Renewable Energy Project Finance Basics with Josh Pearson ’97

[00:00:00] Elizabeth Wilson: Elizabeth Wilson: Hi, everybody. This is Elizabeth Wilson. I'm director of the Irving Institute for Energy and Society and professor in environmental studies. And I am thrilled today to have Josh Pearson from EDF Renewables talking to us about renewable energy project finance basics. As you all know, we have the investing in our energy futures workshop coming up in a few weeks. And we're trying to use these Dartmouth Energy Collaborative lunch series, that's us at the Irving Institute, the Revers Center for Energy at Tuck, the Sustainability Office, and the Thayer School of Engineering to really provide some additional material, background and reference material, to help to contextualize and understand some of the finance topics going forward. And I couldn't be more thrilled than to have Josh, who's Vice President of Legal and Associate General Counsel for EDF Renewables, based in Houston. And EDF Renewables is a renewables company which develops, constructs, and is a long-term owner and operator of wind and solar electricity generation and storage projects. His day-to-day responsibilities include negotiating, drafting, and critical review of merger and acquisition transactions, power and environmental attribute offtakes, derivatives and transactions, permitting and environmental matters, interconnection and transmission agreements. He also procures equipment and oversees project construction contracts, debt and tax equity financings, as well as operations maintenance asset management agreements. He spent eight years working at two nationally recognized law firms before joining EDF Renewables in 2009. And one of the reasons I think it's so important to have this perspective from somebody in the field, is I know so many of our students are really interested in energy and energy finance. But having a perspective and someone who can help us understand the different players, how he makes decisions, and how he thinks about things, will be incredibly useful for all of us as we go forward into more and different conversations. So I'm going to turn my screen off. Josh is going to give his presentation. Please feel free to type questions in the Q&A box below and we will take a question and answer period in about 25 minutes. As a teaser, Josh is also, as I mentioned, based in Houston and has lived through the Texas outages and is working hard on a lot of those issues there. So if you have any Texas questions, now is a great time to ask them from someone there. So Josh, welcome. We're really thrilled to have you here and I'll see you in a little bit. Thank you, Elizabeth. So let me [00:02:39] Speaker 2: ensure that I am sharing my screen properly. Bear with me just a minute. So I thought it would be useful to start with a little bit of contextualization for what I intend to talk about today. And that is partly because the term renewable energy and renewable projects is really a vast universe ever expanding. And there are many different nascent technologies and deployments of existing technologies that certainly may have and hopefully will have a significant impact going forward. But a lot of them are not being deployed effectively on a real-time basis in the same way that utility scale onshore wind and solar projects are. So this is partly based on my experience over the last 12 years or so working for a renewable company. Most of my experience is onshore wind and solar. So those particular types of technologies and their construction and financing in the United States is going to be the primary crux of our discussion. By necessity, I'm going to be covering a number of different subjects associated with the project lifecycle and financing for these projects that is cursory and it's going to be high level by necessity just given the time constraints that we have. There are a number of complexities that go into each and every project and that's true across the board, whether you're talking about renewables or other technologies. And so we're happy to dive into some of those more nuanced details in the Q&A section if people so desire. The same is true for what I'm going to say about project finance. So financing renewables, renewables projects has many of the same components and considerations that apply to conventional power generation resource financings. There are some unique variables associated with wind and solar projects in particular and I'm going to try and highlight those for you as we go along. The last thing I want to mention before we begin is that I'm going to, you'll hear me using the terms developer or sponsor or generator at different points during the discussion and those are all essentially the same. I'm going to use those interchangeably is probably the best way to put it. So that said, the other reason that I'm focused on onshore wind and solar is because they're proven technologies. They've been around for decades and they have widespread deployment and actual operation in the field today. That's a very important aspect of any sort of financing that needs to be considered and one of the reasons so much new investment has gone into those types of resources over the last 10 years in particular. Lenders and financing parties do not, they're risk averse. They do not like to invest their money into unproven technologies and wind and solar electricity generation on a relative basis is simple compared to a lot of other generation resources. These projects can be fairly quickly deployed over the course of, in some cases, nine months for some solar projects to two years for certain wind projects. So the world as a whole, insofar as they're focused on renewables, they're focusing, you know, to a large extent on wind and solar. The chart in front of you is, I thought I would provide just to show you, give you a flavor for the amount of investment that's going into new renewables projects. This graphic runs through the first half of 2020. And what you'll see there is the blue represents new wind capacity, the yellow or orange is new solar capacity. Roughly 300 billion dollars a year in new investment has been put into these resources over the last 10 years. This is globally, but nevertheless it's a significant amount of capital that's being deployed. And there's no reason, frankly, that I've seen no estimates in terms of future capacity growth to suggest that a reversal in that