January 19, 2025 • 48 mins
Special guest John Dalton of Power Advisory joins Jim Bennett and Ian Voparil to discuss the recent spate of offshore wind project cancellations and power purchase agreement renegotiations. We highlight the challenges faced by developers and states in navigating procurement processes, allocating risk, and keeping costs down for ratepayers. The discussion underscores the need for flexibility in pricing structures to adapt to changing market conditions and the importance of local benefits to stabilize the future of offshore renewable energy.
We discuss:
• Comparison between real estate development and offshore wind projects
• Definition of solicitations and Power Purchase Agreements (PPAs)
• Analysis of recent cancellations in offshore wind projects
• Discussion on the need for price escalation in PPAs
• Exploration of economic and societal benefits from offshore wind projects
• Importance of community engagement and stakeholder trust
• Call for innovative procurement strategies from states
• Recognition of the evolving landscape of offshore renewable energy
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Have you ever taken a drive down a country road and
seen one of those future home oflion estate signs, that's,
selling houses in a place wherethey don't yet exist?
Maybe there's an impressiveneighborhood entry with columns
and lion statues, but all yousee is the initial dirt road cut
into the woods and maybe abulldozer.
Would you want to buy a housein a neighborhood that doesn't
yet exist?
There's a natural tensionbetween the developer, who'd
(00:25):
love to sell all of the housesbefore the neighborhood was even
built and have no capital atrisk, and the buyers who want to
be sure that they get a gooddeal for having to wait, like
below market sales prices ormortgage rates or maybe cool
community benefits like aswimming pool in a playground.
Our nation's in a similarscenario with the energy to be
produced by offshore wind in thefuture.
(00:47):
It's a story about riskmanagement and risk allocation,
with tensions between developerstates and, of course, the rate
payers.
And to explore these tensionswe have a special guest, john
Dalton from Power Advisory,joining us.
So grab your suit and let'sdive into the Offshore Energy
Podcast.
Speaker 2 (01:16):
I'm Jim Bennett and I have over 40 years of
experience developing energy inthe ocean.
Speaker 1 (01:26):
I'm Ian Valpero and I've spent the last 20 years
developing offshore energyprojects around the world, and
this is the Offshore EnergyPodcast.
Hey, jim, hey, how are youdoing, ian?
I am fantastic.
Happy New Year.
How are you Happy?
Speaker 2 (01:40):
New Year to you Doing well, staying busy.
Speaker 1 (01:44):
Staying busy.
Yeah, it's been a while sincewe've gotten a chance to speak
together and with our listeners.
Do you have any exciting NewYear's resolutions that you'd
like to share?
Speaker 2 (01:55):
You mean that haven't been broken already?
Speaker 1 (01:59):
Yeah, I guess mine might fall in that bucket too,
Jim.
It is shaping up to be reallyan exciting, tremendous and all
manner of uncertainty 2025 foroffshore energy here in the
United States and lots ofopportunities, I think, for the
US to continue to forward itsvision for energy, its vision
(02:22):
for economic development and thevision for how we all get along
and work together towards thesegoals.
There's one thing that's reallybeen on my mind lately, and
this is specific for offshorewind how the solicitations for
power and the agreements to sellpower and provide other
services really are challengingin the United States at this
(02:46):
point, and so let's talk alittle bit about this in some
detail and maybe, for ourlisteners, we'll just get some
definitions out on the table,right, Just to make sure we're
all talking from the same sheet.
Speaker 2 (03:00):
Yeah, and for the benefit of the newer listeners,
I'd just like to point out thatwhen we talk about PPAs and
solicitations, we're talkingabout the state side of offshore
wind program.
(03:21):
Go is the proper combination ofofftake, which is through PPAs
and other mechanisms, andleasing, which is through the
federal government and theBureau of Ocean Energy
Management that I used to be apart of.
So these are two very, very bigpieces and they're both
essential and they need to fittogether in order for the
(03:44):
program to run well.
Speaker 1 (03:47):
Jim well said.
You know this interplay betweendevelopers, state and federal
authorities super important and,of course, required for
offshore wind in particular tobe successful.
So a solicitation is thestate's request for proposals
from offshore wind developers todeliver their offshore wind
energy to the grid, and theamount of power and the schedule
(04:09):
of procurement is usuallyestablished by a state law or an
executive order.
So that's that States run acompetitive solicitation that
outlines key criteria to beevaluated, including the price
of the power to be purchased,and they also tend to include
non-price criteria.
These are things that the statewould like to see from
(04:29):
successful offshore windprojects, like workforce
development, local economicbenefit, maybe creation of a
domestic supply chain andcommunity benefits and the
mitigation of what people callnegative environmental
externalities.
And there's a lot of differentfactors that might be a part of
the solicitation and a part ofthe of what people call negative
environmental externalities.
There's a lot of differentfactors that might be a part of
the solicitation and a part ofthe review that states do when
(04:51):
deciding who to go with in theirsolicitation process.
And, very specifically, a powerpurchase agreement or PPA is
that long-term contract betweenthe developer and the buyer for
power, like that's usually astate agency or maybe a utility
company right when the buyeragrees to purchase a set amount
(05:11):
of electricity generated at apredetermined price.
So this essentially guaranteespart of the revenue stream for a
developer once the project isdelivering electrons to the grid
, now very different from oiland gas.
Sometimes there's alsosomething called an offshore
wind renewable energycertificate, or OREC, which is a
(05:32):
tradable credit that representsthe environmental benefits of
the generation of electricityfrom offshore wind, and those
can be bifurcated from the saleof the power itself, the energy
offtake, and often are sold intoa separate market.
That also helps the state meetthose kind of non-price
(05:52):
aspirations around economicdevelopment or decarbonization
or procuring power fromdifferent types of renewable
sources.
Just shy of half of theproposed offshore wind projects
in the US have either canceledbeen canceled by the state, or
at least renegotiated theircontracts or power purchase
agreements over the last fewyears.
(06:14):
It's not a tremendous record ofsuccess, is it?
Speaker 2 (06:20):
No, it's not, but keep in mind that these are two
separate processes to a largedegree, and even though a PPA
may not be worked out, itdoesn't necessarily mean that
the project is dead, and that'sa very important factor as we
(06:40):
move into the next few years aswe move into the next few years.
Speaker 1 (06:48):
We have got the perfect special guest to dive
into the challenges in thesolicitation and agreements
markets, why Offshore Wind hasexperienced some of these
challenges in the last few yearsand also maybe some really
insightful ideas on how we canimprove that likelihood of
success in the future.
Listeners, we'd like to welcomeJohn Dalton, president of the
Power Advisory, to join us andhelp us get to the heart of the
(07:11):
matter.
John, good to see you.
Speaker 3 (07:14):
Ian, good to see you, and Jim, it's great to be
talking with you again andreally appreciate the invite to
participate in your podcast here.
Speaker 2 (07:24):
Absolutely.
As Ian said, you're the perfectperson for discussion on this
topic.
Speaker 1 (07:31):
It's great Listeners.
If you don't know John, yousure ought to.
But, John, would you mindtelling us a little bit about
your experience and what PowerAdvisory does?
Speaker 3 (07:42):
Power Advisory is a management consulting firm
focused on the electricitysector.
A major area of practice of thefirm is supporting various
entities with their procurementefforts for offshore wind.
This typically includes thevarious states.
(08:05):
We in the last several yearshave worked with New York State
in the form of NYSERDA we'recurrently serving as the
independent evaluator for theMassachusetts solicitation.
We have worked with RhodeIsland on several of their
procurements, currently doingsome work in North Carolina and
(08:25):
have supported Maine on severalof their procurements, currently
doing some work in NorthCarolina and have supported.
Speaker 1 (08:30):
Maine on some of their procurement activity as
well.
You're the perfect person tohave on this, because not only
are you advising the state sideof things, I know that you also
help the developers withrecognizing where they can go
with their negotiations as well,too.
So this is great.
So, john, you heard our introhelp set the stage for our
listeners about what's going onhere in the us yeah, you know, I
(08:53):
think you some summarized itwell.
Speaker 3 (08:55):
Um, right, the solicitations or procurement
processes, um, are the frameworkthat's used by the buyers to
determine who they're going tobe awarding power purchase
agreements to and, in thesesolicitations, they will outline
(09:16):
evaluation criteria to providedevelopers, the parties who are
participating in thesesolicitations, provide
developers, the parties who areparticipating in these
solicitations, with guidanceregarding what are they really
looking for.
You know, obviously, price iscritically important and price
typically represents themajority of weight given in the
(09:36):
evaluation process.
But they also look at the fullrange of other considerations,
including trying to understandthe overall project risk profile
.
Right, how mature is theproject?
Where do they stand in theirpermitting process?
Where do they stand withrespect to the procurement of
(09:57):
equipment?
