wonder is this the
solution for off shore wind? Is it just that you
guys become more diversified in terms of what you're doing
and end up building out your own supply chain of
the necessary components and tools and transportation that's needed to
(24:13):
actually build these huge wind turbines.
Speaker 4 (24:16):
Yeah, it's a discussion that we have internally a lot.
Remember these are super capital intensive projects. You know, a
gig at twelve hundred megawatt project in the US today
in the order of magnitude of six billion dollars, I
would say, just for us to buy all the stuff
we need and pay for all the stuff we need
to build a project. So if then we have to
(24:36):
spend billions of dollars building ships and building factories and
doing everything ourselves, it starts to become you know, very
few companies that have the balance sheet to do that,
And so I don't think that we want to necessarily
be completely vertically integrated, but there's certain times where maybe
(24:57):
it could make sense for us or others in the
end street to do that. What we what we want
to do is be able to give strong demand signals
so that the supply chain has the you know, the
wherewithal to make their own investments and to meet the
demand for all the components and infrastructure that we need
for these projects. But it's to be determined still, how
(25:19):
that you know what the best way forward is to
do that. Again, we don't want to be a turbine
manufacturer or a monopile manufacturer. We're an energy company that
develops projects and operates them and sells electrons. But we'll
see we've definitely make financial investments to support the supply chain.
So that's a big part of what we're doing to
try to secure our own success.
Speaker 2 (25:41):
I feel like in all of the conversations we have
about energy, and in particular it seems to be renewable energy,
but energy in general, it's just like off take off,
take off, take the consistency, the importance of that the
demand and that demand signal, and so whether it's the
demand for electrons that are produced by wind and then
(26:01):
the demand from companies like ORSTED for the Jones Act
compliant vessels or the infrastructure for the foundations, just like
that sort of continuity of the demand signal seems to
be really critical. I just want to go back to
one thing you said, just real quickly. I think you
said you're supporters of the Jones Act. But why it
(26:22):
does not sound like it's been helpful. What did you
did you? What did you mean by that?
Speaker 4 (26:27):
I think we're supporters of building an American supply chain
which includes vessels which then inherently would be Jones Act compliant.
So even though we're a Danish company, even at the
very top of the organization, but definitely at my level.
We're trying to build an American industry, not just build
(26:47):
offshore projects with you know, Asian or European supply, and
so to the extent that we can help build more
Jones Act compliant vessels and create you know, that part
of the economy, the economic stimulus et cetera for Americans,
or support of that, it is difficult. You know, the
(27:08):
Jones Act makes it difficult to get this industry off
the ground. For sure. I won't say that that's not true,
but in the end we know that, you know, part
of the value proposition of offshore wind is the economic
benefits to Americans and job creation, et cetera.
Speaker 3 (27:39):
So, just on the question of off take and sort
of persistent sources of long term demand, Joe and I
recently had a conversation with Brett Christophers, who just published
a book called, what is it called The Price is Wrong? Yeah,
The Price is Wrong basically about why the current market
mechanisms being used to courage the green energy transition aren't
(28:02):
necessarily working. And one of his points is that there's
a difficulty here. You know, if you're trying to finance
a renewable energy project. There's a lot of uncertainty around
future pricing and future demand, and so it makes securing
that funding very difficult. People in traditional finance might be
(28:23):
a little bit reluctant to give money to something that
is more than likely going to be volatile in the
future and might be difficult to model for various reasons.
I'm curious from your perspective, how do you model out
that demand picture? And then do you feel like in
terms of the federal government or maybe some states that
(28:46):
you're getting support for that sort of long term demand outlook.
Is there a recognition that people have to provide that
demand signal to you as well as maybe help with
some of the initial financing.
Speaker 4 (29:02):
Yeah, I'm going to actually start with the latter question
first and then come back to the first question if
that's okay, because you know the demand and I'm talking
about offshore wind now, but in onshore renewables, they've been
around for a while. There's a big, big marketplace, and
the financing is working right, and we've built probably over
(29:22):
two hundred gigawatts of onshore wind and solar in the US.
