Waldorf Production North Sea Operator Enters into Administration

 

Sources:

• https://www.insider.co.uk/news/waldorf-production-intends-appoint-administrators-32962536
• Waldorf Production files notice of intention to appoint administrators
• Finance Top executives depart distressed UK oil and gas producer
  

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Renewables vs. Datacenter Financings

With power hungry AI hyperscaler datacenters now being large buyers of power, the debt financing markets for the two sectors are beginning to converge.

Both sectors are characterised by upfront capex, followed by cashflows generated under long-term contracts - PPAs in the case of power, and datacenter leases in the case of hyperscaler datacenters. The counterparties in each case are typically large, creditworthy institutions.

Given the above, hyperscaler datacenters provide similar risk-return charateristics to some renewables projects.

However, hyperscaler datacenter debt financings can be superior in a number of ways:

1. Datacenter lease revenue is highly stable and not reliant on variable weather conditions that drive revenue in renewables
2. Broader financing sources with datacenter debt sitting in real estate, infrastructure or project finance lending books
3. Datacenters as a sector have a much broader range of refinancing options including the ABS and CMBS securitisation markets, private placement and institutional debt investor markets, reducing refinancing risk. This is not the case for even utility scale renewable portfolios
4. Datacenter supply is in a short market with no alternative sources of supply - apart from building more datacenters. This increases the value of the asset from a lien or residual value perspective. This contrasts with renewable assets - where more can be built quickly, and power supply can be backstopped by conventional generation sources
5. Tax equity structures do not exist for datacenter financings, meaning debt is senior as opposed to second lien behind such structures which feature heavily in the renewables world

Lenders to both renewables and datacenter projects will have seen the two sectors converge and credit exposures doubling up, when the underlying credit of a renewable project is a hyperscaler datacenter. When comparing the relative value of renewable vs. datacenter financings, the latter is certainly attractive with a current pricing premium of 100-150bps for essentially taking on the same counterparty risk and superior credit quality characteristics noted above.

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OPINION: "There can be no national security without energy security"

There can be no national security without energy security.

Energy security comes from energy sufficiency - not necessary self sufficiency, but sufficiency through a mix of own production and generation, and supply from trusted partner nations. In an ideal world, energy abundance over energy sufficiency.

The big dilemma plaguing Europe - amidst Russian aggression and malign actors such as China, Iran and North Korea - is how to achieve energy security. Is it by fast-tracking renewables or furthering fossil fuel usage for economic growth, but prolonging the chains fossil fuels and dependency from non-desirable nations.

The answer is all the above, but with the ongoing wind down of fossil fuels.

• Fossil fuels are a cheap source of energy - for both power generation and transportation; affordability remains a must in a world where the high cost of living is causing society to challenge the the foundations of democracy.
• Self generation through renewables must ramp up to allow the West to wean off fossil fuels over time.  Green fuels must also be part of the solution for harder to abate sectors.

But renewables ramp up is not simply installing more wind turbines and solar panels. The entire electricity infrastructure needs to be upgraded including mass roll out of battery storage and grid augmentation to deal with renewable intermittency, and the added challenge of increasing electricity demand from the roll-out of AI and general electrification of the economy.

The simultaneous ramp-down of fossil fuels and ramp-up up renewables is the path forward. The electrification of the economy - particularly the adoption of EVs - is gradual, and the ramp provides the time needed to transition. Renewables build-out, battery storage roll-out and grid augmentation takes time and cannot be delivered over night.

The ramp will also allow the required investment to be phased. The energy transition is expensive and it needs to be paid for. But too much financial pain for the public will not be tolerated.

A clear plan is what is now required, to allow regulation to be designed and finalised, providing investors with certainty on proceeding with the necessary projects to deliver the energy transition. 

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European Stability

 

The USA is discouraging investment. The political risk is real and feeding through into policy instability and uncertainty. The USA has upended traditional notions of friends and allies. Its actions have cost it a lot of friends for good.

Europe on the other hand remains steady, stable and united. Government support is structured through commercial contracts free-from political interference, and even protected from future political interference.

Europe's energy transition could well be the beneficiary of cheaper technology as Chinese manufactured equipment is "dumped" into Europe with the US tariff fall-out.

Development risk

Scaling risk

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Sorry State of the Union

This publication rarely ventures into geopolitics – especially that of the USA – but the rapidly shifting world order warrants a record of where things stand, two months into the term of the new administration.