trend. A few other reasons that I think are worthy of note, in terms of why we're talking about renewables today. There's been significant new or renewed and consistent media attention given to renewables over the last several years. The Paris Climate Accord, I think, was a recognition on a global level that many countries in the world, they perceive climate change and reduction of carbon dioxide and other greenhouse gas emissions is a large goal, an important sociological societal goal that should be pursued. And these capital deployments, I think, are a reflection of that. You're also, you may have seen recently, President Biden here in the US released an infrastructure plan that he would like implemented over the ensuing eight to 10 years. That would be he nominally, he proposed a $2 trillion investment. So a lot of those, there are a lot of disparate contributing factors that are keeping renewables investments and new renewables capacity growth in in the forefront of many people's minds. In terms of sort of high level, what I'll call drivers or motivations that have expanded and continue to expand renewables in the US, one that does not get a great deal of attention is something called renewable portfolio standards. These are state level standards passed typically under state legislation that mandate that utilities that operate within the state that passes this RPS have to generate a specified percentage of their electricity from renewable resources by a date certain in the future. Some of those those standards require compliance over, you know, the course of 5, 10, 15, sometimes 20 years. But that, at least historically, going back, say 10 years ago, 15 years ago, most of the new renewable generation that was being constructed in the US was being built primarily to comply with these these portfolio standards. It was not economically viable 10 or 15 years ago to build a wind or solar project in the same way that you could build a new nuclear facility or a new, in particular, natural gas or coal facility. So much of the historical driver for renewables in the US were these renewable portfolio standards. That has changed significantly. One of the big reasons is the precipitous decline in the cost of building wind and solar projects in the US. The costs have come down largely due to economies of scale, efficiencies in the output of wind turbines, and the conversion of sunlight to electricity via increased panel efficiencies have brought those costs for those types of renewables products down to a point now where they are effectively competing with natural gas, if not beating natural gas on price in in in most of most of the parts of the US. Also, beginning around 10 years ago, we started seeing the emergence of what we in the industry call commercial and industrial or CNI customers. These are non traditional buyers of the power and other attributes that renewable projects generate. And I'll go into a little more detail about the CNI business as it goes on. But these are effectively corporate players. So many of them technology companies who have, for example, Apple, Microsoft, Amazon, in addition to, you know, some more more typical manufacturing operators like Procter and Gamble, for example, they have set sustainability goals, not because of any sort of legal mandate or law that requires them to do so. But as a internal corporate goal and in and as a marketing tool, for lack of a better term, so that they can go out to their retail customers and say, hey, yes, you know, our facilities consume a significant amount of power, our data centers utilize a lot of electricity, but we are going out and procuring through, through our, through different removal developers and sponsors, green power to offset the environmental impact of those data centers, for example. So that that's been a big driver over the last 10 years, and will continue to be so federal tax credits is another very significant topic of discussion. I will go into more detail on on that on the tax credits and, and monetization and financing of those credits momentarily. Transmission infrastructure is very important for renewables, most renewables projects, wind and solar in particular, are constructed in rural areas. So particularly large scale projects require a lot of physical land to construct, a utility scale wind project could very frequently utilizes somewhere between 10,000 and 40,000 acres. So understandably, in order to find that, that land mass, you have to get out into the country. But the further away you are from the load, effectively, the demand for the power that is, that is to be generated from that facility, the more limited you are in terms of getting the power from your facility out of the location where you're creating it, and into the metropolitan areas and, and other, predominantly, you know, bigger cities where that power could actually be consumed. So the more investment that's put into transmission, and allowing for the freer flow of electrons, certainly would drive additional investment in, in renewables and, and help with things like grid stability and generation, other resource, other generation resources as well. Trade policy and tariff have an impact on renewables and many other industries, but in particular, most of the wind turbines that are manufactured and deployed in the US, they're, they're actually built predominantly overseas. So most of the wind turbines are generated, sorry, produced somewhere in, in Europe, for the most part, much of the solar panels that are deployed here in the US are manufactured in Asia. And so when you're talking about steel tariffs, or tariffs on on products from China, that creates incremental cost, of course, when you, when you purchase those and deploy them in the US. And, and those, those, those costs in turn drive up the, the price that's needed to pay for that, that new resource, and ultimately the cost of the energy it produces. FERC, which is the Federal Energy Regulatory Commission, has jurisdictional oversight over all interstate transmission of electricity in the US. They, from a policy perspective, because they oversee organized electric electricity markets, the different policies that they adopt or could promulgate certainly could have disparate, either positive or negative impacts on different generation resources. So it's a, it's a, it's a complicated and nuanced area, but I mentioned it only because if you continue to pursue an