Odd Lots - Here's What's Going Wrong in the US Offshore Wind Industry

Episode Date: November 22, 2023

The effort to decarbonize the US electricity grid involves a range of technologies and power sources. Solar is part of the solution, nuclear may also be a component. Battery storage is key. And so is wind — both onshore and offshore. While there are challenges throughout the process, the offshore wind industry in particular has seen a number of setbacks lately, with the Danish company Orsted having recently made headlines for pulling out of a project slated to be built off the coast of New Jersey. Challenges range from surging commodity costs to a scarcity of vessels, the bidding process for deals, and of course, the surge in interest rates over the last two years. On this episode, we speak with Chelsea Jean-Michel, an offshore wind industry analyst at BloombergNEF, to get a clear breakdown of the problems, the degree to which these challenges threaten the larger trajectory of the industry, and the efforts to decarbonize the grid.See omnystudio.com/listener for privacy information.

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Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. Tracy, I have to say, there are a lot of exciting things happening in energy, decarbonization, electrification of the grid, things we've talked about recently with people like Jigger Shaw and so forth. But I have to say, I keep seeing negative headlines about wind.

Oh my gosh. You know, just before we came in studio to record this, I was taking a look at the S&P Global Clean Energy Index. Yeah. It's down 30% this year, more than 30% this year. And a lot of that is thanks to what's been going on in wind. And in fact, if you look at Orsted, which I think is the world's biggest provider of offshore wind farms, it's down 50% year to date. Yeah. So we are recording this November 15th.

I think just earlier in the week, two top Orsted executives. departed the company. I think there was a project off the shore of, I think, New Jersey that recently the plug was pulled on. And it just seems that every story, everywhere, around the world, with the exception maybe of China, it seems to be, something seems to be wrong, whether it's the math doesn't pencil out on the actual projects themselves. There are companies, I think Siemens Wind has had all kinds of manufacturing issues with respect to turbines. And so I'm just trying to understand what is going on with this industry and how bad is it in terms of if it's not going as planned reaching our decarbonization goals as a country. Yeah.

So my understanding is there are two things kind of happening at once. You could say two headwinds for the wind power industry. Creating a perfect storm, Joe. I'm just going to get. I thought a perfect storm would be good for wind. I'm just going to get as many weather puns as I can into this conversation. But there's higher borrowing costs because of. because of surging interest rates, and then there are also higher component costs.

Yes. And I guess my question is how much of all of this is sort of growing pains for an industry that at least in the U.S. is still relatively new, although it is true that it's also facing problems in places like the U.K. Or is this a kind of permanent change in the industry's projection. Basically, is wind power a low interest rate phenomenon like, I don't know, we work or cheaper Ubers? Is wind power a lot of hot air? You know, you mentioned the renewable energy stocks, and that is sort of another, I don't know, funny is the right word, but we're having this great year in the stock market so far. And how many people would have bed? It's like,

oh, the inflation reduction act passed, all this money pouring into renewable energy, all these incentives can't lose betting on these companies. And wind and I think solar. I mean, it's been pretty dismal. Yeah, absolutely. And wind especially was like a much hyped component of the renewable energy revolution. And you're right. With the Inflation Reduction Act, there is this question about how much of this is a temporary holdup given permitting issues that we've discussed with people like Jigger versus how much of this is the math just doesn't pencil out. There is something fundamentally challenging in wind. Lots of questions, and we have the perfect guest to get the answers.

We're going to be speaking with Chelsea Jean-Michel. She is an offshore wind analyst here at Bloomberg NEF, one of our colleagues on a different floor. So excited to chat. Chelsea, thank you so much for coming on Oddlots. Thanks so much for having me, John Tracy. Is our premise correct, more or less, that it's been a just dismal year for the industry? I think dismal is a bit of a big word to use, but, you know, it hasn't been great, and there have been a lot of negative headlines, and you guys highlighted a lot of the key issues already.

I think maybe to highlight at a grander scale, we have seen a lot of the impacts most saliently in the U.S. And Tracy, you mentioned, you know, it's a very, like, new industry in the U.S. for context, there's only seven operational turbines, 42 megawatts installed. However, there are two offshore wind farms currently under construction right now, almost a gigawatt. So the industry is growing, but we've also seen over 12 gigawatts of offshore wind projects seek to cancel or renegotiate their off-take contracts in the U.S. Now, what I mean when I say an off-take contract is that's typically an agreement that these offshore wind developers, their projects, will sign with states, state utilities to essentially guarantee that they're going to buy their power for usually around 20 to 25 years. And that's really key for an offshore win project because they need, you know, you have variable generation. So if you can't guarantee your generation, you can guarantee the price at which that generation is sold. And that makes it easier for these projects to, you know, reach financial close, make a business case for them.

