Odd Lots - Orsted's Americas CEO on Fixing What Went Wrong in Wind Power

Episode Date: June 6, 2024

Last year was a bad one for the US wind power industry, with lots of cancelled projects, writedowns, and an overall reassessment of how the math behind these mega projects might shake out in an era of higher interest rates and supply chain disruptions. But despite all of that, renewable power from wind is still a big part of America's plans to transition towards cleaner energy, with billions of government dollars earmarked to help build out capacity. So what went wrong last year and how is the industry looking now? On this episode, we speak with David Hardy, CEO of the Americas for Orsted, one of the biggest players in wind power. He talks about recent challenges, the potential implications of another Trump presidency, as well as when we might see subsidy-free onshore wind projects in the US.See omnystudio.com/listener for privacy information.

Bloomberg Audio Studios. Podcasts Radio News. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenphthal. And I'm Tracy Allaway. Tracy. We've been talking a lot of electricity lately, actually. Yeah, it's been, what, energy month here on Odd Lots?

Not really intentionally, but yes, it's sort of becoming energy month here on Odd Lots. I find, like, understanding any markets, understanding any commodity markets or whatever is sort of extraordinarily difficult. But I find power and electricity to be sort of like orders of magnitude. Like it just sort of like my mental model, how it all works is so still like inchoate and immature and I'm just sort of understanding it. Like it feels like so much more complicated. All these like auctions and micro auctions and mini markets and you know, it's it feels a lot more complicated in my mind than say like trading oil. My mental model for how it all works is that meme from it's sunny in Philadelphia with the posted notes, right? It's like this weird pseudo-government private thing where on the one hand, you have natural monopolies in the form of the grid. And then on the other hand, you have all these private individual actors who are trying to do all these new things. And it just seems enormously complicated. And in some ways, it's becoming more complicated because you do have efforts to hasten the energy transition in the form of things like the inflation.

Reduction Act. This network of tax credits and subsidies seems very difficult to understand to me as well. Right. And we had this grid that for years sort of operated with gas and coal and some nuclear. And now, you know, over the last several years, and the Inflation Reduction Act has tried to accelerate it, get more renewable clean energy on the grid. So we're sort of putting a new model of production onto an existing model of distribution. creates all kinds of new things. One thing in particular, though, you know, we're here in the northeast, and, you know, we don't get a lot of sunlight or we do, but, you know, we get... It's erratic. It's erratic. And for much of the year, there's hardly any. And so if we're going to sort of decarbonize a lot of the northeastern part of the grid, the bet is that a big chunk has to come from wind and in particular offshore wind. Yes, absolutely. And this is something that we've touched on before in an episode with Chelsea Jean-Michel. the wind industry analyst for Bloomberg NEF, so one of our colleagues here at Bloomberg. And I think to me, the big question is we have all these projects, and there have been some hiccups over the past year. So we've seen projects canceled. We've seen a bunch of big energy companies take impairments on wind projects. We've seen energy stocks, you know, fall quite a bit. There's the potential return of a known wind energy.

like her, let's put it that way, in the form of Donald Trump. All these different headwinds for the industry. And to me, the question is still, are these growing pains for something which requires enormous upfront investment and the creation of a lot of really, really big structures in the form of turbines? And complicated supply chains are needed to build those and huge investment outlays and all of that. Or is this something more fundamental about? the business. That's the big question in my mind. Like, is this just a question of transition and getting started or is this maybe saying something more long term about the industry? I think that's a great way to frame it. And, you know, the only thing I would add is a further complication to

this question is that the IRA and this like particularly aggressive imperative right now is coming at a time when like every industry saw supply chain disruption. Yeah. And every industry saw rising cost of capital thanks to the rate hikes and inflation, etc. You know, if we had a do-over, maybe we would have started this done an IRA like Act in 2009 or 2010 when we had significant unemployment and commodities were dirt cheap, but we didn't, can't go into the past. And so answering these questions, how much is growing pains? How much is the bad timing with supply chains? How much?

Very complicated, but that fits the theme of how complicated energy markets are. our power markets are in general. So we continue our process of discovery of learning about how it all worked. I am excited. We do in fact have the perfect guest for this episode. We do have the perfect guest. We are going to be speaking with David Hardy. He is the CEO of the America's division at Orsted, which is the huge Danish company, one of the global leaders in wind power. He had previously been the CEO of the offshore business at Orsted after joining the company in 2020. So right in the sweet spot to help us disentangle all of this stuff. So David, thank you so much for coming on the podcast.

