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

just sort of understanding it. Like it feels like so much more complicated, all these 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.

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.

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.

fall quite a bit. There's the potential return of a known wind energy disliker, 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.

raid hikes and inflation, etcetera. You know, you know, we if we had to do over, maybe we would have started this done an IRA like act in two thousand and nine or twenty ten 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?

or you know, 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 a little bit of bad timing I would say is there was a lot of ambition and expectations and growth expected from from the US and offshore wind as as the maturity of the industry

overall in Europe reflected an opportunity for America. I remember, or said, built the world's first offshore wind far more than thirty years ago, and as the world leader an offshore wind and has you know, nine gigawatts operating, and a lot of those were pretty low cost projects prices

in Europe. The US Northeast states especially who you know, 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 and so there was a big fast ambition and growth and orsted as the leader saw the opportunity and and and took an aggressive position of building projects and built building, you know, signing up for off take and and committing to billions of dollars of capital investment in this market, all as COVID hits were 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 cap intensive. Our fuel is free, we say, but our fuel is really the cost of capital because we put so much capital out upfront, and so as interest rates rose three hundred BIPs, 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 led to thirty forty percent cost increases. And those two factors just basically required a reset, and or SAT unfortunately, was the most exposed and the most progressed. We had some really late stage projects where we had already invested you know, up to a billion dollars in one project for example, and made commitments for more. And when we we were trying to pull all the levers and take all of our experience to try to make these projects go, and and in the end we couldn't

make them all go. And you know, we we had to make some some tough decisions in twenty twenty three to cease development on on a couple of 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 cancelation 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 final 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 overexposed, you know, in retrospect, could we have slowed earlier, probably in retrospect, you know, could we have not been as ambitious and kind of daggered the number of projects we were building in the US. 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 US specific things, but a lot of it is actually global macro supply chain imbalance, global macrol cost of capital, et cetera. That just impacted us in a negative way in twenty twenty three. Sorry for the long answer. I'll be shorter in the future, but.

favorite subject. The lack of transformers or switch gears or the lack of this is another traditional odd lots topic, the lack of ships to actually build these things.

project specific risks, et cetera. So we create this whack model and then we then we try to achieve you one hundred fifty to three hundred spread to whack against that. And so when when we're looking at projects, that's kind of our one of our first hurdles or KPIs that were that were very very focused on. So as I alluded to, is 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 if the ambition has only one fifty to three hundred and the WHACK went up by three hundred, 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 gonna have to write off anyway, So should we just assume them as written off and look at ford I rrs 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 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 you're you know, P ninety nine outcome is really really bad, and you know your P fifty looks okay, that's different than if your your standard deviations are more narrow between your P

fifty and your P ninety nine. 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 continue 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 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 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, et cetera.

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.

challenges that were emerging. So potentially, you know, delays in our foundations delays, and our turbines delays and vessels, and then you have these knock on effects. Right if you're planning to to start installing foundations and let's say summer of twenty four, which is what our plan was, and now you know those foundations aren't going to be ready until twenty five, or your vessels, you know, your vessels 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 went out to supplier A or supplier B and said we now need to shift this project from twenty four to twenty six, that all of their pains that they were feeling from the macroeconomic challenges we're going to be on the table because we had locked in some thing's pre the big inflation, and we had actually had some very favorable pricing potentially, But as soon as you reopen up things then 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 make the project work. And so we just decided to make the call. We're with South Fork for example. Yes it's a tight project, but but we didn't have those same new supply chain risks that we that we saw on the horizon with Ocean Wing one.

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, it's 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 to your risk, how we have our permits, our interconnect agreements, our land rights are you know, et cetera. Are are a 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 challenge on the supply chain supply chain ramp up and and so definitely there's a global imbalance I would say on some of these key offshore when supply chain categories. And you know, the plan was that in the US, we were going to build our own capabilities here, we wouldn't need the global 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 product in the in the US. Other than kind of R three and and a couple couple more, the rest of the whole industry is basically, you know, had to recontract and push out and and we're you know, kind of in a re re reset of the macroeconomic conditions.

Jones Act. It is, you know, it's it's another challenge to starting up the industry and we would love to have some you know, some waivers in the beginning and then you know, work with with the shipbuilding industry and others to build out the fleet because it's difficult to build off shore 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 AC wind turbine installation vessel, which is one of the really big expensive spoke vessels that actually installs the wind turbines. But there's actually a whole lot of other vessels. There's cable laying vessels, dumping vessels, foundation installation vessels, service operation vessels, et cetera, et cetera.

So we were, we were and are committed to trying to help build out that fleet. But in the beginning, wed they vessels don't exist. It's hard to comply, and so we we in the industry have built workarounds where we you know, either stage stuff outside of the US, or we bring it directly over from Europe, or we barge things out with US flagged tugs and barges and transfer equipment to European flagged or other than US flagged vessels.