Now in the U.S., this is interesting because this happens a little bit earlier on in a project's process. So in the U.K., before you bid for an off-take contract, you need to have a grid connection agreement. You also need to have your permits in. In the U.S. that's not needed. And so you might have a couple of years when between when you lock in your off-date contract until you finally reach financial close and then you want to. to construct and build the project. So that leads to a certain level of risk that's a little bit higher in the U.S. than you've seen other parts of the world. And that's also why, you know, we've seen just how much interest rates have shifted over the last few years, how much inflation has changed. And that

has meant that now when these projects are looking to reach financial close, they're in a different macroeconomic environment than when they had initially placed their bids and made those assumptions back in 2019, 2020. Oh, that's really interesting. Because I was wondering how higher rates are actually feeding into a lot of this given you would have assumed that the financing was in place, but you're highlighting the discrepancy between the revenue coming in through the offtake agreements and the financing that is still coming up in the higher interest rate environment. So just on this note, could you maybe tell us like the factors or the calculations that go into creating a wind farm, whether it's onshore or offshore?

Like if Joe and I were at a bar and we were writing on a napkin, here's our rough cause. and here's like our rough revenue source. What would that napkin actually contain? Yeah, so there's a lot that goes into it and it depends on, you know, if you're building in the U.S. versus if you're building, say, in the Netherlands or in Germany. But we're building in the U.S. We're building in the U.S.S. Sorry, go on. Yeah, so if we're building in the U.S., right, for context, offshore wind development takes a really long time. As I mentioned, there's very few projects currently operational in the U.S. now. But around 8 to 10 years is what we see globally. But in the U.S., you know, this can take

as long as 14 years. We've seen that for some other projects that are currently in the process of getting built right now. When you take a look at that really long process, one of the first things you think about is, okay, so that's like 10 years where you have like development costs going in, right? So you need the people that are going to help formulate the bids. In the U.S., you have a seabed lease auction. So this is usually the first step in the process where you're like, I want to acquire my seabed for X amount of dollars. We recently saw the New York Bight lease auction last year, millions and millions of dollars of revenue for the U.S. government over $4 billion to secure these sites. And that's just step one.

And then you also have... Can I ask really quickly, does the U.S. government own all the seabeds? On the Outer Continental shelf, they do. Okay. However, that being said, I think it's three nautical miles. That's state waters, but most offshore wind development is going to take place in federal waters. Oh, yes. I remember this from my offshore gambling days.

But yeah, so that's like a cost you can expect to pay for the seabed. Then you have kind of other development costs when it comes to, you know, bidding into an offshore wind procurement or bidding into an offshore wind solicitation. So this is where you go in to say, I will bid X price. I will bid Y price. I'll bid Z price for, you know, this off-take contract that we've talked about in state solicitations. And so that takes also some costs. Now you have costs over the development lifetime. then let's say you get to the point where you need to reach financial clothes and actually build that project.

So let's talk about the equipment costs. This includes your turbines. This includes your foundations. This includes your transition pieces, which are kind of, you know, the pieces that exactly what they sound like. Transition from the foundation into the turbine. You have your array cables which connect the turbines to each other. You have your offshore substation, which kind of collects all the power within the offshore wind farm to then get it ready to transmit to shore. then you have your offshore cable, onshore substation, et cetera, et cetera.

So part of the reason why I mentioned, you know, the Netherlands and Germany is because these are markets where they pay for offshore transmission in the U.S., that responsibility falls in the developer. And then, of course, you know, as you're financing the project, you also have different financing costs involved with that. So if you're using project finance and you're going to go to the bank, then you have, you have to factor in the payments that you're going to be making to pay off your loan. And if you're talking about lifetime costs, renewable energy is great because you don't have

to pay for fuel costs. But that being said, you do have some O&M, so some operations and maintenance that you need to take care of as well. This seems complicated, Joe. It's so complicated. Also, you know, I have to, you know how every once in a while with Tracy you try to convince me to write a book? You know, with me, to be clear. And the reason I can't do a project that's going to take two years. That's just too long.

