Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.
Speaker 2: I'm Joe and.
Speaker 3: I'm Tracy Alloway.
Speaker 2: Tracy, it's been too long since we've done an electricity
Speaker 2: great episode.
Speaker 3: I've been avoiding it on purpose, Joe. I, in all honesty,
Speaker 3: I really find this particular market slash issue a difficult
Speaker 3: one to talk about because it's impossible to talk about
Speaker 3: it in broad terms, and I know on odd thoughts
Speaker 3: we try to avoid doing that generally, but even in
Speaker 3: an hour long podcast, even with multiple episodes, we could
Speaker 3: do an episode for each electricity market in the United
Speaker 3: States and still only scratch the surface, right, Like you
Speaker 3: have to talk about regulated monopolies versus competitive markets, and
Speaker 3: then you have to talk about what's an independent system
Speaker 3: operator and what's like, well, what's Texas? That's all about Texas?
Speaker 2: What is Texas?
Speaker 3: What is Texas?
Speaker 2: What is Texas? Would be its own episode, but yeah,
Speaker 2: that's right. You ask a question to a grid expert
Speaker 2: and their first thing and they're like, wait, are you
Speaker 2: talking about a competitive market or regulated market here?
Speaker 3: That's always a meter basis or unmetered or I don't know.
Speaker 2: Yeah, behind the meter, et cetera. Yeah, But anyway, obviously
Speaker 2: with the sort of Ian Dunning who we recently had
Speaker 2: Hudson River Trading, he was talking about how, you know,
Speaker 2: their main constraint is power and that's just a small,
Speaker 2: a very small in the grand scheme of things user
Speaker 2: of AI services. We're talking about using AI and high
Speaker 2: frequency trading. And he said even more than chips that
Speaker 2: the power constraints are their biggest constraints right now. And
Speaker 2: so I do think that one thing we have to
Speaker 2: think about is, especially how long can this AI boom
Speaker 2: go on? Is what's it going to get all of
Speaker 2: this AI activity on the grid, Like how constrained is it?
Speaker 3: That's right, And we also recorded that episode with Sager
Speaker 3: and Jetty and we were talking about the political controversy
Speaker 3: surrounding AI, and obviously power consumption is a big one
Speaker 3: of those. At a time when electricity prices have already
Speaker 3: been rising, is AI only going to drive them up further?
Speaker 3: Although that said, you can't even say that electricity prices
Speaker 3: have been rising because in certain states they've actually been
Speaker 3: going down on an inflation adjustment basis. But even that
Speaker 3: is a nuanced picture.
Speaker 2: But by and large, especially since the pandemic. Really by
Speaker 2: and large we have seen faster than normal increase in
Speaker 2: electricity price inflation, and we have the big AI question.
Speaker 2: So we really have to figure out a how is
Speaker 2: all of this new data center capacity going to come
Speaker 2: onto the market, Who's going to apply the generation? And
Speaker 2: then who is going to bear that cost? Is it
Speaker 2: going to be the consumers who are already generally speaking
Speaker 2: across several markets seeing their bills go up.
Speaker 3: If we have to talk about this rubber band ball market,
Speaker 3: then I'm glad we at least have the perfect guest
Speaker 3: to do.
Speaker 2: That's im say we do, in fact have the perfect guest.
Speaker 2: I'm very excited to say we're going to be speaking out.
Speaker 2: Someone been trying to get on the podcast for a
Speaker 2: little while, Travis Cavula. He is a VP of regulation
Speaker 2: at energ Energy. He's also been on a public commission
Speaker 2: in Montana, so he knows that side of the business
Speaker 2: in terms of how prices are set in those regulated
Speaker 2: monopoly markets. He is also an academic. Travis, thank you
Speaker 2: so much for coming on Outlaws.
Speaker 4: It's great to be here. Thank you.