Thanks, Joe and Tracy. Great to be here. Absolutely. So why don't we start off? 2023, I think, was sort of overwhelmingly recognized as a very challenging year, both for offshore wind and also Orsted specifically. And we can get into some of the projects. But like, what do you give us the sort of like high level summary?

of like what we saw unfold over the last year, 18 months or so. Yeah, I appreciate, appreciate the question. I also appreciate the introductory dialogue you had with each other, thinking about how complex it all is. And I have to echo that it is a complex industry. I actually enjoy that because, you know, with complexity, you can differentiate. It's a lot harder to differentiate if you're selling a cup of sugar to against the other guy who's selling a cup of sugar.

But and likewise, I think the question from Tracy about, you know, is this growing pains or, you know, what was the, what was the cause? I think it is kind of all of the above, but specifically a little bit of, you know, no one likes to in business say bad luck. But, but a little bit of bad timing, I would say is there was a lot of ambition and expectations and growth expected from the U.S. and offshore wind. as the maturity of the industry overall in Europe reflected an opportunity for America. I remember Orsted built world's first offshore wind farm more than 30 years ago and is the world leader in offshore wind and has nine gigawatts operating. And a lot of those were pretty low cost projects, power prices in Europe. The U.S. Northeast states, especially who don't have a lot of sun, as you guys said, and also don't have a lot of space.

saw offshore win as the kind of panacea for how to get large amounts of green energy, you know, onto the grid. And so there was a big fast ambition and growth. And Orsted, as the leader, saw the opportunity and took an aggressive position of building projects and building, you know, signing up for offtake and committing to billions of dollars of capital investment in this market, all as COVID hits, war in Ukraine, massive inflation, rising interest rates. And yes, all industries were affected by that. But renewable energy in general is very, very susceptible to rising interest rates and offshore win, even the most of all of the renewable energy sectors, because it's so capital intensive.

Our fuel is free, we say, but our fuel is really the cost of capital because we put so much capital out in up front. And so as interest rates rose 300 bibs, it just fundamentally changed the economics of the projects. And then on top of that, we had, you know, bespoke inflation, not just generic CPI, but but industry specific inflation that that led to 30, 40 percent cost increases. And those two factors just basically required a reset. And, and Orsted, unfortunately, was the most exposed and the most progressed. We had some really late stage projects where we had already invested up to a billion dollars in one project, for example, and made commitments for more. And when we were trying to pull all the levers and take all of our experience to try to make these projects go,

and in the end, we couldn't make them all go. And we had to make some tough decisions in 2023 to cease development on a couple projects. One, like I said, was a really late stage project. And so it took a big financial impairment and a financial provision for the cancellation charges for that project. But on the bright side, and we'll hopefully get to this part, we have three projects that we're still building, which are one is completed, actually. America's first commercial scale offshore wind farm, the South Fork Wind Farm, was just completed a few months ago. And we've got two other very large commercial projects that we've taken, our so-called financial investment decision and we're in construction offshore on one of them and building the

onshore you build the onshore part first or in parallel with these projects but the second one we're in full construction mode on the onshore part so i think a little bit of being exposed and being over exposed you know in retrospect could we have slowed earlier probably in retrospect you know could we have not been as ambitious and kind of staggered the number of projects we were building in the U.S. probably. Obviously there were some, you know, market-specific challenges that impacted us. A lot of these early projects didn't have any inflation protection and the off-take. The permitting process was slow, et cetera. So there's some U.S. specific things, but a lot of it is actually global macro supply chain imbalance, global macro, cost of capital,

etc. that just impacted us in a negative way in 2023. Sorry for the long answer. I'll be shorter on the future. That was great. That was very helpful. Also, it's good because you gave us like six follow-up questions automatically. Yes. So, okay, first follow-up question. But just on the idea of rationalizing some projects and even some late stage ones,

which you mentioned, and I assume you're talking about the farms in New Jersey, Ocean Wind, but how do you decide what to continue with and what to cancel? Like, is it a question of math? and the financing costs and the interest rates that you just outlined, or is it sometimes a question of physical limitations? So things like supply chain issues, the lack of, this is Joe's favorite subject, the lack of transformers or switch gears or the lack of, this is another traditional odd thoughts topic, the lack of ships to actually build these things. Yeah, it's another kind of all of the above answer. You know, we look at everything. Of course,

you know, our publicly stated ambition is that we, you know, try to achieve 150 to 300 BIP spread to WAC. So, and we are weighted average cost of capital. We have a WAC model, basically, that, of course, is funded in our corporate cost of capital, but then we have WAC adjustments to kind of create a project-specific WAC based on the market, the technology, project-specific risks, et cetera. So we create this whack model and then we try to achieve 150 to 300 spread to whack against that. And so when we're looking at projects, that's kind of one of our first hurdles or KPIs that we're very, very focused on. So as I alluded to, as your costs are going up, that spread to whack is being compressed.