So so I'm not sure I one hundred percent agree
that that it's hard to finance renewable energy. Obviously, that's
been on the back of some incentives, federal incentives that
have been in place throughout the whole period of time,
which eventually we need to wean off of. And likewise
(29:43):
it's been on the backs of some you know, kind
of probably state state policies, rps's renewal portfolio standards, et cetera, right,
that have driven this. But it increasingly it's CNI customers
that are providing the off take and they're in their
desire to have green electrons. When I pivot off shore win,
it's really the same, except that it's just more immature
(30:07):
and so you don't have like a third party CNI
market yet. And the price the prices are higher still
because we're making all these upfront investments in infrastructure that
need to be carried by the by the megawatt hour
price embedded in a project. And so again it's the
states demand and the states off take that are driving
(30:29):
the surety that we've got a revenue stream that then
we can finance. But also it's the tax incentives that
are all offsetting some of the of the cost. And
so I think between the the IRA and the federal
incentives that we have and the states that are driving
the demand for offshore win that we can we can
(30:52):
finance these these projects. Unfortunately, it's the tax credits are
pretty large because they're itcs on this big six billion
dollar project. I'm just using that a round number. But
then you know, it's a tax credit that we can't
self monetize because we don't have enough taxable income. Or
(31:12):
we could, but it would take a long time to
work that off, and so typically you have to use
a third party monetization method and then there's you know,
intermediators who are making some money along the way, so
it's not always the most efficient way. We were advocating
for direct pay, which could have cut out, you know,
some of the cost to have third party monetization of
(31:35):
tax credits, but that's probably a whole another topic we
could spend a different podcast on.
Speaker 2 (31:39):
Yeah, we've been meaning to do a tax credit episode.
So at some point, well but anyway, keep going because
that market seems interesting, but keep going.
Speaker 4 (31:47):
Yeah, but the it wasn't necessarily the lack of off
take that has caused these projects to have to stop
or to be unfinanciable. It was the change in the
cost of capital, and it was the change in the
cost quite frankly. So now we just need an adjustment
to the off take, you know, willingness to pay what
(32:08):
it will take for someone like us to earn a
return or not trying to be greedy, but we need
to earn a return for our investors. And is our
states willing to pay the cost and make the investment.
The federal government is doing its part, or you know,
maybe the states would say they need to do more still,
but you know, everybody needs to do their part to
(32:30):
get these first projects off the ground, get the supply
chain bilk at the upfront cost bilk at the ship's built,
and then I'm very confident the levelized cost of energy
will come down because you can see when you look
across the Atlantic, you can see much much lower cost
offshore wind than we have. But they've got thirty years
of investment in supply chain ships ports that we're trying
(32:52):
to to do it at much faster pace, and those
costs need to be born somewhere and carried somewhere, so
they're being carried in the megawatt hour price that that
you see for offshore win?
Speaker 3 (33:04):
Is there a point at which we could see subsidy
free projects in the US like the ones we've seen
in Europe and I guess specifically the Netherlands. How far
away would that be.
Speaker 4 (33:17):
For on shore I think it could be relatively quickly.
I mean, some of my colleagues in the industry, you know,
don't don't want me to say that, but I mean
the industry is fairly mature. The price of solar and
wind are very competitive with the incentives still and would
still be reasonably competitive without them. For offshore win, Yes,
(33:37):
eventually we can get there as well, but we've got
we've got a ways to go, you know, just because
there is so much upfront investment that needs to be made.
For example, you know, we invested we in our JV partner,
ever Source and the state of Connecticut jointly invested over
two hundred million dollars to build one port. Others in
the industry are investing in ports and massive use. It's
(34:00):
New York, you know, we invested before we left New
Jersey it's over one hundred million dollars into a monopile
manufacturing facility. One ship the Dominion built. I don't know
the exact number, but half a million plus minus I
mean sorry, half a billion plus minus on that ship.
So there's a there's a lot of upfront startup costs
(34:22):
in this in this industry, which you could say, hmm,
that's going to be expensive, but in it and it is.
But it's also it's also creating economic development, right, all
this all this investment in these factories and these ships,
in these infrastructures creating jobs and and and actually making
the US you know, more robust. This port that we
(34:44):
invested is not just for offshore win it's now a
much better port for other things, for multimodal asset for
for the state of Connecticut for example.
Speaker 2 (34:55):
Real quick question. You know you're talking about the higher
higher interest rates or high cost of capital, particularly I
don't know if lethal is the right word, particularly damaging
to the renewable sector. Is it less? Just to sort
of conceptualize why that is, is the European wind industry
or offshore industry less sensitive by virtue of the fact
(35:18):
that it's been around so long and thus has less
core infrastructure that needs to be built out right now, I.
