Modern Money SmartPod

Financing the Energy Transition

March 09, 2022 SmartBrief Season 2 Episode 1
Financing the Energy Transition
Modern Money SmartPod
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Modern Money SmartPod
Financing the Energy Transition
Mar 09, 2022 Season 2 Episode 1

You've probably heard all about the money being poured into the energy transition. We're talking trillions of dollars over the course of many decades. Everyone from sovereign wealth funds and private equity to venture capital and institutional investors seems to be getting in on the action.

Joining the show are Albert Cheung, from BloombergNEF (BNEF) and Danielle Patterson from the law firm of Vinson & Elkins. Both of their organizations recently released reports (see below) about all the capital being poured into the energy transition … where it’s being spent … and who is spending it. We talk about each of those reports and also touch on how events like the war in Ukraine and the recently completed New York Bight offshore wind auction might impact the long-term outlook for renewables.

BNEF: Energy Transition Investment Trends 2022

V&E: How Private Capital is Shaping the Energy Evolution

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Show Notes Transcript Chapter Markers

You've probably heard all about the money being poured into the energy transition. We're talking trillions of dollars over the course of many decades. Everyone from sovereign wealth funds and private equity to venture capital and institutional investors seems to be getting in on the action.

Joining the show are Albert Cheung, from BloombergNEF (BNEF) and Danielle Patterson from the law firm of Vinson & Elkins. Both of their organizations recently released reports (see below) about all the capital being poured into the energy transition … where it’s being spent … and who is spending it. We talk about each of those reports and also touch on how events like the war in Ukraine and the recently completed New York Bight offshore wind auction might impact the long-term outlook for renewables.

BNEF: Energy Transition Investment Trends 2022

V&E: How Private Capital is Shaping the Energy Evolution

Sign up for Modern Money SmartBrief

Follow this show on Twitter @ModernMoneyPod

Sign up for Modern Money SmartBrief

Follow this show on Twitter @ModernMoneyPod

(Note: This transcript was generated using artificial intelligence and has not been edited verbatim.)

Sean McMahon  00:14

Hello, everyone and welcome to the Modern Money SmartPod. I'm your host, Sean McMahon, and things are going to be a little bit different today. That's because I'm flying solo. My co-host Colin Hogan is a way on assignment. And in this case, you can go ahead and put air quotes around that phrase "on assignment" because the real scoop is that Colin is getting married soon, and he's away on his bachelor party. So I guess his only assignment is to have fun, and maybe try to avoid waking up with a tiger in his bathroom. 

As far as today's episode goes, you've probably heard all about the money being poured into the energy transition. We're talking trillions of dollars. So joining me will be Albert Cheung from Bloomberg New Energy Finance and Danielle Patterson from the law firm of Vinson and Elkins. Both of their organization's recently released reports that detail where all that capital that's being poured into the energy transition is being spent ... and who's spending it. 

Looking ahead to upcoming episodes. Chris Perkins, the president of CoinFund will be joining us to discuss his recent career pivot. After graduating from the United States Naval Academy and serving in the Marine Corps. Chris's finance career began at Lehman Brothers, and he eventually became a managing director at Citi. But last year, he moved to CoinFund. So he's going to share his experience transitioning from the world of legacy finance, to the land of non fungible tokens ... NFTs ... decentralized anonymous organizations ... DAOs and all things Web3. 

We're also going to be talking to Dan Scarborough, the President and CEO of IncubEx. Dan is going to walk us through some of the latest developments in the voluntary carbon markets and share his insights on what works well in that corner of the markets ... and where there might be room for improvement. 

And finally, big news about this show. We're going on the road. That's right. Road trip. Colin and I are heading to the International Futures Industry conference later this month in Boca Raton, Florida. FIA Boca is always an awesome event. And it's finally back in person. So we'll be bringing you updates from sunny Florida. 

So lots of exciting stuff on the horizon. But right now, let's hear from Albert Cheung and Danielle Patterson, about the who, where and how much when it comes to finance and the energy transition. 

Hello, everyone, and thank you for joining us for this episode of The Modern Money SmartPod. So I've got a couple of excellent guests joining me today. First up is Albert Cheung from Bloomberg New Energy Finance. Albert, how're you doing today?

Albert Cheung  01:38

Good, Sean, thanks for having me.


Sean McMahon  01:40

Glad to have you on. My next guest is Danielle Patterson from Vinson and Elkins. Danielle, how are you doing?


Danielle Patterson  01:44

Doing? Well, thanks again for having me, Sean.


