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

28:27I 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 offtake, offtake, offtake. The consistency, the importance of that 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 back to one thing you said just real quickly. I think you said you're supporters of the Jones Act, but why?

29:09It does not sound like it's been helpful. 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.

29:53It 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.

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32:35So just on the question of offtake and sort of persistent sources of long-term demand, And Joe and I recently had a conversation with Brett Christophers, who just published a book 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 is a difficulty here. 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.

33:17People 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.

34:05Of 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's working, right? And 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, you know, kind of probably state policies, RPSs, renewable portfolio standards, et cetera, right, that have driven this.

34:48But increasingly, it's CNI customers that are providing the offtake and they're in their desire to have green electrons. When I pivot to offshore wind, it's really the same, except that it's just more immature. And so you don't have like a third party CNI market yet. And the price, the prices are higher still because we're making all these upfront investments in infrastructure that need to be carried by the by the megawatt hour price embedded in a in a project. And so, again, it's the state's demand and the state's offtake that are driving the surety that we've got a revenue stream that then we can finance.

35:31But also, it's the tax incentives that are offsetting some 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 wind, that we can finance these projects. Unfortunately, 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 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 use a third party monetization method.

36:16And 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 nother topic we could spend a different podcast on. Yeah, we've been meaning to do a tax credit episode. So at some point, we will. 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.

36:55It 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, a willingness to pay what it will take for someone like us to earn a return. 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 maybe the states would say they need to do more still, but everybody needs to do their part to get these first projects off the ground, get the supply chain built, get the upfront cost built, get the ships built.

37:31And 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 cost offshore wind than we have. But they've got 30 years of investment in supply chain ships, ports that we're trying to do at a much faster pace. And those costs need to be borne somewhere and carried somewhere. So they're being carried in the megawatt hour price that you see for offshore wind. Is there a point at which we could see subsidy-free projects in the US like the ones we've seen in Europe and I guess specifically the Netherlands? How far away would that be?

38:14For onshore, I think it could be relatively quickly. I mean, some of my colleagues in the industry 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 ways to go, you know, just because there is so much upfront investment that needs to be made. For example, you know, we invested, we and our JV partner Eversource and the state of Connecticut jointly invested over$200 million to build one port.

38:52Others 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 a billion plus minus on that ship. There's a lot of upfront startup costs in this industry, which you could say, hmm, that's going to be expensive. And it is, but it's also creating economic development, right? All this investment in these factories and these ships and these infrastructures creating jobs and actually making the US 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.

39:51Real quick question. 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 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 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 costs.

40:35The more you need to invest upfront, the more interest rates matter. 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 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.

41:11The transportation installation costs are significantly higher. And then we've got 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 US. I want to go back to something you said early on. Almost the day after the Inflation Reduction Act was passed, then a bunch of people was like, oh, well, it's great.

41:48All this money is going to build things, but permitting. And you mentioned permitting, and 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? 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, and it's new.

42:37No one had permitted offshore wind projects in the US, and so people are trying to figure it out, and so that's caused some delays. In general, I'm a big fan of current administration and BOEM and everything they've done. They've completely 180-degree. Now there's, I think, six or seven permitted offshore wind projects. And so you have to really give them credit for that. But it's not running like a Swiss watch yet, right? There's 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.

43:20You 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.

44:14between EV adoption, electric heating, reshoring of manufacturing, and probably the biggest thing of all, AI and data centers required for that, there's a lot of electricity demand anticipated in the US. And where is that electricity going to come from? And whether you're on the left or the right, one of the big 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.

45:07And 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.

46:02And so to me, offshore wind renewables is much more bipartisan than 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 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 weighing out the outcomes. We've written board papers and had lots of discussions and have third-party inputs on things. But we believe in the fundamentals of the industry, and we're confident that Osher Wynn's here to stay.

46:49Just on this politics point real quick, or maybe not politics point, but the policy question. We talk about the Inflation Reduction Act, and we usually sort of talk about it in vague terms, tax credits, subsidies, etc. 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 go into a project today in 2024 versus say 2019, what's different about it today post IRA? Yeah. First off, the longevity of it is good. It was kind of oftentimes a one year or two year kind of extension of an existing tax credit.

47:34Historically, 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 drama for the industry. And even in onshore, it's a medium cycle business and that was really disruptive. In offshore, it's much longer cycle, so it would never work. So having 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.

48:24ITC 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 companies do. So you might not get the full 30%. You get some haircut on that because there's a bank in the middle or somebody that was 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.

49:11So basically any taxpayer now can take advantage of these, helping monetize these tax credits. You can 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, 90 cents on the dollar, whatever we can negotiate and they can monetize those tax credits for us. So that's, that's nice. It creates a larger pool of tax investors. And then there were 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 X traditional energy community, like an X coal mine or an X coal, coal factory or, or X oil and gas, you know, location.

50:13Also, 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, it's, there's some other provisions, 100 % US steel, this or that.

50:52There's also some other, a lot of, a lot, a lot, a lot of little nuances about using US labor and having apprenticeship programs and other things that all go into this. But it's all designed to help create more of a domestic industry. But I guess to sum it up, you can get up to 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 Ovalon. Yeah, you're welcome. I'm glad that you think you learned something.

51:32No, I definitely did. We continue our process of learning. Yeah, we continue our learning. No, that really was excellent and exactly what we were looking for. So I appreciate it. And let's stay in touch. Absolutely.

51:56Tracy, I thought that was great. As soon as like David went into like spread to whack in the beginning, I was like, all right, we are going to get a good granular conversation. And I did feel like I learned it. 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 the world isn't a neoclassical world, like market signals, you know, you have demand for something, but the supply doesn't just arise.

52:39And, 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 this sort of 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 this key component, 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. So you could see how fragile it is and how important it is to get that sequencing right.

53:15to 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.

54:01The 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 gotta 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.

54:39There 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 in the US, 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, 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 maybe wind is basically a low interest rate phenomenon like cheap Ubers or WeWork or something like that.

55:21But 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 US. 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. This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway.

55:58You can follow me at Tracy Alloway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our guest, David Hardy. He's at David Hardy US. Follow our producers, Carmen Rodriguez at CarmenArmond, Dash O 'Bennett at DashBot, and Kel Brooks at Kel Brooks. And thank you to our producer, Moses Andam. For more Odd Lots content, go to Bloomberg.com slash OddLots, We have transcripts, a blog, and a newsletter. And if you want to chat about all of these topics, you can do so 24-7 in our Discord, discord.gg slash oddlots. And if you enjoy oddlots, if you like it when we do these deep dives into the energy market, then please leave us a positive review on your favorite podcast platform.

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57:44We'll see you next time.

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