Episode Transcript
[00:00:00] Speaker A: We don't view clean energy as going away. In fact, I feel like it's still getting started. In some senses. We're going to need it into the future. And so the companies that can weather this storm right now are going to be the ones that are better off on the other side and become the market leaders in their individual spaces.
[00:00:16] Speaker B: Welcome to the Next Imperative, a podcast hosted by A and M energy leaders tackling key issues and trends in the industry.
[00:00:27] Speaker C: Hello and welcome back to the Next Imperative. I'm Jeff Angulo, your host and moderator. Over the past 10 years or so, global interest in clean energy has grown exponentially and that's driven tremendous technical innovation and investor activity. Although global interest in clean energy remains strong today, macroeconomic factors are shifting and that's driving changes in the industry.
Join me today for a conversation on the current landscape in clean energy. Clean energy thought leaders Mark Ricevich and Brett Bergenau. Gentlemen, welcome to the Next Imperative.
[00:00:59] Speaker D: Thanks, Jeff.
[00:01:00] Speaker A: Thanks, Jeff.
[00:01:02] Speaker C: Mark, can you get us started, give us an overview of what's going on in clean energy. Last 10 years it's kind of exploded on the market and has really grown tremendous in leaps and bounds. What's happened and what are the factors at this point?
[00:01:13] Speaker D: Yeah, great, great question. Obviously, thanks for, thanks for having me and Brett on today. You know, as, as we think about this space, it's gathered a lot of interest both within A and M and then more broadly across the market as people are focused on what's really driving distress and clean energy. And as I think about that, I think it's important to start with reflecting back on what's the really the sheer quantum of capital that's flowed into this space. So as you think about the timeframe of 2015 to 2023, we've had roughly $11.7 trillion flow into the renewable energy space. And that's a number in isolation. But as you, as you compare that to traditional oil and gas or fossil fuels, over that same time frame, fossil fuels had 9.5 trillion of investment. So clearly renewable energy outpaced by more than 25%.
And as those dollars were chasing deals in the renewable energy space, it really drove down the targeted hurdle rates or return expectations for a lot of the projects in the renewable energy space. So again, using as a comparable traditional oil and gas or fossil fuels in that space, traditionally 30% on average has been the targeted hurdle rate for investment in the oil and gas space. And on the flip side, comparatively renewable energy projects have been chased down into the upper single digit or lower double digit return rates.
And keep in mind, that's on a spreadsheet. Right. And so that assumes flawless execution.
And as we've seen, you know, since a lot of these projects have commenced, the execution has been anything but flawless. And so it never is. Yeah, it really isn't. And complicating it also is the fact that the market paradigm has really shifted. So when a lot of these projects were underwritten, interest rates were much lower than they are now. Obviously the. The Fed's raised rates, you know, in, in opposition to the inflationary environment that occurred post Covid. So that's been a headwind as financing cost expectations are now much higher than they were when a lot of these projects commenced. And then secondly, as you think about the regulatory landscape, the Biden administration had a much different view on the renewable space than the Trump administration. So Biden was obviously very friendly, very helpful to the space through things such as the Inflation Reduction act and the federal subsidies and tax incentives that came along with that. Now you have the Trump administration, which is taking a much more antagonistic view towards this space and putting a lot more pressure on it from a regulatory environment. And then lastly, we talked about the capital that's flowed into this space. Well, in the last several months, we've really seen a tightening of that capital spigot. And what that's caused is for a lot of these companies, they've now had to pivot from an era of rapid growth almost at all costs, to now focusing on what are the projects that we have under development, what are the projects that are in the near term pipeline, and how do we come at this more with a sense of cost?
[00:04:12] Speaker C: Discipline makes sense. Brett, I think it'd be helpful for the audience if you could give us a definition of what we're including when we say clean energy.
[00:04:20] Speaker A: Yeah. The way we think about clean energy is you've got wind, solar, hydro, as well as geothermal. On the renewable fuel side, you have renewable diesel as well as biomass. And under renewable diesel, you've got all the other biofuels as well. And then the other technologies include things like battery storage, everything around EV charging and its infrastructure. So EVs. EV charging, you've also got blue and green hydrogen. And the one other thing I would say is you've got carbon capture and storage. So not only are we looking at those technologies and companies that participate in those technologies, but also those that manufacture the key components that feed those technologies all the way down to the operational and maintenance or the O and M companies that service those industries.