Sean McMahon  01:46

Great. So I'll start with you, Danielle, tell our listeners a little about your background and your career path to become a partner at Vinson and Elkins?


Danielle Patterson  01:52

Sure. I'm Danielle Patterson. I'm a partner of Vinson and Elkins based out of our Houston office, I am in our energy transactions and projects group. And what that really means is my skill set is I'm an M&A and D attorney. I work on joint ventures, project development, commercial contracts. But I've been practicing a little over a decade, and I focus entirely and exclusively in the energy industry. So naturally, that means I've done work in the oil and gas space upstream and midstream. But I've been part of the renewable space and really the broader energy transition my whole career. So it's a exciting place to be in it seems like every day we're talking with clients about new technologies and where they're going to spend the money. And so we just like to follow our clients wherever the energy transition is taking us and wherever they wanted to play money. That's that's where we go.


Sean McMahon  02:41

That's great. It's exciting times on that side of business, for sure. And Albert, you're the head of global analysis at Bloomberg, New Energy Finance. So how'd you end up there?


Albert Cheung  02:50

Thanks, Sean. Yeah, so I joined a company called New Energy Finance back in 2009. When I started my career, so I've spent about 13 years looking at the low carbon energy transition. And actually, the first areas I looked at were all around smart grids, and energy storage, that kind of energy integration pieces, I became head of research about four or five years ago. And since then, has been F, we've expanded our research coverage to cover all sorts of areas across the energy transition, including not only renewables, but electric vehicles, and hydrogen and sustainable materials and climate tech. So we've really been in a growth phase the last few years, and it's been a really exciting ride.


Sean McMahon  03:25

And sounds like it. Alright, great to hear about your backgrounds for each of you. So the reason we brought you in here is both organizations have put out reports recently about how everyone's going to fund the energy transition. So Albert, we'll start with you, Bloomberg, New Energy Finance put out its energy transition investment trends of 2022. You know, what were some of the highlight items for that.


Albert Cheung  03:45

Yeah, so one of the most kind of anticipated reports we do each year, this year, we found that the world invested $755 billion in the energy transition in 2021. Three quarters of a trillion dollars is a pretty big number. And that number captures really what I would call kind of deployment. So that's money going into the actual creation, manufacturing, deployment of hardware like wind and solar projects, electric vehicle sales, you know, heat pump installations, hydrogen plants, things like that, that number that three quarters of a trillion dollars was up 27% year on year. So growing really nicely, actually at a nice at a nice tick, and has actually doubled since 2015, when the Paris Agreement was signed. So I think that's pretty nice momentum to be tracking. Every region grew to a new record, which is nice to see. So we just divide it into three main regions, the Americas, Asia, Pacific, and Europe, Middle East and Africa. And all three regions hit a new record, which isn't the case every year, so it was really good to see last year. And actually every sector also grew to a new record with the exception of carbon capture and storage. So just to give your listeners an idea of what those sectors are, there's within that 755 billion there's renewable energy, which is largely wind and solar power that was worth about $366 billion of asset investment last year. electric transport that's Evie sales and charging infrastructure that was worth about $273 billion. Last year, there's energy storage, which is much smaller, about 8 billion, electric heat was about 50 billion sustainable materials as a sector was about 20 billion. And then hydrogen and CCS, we're about 2 billion each. So, you know, the good news is energy transition, investment is accelerating, which is fantastic. But the kind of punch line to the report, which we put in there was really to compare that 755 to where we need to be, if we want to get on track for net zero by 2050. And what we found, you know, to keep a long story short, is that that number needs to triple in the first half of this decade, and then double again in the second half of this decade, to get the world on track for a net zero consistent trajectory. So that's the challenge that we have in front of us.


Sean McMahon  05:51

Sounds like quite a huge challenge. So Albert, while the report you and your team put together was kind of a more global focus, Danielle, I know you and the crew at Vinson and Elkins also put out a paper but a little bit more laser focused on the private side. That papers called how private capital is shaping the energy revolution. What were some of the key takeaways there?


Danielle Patterson  06:07

Well, I think one of the key takeaways from from our report, which is interesting, because it was also a key takeaway, when I look at Albert's report, the Bloomberg report is that I think it's becoming much more clear and emphasize that, you know, five to seven years ago, at least in my space, we were really seeing the private deployment in the renewable space, wind and solar. But to meet the low carbon energy transition goals that we're all going for, there's so much more to the puzzle, obviously, we need to continue the growth in the wind and solar space. And I work on wind and solar deals every day. But the entire energy transition is a lot more than that. And frankly, a lot of our traditional private equity and financial institution, clients are finding that it may actually be easier, more palatable, and a better return for them to invest in all of the other stuff and energy transition whether it's, you know, renewable adjacent opportunities, providing services to the renewable energy space, or Evie, CCS, hydrogen orangy, sort of all the other technologies and investments and services are going to be required to meet that carbon neutral goal.