interest in, in electricity markets, or renewables in particular, it's a, it's a topic that you, you will see arising again and again in multiple contexts. I've listed here, again, I alluded, I alluded earlier to the fact that I'm focused on utility scale wind, onshore wind, and solar. But I, I would be remiss not to mention some of these other resources as well, these other renewables opportunities, which each individually are not necessarily, you know, having the order of magnitude impact that onshore wind and solar is having in terms of, in terms of, you know, projects that are currently be being constructed, or, or envisioned over the next near term, several years. But over the longer term, and in aggregate, these other renewables resources certainly will be a driver for renewable expansion in the US. And, and as I said, I can, I can speak to more particulars on any of those subjects in the Q&A. Finally, I listed here, carbon tax, or cap and trade program. These tend to be not well supported, legislatively, at the federal level. So, either one of those program types of programs would have a very profound impact in terms of opportunities for, for building out a more renewable generation. They don't seem like a political reality, again, at the federal level currently, but that could certainly change over time. It's interesting to me to note that as part of President Biden's infrastructure plan, he did not include any sort of reference to a carbon tax or cap and trade program, although they have been deployed in certain states within the US. So now, I wanted to walk you through the way that I think about individual projects that we, that we work on and the sequence, sort of the sequencing and, and inputs into those projects and, and determining their, their viability and how best to construct them and, and implications in terms of long-term ownership. So there's three phases that are reflected here in blue. And again, this is just the way that I like to think of the way the, the way one of these renewable projects breaks down from a work standpoint. The first phase is development of feasibility. Do I, can I actually cobble together the, the foundational components of a project in a way where it will be ultimately financeable? It will be at a cost to a, an ultimate purchaser of the power and the other after attributes that I'm, that I'm going to generate that, that is achievable. In other words, there will be a, an interested buyer at the price I'm offering. Will it be financeable? Whatever sort of financing I'm seeking and I'll delve into those momentarily. What are the considerations around construction? Whose wind turbines or solar panels am I buying? What are the operational characteristics of those turbines? How do those things comport with the location that I'm choosing for my project? All interrelated questions that have to be considered, you know, largely simultaneously. So, so one other note before I progress, I'm depicting here in these yellow boxes under the feasibility phase, this sort of sequential move from land control to permitting design interconnection. In reality, all of these things are going on largely simultaneously in early project development. Your, your primary concern, of course, with any project that you're building is where am I going to put it? Land control is one of your foundational considerations and community support for the project you're trying to build is paramount. Most of these wind and solar projects operate under long-term leases with the landowners. And part of the, you know, determining the viability of your project is, of course, what sort of lease rates you're going to pay to those landowners. That, that of course is going to inform the support that you get from the community because if you have landowners who are excited about you building the project there, they will be able to influence other people in the community to similarly support the project. Your location, your project location has a direct impact on your energy estimates. So depending on how frequently and how strongly the wind blows or how, how sunny it is in the particular location for your project, that is going to directly translate into the amount of power that you're expecting it to produce. Wind and solar are, of course, they're variable resources. That's one of the, the things that, one of the biggest gaps, I think, from many people's impression about renewables is that they're, they're unreliable. There's no question that those resources are variable and something like developments in battery storage technology is going to no doubt help bridge that gap. Over the long term, energy output in terms of the wind and solar capabilities of a project is fairly predictable, but of course, in the short term, it's variable. Part and parcel of that community support that you're trying to garner leads you to permitting considerations. Almost every project will have some sort of county level permitting, unless you're in Texas. It's one of the few states where you don't really deal with site permits in the same way you do in the rest of the country, but almost anywhere else in the US, you're looking at, they typically are called conditional use permits. So again, you're looking for that community support, you want the county board members to be aligned behind your project. And this is really where a lot of consideration begins in terms of cost and timing for your project. So the permit that you're seeking and the timeline in which you hope to obtain it is going to be a critical component as you move through these other aspects of the feasibility phase for your project. Somewhat tangential to permitting, but also relevant, are things like environmental site assessments. So for example, are there some sort of hazardous waste or pollution effects in the land control area for the project that need to be taken into account? They also could include other environmental impacts, such as to threatened or endangered species or habitats. If you build a project without properly accounting for a protected golden eagle, for example, or a California condor or a desert California desert tortoise, and you end up injuring one of those, one of those protected species or their habitat, you could have the federal government effectively shut your project down. So you want to be out in front of those considerations thinking about that in advance. So while your land control and permitting is going