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Is Energy The New Frontier For Infrastructure Investment?
3 Plays5 months ago
This week, Jason and Carlos take a look at the rising shift in infrastructure investment from transport infrastructure to clean and renewable energy.
The duo discuss what factors are driving this shift, the global differences in where this investment is going and what this change means for contractors and the industry in general.
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Transcript
China's Coal Consumption and Imports
00:00:00
Speaker
I didn't get to say my fun fact that I worked out, which was I looked at the cold consumption of China, but they import 281 million tons. That's a lot of fucking ships. If you want to answer to how we afford all the roads and tunnels here.
Introduction to the Offsite Podcast
00:00:20
Speaker
You're listening to the Offsite Podcast with Jason and Carlos, where we talk all things construction and technology. Join us for discussions with industry leaders and insights into latest trends in construction.
00:00:34
Speaker
Welcome back to the podcast.
Shifting Investment to Energy Projects
00:00:35
Speaker
So today, apart from listening to my super croaky flu-ridden voice, we're going to keep pulling the thread of this idea of something that we talked about in the previous week. Off the back of talking about data centers with Sean a few weeks ago, it really sparked this thought about changing investment in infrastructure and how in lots of ah different regions in the world, there is this seeming shift away from, I guess, traditional infrastructure projects, road and rail type projects that are maybe either staying the same or starting to drop off because of things like rising interest rates, lack of ability to access the capital from from different governments. And then there's this other trend of a shifting energy mix
00:01:27
Speaker
renewable targets and things like data center energy demand pushing this big wave of energy projects that seem to be ah going to change the face of of I guess the infrastructure construction industry over the years to come.
Energy Shifts in APAC and Europe
00:01:44
Speaker
So that was a topic that got me pretty excited Carlos, ah something that we can dive into. Keen to explore it mate. Yeah, definitely. It's one of those things where over the last, particularly over the last few months, I'm hearing like murmurs of this like shift from like classic transport transport infrastructure into energy infrastructure. So yeah definitely worth digging into to really sort of validate that.
00:02:09
Speaker
It's something that definitely is like a common conversation that comes up. It's been increasingly over the last like year. And I feel like it's starting to really peak over the last three to six months, especially in, in APAC. But what are you, is you seeing a similar thing in say, in say Europe or the UK?
UK's Clean and Nuclear Energy Investments
00:02:27
Speaker
Yeah. So there's, there's the, I think you probably have similar targets, but there's the whole sort of, um, 2050 zero emissions. We have the same time.
00:02:37
Speaker
yeah You guys are still just smashing out coal. We've all got the same targets on paper. Yeah. Yeah. um Although you guys do have pretty low energy bills. So, you know, we say you guys, but we like as if we don't all live on the same planet. Like we've got a different target to you. It's way easier over here. Yeah. So um if you look into the sort of national infrastructure and construction pipeline here, um Energy infrastructure is way up. um And if you compare the two, it's something like 36 billion on energy infrastructure over the next, I think five years or something like that, um compared to 20 billion.
00:03:18
Speaker
So I think it was per year, whatever that is, compared to 20 billion in and ah classic transport infrastructure. So they are almost doing double on the energy side. um And that's trying to, like the government basically wants this like sustainable, resilient energy system. Like if you look at Ukraine when the gas Yeah, AKA, not a pipeline from Russia. Yeah, yeah, exactly. And then we also had our quadrupled bills. So yeah, the UK itself, most of it in terms of clean energy, the focus seems to be clean energy, not renewable energy, because it supports their sort of drive and nuclear.
Transition Challenges in Europe: Clean Energy Costs
00:03:56
Speaker
We've got like 75 billion. Is that the dumb question? Is that the only difference? Like clean energy is basically renewable plus nuclear?
