Transcript: Has Offshore Wind Finally Hit Rock Bottom?

This is a transcript of episode two of Shift Key: Has Offshore Wind Finally Hit Rock Bottom?

Robinson Meyer: Hi, I’m Rob Meyer. I’m the founding executive editor of Heatmap News, and you are listening to Shift Key, a new podcast about climate change and the shift away from fossil fuels from Heatmap. My co-host, Jenkins: will join us in a second and we’ll get on with the show. But first, a word from our sponsor.

[AD BREAK]

Meyer: Hello, my name is Robinson Meyer. I’m the founding executive editor of Heatmap News.

Jesse Jenkins: And I’m Jesse Jenkins, a professor at Princeton University and an expert in energy systems and climate policy.

Meyer: And you are listening to Shift Key, a new podcast about climate change and the shift away from fossil fuels, from Heatmap News. On today’s episode, we’re going to talk about what exactly is happening in the offshore wind industry. Is it hurt? Is it dying? Is it —has

Jenkins: Has it hit rock bottom?

Meyer: Has it hit rock bottom? Is it very depressed? What’s happening? And of course, we’ll share our upshifts and downshifts from the week, and I will get better at pronouncing it.

Let’s get into it. Jesse, last year was, I think it’s fair to say, a pretty catastrophic year for offshore wind, especially in the United States. That was capped last week when Orsted, which is the world’s largest offshore wind developer, announced that it was cutting 800 jobs, a little less than 10% of its workforce, and suspending its dividend — it’s not going to pay anything to investors — and it was also exiting from a number of European markets, including Norway, Portugal and Spain. And not only that, but it has cut down its kind of internal target for how much offshore wind it wants to build by 2030. It had once hoped to build 50 gigawatts. Now it’s going to go closer to 35 to 38. And what’s interesting is that Orsted, you know, not profitable last year. But that was like, entirely driven by the U.S. So it would have made $2 billion in profit last year, but it took $5 billion in impairment charges — like it would have been profitable, except for its U.S. business. And its U.S. business took it as a firm from like $2 billion in the black to $3 billion in the red.

So, Jesse, let’s just start with, I think, getting listeners up to speed. What projects did Orsted cancel in the United States last year?

Jenkins: Yes. So they actually canceled several, most recently, a pair of projects that had sold contracts to Maryland. That followed a pair of projects in New Jersey, and another that would serve New York State. So I think it’s five projects in total and a couple phases of the same project in New Jersey. And those projects all were under long term contracts with state entities. And we’ll talk a lot more about the role of the states in driving the offshore wind industry here in the Atlantic states, but they basically sign long term, you know, purchase agreements with the states to buy power at a fixed price with, you know, a set escalation schedule. And they did that many years ago or, you know, before the pandemic, before the significant surge in inflation, the cost of goods that rose over the last few years — and then, just as importantly, before the increase in interest rates that the Federal Reserve used to try to combat that inflation.

And so you combine those two things, and it’s really a double whammy. The cost of cement and steel and concrete and labor and all of the specialty equipment they need to build these offshore wind projects is skyrocketing at the exact same time that the finance costs, the mortgage they have to take out to build these projects, is going up. And all that meant that they couldn’t honor their contracts and that, you know, it’s notable that they pulled out because in each of these cases, they had to incur several hundred million dollars of penalties for voiding the contracts with the state. So it’s not just the money they sunk into the projects that may not be complete, but it’s also very significant financial penalties for walking away.

Meyer: And how did they explain why they needed to … What did they blame?

Jenkins: I think it’s three issues that they have consistently pointed to. We talked about two already. One is the cost of goods and labor, going up with inflation. The second is interest rates, which have a huge impact on these projects. They’re almost all upfront cost, right, with some operation and maintenance over time, but no fuel costs. So once you get these wind farms up and running, they’re more or less free. But you got to take out a big mortgage, right? Just like you do when you buy a house. And you got to pay that back over time. And so the interest rate that you strike for those financing costs is a big determinant of how much you can afford to sell your power at and still make a profit.

And then the third factor is a peculiar one, which is the absence of very specialized ships that are used to install these giant wind turbines. And they really don’t exist in the U.S. because we’re just starting to build our industry here. The industry in Europe that has been, you know, going for several decades in the North Sea has a number of these vessels, you know, they’re in use there. We could bring them here, but we have this law called the Jones Act, which requires any vessel that is leaving a U.S. port for another U.S. destination to be a U.S. built and U.S. crewed ship, and we just don’t have any of those yet. There’s one coming soon. But that is a real challenge logistically for any of these projects.