As your cost of capital is going up, that whack is going up. And so you pretty quickly can get upside down on that spread to whack. if the ambition is only 150 to 300 and the whack went up by 300, it's pretty tricky. But at the same time, you know, we are also trying to be strategic. We were trying to make investments in a market. And at some point, we had some sunk cost. And so even though our guiding star is this life cycle spread to whack, fully loaded kind of KPI, we started adjusting a little bit and saying like, well, if we cancel, we've got these

sunk costs. We're going to have to write off anyway. So should we just assume them as written on? off and look at board IRAs. And so we started changing our parameters a little bit and barometer a little bit as we were getting into the tough situation to see if if it strategically made sense to keep going. And we were constantly looking at the supply chain and seeing, okay, well, what risks are still ahead of us? If we sit with a with a target today, you know, how realistic is it? We'll be able to hold that. Of course, we had our big risk registers and we have our modeling of,

you know, what things are going to cost. And we had contingencies and all that. built in, but you still kind of have a scientific but not perfect scientific probability analysis of outcomes. And if your P99 outcome is really, really bad and your P50 looks okay, that's different than if your standard deviations are more narrow between your P50 and your P99. And so as we looked at these projects, there seemed to still be a lot of challenges ahead. And so, again, the management team and the board had a discussion, and we decided that we weren't comfortable with continuing to invest in the projects. And we thought it was better for the company, for the portfolio to go ahead and cancel, take the big hit.

But hopefully take a little bit of risk out of the system, a little bit of risk out of the supply chain and a little bit of, you know, more focus from the organization so that we could make these three projects that we did want to keep going for. forward with successful and that's that's been our target and of course this is all from an america's perspective but or said it was doing this you know globally like looking at projects that had in Asia and Europe etc so first of all I'm very appreciative that you've gone right into things like spread to whack because this is exactly you know what we want to understand better but just to conceptualize sort of like what was or is the sort of way to think about like the difference between say the South Fork project and the new Jersey project. What was it about one of them that it's like, okay, this makes sense to go ahead

and complete it? And another one is like, no, we're going to take the hit on this and write off some of this investment. Yeah, without getting into specifics, but conceptually, it's about, you know, how, like, how negative is the MPV or how, you know, how much more risk was there ahead of us, how much more unknown, what supply chain challenges were still out there. And one of the challenges with ocean wind one in particular was that as we were approaching kind of the buildup to this decision there were new global supply chain challenges that were emerging so potentially you know delays in our foundations delays in our turbines delays in vessels and then you have these knock-on effects right if you're planning to start installing foundations in let's say summer of 24

which is what our plan was. And now, you know, those foundations aren't going to be ready until 25 or your vessels, you know, your vessel stuck on another project and it's not going to be there. Then the whole project has to shift because there's a sequence of how these things get built. And so then when we had lined up, you know, the literally, you know, hundreds of other contracts to make this whole project sequence and the whole thing was going to have to shift, then we were pretty concerned that as we reopened, as we reopened, is we went out to supplier A or supplier B and said, we now need to shift this project from 24 to 26, that all of their pains that they were feeling from the macroeconomic challenges were going to be on the table.

Because we had locked in some things pre the big inflation, and we had actually had some very favorable pricing potentially. But as soon as you reopen up things, then everybody's clawing back. And so I think that that was one of the big, big discussions that we had. And at the time, we weren't sure how the state was going to respond. And, you know, if they would work with us to, to, you know, to make the project work. And so we just decided to make the call. With South Fork, for example, yes, it's a tight project, but we didn't have those same new supply chain risks that we saw on the horizon with Ocean Wing One. Wait, can you talk a little bit more about those supply chain risks?

