WEBVTT - Are We Doing Decarbonization Totally the Wrong Way? 0:00:02.520 --> 0:00:14.880 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:17.880 --> 0:00:21.400 Hello and welcome to another episode of the Odd Lots Podcast. 0:00:21.480 --> 0:00:23.840 I'm Jolle Wisenthal and I'm Tracy Alaway. 0:00:24.040 --> 0:00:26.720 Tracy, here's something that really frustrates me, or I find 0:00:26.760 --> 0:00:27.240 kind of weird. 0:00:27.680 --> 0:00:27.960 You know. 0:00:28.120 --> 0:00:30.600 I see these charts a lot of times. They get 0:00:30.640 --> 0:00:33.640 posted on Twitter and it's like, oh, look at the 0:00:33.720 --> 0:00:38.040 incredible like plunge in solar production costs or the incredible 0:00:38.040 --> 0:00:41.120 advance in you know, how much cheaper it is getting 0:00:41.120 --> 0:00:44.000 to install solar. And then I see these charts where 0:00:44.040 --> 0:00:47.000 it's like more and more of our energy is coming 0:00:47.040 --> 0:00:47.640 from solar. 0:00:47.760 --> 0:00:50.080 So it's like, why do you hate environmentalism? 0:00:50.159 --> 0:00:53.040 No, I don't say something I'm not saying, but if 0:00:53.040 --> 0:00:56.279 the thing is getting cheaper and the volume of it 0:00:56.360 --> 0:00:59.720 is growing, why aren't electricity bills like down ninety percent? 0:00:59.760 --> 0:01:01.880 Why is the electricity not gotten a new chuaber? 0:01:02.280 --> 0:01:05.040 Yes, So you know, I have that house in Connecticut, 0:01:05.080 --> 0:01:09.000 which means that I follow ever source news quite closely. 0:01:09.560 --> 0:01:12.960 And eversource raised their rates because they said they needed 0:01:13.000 --> 0:01:17.240 to make more investment into renewable energy, and then just 0:01:17.319 --> 0:01:19.679 recently they said they're actually pulling back on some of 0:01:19.680 --> 0:01:24.400 their renewable energy investments. But unsurprisingly, perhaps rates aren't actually 0:01:24.520 --> 0:01:27.520 going down. But I think it's a frustration that a 0:01:27.520 --> 0:01:30.640 lot of people share, and one that probably says a 0:01:30.680 --> 0:01:33.759 lot about the way renewable energy currently works. 0:01:34.200 --> 0:01:36.040 By the way, on that thing is like, oh, we 0:01:36.120 --> 0:01:38.720 have to raise prices because you're making these investments. That 0:01:38.920 --> 0:01:41.440 was actually a really interesting nugget that I had forgotten 0:01:41.480 --> 0:01:44.240 about from our recent episode when we went to Mount 0:01:44.280 --> 0:01:46.679 Airy and we talked to the CEO of Unified, the 0:01:46.760 --> 0:01:49.400 textile company, and there was a line in there where 0:01:49.400 --> 0:01:52.320 he said, Yeah, energy is obviously a big component of 0:01:52.360 --> 0:01:55.360 our costs, and it's gone up because the utility is 0:01:55.400 --> 0:01:58.840 making all these renewable energy investments. So like, there's something 0:01:58.920 --> 0:02:02.880 weird about this right for energy, in which here you 0:02:02.920 --> 0:02:05.080 have this thing that's getting cheaper and cheaper, there's more 0:02:05.120 --> 0:02:10.000 and more of it. Obviously we know that decarbonization or 0:02:10.040 --> 0:02:14.600 electrification and decarbonization are major priorities, So it's like, what's 0:02:14.600 --> 0:02:17.400 happening Why. I just like, like it's hard for me 0:02:17.480 --> 0:02:19.040 to wrap my head around, Like when are we going 0:02:19.080 --> 0:02:20.080 to see the fruits of all this? 0:02:20.480 --> 0:02:24.160 Yeah, it feels like the natural path of capitalism here, 0:02:24.280 --> 0:02:28.079 or technological adoption where you would expect, you know, as 0:02:28.360 --> 0:02:32.720 this particular technology becomes more popular, more efficient, more useful, 0:02:32.840 --> 0:02:35.600 prices would come down and it would start to proliferate. 0:02:36.240 --> 0:02:38.959 It doesn't really seem to be happening quite that way. 0:02:39.240 --> 0:02:41.160 You know, we need you know, we need that like 0:02:41.480 --> 0:02:43.560 the kool aid man to jump through the window and 0:02:43.600 --> 0:02:47.119 bring up Jevin's paradox here. It's like, aha, you made 0:02:47.200 --> 0:02:50.400 the fallacy of thinking that is energy comes down and 0:02:50.400 --> 0:02:51.000 gets cheaper. 