Meyer: And let’s just, I think, as a final point, before we go into the discussion further, why is offshore wind, like, important at all? Why, as people who want to solve climate change, should we care at all about how specific offshore wind projects off the coast of New Jersey or Maryland or Rhode Island are going?

Jenkins: Yeah, I think for I mean, a couple reasons. One is that this is a big new industry that we’re trying to kind of give birth to in the region. These were some of the first large scale wind farms. Every 3,000 megawatts of wind power out there is roughly enough to supply the annual electricity needs of about a million households. So that’s a big sized city just in New York State alone, projects that were canceled by Orsted and Equinor totaled about 3 GW. So that’s enough energy for like, Queens, you know, one of the entire boroughs, right? So these are big deals in terms of the amount of supply they’re going to provide and the the local economic impact.

And so I think for the region at least — I mean, if you’re in Wyoming, you probably don’t care too much about what’s going on in the Atlantic. But all up and down the East Coast from North Carolina to Maine, states have made a real significant commitment to offshore wind, to be a major contributor to their local electricity mix and help them meet clean energy and climate goals. And, you know, and their megaprojects are big, you know, large-scale efforts, billion-dollar projects, you know, millions of households worth of energy and lots of jobs and local economic investment. And so when a project like that fails, you know, it’s kind of a big deal for the local economy, for the politics around it, for our progress towards our clean energy goals. And it’s a potential setback in our clean energy transition.

Meyer: There’s also — It’s economically important, but there’s also technical, I think what an electricity engineer would call resource related reasons why we want offshore wind. Is this right? Like it fits into the grid in a very useful way. Am I wrong about this?

Jenkins: Yeah, actually, I was just teaching a lecture on wind power to my students today, and we took a look at the Global Wind Atlas, which we can drop in the show notes. And what you can really see quite clearly is that the onshore wind potential in the Atlantic area is really quite poor. We don’t really have good locations to build wind power in Virginia or New York, near the coast at least, or in New Jersey at all. But the wind resource offshore is very good.

Wind speeds, you know, can move across the ocean. It’s very flat. There’s nothing that gets in the way. And you get a lot of frequent, wind patterns driven by the difference in temperature between the ocean and the land. So there’s all these localized effects that tend to produce a lot of energy in the morning, in the evening and overnight when it’s cooling off. And these are nice complements to solar power that produces mostly during the day. And you know, you can’t run your entire grid on one variable renewable resource, or even two. But having offshore wind complementary, you know, which is complementary to solar, and also to sometimes onshore wind patterns further inland that, you know, are separated from the ocean can really help you smooth out the variability that you have to deal with, make it easier for energy storage and, and flexible demand and more dispatchable generators to kind of fill in the gaps around it.

And there’s just really not a lot of other options in these states. Like, you know, if you want to have economic development and meet your clean energy goals with resources in your state, there’s just not a lot of other options. You can, you know, build solar, you can build nuclear power plants, or you can do offshore wind. Those are kind of your options for the Atlantic states, at least those without, you know, the large interior territories that New York has.

Meyer: So I want to come back to some of the like resource questions in a second. I will say, this is all very interesting — well, let me think about how I want to pitch this. I understand offshore wind being technically important, right? I understand how it fits into the solar mix. I understand it’s good economic development.

I found last year to be fairly … I wouldn’t say radicalizing, but I will say I kind of came out of last year being like, I don’t know if I see it anymore. Like I did start to feel like, man, is offshore wind more of a like, is it going to succeed exclusively in Europe and China, where there is more willingness to have a working coast, where electricity, especially in Europe, is just structurally more expensive? And so this technique, this way of generating electricity, kind of fits into their mix better. And so, what I’m going to ask you to do is just argue to me, like make a case for why that’s wrong. Make a case to me about why offshore wind … like 2023 was the catastrophic year for offshore wind, and now it’s going to come back.

Jenkins: Yeah, that’s a great question. I mean, I think it is worth pausing and noting that offshore wind in the United States was already pretty expensive, and is now even more expensive. So I think the contracts that New Jersey signed, for example, which are 20-year, you know, basically fixed price contracts — they got to go up at 2% per year, which is, you know, what we thought inflation would be, but now is maybe not where it will be over the next few years, but basically fixed long term contracts — were in the $80 to $90 per megawatt-hour range, which itself is roughly double the wholesale electricity cost in the region. So we’re, you know, we’re basically paying for, you know, twice as much for wind energy as we would pay for natural gas or coal fired power in the regional electricity mix. And that’s after a federal subsidy knocks off 30% of the upfront cost.