Because I kind of alluded to this earlier, but this is core odd lots thematic content. So things like switch gears and transformers and then the ships as well. You know, offshore wind is growing rapidly across the world, right? It's not just here where people saw this as a solution to get large renewable energy. And remember, in Europe, right, Russia invades Ukraine. Europeans want energy sovereignty. And so offshore wind became like even more important as they got off Russian gas. And so you all of a sudden have this huge supply and demand imbalance,

particularly on things like HVDC systems, but also vessels, monopiles, et cetera. And some of these companies are not, you know, super large, well-funded balance sheet companies. So they can't just see the demand signal and ramp up the way that you would think they could. And also just the way the industry. works its long cycle. So we typically don't want to like commit in a kind of take or pay way

for whether that's vessels or equipment until we take our final investment decision to tell the projects do you risk, until we have our permits, our interconnect agreements, our land rights, our, you know, et cetera, our point of interconnect agreements. And so there's a little bit of a chicken in the egg on like if the supply chain builds it, will there be demand or do they want that demand locked in, but we're not we, and I'm saying we not Orsted, but we, the industry, are we, even though there's a lot of demand signals, are we committing so they have business case certainty? And so you kind of have had this, this challenge on the supply chain ramp up. And so definitely there's a global imbalance, I would say, on some of these key

offshore wind supply chain categories. And, you know, the plan was that in the U.S. we were going to build our own capabilities here. We wouldn't need the global supply chain, but then again, the same chicken and egg problem, right? We had a bunch of projects that had promised to help contribute to both demand and in some cases even contribute to some of the upfront costs to build out some of the supply chain. But then when the economics or the project didn't work anymore, then of course the economics for the supply chain didn't work anymore. So we're in a reset period for most of the projects in the U.S. other than kind of our three and a couple more,

the rest of the whole industry is basically, you know, had to re-contract and push out and we're, you know, kind of in a reset of the macroeconomic conditions. I'm going to dive right into a subset of the supply chain question that speaks to this, that also sort of one of our core topics. Talk to us about the Jones Act, how it affects your business. And I think Orsted has a, you built your own Jones Act compliant vessel, but I think that's right.

But talk to us about like this particular piece of legislation that's been around forever and what it means for basically the industry's capacity to build out U.S. offshore wind. Yeah, I mean, the Jones Act for for those that don't know, and I'm just going to make it simple, it requires a U.S. flag, which means, U.S. owned and operated and built vessel to transport equipment from one U.S. port to another. These products are built in the U.S. outer continental shelf, and so they're subject to the Jones Act. In general, I'd say Orsaid, we're supportive of the Jones Act. It is, you know, it's another challenge to starting up the industry. We would love to have some, you know, some waivers in the beginning and then, you know, work with the shipbuilding industry and other to build out the fleet because it's difficult to build offshore wind with Jones Act requirements

when there are no Jones Act vessels that exist. We were first movers in working with another company to invest in and commit, create demand for a Jones Act wind turbine installation vessel, which is one of the really big, expensive bespoke vessels that actually installs the wind turbines. But there's actually a whole lot of other vessels. There's cable-laying vessels, rock dumping vessels, foundation installation vessels, service operation vessels, et cetera, et cetera. So we were and are committed to trying to help build out that fleet. But in the beginning, when these vessels don't exist, it's hard to comply. And so we in the industry have built workarounds where we either stage stuff outside of the U.S.

or we bring it directly over from Europe, or we barge things out with U.S. flagged tugs and barges and transfer equipment to European flagged or other than U.S. flagged vessels. And so it's been a, it's been a hindrance, I would say, in at least being able to get the most cost-effective offshore wind in the U.S. on early projects. And so, yeah, we're still just working through it, both getting first projects built and trying to support the maritime industry.

You did allude to, like I said, we were the first charter for a vessel called the Carribus, which Dominion Energy was building for their project. And we helped secure the business case for the vessel. But the vessel was very, very late in being completed. And so we had to pivot to this barge and tug solution for our three Northeast program projects. so we're not using the Caribdis for those. But we have built a handful, more than a dozen, I think, crew transport vessels. And we just a few weeks ago, I alluded to the celebration we're having in Louisiana with Leader Scalise,

where we built a large service operation vessel there, which is Jones Act compliant. And we're contracting other vessels that are under construction for other parts of the offshore wind setup. So just on this note, you know, building some of your own transport vessels, I sometimes wonder, is this, is this the solution for offshore wind? Is it just that you guys become more diversified in terms of what you're doing and end up building out your own supply chain of the necessary components and tools and transportation that's needed to actually build these huge wind turbines? Yeah, it's a discussion that we have internally a lot. Remember, these are super capital. intensive projects, you know, a gigawatt, 1,200 megawatt project in the U.S. today in the order of magnitude of $6 billion, I would say, just for us to buy all the stuff we need and pay for all the stuff we need to build a, to build a project. So then we have to spend billions of dollars building ships and building factories and doing everything ourselves. It starts to become, you know,

very few companies that have the balance sheet to do that. And so I don't think that we, We want to necessarily be completely vertically integrated, but there's certain times where maybe it could make sense for us or others in the industry to do that. What we want to do is be able to give strong demand signals so that the supply chain has the wherewithal to make their own investments and to meet the demand for all the components and infrastructure that we need for these projects. but it's to be determined still how that, you know, what the best way forward is to do that. Again, we don't want to be a turbine manufacturer or a monopile manufacturer. We're a energy company that develops projects and operates them and sells electrons. But we'll see. We've definitely make financial investments to support the supply chain.