And so when I hear, oh, the process is going to be 10 to 14 years, I can't even imagine thinking about starting out of project 10. 10 to 14 years. I can't even do a two-year project. So just that blows my mind. But when you're talking about such long development timelines, it really drives home, you know, how much financing costs can matter. And that's a lot of time where you're spending a lot of money on various things without revenue. And the whole math changes with the change in financing conditions. But why do you talk to us about, okay, what are the conditions for these developers in 2023 versus 2019, both in terms of the rate environment, but also just the inflation environment, the cost of labor, the cost of construction, the cost of steel for the materials and so forth.

Like how much have things change for them in four years or three years? Significantly, I actually, I have those numbers. When we're talking about the impact that inflation interest rates, and also you mentioned, Tracy, the Inflation Reduction Act have had on the levelized cost of electricity. So what this means is this is essentially the price at which electricity must be sold in order to kind of break even, make sure your returns are met, et cetera. So in 2021, we did some analysis estimating that the LCOE for offshore wind projects in the U.S. Assuming a 30% investment tax credit. So this is investment tax credits as allowed in the Inflation Reduction Act was around $77.30.

So this is assuming a 30% ITC. if you take into account CAPEX and OPEX rise, so OPEX being operational expenditure, this added around $17 per megawatt hour, then take into account interest rate hikes. That's around $27 per megawatt hour. But then we also had when the IRA came out,

you know, bonus tax credits. So developers could also get plus 10% for certain meeting certain requirements. That took down. So it reduced the levelized cost of electricity by around $7 per megawatt hour. So when we're sitting here in 2023, This means that now the LCOE, assuming a 40% investment tax credit, stands around $114.20 per megawatt hour.

So you can see comparing that 114 to that $77 per megawatt hour number, just how much that environment has changed. And I think to highlight a couple of movement pieces in terms of what has been happening on a macroeconomic scale. So US CPI, so this is consumer price indexed, average at around 1.9% before. COVID-19 in 2019. And then if you take a look at how it peaked in 2022, it was at around 9%. And so you can really see how that environment has shifted. Also for several projects, the secured overnight financing rate, so this is the base rate for interest rates in the U.S. stood at around 0%, almost nothing in, you know, kind of end 2020 into 2021. And then when you take a look at where it is in 2023, it's, you know, around 5.5%. And so you can see just how much the base rate, you know,

for, you know, borrowing money has increased. Wow. It's like an almost 50% increase in the cost, which is almost perfectly tallied with the drop in Orsted's share price. Oh, perfect. Yeah. Efficient markets right there. This is Tom Keane, inviting you to join us for the Bloomberg Surveillance podcast. It's about making you smarter every business day. I'm Paul Sweeney. We bring you complete coverage of the U.S. market open. We cover stocks, bonds, commodities, even crypto, all the information you need to excel. And I'm Alexis Christophers. Bloomberg surveillance also brings you the analysis behind the headlines. We do that through conversations with the smartest names in economics, finance, investment, and international relations. We do all this live each and every weekday

that bring you the best analysis in our daily podcast. Search for Bloomberg surveillance on Apple, Spotify, YouTube, or anywhere else you listen. On the East Coast, listen at lunch. And on the West Coast, Listen as soon as you wake up. That's the Bloomberg Surveillance Podcast with Tom Keene, Paul Sweeney, and me, Alexis Christophores. Subscribe today, wherever you get your podcasts. Bloomberg Surveillance, Essential Listening, each and every business day. Okay, so you just laid out wonderfully all the different cost pressures that have landed on the wind industry. And I guess my question now is, what levers can they pull to offset

some of these. So, you know, you have fixed rates on the revenue side because of those off-take agreements. Can they renegotiate to try to get additional money? And then on the cost side, I imagine putting together these massive wind turbines is a pretty expensive and complicated endeavor. But we have seen, for instance, in the oil industry, that you can do things like have standardization on components and things like that that can. bring down costs. So which of these is the industry looking at? Which, in your opinion, might be most effective here? So I think what comes to mind are three things. So one, the first you mentioned being renegotiation. So that's what a lot of these developers have been trying to do.