[00:05:04] Speaker C: Great. So kind of almost full value chain.
[00:05:06] Speaker A: Correct.
[00:05:07] Speaker C: Fantastic. We mentioned recent macroeconomic shifts are driving changes in the industry. What are some of the challenges you're seeing your clean energy clients facing? Mark, maybe you start off with a talk about financial pressures.
[00:05:18] Speaker D: Yeah, no, that's a, that's a good place to start. So I mentioned the interest environment has shifted. So obviously the financing costs are much higher now than they previously were. But also there's been a shift in the mindset of some of the traditional lenders in this space. So the space is a little unique compared to others in that you have got warehouse lenders and tax equity partners that fund construction of a lot of these projects in the renewable energy space. And that funding typically occurred at the earlier stages of construction. But we've now seen a mindset shift with a lot of the warehouse and tax equity lenders where they're de risking some of their investments and shifting to focusing more on investment at the latter stages of construction. And what that's really caused is a working capital need now that's sprung on the developers unexpectedly. And so that's really put a lot of pressure on liquidity for a lot of these developers. And then as we talked about operationally, the initial expectations on things such as development costs and even maintenance costs have really shifted in that I'll just pick on maintenance for a second. As these projects mature and develop, the ongoing maintenance costs are really departing from what was initially expected in the spreadsheet. And again, another headwind for this industry that's compressing margins. But there's a myriad of operational issues and challenges that the companies are encountering. And Brett, that may be something that you can touch on.
[00:06:42] Speaker A: Yeah, I like the phrase that Mark coined earlier, the flawless execution.
What we've seen is that these cost structures are exceeding the spreadsheet based flawless execution. And a big piece of that is the first one I would say is there's immature processes and systems at these organizations. They're very spreadsheet based, which requires a lot of people. And so you've got a higher than exceed expected people cost as it relates to the organization.
[00:07:10] Speaker C: So it's not inflationary pressures, it's actual people doing the work.
[00:07:13] Speaker A: Correct? Correct. That's one piece of it. You have uneconomic contracts. So think about not only the offtake agreements, but the EPC agreements. You have uneconomic O and M ones. Like Mark just mentioned a second ago, a lot of these organizations were told to grow into profitability. And under the flawless execution, they certainly were making money or marginally making money. But now in some of the headwinds that we've already described, these contracts are underwater and they're just not working. The other thing we would say is the higher than expected O and M, which we've talked about. I'd say that finally the key equipment has been delayed as well. And so things like solar panels, blades, transformers, it's been far more difficult to get them and have visibility beyond your tier one suppliers. And this is all before the policy changes that have come as it relates to tariffs, which I know Mark has some thoughts on that.
[00:08:03] Speaker D: Yeah, no thanks.
As I think about the policy situation here, it's multi layered, right? So you've got the federal structure, you've got a state level structure and you've got corporate structures. And as we think about or observe what's going on across the various states and jurisdictions here in the United States, many geographies are now rolling back various subsidies and tax incentives that a lot of these projects were initially underwritten on. So that's creating its own pressure. And then we have touched on the Trump administration and sort of the, the view that it's taken and sort of the posture that it's taken towards the renewable space. So notably there, you know, things that come to mind are, you know, the permitting process, the construction approval process and sort of the, the general pause or pressure that's been put on blocking many of the projects there, notably in the press, you know, that I'm sure folks have seen a lot of the offshore wind projects have been front and center in terms of very publicly receiving halt work orders. And so remains to be seen what additional pressures come out. Obviously there's legislation that's under consideration right now with the big beautiful bill, the one big beautiful bill. And so I know tax incentives and subsidies are being thought of as part of that bill. And so it remains to be seen what incremental pressures may arise on the other end of that. And then separately, if you think about the, the Department of Energy, again, you know, to compare and contrast administrations, the Biden administration over the last 12 to 14 months of that administration issued roughly $50 billion of loan commitments and guarantees to companies in the renewable energy space. And now that the Trump administration has taken over oversight of that agency, they really taking a hard look in a fine tooth comb to those agreements and looking for avenues to potentially pause or exit certain of those commitments. And so that's going to create its own issues and potential capital holes on the balance sheets for many of these companies. And so, you know, when you Think about all of that from a project underwriting perspective. You know, the federal subsidies, the tax incentives, some of the DOE grants and commitments.