on, you're starting the the area of your project begins to take shape. Now you're starting to think about the actual design of that facility from from an electrical and and civil, you know, structural standpoint. You are also beginning to think about interconnection, which is essentially how you are going to get the electrons that are generated by your project connected to the existing electric grid. That ties back in many ways to the land control and siting discussion because interconnection costs, in other words, building a new transmission line to get power from a sponsor's generating facility to the existing electrical grid oftentimes can be north of $1,000,000 a mile. So, you know, a fit a project that is 50 miles away from the existing grid is going to have a huge extra cost associated with that new interconnection. And so the closer you can get your project to the existing grid, the more, you know, the less cost you're facing. Part of the interconnection process involves grid studies. Those look at in terms of the actual grid operator and the owner of the transmission lines that you're trying to interconnect to. What impact is your new facility going to have on the stability of the grid in the area where you're interconnecting? There will be studies around actual construction that needs to be done at the location in the grid where your project is interconnecting. And depending on, again, some of those stability considerations, there may need to be other upgrades to the existing grid to enable the full output of your new project to be utilized on the on the larger grid, the larger system. There again, timing becomes an issue because if upgrades need to be constructed, you need some, you're looking for certainty in terms of not just the cost, but when those upgrades will be available and how that lines up with when you're actually intending to start delivering electricity from your project. Those four elements, as they begin to take shape in a, typically a preliminary or intermediate fashion, so in other words, you're still working on all these items, you are beginning to think about what is really the most critical component of any renewable wind and solar project, which is your power purchase agreement. And this agreement can take several different forms that I'll speak about momentarily. But this is your primary revenue generator for your project. It's without a power purchase agreement or offtake agreement, as they're sometimes called, you will have a very hard time finding any sort of construction financing or tax equity financing for your project. So the terms, the existence of that contract is, it can't be, the importance can't be overstated. Again, the conversation around the power purchase agreement is largely driven by who the buyer of the power is going to be. And at what price. So as you're thinking about these costs for land control for permitting for interconnection. And then you start to reach out to suppliers of the wind turbines or solar panels that you're looking to construct and actual construction companies who will put that equipment together for you. You're getting cost estimates from these suppliers and contractors. You're taking into account the other construction and long term operating costs for the project and you're arriving at a price that you can offer to a buyer of the power. And without the right price and the right customer. And the right timeline for your project in terms of when you expect to reach commercial operation for the project. And what sort of production profile the project will have. What sort of assurances you can give your your your PPA or off taker buyer about the amount of electricity to be produced. All of those things are really going to drive whether or not your project actually will ever be built effectively. So. Just a few words on a few types of financing that are worthy of consideration. I listed here equity slash working capital financing as something that some developers will see during the development phase of a project. There's not a great deal of discussion around, you know, or what I'll call early stage equity financing for most wind and solar projects that are built in the US. There's not a smaller developer, maybe not very well capitalized so you know it's a sort of a mom and pop operation they come up with the idea for building a wind project. They get support from some of the local farmers or ranchers that live in their area, they can start to put together some of these basic building blocks for the project. But the cost on the you know, in this development phase tend to be in the. You know, in the millions to 10s of millions of dollars, which is relatively small compared to the aggregate cost to build. An entire project so you know, a smaller developer might go out and seek what I think of as effectively sort of a venture capital financing. So you know, a lot of capital investors who are dedicated to investing in renewables projects, that may be one source of capital for the project, but by and large, most of the projects that are built in the US today. Are being built by developers and sponsors who are sufficiently capitalized that they don't need to rely on on this sort of early stage equity financing. So, once you get to a point where again, your land control permitting all these building blocks and your power purchase agreement are taking shape and. You are advanced in your negotiations in terms of your suppliers and your construction contractor you're then ready to start thinking. You've been thinking about this already for quite some time and probably negotiating it already. But you may see construction financing. There are banks around the world that focus on lending construction lending for renewables projects. They are very sophisticated about the different pitfalls and and due diligence items that they will want to focus on before they're willing to lend funds to construct your project. So they will want to assess all of these projects. So they will want to assess all of these project inputs and the terms associated with the supply and construction of the projects to ensure that they have, you know, are as they've been de-risked effectively to the maximum extent possible. And to the extent there are any risks that the sponsor is bearing that the sponsor, in fact, has the financial wherewithal to nevertheless see the project through. So construction costs overruns, for example, they will