What have they done in terms oftheir interconnection studies?
You know, is there continue tobe outstanding risks associated
with how the project's going tointerconnect to the onshore grid
?
As well as looking at theeconomic benefits that the
project might be offering thestate or the region, as well as
(10:21):
any other benefits?
You know, are they proposingagreements with?
Speaker 1 (10:28):
labor, are they?
Speaker 3 (10:29):
looking at specific programs to mitigate any
environmental impacts.
That's related to theprocurement framework at the
highest level.
Speaker 1 (10:39):
These are, I think, really creative and innovative
ways for the states to try toget multiple objectives not just
the purchase of power, but alsoa control on the price of the
power, but also all of theseother benefits to society that I
know in oil and gas we used totalk about a lot, but there
wasn't always a specificstructure to negotiate those in,
(11:00):
at least in other jurisdictionsof the world.
Offshore wind in the US sureseems.
We've learned the lessons thathave come from offshore oil and
gas before to really make surethat those are incorporated into
the contracts that are signed.
What's going on with thecancellations?
Because you read the news andmany of them.
I'm not sure my statistics areexactly right, but many of them
(11:22):
are challenged.
Give us your sense of what'sgoing on in the market over the
last few years.
Speaker 3 (11:29):
Yeah, I think you've captured it accurately, ian.
There have been a number ofcancellations.
I think that what thesecancellations reflect many of
the challenges that the offshorewind sector has faced.
When the initial set ofcontracts were first procured in
(11:51):
the initial solicitations, thiswas a time when offshore wind
costs were declining and theprocurement frameworks in the
power purchase agreements, orPPAs, typically didn't provide
for the escalation of thecontract price over the term of
(12:12):
the contract.
They basically required fixedpricing that was specified for
the full term of the contract,and these are typically 20 or
25-year contracts.
That works when costs aredeclining.
But, as probably many of thelisteners are aware, over the
last several years there havebeen a number of economic
(12:35):
headwinds that offshore windprojects have faced.
First of all, we have theinflation that really was
unleashed by the COVID pandemic.
After that we had the Ukrainianwar.
That had significant impacts interms of the offshore wind
sector because many of theEuropean countries doubled down
(13:03):
on their offshore windprocurement targets as energy
independence became increasinglyimportant.
And the third factor was theFederal Reserve's efforts to try
to get inflation in line bytightening on credit and the
federal funds rate, and thatobviously resulted in pretty
(13:27):
significant increases ininterest rates and, as everyone
knows, offshore wind projectsare highly capital intensive and
increases in interest rates hasa profound impact in terms of
the level of cost of energy.
Speaker 2 (13:40):
Yeah, I'd just like to note that, yeah, it has been
some rough seas, so to speak,for the developers and it's not
exactly what we had all hopedwould happen in terms of the
development of these projects.
But the factors that you areidentifying, john, they're very
much factors that have to dowith the viability of the
(14:04):
project and, of course, thequestion that's going to be
raised immediately is well, whatabout the rate payers?
I know it's tough on thedevelopers, but the whole idea
here, or one of the idea here,is to get electricity to the
consumers at a reasonable rate,to the consumers at a reasonable
(14:26):
rate.
So how does all of this affectwhat the ratepayers is going to
end up paying?
Speaker 3 (14:31):
Great question, you know right, it's the cost of
offshore wind have increased andthat has an impact on
ratepayers, and I think that'swhy, you know, states are being
particularly careful in terms oftheir procurement decisions and
, as well as that, they'rerethinking how they contract for
(14:55):
offshore wind changes in termsof allowing for the escalation
of the contract price to reallyreflect some of these inflation
factors that are really drivingthe increase in the cost of
(15:16):
offshore wind.
Speaker 2 (15:18):
I guess also from a policy standpoint, not just the
numbers in terms of pricing, butfrom a policy standpoint.
We have an issue here that isgetting boiled down to and I'm
going to use the S wordsubsidies, either in terms of
investment tax credits,production tax credits, or in
(15:40):
terms of the state guaranteesthrough PPAs.
In terms of the stateguarantees through PPAs, and
although subsidies, there'svarious types of subsidies the
word gets thrown around andoffshore wind gets labeled with
it, and I guess the question isis that a fair characterization
(16:03):
of what goes on with regard toPPAs and other offtake
mechanisms?
Speaker 3 (16:07):
I guess to me subsidy is a little bit of a loaded
term.
There are obviously right,there are investment tax credits
.
Yes, an investment tax creditmeans that there's a tax benefit
that a project's receiving and,effectively, taxpayers are
making that project moreeconomic for electricity
(16:29):
customers.
But the way I view it, Jim, isthere's been a deliberate policy
decision to implement theseinvestment tax credits to
support an industry that'scritical in terms of if the US
is going to be able to achieveits climate change objectives,
(16:49):
which to me is an essentialissue, and in the US Northeast
there are a very limited numberof non-emitting resources that
can be developed to achievethese very aggressive greenhouse
gas emission reductions, andoffshore wind is one of those
(17:13):
resources and it has, you know,multiple benefits that, from my
perspective, justify and supportthe establishment and
maintenance of these investmenttax credits.
Speaker 1 (17:28):
And it's not just the decarbonization of the existing
power system too, but it's weexpect that we're going to use
more and more electricity.
You know, doubling theprojections for electricity use
by 2050 ish nationally, and evensooner in some states and parts
of New England.
On the sale of power, that is apoint that it's easy to focus
(17:54):
on the price, but it is also thecreation of economic
opportunity.
It's the creation of workforceopportunity.
It's the creation of smallbusinesses that can support
larger businesses.
It's the opportunity, I thinkpersonally, for America to get
into this energy industry andpotentially help lead the next
iterations of its generationaround the world.
(18:15):
Here's looking at you floatingwind, right.
The US also did that in oil andgas, by the way, back in the
day and, Jim, I know you wereinvolved.
You know, back in the late 80s,mid 90s, deep water oil and gas
exploration and thendevelopment Absolutely Really
started here.
Speaker 2 (18:31):
Many industries benefit from various types of
assistance, whether you callthem subsidies or otherwise.
But, of course, keeping in mindthe policy implications and the
policy directions that we'relooking at, that definitely is a
major factor, a majorconsideration as to how much in
(18:54):
the way of subsidies large andexplicit versus small and
implicit various industries aregoing to receive.
Speaker 1 (19:03):
So, john, you've talked a little bit about some
of the reasons why we've seenthis complexity over the last
few years complexity over thelast few years.
I do want to also talk aboutthe timing and the sequence of
when solicitations come out andwhen developers bid with their
project ideas into this, because, as I've been watching the
(19:23):
market, I see some reallyinteresting things that are
quite different than the waythat I was taught to deliver
major opportunities and thenprojects in the oil and gas
industry.
Speaker 3 (19:33):
Certainly, and the timing varies right.
So we now have an industrywhere there are some mature
projects that are seeking PPAsand in New England this would
include South Coast Wind and NewEngland Wind One, two projects
(19:56):
that previously were awardedcontracts by Massachusetts, but
those contracts were terminatedby the developers based on the
various economic conditions thatI referenced earlier, various
economic conditions that Ireferenced earlier.
So these are two matureprojects that are well-advanced
(20:19):
and are distinctly differentthan the types of projects or
the projects that were competingin the first round of
solicitations.
You know, that would be theVineyard Wind Project right,
which secured a contract in the2018 timeframe and is, you know,
(20:41):
right now kind of currentlyunder construction.
So right, so six, seven yearslater from when the project was
originally bid it's enteringconstruction and you know that
has there's a lot ofimplications associated with
that length of time, because Ithink that with time comes
(21:03):
uncertainty.
Right Things can change, andthat's what we saw with many of
these second rounder projectsthat bid in solicitations where
they committed to a contractprice.
Things changed and they couldn'tperform based on the contract
(21:25):
price that they had committed toby shortening up the period
from when projects submit theirproposal commit to a price to
when they secure financial closewhen they go to final
investment decision.
(21:48):
That's one way to kind ofde-risk the projects, but that
requires a more mature project.
That's one way to kind ofde-risk the projects, but that
requires a more mature projectand as a result, to get that
more mature project developershave to invest millions of
dollars, which is at risk.
(22:09):
The transmissioninterconnection agreements to
probably commit some funds withequipment manufacturers, so it
is lower risk to rely on moremature projects, but that comes
at the requirement fordevelopers to put quite a bit of
capital at risk.
Speaker 1 (22:30):
There's a couple of project principles that I
learned when I was working for abig oil and gas company doing
offshore projects.
You have to make sure yourpromises early are very
realistic.
We tend to have a lot ofoptimism when we're looking at
the future.
Clear, competitive and definedprojects were ready to come to
(22:52):
investment decisions.