Many have referred to the current events as a tectonic or seismic shift. We are beyond that now with the destruction of long-held relationships with allies, institutions, and the foundations of democracy. We are in paradigm shift territory. The world has enjoyed, and newer generations have taken for granted, the hard-fought peace since the end of the Second World War and the careful navigation of the Cold War.

The world has since gone through unprecedented times: the fall of the Berlin Wall, the Northern Ireland peace process, 9/11, the invasion of Iraq, the Arab Spring, Brexit, Obama presidency, Khashoggi, the Umbrella Movement, first Trump presidency, COVID-19, the invasion of Ukraine by Russia, and most recently the Israel-Gaza conflict.

But we are now in truly unprecedented times. Many of the above events were consistent with the advancement of liberal democracy: a worthy cause that the US, previously a key proponent, no longer stands behind. Even then, the beginning of the current snowball is evident in events like Brexit and the first Trump presidency.

The US is rapidly shifting to a different system built on outdated views of protectionism and mercantilism, and led by hugely misinformed, conspiracy theorist billionaires with false confidence from the successes that life has gifted them. This group is now running a country and system like a business with blatant disregard for the social wellbeing of its citizens, or the rule of law for that matter. The speed of change and disruption is enormous. 

Those with the most money and access to the loudest megaphone, aka X fka Twitter, control the narrative. Unfortunately that narrative is populist, twisted, and self-serving. Then again, what else should we expect from a group of misinformed and conspiracy theorist billionaires. As the recent New Zealand envoy to the US put it, “Trump [and this group] does not understand history” – he was dismissed for making this statement. They treat the world as a playground, with enough wealth to protect them no matter what the consequences of their actions. In fact, some would relish a collapse of the status quo so they can play out their end-of-civilisation fantasies in their far-away, ready to go, fully stocked bunkers. This group has used its money and megaphone to bend Washington to its will. The US is quickly descending into plutocracy.

Trump and his cronies hold the worldview where, quoting [x] “might is right”, and an acquiescing neutered Zuckerberg agrees that we need more “macho energy”. This is coherent with Trump’s view that democracy as a system, exemplified by Europe, is weak, loosely blending into his view that Europe has been freeloading off the US. If Trump, his cronies and his supporters really understood politics and how the world worked, they would realise that overseas defence and aid to counter malign influence is a very good deal for the US. The US and its citizens could not have prospered without the global peace we have enjoyed up until now. Ukrainian soldiers are on the front lines right now to protect this peace, not US soldiers.

Where does this leave the US’ allies? The damage is done. It has been made clear that the US can no longer be relied upon and the defence backstop it once provided is now worthless. The assault on institutions, the very visible weakening separation of executive, legislature and enforcement, the attack on free speech, and the vindictiveness of Trump and his administration is taking the US to a very dark place.

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The Problem with the UK Hydrogen CFD

 

The principle of a Contract-for-Difference or CFD is to provide pricing stability (or at least visibility) on the hydrogen being produced and sold. The government is typically the counterparty on CFDs.

The producer of the electricity or hydrogen negotiates and agrees a "strike price" with the government under the CFD. When the producer sells hydrogen below this agreed strike price, the government will top it up to the strike price. Conversely when the producer sells hydrogen above the agreed strike price, it must pay the excess to the government. This way, the producer will always receive the strike price for the duration of the CFD.

However the problem with the UK's Hydrogen CFD will not always top up a producer to the strike price because it imposes a floor on how low the hydrogen sale price is, below which the government will no longer top the producer up to the strike price. The floor is set at the natural gas price on a GBP/MWh basis.

Hence if hydrogen is sold below the natural gas price, the CFD payment will only be the difference between the natural gas price and the strike price. The producer does not receive any top-up for the difference between the hydrogen sale price and the natural gas price.

One further issue is that the natural gas price is variable - this introduces another risk to the producer. Even if a producer has locked in the hydrogen sale price, and therefore the difference between the sale price and strike price is fixed, the subsidy under the CFD can be variable if the natural gas price moves. The highest risk occurs when natural gas prices are high and rises to a level above the hydrogen sale price. In this case the subsidy would begin to shrink and the combined producer's hydrogen sale price plus the subsidy would end up being below the strike price.

It should be noted that the regime has been designed to incentivise producers to sell the hydrogen above the natural gas price, by paying 10% of the difference to the producer. Industry feedback has been that a 10% share is not generous enough to sufficiently incentivise produers to seek higher pricing with hydrogen buyers. This also perversely does not help drive down hydrogen pricing which is necessary for more broader base adoption. 

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Ithaca Energy and Eni UK merge to create UK North Sea powerhouse

 

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