Speaker 4 (35:25):
Would say that yes, because the same you know, twelve
hundred MEGAWAP project in Europe doesn't cost six billion, it
costs less. And so the reason it's so susceptible is
because of the high the high upfront costs. The more
the more you need to invest upfront, the more interest
rates matter, right, And so you can build a project
(35:46):
for less CAPEX in Europe than here. And part of
it is the infrastructure difference, as part of it is
scope difference. We build you know, the we build the
generating plant, but we also build the bespoke transmission from
the generating plant to shore. Then we also are upgrading
the onshore grid, the existing grid in order to accept
the offshore win. And then we're building the infrastructure, the ports,
(36:08):
the vessels, the supply chain. And then we also are
having to import everything from Europe, so just cost more.
The transportation, installation costs are significantly higher. And then we've
got you know, our Jones Act, which is not super efficient,
and we've got other things that make it more expensive
to build here. So the interest rates affect us more,
but the interest rates affect them too. I mean, the
(36:30):
cost of offshore WIN has gone up in Europe as well,
it just was much much lower, and so it's gone
up to a point it's still significantly attractive from my perspective,
especially compared to US.
Speaker 2 (36:42):
I want to go back to something you said early on.
You know, almost the day after the Inflation Reduction Act
was passed, then a bunch of people was like, oh, well,
it's great, all this money is going to build things,
but permitting and you mentioned permitting, and you know, in
my mind is like, guys, you should have put that
in the bill itself some way. What specifically with permitting,
(37:03):
How is that impaired timeline? Like what comes up in
the permitting process that slows down these projects.
Speaker 4 (37:11):
I think there's a couple different ways I could answer that.
One is that you had an administration that wasn't so supportive,
and so I think, you know, maybe there were delays
that were happening by design for prior prior to the
current administration. Then you have a really ambitious and supportive
(37:32):
administration who wanted to see everything go, but they they
had a huge backlock they had to work through, probably understaffed,
and it's new they had to you know, no one
had permitted offshore wind projects in the US, and so
people are trying to figure it out, and so you
know that's caused some delays. In general. I'm I'm a
big fan of you know, current current administration and Boehm
(37:55):
and everything they've done. They've completely one eighty degree. You know.
Now there's I think six or seven permitted offshore win
projects and so you have to really give them, give
them credit for that. But it's it's not running, you know,
like a Swiss Swiss watch yet. Right there's still ideally
supposed to be a twenty four month process. That's more
(38:15):
like a forty eight month process. So and that's you know,
hope hopefully can improve if we can keep some consistency,
but we'll have to see.
Speaker 3 (38:24):
You mentioned gaving out the probability of outcomes earlier, and
I think you were mostly talking about that in the
context of interest rates. But I have to imagine the
political landscape must be on your radar, and so I'm
curious how you're thinking about, you know, the potential return
(38:45):
of Donald Trump to the US presidency and how you
would begin to calculate how that would impact your business.
How do you actually think about that type of policy risk.
Speaker 4 (38:57):
We always start with the with the macro and we
all also obviously overlay the political side to things, and
so from the macro, which we haven't spent a lot
of time talking about, but you guys alluded to it
in the beginning. I think there is a significantly increasing
electricity demand happening in America between ev adoption, electric heating,
(39:21):
reshoring of manufacturing and probably the biggest thing of all
AI and data centers required for that. There's a lot
of electricity demand anticipated in the US. And where is
that electricity going to come from? And whether you're on
the left or the right, one of the big waste
to get big chunks of electricity is through renewables and
(39:45):
in certain parts of the country offshore wind. Even if
you don't care about green it's a way to get
a lot of near boat base load electrons onto the grid,
which we need as a country. Then you think about
all the stuff that we have spent a lot of
time on the job creation, the infrastructure and its core
(40:06):
things like steel and ports and ships and factories, and
these are things that are bipartisan right Just in our projects,
we can trace the supply chain to forty different states
that are contributing, So it's not just benefiting Rhode Island
or New York. It's the supply chain goes across most
(40:28):
of America, and so that's red states, Purple states, Blue states,
and most Americans value job creation, economic progress. And last
I would say is that you've got a strong energy
security argument here, where we want to be a net
exporter of energy and we are today with L and G,
(40:50):
but we want to maintain that position. And the more
renewable energy that we build in America, the more opportunity
we have to maintain that energy security and that net
exporter of energy position. And so to me, offshore wind
renewables is much more bipartisan than than maybe people are
(41:14):
making it out to be. And of course we're not
just pushing the hope button. We we've we've got mitigation
plans regardless of any outcome. But we're you know, we
we I talked to Republicans all the time, and many
of them understand everything that I just said and understand
the importance of this sector. And so yeah, we're we're
(41:36):
weighing out the the outcomes. We've you know, written board
papers and had lots of discussions and you know, have
third party inputs on things. But we believe in the
in the fundamentals of the industry, and we're confident that
that offshore winds here to stay.