Sean McMahon  07:18

Alright, just a quick note to our listeners, I will put a link to both of these reports in the show notes. So you want to check those out, just head over there. Real quick, any surprises from either reports? And, Danielle, let's start with you. Anything that your team came up with it caught your eye?


Danielle Patterson  07:29

I'm actually looking at the Bloomberg report, probably the one that caught my eye the most is the investment in nuclear. We're obviously for a variety of reasons, you know, my clients and us focus, we don't spend a lot of time there. So I found that a bit interesting, surprising and sort of, you know, looking more globally, like how how fast deployment might happen in the nuclear space, but definitely not something I'm dealing with on a daily basis.


Sean McMahon  07:53

And Albert, how about you any surprises from what you found?


Albert Cheung  07:55

Yeah, we did a new bit of work for this report, looking at supply side versus demand side analysis. So how much money is being invested by supply side being kind of producers of energy, and the demand side being used as energy. And so on the supply side, we include things like large scale renewables, public charging infrastructure, you know, hydrogen and CCS plants, recycling plants, things like that. And on demand side, we looked at things like rooftop solar behind the meter storage, you know, residential heat pumps, purchases of electric vehicles, things like that. And interestingly, we found that the demand side energy users are investing more than the supply side at the moment, it's 400 billion versus 355. I don't know what we expected to find, I didn't necessarily expect to find that. But it sort of underscores for me the importance of the consumer, the importance of energy users in the whole energy transition, that that's actually a lot of capital there that could be unlocked to drive the transition even faster.


Sean McMahon  08:49

Okay, now I pivot real quick to just a spotlight on both sector and regional. Right. So Danielle, let me start with you. Your report covered a lot of private equity, venture capital producers, institutional investors, things like that. Which of those sectors is poised to increase their investment the most?


Danielle Patterson  09:03

Yeah, I do think as we sort of, as I alluded to, as we think about the broader energy transition, and sort of, yeah, there's going to continue to be investment in wind and solar. But as we sort of look at all the other facets that are required in this space, you know, there's a lot more opportunity for private equity funds for institutional investors to meet the return profiles that they're looking for, to they're there a lot of larger projects out there, you know, you see a lot of larger developers, you know, IPPs that are growing, there are a lot of large joint ventures that are being announced, you know, offshore wind, these are, you know, larger dollar projects that maybe didn't exist and opportunities weren't there, you know, a few years ago, and that just gives our private equity clients and institutional investors the ability to deploy and invest larger dollars more quickly and a different return profile than, you know, again, just going back to a wind farm with a long term, fixed PPA. doesn't always fit their needs. So there's definitely a lot more opportunities. And we're sort of at that tipping point with a lot of technology. And I'm really hoping offshore wind is going to be one of those that we just see explode here in the coming years. And those are huge dollars that can be spent.


Albert Cheung  10:15

I would just chime in and said, I totally agree on that in terms of scaling up investment, I think there's also going to be really interesting commercial innovation, in terms of, you know, new types of PPAs for solar and storage, hybrid projects, potentially new types of agreements for offtake of green hydrogen, and industrial sites and things like that. So I think there's kind of two dimensions of growth, one being scale, scale scale, and the other being kind of innovation and unlocking the opportunities.


Sean McMahon  10:39

Okay, and it's real quick. For our listeners, we're talking PPAs. I know, there's a lot of slang, a lot of acronyms, that's power purchase agreements. So Albert, you mentioned new kinds of PPAs. Talk to me a little about that. What does that mean?


Albert Cheung  10:48

Well, I guess, you know, solar plus storage is really the key example here. You know, to finance a plant, you're gonna need some kind of PPA. But when you have a hybrid asset, that's part generation and part storage, there's different ways of thinking about how to contract for that. So you think see things like blended PPAs, where you have a price for the solar production, and another price for energy coming out the battery. And that's being agreed, things like time varying PPAs, where you'll pay the developer different price, depending on the time that so basically more in the evening, right? Because you're using the battery, or potentially you do it as a capacity payment. So you have a PPA for the solar plant, and then you pay a fixed kind of resource adequacy payment as a kind of adder. So I think all of those different contracts are, first of all interesting in terms of the innovation and also different ways of spreading the risk and understanding the value to the to the utility or the off taker, and there's going to be more of that coming.