So that's a big part of what we're doing to try to secure our own success. I feel like in all of the conversations we have about energy and in particular it seems to be renewable energy, but energy in general. It's just like off take, off take, off take. The consistency, the importance of that. The demand signal. And so whether it's the demand for electrons that are produced by wind, and then the demand from companies like Orstad for the Jones Act compliant vessels or the infrastructure for the foundations, it's like that sort of continuity of the demand signal seems to be really critical. I just want to go big to one thing you said just real quickly. I think you said you're supporters of the Jones Act, but why?

It does not sound like it's been helpful. What did you, what did you mean by that? I think we're supporters of building an American supply chain, which includes vessels, which then inherently would be Jones Act compliant. So even though we're a Danish company, even at the very top of the organization, but definitely at my level, we're trying to build an American industry, not just build offshore projects with, you know, Asian or European supply. And so to the extent that we can help build more Jones Act compliant vessels and create, you know, that part of the economy, the economic stimulus, et cetera, for Americans, we're supportive of that. It is difficult. You know, the Jones Act makes it difficult to get this industry off the ground.

For sure. I won't say that that's not true. But in the end, we know that, You know, part of the value proposition of offshore wind is the economic benefits to Americans and job creation, et cetera. So just on the question of offtake and sort of persistent sources of long-term demand, Joe and I recently had a conversation with Brett Christophers who just published a book called, what was it called The Price Is Wrong? Yeah. The Price is Wrong.

Basically about why the current market mechanisms being used to encourage the green energy transition aren't necessarily working. And one of his points is that there's a difficulty here, you know, if you're trying to finance a renewable energy project, there's a lot of uncertainty around future pricing and future demand. And so it makes securing that funding very difficult. People in traditional finance might be a little bit reluctant to give money to something that is more than likely going to be volatile in the future and might be difficult to model for various reasons. I'm curious from your perspective, how do you model out that demand picture? And then do you feel like in terms of the federal government or maybe some states that you're getting support

for that sort of long-term demand outlook? Is there a recognition that people have to provide that demand signal to you as well as maybe help with some of the initial financing. Yeah, I'm going to actually start with the latter question first and then come back to the first question, if that's okay. Of course. Sure. You know, the demand, and I'm talking about offshore wind now, but in onshore renewables, they've been around for a while.

There's a big, big marketplace, and the financing is working, right? We've built probably over 200 gigawatts of onshore wind and solar in the U.S. So I'm not sure I 100% agree that it's hard to finance renewable energy. Obviously, that's been on the back of some incentives, federal incentives that have been in place throughout the whole period of time, which eventually we need to wean off of. And likewise, it's been on the backs of some kind of probably state policies, RPSs, renewable portfolio standards, etc. right that have driven this but increasingly it's c and i customers that are providing the offtake and their in their desire to have green electrons when i pivot to offshore win it's really the same except that it's just more immature and so you don't have like a third-party cn i market yet and the the price

the prices are higher still because we're making all these upfront investments and infrastructure that need to be carried by the by the megawatt hour price embedded in a in a project. And so again, it's the state's demand and the states offtake that are driving the surety that we've got a revenue stream that then we can finance. But it also is the tax incentives that are offsetting some of the of the cost. And so I think between the IRA and the federal incentives that we have, and the states that are driving the demand for offshore win that we can finance these projects. Unfortunately, it's, you know, the tax credits are pretty large because they're ITCs on this

big $6 billion project. I'm just using that as a round number. But then, you know, it's a tax credit that we can't self-monetize because we don't have enough taxable income or we could, but it would take a long time to work that off. And so typically you have to, to use a third-party monetization method. And then there's, you know, intermediators who are making some money along the way. So it's not always the most efficient way. We were advocating for direct pay, which could have cut out, you know, some of the cost to have third-party monetization of tax credits.