0:02:51.080 --> 0:02:53.920 Where's the where's the paradox collects? And that's what we 0:02:53.960 --> 0:02:55.360 need the airhorn to go off. 0:02:55.760 --> 0:02:58.520 So obviously especially in the US right now, but I 0:02:58.520 --> 0:03:01.680 think globally and the doing some similar things in Europe, 0:03:01.680 --> 0:03:04.160 but certainly in the US. We have the Inflation Reduction Act, 0:03:04.280 --> 0:03:05.800 and you hear a lot about like these, like the 0:03:05.840 --> 0:03:08.880 public private partnerships, and we're going to unleash the power 0:03:08.919 --> 0:03:12.640 of capitalism, and we're going to unleash market forces. And 0:03:12.680 --> 0:03:15.720 because capitalism does something really well, which is like drive 0:03:15.800 --> 0:03:18.880 for cheapness and efficiency and all this, you know, that's 0:03:18.919 --> 0:03:20.320 the sort of idea and we're going to nudge it 0:03:20.400 --> 0:03:23.520 along with subsidies and tax credits et cetera. We're going 0:03:23.600 --> 0:03:26.720 to sort of have these like powerful capitalist actors come 0:03:27.160 --> 0:03:31.160 and deliver us this world of cheap, clean electrified energy. 0:03:31.480 --> 0:03:33.679 I mean, I do feel like things are changing a 0:03:33.760 --> 0:03:36.040 little bit on that front. And you mentioned the IRA 0:03:36.520 --> 0:03:39.040 just then, but yes, you're absolutely right. At least in 0:03:39.080 --> 0:03:41.320 the States and you know, large parts of the West, 0:03:41.440 --> 0:03:45.040 a lot of the renewable energy transition is still this 0:03:45.160 --> 0:03:48.720 like kind of weird half measure where it's like private 0:03:48.760 --> 0:03:52.360 capital meets for the most part government subsidies. 0:03:52.840 --> 0:03:55.400 Right, So the question is like, are we doing it wrong? 0:03:55.840 --> 0:03:58.280 What is the role of private capital? Do we need 0:03:58.320 --> 0:04:01.880 private capital to invest in all this? Can the sort 0:04:01.920 --> 0:04:04.880 of the things that capitalism good at deliver us cheap 0:04:04.920 --> 0:04:08.400 clean energy? I'm very excited. We have the perfect guest today. 0:04:08.400 --> 0:04:10.560 We're going to be speaking with Brett Christophers. He's a 0:04:10.560 --> 0:04:14.000 professor of geography at Uppsalo University in Sweden, and he 0:04:14.080 --> 0:04:15.920 is the author of a book that came out this year, 0:04:16.160 --> 0:04:19.880 The Price is Wrong, Why Capitalism Won't Save the Planet, 0:04:19.960 --> 0:04:24.159 and it's a deep dive into how these energy markets work. So, Brett, 0:04:24.200 --> 0:04:25.680 thank you so much for coming on. 0:04:25.640 --> 0:04:26.960 Odd lots, thanks for having me. 0:04:26.960 --> 0:04:27.840 It's great to be with you. 0:04:28.279 --> 0:04:30.880 Why don't you just start by telling us the basic 0:04:31.040 --> 0:04:34.600 thesis of your book, which seems to be, you know, 0:04:35.040 --> 0:04:37.120 you say why capitalism won't save the planet, or why 0:04:37.240 --> 0:04:40.719 why market forces won't save the planet, why it won't 0:04:40.720 --> 0:04:44.159 deliver us that world of abundant, decarbonized energy. 0:04:44.600 --> 0:04:47.640 Sure, the basic thesis of the book is as following, 0:04:48.120 --> 0:04:50.320 but it's important to preface it with two kind of 0:04:50.400 --> 0:04:53.400 bits of contextual information that are really really important to understand. 0:04:53.760 --> 0:04:56.760 So the first of those is how the world is 0:04:56.839 --> 0:05:01.640 approaching the job of electricity sector decalanization in economic terms, 0:05:02.000 --> 0:05:03.880 And what I mean by that is to say that 0:05:03.960 --> 0:05:06.800 for the most part, we are relying on the private 0:05:06.800 --> 0:05:10.640 sector to do this. So governments, accepting certain important places 0:05:10.680 --> 0:05:14.560 like China, are keeping out of this in terms of 0:05:14.600 --> 0:05:19.000 the actual role of energy investment and ownership and operation. 