No open switches, no selectionstill to be made, indeed,
detailed engineering and designalready completed, and I think
this mindset really came fromsuffering the arrows of failure
before, when a project may havedecided to take investment but
(23:14):
then ran into a technical issuethat caused it to change and, lo
and behold, caused the scheduleand budget to slip
significantly.
At the point at which you arenegotiating commercially, you
better know exactly what youwant to build, exactly how
you're going to do it and indeedhave the contracts in place so
that you can.
The lack of price certainty formost E&P companies and that's
(23:37):
the part of a large oil and gascompany that I worked for
they're all price takers.
We are selling our product atthe going rate.
We are used to the wildvariations in price that can be
achieved in the market,especially for projects that
last 20, 25 years, and so thatrisk, and bearing that risk was
(24:00):
a part of the culture that wedeveloped.
We came up with all of thesestrategies to help mitigate that
risk, but ultimately we knewthat we couldn't control oil
prices at any particular time inthe future and our range of
scenarios that we plannedthrough were very wide.
We had to make sure ourprojects were robust in very
(24:20):
high price environments whereyou're lucky, and even much
lower price environments thanaverage.
Speaker 2 (24:29):
I think, ian, that's a great point.
Learning those lessons is toput it mildly.
The comparison that you'remaking is absolutely true, but
at the same time, the oil andgas industry went through that
learning curve over multipledecades, and the wind industry
is starting to go through thatlearning curve now.
Speaker 3 (24:51):
I would definitely agree with that, jim.
I think that developers youknow developers are different.
They have different financialcapabilities and there are a
number of developers thatclearly have the financial
wherewithal to make theinvestments necessary to mature
(25:17):
their projects and invest themillions upon millions of
dollars to get them to thatpoint.
Other developers, I think, aremore interested in terms of
securing a contract, maybe notat day one, but earlier on in
the development process, becausethese development dollars are
(25:39):
the most expensive dollars.
Speaker 1 (25:41):
That developers have access to.
Speaker 3 (25:45):
You know when they, after they secure financial
close, secure financial close,they're able to get money from
banks and that money isconsiderably cheaper.
And with a contract in placeand with financing secured, you
know the underlying risk of theproject go down and the cost of
(26:06):
capital goes down.
Speaker 1 (26:07):
What are the key things that you advise states
and you know your developerclients to make this.
You know clients to make theseprojects ultimately become real.
Speaker 3 (26:18):
One of the obvious ones and it's a reform that all
of the states and buyers havemade would be to make sure that
in the power purchase agreementthat there is some form of
escalation provision that allowsthe contract price to escalate
(26:39):
from at least the period whenthe proposal was submitted to
the financial close.
That's the period where theproject is at greater risk.
Once at financial close, theycan get some more certainty
regarding what their projectsare.
Once a financial close, theycan get some more certainty
regarding what their projectsare, recognizing how capital
(27:00):
intensive these projects are.
So that's one very importantreform that all parties are
making to embed within theresome consideration of the
underlying interest rateenvironment, because that's also
a critical driver in terms ofproject costs.
Speaker 1 (27:19):
Give us a couple of examples of escalation
provisions.
Speaker 3 (27:23):
They vary, so some states have used the consumer
price index.
Very straightforward approach.
However, the consumer priceindex, from my perspective
probably you know it's aconsumer price index.
It isn't meant to rack thecosts of an offshore wind
project.
So a number of states New York,massachusetts, new Jersey have
(27:47):
developed what I would view asmore sophisticated indices, what
I would view as moresophisticated indices which
really try to capture theappropriate proportions of kind
of cost inputs.
So this would include steel,this would include copper, this
(28:08):
would include there'd be a laborcomponent, there might be a
manufactured goods component andtypically there's a fuel
component as well.
They vary from state to statebut you know there is quite a
bit of work that's been donewith respect to these.
Speaker 1 (28:27):
While the state still holds kind of a ceiling to the
ultimate cost, to rate payersright.
Speaker 3 (28:36):
Yes, so recognizing that one shouldn't require rate
payers to absorb unlimited risk.
In the Massachusettssolicitation they specified that
the escalation would be limitedto 15%.
(28:56):
And it isn't just escalation,it can be de-escalation.
These are symmetricalprovisions.
If commodity prices, if thevarious components that are in
the index, go down, the contractprice would go down.
So they're symmetrical andthat's one of the important
benefits that customers or ratepayers would realize.
Speaker 1 (29:17):
Is this common with other renewables?
Are they also used?
Is this really unusual becauseoffshore wind is so unusual and
important, or do we also see itin others?
Speaker 3 (29:30):
We are seeing it with other procurements as well.
It's become increasingly common.
I think that the reason why itmight be more important for
offshore wind is the length oftime from when a proposal is
submitted to when a projectachieves financial close.
Speaker 1 (29:51):
Um, so that's really kind of the to me, the interval
where risk can cause contractpricing to go awry these
non-financial considerations, uhin solicitations and that
developers provide uh input on,seem to be so important for the
reason why we want offshore windto be successful.
(30:12):
Where have you seen some reallygood practice examples?
Where have you seen that reallysharpened to make sure that you
know offshore and developmentsare providing benefits to
america and to americans?
Speaker 3 (30:24):
I think that one thing that we're seeing that to
America and to Americans.
I think that one thing thatwe're seeing that is really
important is if you're going tobe giving weight in the
evaluation process tocommitments that proponents are
making for the creation ofeconomic benefits for
(30:45):
environmental mitigation, thereneeds to be some commercial
framework put in place to ensurethat they live up to the
commitments that they made.
So virtually all statesnegotiate a memorandum of
understanding, or MOU, with adeveloper where they make them
(31:10):
commit to delivering on thevarious critical elements of
their proposal, focusing on, youknow, the job programs that
they're proposing, the grantsthat they're going to make to
state universities, thecommitments that they are making
with fishers to supportresearch or to replace equipment
(31:37):
.
So often we'll see a memorandumof understanding or MOU, between
the developer and the stateDepartment of Commerce or the
state Department ofEnvironmental Management or
Environmental Protection, sothat, from our perspective, is
(31:59):
an important best practice whichmost states are employing and
really is critical to kind ofmaking sure that the
considerations that result inthe project being selected are
delivered on by developers.
Speaker 1 (32:15):
This is new and evolving and very interesting
space for us.
Government support, as well assome government finance, creates
these more widespread societalbenefits too.
Any additional good practicesfrom the developer side?
Speaker 3 (32:36):
I think some of the good practices are really the
engagement that they do with thecommunities as well as the
various key interests in thestate right.
They have to recognize thatthis project, if it's going to
be successful, requiresstakeholder support.
Speaker 2 (32:55):
Yeah.
Speaker 3 (32:56):
They have to early engage with these parties and
get out in front and make surethat they become a trusted voice
with respect to the impacts ofthe project Because, as we all
know, there's a lot of chatterout there regarding the impacts
of offshore wind and it'simportant that developers are
(33:21):
there to be part of theconversation and that they as
well have other parties that cansupport them and can become
trusted partners for the partiesthat are looking at these
projects and have to makedecisions as to whether they're
going to choose to support theprojects.
Speaker 1 (33:41):
But we've really gone through this paradigm shift of
expectations, both from kind ofgovernment but also society,
that you have to involvegovernment and society in the
early stages to help shape theopportunity and you have to
allow them to participate andfeel the benefits and also
express, I guess, the challengesright that that that new
(34:04):
development can create in timeand space and environmental
impact and conflict with otherusers.
Jim.
Speaker 2 (34:11):
Well, we can't really get away from the fact that we
have challenges with the newadministration, but in fact it's
as much a challenge of the newadministration.
It's been very clearly putforward that we want to be
energy dominant, very clearlyput forward that we want to be
energy dominant.
And energy dominant doesn'tnecessarily mean, and probably
(34:33):
cannot mean, any one form ofenergy.
It's going to be multiple formsof energy and I think wind,
renewable energy, particularlywind energy, is going to be one
of them.
And the question is how does itget folded in in a way that is
constructive and economicallyviable?
(34:53):
And this is reflected in theappointments that have occurred.
The Secretary of Interior he isvery clearly and all of the
above advocate has been forquite some time and he's got the
record to show it as well andso we're going to be including
industries that are on the cuspor hopefully on the cusp of
(35:14):
being economically viable,including wind energy and the
development of an Americanworkforce, an American supply
chain and American technology tohelp support that industry,
with the couple of offshoreprojects that have recently
signed and executedsolicitations, responses and
(35:37):
PPAs.
Speaker 1 (35:39):
there are still permits and approvals needed to
keep those projects on track tothe schedules that they've
committed to in the PPAs, and sothat could be a complexity and
hopefully that doesn't become anissue for those projects.