Danielle Patterson  11:38

Yeah, definitely, I think the markets still being tested exactly what those PPAs are going to look like. There's a lot of uncertainty around it. And there's a variety of reasons, I think, with the onslaught of battery storage, that we need to change what that product looks like. The winter storm Yuri, that happened in Texas absolutely changed what you know, hedging structures might look like for these types of projects. So there's there's sort of a combination of factors that are leading folks to sort of reevaluate, you know, what the commercial products are going to look like. So I don't think the markets fully settled, but you know, agree with a lot of the options out there that I was describing.


Sean McMahon  12:14

Okay, Danielle, and circling back to the report from V&E. So, you know, we've all witnessed the trend for SPACs, kind of shot to the moon. And now it's definitely kind of cooled off or started to taper. So are there any sectors that might decline? I know we talked about the sectors that we'll see increases in investment, but any areas where things might drop off? Or even level off a little bit?


Danielle Patterson  12:33

I think you might see a little bit more cooler heads arise, maybe an auction processes bid processes, there's definitely been a frenzy and no put, well, maybe pun intended, you know, an energy around this space and investing and being a first mover and getting the big, you know, white whale. And so, you know, wanted two years ago, we were definitely seeing valuations that, you know, look and just the lawyer, but maybe we're scratching our heads on how they're being supported by the underlying projects that are there. But I think, you know, there is value, obviously, to many clients being you know, first movers and early adopters in this space, but we are seeing sort of a leveling out on the options. Bilateral processes are much more valued for investors and management teams really coming together and getting the right goals. It's not just about who can throw the most money out there. You're building long term partnerships in this space. And so we need to be the right valuation that can be supported the right goals. So I think you see cooler heads there. We can talk about the offshore wind auction not to jump the gun. That's obviously one where again, there's there's a and I think, you know, fully warranted energy being a first mover there is hugely important, you know, driving up the prices and the bidding there. But, you know, some of the other sectors again, I think, I think we're gonna see prices kind of level eyes again.


Sean McMahon  13:56

Yeah, you're jumping ahead of us here, Danielle, we've got the New York Bight auction on the agenda here. But we'll we'll circle back to that, I promise. But first, Albert, so we're talking about, you know, Danielle covered where, you know, sectors within private capital, where those growth and investment things like that. But what are you seeing from a regional perspective? Like, are there any regions around the world that might see more growth and more spending than others?


Albert Cheung  14:16

Yeah, for sure. I'm just giving a breakdown of the region's out of the 755 billion that we tracked, almost half I think 49% was Asia Pacific. And that region grew by 38% in 2021. So I've seen really strong acceleration of energy transition in the Asia Pacific region, it's probably not surprising to you and your listeners that China was the leading nation with 266 billion of the total. So I think about a third. And I think over a third of the world's energy transition investment happened in China last year. So by far the single largest nation, the US a second actually with 114 billion. So a little bit behind China, let's say but you know, those are the two kind of powerhouses. Then if you take the year peon Union as a bloc, then the European Union did about $150 billion of investment last year. So that that would actually place that block into second place ahead of the US. But clearly no single country, this is ahead of the US there. In terms of growth, I think Europe and Asia are just accelerating the fastest right now. In terms of renewables deployment, in terms of electric vehicles uptake, there's a pretty clear formula now in terms of renewables that's around getting the auction mechanisms and getting that auction pipeline to secure finance for renewables, and then on electric vehicles, you know, having having the demand side subsidies, but also the supply side regulations to provoke the auto manufacturers into producing the EVS to be sold. And I think both Europe and China in particular, kind of have that formula. Now, they've got that framework in place to keep ratcheting up the pace. And so that's where I think we're gonna see the most the most rapid growth. As for the US and the Americans, I think, you know, what, we're seeing growth there too. But it's probably not quite the same as, as it is in in Asia and Europe, investment in renewable energy was actually flat in 2021 in the Americas. And that's a combination of factors that's, you know, expression of tax credits in the US, and so on, and so forth. So I would say, you know, if I had to pick regions for growth, at the moment, we'll be Europe and Asia, that's probably gonna accelerate the most. Alright, and


Sean McMahon  16:15

I want to kind of dive into the numbers a little bit now. So I saw that for Europe, Middle East and Asia, the total was 231 billion. And you just mentioned that about 150 billion of that was Europe. So that remaining 80 or 81 billion? How does that break down between the Middle East and Africa? And are there any countries within Africa that are kind of leading the way or any countries within the Middle East?