So far, not really any of the renegotiation attempts have been successful. We did see some green lights in New Jersey when Orsted requested basically being able to keep some of the upside of their federal tax credits. So traditionally, in their contracts, they're meant to pass down those benefits to ratepayers if they're going to get, you know, any extra access. But New Jersey kind of passed a bill saying that, no, this is okay. Orsted can keep the upside to make sure that that project goes forward. Now, even though that bill passed and Orsted was able to receive the upside, that project

still did not go through. If we take a look at renegotiation attempts in Massachusetts, the regulators had also said, no, we're not willing to renegotiate. And so then we saw fines of around $50 million, $60 million that these developers were paying to kind of exit those agreements so that they could then rebid into future solicitations. In New York, we also saw regulators decline requests to increase offtake prices. And so for New York, we're still waiting to see what exactly might happen. But basically renegotiating kind of opens up a whole can of worms because this is a competitive process that these developers are competing against each other for. And then the second you reopen that up to say, oh, I want to hire.

off-take price, then that kind of calls into question the competitive nature of the award. Wait, sorry, explain that further when you say it calls into question. Can you clarify that? Yeah, so essentially when we see something like an offshore wind solicitation, I've been using a lot of different words, solicitation procurement. They're also known as request for proposals, RFP, some people might call them an auction. So these are essentially developers coming in. The state says, I want to procure, let's say, four gigawatts of electricity of offshore wind power. And so then you'll have multiple developers kind of develop a proposal with different projects. They'll say, I'm developing a one gigawatt project. I'm developing a 500 megawatt project, etc.

They'll then say, I'm willing to provide this project at, let's say, $100 per megawatt hour. And this project is going to commission in 2030. And so then you'll have all of these different elements. Now, usually in the U.S., they'll take into account the bid price. So the lower your price, you know, the more that you can save ratepayers money. And so then the better that looks. So that's usually around maybe 70% of the evaluation. And then you'll have 30% be attributed to things like environmental attributes, economic development opportunities, how much are you investing in the state?

Also things like project viability, developer experience, different pieces like that. But the big portion is how cheap can you, you know, sell electricity to me? And so when you have these different developers essentially saying, I can, you know, sell it at this price. And this is the lowest one that, or this is the most attractive one that. the state selected, you award it, and then a couple years later you say, oh, I need an increase, then that calls into question, okay, what about the previous developers that lost out in the auction? Were they bidding at a price because perhaps they had, you know, less optimistic assumptions about what the future would be like? Yeah, their math was better. Exactly, right?

So when you think about contingency planning, things like that, it's good to have an optimistic view of the future, but when the optimistic view doesn't actually end up happening, then that kind of, you know, makes it a little bit more difficult. And what about on the supply side, like the component idea, how much can be squeezed out of costs there? That is a great question. So a lot of the cost declines we've seen in offshore wind has been due to increasing sizes in turbines. And so what that means is that as a turbine gets bigger, that means that oftentimes you need less turbines for the same amount of output. So for, you know, a one gigawatt wind farm, you need less turbines if you have bigger turbines at higher rate of capacities. You also need less array cables to interconnect them, less foundations, oftentimes less vessel trips needed to, you know, go in and install the turbines because there's fewer of them. So with that being said, you know, sometimes when you have this longer runway for offshore wind development, that means, oh, okay, well, I have a little bit longer time to kind of pick the biggest, newest technology that is going to allow for cost savings on a per megawatt basis. Now that being said, a lot of these projects that have been raising red flags are a little bit more in the later stages.

And so kind of reconfiguring and getting the newest and biggest turbine or signing new supplier agreements and, you know, trying to figure out where to squeeze can be a little bit more challenging because oftentimes a lot of these supplier agreements are already being put in place or have already been put in place. So this was the case for Ocean Wind 1 and 2, where if you take a look at Orsted's impairment, the vast majority of it was due to supply chain complications, mostly in Ocean Wind 1. And this is because they experience kind of knock-on effects from delays and kind of scheduling issues that they were having with suppliers predominantly with vessels. And so there is some wiggle room that you can do with reconfiguration and redesigning, you know, the project. We have seen, you know, I mean, Orsted mentioned for their Skipjack projects in Maryland that they are revisiting some reconfiguration to see if they can, you know, make the project as valuable as possible. But that being said, for some projects, it's not always possible. sometimes you reconfigure as much as you can until you kind of have to make a final investment decision. And for some projects, you have less runway. So if you're early on in the development process,

then you have more leeway to shift, you know, your designs and change your suppliers. But if you're later on, it's a little bit more challenging. So you mentioned supply chains. And the big stress point has actually been the vessels? For Orsted's Ocean One and two, that's what they mentioned. Is that going to be, was that the one off of, that was going to be off of New Jersey? Yes. And wait, what's the vessel? constraint. Is it actually the number of ship? Yeah, what's going on there? Yeah, so the U.S. has essentially