0:05:19.360 --> 0:05:22.640 They're expecting the private sector to drive this forwards, but 0:05:22.760 --> 0:05:25.000 with the helping hand from government in various different ways, 0:05:25.040 --> 0:05:27.200 which we can talk about, and the Inflation Reduction Act 0:05:27.320 --> 0:05:29.320 is obviously a very important example of that. So the 0:05:29.320 --> 0:05:31.880 private sector is being expected to do it. The second 0:05:31.880 --> 0:05:34.800 thing it's important to say by context is what the 0:05:34.839 --> 0:05:37.440 private sector is being expected to do, and for the 0:05:37.480 --> 0:05:41.920 most part, solar and wind are the key things that 0:05:42.160 --> 0:05:44.640 the future, i guess is being hung on. So yes, 0:05:44.760 --> 0:05:46.640 there will continue to be a role for things like 0:05:46.760 --> 0:05:50.200 nuclear and hydro, and that will vary to different degrees 0:05:50.200 --> 0:05:52.880 in different countries, but for the most part, we're kind 0:05:52.880 --> 0:05:55.800 of betting the house on solar and wind. Coming to 0:05:55.880 --> 0:05:59.440 our aid now, with those two bits of information said, 0:06:00.000 --> 0:06:03.040 the basic argument of the book is that in so 0:06:03.200 --> 0:06:05.200 far as we're relying on a private sector, and in 0:06:05.240 --> 0:06:08.080 so far as we're focusing on solar and wind, that's 0:06:08.120 --> 0:06:11.360 a problem because solar and wind, and I'm not talking 0:06:11.400 --> 0:06:14.120 here about the manufacturing side of it, I'm talking about 0:06:14.120 --> 0:06:17.839 the deployment side. Building the solar and wind farms, owning them, 0:06:17.960 --> 0:06:22.520 selling the electricity they generate is a pretty uncertain and 0:06:22.600 --> 0:06:28.520 actually relatively unattractive proposition in investment terms, and specifically in 0:06:28.600 --> 0:06:32.719 terms of profitability. It's very volatile in profitability terms, and 0:06:32.760 --> 0:06:36.760 the returns are actually not great in general. And so 0:06:37.279 --> 0:06:39.960 in so far as that's true, that's a problem because 0:06:39.960 --> 0:06:42.000 we're relying on the private sector to do this, and 0:06:42.000 --> 0:06:44.839 obviously the private sector is led by profit motivations, and 0:06:44.880 --> 0:06:48.120 if it's not a great prospect in profit terms, then 0:06:48.120 --> 0:06:48.760 we're in trouble. 0:06:49.360 --> 0:06:53.240 So I want to get more into why solar and 0:06:53.760 --> 0:06:57.760 wind might not be the best investment opportunity. But before 0:06:57.760 --> 0:07:00.039 we do, I feel like we need to define some 0:07:00.080 --> 0:07:03.359 of your terms. And you make a big distinction between 0:07:03.560 --> 0:07:07.400 price cost versus profit in the book. Can you maybe 0:07:07.480 --> 0:07:09.279 explain that a little bit more, because I think a 0:07:09.279 --> 0:07:11.560 lot of people will hear the word profit and then 0:07:11.560 --> 0:07:13.400 they'll hear a price cost and they'll be like, well, 0:07:13.400 --> 0:07:15.960 the difference between price and cost is the profit, and 0:07:16.000 --> 0:07:18.720 that those two things are interconnected. But you make a 0:07:18.800 --> 0:07:19.920 very important distinction. 0:07:20.320 --> 0:07:23.240 Yeah, So I'm sure almost all your listeners will have 0:07:23.280 --> 0:07:25.760 heard about one of the things that you guys were 0:07:25.760 --> 0:07:28.720 talking about earlier, which is the fact that the cost 0:07:28.800 --> 0:07:32.280 price of renewable energy, which is essentially the cost of 0:07:32.480 --> 0:07:36.880 generating power through solar or wind, has come down hugely 0:07:37.040 --> 0:07:39.680 over the past ten to fifteen years. In particular, it 0:07:39.720 --> 0:07:43.640 has come down a lot, and you would imagine intuitively 0:07:44.200 --> 0:07:48.440 that if the price of generating it comes down, then 0:07:48.440 --> 0:07:51.440 the profit