be expecting the sponsor to scoop up, you know, sort of clean up whatever mess may have arisen unexpectedly during construction to see the project to fruition. So construction lenders will take a lien on the project assets as collateral in the event something goes wrong and and the sponsors unable to repay the construction loan. There are a ton of third parties that are involved in construction loan. They they vary from insurance consultants, of course, lawyers helping negotiate the loan conditions, providing legal opinions. They're environmental consultants, a lot of third party subject matter experts being brought to bear through what for these lenders is it, you know, a pretty prudent typical underwriting process they undertake. Once you've got your construction financing in place, then you get to what what the industry term for most capital intensive project, you know, large infrastructure projects. You get to what you're what what is referred to in your construction supply contracts as a notice to proceed. That is the point at which you are effectively telling your suppliers and your contractors, I'm ready to go build the project based on the agreed schedule and timelines that we've negotiated. So, please go do everything that you need to do spend whatever money you need to to to to manufacture what i'm buying you or actually put people into the field to to do the civil work. The roads pouring foundations, you name it, the notice to proceed is sort of the point of no return effectively in terms of what you're expected to to do to to bring the project to fruition. So, tax equity financing i'll talk a little bit more about in a moment it's this in my experience tax equity financing is unique to the renewables industry in the US. Again, again, primarily wind and solar a lot of the underwriting that goes on from a tax equity perspective is similar to construction lender, but the tax equity investor is very focused on the potential tax attributes that will flow from the project and. And. And i'll just i'll get into a little more detail on those tax attributes in a moment when you get to commercial operation now your facilities fully constructed you raise deliver electrons on a regular basis. What usually happens with your construction debt is your tax equity financing will fund around the time of commercial operation so you'll get the money from that tax equity financing you'll use those funds to pay down your construction debt. And then you will convert the remainder of that debt. And then you will convert the remainder of that debt. To a long term. Lending facility, essentially. The term of that term debt will roughly coincide with the link of your power purchase agreement, and it is effectively, you know it's a way to use borrowed money to help maximize the sponsors returns. So that's a high level overview on the project lifecycle again we're going to revisit a few of these topics in more detail. In terms of and you know each individual renewable project each wind and solar project that a sponsor is contemplating construction constructing again the most critical drivers economically are these offtake agreements these power purchase agreements. The federal tax credits they're called itc investment tax credits for solar projects and production tax credits for wind projects. Again, I'll get into more detail about those in a moment. Renewable energy credits is another, you know, attribute financial attribute effectively that is created by renewables projects so for each megawatt hour of electricity that is generated from a wind and solar project. Renewable energy credit is created along with that electricity the these wrecks are they are can be separated from the the electricity that creates them and they can be separately sold there various markets around the country where they these credits are traded and retraded. Renewable energy credit is the value of these credits is derived largely from those who want to demonstrate that they have paid value they've effectively contributed through a purchase of those wrecks to the generation of power from a renewable facility. Most important for most CNI customers, for example, is the wrecks that they are purchasing from a wind and solar generation project. And I'll explain that in slightly more detail as we get down to talk more about the sponsor agreements or offtake agreements. There are other other what are known as Ansley services that can also create some some financial benefit to sponsors. There in some states there are state tax credits as opposed to federal that a sponsor can benefit from tax abatements. But all of these other items from a pure financial impact perspective are relatively small compared to the offtake agreement and the federal tax credits. So now in terms of these different offtake agreements and the types of offtake agreements that that are available for or available to a renewable generator. 10 years ago, almost all these power purchase agreements were what we call bus bar PPAs effectively it was sale of power from the project and and wrecks to a utility traditional utility buyer that utility would acquire those electrons. Once they hit the hit the grid effectively, they were long term fixed fixed price contracts. 10 years ago, they were were and continue to be a very attractive revenue generation resource for renewables projects, but they were seeing less and less of these in the marketplace as as PPA buyers become more more sophisticated they demand more exacting terms in their power purchase agreements. 10 years ago, and so, while occasionally you still will see some of these long term fixed price power purchase agreements you're also seeing you know many other variable. 10 years ago, many other offtake arrangements with much more variability in terms of the revenue certainty that they offer and so one example. 10 years ago. 10 years ago, you really never heard or saw commercial customers. 10 years ago, you really never heard or saw commercial customers looking to procure or enter into one of these virtual PPAs with a renewable generator. What is enabled that it's the precise structure of these contracts that allows for that interaction between a commercial customer and a renewable generator and that in particular ties to the fact that these are financial contracts. So they're not a purchase of the physical electricity or electrons that are generated by the sponsor, but rather, they are a what we call a fixed for floating financial settlement contract. 