But that's probably a whole other topic. We could spend a different podcast on. Yeah, we've been meaning to do a tax credit episode. So at some point we'll well. But anyway, keep going because that market seems interesting. But keep going. Yeah. But it wasn't necessarily the lack of offtake that has caused these projects to have to stop or to

be unfinanceable. It was the change in the cost of capital. And it was the change in the cost, quite frankly. So now we just need an adjustment to the offtake, you know, a willingness to pay what it will take for someone like us to earn a return. And we're not trying to be greedy, but we need to earn a return for our investors. and is our states willing to pay the cost and make the investment, the federal government is doing its part or, you know,

maybe the states would say they need to do more still, but, you know, everybody needs to do their part to get these first projects off the ground, get the supply chain bill, get the upfront cost bill, get the ships built. And then I'm very confident the levelized cost of energy will come down because you can see, when you look across the Atlantic, you can see much lower costs.

offshore wind than we have. But they've got 30 years of investment in supply chain, ships, ports that we, that we're trying to do it a much faster pace. And those costs need to be born somewhere and carried somewhere. So they're being carried in the megawatt hour price that that you see for offshore wind. Is there a point at which we could see subsidy-free projects in the U.S. like the ones we've seen in Europe and I guess specifically the Netherlands? How far away would that be? For onshore, I think it could be relatively quickly. I mean, some of my colleagues in the industry, you know, don't want me to say that.

But, I mean, the industry is fairly mature. The price of solar and wind are very competitive with the incentives still and would still be reasonably competitive without them. For offshore wind, yes, eventually we can get there as well. But we've got a we've got a waste to go, you know, just because there is so much up front. investment that needs to be made. For example, we invested, we in our JV partner, Eversource, and the state of Connecticut, jointly invested over $200 million to build one port. Others in the industry are investing in ports in Massachusetts, New York.

We invested before we left New Jersey, over $100 million into a monopile manufacturing facility. One ship that Dominion built, I don't know the exact number, but half of the $1,000. a million plus minus, I mean, sorry, half a billion plus minus on that ship. So there's a, there's a lot of upfront startup costs in this, in this industry, which you could say, hmm, that that's going to be expensive. But it, and it is, but it's also, it's also creating economic development, right? All this, all this, all this investment in these factories and these ships and these infrastructures creating jobs and, and, and, and actually making the U.S., you know, more robust, this port that we invested is not just for offshore wind. It's now a much better port

for other things, for multimodal asset for the state of Connecticut, for example. Real quick question, you know, you're talking about the higher interest rates or higher cost of capital, particularly, I don't know if lethal is the right word, particularly damaging to the renewable sector. Is it less, just to sort of conceptualize why that is, is the European in wind industry or offshore industry less sensitive by virtue of the fact that it's been around so long and thus has less core infrastructure that needs to be built out right now? I would say that yes, because the same, you know, 1,200 megawatt project in Europe doesn't cost $6 billion. It costs less. And so the reason it's so susceptible is because of the high

upfront cost, the more you need to invest up front, the more you need to invest up front, the more, the more interest rates matter, right? And so you can build a project for less CAPEX in Europe than here. And part of it is the infrastructure differences. Part of it is scope difference. We build, you know, we build the generating plant, but we also build the bespoke transmission from the generating plant to shore. Then we also are upgrading the onshore grid, the existing grid in order to accept the offshore wind. And then we're building the infrastructure, the ports, the vessels, the supply chain. And then we also are having to import everything. from Europe. So it just costs more. The transportation installation costs are significantly higher.

And then we've got, you know, our Jones Act, which is not super efficient. And we've got other things that make it more expensive to build here. So the interest rates affect us more. But the interest rates affect them too. I mean, the cost of offshore wind has gone up in Europe as well. It just was much, much lower. And so it's gone up to a point that's still significantly attractive from my perspective, especially compared to U.S. I want to go back to something you said early on, you know, almost the day after the inflation reduction act was passed, then a bunch of people was like, oh, well, it's great. All this money is going to build things, but permitting.

And you mentioned permitting. And, you know, in my mind is like, guys, you should have put that in the bill itself in some way. What specifically with permitting, how is that impaired timelines? Like, what comes up in the permitting process that slows down these projects? I think just a couple different ways I could answer that. One is that you had an administration that wasn't so supportive. And so I think maybe there were delays that were happening by design prior to the current administration.

Then you have a really ambitious and supportive administration who wanted to see everything go. But they had a huge backlog. They had to work through probably understaffed. it's new. They had to, you know, no one had permitted offshore wind projects in the U.S. And so people are trying to figure it out. And so, you know, that's caused some delays. In general, I'm, I'm a big fan of, you know, current, current administration and

Boehm and everything they've done. They've completely 180-degree, you know, now there's, I think, six or seven permitted offshore wind projects. And so you have to really give them, give them credit for that. But it's not running. you know, like a Swiss watch yet, right? They're still ideally supposed to be a 24-month process that's more like a 48-month process.