this law called the Jones Act. I'm not sure. Are you guys familiar? Yes. We love it. It always comes back. It always comes back to the Jones Act. No, we've done a couple episodes. I had no idea this is going to turn into a Jones Act episode. Now I'm really excited. So I have my own personal feelings about it, but that aside. I've noticed, by the way, like on social media, that's one of the most hot button topics that you can talk about so you never and never say anything about the Jones Act online people ever people have a really strong opinion okay sorry go on no worries i mean it's a hot button topic so essentially basically if you are traveling between two points yeah in the u.s. then that ship has to be u.s build u.s. crude and what that means for offshore wind is that that offshore wind farm counts as a point and so

the u.s has you know i mentioned seven turbines currently installed two projects currently under construction. But what happens is because of the Jones Act, you either have to have a Jones Act compliant, you know, vessel that can do that transportation. That doesn't exist in the U.S. right now. Currently, there's only one wind turbine installation vessel that Dominion is building right now. I'm getting dredging. Yeah, oh my God. This is so amazing. It all comes full circle. So, yeah, there's only one vessel currently under construction right now, and that's not going to be ready until, you know, a few years from now. And Dominion's planning on using that on their 2.6

gigawatt coastal Virginia offshore wind projects set to be set to be the largest in the U.S. when it commissions, one of the largest in the world, which is great for them. But for other projects, Orsted was actually hoping to use this for their sunrise wind and revolution wind projects. But now that the vessel has been delayed, they are no longer able to use that Jones Act compliant wind turbine installation vessel. So another thing that you can consider doing is using a European wind turbine installation vessel and then using a kind of kind of like feeder barge method. And so this is what a lot of U.S.

offshore wind projects are hoping to do. Essentially, the feeder barges are Jones Act compliant, and you feed in the components to the European vessel that stays at the offshore wind site. This is traditionally not how projects are installed in Europe, as you might imagine. Usually the European WTIV will go to the port, pick up the components, load it up,

go to site, and then install the components. And so you kind of have this mish-mosh way of doing things. And then the last one that we don't really expect to see because it's super expensive. But you might stage your components in, say, Canada and then use a European WTIV and then go get the components and then install them. So the Jones Act has essentially created a situation where so many vessels involved in the offshore wind installation process need to be built here. And right now there's only one. So that's a huge constraint. Joe, I dare you to tweet that the Jones Act causes pollution and adds to the U.S.'s carbon load by denying wind energy.

I'll tweet it from my outlocked alt account that nobody knows about. Okay, but this actually leads nicely into another question. Just going back to the IRA, a lot of this sounds like difficulty with how the U.S. system is set up for wind power. So you have the ship constraints via the Jones Act that you just described. And then you have the permitting process, which can also be difficult. You have the sort of time discrepancy between when the offtake agreements are agreed. and when the financing is actually secured, which is different to other countries,

different types of subsidies and things like that. How much can the government do to alleviate some of these pressures? And then on the IRA specifically, setting the griping aside about the permitting process, what does it actually do to help wind power here? Does the existence of a very large underwriter in the form of the U.S. government provides some certainty to the industry at a time when it seems like there are a lot of challenges.

Yeah, so I think that you mentioned like what can governments do. So I think going back to one of your initial questions that I think that I'd end up missing at some point, starting at the state level, what states have begun to do is starting to introduce inflation adjustment mechanisms in their offtake contracts. And so the U.S., I mentioned having that timeline between being so long between, you know, when you agree with that offtake to the offtake price. And then when you actually finance the project being really long, that makes it really risky. But also another piece is that the U.S. offtake contracts are not indexed to inflation. And so what that means is that in the U.K. in Poland, partially in Ireland, over the 2015, 20, 25-year off-take contract lifetime, the price might go up. by a certain percentage that is usually up by inflation. In the U.S., these projects bid at like a flat price or at a set escalator, say two or three percent. And so again, given the shifts that we've

seen in the environment over the last few years, this means that these projects are not nearly as protected as they are elsewhere. And so states have been starting to say, okay, we're not necessarily going to index this price over the lifetime of the contract, but we will say we'll give you a one-time adjustment mechanism. And so in New York, what this means is for, from the time that you bid until the time you receive your final federal permits, your price will be indexed to metrics like steel, labor, fuel, copper, different pieces like this to help kind of protect the developers a little bit more and stave off a little bit more of that risk. So that's one beneficial thing that we've seen kind of help in this way at the state level.