That sounds like a lot, right? And I think it’s fair to say that the costs that are going to be signed in the new auctions that are happening now are going to be up or above $100 per megawatt hour. So, you know, they, you know, just the interest rates alone. You know, the Fed raised interest rates by over 5% from March 2022 to August 2023. That 5 percentage point increase in the cost of capital would raise the levelized cost, or average cost of electricity alone, by about a third for any of these projects. So it’s a huge cost escalator. And of course, the underlying cost of building the projects went up by about 65%. That’s way faster, about three times faster than consumer goods went up. So, you know, we all know about how much more expensive it is to buy milk or bread or fill up at the gas pump. So, you know, that’s the case for seeing this as, you know, the bear case — that these projects are now really expensive, and maybe they’re more expensive than we’re willing to pay.

On the other hand, I think there’s three reasons that, basically every state is still committed to building out offshore wind despite those cost increases. One is that is a, you know, a historic, once in a generation macro inflationary cycle, a global pandemic with all of the supply chain disruptions that came with that, followed by a war in Europe and all of the impacts on energy costs that that, you know, brought about, you know, etc., these are really unique circumstances. You know, and so those should be behind us, right? Hopefully we can then get back on a trajectory of building out this new industry across the region, including the supply chains and the expertise in the transmission infrastructure undersea, to bring the wind onshore. That will steadily drive down the cost. And the reason to be optimistic about that is we have seen that in Europe, right? The wind industry did follow a very significant cost decline trajectory over the, you know, 15 years or so from its birth to now, in Europe. And we’re just going to have to pay a lot of those costs here because that learning and the experience in the infrastructure and the workforce isn’t really translatable.

The second reason is just there’s not a lot of alternatives for these states. You know, yes, electricity is structurally more expensive in Europe. It’s also structurally more expensive all along the eastern coast because we have high population density, population centers. There’s … these are very dense populated centers close to the coast, without access to the really good wind and solar resources that we see in the U.S. interior or the West. And so what are we going to do? Are we going to continue to burn fossil fuels? That would be the cheapest thing to do in the near term, but of course has lots of long term implications, including accelerating climate change. And all of these states have committed to transitioning away from fossil fuels. Virginia, New Jersey, York, Massachusetts, etc. have these 100% clean energy commitments.

Meyer: Assuming those states have this durable interest in decarbonization, in some ways, like, offshore wind has to have hit rock bottom, is part of what I’m hearing. Because there are just no other options. So they could go through this tear-your-hair out frustration loop, where they go try to build more solar, and then they go try to build more nuclear, and maybe those don’t work, so then they find themselves back where they began with offshore wind. But like, even with that, they’re still going to need offshore wind. So can you just get us up to speed on, like, what’s the good news in offshore wind, I guess?

Jenkins: Yeah. And I think this is the evidence that the states are going to stay committed and are moving forward, and that we probably have hit rock bottom. So, you know, yes, the news in November and December and early January was dominated by all these cancellations. And it wasn’t just Orsted. There were others up and down the Atlantic coast. But if we look at just, you know, New York and New Jersey, there’s similar stories in other states. You know, New York State has a goal of building 9,000 MW or 9 GW of offshore wind by 2035. Again, that’s about enough, to power 3 million households. So they had a third-round contract towards the end of last year. At that point, they had contracted for about 8.3 of those 9 GW, so they were kind of almost there. Then we had these cancellations: Orsted’s, Sunrise Wind and Equinor’s Empire I and II that lost about 3 GW of that. So now they’re back to about 5 GW of the nine. New York just closed another accelerated auction. And if that, you know, contracts another roughly 3 or 4 GW, like the last round, that would get them their full pipeline of nine gigawatts of projects. And again, they have until 2035 to bring those online. So it’s sort of like, you know, three steps forward, two steps back in the near term here, but they’re continuing to move forward. We could still hit those goals.

What’s going to happen is that the buildout trajectory is going to get pushed back by a couple of years, and even some of those canceled projects could have a second lease on life because they are going to be rebid into these subsequent auctions. And we think we saw that, actually, with Orsted re-bidding one of their projects into New York’s recent auction in January, and we don’t know if they’ll win that round of auction. They have to beat out other competitive bids from other developers. That’s good. They tried to get New York to just single, to bilaterally renegotiate their existing contract and give them more money. And New York and New Jersey, you know, basically, and Massachusetts, all said no to those requests from developers. They said, look, a contract’s not worth anything if we sign it and you agree to a price and then you come back later and ask for more money. So if you want more money, you’re going to have to go out and, you know, pay the fine for not honor your contract and then rebid, and, and beat out everybody else. And if you can’t beat everybody else, that’s not in the interest of the state. So they really held the line against all of the requests from the developers to try to, you know, inflate their contracts. But some of those projects will come back in this next round. We’ll just come back at a higher price and probably a couple of years delayed.

