The Biden administration has gained legislative ground in its efforts to rebuild US infrastructure and overhaul the country’s energy mix. Felix Thompson speaks to Dennis Wamsted, energy analyst at the Institute for Energy Economics and Financial Analysis, about the potential corollary opportunities for companies involved in renewable energy projects and related supply chains, as well as those that finance them.
Towards the end of last year, after months of political wrangling, the US Congress approved the much-vaunted US$1tn infrastructure bill, handing President Joe Biden a major legislative victory.
Alongside the president’s Build Back Better legislation, which as of press time is yet to be passed by Congress, the infrastructure package is seen as a key part of the administration’s wider efforts to turn the US into a clean and renewable energy powerhouse.
The infrastructure package includes substantial funding for road, rail and port projects. But it also has over US$70bn earmarked for clean energy purposes, such as building half a million electric vehicle (EV) charging points.
Should the Build Back Better act be passed into law, its framework also includes more than US$550bn in funding for clean energy, and would offer manufacturing credits for sectors such as solar and wind.
“We’re going to get off the sidelines on manufacturing solar panels and wind farms and electric vehicles with targeted manufacturing credits. You manufacture, you get a credit for doing it. These will help grow the supply chains in communities too often left behind,” Biden said in a speech in late October.
He added: “That means tens of millions of panels and turbines, doubling the number of electric vehicles we have on the road within just three years. And we’ll be able to sell and export these products and technologies to the rest of the world.”
GTR speaks to Dennis Wamsted, an energy analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), to get a better sense of the impact of the White House’s renewable energy push on global supply chains – and what it might mean for the banks who finance them.
The IEEFA is a US-based non-profit with dozens of analysts examining matters related to energy markets, trends and policies globally. Wamsted, who has covered energy and environmental policy and technology issues for the past three decades, largely focuses on developments in the US.
GTR: Comparing the US to other countries globally, how developed is its renewable energy sector?
Wamsted: China is obviously the dominant manufacturer and player across all renewables. But the US is on top of what you might call the second tier. We already have an enormous amount of installed wind and solar capacity: at the end of September 2021, the US had more than 126,000 megawatts (MW) of installed onshore wind capacity and some 54,000 MW of solar. But what’s really impressive is the growth that’s about to happen. Standard & Poor’s is forecasting that 44GW of solar and 27GW of wind capacity will be installed across the US in 2022, which would be a record year by some distance. Five years ago, you never would have thought that was possible. Projects get delayed a little bit, and circumstances can shift from one year to the next, so potentially these forecasts might be revised down. But without a shadow of a doubt, there is going to be a significant increase in solar and wind installations in the US – which will be helped in part by favourable federal government policy, as well as efforts by businesses and state governments.
In the US, there are two bills which could potentially help accelerate efforts in the renewable energy space. One is the infrastructure bill, which is more geared toward traditional infrastructure, such as roads and airports, but it also includes quite a lot of funding for clean energy initiatives. For instance, there’s a very large amount of money in there to build up the EV battery supply chain in the US. There’s also money for hydrogen manufacturing development. Nonetheless, the bulk of the clean energy funding is going to come from the so-called Build Back Better legislation.
GTR: How will the president’s bold ambitions for renewables impact companies operating in domestic supply chains, as well as those further afield? China is a dominant player in the solar sector, while European firms are major developers of wind. Will the infrastructure bill – and the wider renewables push – shake up the market and transform the US into a leading manufacturer in the sector?
Wamsted: One of the big and new developments in the US is offshore wind. European development has lowered the cost of offshore wind significantly, and now the US is muscling into the game. The administration’s goal is to build out 30,000MW of offshore wind by 2030, so we will likely see an enormous ramp up of offshore wind in the next 10 years. The US only has two very small commercial projects in operation, but this is about to change. Ground-breaking for the country is the first large scale offshore wind project, Vineyard 1, an 800MW facility off the Massachusetts coast, where development started in November 2021. The federal government also recently approved permits for a second large project. While the timing is always somewhat uncertain, developers are aiming to have more than 10,000MW of offshore wind capacity online by 2026.
From a supply chain standpoint, the Biden administration has laid out a clear intention to grow manufacturing capacity in the US, and there is a strong effort to encourage union labour in the build-out of the offshore wind industry, especially along the eastern coast.
Siemens Gamesa’s October announcement that it would build a turbine blade finishing facility in Virginia is a concrete example of the economic impact that the development of the offshore wind sector will have in the US. The US$200mn facility will be the first offshore wind manufacturing plant in the US, but it almost certainly won’t be the last. As the market develops, manufacturers are certain to expand their local manufacturing capabilities.
On the issue of solar, there have been efforts to boost the US’ share of solar manufacturing in recent years. But the market is dominated by companies in China and Southeast Asia, and I do not foresee these supply chains changing significantly.