That's really assaulting, you know, one of the key pillars of underwriting for projects in this space.
[00:10:19] Speaker C: Just a giant snowball growing every time you turn. Brett, you know, this situation reminds me of what the upstream oil and gas companies faced it not that many years ago. And I know you and I worked with a lot of those companies, helping them through it. What are the parallels you see?
[00:10:33] Speaker A: Yeah, I think you're right, Jeff. I think this is very similar to what oil and gas went through between 2015 and 2020. And like you said, we had a front row seat there. We restructured nearly $100 billion worth of debt, working alongside management teams to really come out on the other side a stronger across the multiple, multiple organizations that we worked with. I think there's a lot of lessons to be learned here. The number one thing to me is that like oil and gas, those that take action quickly are the ones that can weather the storm, get through the other side, buckle down, and figure out a way to become the more profitable market leading in the industry.
We don't view clean energy as going away. In fact, I feel like it's still getting started in some senses.
We're going to need it into the future. And so the companies that can weather this storm right now are going to be the ones that are better off on the other side and become the market leaders in their individual spaces.
[00:11:27] Speaker C: Face your problems, don't hide in the sand. Get it, get it going and get on top of it.
[00:11:31] Speaker A: That's exactly right.
[00:11:32] Speaker C: Great advice, Mark. What advice would you give a clean energy CEO or leadership team that's watching our podcast and trying to manage through these times? What, what are some kind of high end advice or points you can make for them?
[00:11:44] Speaker D: Yeah, it's a great question. So I think where I turn to is really the dichotomy of what we've experienced with clients that have engaged what I'll call earlier in the distress cycle versus later. And so we've had the opportunity to work with folks on both ends of the spectrum. And really the key differentiator there is the degrees of freedom that exist with those that engage earlier in the process and hire advisors and engage with lenders to address some of the headwinds we've been talking about.
One of the old adages is cash is king. And as we think about this space, that's becoming true again, as much as ever, as you think about the timeframe and timeline, you've got to work out some of these issues.
More and more companies are finding themselves, you know, in situations where the liquidity Runway isn't as long as they initially expected. And so that's really one of the things that A and M historically has done a great job in working with companies is assessing the liquidity position, but almost more importantly, coming up with creative solutions to extend that liquidity Runway and restore a little bit of degree of freedom to the companies that are evaluating their options and making sure that companies can keep control of the process as much as possible.
[00:12:57] Speaker C: Give them some breathing room so they can live to fight another day. Great.
Brett, can you share some examples of issues you've been working on with your clean energy clients? What are they really focused on and how are we able to help?
[00:13:07] Speaker A: Yeah, I think the number one thing that Mark and I are getting engaged on are one, come take a look at our cost structure. Two, come look at our liquidity. And then that feeds into the third piece, which is evaluate our business plan. And that assessment, that upfront assessment, can happen in a matter of weeks. We're not talking a month type process, which to Mark's point, gives these management teams the latitude and information that they need to make the strategic decisions. From there, we dive in more thoroughly and can help re baseline a new business plan that is bankable and one that they can take to their lending group as well as do a proper profitability analysis on the different aspects of the business and determine what should we keep investing into, what are areas where we just continue need to cut costs and it'll turn around or what are things that we need to sideline for maybe a short period of time while we weather through the storm right now. So that's really the things that we're focused on and looking at as it relates to the client engagements that we've seen most recently.
[00:14:04] Speaker C: Fantastic. So there, there is light at the end of the tunnel and there's options to get ahead of the game.
[00:14:09] Speaker A: Yeah, absolutely.
[00:14:09] Speaker C: Great. Well, gentlemen, thank you very much for joining me on this robust conversation about clean energy and what the current market environment is. I think we've given us a lot and our audience a lot to think about and appreciate it to our audience, thank you for joining us. We hope you've enjoyed this conversation and we look forward to seeing you on a future episode.
Thank you.
[00:14:28] Speaker B: Thank you for listening. Make sure to subscribe to the next imperative so you never miss a new episode.
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