Meyer: Let’s zoom out for a second. So we’ve been talking about the Atlantic a lot, partially I think, because you and I, listeners will discover, have a shared interest in New Jersey.

Jenkins: That’s right.

Meyer: Me, having grown up in New Jersey and you currently living in New Jersey. Let’s zoom out from New Jersey for a second. Much of the Atlantic coast is not a working shoreline in, I think, ways that parts of, say, Northern Europe are a working shoreline. But we do have working shoreline in the country. And that’s not to say that like people on the coast don’t work. It’s just like.

Jenkins: It’s a lot of tourism.

Meyer: It’s a lot of tourism. It’s a very tourism dependent industry. And so anything like these wind farms, they’re going to be close enough to be seen from the shore. They were not going to be very big, but they were going to be close enough to be seen from the shore. And you really, when you’re there, you don’t see a lot of other light industrial activities from the shore. We do have a working coastline in the U.S., though. It’s the Gulf Coast. And so why are we not like filling the Gulf Coast with offshore wind farms?

Jenkins: There’s really two main reasons why that didn’t happen. One is physics and the second is politics — I think we’ll keep coming back to those two as consistent themes in the show, physics and politics. But the first is just that, unlike the Jersey Shore or New York, you know, coastline or Virginia, where we really don’t have good wind resources onshore, Texas has an incredible wind resource onshore, including even the coastal regions quite close to the shoreline. And also the Gulf Coast, wind speeds are not as high, although it does suffer hurricanes. The average wind speeds are not as consistently high as they are in the Atlantic because it is a gulf. It’s, you know, it’s not a big open expanse of ocean the way the Atlantic is. And so the dominant wind patterns are not quite so strong. So the differential, the sort of benefit that you get from going offshore is really quite modest, if anything, in the Gulf versus a good onshore wind site. And of course, anytime you’re building in a marine environment where you have to deal with the corrosive nature of the ocean and the damaging destruction of storms and the cost of servicing and equipping, and, you know, working on wind farms and deep offshore, that’s going to be a lot more expensive. So unless you’re getting a lot more energy out of that project than you would on land, it just simply doesn’t make sense to build offshore. So that’s the kind of physics and economics.

Of course, the second reason — we talked already about the commitment to decarbonization that all of those states in the Atlantic exhibit, which is really driving the ship, so to speak. Texas, clearly, Mississippi, Louisiana, they clearly don’t have the same kind of commitment, at least at this point, to those goals. And we should say that’s really important because the Inflation Reduction Act provides significant long term tax credits for offshore wind and solar and, you know, onshore wind and all kinds of other clean electricity sources. And while those tax credits have been enough to make solar and wind onshore quite economically attractive in deep red states, right — you know, Kansas, Oklahoma, Texas, all over the place are building huge amounts of onshore wind and solar just based on the economics, not because of their climate or green credentials — that’s just not true for offshore wind. The tax credits alone, again, they still leave offshore wind about twice the cost of wholesale energy. And so they’re just not going to move forward without a state level commitment. And that’s really lacking in the Gulf Coast region as well.

Meyer: That’s really interesting.

[AD BREAK]

So I want to ask — there’s like a point that keeps coming up again and again here that is, like, the states play a major role. And I do think this is interesting. From a larger policy like to kind of zoom out a bit and kind of look at this as a policy question. Normally when we think about states playing a role in climate policy, there’s like one jewel, there’s like one big star when we talk about state level climate policy, and that’s California. And that’s because California, and this is not where, I’m not talking about the electricity system here. I’m talking about kind of the whole emissions picture. California has a special carve out under the law, under the Clean Air Act — like it’s written into the text that Congress passed, that California can set higher standards for certain pollutants than the rest of the country, and that any other state can join into its standards. And California does do that for a number of pollutants, including right now for carbon dioxide. I think right now about 13, 12 or 13 states sign on to its standards.

But other than that, other than California having these special powers to, like, regulate the vehicle fleet and various other things, we don’t talk about — at least I don’t think about states as being major players at the level of shaping what their resource mix looks like. Is that because I, is that because I just don’t know things? Or is that like, is that because I’m ignorant? Or is that because there is something kind of unique and interesting about offshore wind, or maybe unique and interesting about where state’s decarbonization goals are going to have to take governments?