Albert Cheung  16:33

Yeah, good point. So the European Union was about 150, out of the 230. In the Europe, Middle East and Africa region. If you add a non EU countries that are still in Europe, like the UK, and Norway, and so on, you actually get even closer to the 230. So the Middle East and Africa are actually very small part of that pie. Having said that, there were some really interesting developments last year, it was great to see South Africa coming back into the market, they've had slightly a slightly dormant renewable energy sector since the independent power producer program kind of slowed down a few years ago. But you know, South Africa came back, they ran a couple of auctions last year, not for renewables, specifically, actually, but for power, because they've had a real shortage of power, really plaguing the country, you know, with rolling brownouts and things like that. And interestingly enough, a number of renewable energy plus battery storage projects were actually successful in those auctions alongside your conventional gas, and so on. So that was great to see clean energy, kind of winning out on a on a level playing field there in South Africa, I think the country record about $400 million of investment last year. So we do see some positive stories there. But I would say that the majority that the centerpiece of EMEA is still in Europe.


Sean McMahon  17:40

Alrighty now just transition real quick to kind of the conversation around how much capital is committed versus how much is deployed. Right? There's obviously a pretty huge hurdle there sometimes from getting from one to the other. So Albert is spinning these A triple 3g Net Zero, like you mentioned at the top of the show about how it's got, you know, the numbers we got to hit by the first half of this decade and the second half this decade. And the wherewithal that capital be deployed? Are there enough projects in the pipeline out there?


Albert Cheung  18:02

Well, first of all, I mean, this is a sort of scenario to get to net zero. So all of those sectors have to grow. So unfortunately, there's no one sector that's like doing well, or doing well enough, I think renewables needs to double EVs needs to double. I think hydrogen and carbon capture have to do sort of 10 to 100x more over the next few years. So everything needs to grow. I think that the pipeline of projects in some sectors is there. The last time we checked, the interconnection queue, and Urquhart in taxes had something like 200 gigawatts of projects waiting for approval, and 100 gigawatts of solar waiting, I think it was 100 gigawatts of solar awaiting connection or awaiting approval. And Texas is doing about five gigawatts of solar per year at the moment. So you've got 20 years worth of solar additions just waiting to be done. So I think there are some real challenges on the renewable side around things like getting, you know, local regulatory approvals and permitting and getting a grid connection, things like that, that really need to be sorted out. So I think the pipeline of projects is definitely there, there's development projects ready to go. That's probably not the case in areas like hydrogen and carbon capture where it's just still very complicated to come up with a project that really pencils out and get the business model right and understand that you know, who's going to uptake the hydrogen? Or how is the cost of carbon capture going to be priced in? Have you got the right tax credit? Have you got the right carbon pricing regime to pay for that? So I think it's probably quite a different story where there isn't really a pipeline of projects just ready to go just yet there.


Danielle Patterson  19:26

Yeah, Albert, just to add to a couple of things that you said there, you're talking about just the pipeline in ERCOT. You know, PJM in the US is a very good example where they they frankly, can't handle all the requests. So there may be the desire to build the projects, but whether it's from a purely a staffing or resources issue to grid issues, transmission issues there. There's some larger issues in the US in particular, that can't be solved alone by developers and private money wanting to back this industry and deploy it. And there are some larger challenges. We're facing they're sort of you're holding up that continued growth already. Now,


Sean McMahon  20:03

I also noticed, Danielle, you're shaking your head whenever we're talking about the 100 gigawatts of solar pipeline in Texas. It sounds like you're the team of V&E has got 20 years of business, waiting for you. That's got to be music to your ears.


Danielle Patterson  20:15

Yeah, definitely, like we said, I think there's plenty of people interested in doing it, but I’m kind of appealed challenges as far as the broader infrastructure that the US needs to support it. Albert. I guess I'll also echo on on your comments on CCS and hydrogen, because I don't think we've talked much, you know, in this segment about what the oil and gas industry is doing. Now, obviously, Vinson and Elkins we've spent, you know, our whole history servicing the oil and gas industry. I am hopeful, and I am really seeing and I think it's upstream companies. But really, the midstream companies seem to be leading the way of really trying to do their homework and make the carbon capture and sequestration projects work, looking at hydrogen projects, RNG, even if they're initially on small scale, just to sort of test the waters. But I am, I am hopeful. To your point. I'm not really sure how all the economics work together yet. But we're definitely seeing, you know, the oil and gas companies, traditional fossil fuel companies saying, Okay, we've got to do our part be part of the energy transition, there is potentially real opportunity here. And really focusing on this space taking things they already know, well, you know, pipelines, moving products, sequestering products, the environmental liability, exposures, things that they already know. And just you're changing their focus into a, you know, lower carbon impact environment. So hopefully, that's an area where we see do you see a lot of growth?