10 years ago, and without getting into too much complexity effectively a PPA a virtual PPA buyer corporate and industrial customer agrees with a sponsor to pay a set dollar per megawatt so a fixed price. for the electricity that the sponsor generates they don't but they don't actually buy the power they're just paying a fixed dollar per megawatt price. [00:42:19] Speaker ?: In exchange. [00:42:20] Speaker 2: The sponsor agrees that. In the future. If the price that the sponsor receives based on selling the actual electrons of the project into the market. higher than the fixed price that the PPA buyer is paying then that overage that excess revenue goes back to the virtual PPA buyer so it's a it's a tool that effectively allows. These commercial and industrial customers to create a ceiling on their they're going forward electricity prices. When it all the while they're actually procuring their electricity needs from their local utility. Another somewhat somewhat analogous offtake agreement is a commodity hedge these have some similarities to these these virtual PPAs. But they come in a lot of different shapes and sizes, and they are much more like a traditional commodity hedge effectively short term. And you're dealing in that case with energy trading counterparts so. Companies that are in in the business of buying and reselling electricity for the most part and financial derivative products so it's it's a slightly different product. But the commonality between a commodity hedge and a virtual PPA and a bus bar PPA what you're looking for is long term reliable revenue streams. That form the foundation of a financing investment decision by a. By a group of lenders that might be providing construction financing and similarly from a tax equity investor who's willing and considering investing in your project as a as an equity. Now a moment on tax equity financings. One of the answers most project developers for wind and solar projects do not have tax appetite. What that means is effectively, there are certain tax attributes that are generated by renewables projects. I mentioned these investment tax credits for solar production tax credits for when there are also depreciation benefits associated with the components, the equipment that is installed. Sponsors do not have sufficient taxable gains to be able to fully utilize the value of those tax attributes. So what has evolved over the last number of years more than 10 15 or 20 years is a particular type of fake financing known as tax equity. So a third party investor who does have tax appetite and these are traditionally. Imagine banks or insurance companies very profitable institutions have a desire to reduce or minimize their taxable gains and they can do that by co investing in these projects with a sponsor or developer. Providing the sponsor or developer cash up front in exchange for their equity investment and then in return receiving from the sponsor. The disproportionately large amount and value of the tax attributes that are associated with the project. So it's a symbiotic investment in so far as you get a tax equity investor who's sort of maximizing their tax position. You've got a sponsor who has tax attributes that it cannot utilize and and so they're turning, turning those to. Their own needs effectively to help finance future costs. These different tax credits. Devolving this the particularities of each. Are our very nuanced and very IRS tax compliance driven. The probably the biggest takeaway from this slide is that those existing credits are being phased out over the next several years under current law. However, part of President Biden's infrastructure plan is a potential extension of those credits for for I think he proposed 10 years into the future. It could be could be longer or shorter. The last slide I wanted to speak to quickly is is this is from the energy information administration, so the US government effectively. These are projected, so I will say the one consistent thing about projections is that they're wrong, maybe one way or the other. So, so you know they're these these outcomes could be much greater or much smaller than projected but here you see as of 2020. Renewables in green here is represented 21% of the total generation mix in the US natural gas was at 40 and then nuclear and coal and that's projected by 2050 to increase to 42% for renewables. And then within that subset of renewables, you can see here that, you know, to a large extent you're looking at hydro electric, but most of the new generation here is coming from wind and and solar. So lots of opportunities for growth, so lots of opportunities for growth, by the way, I have not seen anything that I don't I don't think these projections are reflective of President Biden's infrastructure plan. I think they would look vastly different, of course, if that plan was implemented, but that will have to be determined, of course. [00:48:45] Elizabeth Wilson: Josh, this was just super. I'm going to watch this video three or four more times and and really try and understand some of the nuances that that you've pulled out. And I have to say I really appreciated your you're helping walk us through these different phases of the developer and understanding the roles of the sponsor and then the that the generator as you went through. We have a couple of questions that were submitted before and a few in the queue and let's go through them. And one of the ones that i'm always interested in is within the United States. How does project financing strategy change between states are projects that span multiple states feasible and I guess what are some of the challenges and I appreciated your your play on the Texas and kind of the different, you know, land control components and how that might vary transmission access components and how that might vary. So if you could speak to just the different state by state, that would be wonderful. And in addition to that, just how that's changed over your career, because I realized that places that were easy at the beginning are impossible now and vice versa. [00:49:51] Speaker 2: That's right so so the state and even the county to county variations that you see. That can create very different potential outcomes for a project so by way of example. Is not will come to as no surprise to anyone that a lot of people. When they find out that a new wind generation