Jenkins: I think in some ways it’s sort of a back to the future kind of thing. Yeah, I guess it changes who’s, like, who’s in the driver’s seat, right? Historically, we had vertically integrated monopoly utilities, and in much of the country that’s still the case, like in the Southeast and much of the West. But in about, you know, 60% of the country, fairly recently, like around 2000, in early 2000s, we basically restructured the markets to say, you know what, for at least generation and wholesale large power plants, and maybe also for retail sales, like who signs you up as a customer and, you know, does your billing and provide some other services, we’re going to open that part of it up to competition, and we’ll keep the wires part the network utility because that makes sense. But we’ll let the generators all compete with each other. And now the market is in the driver’s seat. And what does the market build an enormous amount of natural gas.

Meyer: I was gonna say, the market the market falls over itself to build natural gas. Yeah. The market goes to sleep and wakes up, and it’s just surrounded by extra natural gas plants that it made while it was sleeping.

Jenkins: Yeah. And bankruptcies.

Meyer: And bankruptcies. Yes. Exactly. Yeah.

Jenkins: So the wisdom of the market overbuilt a huge amount of gas in an attempt to get regulated utilities for to stop overbuilding a huge amount of nuclear and coal plants. That’s a cycle we went through. And then states, again, around similar times, like, start to get more and more concerned about climate change and clean energy and reducing their exposure to what, at that point, we talked about in the last episode, were increasing natural gas prices right in the early, in the mid 2000s. And they say, you know what, we should actually take a little bit more of a hand here and shape how the market works. And they still did it in a relatively hands off way through what are known as renewable portfolio standards.

So these are basically laws that say to the utility, okay, you get to, you know, the market can shape the mix, but you have to buy a certain amount of your electricity from clean resources or a certain qualifying renewable resources. But you decide: offshore wind, onshore wind, solar, whatever. And then what changed, really, is these resource-specific procurements that we’re now seeing. And wind is the most salient, but also we’re seeing procurements of utility-scale solar in certain states.

And actually, I think the most, the most interesting one is, is the recent law passed in North Carolina by the legislature, which is basically like a resource plan in law. You know, build this many megawatts of this shut down this many megawatts of coal, build these many megawatts of offshore wind, 50% of that the utility gets to own, this much has to go to market. It’s like the legislature taking the driver’s seat now and writing through law what they want the resource mix to look like. And that’s, I think, the thing that has shifted, right. It’s the legislature driving resource procurement. And that is, that is new.

Meyer: And I think there is, like, a “Just when I got out, they pulled me back in” aspect to all of this, I think. Where, it seemed like, for reasons having to do with broader ideas floating around about how markets were smart and how what often seemed like the very corrupt nature of the kind of state regulatory and monopoly utility interface that these, you know, the states were very corrupted by the utilities, the utilities were very corrupted by the state. But I guess what I’m saying is that there was this move toward markets, and that since then, and then even with the RPS, as you said, there’s still this kind of market technology neutral, well, we’re open to all kinds of portfolios. And what we’re discovering is for reasons that mostly, I think have to do with physics, you wind up — states kind of wound up right back where they started, where it’s like, okay, well, now we’re actually. it’s just easier if we plan this.

Jenkins: I do think there’s still I mean, I think there’s some of that, I think. I think there’s a lot more politics going on here. I would shade into the story.

Meyer: By all means, yes.

Jenkins: Yes. There is some local opposition to offshore wind. There is a lot of economic, salience or political salience to being able to say to some of the working shoreline communities — which we did have long ago, right? And being able to go there and say, we’re going to build a $500 million revitalization of the port of New Bedford in Massachusetts or New London in Connecticut or Staten Island in New York or Brooklyn, where they’re building these terminals and drive a huge amount of employment and investment and revitalization in these communities. That’s why the politics of offshore wind is so attractive.

Also, because the components are so big and because the state is shaping it, they can add these riders about local benefits in manufacturing. A lot of the manufactured components for these turbines are also coming from the area. So there’s the steel piles you have to drive into the ground, called monopiles. The towers, the blades, the turbines, they’re all getting built in New York and New Jersey and Virginia and elsewhere, and creating manufacturing jobs in communities that were previously depressed. And, you know, politicians can go to ribbon cuttings and point to their legislation and say, we did this right.

So I think that’s a big piece of why the legislatures are so attracted to offshore wind, is it does create a lot of jobs and a lot of investment and a lot of local manufacturing activity. And I think that’s part of why the legislature has basically decided we’re willing to pay a lot more for offshore wind than we would be for, say, a transmission line to wind in a state inland is that it might be a lot cheaper.