And that's, you know, hopefully can improve if we can keep some consistency, but we'll have to see. You mentioned gaming out the probability of outcomes earlier, and I think you were mostly talking about that in the context of interest rates. But I have to imagine the political landscape must be on your radar. And so I'm curious how you're thinking about, you know, the potential return of Donald Trump to the U.S. presidency and how you would begin to calculate how that would impact your business.

How do you actually think about that type of policy risk? We always start with the macro and we also obviously overlay the political side to things. And so from the macro you have, which we haven't spent a lot of time talking about, but you guys alluded to it in the beginning, I think there is a significantly increasing electricity demand happening in America. Between EV adoption, electric heating, re-reshoring of manufacturing, and probably the biggest thing of all, AI and data centers required for that, there's a lot of electricity demand anticipated in the U.S. And where is that electricity going to come from. And whether you're on the left or the right, one of the big ways to get big chunks of electricity is through renewables and in certain parts of the country offshore wind. Even if you

don't care about green, it's a way to get a lot of near-base load electrons onto the grid, which we need as a country. Then you think about all the stuff that we have spent a lot of time on the job creation, the infrastructure, and its core things like steel and ports and ships and factories. And these are things that are bipartisan, right? Just in our projects, we can trace the supply chain to 40 different states that are contributing. So it's not just benefiting Rhode Island or New York. It's the supply chain goes across most of America.

And so that's red states, purple states. blue states, and most Americans value job creation, economic progress. And last I would say is that you've got a strong energy security argument here where we want to be a net exporter of energy. And we are today with LNG, but we want to maintain that position. And the more renewable energy that we build in America, the more opportunity we have to maintain that energy. security and that net exporter of energy position. And so to me, offshore wind, renewables is much more bipartisan than maybe people are making it out to be. And of course, we're not just pushing the hope button. We've got mitigation plans regardless of any outcome, but we're,

I talk to Republicans all the time and many of them understand everything that I just said and understand the importance of this sector. And so, yeah, we're we're weighing out the outcomes. We've, you know, written board papers and had lots of discussions and, you know, have third-party inputs on things. But we believe in the fundamentals of the industry and we're confident that offshore wins here to stay. Just on this politics point real quickly, or maybe not politics point, but the policy question. You know, we talk about the inflation reduction. Act, and we usually sort of talk about it in vague terms, tax credits, subsidies, et cetera. But actually, can you just give us a sort of succinct summary of the specifics, what you get,

and how the Inflation Reduction Act changes the math for you on any given project? What specifically, you know, you go into a project today in 2024 versus, say, 2019. What's different about it today post-Irae? Yeah. First off, the longevity of it is good. kind of oftentimes one year or two year kind of extension of an existing tax credit. Historically, primarily the production tax credit, which was a certain 2.3 cents per megawatt hour of, sorry, per kilowatt hour of production.

But you're trying to get your start of construction. So you qualified in the year that the tax credit was still eligible. And then it would get renewed. And it was like this stop, start, you know, drama for the industry. And even in onshore, it's a medium cycle business. business and that was really disruptive. In offshore, it's much longer cycle, so it would never work. So having the kind of the 10-year horizon, I think, was a big, big factor. Then in addition to the traditional PTC and ITC, the difference production tax credit was this, you know, kind of incentive

that was added that you get for every megawatt hour you produce, you get an extra tax credit that you can monetize. ITC is a percentage of the eligible basis of the investment that you make. So there's a certain portion of the infrastructure that is eligible for the ITC, for the investment tax credit. And then you could get the base ITC is 30%. So you could get the equivalent of a 30% tax credit for whatever portion of your investment qualified.

And then you have to go, again, third party monetize that most, most companies. companies do. So you might not get the full 30 percent. You get some haircut on that because there's, you know, a bank in the middle or or somebody that was, you know, taking some of that value. And then after the IRA, that was always a bank typically in the past. But now the IRA has something called transferability. So basically any taxpayer now can take advantage of these, helping monetize these tax credits. So you could be a toothpaste company and you can basically negotiate with us. And if you've got a tax liability and you want to offset that with tax credits, you can negotiate with us.