Now at the federal level for the Inflation Reduction Act, a lot of the big drivers for offshore wind have, you know, has been at the state level. And so, you know, the Biden administration came out with a 30 gigawatts of offshore win by 20, 30 goal a few years ago. And that's a good sign for the industry. But in reality, these offtake agreements that are really what, you know, these developers need, a guarantee of, like, route to market and, you know, a future for like how much build is going to be, is there going to be in the future, you know, that kind of long-term certainty. That's what the states have really been giving. And so the Biden administration's goal, while a good sign, also just for context at Bloomberg NEP. in our last...

Didn't one of your colleagues call it a pipe tree? One of my colleagues did call it a pipe tree. And, you know, part of the reasons for that is because we've never once forecasted that the U.S. was going to meet this goal even before it came out. But it is a good sign for the industry just to kind of, you know, hammer that home. The ambition is good, but it doesn't look like it's realistic. And in our latest forecast, it looks more likely that it's going to be half of that. Wow.

And for the Inflation Reduction Act, I think that the tax credits that are included in it are a very good sign. They help kind of decrease the price of offshore wind, onshore wind, onto renewables in general, right? And so it becomes a more attractive space to certain investors, let's say. But offshore wind is one of the most expensive renewable energy technologies out there. And so when we take the look at why developers and countries are building it, it's not necessarily because, you know, it's the cheapest, you know, form of electricity. Offshore wind has super high capacity factors. And so what that means is that essentially if you take the entire year and assume a wind farm is generating at 100%, the wind speeds are like ideal, generation is at 100%, but then you

actually take the actual generation. So, you know, sometimes wind is variable and wind speeds are lower and the turbines, you know, aren't spinning always at high speed all the time. There's some curtailment, perhaps. That percentage of the year, which it's like fully operational, is the capacity factor. And so for solar where you might have a capacity factor like 20%, and that makes sense given that, you know, it's only really generating when the sun is out. Onshore wind, you might have something like 30% or so, 35%. Offshore wind in the U.S., you can get, you know, 40, 45%. And so it's a lot higher. And so when you're looking at renewable generation as it gets more and more integrated into the grid, having higher capacity factors, you know, having technology, which is able to generate a lot more

is more beneficial for the system. And then also scale. So you have gigawatt scale projects that are offshore wind projects. You know, for context, you might see 100, 200 megawatt onshore wind project in the U.S. But that turns to 1,000, sometimes 2,000 megawatts when you go offshore. And so you have things like scale, higher capacity factors. Also, they're huge economic development opportunities, really kind of being the driver for offshore wind more so than it is the price of that electricity. And so I think the IRA is great for, you know, taking the impact off, you know, the price of that electricity and the amount that, like, states are going to have to be paying and, you know, kind of putting that on the federal budget side of things.

But in terms of actually spurring on that build and making it, you know, essentially being a driver for more offshore wind growth, I think that that's really lying more so with the states than it is with the federal government and the IRA. This is Caroline Hyde. And I'm Ed Ludlow inviting you to join us for Bloomberg Tech, a daily podcast. focusing exclusively on technology, innovation and the future of business. Every weekday, we bring you the top headlines from the world's biggest tech companies. From finance to defence, AI to entertainment and from startups to the magnificent 7. We highlight the latest stories of the people and companies pushing the tech sector to new frontiers and the politics that shape global tech markets.

We do this all every weekday, then bring you the most important conversations and analysis in our podcast. Search for Bloomberg Tech on YouTube. Apple, Spotify, or anywhere else you listen. Join us every afternoon on your commute home and stay ahead of the tech news cycle. That's the Bloomberg Tech podcast. I'm Caroline Hyde in New York. And I'm Ed Ludlow in San Francisco. Subscribe today wherever you get your podcasts. Just to hammer this point home, how much of the challenge here is the physics of wind power

versus financial conditions, the increase in borrowing costs and the higher, you know, cost of physical components like labor, like ships, things like that. In other words, could there be an argument that unless those costs come down really significantly, that wind power just isn't, I guess, energy dense enough to make financial sense? That's a really interesting question. I think that one thing that's important to contextualize is that these things that we've been talking about in terms of inflation interest rates, it's not just relegated to wind, right? Like, we have been seeing this hit other renewable technologies. We've been seeing it hit other sectors. I know I go to the grocery store now and say, oh my goodness, what? Like, this has gone