Meyer: Is that a good thing? I mean, I guess I just —

Jenkins: Yeah, I don’t you —

Meyer: You know me, like, I love industrial policy blah blah blah. However, I will say when you look across the U.S. and you look at projects that have been considered to be drivers of economic development in a direct way instead of an indirect way, by which I mean, like when you look at these big public projects where some of the stated top line benefits of these projects are like, creates many jobs, creates, helps three dozen small businesses. You don’t … it’s not exactly a record that like covers itself in glory. Like, you know, California high speed rail remains unbuilt. But the director, you know, like people involved with California high speed rail, sometimes they’re like, well, it’s actually been very successful because we’ve supported all these jobs and we’ve supported all these businesses. And it’s like, still, you know, this, all this economic activity. But of course, the thing hasn’t been built yet, actually doing the thing that we wanted to do, which is move people quickly from L.A. to San Francisco. Is it good that we’re looking at that? Legislatures look at offshore wind and they’re like, oh, look at all those jobs in it rather than like … yeah, yeah.

Jenkins: Yeah. I mean, let me go on the record and say, I am not a fan of resource planning by the state legislatures. I mean, I think that, you know, as a deliberative democracy, you know, democratic body or representative body, right? They have a role in representing the combined stakeholder interests. But, you know, when it comes to, when it comes to making energy policy, we all know that there are certain stakeholders who have a lot more access and a lot more influence in, you know, state legislatures than others, and are likely to sort of shift things in certain directions. And so what I have counseled — and I’ve been asked to advise state legislatures and, and policymakers in a number of contexts. And what I have advised is to say, look, you are balancing real goals here, right there. There are several different objectives we’re trying to achieve. Right? We want to reach a cleaner energy mix because we’re trying to combat climate change and reduce air pollution and improve environmental justice, and all those goals. So we want a clean mix, but also, I’m sure we’ll do an episode on this later, the electricity sector has to play a much bigger role in powering our lives in a cleaner future, right?

Meyer: Load must go up.

Jenkins: Electric cars and other industries … Yeah, yeah, there just has to be a lot more electricity generated, period, to electrify so many different things, from EVs to heat pumps to industry. Yeah. And if you do that, you know, not putting aside, you know, so that even from the climate concern, you have to worry yourself about affordability of this transition, as well. If you make electricity prices two or three times more expensive, that’s going to make it a lot harder to electrify all those industries. And it’s going to make, you know, energy costs for low income and fixed income residents go up and, you know, there’s justice implications of that. It’s going to make your small businesses and competitive businesses or businesses and competitive industries less competitive, you know, with other states. So there’s an affordability concern that’s always front and center in these conversations. And then there’s this economic development concern.

Obviously, state legislatures are historically interested in driving economic investment and in development in their state. That’s a big part of what they do. And so you’re balancing these three things, right. You know, affordability, clean energy and climate goals and in-state economic development. And I have simply recommended that you focus on the ends and not the means. So if those are your goals, let’s write into the law that you know, we’re going to have X percent clean energy and we want y percentage of that to be in state because of economic development goals. And we want to put a cost containment provision in here that says we won’t build those offshore wind or those in-state projects if it costs more than Z, because that’s how much we’re willing to pay for that insane development. And then go let the utilities or a state agency contract for whatever the cheapest way is to meet that goal, right, to maintain your affordability goals. And maybe that’s offshore wind in certain places, and maybe it’s not.

Meyer: I’m going to really mangle this concept because it is not exactly creative to describe this, but there was a Hungarian anthropologist and political economist named Karl Polanyi. It’s also a name I’m probably not saying correctly. Yeah, I’m choosing to pronounce his name like he’s a Chicago guy. Karl Polanyi, you know, down by Wabash.

Jenkins: He’s a good guy, he’s got the pizza shop.

Meyer: He, he, he has this idea of fictitious commodities, which are kind of things that you have to treat as a commodity to make the whole system work, to make the whole economy work, but are not themselves commodities. They don’t really work like actual commodities. And his big three examples are land, labor and money. He was writing during the 1940s, but it feels like electricity is one of them. I’m like, I’m, I’m adapting this idea to a situation that was not designed to apply to, but it does feel kind of like to describe the whole nature of how we think about electricity, which is this extremely important thing that mostly remains kind of mired in technical discussion, but nonetheless makes the whole world work.

Jenkins: Yeah, no that sounds about right. And I think that describes sort of the pendulum swinging back and forth. And so, you know, where I, where I do think we have opportunity here is to say, look, we have public objectives. We can, we know that these are high upfront cost, you know, capital intensive projects that once you build them, are just going to produce cheap energy for a long period of time. Right? Their marginal costs are low, and so the cost of capital is really important, and the cost to build the project is really important. Right. Those are the two determinants of how much a wind farm is going to cost. So we can use long term public contracts to drive down the cost of capital by basically guaranteeing revenue to developers so that the risk is low and they can get a low-cost loan from a bank and build the project. That’s what we’re doing with all these procurements at the state level. And we can use competitive forces like auctions to ensure that the cheapest projects are the ones we’re going to buy. And I just think we should open that up from offshore wind specifically, or rooftop solar specifically to whatever resources are built in the state that can meet our climate goals and deliver some economic development benefits at the lowest cost. And so it’s just a question of like, how do you define that market goal and harness those competitive dynamics to deliver the public policy goals? That’s what the auctions are doing.