00:04:03
Speaker
A potentially dumb answer, I think so. I think clean means we're not using fossil fuels. People don't come here for facts. Yeah, I think clean means we don't use fossil fuels, whereas because nuclear is obviously not renewable. So we've got like 75 billion of nuclear projects, albeit we seem to spend a silly amount of money on nuclear power stations if you compare the cost of each reactor to Europe. And now that's 75 actually, 15 of these new, um they call them small modular reactors that Rolls Royce are building. So they're much smaller, lower cost, but have a decent design life on them. And the other side here is wind. And wind is quite impressive what they're doing here. If you look at sub wind farms, they are way better value for money than nuclear, but
00:04:48
Speaker
The other issue we have with that is they're all in the North Sea where we see there's a lot of wind and there's these huge projects now. There's one I actually speak to this week called Eastern Greenlink where how do we actually distribute that power back from Scotland to England basically for these huge high voltage like cables. Yeah, because that's the thing, right? It's like it's like generation, but a lot of the spend seems to be in the in the network and transmission yeah distribution of of the power because, you know, the generation is is always um quite a ways away from
00:05:22
Speaker
other the people Yeah, 100%.
Public vs Private Investment in Energy Projects
00:05:26
Speaker
Wind looks cheap. The design life is quite short on a turbine and the amount of infrastructure that you actually have to build because they're in remote places, whether that's part of the cost assumed for the actual each scheme, it's hard to sort of tell. Is Europe similar in terms of the UK or is it ah is it skewing ah to a different energy mix? The two sort of notable ones, France is like, I think nearly 70% nuclear, like they went all in on it. It's the French companies building the nuclear reactors here. That's just their sort of bread and butter. They're like the Switzerland of watchmaking for nuclear power stations.
00:06:07
Speaker
Yeah, yeah, absolutely. and And similar to the watch, the watches always cost more when you're not in Switzerland. It's the same with the power stations. If you build them in France, so this price that if you build them in the UK there, then there's other price. Yeah, like I was looking at the cost of each each sort of nuclear reactor. And when you look at the French ones, they're super good value. And then they come here and triple the price. So yeah, export tax. Yeah, exactly. If you look at Germany, they've got quite a big reliance on ah natural gas and a reasonable amount of coal, but definitely growing in that space. The EU generally is pushing renewable and clean energy, so everyone's kind of being driven to that to that point. um yeah Just touching back on the UK, I think it's actually going to have a huge boost very soon, but anyone outside of the UK
00:06:54
Speaker
I'm sure you've seen we're going through an election now.
Australia's Renewable Energy Push
00:06:56
Speaker
Labour's going full on clean energy. They've got significant plans to hit something by 2030, which is what, six years away. They want 100% clean energy by then. So no coal, no gas. And um yeah, they're going to finish finish that power station. yeah station Yeah, yeah. I'm sure they've considered these six year design periods for each scheme to get us there. But um yeah, it sounds like they're going to come in and they want they focus on the security and independent side of energy as well as the clean aspects. So um it's almost a certainty they're coming in.
00:07:32
Speaker
Yeah, so that's interesting. I say ah similar to to what i ah what I was seeing when I was researching this topic, it sounds like UK and Europe, in some areas, maybe traditional infrastructure is starting to be a little bit heated off, but but not everywhere. um And then in Australia, the or APAC generally there is like it does seem to like start to drop off increasingly in traditional infrastructure and then Australia is like massively in on this energy transition and projects coming online. Yeah because solar is actually quite low at the moment isn't it which is surprising in terms of current capacity.
00:08:13
Speaker
Yeah, there's always been this ah there's been this like tug and push and pull in Australia around like everyone wants the renewable effort. We've always been really like asking the question of what's what's the storage option because you obviously wants the base load power ah supply. What's happening in Australia is that ah different states um are taking like slightly different strategies, but there is a giant push for renewable energy and combination with different storage and transmission projects. The most prolific or the the biggest example is in New South Wales, which is a state here. They're implementing a bunch of what they're calling renewable energy zones. And so there are a series of these zones
00:08:58
Speaker
And like some of them are quite large. They cover a decent percentage of the state. I think there's like five or six of these big zones. And some of them are looking for like three, four, five, some of them even 8,000 megawatts of of generation capacity. And so those zones will have ah wind, they'll have solar, and then they'll have transmission um and distribution networks built into them. And then they'll have some usually some amount of storage as well. So one of the things that Australia has built some of, I don't know if it's happening in in Europe as much, but ah
Global Energy Shifts: Asia and North America
00:09:36
Speaker
Pumped Hydro. So there are two massive Pumped Hydro projects in in Oz. One's the Snowy 2.0. We don't talk about that one because they've got a TPM stuck ah for quite ah a bit of time underground.