up by X amount. This is a ridiculous amount of money. Or now when, you know, you try to, you know, go for a loan. I think my parents were saying the other day that the interest rates are crazy nowadays. And so this is something that's hit a lot of industries. And it's not necessarily. just wind power. If we take a look at offshore wind in particular, I think that one of the reasons why we've been seeing so much news around it is because these are large infrastructure projects. You know, they're billions of dollars. The second one project says, you know, I can no longer develop. It's huge news because that's like a gigawatt of clean electricity versus, you know, if one solar project doesn't move forward, you know, maybe that's 50 megawatts and it's gone. So it's a smaller

fraction. These are also, you know, huge government initiatives. So you might have government-backed contracts now being called into question versus, you know, if you have like a corporate bilateral PPA at a smaller scale, you know, that's a little bit easier to renegotiate, perhaps have a little more wiggle room. And so I think that a big portion of it is on, you know, the financing height of it and the macroeconomic situation that's impacting, you know, everything. But also if we take a look at wind and offshore wind in particular, there are some unique pieces to it that I think make it a little bit more susceptible to say, I'm trying to figure out the right words, but let's say grandioseness or like bigger news because they are larger projects. They are

billions of dollars. They are huge when it comes to like amount, the amount of clean energy that you see it can contribute to countries' portfolios, but also from a company level as well, right? We've seen a lot of oil and gas majors get into offshore wind. And it's because, you know, they've been starting to integrate, you know, renewable energy goals into their strategies. And offshore wind, you know, you win a huge seabed lease, a seabed lease auction. You get gigawatts immediately added to your clean energy portfolio. And so I think the bigness of the projects, bigness is not a word, but we'll go with it. Close enough to it.

How expensive they are. But also, you know, these longer timelines, I think, I mean, I don't know about you guys, but I'm a lot more upset when I've been working on something. a really, really long time and it doesn't work out when you've been working on it for, you know, a couple days. Joe just admitted that he doesn't work on any long-term project. Yeah, I don't do a long-term project, so I completely agree. I have one last question, which is, okay, there are all these challenges from interest rates

to statewide legal issues to the Jones Act to whatever. If things don't get figured out, how important is the wind component to overall clean energy goals? especially I know in the Northeast, we don't get a ton of sunlight. There aren't a ton of other alternatives for decarbonization. Just talked a little bit about the significance of somehow getting this right in terms of the U.S. as bigger strategy. Yeah, I mean, I think it's huge. For context, our view at BNF is that this is more of a bump in the road than anything.

So for years, we've seen cost declines, cost declines, cost declines, cost declines, especially in solar. And now is one of the first time in years where we've seen a little bit of a bump in costs. And so a lot of it in part is due to the inflationary pressures and higher costs of capital that we've been seeing. Now, we do think we're going to see a return to normal, whatever that means to you in the next few years. And so then we should come back to seeing some cost declines. And yes, there are bigger components. And I think that there are some structural issues that the industry needs to work out. I mentioned bigger turbines being like a huge push, a huge

reason why we've seen cost declines an offshore win. Then there's also the question of how big can those turbines get. Yeah, I saw like one of them or some of them are now like 350 feet or like 100 meters, something like that, the blaze. Yeah, I think in meters. Yeah, so the Vestis 15 megawatt turbine has a 236 meter rotor diameter. Oh my gosh. Yeah, so they're really big. But yeah, as they get bigger, you need vessels that are going to be able to install them ports that can house them, you know, factories that can manufacture them. The entire supply chain has to grow with it. And so there's some structural issues there that also need to be worked out. And turbine makers have differing strategies on whether or not it's better to keep going big or to,

you know, kind of maintain at, you know, one turbine size. Now, now that aside, in terms of like how important it is your question, Joe, yeah, we can't necessarily just have an energy system that's made completely of solar panels, right? The sun's going to rise. You're going to have lots and lots and lots of solar energy, and then it's going to set, and then everyone's in a blackout. You know, that doesn't really make sense. Then you add storage. How many batteries can you add? You have wind.