Meyer: That’s kind of like in some ways, related to this change that is going to happen and how the Inflation Reduction Act conducts its subsidies, right? Which is since the 1980s, we’ve been in a situation where, like, we, the U.S. tax code incentivizes certain types of technology. And then starting in 2025, I believe the U.S. tax code will just incentivize all kinds of zero carbon electricity instead of calling out certain technology. It’s just saying, however you can do it, we’re going to pay you the subsidy. Yeah.

Jenkins: And also layering on a couple of other economic development objectives. Right. You have to meet prevailing wage and you have to it if you build domestic content, you get more money. And if you build energy in communities that we want to help transition, you get more money. So yeah, it’s an interesting example of that where you’re sort of layering these multiple objectives on, but still relying on the market to go deliver the lowest cost, most competitive ways to do that.

[AD BREAK]

Meyer: Let’s do downshifts first because I think we should end on an upshift.

Jenkins: That sounds good. Let’s end on the up note. So my downshift, speaking of utilities and regulation, and actually tying back to last episode winners and losers from trade, my downshift is a recent report by the Energy and Policy Institute, which is a public interest watchdog that keeps an eye on state utility regulation, on how a number of monopoly utilities, particularly those in the Southeast, where they are still vertically integrated, so they still own transmission and generation, have been routinely pushing back against efforts to build more long distance transmission, and also to organize into larger regional markets that can, you know, expand the footprint of trade across a wider area — something that’s happened in all of the competitive markets in the state and the country — in order to basically protect their turf, right? So customers in their territories would benefit from access to cheaper resources further away, and the transmission lines that could bring that power to those customers. But the utilities in these areas make their money, like most utilities, by investing capital and getting a return on those investments. And they don’t get money in somebody else’s generator. And this is an area where unless the state regulators are really acting in the public interest and leaning in here and making sure that the utility is not kind of basically abusing its control of the network to act as a monopoly, then there’s every economic incentive for the state or for the there’s every economic incentive for the utility to do that. And that’s exactly what we should expect.

Meyer: My downshift is, so we’re coming up on the first anniversary of Heatmap — that’s not my downshift.

Jenkins: It’s been that bad, huh, Rob?

Meyer: I’m very excited about that! No, no, no, my downshift is, it turns out that, as Neel Dhanesha wrote for Heatmap today, Heatmap’s first 12 months in existence more or less co-existed with the first 12 months where the Earth was 1.5 degrees Celsius above pre-industrial temperature. So from February 2023 through January 2024, the average global temperature was 1.5 degrees C higher than what we think of as kind of the 19th century baseline. And that’s according to the Copernicus Climate Change Service, the EU climate data service. Now, I should say that just because we’ve had this 12-month period where temperatures were more than 1.5 C above the pre-industrial average, does not mean we have passed the so-called 1.5 C threshold, which also, we should be clear, is not a physical thing. It’s more kind of like a construct. It’s a political construct that we use to talk about when climate change starts to get very bad. So we have not passed that threshold. It is not a point of no return.

Jenkins: But it is nonetheless an ominous signpost.

Meyer: It is nonetheless an ominous sign. And of course, we pass it this year because because of El Niño, which has caused additional atmospheric warming on top of what we’re observing with climate change. But it is nonetheless, exactly, an ominous signpost.

Jenkins: Well, my, my upshift is on heat pumps, so maybe that’s why you named it Heatmap, too. Yeah. My upshift today is, is about heat pumps. Heat pumps are a magical device that allow you to move way more heat around with small amounts of electricity through the magic of the thermodynamic cycle.

Meyer: We should do an episode where you just explain how heat pumps work.

Jenkins: Magical gnomes.

Meyer: Like, how does the thermos know whether to keep the liquid hot or cold?