that can be obtained from selling it would 0:07:51.440 --> 0:07:53.920 be going up, so that as the price comes down, 0:07:54.120 --> 0:07:56.800 it inherently becomes more profitable. But one of the arguments 0:07:56.840 --> 0:07:58.320 I make in the book, I mean, in a way 0:07:58.400 --> 0:08:02.040 the central argument is that for all sorts of interesting 0:08:02.080 --> 0:08:04.680 and important reasons, they are kind of nerdy reasons. You 0:08:04.720 --> 0:08:07.360 have to get into the thickets to understand them. That's 0:08:07.440 --> 0:08:10.000 just absolutely not necessarily the case. There are all sorts 0:08:10.040 --> 0:08:13.240 of reasons why A does not lead inevitably to B. 0:08:13.760 --> 0:08:16.680 And my argument is that the focus on price, the 0:08:16.680 --> 0:08:20.240 focus both on the left and right in understanding these things, 0:08:20.680 --> 0:08:23.760 relentlessly on this what's referred to as the levelized cost 0:08:23.760 --> 0:08:25.360 of energy, and lots of people will have seen this 0:08:25.480 --> 0:08:28.400 chart with the declining price. The focus on that has 0:08:28.480 --> 0:08:32.640 been misleading when it comes to understanding the economics of renewables. 0:08:32.880 --> 0:08:34.480 And the argument is that we should be thinking on 0:08:34.600 --> 0:08:38.160 specifically about profit because that's what drives investment decisions. 0:08:38.400 --> 0:08:41.000 Great, well, then let's get right into this. So there 0:08:41.040 --> 0:08:43.720 are a lot of solar firms in the US. There's 0:08:43.840 --> 0:08:47.560 more and more installation happening all the time, like and 0:08:47.640 --> 0:08:49.680 at a piece that many people would not have guessed. 0:08:49.720 --> 0:08:53.160 So a solar installation, even prior to the IRA was 0:08:53.200 --> 0:08:56.439 deployed at a rate faster than expected there's still more 0:08:56.520 --> 0:09:00.360 the IRA maybe accelerating it at further before we even 0:09:00.400 --> 0:09:03.800 get to the whole grander decarbonization thing. Tell us about 0:09:03.800 --> 0:09:06.120 a business model of a solar farm and why it's 0:09:06.120 --> 0:09:07.200 not that great of a business. 0:09:07.400 --> 0:09:10.280 Yeah, okay, So I think the best way to approach 0:09:10.320 --> 0:09:13.360 this is to think about what needs to be done 0:09:13.960 --> 0:09:17.040 to get a solar wind farm development off the ground, 0:09:17.440 --> 0:09:20.920 and there are basically three or four crucial things you 0:09:20.960 --> 0:09:23.600 need to do. So the first of those is you 0:09:23.640 --> 0:09:26.080 need the technology, right, so you need in the case 0:09:26.080 --> 0:09:29.199 of wind, you need the turbines, in the case of solar, 0:09:29.240 --> 0:09:31.200 you need the solar sales and the solar modules. You 0:09:31.240 --> 0:09:33.240 need the stuff that's going to help you to generate 0:09:33.240 --> 0:09:36.640 the electricity. The second thing, and all of these are 0:09:36.720 --> 0:09:38.760 really really important. The second thing is you need somewhere 0:09:38.760 --> 0:09:40.760 to put it. So in the case of solar and 0:09:40.840 --> 0:09:44.120 onshore wind, you need land, and you need lots of it, 0:09:44.240 --> 0:09:47.360 which is a really important thing to understand. I would 0:09:47.400 --> 0:09:49.320 say that as a geographer, but it's actually true that 0:09:49.360 --> 0:09:51.960 you need lots and lots of land. And in the 0:09:52.000 --> 0:09:54.000 case of on shore, you can either lease that land 0:09:54.080 --> 0:09:56.280 or you can buy that land. So land is the 0:09:56.280 --> 0:09:58.400 second thing you need, or in the case of offshore wind, 0:09:58.440 --> 0:10:02.440 you need rights to ocean and sea floor. Essentially that 0:10:02.480 --> 0:10:05.080 gets auctioned off by the state, so that's the second 0:10:05.120 --> 0:10:07.000 thing you need. Third thing you need typically is a 0:10:07.040 --> 0:10:09.439 grid connection, So you need to be able to connect 0:10:09.480 --> 0:10:12.920 your generating facility to the transmission grid in