But, john, are there otherpieces that you see that we
might want to make sure we keepspecial eye on?
Speaker 3 (36:02):
I think there's three areas that should be viewed as
risks associated with the newadministration.
One is the timing associatedwith the issuance of permits.
Second would be investment taxcredits, the durability of the
investment tax credits, and thenthe potential for there to be
(36:25):
tariffs, recognizing that muchof the equipment the wind
turbine generators in particularthe HVDC components if these
are offshore wind projects,they're going to require HVDC
transmission those are going tobe sourced from outside of the
(36:48):
US and could conceivably besubject to import tariffs.
So that's a cost risk thatdevelopers will be concerned
with and consideration needs tobe given to that.
Speaker 1 (37:03):
And already quite a constrained supply of some of
those specialty pieces ofequipment, like you mentioned
HVDC transformers and switchgear, jim.
How can we do this better?
Speaker 2 (37:14):
I think what John has pointed out to us is that
there's a lot of complexity inthe PPAs and in the offtake
agreements, but that, as alarger issue, we have to decide
as a society, as a body politic,whether or not these
complexities should be pursued,dealt with and even possibly
(37:41):
subsidized for the greater goodover the longer term.
Speaker 1 (37:47):
Jim.
I love it.
John shared with us some ofthese really innovative ways.
Now where offshore wind isdemonstrating that much wider
economic and societal valueProjects can better and better
time their maturity and theirreadiness to commit with what
the market is willing to accept.
Speaker 3 (38:05):
While we've made progress in terms of these
procurement frameworks, there'scontinued work that needs to be
done.
Right there's?
In the current environment,there are new risks that need to
be addressed.
Some conceivably need to beshared amongst the parties, and
we need to figure out how to dothat most efficiently.
(38:25):
But I think that there are waysto do that.
It's just, we need to figureout how to do that most
efficiently.
But I think that there are waysto do that.
It's just we need to spend thetime and need to roll up our
sleeves, and all the partiesneed to work together the buyers
, the sellers, the states.
Speaker 1 (38:39):
In our podcasts we have this section called the
last drops in the ocean for theweek, and that's really where
Jim or I mention a couple ofother recent things that have
happened that aren't on thetopic of this podcast but are
important for our listeners justto be aware of and, in case
they haven't heard about them,to go out and do their own
Google search and look, John,you are our guest.
(39:02):
Are there any last drops in theocean that you'd like to share
with our listeners?
Speaker 3 (39:08):
Maybe one thing that is pretty on topic and it's
something that I just posted onthis morning on LinkedIn, and
it's it really is.
So here in New England we'vegone through recently a cold
snap where we had not extremecold weathers but a typical
(39:28):
winter cold snap, and in thisperiod we had very high energy
prices.
And specifically, the energyprices were in the neighborhood,
over a five-day period, ofabout $130 per megawatt hour.
(39:49):
So when you add that value tothe value of the Class I RECs,
the value of offshore windduring this period was in excess
of $170 per megawatt hour, andoffshore wind projects during
this period were operating atgreater than a 72% capacity
factor, so they were operatingpretty close to like baseload
(40:10):
resources.
And this is at a period when thesystem was not under high
stress but was experiencingpretty high loads.
So that's really some of thevalue that offshore wind can
deliver and is delivering, and Ithink that's one of the reasons
why we really need to focus onthis issue and recognize that we
(40:33):
have a resource here that candeliver meaningful value to
customers and to the fulluniverse of stakeholders out
there.
Speaker 2 (40:42):
Reacting to John's comments, I think that's really
very, very much on target andappreciate those figures.
When you talk about a largerpicture of diverse energy
sources and all of the above, Ithink that's critical.
Last drop to share witheverybody is in this discussion
of subsidies, both large andsmall, and helping industries
(41:07):
move forward.
I refer everybody to a op-edpiece in the Wall Street Journal
last Sunday that took on thetask of using the word subsidies
and what it meant and whetherit was implicitly bad.
And I think that in thediscourse that occurs, the
(41:30):
social and policy discourse thatwe have, that's a good thing to
look at and to think about aswe move forward and start to
discuss whether or not subsidiesshould play a role in the
development of offshore wind.
Speaker 1 (41:49):
And, I guess, my last drops for the ocean.
You know our previous episodewe recorded and released before
Christmas last year, and nowwe're coming in right before
January 20th, which is when wehope to release this podcast,
and so Trump will be inauguratedon that day as president of the
United States, and so there maybe fast action and executive
(42:10):
order from the newadministration on energy policy
that we don't yet have cleareyes on.
So let's hope this podcastdoesn't get dated real quick
when that happens.
So that's one thing.
Another last drop I have is arecognition of the passing of
president Carter and not beingold enough really to remember
(42:30):
President Carter and what thenation went through.
I was doing a little reading andrecalled that in the late 70s
the US went through its firstenergy crisis.
I kind of remember long linesat the gas station and I
certainly remember the tensionof my parents complaining about
the cost and the difficulty inaccessing energy at the time,
(42:54):
and Jimmy Carter seemed to bethe first president that really
sought to reduce America'sdependence on foreign oil and
foreign sources of energy.
And boy, I think that speaksvery clearly to where we are
right now.
The opportunity for Americansto conserve energy provide
incentives for the developmentof our own national resources,
(43:20):
as well as to maybe take aleadership role in the creation
of new types of energy and newways to access energy are great
things for america's energyfuture, and we're all a part of
making it right now, every dayyour reference to jimmy carter.
Speaker 3 (43:37):
I just wanted to add to it because because I think
from an energy perspectiveyou're right on um he was
critical in terms of passingsome legislation that really has
contributed to where we aretoday.
This is the Public UtilitiesRegulatory Policy Act.
You know PURPA, which you knowestablished the independent
(44:00):
power industry and theseoffshore wind developers are
IPPs.
So Jimmy Carter are IPPs.
So Jimmy Carter, back in 1978,put in place the regulatory
framework that really hassupported this offshore wind
industry and how it's structuredtoday.
Speaker 2 (44:20):
And I can't help but add to that because, unlike
yourself, I actually did livethrough that.
Speaker 1 (44:26):
What was it like, Jim , when the world was a
pocketbook?
Speaker 2 (44:28):
Yeah, I actually did live through that as a college
student and I just want toreiterate what you and John have
said.
And it was a real eye-openingexperience for the country and
Jimmy Carter was good inbringing that to our attention.
(44:51):
And I will add that one of mylast projects as a graduate
student was taking a look atthis thing called wind energy
and what possibilities it mighthave for the future.
Now it took a while to take off, but it's been going on since
since back then and uh, uh, we,we owe a debt to the man a real
(45:12):
final last drop.
Speaker 1 (45:13):
There's a really fun new show called landman on
paramount plus uh landman tellsthe story of uh, basically e and
p, uh production, oil and gasactivity out in West Texas.
It's filled with greatcharacters, flamboyant, crazy
behavior and has just a tinge ofrealism in it too.
(45:36):
But like every good TV program,it's probably the Hollywood
version of what really goes onin Texas and other parts of the
US that do a lot of energydevelopment.
I found it really fun to watchand so let me recommend it, Jim,
to you and John, and also toour listeners.
If you have a chance, take alook at an episode.
They're very entertaining.
Speaker 2 (45:56):
Yeah, I'm sure that it's an artistic view of Landman
, but they are real and theyused to come to the Department
of the Interior and we used tohave meetings and they had
interests.
Speaker 1 (46:09):
Yeah, and the main character is played by Billy Bob
Thornton, who's quite an actorand I'll say too, I've met a lot
of characters that aren't quiteBilly Bob Thornton and such
good actors but there's somering of truth to the role as
he's delivering it.
We're at the end of our episode.
We ask that you share with yourfriends.
(46:32):
We've had a couple of greatfolks share our podcast on
LinkedIn, that's.
That's seen really expansivegrowth in our listenership.
So thank you so much forsharing.
Send us any topics that you'reinterested for us to discuss and
, of course, if you'reinterested to be a special guest
, like John, come join us on thepodcast, but reach out.
I think you all have our emailsand you all know Jim and I on
(46:54):
LinkedIn, so we're easy to getin touch with Our next episode.
What do you want to talk about?
Speaker 2 (47:00):
This time I think we're going to have a little fun
.
We'll have some game showactivity test your knowledge of
offshore wind.
It should be of great benefitto newbies, but it should also
be very useful for those who areexperienced and can help
clarify and tell Ian and I ifwe're on track or maybe we
(47:22):
missed the mark here.
But, we're going to have alittle quiz time and it should
be enjoyable for everybody.
I hope you join us.
Speaker 1 (47:32):
So, jim, are you and I going to quiz each other, or
do I get to write my ownquestions and then answer them?
Speaker 2 (47:36):
I think I could be really good at that one, I think
you should write your ownquestions and give them to me,
and then I'll ask you somethingelse.