Speaker 2 (41:53):
Just on this politics point real quickly, or that maybe
not politics point, but the policy question. You know, we
talk about the Inflation Reduction Act, and we usually sort
of talk about it in vague terms tax credit, subsidies,
et cetera. But actually, can you just give us a
sort of succinct summary of the specifics what you get
and how the Inflation Reduction Act changes the math for
(42:16):
you on any given project. What specifically you know you
go into a project today in twenty twenty four versus say,
twenty nineteen, what's different about it today post di ray.
Speaker 4 (42:27):
Yeah, First off, the longevity of it is good. It
was kind of oftentimes one year or two year kind
of extension of an existing tax credit historically primarily the
production tax credit, which was a certain two point three
cents per megawatt hour of sorry per kill a what
hour of production? But you you know, you're trying to
(42:48):
get your start of construction, so you qualified in the
year that the tax credit was still eligible, and then
it would get renewed and it was like the stop start,
you know, drama for the industry, and even in Onshore
it's it's a medium cycle business and that was really
disruptive and offshort it's much longer cycle, so it would
never work. So having the kind of the tenure horizon
(43:09):
I think was a big big factor. Then in addition
to the traditional PTC and ITC, the difference Production tax
credit was this you know, kind of incentive that was
added that you get for every mega what hour you produce,
you get an extra tax credit that you can monetize.
ITC is a percentage of the eligible basis of the
(43:32):
investment that you make. So there's a certain portion of
the infrastructure that is eligible for the ITC for the
investment tax credit, and then you could get the base
ITC is thirty percent, so you could get the equivalent
of a thirty percent tax credit for whatever portion of
your investment qualified. And then you have to go again
(43:54):
third party monetize that most companies do, so you might
not get the full thirty percent. You get some hair
cut on that because there's you know, a bank in
the middle or or somebody that was you know, taking
some of that value. And then after the IRA that
was always a bank typically in the past, but now
the IRA has something called transferability, So basically any taxpayer
(44:16):
now can take advantage of these helping monetize these tax credits.
So you could be a toothpaste company and you can
basically negotiate with us, and if you've got a tax
liability and you want to offset that with tax credits,
you can negotiate with us. Is that ninety nine cents
on the dollar, ninety cents on the dollar, whatever, we
(44:37):
can negotiate and they can monetize those tax credits for us.
So that's that's nice. It creates a larger pool of
tax investors. And then there are two additional we'll call
bonus tax incentives. One related to something called energy community.
So if a project is built and this goes for
onshore and offshore, but if a project is built in
(44:58):
a community that's deemed to be an energy community, either
primarily like a historically X traditional energy community like an
X coal mine or an X coal coal factory or
an X oil and gas you know location. Also there
are some definitions around if it's a contaminated brown filled area,
(45:21):
if it had certain contaminations, then it qualifies as an
energy community. So this is all across America. There's these
energy communities that you can qualify for, and if you
build a project in those communities, you can get an
extra ten percent tax benefit. And then the last one
is an extra ten percent bonus for domestic content. And
again the domestic content definitions vary from entoursolar and wind
(45:44):
and offshore, but there's a certain requirement of what percentage
of the project needs to be produced domestically. You know,
in some cases it's there's some other provisions one hundred
percent US steel this or that. There's also some other
a lot of a lot, a lot a lot of
little nuances of about using US labor and having apprenticeship
programs and other things that they all go into this,
(46:06):
but it's all designed to help create more of a
domestic industry. But I guess to sum it up, you
can get up to fifty percent of your let's say
ITC's of your eligible basis tax credits, and then you
need to go monetize that.
Speaker 2 (46:21):
So, David Hardy, that was a fantastic conversation. Really appreciate
the detail and the explanation. I actually feel like I
learned something in that. So thank you so much for
coming out of lock.
Speaker 4 (46:32):
Heh, you're welcome. I'm glad that you think you learned something.
Speaker 2 (46:35):
No, I definitely did know that we continue our process. Yeah,
we continue our learning group. No, that really was that
really was excellent and exactly what we're looking for. So
I appreciate it. Now let's stay entire absolutely Tracy. I
(47:00):
thought that was great. As soon as like David went
into like spread to whack in the beginning, I was like,
all right, we are going to get a good granular conversation.