Sean McMahon  21:36

Danielle, that's an excellent segue to one piece of the paper your crew at Vinson & Elkins put out was was called a “competition for capital.” And you just mentioned how some, some existing firms are kind of starting to pivot a little bit. What does that competition for capital all about? And how did your team explain that?


Danielle Patterson  21:50

I think the competition for capital I talked about a little bit before I mean, there's so much excitement and just energy and you know, everyone wanting to be in this space, making sure you find the right you know, management team or partnership or right product to line up with, there's definitely some considerations, you know, around newer technologies, do you want to be the early adopter or the first adopter, you know, investing money in the technology that just doesn't go because there's a lot of competing technology right here, all throughout the energy transition space. So there are definitely some some tensions there. And again, making sure that you find something that's the right you know, return profile for any type of investor what you know, their LPs are looking for, we're definitely seeing a lot of money wanting to be spent in this space, and people not wanting to you know, to lose the right opportunity based on you just simply valuation. But But again, I do kind of think we're seeing kind of the, the cooler heads prevailing, making sure that the underlying projects can can back up the numbers that are being presented. So it's definitely a space where everybody wants to be figure out how they can invest. And again, it may not be through, you know, renewable or solar power generation facilities itself, but find something, you know, adjacent in this space or that services, the industry that will have the right kind of profile that you're looking for.


Sean McMahon  23:03

All right, you mentioned the auction side of it earlier, and I promised would come back to the the New York Bight auction that was recently completed. You know, the background there is I think, you know, most folks were thinking that for those six tracts, they'd see, you know, maybe a couple billion dollars total. And that thing climbed all the way up to 4.3 billion. So there's a lot of people cheering for that saying, Look at all this interest, but you've kind of nailed it, Danielle, there's a little bit of frothiness there, and just a lot of a lot of capital being spent, it's going to have to be kind of made back at somehow. So is that an example where you're talking about what this competition for capital?


Danielle Patterson  23:33

I think that's a really good example of it. And you know, look, again, I'm the lawyer, I haven't set the numbers, I do think is a good thing. It shows excitement for the offshore wind space. But for the reasons you laid out, based on estimates of what people thought it would go for bases, where we land, we can obviously see that there was some, you know, added valuation to make sure that you were the first mover and that you've got these leases. And there's going to be huge learning curves with offshore wind in the US, and getting supply chains and getting all the you know, all the work that's going to go into it. So not saying that it was overvalued or not warranted in any type of way, but definitely a lot of excitement to be the first one in there. Because hopefully, there will just be astronomical growth in this space. And once you figure out one project, being able to replicate that will be you know, invaluable to lots of these companies.


Albert Cheung  24:21

Yeah, maybe I'll just jump in and just say that this is absolutely a global trend as well. I think we've seen it certainly in Europe, we've seen companies putting down billions for the rights to to offshore seabed in the UK. Going back even maybe four years ago, we were seeing zero bids in offshore wind auctions in Germany, where, you know, companies are basically promising to build an offshore wind farm with with zero revenue guarantee and just saying, well, basically, take whatever the market will pay us when whatever the power prices will be in five years time. We'll just do that. Thank you very much. We see extreme competition for you know, to win solar auctions in India, in the Middle East. And certainly it creates a challenging competitive environment but I think at the same time, you know, as certainly at BNF, for many years, we've we've sort of sat in our ivory tower and worried about, you know, one day the macroeconomic environment will change and interest rates will rise, and debt costs for renewables will go sky high. And, you know, we sat there worrying that investor interest in clean energy would evaporate. And now we're in that reality where the macro economy is changing. And interest in clean energy is higher than it ever has been before. And that's because of this appetite for ESG related assets, for sustainable investments, and so on. So I think overall, it's a really positive sign of the way people are thinking about kind of long term value, even though it does create these challenges in the short term around competition, and around finding that, that place where you can compete,


Sean McMahon  25:44

Any concern that these auction prices that are kind of far beyond what was expected. So, you know, we see a lot of projections that come out that like how much world or specific countries have to spend for the energy transition. And I would guess that those projections included something like a $2 billion number for Bight. And now it's four. So any concern that these auctions that are kind of fetching high prices, just throw a lot of those estimates out the window, or at least demand that they be increased?