Jenkins: Yeah. So heat pumps are magic. There are like, 300% to 500% efficient, effectively, because you can use a little bit of electricity to move, you know, two, three, or five times as much heat around. And so that makes them a really great way to both improve energy efficiency and shift from burning fossil fuels in our basement, in furnaces, oil or gas boilers or furnaces to a clean electricity source. So that reduces air pollution. And of course, if we can produce all that electricity with clean resources, we’ve helped decarbonize home heating. So it’s a central technology in any decarbonization and environmental justice strategy, I should say, because it’s a big source of air pollution. And so my upshift is from Michael Thomas, who writes a newsletter called Distilled and is active on Twitter and shared a great thread today compiling some data on recent heat pump trends in the U.S., where he found that heat pumps have been outselling gas furnaces for the last two years in a row, in 2022 and 2023. And that I thought, most interestingly, the share of homes in the U.S. with heat pumps has gone up in 48 of 50 states over the last decade, and the most rapid progress has been driven by states that have recently taken policy action to try to accelerate adoption of heat pumps.

Maine is probably the most exciting story. They basically doubled their heat pump adoption rate in just two years. And if they kept that up, that’s crazy to hit. Yeah, and they’re actually on track to hit, yeah, to get heat pumps in every home in Maine by 2050. And there’s a reason for Maine to do this: because Maine is not on the natural gas system. So there, people in Maine are mostly heating with fuel oil and propane, which has gotten incredibly expensive over the last few years, and obviously does that periodically because of all those ups and downs and global oil prices that we mentioned on the last episode. So, yeah, Maine is an interesting case. It’s cold. A lot of people don’t think heat pumps can work in cold climates. Well, that’s definitely not true. There’s huge heat pump adoption in Scandinavian countries and in Canada. And now in Maine. You just have to design them, right? And probably also do some energy efficiency improvements to seal up your home when you do it. But yeah, we’re moving in the right direction on heat pumps.

Meyer: Home heating oil is so crazy because it’s like, imagine heating your house with gasoline.

Jenkins: Yeah, exactly. Diesel. But dirtier.

Meyer: Right. It’s so interesting. My upshift. Is that a new analysis in Carbon Brief from Lauri Myllyvirta, who is kind of one of the leading analysts of China’s greenhouse gas emissions. And he found, basically, China’s emissions may have peaked last year. That kind of, if you look at all the factors in their economy, it’s very likely China’s emissions will go down this year in 2024 compared to 2023. That, now, that’s partially — and I would say, this is suboptimal. This is not the upper part of the upshift. That’s partially because of just very soft economic activity in China. As we record this, the Chinese stock markets have basically been falling apart over the past few days. It’s that kind of softness of industrial activity matched with this massive, massive build out of renewables that is going to that that in his analysis is going to peak, lead China’s emissions to decline in 2024, and may cause them to permanently kind of subside.

And I think the other interesting aspect of this is at the same time he sees this, he also sees, I think, what people tend to notice more, which is that China’s continuing to build coal overcapacity in its power grid. It’s continuing to build a lot of new coal plants, and it kind of talks about how there is this clash coming up between the cleaner parts of the economy and the cleaner subsectors, or the new energy subsectors, versus the kind of old fossil subsectors, both of which are building, but eventually their needs will directly conflict.

Jenkins: That’s fascinating. Yeah, we should definitely do an episode on what the heck is going on in China. You know, one of those major signposts that we have to pass if we’re going to get the world on track for net zero, is peak emissions in China the world’s biggest emitter? And until China turns the corner, you know, we won’t be able to turn the corner globally to get emissions on a downward trajectory either. Most likely. So yeah, I’d be really fascinated to see are we are we nearly at that peak. That’s some encouraging signs, but we’re not quite sure yet. All right.

Meyer: Let’s, yeah, let’s …

Jenkins: Let’s leave it there and let’s come pick up the China story again in a future episode here on Shift Key.

Meyer: Here on Shift Key. You want to share your friend’s line about what our next podcast should be called?

Jenkins: Let me find that. Yeah. So a friend and early listener said, are we going to start a recurring section about emissions trading called Caps Lock? I think we have to.

Meyer: And California has to re-up its emissions trading system pretty soon, or it’s going to try to do it pretty soon.

Jenkins: So maybe we’ll have a special issue.

Meyer: Special Caps Lock edition of Shift Key. Well, thank you for listening to Shift Key. And we’ll be back next week. And in the meantime, subscribe. And please, if you have a friend, an ally, a coworker, a nemesis, a jilted lover who you think would enjoy the stimulating discussion and intelligent conversation of Shift Key. Please. Share the podcast with them and ask them to subscribe.

Jenkins: See you next week.

Meyer: Shift Key is a production of Heatmap News. The podcast was edited by Jillian Goodman. Our editor in chief is Nico Lauricella, multimedia editing and audio engineering by Jacob Lambert and Nick Woodbury. Our music is by Adam Kromelow. Thanks so much for listening and see you next week.