facility is going to be built in their county. And they find out that you know the average height of each of those wind turbines is going to be somewhere between 350 and not quite 500 feet tall. And they moved, you know, it's a family homestead that they've owned for generations or they moved to the area because they love the sunsets and the vistas. There are certainly places and and and and you know as landowners they're absolutely entitled to take these positions there's some places that do not support new wind projects right or solar projects and. One very effective way to deter new renewables generation is by doing things like getting a county board to pass. One very effective way to get a county board to pass. One very effective way to get a county board to pass. One very effective way to get a county board to pass. One very effective way to get a county board to pass. One very effective way to get a county board to pass. One very effective way to get a county board to pass. One very effective way to get a county board to pass. One very effective way to get a county board to pass. One very effective way to get a county board to pass. One very effective way to get a county board to pass. One very effective way to get a county board to pass. One very effective way to get a county board to pass. One very effective way to get a county board to pass. One very effective way to get a county board to pass. One very effective way to get a county board to pass. The turbine that you build cannot be located anywhere within, let's say, 400 feet of or 500 or 1,000 or 1,500 feet from any other existing structure, a dwelling, a road, anything. And ostensibly, it's for safety reasons, right? The county says, hey, you know, we want to make sure if the turbine falls down, right, it's not going to kill anybody, it's not going to fall into traffic. And those are certainly, safety is our number one concern. But what those requirements do in certain parts of the country is effectively, you can't build your project. You can't build anywhere and comply with those requirements. So certainly, county to county, the viability of a project is highly dependent on, again, that community support. Different states, I think I alluded to the fact that there, some states have state production credits that they offer, tax credits, effectively. Those tend to be pretty nominal in the grand scheme of things. So there's not a ton of variability in terms of, you know, can a project get or obtain financing if they're in California versus Texas. But the amount of underlying work that has to go in to make the project viable will vary significantly, depending on which state and, you know, local county and municipality where you're building. [00:52:57] Elizabeth Wilson: Transaction costs. [00:52:59] Speaker 2: No doubt. [00:53:00] Elizabeth Wilson: Yeah, I mean, it's really interesting, because so often we think about the technology and the cost without taking into account the cost of those delays, the transaction costs within the permitting and citing and, and build prospects as well that from a developer's perspective, can make or break a project, I'm sure. [00:53:15] Speaker 2: Absolutely, yes. Yes. [00:53:17] Elizabeth Wilson: Another question that we had here, these two actually fit together. One of the pre submitted was from one was from David Pearlman on project finance for large energy projects began its lifecycle in the 1980s, when most project sponsored developers were entrepreneurs who had limited capital, limited tax credit deduction capacity. With the project sponsor world moving towards large companies such as EDF, how do you view the trade off between the complexity, labor intensity and high transaction costs associated with project financing versus using traditional corporate financing to fund new project construction. And something that you address before that I want to just link on to this is the future of small 150 to 500 kilowatt really small community solar is it still viable in the era of utility solar let's make that up to one megawatt just to give us some more running room there. [00:54:10] Speaker 2: Sure, so so so. To the earlier question. So financing finance there's no question that that not all financing are created equal and the cost of capital that is being utilized is going to make a big difference in terms of whether or not. And an individual sponsor actually thinks some forms of financing are worthwhile construction financing is a very good example it tends to be very expensive. So these. You know these syndicated lenders they take they. They look at ease like they look at you know every other investment that they make they take they take significant fees. Just for making the loans on the front end right they charge you know fairly exorbitant interest rates. The other difficulty with construction financing is that you're financing before you are actually building anything while you're still working on putting together those building blocks for the project. So there. There are many more gaps that need to be filled before you are really can sort of look your lenders in the eye and convince them that this is, you know, you D risk the project as much as possible. [00:55:34] Elizabeth Wilson: And so it's higher risk it's considered higher risk financing that and then construction phase. [00:55:39] Speaker 2: No question, and and more expensive so if you have the wherewithal like like, you know, fortunately, EDF is in this position, we have not actually done construction financing for the last six or seven years. But just because of all those costs, it just hasn't made sense for us. Again, we're fortunate to have a balance sheet to allow us to do that. Tax equity is something that we still need that I don't see. Well, we'll see what happens with tax equity over the ensuing years as I mentioned. Many of those credits are phasing down over the next several years. Of course, if you see, if you see one, an extension of those credits for the for 10 more years, and two, if you see, for example, an increase in the corporate tax rate, which is also part of the President's infrastructure plan. Well, then now you're the appetite right of the investors goes up and there's a longer period to build projects to take advantage of it so that that could have a certainly an enhanced impact on the future for those over the ensuing years. [00:56:49] Elizabeth Wilson: No, and I appreciate that. I mean, Felix