00:09:49
Speaker
And then another one is um is in Queensland. It's kids that I think. And then there's also a mega battery and we bought like the world's biggest ah Powerwall. The world's biggest like Tesla Powerwall. So you know those little like Tesla things that go in your garage. ah We've got one that like powers a part of the state. So massive Tesla. Basically Elon Musk was tweeting a premiere of a state and we decided to buy one of his big storage things. Presumably distribution is pretty tough given given the size of Australia and the population is not that high. So outside of cities, it's a nightmare, presumably. Yeah. Yeah. It's well, it's just a long way. It's not it's not the North Sea. So it's not as like difficult as getting yeah it's not i'm usually a marine.
00:10:35
Speaker
a job. But yeah, it's a long way to cover. And yeah, a lot of these zones are well, some of the zones are quite far inland. So yeah, the some of the biggest components of the investment are in transmission. um The other thing that that kind of mix shift is it also seemed to be happening in places like Asia. In the US, they're definitely driven by things like data setup, renewable targets, Yeah, mainly those two. There's definitely a shift in in infrastructure spend. They also have things like that ah Infrastructure Investment and Jobs Act, which is driving yeah massive investments in solar and wind energy in North America. So if we've kind of set the scene that, okay, there's a different type of construction project coming down the line or more of this other type of project, whether it's a transmission line, um a wind project, a solar project or something like that.
Impact on Construction Industry: Energy vs Transport
00:11:36
Speaker
All of the folks like you and I that, you know, i grew up delivering road or rail projects, what does that shift, do you think, what does that shift mean for ah folks in in the industry? If we think about, if we compare to like a typical, say, rail project and a, let's just say, a wind farm or nuclear power station, in terms of sort of program and time investment, you'd expect the bulk of both to still be classic earthworks, FRC like infrastructure works around the the the the site or the location and like if you compare like a wind farm or ah or to say a rail project the rail stuff at the end like the track and the electrification and the really niche stuff is done by like so quite especially supply chain. With a wind farm you get like a Vestas or someone that comes in it just builds a turbine it doesn't take very long at all it's all manufactured off site.
00:12:28
Speaker
I have no experience of working on energy projects but you'd assume that the skill set is similar because it's heavy civils. to To a degree I think yeah there's obviously like a boatload of footings to go in so you've got these like massive towers or uh or turbines and they've got these epic like uh civils scope for footings and you know some you know probably earthworks and hall roads but I wonder as an engineer the principle is still the same as like ah Yeah, it's also like grey stuff and steel. and yeah's ah yeah i i think the I think the differences probably lie in like the delivery models of the projects, probably. I guess the ones that we've seen, there is definitely more of a subcontracted versus self-delivered approach to it.
00:13:14
Speaker
You also have these like kind of interesting, maybe the developer is partnered with the supplier to a degree. So you end up kind of like with the client procuring, maybe turbines as an example. So you just get these like slightly different delivery models than would have been more typical if you were building a road. Yeah, you can imagine rather than getting the getting the contractor on board and they procure a wind turbine company and that make it insanely expensive for the client. They're just going to have you to expect two relationships, everything enabling and civils. And then that sort of end and then you'd have the turbine company come in separately with its own relationship relationship with the client.
00:13:55
Speaker
it wouldn't make sense to to stick it under the contractor when most contractors in the UK haven't delivered extensive like wind farm contracts. Yeah, and then the design of the whole, like if we stick with the wind farm, the whole wind farm is so intrinsically tied to the supplier of ah ah that hardware. yeah um And so yeah, you end up with you end up with almost like this paradigm where the the let's say main contractor is doing kind of like all the grunt work and all the dirty stuff and then these other folks come in and ah put in the expensive bits. Yeah yeah you're not gonna you know i'm going to risk training up a team without experience and that sort of stuff to potentially get it wrong because it's too much of an expensive mistake.