Albert Cheung  26:09

It's a good question. It's funny because you have auctions like the New York Bight and the you know, the seabed auctions, and then you have the reverse auctions, where you're bidding down on the power price that you're going to be paid. And that's a more common structure in other parts of the world, right. So if you think about competition, and the fact that there's just a lot of capital available for these types of projects, in most of these auctions around the world, it has the effect of lowering costs for the consumer, because you're basically competing to bid for the lowest possible PPA. And so that's actually been a real positive story for, particularly for the sort of political story around energy transition, because the governments can turn around to the consumers and say, look how cheap we're getting solar for, look how cheap we're getting wind for this really works. But I think, yeah, what we see now with the seabed Auctions is, is a slightly reversed dynamic where it's bidding up the price of the rights to do that, and therefore, probably bidding up the the future power price required to make this project pencil out. So yeah, I don't know what the endgame is there. But I think that it's not all one way, I think there's the other side of the story, which is competition is driving down costs as well. And I think it's important to remember that


Sean McMahon  27:16

One big headline grabbing story that I think we've got to talk about in terms of how it might impact the build out of renewables is what's going on with the war between Russia and Ukraine. So how does that help or even potentially hurt the outlook for spending on renewables? Albert, you want to take that?


Albert Cheung  27:31

We're getting this question a lot at the moment, it's definitely too early to say. So I mean, we're a few days into this conflict, and who knows how long it will last. So I think we just need to monitor what's going to happen. The three main things I've been asked that I think we're going to really pay attention to, in terms of the impact on clean energy, I mean, there's many other impacts. But on clean energy, I think we need to pay attention to what's happening in the commodity markets with oil and gas prices very, very high. And there's more potential to switch to other other fuels, and even green hydrogen is probably going to be in the money now, which we thought would take another 10 years. But um, it could happen now, this year, because of the current gas price situation. On the flip side, you have nickel prices being very, very high because Russia is a major producer of nickel, and nickel, has become one of the really key elements for Evie batteries. So then you have, you know, a challenge on the on the battery supply chain. So I think we need to pay attention to what's what's happening commodity markets. And then I think, thinking slightly longer term, we just need to pay attention to what the policy responses are going to be, particularly in Europe, we're seeing Germany talking about a faster shift towards renewable power, pulling forward their targets by quite a long way. We're seeing ideas around moving more quickly towards electrified heating, because Europe hits at times with gas. We're also seeing policy responses around diversification of supplies, which includes building more LNG terminals, prolonging the life of coal assets, prolonging the life of nuclear assets, which would clearly impact on the low carbon transition as well and potentially lock in some, some assets that otherwise wouldn't be there. Again, I think it's too early to say, but we definitely see a few different signposts of things to pay attention to. And, you know, like I said, I think it'll take months to see how all that plays out.


Sean McMahon  29:13

Danielle, you're getting any questions from your clients about what the war means for the marketplace? 


Danielle Patterson  29:17

Yeah, we definitely get questions. And I agree with Albert, that it's really, you know, too early to tell. But I think the main thing that we focus on and our clients focus on the energy transition, we're well into the midst of it, right? I don't see a singular event in the world that's really going to it could delay things alter the course, you know, modify the course, but not going to see a major flip away from the movement of the energy transition that we're in. Like Albert said, We've got to watch commodity prices. We need continued government incentives and policies and clear rules and regulations that help us continue with an energy transition. Innovation needs to continue all those types of things, but you know, look, we can through a global pandemic, there's been negative oil prices, there's prices, oil prices over $100. Again, those things are going to impact on the margins. But we're on a path that I don't see being, you know, flipped by any singular event.


Sean McMahon  30:13

I like how you summed that up there, because I didn't even think about that, like we were thinking about a war one specific part of the world. But we had a pandemic that just rocked pretty much every corner of the world and and the transition still seems to keep going. That being said, what are some of the headwinds you might see out there that could either slow the transition or forced us to miss some of the goals we've set?