Mormon, who's a professor down at and in Florida was talking a lot about how it was essentially three banks with the tax appetite to kind of finance everything. And his point was in about 30% of the production tax credit goes to these three big banks. And, you know, it's so basically it's a finance subsidy sector was his kind of critique of the production tax credit. [00:57:13] Speaker 2: You're speaking about some very important partners of ours, Elizabeth. So, yes, I'm a professor. [00:57:19] Elizabeth Wilson: So, you know, I can say whatever nonsense I want. I can confirm that. Yeah, I think that's right. I think that's right. And so one of the questions again from Jack Robinson, and I've got one from Catherine Webber as well, and then I'm going to leave you with your big thoughts. But one was, again, that cost of capital and how you adjust it for risk. And is that done in the pricing of the PPA? And the other is something that you and I talked about a little bit before we came on screen, and that was kind of what the future developments and revenue streams will be. And Catherine Webber asked, do you think that ancillary services, particularly in forward capacity markets, but I think we can add all of the other ancillary services as well, will become more important revenue streams in the future. For instance, there are several offshore wind installations being built that are as large power plant and could provide these services. I know within the European context, that's a big part of some of these offshore energy islands that they're talking about in the Baltic and North Sea. [00:58:13] Speaker 2: Sure, and capacity. So the biggest, and I'm not an expert, a capacity expert, and I have not delved into much of our offshore work, although, as alluded, there's a lot of deployments going on historically and coming online in offshore Europe. But the problem that I see with capacity is when you're when you're when you are paying when you when a market is is incentivizing capacity, what the market is counting on and the regulator, you know, the system operators counting on is that when it calls upon you to generate, you will be able to show up at that time. But the complexity is the complexity is the variability of renewable generation so there are places. The PGM market, for example, where all generators are, you know, they must operate or contribute to certain aspects of their capacity markets. But it's not a great setup. What really solves or sort of bridges that gap in my mind is storage, right? If you can you can couple storage with your variable resource, then yet then now you do have a generator with capacity attributes, you know, to be called upon when necessary. So there's value there. So there's value there. But the ways in which these markets evolve and what they monetize and what they don't is so disparate. The market market market and it it changes constantly, constantly. [00:59:49] Elizabeth Wilson: So this is my research, right? You're you're you're singing my song here. [00:59:53] Speaker 2: Well, yeah, it's my day to day. So, yeah, trying to follow the market evolutions is is a full time job in and to itself. [01:00:00] Elizabeth Wilson: Yeah. So, Josh, we're going to invite you back in five years and check this next prediction. But if you could just put on your magic thinking hat here and help us understand kind of where you see the horizon going in this space where you see some of the big things that could flip conventional wisdom and where you see some of the big opportunities paint that picture for us. [01:00:22] Speaker 2: I think I would go back. So. All of the tech, the, the, the credits, the tax incentives, those sort of, of, of, of drive, you know, drivers is the expression I kept using are wonderful. And there's nobody in the, in the renewables industry who, who, who would, you know, who would wish those to go away. But the fact of the matter is the precipitous decline in the cost of these resources is really sort of wiping away. So many other considerations now. So such that you're seeing, you don't even really have to talk to people, you know, some traditional utilities, for example, as potential customers, you don't have to talk to them. They don't care about environmental benefits, CO2 reductions. They don't, what they care about is the lowest cost source of power for their customers. And that there has to be a bottom somewhere in terms of those cost reductions, but we've not seen it yet. And, and so I think you're just going to see a bigger, bigger market share for renewables going forward. And I, I don't, again, battery and storage is sort of the missing link that I think helps solve the, the grid stability puzzle. And I think we'll see, you know, two to three times the growth in the, in solar deployments than in wind, again, because in the not too distant future, probably solar will become more inexpensive than wind. And, and, and, and so, you know, the demise, I think of conventional power is, is maybe too, too happily predicted by some in the renewables energy. I think we're going to see natural gas around for, for quite some time. But the bridge to an energy transition, I think the foundation is being laid now, if some form of President Biden's plan passes, even if it's not nearly as ambitious as, as what was presented. It's just going to continue to accelerate the expansion of our, our market and our industry again, because we're really competing on price more than anything else now. [01:02:45] Elizabeth Wilson: No, I, I sure appreciate this conversation. Everyone knows that I cut everyone off on time and I let you go five minutes longer, which I never do. So I, I really think this is important for all of us as we get ready for investing in an energy futures conference. But I want to talk to you also about what this means in a global market and get your reflections on Texas. So we'll be sure to have you back if you're willing. I would love it. And thank you so much for being part of this conversation and have a good rest of your week. And I know I've already been getting little texts about, is this going to be available online? Yes, it will be on the YouTube channel and we'll flip to upcoming events that are happening now. And Josh, thank you so much. This is really fantastic. [01:03:22] Speaker 2: Thanks for having me. Yeah. [01:03:24] Elizabeth Wilson: So everybody have a good rest of your day and we'll see you next week. Bye bye.