00:14:38
Speaker
the other The other difference that ive ah we definitely see a lot, I don't know if it's the same there, but definitely in Australia, it's a giant shift in the the type of
Project Timing and Negotiation Dynamics
00:14:49
Speaker
client, right? So obviously most of the road rail infrastructure is delivered by ah by a public client. There's a sort of rules of the game that are kind of understood in how to deliver those projects. You know, people know. Yeah, there's just like I said, there's some there's a kind of understood rules of the game. People are familiar with it. The a lot of the energy infrastructure is private investment, and that has a whole different flavor to it.
00:15:16
Speaker
One of the differences, and I'll get your thoughts on it in a second, but definitely one of the differences is project timing is super variable. Public client had this budgeting cycle. You know they're forecasting it to be a certain point. Maybe it can kick out a little bit, but they're pretty public in signaling, okay, we've got the money for this project. We plan to start it in this period. we're going to go to market and then we're going to start it. The private clients tends to be, we want to do this thing, we may or may not do it depending on whether the economics stack up and then until the point they say we're definitely going ahead in the contract signed, people are still like on the fence. so Don't know if any other dynamics like that, even with your QS hat on around like yeah private versus a public client for that size of project and other things that would jump out, it was different.
00:16:05
Speaker
Yeah, you can imagine this horrible negotiation on like, particularly with nuclear here, agreeing the price per gigawatt price per megawatt output. And that basically drives the decision on whether they're going to commit or not. And you're looking in like such a long period of time. Yeah, that's a tough place to be. I think in the UK, there's a plan for this great British energy company. So they're actually going to nationalize renewable ended energy projects. So everything wins solar and wave. will be public owned, so they'll be public commissioned projects, and then they get contractors to build them. That's part of the plan that the next government wants to establish as soon as they're in. So that should take away. You've preemptively called it the next government, so we're shooting. Yeah, they're so far ahead, it's ah it's happening.
00:16:52
Speaker
Yeah, that'd be a big old shift if they don't. So um yeah, that's a huge change here, because at the moment, there's lots of yeah private companies fighting or driving those negotiations. So it does make sense to yeah nationalize it, in theory. But it even on the contractor side, though, like, even if they kind of there's like this, there's like this dual negotiation, right? like We're going to go and bill we're go to go and build this project. whether it's let's say Let's keep with the wind farm example. ah Then you've got the like price per megawatt or whatever it is, this kind of tariff ah negotiation thing. But then on the flip side, you've got the downstream negotiation with your suppliers. And I think a lot of times or often the ah private client is
00:17:37
Speaker
can like play this like sit on the fence until I've got numbers I'm happy with in both directions. This project may or may not go ahead at X timeframe. So it it does change the dynamic for contractors that are like, one of the things that contractors really ah thrive on a need is this kind of like surety of pipeline. The whole business is like cycled around. What's the pipeline of work? What's the timing of it? Um, where are people going to go from this project to another project? And so that being such a big mix, it will just introduce, uh, definitely in Australia, it's going to introduce a different dynamic to how that happens. I was talking to one tier one contractor that was saying that they have like a hundred billion in projects to tender with a large proportion of that being energy related.
00:18:26
Speaker
And so if all if that if a if a large proportion of that are private and the timing is really like uncertain. The weather or not we're going ahead is really uncertain. That's a big like question mark for the business model and the forward planning of of contractors.
Contractor Strategies and International Expansion
00:18:43
Speaker
Yeah, these schemes are far too big to just suddenly introduce a major scheme to the market, have enough people go for it, and be able to deploy immediately, right? Without that strong pipeline, which is normally sort of government driven, if it's fully private, it's quite difficult. And yeah, obviously contractors will want to play that game of ah showing up what they're getting and make sure they're making you a profit buy.
00:19:05
Speaker
subbing everything out below. You would expect, because the pipeline is growing, the supply chain below will mature and adjust to suit to make sure that they're actually geared up. But if you could do but the alternative is outside of nuclear, sorry, yeah. No, I was just going to say you could do the, oh the, the, the counter argument to that theory is that people think they can go and win a bunch of work and make a bunch of money. They go and hire and sub whoever they can to get the contracts. And then with the thought that like this boom will be around for X, you know, we'd been through a resource including we've been through ah and then, uh, I just need to like grab whatever work I can try to make some variations on the way.