All right, that's the way it'sgoing to work.
Speaker 1 (47:45):
I look forward to this.
I think that's going to be alot of fun, chip.
Thanks, thanks, listeners,we'll see you again soon on the
next Offshore Energy podcast.
Speaker 2 (47:55):
And thank you, john, thanks for joining us.
Thank you both Really enjoyedit, Bye guys.
Bye, bye now, bye now.
Have you ever taken a drive down a country road and
seen one of those future home oflion estate signs, that's,
selling houses in a place wherethey don't yet exist?
Maybe there's an impressiveneighborhood entry with columns
and lion statues, but all yousee is the initial dirt road cut
into the woods and maybe abulldozer.
Would you want to buy a housein a neighborhood that doesn't
yet exist?
There's a natural tensionbetween the developer, who'd
(00:25):
love to sell all of the housesbefore the neighborhood was even
built and have no capital atrisk, and the buyers who want to
be sure that they get a gooddeal for having to wait, like
below market sales prices ormortgage rates or maybe cool
community benefits like aswimming pool in a playground.
Our nation's in a similarscenario with the energy to be
produced by offshore wind in thefuture.
(00:47):
It's a story about riskmanagement and risk allocation,
with tensions between developerstates and, of course, the rate
payers.
And to explore these tensionswe have a special guest, john
Dalton from Power Advisory,joining us.
So grab your suit and let'sdive into the Offshore Energy
Podcast.
Speaker 2 (01:16):
I'm Jim Bennett and I have over 40 years of
experience developing energy inthe ocean.
Speaker 1 (01:26):
I'm Ian Valpero and I've spent the last 20 years
developing offshore energyprojects around the world, and
this is the Offshore EnergyPodcast.
Hey, jim, hey, how are youdoing, ian?
I am fantastic.
Happy New Year.
How are you Happy?
Speaker 2 (01:40):
New Year to you Doing well, staying busy.
Speaker 1 (01:44):
Staying busy.
Yeah, it's been a while sincewe've gotten a chance to speak
together and with our listeners.
Do you have any exciting NewYear's resolutions that you'd
like to share?
Speaker 2 (01:55):
You mean that haven't been broken already?
Speaker 1 (01:59):
Yeah, I guess mine might fall in that bucket too,
Jim.
It is shaping up to be reallyan exciting, tremendous and all
manner of uncertainty 2025 foroffshore energy here in the
United States and lots ofopportunities, I think, for the
US to continue to forward itsvision for energy, its vision
(02:22):
for economic development and thevision for how we all get along
and work together towards thesegoals.
There's one thing that's reallybeen on my mind lately, and
this is specific for offshorewind how the solicitations for
power and the agreements to sellpower and provide other
services really are challengingin the United States at this
(02:46):
point, and so let's talk alittle bit about this in some
detail and maybe, for ourlisteners, we'll just get some
definitions out on the table,right, Just to make sure we're
all talking from the same sheet.
Speaker 2 (03:00):
Yeah, and for the benefit of the newer listeners,
I'd just like to point out thatwhen we talk about PPAs and
solicitations, we're talkingabout the state side of offshore
wind program.
(03:21):
Go is the proper combination ofofftake, which is through PPAs
and other mechanisms, andleasing, which is through the
federal government and theBureau of Ocean Energy
Management that I used to be apart of.
So these are two very, very bigpieces and they're both
essential and they need to fittogether in order for the
(03:44):
program to run well.
Speaker 1 (03:47):
Jim well said.
You know this interplay betweendevelopers, state and federal
authorities super important and,of course, required for
offshore wind in particular tobe successful.
So a solicitation is thestate's request for proposals
from offshore wind developers todeliver their offshore wind
energy to the grid, and theamount of power and the schedule
(04:09):
of procurement is usuallyestablished by a state law or an
executive order.
So that's that States run acompetitive solicitation that
outlines key criteria to beevaluated, including the price
of the power to be purchased,and they also tend to include
non-price criteria.
These are things that the statewould like to see from
(04:29):
successful offshore windprojects, like workforce
development, local economicbenefit, maybe creation of a
domestic supply chain andcommunity benefits and the
mitigation of what people callnegative environmental
externalities.
And there's a lot of differentfactors that might be a part of
the solicitation and a part ofthe of what people call negative
environmental externalities.
There's a lot of differentfactors that might be a part of
the solicitation and a part ofthe review that states do when
(04:51):
deciding who to go with in theirsolicitation process.
And, very specifically, a powerpurchase agreement or PPA is
that long-term contract betweenthe developer and the buyer for
power, like that's usually astate agency or maybe a utility
company right when the buyeragrees to purchase a set amount
(05:11):
of electricity generated at apredetermined price.
So this essentially guaranteespart of the revenue stream for a
developer once the project isdelivering electrons to the grid
, now very different from oiland gas.
Sometimes there's alsosomething called an offshore
wind renewable energycertificate, or OREC, which is a
(05:32):
tradable credit that representsthe environmental benefits of
the generation of electricityfrom offshore wind, and those
can be bifurcated from the saleof the power itself, the energy
offtake, and often are sold intoa separate market.
That also helps the state meetthose kind of non-price
(05:52):
aspirations around economicdevelopment or decarbonization
or procuring power fromdifferent types of renewable
sources.
Just shy of half of theproposed offshore wind projects
in the US have either canceledbeen canceled by the state, or
at least renegotiated theircontracts or power purchase
agreements over the last fewyears.
(06:14):
It's not a tremendous record ofsuccess, is it?
Speaker 2 (06:20):
No, it's not, but keep in mind that these are two
separate processes to a largedegree, and even though a PPA
may not be worked out, itdoesn't necessarily mean that
the project is dead, and that'sa very important factor as we
(06:40):
move into the next few years aswe move into the next few years.
Speaker 1 (06:48):
We have got the perfect special guest to dive
into the challenges in thesolicitation and agreements
markets, why Offshore Wind hasexperienced some of these
challenges in the last few yearsand also maybe some really
insightful ideas on how we canimprove that likelihood of
success in the future.
Listeners, we'd like to welcomeJohn Dalton, president of the
Power Advisory, to join us andhelp us get to the heart of the
(07:11):
matter.
John, good to see you.
Speaker 3 (07:14):
Ian, good to see you, and Jim, it's great to be
talking with you again andreally appreciate the invite to
participate in your podcast here.
Speaker 2 (07:24):
Absolutely.
As Ian said, you're the perfectperson for discussion on this
topic.
Speaker 1 (07:31):
It's great Listeners.
If you don't know John, yousure ought to.
But, John, would you mindtelling us a little bit about
your experience and what PowerAdvisory does?
Speaker 3 (07:42):
Power Advisory is a management consulting firm
focused on the electricitysector.
A major area of practice of thefirm is supporting various
entities with their procurementefforts for offshore wind.
This typically includes thevarious states.
(08:05):
We in the last several yearshave worked with New York State
in the form of NYSERDA we'recurrently serving as the
independent evaluator for theMassachusetts solicitation.
We have worked with RhodeIsland on several of their
procurements, currently doingsome work in North Carolina and
(08:25):
have supported Maine on severalof their procurements, currently
doing some work in NorthCarolina and have supported.
Speaker 1 (08:30):
Maine on some of their procurement activity as
well.
You're the perfect person tohave on this, because not only
are you advising the state sideof things, I know that you also
help the developers withrecognizing where they can go
with their negotiations as well,too.
So this is great.
So, john, you heard our introhelp set the stage for our
listeners about what's going onhere in the us yeah, you know, I
(08:53):
think you some summarized itwell.
Speaker 3 (08:55):
Um, right, the solicitations or procurement
processes, um, are the frameworkthat's used by the buyers to
determine who they're going tobe awarding power purchase
agreements to and, in thesesolicitations, they will outline
(09:16):
evaluation criteria to providedevelopers, the parties who are
participating in thesesolicitations, provide
developers, the parties who areparticipating in these
solicitations, with guidanceregarding what are they really
looking for.
You know, obviously, price iscritically important and price
typically represents themajority of weight given in the
(09:36):
evaluation process.
But they also look at the fullrange of other considerations,
including trying to understandthe overall project risk profile
.
Right, how mature is theproject?
Where do they stand in theirpermitting process?
Where do they stand withrespect to the procurement of
(09:57):
equipment?
What have they done in terms oftheir interconnection studies?
You know, is there continue tobe outstanding risks associated
with how the project's going tointerconnect to the onshore grid
?
As well as looking at theeconomic benefits that the
project might be offering thestate or the region, as well as
(10:21):
any other benefits?
You know, are they proposingagreements with?
Speaker 1 (10:28):
labor, are they?
Speaker 3 (10:29):
looking at specific programs to mitigate any
environmental impacts.