order that 0:10:12.920 --> 0:10:15.240 that electricity that you produce can be delivered to the 0:10:15.360 --> 0:10:19.640 entities that consume that electricity, households and businesses. There are 0:10:19.679 --> 0:10:22.360 some exceptions to that, so some you get some off 0:10:22.400 --> 0:10:26.800 grid developments that are literally connected directly to whoever it is, 0:10:27.000 --> 0:10:29.200 might be a big corporation like a Google or something 0:10:29.200 --> 0:10:32.800 that's going to consume that electricity. But in almost always 0:10:32.800 --> 0:10:34.920 you need a connection to the grid. And then the 0:10:35.000 --> 0:10:38.080 fourth and final thing, but actually by far the most 0:10:38.120 --> 0:10:41.600 important thing. And I say that because if a project 0:10:41.640 --> 0:10:43.520 is not going to proceed, if a project is going 0:10:43.559 --> 0:10:46.679 to fall down, this is in the vast majority of 0:10:46.760 --> 0:10:49.120 cases where it falls down, it's in not getting a 0:10:49.160 --> 0:10:51.680 grid connection. It's not in not getting land, it's in 0:10:51.720 --> 0:10:54.800 getting finance. And so this is the really important thing 0:10:54.920 --> 0:10:57.080 to say, which is to say that I thought I 0:10:57.120 --> 0:10:58.920 was writing a book about electricity and I did write 0:10:58.960 --> 0:11:01.200 a book about electricity just as much it's a book 0:11:01.200 --> 0:11:04.520 about finance. And so, whoever you are, whatever type of 0:11:04.559 --> 0:11:08.800 renewable energy developer you are, you typically will be looking 0:11:08.840 --> 0:11:10.920 I mean it varies a bit across time and space, 0:11:10.960 --> 0:11:15.720 but typically you're looking to finance your development in large 0:11:15.760 --> 0:11:18.680 part with debt. So somewhere between sixty and ninety percent 0:11:18.760 --> 0:11:21.640 is the typical range that is debt rather than equity financed. 0:11:22.480 --> 0:11:25.680 And obviously the key thing to understand here is what 0:11:25.760 --> 0:11:28.600 type of economic business this And again it's really really 0:11:28.640 --> 0:11:29.800 important to understand this. 0:11:30.480 --> 0:11:32.160 So with a sonar and wind. 0:11:32.400 --> 0:11:36.360 Power plant rather than a conventional power plant, the key 0:11:36.400 --> 0:11:39.360 economic characteristic of it is that essentially all the costs 0:11:39.559 --> 0:11:42.440 getting curred up front, So you have your cost of 0:11:42.440 --> 0:11:45.920 getting the grid connection, getting the land, buying the technology. 0:11:46.120 --> 0:11:49.520 But once it's up and running kind of free. You know, 0:11:49.679 --> 0:11:52.280 occasionally a rotor will stop turning, you need to get 0:11:52.320 --> 0:11:54.199 an engineer to come out with a screwdriver and get 0:11:54.200 --> 0:11:57.480 the road to turning again, but basically it's free. So 0:11:57.960 --> 0:11:59.680 well over ninety percent of the costs are incurd up 0:11:59.679 --> 0:12:02.160 front that it's very different from a conventional power plant 0:12:02.160 --> 0:12:04.600 where you're buying the gas or cold to keep the 0:12:04.600 --> 0:12:07.960 power plant running. So if you let's put it this way, 0:12:08.040 --> 0:12:11.040 if you are a renewable energy developing and you've done 0:12:11.080 --> 0:12:13.719 those first three things and now or you've got the 0:12:14.280 --> 0:12:16.520 kit on order, and you now say, right, I need 0:12:16.559 --> 0:12:18.360 to raise the finance. If you go to you and 0:12:18.400 --> 0:12:20.679 you'll basically go to a bank and you'll say I 0:12:20.720 --> 0:12:23.319 need two hundred million dollars to develop this solar farm, 0:12:23.920 --> 0:12:25.839 and your bank manager will say, okay, you know I 0:12:25.920 --> 0:12:28.000 want to invest in green stuff. Green stuff's cool. I 0:12:28.040 --> 0:12:30.000 definitely want to do that. How are you going to 0:12:30.040 --> 0:12:31.320 pay that loan back? And how long is it going 0:12:31.360 --> 0:12:33.640 to take you to pay it back? And you'll say, well, 0:12:34.240 --> 0:12:36.880 maybe ten to twelve years. The kit will last for 0:12:36.920 --> 0:12:39.000 thirty but hopefully within ten to twelve I'll be able 0:12:39.000 --> 0:12:40.520 to pay it back and I'll pay you the interest 0:12:40.559 --> 0:12:42.760 all the time. And the bank manager will look at 0:12:42.800 --> 0:12:44.760 you and say, well that sounds great. How are you 0:12:44.760 --> 0:12:46.040 going to make the money And you say, I'm going 0:12:46.080 --> 0:12:47.600 to sell the electrics and they say what price you're 0:12:47.600 --> 0:12:50.080 going to sell the electricity for? And you say, I 0:12:50.120 --> 0:12:52.720 have absolutely no idea. And the reason you have no 0:12:52.800 --> 0:12:57.520 idea is electricity price is unbelievably volatile in places where 0:12:57.559 --> 0:13:01.200 you have deregulated electricity markets, which in the US isn't 0:13:01.240 --> 0:13:04.240 about two thirds of the country by population, and they're 0:13:04.360 --> 0:13:07.200 very volatile at all time scales, short, medium, and long 0:13:07.200 --> 0:13:07.800 time scales. 0:13:07.880 --> 0:13:08.560 And here's the thing. 0:13:08.800 --> 0:13:14.040 Nobody can reliably predict wholesale electricity market prices a week, 0:13:14.240 --> 0:13:16.240 two weeks, let alone a month or a year or 0:13:16.240 --> 0:13:18.120 five years in as the bank manager will say, well, 0:13:18.160 --> 0:13:20.200 I can't lend you that money because you have no 0:13:20.200 --> 0:13:21.400 idea what the price you're going to be to sell 0:13:21.440 --> 0:13:24.800 the electricity at. And so some mechanism has to be 0:13:24.960 --> 0:13:29.320 found to stabilize those prices so that the bank manager 0:13:29.360 --> 0:13:31.320 can be confident that you will be able to pay 0:13:31.320 --> 0:13:33.760 that deep back. So that's the basic way the business works. 0:13:33.800 --> 0:13:49.280 Once you've raised the finance, you're off to the races. 0:13:51.880 --> 0:13:56.640 So low returns, at least initially, coupled with the difficulty 0:13:56.640 --> 0:13:58.720 of predicting how much you're going to sell the power 0:13:58.840 --> 0:14:02.439 for or the volatility of electricity prices, yeah, I can 0:14:02.559 --> 0:14:05.080 understand how that would be a bad mix if you're 0:14:05.160 --> 0:14:08.199 a bank manager. This is something that has come up 0:14:08.280 --> 0:14:11.960 before when We've spoken with Jiggershaw from the Department of Energy, 0:14:12.160 --> 0:14:15.319 the Loan Program's office there, where he talks about the 0:14:15.440 --> 0:14:19.160 lack of expertise in banks when it comes to renewables, 0:14:19.200 --> 0:14:22.600 and also just the reluctance to take on this particular 0:14:22.720 --> 0:14:26.680 risk even when you have like many mandates both internally 0:14:26.800 --> 0:14:30.840 and externally that are saying you should throw money at renewables. 0:14:30.840 --> 0:14:33.240 It's kind of difficult to overcome. One of the reasons 0:14:33.240 --> 0:14:35.280 we wanted to talk to you is because in your 0:14:35.320 --> 0:14:38.200 book you do a lot of one on one interviews 0:14:38.240 --> 0:14:40.960 with people in this industry, So I'm curious, can you 0:14:41.000 --> 0:14:45.359 tell us, like what bank managers say specifically about underwriting 0:14:45.520 --> 0:14:48.320 this kind of risk. Are there any like particular stories 0:14:48.400 --> 0:14:49.920 or anecdotes that stand out to you? 0:14:50.520 --> 0:14:50.880 Yeah. 0:14:50.960 --> 0:14:52.680 So, I think one of the things that came through 0:14:52.800 --> 0:14:54.920 very clearly to me when I talk to people in 0:14:54.960 --> 0:14:58.760 this business is that they want to invest in this space. 