GTR: In other parts of the world, banks, export credit agencies and insurers have ramped up support for renewable energy projects in recent years. In the UK, the Dogger Bank wind farm financing signed in 2020 involved nearly 30 commercial lenders and three export credit agencies. Do you expect Biden’s renewable energy push will drive similar opportunities in the US in the coming few years? Which types of financial institutions do you envisage being involved?
Wamsted: The easy answer is that it’s going to be every bank and every financial institution in the US, because that’s where the money is.
There was a fascinating analysis released by Goldman Sachs recently, showing that the cost of capital for a fossil fuel project was over 20%, versus the cost of capital for renewable projects of below 5%. That spread will help drive a change in a lot of financial institutions’ decision making. Renewable projects are relatively low risk and have stable returns, which is a recipe for financial success. Fossil fuel projects, on the other hand, face increasing risks and uncertain returns. Given that, the decision is pretty straightforward. Banks and financial institutions are abandoning the fossil fuel sector while seeing growing opportunity in renewables.
The offshore wind projects under development in the US are likely to follow the example set by Vineyard 1, the Massachusetts project being developed by Avangrid and Copenhagen Infrastructure Partners. Financing for the US$2.3bn project was announced in September 2021 and included a consortium of nine US and international banks. I don’t foresee there being a need for export credit agencies, which tend to get involved where there isn’t a robust, private market.
GTR: Biden has also sought to secure ‘critical’ supply chains, including semiconductors and batteries for electric vehicles. To what extent will these supply chains offer opportunities for US companies?
Wamsted: Critical minerals have been an issue in the US for the past five to 10 years but were previously not a number one priority. Now there is a clear push to ensure the US has access to sufficient supplies of materials such as lithium to meet the rapidly growing needs of the electric vehicle and stationary battery storage markets.
There are two interesting developments underway. One is a proposal to build a mine in Nevada to tap into one of the largest lithium resources in the world. Dubbed Thacker Pass, the mine could potentially produce 60,000 metric tons of lithium a year. But the proposal is controversial with local indigenous communities. Whether the developer will be able to tap the full potential of the reserves is certainly in question. There’s also another area in California, where project developers are looking to draw lithium from underground through geothermal resources. Although it’s unclear whether the US will be able to produce 100% of its supply needs domestically in the next five to 10 years, we do think there will be an expansion in local production going forward.
GTR: What impact could the infrastructure bill, and the wider renewable energy push, have on the US’ oil, gas and coal industries? Do you expect the country’s energy mix to change radically in the coming years?
Wamsted: The growing use of renewables is going to drive a huge transition in the US electricity sector. Hydro, wind and solar currently account for slightly less than 20% of the US electricity mix, but this will rise sharply over the coming decade. It likely will be over 30% by the mid-2020s and much higher by 2030.
One of the things we track closely is the abandonment of the coal industry, where there are now more than 175 financial institutions around the world that will no longer loan money for coal growth, whether that’s a mine, or a new coal plant, or a refurbishment of an existing coal plant. The same thing is happening in the insurance industry, where coal companies can’t get insurance.
We are going to see a similar transition for oil and gas development over the next decade, where financial institutions will say: ‘There’s more money to be made at a much lower risk in the renewable sector, so that’s where we’re going to put our money.’ It is already starting to happen now in the oil tar sands sector, where an increasing number of lenders will not lend money for exploration.
Offshore wind financing gathers pace
As detailed in a July 2021 report from law firm Orrick, financing opportunities across the US’ offshore wind sector look set to rise.
Efforts to construct a number of large offshore projects have been making “rapid progress” over the past two years, it says. The firm adds that the Biden administration provided a “tremendous boost” to the US offshore wind industry when in March 2021 it announced a string of actions aimed at increasing offshore wind capacity in the coming years.
In one such example, the White House designated a priority area for offshore wind off the coast of New York, which is forecast to support up to 25,000 development and construction jobs. Lease sales are projected to take place by early 2022.
Against this backdrop, Orrick says that dozens of major lenders and tax equity providers – more than 50 of them – have expressed interest in financing offshore wind in the US.
“This includes numerous European lenders with offshore wind financing experience and who will likely be a driving force for offshore wind financing in the United States,” the firm says.
The first major offshore wind development, the Vineyard wind farm project, arranged financing in mid-September. Construction is due to start off the coast of island Martha’s Vineyard in 2022 and the plan is to start delivering electricity sometime next year.
Bank of America, BNP Paribas, Crédit Agricole, JP Morgan, MUFG, Natixis, NatWest and Santander are the banks raising approximately US$2.3bn in senior debt to finance construction of the project, which is a joint venture between US firm Avangrid Renewables and Denmark-headquartered Copenhagen Infrastructure Partners.