Episode 12

July 28, 2021

Three renewable energy questions for Daniel

Steve sits down with Daniel Sausmikat, Co-Head of infrastructure investment across the Americas at InfraRed Capital Partners, to discuss the new construction of renewable energy infrastructure, trends in battery technology and challenges of building and developing these projects.

Steve Peacher: Thanks for tuning in to this episode of “Three in Five.” I'm Steve Peacher, I’m President of SLC Management. I’m really pleased to be joined today by Daniel Sausmikat, who is in our New York office at InfraRed Capital Partners, which is our infrastructure investment firm. Daniel, thanks for taking a few minutes today.

Daniel Sausmikat: Hi Steve, thank you very much for having me.

Steve Peacher: So, I’ve got some questions about renewable energy, which is on everybody's minds these days, and my first question is, there's so much talk about the need to expand our renewable energy resources, both in the U.S. and around the world. What are you seeing in terms of actual activity in terms of the new construction of renewable energy projects?

Daniel Sausmikat: And maybe to put that a little bit into context, and when you say really what, “what does the expansion mean?” for people to get a sense. In order to meet the climate and renewable energy targets that have been set, basically till 2050 renewable energies will have to double their contribution to electricity generation in the U.S. from the level they are today. And that will require an investment of about $25 to $30 billion dollars per annum, only in the two major renewable technologies, which are offshore wind and solar, but there is obviously something beyond that. And so, a lot of investment it needed, and a significant amount of investment is already going into the sector. So to give you a few numbers – 2019 on the whole $62 billion went into this, but we've seen some slow down of investment during Covid, so in 2020 the number was lower. And in 2021 so far $15 billion have been invested. And so we see significant levels of activity, but principally as a result of Covid, things have certainly slow down but we're noticing activities picking up and we've recently seen more activity investing into new segments. One thing that makes me optimistic about the future for wind and solar is really that in most locations this is already the cheapest form of power generation. And so to share a few recent trends that we've seen in terms of new build out a new investment, is solar for sure continues to be the most predominant technology for new project investment that's driven by the fact that it is the relatively lowest cost technology. We increasingly seeing new solar projects that are paired with battery technology projects, in order to extend a production window, or at least power more flexibly to meet the demands of relevant power of takers. There are fewer wind projects than solar, but they are very significant size and to just give you an example of this one project we're looking at now is five megawatt wind turbines and those as a sort of a turbine size that a few years ago we actually only show offshore, so turbine sizes that massively stepped up. Another trend we see in the U.S. geographically projects tended to be in they are now increasingly in the Midwest and the Mid-Atlantic regions, whereas historically really it was the West and the planes that are dominated. And finally, which is very exciting, there's really now momentum in the offshore wind space because the new Federal Government is really in support of it and has set a target of 30,000 megawatts by 2030 from only 42 megawatts today, so it's really from nothing. And that will require investment of about $75 billion in projects alone, not even considering the related infrastructure, boards and vessels and so on and so forth. And one of the first project called Vineyard Wind, that's an 800-megawatt project that's just obtained its final federal environments permit and we expect that to start construction in 2022.

Steve Peacher: You mentioned battery storage in your answer, and battery storage technology is key to making solar and wind energy more useful and more economic. What trends are you seeing in battery technology that may make renewable energy even more economic going forward?

Daniel Sausmikat: Well as a first observation we've been involved in sort of the battery space for the better part of five years now. And over the last couple of years we've really seen what I would call an explosion of battery project development really across the entire U.S. But, in particular in the states where or regions where you already have significant renewable energy deployment. Good examples of that are, for example, California and Texas. But at the same time, you also see it in places where there are bottlenecks on the grid network or some stresses, which tends to particularly be in the vicinity of larger cities such as New York and Chicago. One of the key trends that sort of underlying all of this is that cost for battery technology and battery projects on the whole, has declined a lot faster than I think a lot of participants had anticipated, which makes these projects economically viable and viable on a fastest scale than before. But this rapidly increasing demand is now catching up with a somewhat still nascent industry and supply chain. And pricing is temporarily not declining further, especially for the most predominant technology which is really lithium ion. So, one of the trends that we're seeing is developers and sponsors are now considering more than merging battery technologies, such as, for example, within zinc which aren't quite as commercially proven yet. And, and another aspect, I think, is batteries are for sure a huge role to play in the further energy transition and in particularly also in the consideration of electrification of transport. But eventually other storage technologies and, for example hydrogen, has to come into play to really facilitate the transition of the energy sector and the way that it's needed.

Steve Peacher: You see the construction of renewable energy projects from the inside and I’m wondering if there are any challenges in the building of these projects, in the development of these projects that may be under appreciated by investors that aren't as close to the projects that you and your team are? 

Daniel Sausmikat: I think there is one aspect, and really starting with the basics with the rush into projects and sort of really the excitement of the sector. Building and operating projects, it's better understood, now, and there are plenty of established contractors who can do this. But it still has its challenges, and I think, overall, the challenges that are involved that are probably a little bit under appreciated and underpriced at the moment. And so that's sort of one aspect which I can think of. The other one is that renewables and clearly only produced when the when the resources available, so the more renewables penetrate the system there's going to be an ever-greater imbalance between demand and supply. And so to ease the systems into this transition, we need a significant build out of storage and also systems transmission capacity to keep pace with this build of renewables, to avoid bottlenecks, to avoid systems pressure such as outages overload and etc. And that requires a lot of additional investment in related infrastructure, which I think at the moment there aren't necessarily the right plans and right structure for that in place. At same time a lot of renewable projects of have the same technology, if they're all in the same region, they will all be generating at the same time, when the resources are available, and this will impact the power pricing, something that we call price cannibalization. So, as you invest in these kinds of projects, this is something that you need to appropriately factor into your economic forecasts and really consider this. And, and while that is on the one hand, a challenge, at the same time, this represents a big opportunity for battery and other storage technologies, who can basically take power out of the system when it's cheaply available and then release it when it’s expensive. So to bring it all together, I think for a successful investment strategy and renewable energies, you really need to combine investments into different generation technologies across a fairly diversified portfolio and similarly it needs to go hand in hand investing in storage and other technologies that you can really balance your investment portfolio and not solely focus on generation.

Steve Peacher: Thanks Daniel, one final question the InfraRed offices in New York or in midtown and I know you like to bike to work, when the weather permits. And when someone thinks of New York City they think of car speeding down, you know Fifth Avenue. So my question is, how do you get to work on a bike and do it safely in the middle of Manhattan?

Daniel Sausmikat: Yeah that's a good question. Now, I used to live in London, for a long time and that's really when I started commuting into work and let's say London is probably  considered a more cycle friendly city, but you know cycling into the office wasn't without its hazards. By comparison New York, you don't necessarily think about it, but the city has done a fantastic job of really developing the recreational, including the biking lanes along the river.  Which really makes for a really fantastic and relatively safe come into the office, however, as you then cut from the river to the relevant block you need to get to New York City there's probably been a couple of minutes of excitement where you need to still manage traffic, but relatively speaking, that's pretty good.

Steve Peacher: Well, thanks Danielle for taking time with us, I think we're going to be talking about renewable energy for a lot of years, and so this has been a great session. Thanks to everybody for tuning in to this episode of “Three in Five.”

Daniel Sausmikat: Thank you very much for having me, Steve.

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