00:19:43
Speaker
And then at the end where everyone will like disperse this kind of like, I don't know, mercenary approach. Yeah. the big is' Yeah. But why, why would the boom ends other than new technology? So like by definition. yeah Yeah, but like, yeah, unclean energy won't come back. If you look at the design life on the wind farm, there's something like 25 years, and then nuclear pushes 40, 50 years. So the volume that we're building, gonna be constantly recycling these forever.
00:20:17
Speaker
Yeah, but I think like ah if you look at the the breakdown in spend, I think you'll find that like a large proportion of the overall capex is in transmission and storage. And so, yeah, you might be recycling turbines, but you're, well, hopefully like things like your footings and everything are like totally wasted. but like yeah yeah you your your your your dam that you're using for pump hydro not changing your transmission line maybe you restring but that's going to have a longer design life i don't think it's like this investment to infinity
00:20:54
Speaker
There's a big capex and then there's there's ongoing yeah there's an ongoing project demand. Do you think there will be ah more tier one contractors who try to nail their sort of position in the market, their expertise in home markets, and then move abroad to other countries who can't necessarily afford to go clean now, but to drive the price down and and venture out? If you look at the statistics, obviously the sort of Western Europe, Nordic, Countries and others are sort of the most progressed in terms of 100% renewal And then there are some sort of random ones like I think Costa Rica is a hundred percent things like that But if you look at like Africa South America right now, then might not be the investment for it But you would expect these contractors to be looking abroad because everyone's gonna have these targets eventually because coal and gas is finite and Yeah, for sure. yeah if If that is your strategy as a contractor, you want to have something pretty unique that you're bringing to the table. Because like it's amazing how many contractors in the last two years have now become like whole divisions withnew you know for renewables. And they're now like the renewables expert. So there's a lot of people doing like the kind of rebrand where we the the right partner for renewables. But if all you're bringing to the table is digging holes and putting footings in,
00:22:13
Speaker
There's probably people in South America that can do that as well. Yeah. Yeah. you'd have to all yeah It's folks like a vest ass or people that have like some IP that can do supply. They are in a cracking position to do what you're describing. But that's what I was saying before where like the general contractor is kind of getting pushed to do a little bit of the grunt work. that I don't think is super transportable or exportable to other regions. Because all you'll do is take all your overhead to that region. You need to have something that's your intellectual property that you're bringing to the table. yeah for sure Or people you know or people people that have done it before. So yeah, there is a little bit of that. But if you're going to go somewhere with a lower cost of labor, it needs to be something pretty powerful in terms of IP that you're bringing in.
00:23:01
Speaker
I was just going to push to the next, I guess, topic or thought, which was we talked about, okay, projects will, the project delivery is
Remote Management and Workforce Dynamics
00:23:09
Speaker
different. The type of client is different. The other thing that is noticeably different with both of us having worked on like central London projects before is that pretty much all of these things happen way away from population centers. So a lot of people that have been working for the last five years or 10 years on rail projects in very populated areas are now going to be forced with this choice possibly coming up of the big project is now 10 hours drive away or you know as you described in the North Sea. Is that something that your people are talking about over in the UK there?
00:23:48
Speaker
No notable conversations. There's a lot of people that work in, say, London that actually don't want to work in London, but they work there because it's the big megaprojects that is great on the CV. It's interesting. And it's going to focus on things like London because all the projects are infrastructure projects trying to get people here. But with the combination of the cost of living here, the fact that everyone wants to work from home, and those transport projects are going to get hit a capacity where there's no need to sort of do that much more other than keep them modernized. I can imagine it it's well received. There is the extreme of a wind farm in the Shetland Island. If you look at the population of the Shetland Islanders, that just can't deal with lots of people. There's some really little horses. What, the Shetland ponies? Yeah. I actually never actually thought they might have been indigenous to the Shetlands. You'd assume so. Well, yeah, you've got to ask whether the island is named after the horse or the horse is named after the island. We don't know. We'll take a quick break and do some research and come back.