That's related to theprocurement framework at the
highest level.
Speaker 1 (10:39):
These are, I think, really creative and innovative
ways for the states to try toget multiple objectives not just
the purchase of power, but alsoa control on the price of the
power, but also all of theseother benefits to society that I
know in oil and gas we used totalk about a lot, but there
wasn't always a specificstructure to negotiate those in,
(11:00):
at least in other jurisdictionsof the world.
Offshore wind in the US sureseems.
We've learned the lessons thathave come from offshore oil and
gas before to really make surethat those are incorporated into
the contracts that are signed.
What's going on with thecancellations?
Because you read the news andmany of them.
I'm not sure my statistics areexactly right, but many of them
(11:22):
are challenged.
Give us your sense of what'sgoing on in the market over the
last few years.
Speaker 3 (11:29):
Yeah, I think you've captured it accurately, ian.
There have been a number ofcancellations.
I think that what thesecancellations reflect many of
the challenges that the offshorewind sector has faced.
When the initial set ofcontracts were first procured in
(11:51):
the initial solicitations, thiswas a time when offshore wind
costs were declining and theprocurement frameworks in the
power purchase agreements, orPPAs, typically didn't provide
for the escalation of thecontract price over the term of
(12:12):
the contract.
They basically required fixedpricing that was specified for
the full term of the contract,and these are typically 20 or
25-year contracts.
That works when costs aredeclining.
But, as probably many of thelisteners are aware, over the
last several years there havebeen a number of economic
(12:35):
headwinds that offshore windprojects have faced.
First of all, we have theinflation that really was
unleashed by the COVID pandemic.
After that we had the Ukrainianwar.
That had significant impacts interms of the offshore wind
sector because many of theEuropean countries doubled down
(13:03):
on their offshore windprocurement targets as energy
independence became increasinglyimportant.
And the third factor was theFederal Reserve's efforts to try
to get inflation in line bytightening on credit and the
federal funds rate, and thatobviously resulted in pretty
(13:27):
significant increases ininterest rates and, as everyone
knows, offshore wind projectsare highly capital intensive and
increases in interest rates hasa profound impact in terms of
the level of cost of energy.
Speaker 2 (13:40):
Yeah, I'd just like to note that, yeah, it has been
some rough seas, so to speak,for the developers and it's not
exactly what we had all hopedwould happen in terms of the
development of these projects.
But the factors that you areidentifying, john, they're very
much factors that have to dowith the viability of the
(14:04):
project and, of course, thequestion that's going to be
raised immediately is well, whatabout the rate payers?
I know it's tough on thedevelopers, but the whole idea
here, or one of the idea here,is to get electricity to the
consumers at a reasonable rate,to the consumers at a reasonable
(14:26):
rate.
So how does all of this affectwhat the ratepayers is going to
end up paying?
Speaker 3 (14:31):
Great question, you know right, it's the cost of
offshore wind have increased andthat has an impact on
ratepayers, and I think that'swhy, you know, states are being
particularly careful in terms oftheir procurement decisions and
, as well as that, they'rerethinking how they contract for
(14:55):
offshore wind changes in termsof allowing for the escalation
of the contract price to reallyreflect some of these inflation
factors that are really drivingthe increase in the cost of
(15:16):
offshore wind.
Speaker 2 (15:18):
I guess also from a policy standpoint, not just the
numbers in terms of pricing, butfrom a policy standpoint.
We have an issue here that isgetting boiled down to and I'm
going to use the S wordsubsidies, either in terms of
investment tax credits,production tax credits, or in
(15:40):
terms of the state guaranteesthrough PPAs.
In terms of the stateguarantees through PPAs, and
although subsidies, there'svarious types of subsidies the
word gets thrown around andoffshore wind gets labeled with
it, and I guess the question isis that a fair characterization
(16:03):
of what goes on with regard toPPAs and other offtake
mechanisms?
Speaker 3 (16:07):
I guess to me subsidy is a little bit of a loaded
term.
There are obviously right,there are investment tax credits
.
Yes, an investment tax creditmeans that there's a tax benefit
that a project's receiving and,effectively, taxpayers are
making that project moreeconomic for electricity
(16:29):
customers.
But the way I view it, Jim, isthere's been a deliberate policy
decision to implement theseinvestment tax credits to
support an industry that'scritical in terms of if the US
is going to be able to achieveits climate change objectives,
(16:49):
which to me is an essentialissue, and in the US Northeast
there are a very limited numberof non-emitting resources that
can be developed to achievethese very aggressive greenhouse
gas emission reductions, andoffshore wind is one of those
(17:13):
resources and it has, you know,multiple benefits that, from my
perspective, justify and supportthe establishment and
maintenance of these investmenttax credits.
Speaker 1 (17:28):
And it's not just the decarbonization of the existing
power system too, but it's weexpect that we're going to use
more and more electricity.
You know, doubling theprojections for electricity use
by 2050 ish nationally, and evensooner in some states and parts
of New England.
On the sale of power, that is apoint that it's easy to focus
(17:54):
on the price, but it is also thecreation of economic
opportunity.
It's the creation of workforceopportunity.
It's the creation of smallbusinesses that can support
larger businesses.
It's the opportunity, I thinkpersonally, for America to get
into this energy industry andpotentially help lead the next
iterations of its generationaround the world.
(18:15):
Here's looking at you floatingwind, right.
The US also did that in oil andgas, by the way, back in the
day and, Jim, I know you wereinvolved.
You know, back in the late 80s,mid 90s, deep water oil and gas
exploration and thendevelopment Absolutely Really
started here.
Speaker 2 (18:31):
Many industries benefit from various types of
assistance, whether you callthem subsidies or otherwise.
But, of course, keeping in mindthe policy implications and the
policy directions that we'relooking at, that definitely is a
major factor, a majorconsideration as to how much in
(18:54):
the way of subsidies large andexplicit versus small and
implicit various industries aregoing to receive.
Speaker 1 (19:03):
So, john, you've talked a little bit about some
of the reasons why we've seenthis complexity over the last
few years complexity over thelast few years.
I do want to also talk aboutthe timing and the sequence of
when solicitations come out andwhen developers bid with their
project ideas into this, because, as I've been watching the
(19:23):
market, I see some reallyinteresting things that are
quite different than the waythat I was taught to deliver
major opportunities and thenprojects in the oil and gas
industry.
Speaker 3 (19:33):
Certainly, and the timing varies right.
So we now have an industrywhere there are some mature
projects that are seeking PPAsand in New England this would
include South Coast Wind and NewEngland Wind One, two projects
(19:56):
that previously were awardedcontracts by Massachusetts, but
those contracts were terminatedby the developers based on the
various economic conditions thatI referenced earlier, various
economic conditions that Ireferenced earlier.
So these are two matureprojects that are well-advanced
(20:19):
and are distinctly differentthan the types of projects or
the projects that were competingin the first round of
solicitations.
You know, that would be theVineyard Wind Project right,
which secured a contract in the2018 timeframe and is, you know,
(20:41):
right now kind of currentlyunder construction.
So right, so six, seven yearslater from when the project was
originally bid it's enteringconstruction and you know that
has there's a lot ofimplications associated with
that length of time, because Ithink that with time comes
(21:03):
uncertainty.
Right Things can change, andthat's what we saw with many of
these second rounder projectsthat bid in solicitations where
they committed to a contractprice.
Things changed and they couldn'tperform based on the contract
(21:25):
price that they had committed toby shortening up the period
from when projects submit theirproposal commit to a price to
when they secure financial closewhen they go to final
investment decision.
(21:48):
That's one way to kind ofde-risk the projects, but that
requires a more mature project.
That's one way to kind ofde-risk the projects, but that
requires a more mature projectand as a result, to get that
more mature project developershave to invest millions of
dollars, which is at risk.
(22:09):
The transmissioninterconnection agreements to
probably commit some funds withequipment manufacturers, so it
is lower risk to rely on moremature projects, but that comes
at the requirement fordevelopers to put quite a bit of
capital at risk.
Speaker 1 (22:30):
There's a couple of project principles that I
learned when I was working for abig oil and gas company doing
offshore projects.
You have to make sure yourpromises early are very
realistic.
We tend to have a lot ofoptimism when we're looking at
the future.
Clear, competitive and definedprojects were ready to come to
(22:52):
investment decisions.
No open switches, no selectionstill to be made, indeed,
detailed engineering and designalready completed, and I think
this mindset really came fromsuffering the arrows of failure
before, when a project may havedecided to take investment but
(23:14):
then ran into a technical issuethat caused it to change and, lo
and behold, caused the scheduleand budget to slip
significantly.
At the point at which you arenegotiating commercially, you
better know exactly what youwant to build, exactly how
you're going to do it and indeedhave the contracts in place so
that you can.