Danielle Patterson  30:31

I think one thing many of our clients grapple with is investing in the right technology. And at the right time, again, there's sort of this time period, when you want to be an adopter and get in, you know, early enough, if you wanted to be an early mover in the space, but don't want to lose out on the wrong technology that doesn't really take hold. There's also a sort of a constant paradigm, you know, you can even take something as simple as the wind industry and turbines like technology there that with supply chain concerns with everything that's going on in the world, you want to lock in your supply and component parts early, take batteries for solar as well lock that in early yet, with a constantly evolving, changing, improving technology, you don't want to lock in so early that you miss out you build a project with you know, antiquated technology. So just kind of a constant, you know, paradigm there that they're having to struggle with that, you know, look, a lot of smart people in the space, make decisions where they need to and, and execute where they need to, but it is kind of a constant, you know, headwind and challenge.


Sean McMahon  31:35

Albert, any headwinds you're out there watching?


Albert Cheung  31:38

Yeah, as Danielle alluded to already, I think supply chain challenges, commodity prices, you know, last half year. So our sort of second half of 2021, look at cost of energy was that was the first time that we've seen the costs of wind and solar actually rise on our global benchmarks. In as long as I can remember, maybe 10 years, we've not seen that happen. And it's quite striking. I mean, most people in the renewable energy sector have have only ever known declining prices, like they've never experienced before, the idea that prices could rise. And it's hurting winter, when manufacturer margins, it's leading to some solar projects being delayed in the hope that they can get a better deal later in the year, some solar projects being built at higher prices. And so those are real challenges. The good news is, of course, you know, most parts of the world, renewables are still cheaper than gas and coal. And probably the difference is even bigger. Now, because of high gas prices. I don't think that minimizes the challenges in the supply chain, because the developers have to work through kind of negotiating prices and figuring out how to delay their projects in the right way and trying to figure out when prices will come back down. So I think there's a lot of friction there, that's just going to be a little bit irritating for probably for the next year or so.


Sean McMahon  32:49

Alright, and one of the things I like to do on this show is kind of ask guests for bold predictions. And I know both your organizations already pushed out reports about kind of what they think is gonna happen. But you individually, are there any things out there that you might think could happen? But you know, you might be sticking your neck out there a little bit? I don't know. But anything you want to share anything you want to prognosticate?


Danielle Patterson  33:07

I think what is most chatters is a bold prediction. But what's most exciting for me in this space is that it can change in almost an instant. And what we were talking about four years ago is not we were talking about two years ago, and what we're talking about today could radically change with a breakthrough in innovation. And I think all the spend on EV in the past two years is a huge example. We all knew what electric cars were 10 years ago, it's not a new concept. But the the focus on EV, on the cars on the component parts on the charging stations and the infrastructure that would be needed to really deploy EV has exploded. So you know, the three of us should circle up in six months or 12 months and see what the new hot topic or trend is that we're talking about. So that's what keeps me excited about this industry and and optimistic about it is because it can rapidly change and, you know, Albert threw out some aggressive numbers of of investment deployment that we need, which seem very hard to achieve. But you know, there could be a tipping point any day that takes us in a different direction. And we have some explosive growth in one area that you know none of us really saw coming.


Sean McMahon  34:21

Albert, any bold predictions from where you're sitting?


Albert Cheung  34:22

Yeah, I'll build on what Danielle said. I think the EV sector is going through an explosion right now. I think we've got markets around the world that are hitting 10% EV sales penetration. And that's where you get to this point where everybody knows someone who's got an EV. And that just makes you so much more likely to buy once you get into that really steep part of the curve. So one prediction we didn't quite make the prediction in the report we kind of alluded to it is that this year, the EV sector globally could be worth more than the renewable energy sector, which never happened before. Last year it was 25% smaller and both are growing. So it's kind of who you know which one catches up but that could potentially happen this year. and it would be quite a turnaround in the kind of balance of those two sectors.


Sean McMahon  35:05

All right, well, with those bold predictions, I think it's time to bring this episode to a close. I want to thank you both for your time and your insights. This has been a wonderful conversation. 

Albert Cheung

Thank you very much. 

Danielle Patterson

Thank you. 

Sean McMahon
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Highlights from BNEF report
Highlights from V&E report
Danielle's surprise takeaway: Nuclear
Albert's surprise takeaway: Supply side vs. Demand side
Spotlight on private equity, venture capital producers, institutional investors
New kinds of Power Purchase Agreements
Private capital cooling off
Regional investment trends around the world
A closer look at EMEA investment trends
Committed capital vs. Deployed capital
"Competition for Capital"
The frothy New York Bight offshore wind auction
The war in Ukraine
Headwinds for the Energy Transition
Bold predictions: Continued rise of EVs