00:24:48
Speaker
I've just checked, they did originate at the Shetlands, so they they were named after the island. There we go. but you would That's rattled you. You can't even think now. You're like, all you can think about is the... I'm just imagining, could you deliver a project more remotely on something like a wind farm? Like, if you think about if you think about it like a a station in London, there's such a concise coordination side of things. Doing that remotely would be almost impossible.
Fly-in Fly-out Work Dynamics in Remote Projects
00:25:16
Speaker
But if you're doing something that's quite sparse and in the middle of nowhere, could you have a ah larger proportion of the workforce working remotely because there's like a smaller set of like high value tasks done by specialists on site potentially?
00:25:31
Speaker
Yeah, it it depends on the the type of project as well. like If you're doing a project in the North Sea, you're you're on ah now talking about a marine project with giant pieces of marine plant. Probably the proportion of labor cost over of overall project value is probably, like I'd imagine, slightly lower than a station where you've got 40 block layers or something smashing up block work. um your like Plant cost is a lot higher. I don't think there's like a major opportunity to make a meaningful difference to like remotely deliver it. It's still dirty work and very mechanical work. I think ah if if I reflect on when when when we first, ah because we're a similar age, when we were first like starting out um after university,
00:26:24
Speaker
In Australia, there was like ah coming to the end of a massive ah resources boom. So tons and tons of tons of projects in ah resource extractions, iron ore, coal projects. yeah And so there was a similar dynamic where tons and tons and tons of the infrastructure work that was available was on mine sites ah really far away. And that created this big dynamic where lots of people would go and do this like fly and fly out style work and work for two weeks. but one Those people from here went to Australia to do that. Yeah.
00:26:57
Speaker
Yeah. And, you know, there was like a pay increase and stuff associated with it, but it created this really big dynamic where, yeah, all sorts of things. We talked about mental health a while ago. It'd be interesting to see whether that's like what's coming back. It's always been there. There's like lots of people still doing it, but a large proportion of people have been back in kind of like Central in Australia, Melbourne, Sydney projects. that fly and fly out thing and and whether that starts to also happen increasingly in UK, in Europe, in the US.
Future of Construction Industry: Project and Client Changes
00:27:32
Speaker
I mean, if you if you think about most of the, a lot of the workforce in London, they're on subsistence anyway. They're they're coming in Monday to Thursday and living here as they would with anywhere else.
00:27:43
Speaker
But there's yeah there's quite a few people I've spoken to to recently where there's British contractors doing mega projects in Europe and they have an arrangement where they basically are away Tuesday to Thursday. So they work from home Monday, they fly Tuesday morning, they stay two nights and they fly home Thursday night. And they love it. You're you're talking to like senior management or something, because when I was a site engineer, there was none of that. there You would get shipped somewhere for four weeks and then you could you can come out for a break for a couple of days. Like, surely that's the rotation that most people are going to get. If say engineer yeah yeah you fly out for 10 weeks and then they get a week off, right? That's the idea. Make your own way to the side. Get there.
00:28:29
Speaker
Here's a, here's a bunk bed and then yeah, you can come back. You can go for a break in four weeks. Yeah. And get underpaid throughout the whole course. Yeah. Yeah. But one day you'll get that Tuesday to Friday gig. Yeah. yeah That's the aim, right? Yeah. Uh, no, I think that the, I think that the, it will be interesting to see it. it Yeah. So I guess to summarize, it's, it seems as though there is this big shift coming, the types of projects that we're as an industry going to be delivering is going to be shifting. There's going to be different ways that they're delivered, uh, different companies that will be working for instead of like the government, there'll be lots of these like private clients that'll be.
00:29:10
Speaker
ah different consortiums of like investors and energy operators. There's going to be a big shift in the the industry for what people have been familiar with. Yeah, for folks in the industry, it's going to be a change. It's going to require a lot of people to adapt to that change. It'll be interesting to see how that um progresses over time. It might be interesting for us to discuss with one of the folks working on ah on a wind farm project in the future. Mate, that was an interesting conversation, folks. Thank you very much for listening and as as usual, any feedback that we get is always really welcome. Yeah, thank you for folks to send through text messages, through LinkedIn messages and yeah, thanks for listening and see you next week. Thanks everyone. um