The lack of price certainty formost E&P companies and that's
(23:37):
the part of a large oil and gascompany that I worked for
they're all price takers.
We are selling our product atthe going rate.
We are used to the wildvariations in price that can be
achieved in the market,especially for projects that
last 20, 25 years, and so thatrisk, and bearing that risk was
(24:00):
a part of the culture that wedeveloped.
We came up with all of thesestrategies to help mitigate that
risk, but ultimately we knewthat we couldn't control oil
prices at any particular time inthe future and our range of
scenarios that we plannedthrough were very wide.
We had to make sure ourprojects were robust in very
(24:20):
high price environments whereyou're lucky, and even much
lower price environments thanaverage.
Speaker 2 (24:29):
I think, ian, that's a great point.
Learning those lessons is toput it mildly.
The comparison that you'remaking is absolutely true, but
at the same time, the oil andgas industry went through that
learning curve over multipledecades, and the wind industry
is starting to go through thatlearning curve now.
Speaker 3 (24:51):
I would definitely agree with that, jim.
I think that developers youknow developers are different.
They have different financialcapabilities and there are a
number of developers thatclearly have the financial
wherewithal to make theinvestments necessary to mature
(25:17):
their projects and invest themillions upon millions of
dollars to get them to thatpoint.
Other developers, I think, aremore interested in terms of
securing a contract, maybe notat day one, but earlier on in
the development process, becausethese development dollars are
(25:39):
the most expensive dollars.
Speaker 1 (25:41):
That developers have access to.
Speaker 3 (25:45):
You know when they, after they secure financial
close, secure financial close,they're able to get money from
banks and that money isconsiderably cheaper.
And with a contract in placeand with financing secured, you
know the underlying risk of theproject go down and the cost of
(26:06):
capital goes down.
Speaker 1 (26:07):
What are the key things that you advise states
and you know your developerclients to make this.
You know clients to make theseprojects ultimately become real.
Speaker 3 (26:18):
One of the obvious ones and it's a reform that all
of the states and buyers havemade would be to make sure that
in the power purchase agreementthat there is some form of
escalation provision that allowsthe contract price to escalate
(26:39):
from at least the period whenthe proposal was submitted to
the financial close.
That's the period where theproject is at greater risk.
Once at financial close, theycan get some more certainty
regarding what their projectsare.
Once a financial close, theycan get some more certainty
regarding what their projectsare, recognizing how capital
(27:00):
intensive these projects are.
So that's one very importantreform that all parties are
making to embed within theresome consideration of the
underlying interest rateenvironment, because that's also
a critical driver in terms ofproject costs.
Speaker 1 (27:19):
Give us a couple of examples of escalation
provisions.
Speaker 3 (27:23):
They vary, so some states have used the consumer
price index.
Very straightforward approach.
However, the consumer priceindex, from my perspective
probably you know it's aconsumer price index.
It isn't meant to rack thecosts of an offshore wind
project.
So a number of states New York,massachusetts, new Jersey have
(27:47):
developed what I would view asmore sophisticated indices, what
I would view as moresophisticated indices which
really try to capture theappropriate proportions of kind
of cost inputs.
So this would include steel,this would include copper, this
(28:08):
would include there'd be a laborcomponent, there might be a
manufactured goods component andtypically there's a fuel
component as well.
They vary from state to statebut you know there is quite a
bit of work that's been donewith respect to these.
Speaker 1 (28:27):
While the state still holds kind of a ceiling to the
ultimate cost, to rate payersright.
Speaker 3 (28:36):
Yes, so recognizing that one shouldn't require rate
payers to absorb unlimited risk.
In the Massachusettssolicitation they specified that
the escalation would be limitedto 15%.
(28:56):
And it isn't just escalation,it can be de-escalation.
These are symmetricalprovisions.
If commodity prices, if thevarious components that are in
the index, go down, the contractprice would go down.
So they're symmetrical andthat's one of the important
benefits that customers or ratepayers would realize.
Speaker 1 (29:17):
Is this common with other renewables?
Are they also used?
Is this really unusual becauseoffshore wind is so unusual and
important, or do we also see itin others?
Speaker 3 (29:30):
We are seeing it with other procurements as well.
It's become increasingly common.
I think that the reason why itmight be more important for
offshore wind is the length oftime from when a proposal is
submitted to when a projectachieves financial close.
Speaker 1 (29:51):
Um, so that's really kind of the to me, the interval
where risk can cause contractpricing to go awry these
non-financial considerations, uhin solicitations and that
developers provide uh input on,seem to be so important for the
reason why we want offshore windto be successful.
(30:12):
Where have you seen some reallygood practice examples?
Where have you seen that reallysharpened to make sure that you
know offshore and developmentsare providing benefits to
america and to americans?
Speaker 3 (30:24):
I think that one thing that we're seeing that to
America and to Americans.
I think that one thing thatwe're seeing that is really
important is if you're going tobe giving weight in the
evaluation process tocommitments that proponents are
making for the creation ofeconomic benefits for
(30:45):
environmental mitigation, thereneeds to be some commercial
framework put in place to ensurethat they live up to the
commitments that they made.
So virtually all statesnegotiate a memorandum of
understanding, or MOU, with adeveloper where they make them
(31:10):
commit to delivering on thevarious critical elements of
their proposal, focusing on, youknow, the job programs that
they're proposing, the grantsthat they're going to make to
state universities, thecommitments that they are making
with fishers to supportresearch or to replace equipment
(31:37):
.
So often we'll see a memorandumof understanding or MOU, between
the developer and the stateDepartment of Commerce or the
state Department ofEnvironmental Management or
Environmental Protection, sothat, from our perspective, is
(31:59):
an important best practice whichmost states are employing and
really is critical to kind ofmaking sure that the
considerations that result inthe project being selected are
delivered on by developers.
Speaker 1 (32:15):
This is new and evolving and very interesting
space for us.
Government support, as well assome government finance, creates
these more widespread societalbenefits too.
Any additional good practicesfrom the developer side?
Speaker 3 (32:36):
I think some of the good practices are really the
engagement that they do with thecommunities as well as the
various key interests in thestate right.
They have to recognize thatthis project, if it's going to
be successful, requiresstakeholder support.
Speaker 2 (32:55):
Yeah.
Speaker 3 (32:56):
They have to early engage with these parties and
get out in front and make surethat they become a trusted voice
with respect to the impacts ofthe project Because, as we all
know, there's a lot of chatterout there regarding the impacts
of offshore wind and it'simportant that developers are
(33:21):
there to be part of theconversation and that they as
well have other parties that cansupport them and can become
trusted partners for the partiesthat are looking at these
projects and have to makedecisions as to whether they're
going to choose to support theprojects.
Speaker 1 (33:41):
But we've really gone through this paradigm shift of
expectations, both from kind ofgovernment but also society,
that you have to involvegovernment and society in the
early stages to help shape theopportunity and you have to
allow them to participate andfeel the benefits and also
express, I guess, the challengesright that that that new
(34:04):
development can create in timeand space and environmental
impact and conflict with otherusers.
Jim.
Speaker 2 (34:11):
Well, we can't really get away from the fact that we
have challenges with the newadministration, but in fact it's
as much a challenge of the newadministration.
It's been very clearly putforward that we want to be
energy dominant, very clearlyput forward that we want to be
energy dominant.
And energy dominant doesn'tnecessarily mean, and probably
(34:33):
cannot mean, any one form ofenergy.
It's going to be multiple formsof energy and I think wind,
renewable energy, particularlywind energy, is going to be one
of them.
And the question is how does itget folded in in a way that is
constructive and economicallyviable?
(34:53):
And this is reflected in theappointments that have occurred.
The Secretary of Interior he isvery clearly and all of the
above advocate has been forquite some time and he's got the
record to show it as well andso we're going to be including
industries that are on the cuspor hopefully on the cusp of
(35:14):
being economically viable,including wind energy and the
development of an Americanworkforce, an American supply
chain and American technology tohelp support that industry,
with the couple of offshoreprojects that have recently
signed and executedsolicitations, responses and
(35:37):
PPAs.
Speaker 1 (35:39):
there are still permits and approvals needed to
keep those projects on track tothe schedules that they've
committed to in the PPAs, and sothat could be a complexity and
hopefully that doesn't become anissue for those projects.
But, john, are there otherpieces that you see that we
might want to make sure we keepspecial eye on?
Speaker 3 (36:02):
I think there's three areas that should be viewed as
risks associated with the newadministration.
One is the timing associatedwith the issuance of permits.
Second would be investment taxcredits, the durability of the
investment tax credits, and thenthe potential for there to be
(36:25):
tariffs, recognizing that muchof the equipment the wind
turbine generators in particularthe HVDC components if these
are offshore wind projects,they're going to require HVDC
transmission those are going tobe sourced from outside of the
(36:48):
US and could conceivably besubject to import tariffs.
