OPINION: Supply Chain Woes

Supply chain risk was a child of COVID-19. With mass lockdown, industrial closures, limitations on transportation and shipping, supply chains were stretched. This was then exacerbated post COVID-19 as the world ramped back up to normal and supply chains unable to cope. This manifested in delivering delays and higher transportation costs along the entire value chain.

Now geopolitics are entering the mix of reasons for supply chains disruption. Protectionism and tariffs are increasing costs - project developers have been bulk ordering to try and get ahead of the curve - and reshoring are pushing up costs further. Restrictions on exports are adding to the woes. Think US CHIPS Act and Chinese restrictions on rare earths exports.

All this at a time when the world needs an affordable and functioning supply chain to deliver the energy transition, growth in power demand and AI compute.

This is what happens when supply chains were built for just-in-time to slim down costs and working capital. What the world needs now to rebuild is a just-in-case supply chain.

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Real-time power consumption from two US hyperscale data centres

 

Real-time power consumption from two US hyperscale data centres (MW)

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US Large Load Tariffs

 Large load datacenters are driving a large proportion of investment by utilities required for load augmentation. This introduces asymmetry with significant long-term investment to serve one specific group of customer over the current broad retail/commercial customer base.

This one customer group - hyperscalers - are also prone to rapid technological change. This poses the dilemma of how to ensure this group pays for the cost of serving them and shielding existing customers from the risk of future datacenter power demand being lower than expected.

Utilities are adopting several mechanisms to balance attracting new large customers while protecting existing customers (ratepayers) with "large load tariffs":

• Rates based on the marginal cost of serving the new customer
• Long-term contracts obliging payment of service regardless of whether power is required, to provide revenue certainty; an option to exit the contract for a fee could be a feature
• Minimum monthly demand and energy charges - i.e. take-or-pay, so that large customers contribute to grid costs even during low usage periods. Foe example, AEP Indiana uses a charge based on 80% of contracted or historical peak demand
• Collateral requirements

Examples of large load tariff protectionist features include:

State	Utility	Tariff Features	Purpose / Notes
New Mexico	Multiple Utilities	Special rates allowed by law if they recover incremental service costs	Supports economic development while protecting existing ratepayers
Indiana	AEP Indiana	Minimum demand charge (80% of contracted/historical peak)	Ensures cost recovery even during low usage periods
Kansas	Evergy	15-year contracts, collateral requirements, early termination fees	Provides revenue certainty and risk mitigation
Georgia	Georgia Power	Load forecast shows high growth; cautious tariff commitments due to project risk	Focus on data centers; many projects not yet committed
Texas	Oncor, CenterPoint	Tariffs include peak demand incentives and grid contribution requirements	Designed to manage grid stress and incentivize off-peak usage
Virginia	Dominion Energy	Tariffs include clean energy integration options and flexible load management	Aligns with state clean energy goals and large customer flexibility
Arizona	APS, SRP	Tariffs include time-of-use rates and infrastructure cost-sharing	Encourages load shifting and shared investment in grid upgrades
North Carolina	Duke Energy	Tariffs include customer commitment thresholds and performance guarantees	Ensures reliability and investment justification

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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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