That's really good. It's going to be a good conversation,
totally right.
Speaker 3 (47:11):
No, it was really nice to hear from We've been
talking a lot about I guess the structure of the
US energy market from you know, academics or people who
take an interest in it, but it was good to
hear from a practitioner of the market. Let's put it
that way.
Speaker 2 (47:27):
There were many interesting things in there, particularly in the
supply chain aspect of the conversation that I think, you know,
sometimes we talk about like the world isn't a neoclassical world,
like market signals. You know, you have demand for something,
but the supply doesn't just arise, and you know, he
had a line about the balance sheet of the suppliers
(47:48):
to his own company, and how few of them, et cetera.
And so you think about like this sort of like
sequence of off take agreements, the demand for the electricity,
the demand for the ships, et cetera. And then you
think about, Okay, there's some companies somewhere, maybe probably in
Europe or somewhere that makes a key component. But they
don't have unlimited amounts of money. They can't just ramp
(48:09):
up instantly, or they can't just have excess supply excess
inventory if they don't know. And so you could see
how like fragile it is and how important it is
to get that sequencing right to actually get these things
done in time.
Speaker 3 (48:22):
Well, it also seems to me that traditional economics is
especially ill equipped to deal with I guess, industries with
incredibly long timelines, right. It seems like that's where you
sort of get the lag between the demand signal and
the actual supply increase. And as far as I remember
from like AP microeconomics.
Speaker 2 (48:43):
It'sok AP.
Speaker 3 (48:44):
Yeah, actually I still have grievances about microeconomics AP, but
as far as I can remember from that, it was like,
you know, you draw the little demand supply chart and
the lines cross, and like there's very little discussion of
the actual like physical constraints around building up that production capacity.
(49:04):
The companies are supposed to hear like, oh, we want
more of this thing, and so prices go up and
they immediately start building it out. But as we've seen
time and time again since twenty twenty, it doesn't always
happen that way in practice.
Speaker 2 (49:18):
No, it definitely doesn't. And all I always say is
I wish we had done the IRA in twenty ten. Well,
we had abundoned all that stuff. But it does seem
like I kind of came away from the conversation, so
actually two things I kind of now come on the
side of, Like, it does seem to be like a
mix of bad timing and bad luck and growing pains.
(49:41):
And I think the best argument for that as simple
as like, there is a booming offshore business in Europe,
and it can be done. It can be done cheaply,
and it can be done economically. But if you're starting
from zero and you're trying to build an US and
you have the Jones Act, and you have various incentives
for domestic steal and domestic labor, and maybe those get
(50:02):
in the way. I don't know, like this is a
ramp up process. That.
Speaker 3 (50:06):
Yeah, I was going to say the exact same thing.
So there was a time, and I think we spoke
about it with Chelsea and I kind of mentioned it
in the intro where I thought, maybe wind is basically
a low interest rate phenomenon like cheap ubers or we
work or something like that. But speaking to David, I've
(50:27):
sort of come away thinking it was that extraordinary combination
of really bad timing in the form of both supply
chain disruptions and the ramp up in interest rates, and
the fact that you're at the very beginnings of this
particular technology, at least in the US, and that, as
you said, there is a comparative model in the form
of Europe where there is some subsidy free wind and
(50:50):
the cost is much much lower.
Speaker 2 (50:53):
So yeah, maybe there's hope.
Speaker 3 (50:56):
All right, shall we leave it there.
Speaker 2 (50:57):
Let's leave it there.
Speaker 3 (50:58):
This has been another episode of THEOS podcast. I'm Tracy Alloway.
You can follow me at Tracy.
Speaker 2 (51:03):
Alloway and I'm Joe Wisenthal. You can follow me at
the Stalwart. Follow our guest David Hardy. He's at David
Hardy us follow our producers Carmen Rodriguez at Kerman armand
dash Ol Bennett at Dashbot and Kelbrooks at Kelbrooks. And
thank you to our producer Moses Ondem. For more Oddlots content,
go to Bloomberg dot com slash odd Lots, where you
have transcripts, a blog and a newsletter. And if you
(51:26):
want to chat about all of these topics, you can
do so twenty four to seven in our discord Discord
dot gg slash od Loots.
Speaker 3 (51:33):
And if you enjoy ad thoughts, if you like it
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(51:53):
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Hosts And Creators
Joe Weisenthal
Tracy Alloway
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