So that's a cost risk thatdevelopers will be concerned
with and consideration needs tobe given to that.
Speaker 1 (37:03):
And already quite a constrained supply of some of
those specialty pieces ofequipment, like you mentioned
HVDC transformers and switchgear, jim.
How can we do this better?
Speaker 2 (37:14):
I think what John has pointed out to us is that
there's a lot of complexity inthe PPAs and in the offtake
agreements, but that, as alarger issue, we have to decide
as a society, as a body politic,whether or not these
complexities should be pursued,dealt with and even possibly
(37:41):
subsidized for the greater goodover the longer term.
Speaker 1 (37:47):
Jim.
I love it.
John shared with us some ofthese really innovative ways.
Now where offshore wind isdemonstrating that much wider
economic and societal valueProjects can better and better
time their maturity and theirreadiness to commit with what
the market is willing to accept.
Speaker 3 (38:05):
While we've made progress in terms of these
procurement frameworks, there'scontinued work that needs to be
done.
Right there's?
In the current environment,there are new risks that need to
be addressed.
Some conceivably need to beshared amongst the parties, and
we need to figure out how to dothat most efficiently.
(38:25):
But I think that there are waysto do that.
It's just, we need to figureout how to do that most
efficiently.
But I think that there are waysto do that.
It's just we need to spend thetime and need to roll up our
sleeves, and all the partiesneed to work together the buyers
, the sellers, the states.
Speaker 1 (38:39):
In our podcasts we have this section called the
last drops in the ocean for theweek, and that's really where
Jim or I mention a couple ofother recent things that have
happened that aren't on thetopic of this podcast but are
important for our listeners justto be aware of and, in case
they haven't heard about them,to go out and do their own
Google search and look, John,you are our guest.
(39:02):
Are there any last drops in theocean that you'd like to share
with our listeners?
Speaker 3 (39:08):
Maybe one thing that is pretty on topic and it's
something that I just posted onthis morning on LinkedIn, and
it's it really is.
So here in New England we'vegone through recently a cold
snap where we had not extremecold weathers but a typical
(39:28):
winter cold snap, and in thisperiod we had very high energy
prices.
And specifically, the energyprices were in the neighborhood,
over a five-day period, ofabout $130 per megawatt hour.
(39:49):
So when you add that value tothe value of the Class I RECs,
the value of offshore windduring this period was in excess
of $170 per megawatt hour, andoffshore wind projects during
this period were operating atgreater than a 72% capacity
factor, so they were operatingpretty close to like baseload
(40:10):
resources.
And this is at a period when thesystem was not under high
stress but was experiencingpretty high loads.
So that's really some of thevalue that offshore wind can
deliver and is delivering, and Ithink that's one of the reasons
why we really need to focus onthis issue and recognize that we
(40:33):
have a resource here that candeliver meaningful value to
customers and to the fulluniverse of stakeholders out
there.
Speaker 2 (40:42):
Reacting to John's comments, I think that's really
very, very much on target andappreciate those figures.
When you talk about a largerpicture of diverse energy
sources and all of the above, Ithink that's critical.
Last drop to share witheverybody is in this discussion
of subsidies, both large andsmall, and helping industries
(41:07):
move forward.
I refer everybody to a op-edpiece in the Wall Street Journal
last Sunday that took on thetask of using the word subsidies
and what it meant and whetherit was implicitly bad.
And I think that in thediscourse that occurs, the
(41:30):
social and policy discourse thatwe have, that's a good thing to
look at and to think about aswe move forward and start to
discuss whether or not subsidiesshould play a role in the
development of offshore wind.
Speaker 1 (41:49):
And, I guess, my last drops for the ocean.
You know our previous episodewe recorded and released before
Christmas last year, and nowwe're coming in right before
January 20th, which is when wehope to release this podcast,
and so Trump will be inauguratedon that day as president of the
United States, and so there maybe fast action and executive
(42:10):
order from the newadministration on energy policy
that we don't yet have cleareyes on.
So let's hope this podcastdoesn't get dated real quick
when that happens.
So that's one thing.
Another last drop I have is arecognition of the passing of
president Carter and not beingold enough really to remember
(42:30):
President Carter and what thenation went through.
I was doing a little reading andrecalled that in the late 70s
the US went through its firstenergy crisis.
I kind of remember long linesat the gas station and I
certainly remember the tensionof my parents complaining about
the cost and the difficulty inaccessing energy at the time,
(42:54):
and Jimmy Carter seemed to bethe first president that really
sought to reduce America'sdependence on foreign oil and
foreign sources of energy.
And boy, I think that speaksvery clearly to where we are
right now.
The opportunity for Americansto conserve energy provide
incentives for the developmentof our own national resources,
(43:20):
as well as to maybe take aleadership role in the creation
of new types of energy and newways to access energy are great
things for america's energyfuture, and we're all a part of
making it right now, every dayyour reference to jimmy carter.
Speaker 3 (43:37):
I just wanted to add to it because because I think
from an energy perspectiveyou're right on um he was
critical in terms of passingsome legislation that really has
contributed to where we aretoday.
This is the Public UtilitiesRegulatory Policy Act.
You know PURPA, which you knowestablished the independent
(44:00):
power industry and theseoffshore wind developers are
IPPs.
So Jimmy Carter are IPPs.
So Jimmy Carter, back in 1978,put in place the regulatory
framework that really hassupported this offshore wind
industry and how it's structuredtoday.
Speaker 2 (44:20):
And I can't help but add to that because, unlike
yourself, I actually did livethrough that.
Speaker 1 (44:26):
What was it like, Jim , when the world was a
pocketbook?
Speaker 2 (44:28):
Yeah, I actually did live through that as a college
student and I just want toreiterate what you and John have
said.
And it was a real eye-openingexperience for the country and
Jimmy Carter was good inbringing that to our attention.
(44:51):
And I will add that one of mylast projects as a graduate
student was taking a look atthis thing called wind energy
and what possibilities it mighthave for the future.
Now it took a while to take off, but it's been going on since
since back then and uh, uh, we,we owe a debt to the man a real
(45:12):
final last drop.
Speaker 1 (45:13):
There's a really fun new show called landman on
paramount plus uh landman tellsthe story of uh, basically e and
p, uh production, oil and gasactivity out in West Texas.
It's filled with greatcharacters, flamboyant, crazy
behavior and has just a tinge ofrealism in it too.
(45:36):
But like every good TV program,it's probably the Hollywood
version of what really goes onin Texas and other parts of the
US that do a lot of energydevelopment.
I found it really fun to watchand so let me recommend it, Jim,
to you and John, and also toour listeners.
If you have a chance, take alook at an episode.
They're very entertaining.
Speaker 2 (45:56):
Yeah, I'm sure that it's an artistic view of Landman
, but they are real and theyused to come to the Department
of the Interior and we used tohave meetings and they had
interests.
Speaker 1 (46:09):
Yeah, and the main character is played by Billy Bob
Thornton, who's quite an actorand I'll say too, I've met a lot
of characters that aren't quiteBilly Bob Thornton and such
good actors but there's somering of truth to the role as
he's delivering it.
We're at the end of our episode.
We ask that you share with yourfriends.
(46:32):
We've had a couple of greatfolks share our podcast on
LinkedIn, that's.
That's seen really expansivegrowth in our listenership.
So thank you so much forsharing.
Send us any topics that you'reinterested for us to discuss and
, of course, if you'reinterested to be a special guest
, like John, come join us on thepodcast, but reach out.
I think you all have our emailsand you all know Jim and I on
(46:54):
LinkedIn, so we're easy to getin touch with Our next episode.
What do you want to talk about?
Speaker 2 (47:00):
This time I think we're going to have a little fun
.
We'll have some game showactivity test your knowledge of
offshore wind.
It should be of great benefitto newbies, but it should also
be very useful for those who areexperienced and can help
clarify and tell Ian and I ifwe're on track or maybe we
(47:22):
missed the mark here.
But, we're going to have alittle quiz time and it should
be enjoyable for everybody.
I hope you join us.
Speaker 1 (47:32):
So, jim, are you and I going to quiz each other, or
do I get to write my ownquestions and then answer them?
Speaker 2 (47:36):
I think I could be really good at that one, I think
you should write your ownquestions and give them to me,
and then I'll ask you somethingelse.
All right, that's the way it'sgoing to work.
Speaker 1 (47:45):
I look forward to this.
I think that's going to be alot of fun, chip.
Thanks, thanks, listeners,we'll see you again soon on the
next Offshore Energy podcast.
Speaker 2 (47:55):
And thank you, john, thanks for joining us.
Thank you both Really enjoyedit, Bye guys.
Bye, bye now, bye now.
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