0:14:59.040 --> 0:15:01.560 And so I often hear people, you know, colleagues, a 0:15:01.600 --> 0:15:03.400 man on the left who, like you know, esg is 0:15:03.440 --> 0:15:06.160 all just greenwashing. I don't actually believe that. I think 0:15:06.160 --> 0:15:07.760 there are a lot of people out there in the 0:15:07.760 --> 0:15:11.520 industry who want to support these types of developments, and 0:15:11.520 --> 0:15:16.080 there are also lots of renewable energy developers who are 0:15:16.120 --> 0:15:18.520 actually maybe not the big guys like the Next Era 0:15:18.760 --> 0:15:21.400 energies and the Black Rocks, but the smaller guys, and 0:15:21.440 --> 0:15:24.080 there's tens of thousands of them out there, you know what, 0:15:24.200 --> 0:15:27.000 They're actually prepared to take on the risk. In many 0:15:27.040 --> 0:15:30.800 cases they're like, well, we will do this even if 0:15:30.960 --> 0:15:34.160 the profit prospects are not necessarily great. And so it 0:15:34.200 --> 0:15:36.960 tends not to be them that are making the decisions 0:15:36.960 --> 0:15:39.640 not to invest if the profits don't look particularly appetizing. 0:15:39.960 --> 0:15:43.000 It's the financial institutions that are doing that. And of 0:15:43.000 --> 0:15:45.840 course that makes sense. If you are advancing two hundred 0:15:45.840 --> 0:15:48.120 million dollars that's not going to be paid back over 0:15:48.160 --> 0:15:51.280 to ten to twelve years, you want to be very 0:15:51.360 --> 0:15:53.560 very sure that you're going to get that money paid back, 0:15:53.720 --> 0:15:58.800 and so that they will emphasize relentlessly and repeatedly that 0:15:59.000 --> 0:16:03.960 having some form of certainty over the price which the 0:16:03.960 --> 0:16:06.360 electricity is going to be sold is the key thing. 0:16:06.840 --> 0:16:09.200 Now here's where it gets really interesting, which is the 0:16:09.200 --> 0:16:12.480 difference between the US and say Europe, Because the thing 0:16:12.520 --> 0:16:15.440 about the way the US has approached this, which is 0:16:15.440 --> 0:16:18.920 through renewables tax credits, both historically and with under the 0:16:18.920 --> 0:16:24.560 Inflation Reduction Act. They subsidize electricity investment and generation, but 0:16:24.640 --> 0:16:27.360 they don't stabilize it. And now that's very different from 0:16:27.360 --> 0:16:30.440 the types of mechanisms that governments have typically used in Europe, 0:16:30.840 --> 0:16:33.560 which do both. So some people might have heard of 0:16:33.560 --> 0:16:36.520 what are called feed in tariffs, which has been historically 0:16:36.560 --> 0:16:39.120 the main way in which this is supported in Europe, 0:16:39.120 --> 0:16:41.320 and in China historically as well, and in lots of 0:16:41.360 --> 0:16:44.640 other countries India included, And what they do is essentially 0:16:45.160 --> 0:16:48.480 the government itself or a government back dentity will provide 0:16:48.520 --> 0:16:52.000 a long term contract of say twelve years to buy 0:16:52.040 --> 0:16:55.440 the electricity produced by a renewal developer at a fixed price. 0:16:55.520 --> 0:16:58.080 And the IRA doesn't do that. So what's really interesting 0:16:58.120 --> 0:17:00.840 about the US is that tax credits are enough. So 0:17:00.880 --> 0:17:03.080 you need tax credits plus something else. 0:17:03.400 --> 0:17:06.560 There is some guaranteed right in the Inflation Reduction it's 0:17:06.600 --> 0:17:09.800 some like guaranteed something per kilo or. 0:17:10.160 --> 0:17:14.720 So that's a supplement, okay, to the market price. So yes, 0:17:14.720 --> 0:17:16.560 you get a supplement, but if the market price is 0:17:16.960 --> 0:17:19.359 in the toilet, you're still in the toilet, but just 0:17:19.440 --> 0:17:21.879 less in the toilet, so to speak. And so in 0:17:21.920 --> 0:17:23.560 the US you need something else. And so there have 0:17:23.600 --> 0:17:26.520 been two main things historically that do that, and that 0:17:26.600 --> 0:17:29.000 you know, talking to bank bank investors, this is what 0:17:29.040 --> 0:17:31.199 they look for. So either there are some form of 0:17:31.240 --> 0:17:35.480 financial hedging instrument so banks will do other parts of 0:17:35.520 --> 0:17:37.560 the same, or a different bank will provide swap or 0:17:37.560 --> 0:17:43.200 futures contracts in order to synthetically stabilize the electricity price essentially, 0:17:44.080 --> 0:17:46.440 or and again lots of listeners will have heard of these, 0:17:46.480 --> 0:17:48.840 particularly recently because they've been in the news a lot recently. 