Is that 99 cents on the dollar or 90 cents on the dollar, whatever, we can negotiate and they can monetize those tax credits for us. So that's nice. It creates a larger pool of tax investors. And then there are two additional, we'll call bonus tax incentives. One related to something called energy community. So if a project is built, and this goes for onshore and offshore, but if a project is built in a community that's deemed to be an energy community, either primarily

like historically ex-traditional energy community, like an ex-coal mine or an ex-coal factory or ex-oil-and-gas location. Also, there are some definitions around if it's a contaminated brownfield area, if it had certain contaminations, then it qualifies as energy community. So this is all across America, there's these energy communities that that you can qualify for. And if you build a project in those communities, you can get an extra 10% tax benefit. And then the last one is an extra 10% bonus for domestic content. And again, the domestic content definitions vary from onshore solar and wind and offshore, but there's a certain requirement of what percentage of the project needs to be produced domestically. You know, in some cases,

there's some other provisions, 100% U.S. steel. this or that. There's also some other, a lot, a lot, a lot, a lot of little nuances about using U.S. labor and having apprenticeship programs and other things that all go into this. But it's all, it's all designed to help create more of a domestic industry. But I guess to sum it up, you can get up to 50% of your, let's say, ITCs of your eligible basis tax credits and then you need to go monetize that. David Hardy, that was a fantastic conversation. really appreciate the detail and the explanation. I actually feel like I learned something in that.

So thank you so much for coming on a blog. Yeah, you're welcome. I'm glad that you think you learned something. No, I definitely did. We continue our process of learning. Yeah, we continue our learning. No, that really was excellent in exactly what we're looking for. So I appreciate it.

And let's stay in touch. Absolutely. Tracy, I thought that was great. As soon as David went into like spread to whack in the beginning, I was like, all right, we are going to get a good granular conversation. That's when you know it's going to be a good conversation. Totally, right? No, it was really nice to hear from, we've been talking a lot about, I guess, the structure

of the U.S. energy market from, you know, academics or people who take an interest in it. But it was good to hear from a practitioner of the market. Let's put it that way. There were many interesting things in there, particularly in the supply chain aspect of the conversation, that I think, you know, sometimes we talk about, like, Like the world isn't a neoclassical world. Like market signals, you know, you have demand for something, but the supply doesn't just arise. And, you know, he had a line about the balance sheet of the suppliers to his own company and how few of them, et cetera.

And so you think about like this sort of like sequence of offtake agreements, the demand for the electricity, the demand for the ships, et cetera. And then you think about, okay, there's some companies somewhere maybe probably in Europe or somewhere that makes these key components. But they don't have unlimited amounts of money. They can't just ramp up instantly or they can't just have excess supply, excess inventory if they don't know. And so you could see how like fragile it is and how important it is to get that sequencing right to actually get these things done in time. Well, it also seems to me that traditional economics is especially ill-equipped to deal with, I guess, industries with incredibly long timelines, right? It seems like that's where you sort of get the lag between the demand. signal and the actual supply increase. And as far as I remember from like AP microeconomics. Oh, you took AP. Yeah. Actually, I still have grievances about microeconomics AP. But as far as I can remember from that, it was like, you know, you draw the little demand supply chart and the lines cross. And like, there's very little discussion of the actual like physical constraints around

building up that production capacity. The companies are supposed to hear like, oh, we want more of this thing. And so prices go up and they immediately start building it out. But as we've seen time and time again since 2020, it doesn't always happen that way in practice. No, it definitely doesn't. And all I always say is, I wish we had done the IRA in 2010 when we had abundant all that stuff. But it does seem like I kind of came away from the conversation. So actually two things. I kind of now come on the side of like it does seem to be like a mix of bad timing and bad luck and growing pains. And I think the best argument for that is simple. It's like there is a booming offshore business in Europe and it can be done cheaply and it can be done economically. But if you're starting from zero and you're trying to build a U.S. and you have the Jones Act and you have various incentives for domestic steel and domestic labor and maybe those get in the way. I don't know. Like, this is a ramp up process. Yeah, I was going to say the exact same thing. So there was a time, and I think we spoke about it with Chelsea, and I kind of mentioned it in the

intro, where I thought maybe wind is basically a low interest rate phenomenon, like cheap ubers or we work, or something like that. But speaking to David, I've sort of come away thinking it was that extraordinary combination of really bad timing in the form of both supply chain disruptions and the ramp up in interest rates and the fact that you're at the very beginnings of this particular technology, at least in the U.S. And that, as you said, there is a comparative model in the form of Europe where there is some subsidy-free wind and the cost is much, much lower. So, yeah.

Maybe there's hope. All right. Shall we leave it there? Let's leave it there. been another episode of the Odd Thoughts podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Joe Wisenthall. You can follow me at the stalwart. Follow our guest, David Hardy. He's at David Hardy, U.S. Follow our producers, Carmen Roderiggas at Carmen Armin. Dashobn at Dashbot and Kel Brooks. And thank you to our producer, Moses Ondam. For more Oddlots content, go to Bloomberg.com

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