Hello, and welcome to another episode of the Odd Lots Podcast.
I'm Joe Wisenthal and I'm Tracy Alloway.
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 SMP Global Clean Energy Index. Yeah, it's down thirty percent this year, more than thirty percent this year, and a lot of that is thanks to what's been going on in wind.
Yeah.
In fact, if you look at Orsted, which I think is the world's biggest provider of offshore wind farms, it's down fifty percent year to date.
Yes, So we are recording this November fifth teenth. 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 they 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, et cetera. And so 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 say, so a perfect storm would be good for wind.
I'm just going to get as many weather puns I can into this conversation. But there's higher borrowing costs 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 US is still relatively new, although it is true that it's also facing problems in places like the UK. Or is this
a kind of permanent change in the industry's trajection. 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? So 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 and win and I think solar, I mean, it's been pretty dismal.
Yeah, please, doc, 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 hold up given permitting issues that we've discussed with people like Chicker versus how much of this is the math just doesn't pencil out. There is something fundamentally challenging in Win.
Lots of questions, and we have the perfect guest to get the answers. We're going to be speaking with Chelsea Jean Michelle she is an offshore wind analyst here at Bloomberg n EF, one of our colleagues on a different floor. So excited to check Chelsea. Thank you so much for coming on odd Laws.
Thanks so much for having me Joan Jacy.
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 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 most saliently in the US. And Tracy, you mentioned you know it's a very like new industry in the US. For contexts,
there's only seven operational turbines forty two 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 twelve gigawatts of offshore wind projects seek to cancel or renegotiate their off take contracts in
the US. 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 twenty to twenty five 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 clothes make a business case for them. Now in the US, this is interesting because this happens a little bit earlier on
in a project's process. So in the UK, before you bid for an off date contract, you need to have a grid connection agreement. You also need to have your permits. In in the US 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 clothes and then you want to construct and build the project. So that leads to a certain level of risk that's a little bit higher in the US than
you've see in 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 clothes, they're in a different macroeconomic environment than when they had initially placed their bids and made those assumptions back in twenty nineteen, twenty twenty.
Oh, that's really interesting because I was wondering how higher rates are actually feeding into a lot of those given you would have assumed that the financing was in place, but you're highlighting the discrepancy between the revenue coming in the off take 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 cost 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 US versus if you're building say in the Netherlands.
Or in Germany, but we're building in the US.
We're building in the US. Yeah, so if we're building in the US right for context, offshore wind development takes a really long time. As I mentioned, there's very few projects currently operational operational in the US right now, but around eight to ten years is what we see globally. But in the US, you know, this can take as long as fourteen years. We've seen that for some other projects that are currently in the process of getting built
right now. Or when you take a look at that really long process, one of the first things you think about is, okay, so that's like ten 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 US, 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 by at lease auction last year millions and millions of dollars of revenue for the US government over four billion dollars to secure these sites. And that's just step one. And then you also have.
Can I ask really quickly to shore the US government own all those sea.
Beds 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.
Ah, yes, I remember those 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, fitting into an offshore and off shore wind procurement or bidding into an offhr 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 rate 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 offer 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 US, 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 know, 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 and MS, 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, however long it's in a while with Trace that you try to convince me to write a book, you.
Know, yeah, and meet here with you.