0:17:49.200 --> 0:17:52.919 It's what's called corporate power purchase agreements where instead of 0:17:52.960 --> 0:17:56.160 the generator having to sell their electricity into the volatile 0:17:56.160 --> 0:17:59.520 spot market, but Google or an Amazon or a Microsoft 0:17:59.520 --> 0:18:01.640 will come along and say, hey, we're going to build 0:18:01.640 --> 0:18:03.560 a new data center. Because of everything that's going on 0:18:03.600 --> 0:18:07.720 with AI, we want to secure as much of that 0:18:07.800 --> 0:18:10.879 electricity in renewably as we can because it's good for 0:18:10.920 --> 0:18:14.040 our pr Obviously that's the most the most important thing 0:18:14.080 --> 0:18:17.600 for them, and so they will enter a direct agreement 0:18:17.680 --> 0:18:20.760 of our purchase contract with the renewable developer and say, look, 0:18:21.560 --> 0:18:26.200 if you build this facility, we commit to buying often 0:18:26.280 --> 0:18:29.600 all your electricity, sometimes fifty percent of the electricity you generate, 0:18:30.320 --> 0:18:32.639 and we'll do that at a fixed price for the 0:18:32.640 --> 0:18:36.040 next twelve years. And the renewables developer then takes that commitment, 0:18:36.480 --> 0:18:38.600 goes back to the bank and says, here's what you're 0:18:38.600 --> 0:18:41.240 looking for, Now give me the money. And so they've 0:18:41.240 --> 0:18:45.840 become a really important way of rendering renewables projects bankable. 0:18:46.800 --> 0:18:49.119 I want to give back to some of these market 0:18:49.160 --> 0:18:52.640 structure questions with electricity, but you know, you lay out 0:18:52.680 --> 0:18:56.040 a very compelling argument that in theory there are some 0:18:56.080 --> 0:18:59.080 real problems that the way we deploy solar and wind, 0:18:59.160 --> 0:19:01.840 and on the other hand, in practice we are deploying 0:19:01.840 --> 0:19:02.440 a lot of stuff. 0:19:02.440 --> 0:19:03.919 We are so for all. 0:19:03.800 --> 0:19:07.200 These things, whether it's the uncertainty about the ultimate price 0:19:07.240 --> 0:19:09.760 you get, the cost of land, the coins of interest rates, 0:19:10.080 --> 0:19:12.600 in practice there is a lot more and there's more 0:19:13.000 --> 0:19:15.120 solar on the grid in California every day, and there's 0:19:15.160 --> 0:19:18.239 more battery stores to augment that solar, to deal with 0:19:18.280 --> 0:19:20.960 some of the variability that naturally comes out of solar. 0:19:21.480 --> 0:19:24.480 So like, why is that not an undercutting point the 0:19:24.520 --> 0:19:26.800 fact that, yes, in theory it shouldn't work, but in 0:19:26.840 --> 0:19:28.000 practice it's getting built. 0:19:28.440 --> 0:19:31.280 Yeah, so it is getting built, which is great. But 0:19:31.480 --> 0:19:36.600 a it's getting built because the renewables industry globally remains 0:19:37.040 --> 0:19:40.359 fundamentally buttressed by subsidy and support. So any way you 0:19:40.359 --> 0:19:43.160 look in the world, where governments have tried to remove 0:19:43.320 --> 0:19:47.680 those support mechanisms or even substantially attenuate them, investment collapses. 0:19:47.720 --> 0:19:50.160 So that's important to understand. And that's fine in a way. 0:19:50.240 --> 0:19:52.560 I mean, of course, the fossil fuel sectory is underwritten 0:19:52.600 --> 0:19:54.720 by subsidy globally as well, so it's not like renewables 0:19:54.760 --> 0:19:56.560 are alone in this. That's the first thing to say. 0:19:56.720 --> 0:19:59.520 The second thing to say is that you know, I 0:19:59.520 --> 0:20:01.800 often like in this to people who look at things 0:20:01.840 --> 0:20:04.440 through a glass half full or a glass half empty, right, 0:20:04.440 --> 0:20:06.800 which is, you look at the pace of growth of 0:20:06.840 --> 0:20:10.000 renewables investment, and you look at the pace of growth 0:20:10.520 --> 0:20:14.920