You want to have different sorts of electricity sources with differing profiles so that your system can be a little bit more flexible. You can be a little bit more nimble with, you know, moving your resources around so that you can actually go where demand is needed. So that includes investments in the grid, right? And making sure that that is upgraded to a point where electrons can flow a little bit more easily. And in the Northeast, as you mentioned, there's not a lot of sun. And it doesn't always make a whole bunch of sense to build solar even if it might be, you know, cheaper on a levelized

cost of electricity basis than onshore, offshore wind. And so the big push in the northeast for offshore wind has to do with, you know, we see these really high electricity price spikes in the winter because, you know, gas, due to gas constraints and high prices for gas. And so offshore wind kind of helps offset that a little bit more. So those kind of tie into some of the other benefits that I mentioned, not necessarily environmental attributes and economic benefits, but when you look at the electricity system as a whole and kind of trying to reduce those price spikes and price drops, offshore wind can kind of help add to it in that way. So there are benefits there that I think are good for the industry. And I think wind is a really big necessary part of the energy transition.

Chelsea, Jean-Michel, that was amazing. That answered so many questions. Really appreciate you coming on the podcast. No, for sure. Happy to be here. Thank you guys. Yeah, that was great. Tracy, I thought that was great that answered so many questions and the fact that it ended up coming back around to being a Jones episode two. It was like a classic interview from my perspective. We should have seen it coming. I didn't. I had no idea. I had no idea that was a big part of the story. Yeah. So there was so much packed into that. Chelsea got so much in. I'm struggling to think about where to start. But so one thing I'm thinking is like on the one hand, a lot of this sounds really complicated to solve. So these are huge infrastructure projects. as she laid out, working on very long timelines. And so you would imagine that the macro environment might change, you know, as the project

actually matures and comes to fruition. But on the other hand, it does seem like there are some little things that could be kind of fixed almost immediately. So the idea of off-take contracts actually being indexed to inflation, I'm sure that would be a extremely politically unpopular move. but I guess if other countries are doing it, maybe you could make the argument. And if wind power is a necessary source of energy to get us to our carbon goals, like maybe there is some political appetite for making the projects more financially sound.

But yeah, it seems like it's complicated. It seems like there are like multiple things happening here and multiple levers you could pull. And the question is, again, like, which are the most efficient? and at the end of the day, if you do all of them, is wind power still efficient and financially viable? Yeah. And you can see, though, too, even with all of these challenges, from engineering to financing, the prize is great, right? I think I saw some stand one of the, all it takes is one spin of the blade, literally just one and that powers multiple houses for a few days or something like that. And there's just so much potential energy out there, you know, a couple miles off the shore that you could see

why there's this pursuit. But then also, you know, there are so many different follow-up conversations that we can now have related to questions about, well, what is the optimal size of the blade or the optimal size of the turbine and all these different things that you could see or the optimal bidding process, as you described. Oh, yeah, that was really interesting. Also, like, the idea, the renegotiation of the off-take agreements and the idea that, like, obviously the environment has changed. So if you're an energy provider, you might want to get additional revenue to cover your costs. But given the way those auctions are structured, you can't really do that in a fair way. Electricity markets, future episodes for sure. Yeah. And probably a Jones Act debate in our future.

Yes, for sure. All right. Shall we leave it there for now? Let's leave it there. Okay. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Jill Wisenthall. You can follow me at the stalwart. Follow our producers, Carmen Rodriguez, at Carmen Armand, Dashel Bennett, at Dashbot, and Kel Brooks at Kail Brooks. Thank you to our producer, Moses Ondom. For more odd lots content, go to Bloomberg.com slash odd lots, where we have a blog, transcripts, and a newsletter. It comes out every Friday. And if you want to chat with people about energy, one of the favorite places I go to check, energy news in the Discord. We actually have two channels that this is relevant. into. We have a climate channel energy. People are chatting in there about these topics. 24-7 discord.g.g. slash oddlots. And if you enjoy oddlots, if you want us to hold that Jones Act debate, then please leave us a positive review on your favorite podcast platform. Thanks for listening. I'm Michelle Hussein. And for more than 20 years, I was at the BBC.

But all the time I was delivering the headlines, I wanted to go further than the of the day, to spend more time with the people shaping our world. And that's what I'm doing here on this podcast, speaking to people from Nigel Farage. Russia needs to be taught a lesson. To tech journalist Karaswisher. And the tech industry is running wild. You know, they've gotten what they wanted and they've seen a huge run-up in their stock prices. This will be a place where every weekend you can count on one essential conversation.

to help make sense of the world. So please join me, listen and subscribe to the Michelle Hussein show from Bloomberg Weekend, wherever you get your podcast. You certainly ask interesting questions.