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 ten to fourteen years, I can't even imagine thinking about starting out a project ten to fourteen 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 very 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 twenty twenty three versus twenty nineteen, 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 changed 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 twenty twenty one, we did some analysis estimating that the LCOE for offshore win projects in the US, assuming a thirty percent investment tax credit, so this is investment tax credits as allowed in the Inflation Reduction Act was around seventy seven dollars and thirty cents. So this is assuming a thirty percent ITC. If you take into account capex and oppex rise, so opex being operational expenditure, this added around seventeen dollars per
megawat hour. Then take into account interest rate hikes, that's around twenty seven dollars per megawa hour. But then we also had when the IRA came out, you know, bonus tax credits, so developers could also get plus ten percent
for certain meeting certain requirements. That took down so it reduced the levelized cost of electricity by around seven dollars per meg on hour, So when we're sitting here in twenty twenty three, this means that now the LCOE assuming a forty percent investment tax credit, stands around one hundred and fourteen dollars and twenty cents per megawat hour. So you can see comparing that one fourteen to that seventy seven dollars per megawat hour number, just how much that
environment has changed. And I think to highlight a couple of you know, movement pieces in terms of, you know, what this has been happened, what has been happening on a MACRII economic scale, So US CPI, So this is, you know, consumer price index average at around one point nine percent before COVID nineteen in twenty nineteen, and then if you take a look at how it peaked in twenty twenty two, it was at around nine percent, 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 US, stood at around zero percent, almost nothing in you know, kind of end twenty twenty into twenty twenty one. And then when you take a look at where it is in twenty twenty three, it's you know, around five point five percent. And so you can see just how much the base rate for you know, barring money has increased.
Wow, it's like an almost fifty percent increase in the cost, which is almost perfectly tallied with the drop in or studs share price.
Oh perfectly.
Yeah, So if pishient markets right there?
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 risted 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 rate payers if they're going to get any extra access. But New Jersey kind of passed a bill saying that no, this is okay, or Stead can keep the upside to make sure that project goes forward. Now, even though that bill passed and Orstad 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 fifty million sixty million dollars that these developers were paying to kind of exit those agreements so that they could then rebid into future solicitations. York, we also saw regulators decline requests to increase off take 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 a higher off take price, then that kind of calls into question the competitive nature of the award.
Wait, sorry, explain that further. When you say 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 requests 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 gigawat project, I'm developing a five hundred megawat project, et cetera. They'll then say I'm willing to provide this project at say one hundred dollars per Mega one hour, and this project is going to commission in twenty thirty and so then you'll have all of these different elements. Now, usually in
the US they'll take into account the bid price. So the lower your price, you know, the more that you can save rate payers money, and so then the better
that looks. So that's usually around maybe seventy percent of the evaluation, and then you'll have thirty percent 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 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 of 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 and other 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 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 gig go out wind farm,
you need less turbines. If you have bigger turbines at higher rated 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, and 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 permegawap 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 you know, 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 one and two, 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 one, 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 or stead mentioned for their skins Jack 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 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 the supply chains, and the big stress point has actually been the vessels.
For Orsted's Ocean Win one and two.
That's what they mentioned that It 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 US.
Has essentially this law called the Jones Act. I'm not sure you guys familiar.
Yes, we love it.
It always comes back, It always comes back to the Jones Act.
No, we've done I've done a couple episodes.
I had no idea this is going to turn into a Joneses Act episode.
Now I'm reallycas 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 never say anything about the Jones Act online whatever. People have a really strong opinion.
Okay, sorry, I mean it's a hot button topic. So essentially, basically, if you are traveling between two points in the US, then that ship has to be US built, US crewed, US flag, and what that means for offshore wind is that that offshore wind farm counts as a point. And so the US 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 US right now. Currently there's only one wind turbine installation vessel that Dominion is building right now.
I'm getting dredging.
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 a few years from now. And Dominion's planning on using that on their two point six Gagua Coastal Virginia afsher wind projects. That's set to be the largest in the US when it commissions, one of the largest in the world, which
is great for them, but for other projects. Orstead 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 winterbine installation vessel. So another thing that you can consider doing is using a European wind turbine installation vessel and then using a kind of like feeder barge method, and so this is what a lot of US austr
WIN 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 loaded up, go to site and then install the component, and so you kind of have this mish mash 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 EUROPEANATIV 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 Austra 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 US's carbon load by denying wind energy.
I'll tweet it from my out locked all too 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 US 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 all be difficult. You have the sort of time discrepancy between when the off take 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 win power here?