And so it's been a 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 US 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 Caribdas 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 bargin tug solution for our three Northeast program projects. So we're not

using the Charybdis 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 was 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 set up.

to build a project. So if 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 want to necessarily be completely vertically integrated, but there's certain times where maybe it could make sense for us or others in the

end street to do that. What we what we want to do is be able to give strong demand signals so that the supply chain has the you know, 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 an 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.

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 it does not sound like it's been helpful. What did you did you? What did you mean by that?

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, or support 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.

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.

that 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 state policies, rps's renewal portfolio standards, et cetera, right, that have driven this. But it increasingly it's CNI customers that are providing the off take and they're in their

desire to have green electrons. When I pivot off shore win, 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 project. And so again it's the states demand and the states off take that are driving the surety that we've got a revenue stream that then

we can finance. But also it's the tax incentives that are all offsetting some of the of the cost. And so I think between the the IRA and the federal incentives that we have and the states that are driving the demand for offshore win that we can we can finance these these projects. Unfortunately, it's the tax credits are pretty large because they're itcs on this big six billion dollar project. I'm just using that 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 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 another topic we could spend a different podcast on.

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 bilk at the upfront cost bilk at the ship's 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 much lower cost

offshore wind than we have. But they've got thirty years of investment in supply chain ships ports that we're trying to to do it at 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 win?

For example, you know, we invested we in our JV partner, ever Source and the state of Connecticut jointly invested over two hundred million dollars to build one port. Others in the industry are investing in ports and massive use. It's New York, you know, we invested before we left New Jersey it's over one hundred million dollars into a monopile

manufacturing facility. One ship the Dominion built. I don't know the exact number, but half 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's going to be expensive, but in it and it is.

But it's also it's also creating economic development, right, all this all this investment in these factories and these ships, in these infrastructures creating jobs and and and actually making the US you know, more robust. This port that we invested is not just for offshore win it's now a much better port for other things, for multimodal asset for for the state of Connecticut for example.

scope difference. We build you know, the 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 win. 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 just cost 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 WIN has gone up in Europe as well, it just was much much lower, and so it's gone up to a point it's still significantly attractive from my perspective, especially compared to US.

current administration. Then you have a really ambitious and supportive administration who wanted to see everything go, but they they had a huge backlock they had to work through, probably understaffed, and it's new they had to you know, no one had permitted offshore wind projects in the US, 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 one eighty degree. You know. Now there's I think six or seven permitted offshore win projects and so you have to really give them, give them credit for that. But it's it's not running, you know, like a Swiss Swiss watch yet. Right there's still ideally supposed to be a twenty four month process. That's more like a forty eight month process. So and that's you know, hope hopefully can improve if we can keep some consistency, but we'll have to see.

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 waste 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 boat 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 forty 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 L and G,

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 than maybe people are making it out to be. And of course we're not just pushing the hope button. We we've we've got mitigation

plans regardless of any outcome. But we're you know, we we I talked 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 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 in the fundamentals of the industry, and we're confident that that offshore winds here to stay.

you on any given project. What specifically you know you go into a project today in twenty twenty four versus say, twenty nineteen, what's different about it today post di ray.

hour of production? But you you know, 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 the stop start, you know, drama for the industry, and even in Onshore it's it's a medium cycle business and that was really disruptive and offshort it's much longer cycle, so it would never work. So having the kind of the tenure 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 mega what 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 thirty percent, so you could get the equivalent of a thirty percent 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 thirty percent. You get some hair cut 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 ninety nine cents on the dollar, ninety 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 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 a historically X traditional energy community like an X coal mine or an X coal coal factory or

an X oil and gas you know location. Also there are some definitions around if it's a contaminated brown filled area, if it had certain contaminations, then it qualifies as an energy community. So this is all across America. There's these energy communities that you can qualify for, and if you build a project in those communities, you can get an extra ten percent tax benefit. And then the last one

is an extra ten percent bonus for domestic content. And again the domestic content definitions vary from entoursolar 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 one hundred

percent US steel this or that. There's also some other a lot of a lot, a lot a lot of little nuances of about using US labor and having apprenticeship programs and other things that they 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 fifty percent of your let's say ITC's of your eligible basis tax credits, and then you need to go monetize that.

And so you think about like this sort of like sequence of off take 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 a 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. 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.

they immediately start building it out. But as we've seen time and time again since twenty twenty, it doesn't always happen that way in practice.

and it can be done economically. But if you're starting from zero and you're trying to build an US and you have the Jones Act, and you have various incentives for domestic steal and domestic labor, and maybe those get in the way. I don't know, like this is a ramp up process. That.

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 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.

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