Does the existence of a very large underwriter in the form of the US government provide 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 ended 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 off take contracts. And so the US, I mentioned having that timeline between being so long between you know, when you agree with that off take to the off take price and then when you actually finance
the project being really long. That makes it really risky. But also another piece is that the US off take contracts are not indexed to inflation, and so what that means is that in the UK, in Poland partially in Ireland. Over the twenty you know, fifteen twenty twenty five year off take contract lifetime, the price might go up by a certain percentage that is usually up by inflation. In the US, 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 and adjustment mechanism. And so in New York, what this means is from the time that you bid until the time you receive your final f federal permits, your price will be indexed to metrics like steal 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 the federal level, for the Inflation Reduction Act, a lot of the big drivers for offshra wind have you know, has been at the state level. And so you know, the Biden administration came out with a thirty gigawatts offsh win by twenty thirty goal a few years ago, and that's a good sign for the industry.
But in reality, these off take 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 contexts at Bloomberg NIF in our.
Class, didn't one of your colleagues call it a pipe dream.
One of my colleagues did call it of vibreed. And you know, part of the reasons for that is because we've never once forecasted that the US 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 offter wind, on ture wind, entre 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. Offter 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 one hundred percent, the wind speeds are like
ideal generation is at one hundred percent. 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 twenty percent, and that makes sense given that you know,
it's only really generating when the sun is out. Onsure wind you might have something like thirty percent or so thirty five percent offshore wind in the US you can get you know, forty forty five percent, 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 offsru wind projects. You know, for context, you might see one hundred two hundred megawat on sure wind project in the US, but that turns to a thousand, sometimes two thousand 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 offsher 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.
Just to hammer this point home, how much of the challenge cheer 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, the interest rates are 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 offshriwind 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 fifty megawats and it's gone. So
it's a smaller fraction. These are also, you know, huge government initiatives, so you might have government back 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 bit more wiggle room. And so I think that a big portion of it is on you know, the financing side 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. An 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 project's bigness is not a word, but we'll go with 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 for a really, really long time and it doesn't work out. Then, you know, when you've been working on it for you know, you know. A couple of.
Show just admitted that he doesn't work on any.
Long term pa I don't don't.
I don't do long term projects. 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 g 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 US's bigger strategy.
Yeah, I mean, I think it's huge. For context, are you at PENF 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 aclients, especially in solar, and now is one of the first time in years where we've seen a little of a bump in costs, and so a lot of it in part is due to the inflationary pressures and higher cost 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 in offher 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 three hundred and fifty feet or like one hundred meters something like that.
The blank I think in meters. Yeah, so the Vestus fifteen megawat turbine has a two hundred and thirty six meter rotor dice.
Oh my gosh.
Yes, they're really vague. 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
a you know, one turbine size. Now, Now that is 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 on sure
offshore wind. And so the big push in the Northeast for offure 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 offter 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 astrobotes and economic benefits, but when you look at the electricity system as a whole and kind of trying to reduce you know, those price spikes and price drops, offter wind can kind of help add swin 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 Michelle, that was amazing, that answered so many questions. Really appreciate you coming on the podcast.
Noah for sure, happy to be here.
Thank you guys.
Yeah, that was great, Tracy. I thought that was great.
That entered so many questions, and the fact that it ended up coming back around to being a Jones episode two just 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, and 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 an 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 could see though too, like even with all of these challenges from engineering to financing, the prize is great, right, And I think I saw some stand one that 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 a couple miles off the show or that you could see why there's this pursuit.
But then also, you know, there were 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 can see, or the ultimate 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 Ac 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 Alloway. You can follow me at Tracy.
Alloway and I'm Jill Wisenthal. You can follow me at the Stalwart. Follow so our producers Carmen Rodriguez at Carman armand dash Ol Bennett at Dashbot and Kelbrooks at Kelbrooks. Thank you to our producer Moses Ondam. For more odd Loots content, go to Bloomberg dot com slash odd Lots, where we have a blog, transcripts and a newsletter 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
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