Speaker 2: We're really excited about this one because there's so many questions,
Speaker 2: why are we talking to you? What do you give
Speaker 2: us the sort of brief intro of what you do
Speaker 2: and what your background is, so that our audience has
Speaker 2: some idea of why are the perfect guest?
Speaker 4: Sure?
Speaker 5: So I spend my time on regulatory affairs at a
Speaker 5: company NRG. We're a big producer of power. We sell
Speaker 5: power to end use customers. That's permitted by law where
Speaker 5: competition exists in the power and gas markets. So we've
Speaker 5: got about eight million end use customers. And previously I
Speaker 5: was the head of the Montana Public Service Commission, the
Speaker 5: rate setting body for regulated utilities in the state. I
Speaker 5: head it up an organization that represents state utility commissions
Speaker 5: at the national level called NAYRUK, and I teach a
Speaker 5: little bit on the side at University of Chicago's Hair
Speaker 5: School of Public Policy, of course on utility regulation and
Speaker 5: electricity markets. So I spend my time thinking a lot
Speaker 5: about what goes into customer bills, both the stuff that
Speaker 5: we can control being a company that is a provider,
Speaker 5: and also stuff that are sort of upstream costs of
Speaker 5: goods sold that appear on my company's bills, the sort
Speaker 5: of polls and wyers charges, that go into people's bills.
Speaker 5: So basically, you know, there's two parts of people's bills,
Speaker 5: the commodity and the regulated grid charges that get the
Speaker 5: commodity to you, and both of those are subject to
Speaker 5: some form of regulation in this industry.
Speaker 2: Yeah, Tracy, when we were in Chicago recently for a
Speaker 2: live episode, I met one of Travis's students there and
Speaker 2: he's like, you got to talk to Travis. Travis is
Speaker 2: the man that will explain all these things. So Glamor
Speaker 2: finally making this happen.
Speaker 4: I'm high rating for that's important from.
Speaker 2: Rate by professor.
Speaker 3: That's right. Okay, so no pressure Travis.
Speaker 4: All right.
Speaker 3: So you were talking about the wholesale cost of the
Speaker 3: thing that goes across the wires and the polls and
Speaker 3: all of that. So that's electricity versus the actual transmission system.
Speaker 3: One thing that we hear whenever this topic comes up
Speaker 3: is it's not necessarily about the wholesale cost of electricity.
Speaker 3: It's the cost of actually maintaining and expanding the grid.
Speaker 3: How much truth is there to that? If you're going
Speaker 3: to pinpoint the dominant factor behind higher electricity prices right now,
Speaker 3: is it the wholesale price or the actual cost of transmission.
Speaker 5: Yeah, it's kind of the scope of time that you
Speaker 5: choose to evaluate, but you know, just to give you
Speaker 5: kind of a benchmarking. You know, if you looked at,
Speaker 5: say the New England power market over the last twenty years,
Speaker 5: which sort of is the beginning point of the restructuring
Speaker 5: of the industry and the introduction of competition in a
Speaker 5: place like New England, the actual commodity cost would have
Speaker 5: fallen by about fifty percent on an inflation adjusted basis,
Speaker 5: whereas on the same basis, transmission costs would have increased
Speaker 5: something like nine hundred percent now from a very low
Speaker 5: level to a much more substantial level. But then if
Speaker 5: you drew that comparison in another market, say the mid Atlantic,
Speaker 5: over a shorter period of time, like year over year,
Speaker 5: you know, the grid costs would not have risen substantially
Speaker 5: in a year, but power prices would have. And that's
Speaker 5: really just because the commodity works on more fundamental kind
Speaker 5: of supply and demand balance. You know, scarcity will drive
Speaker 5: up prices relatively rapidly, and then an oversupply that occurs
Speaker 5: when the market is moving back toward equilibrium will drive
Speaker 5: prices down rapidly. Whereas those regulated set of costs that
Speaker 5: attached to the transmission and distribution systems. You know, those
Speaker 5: are still cost plus regulated industries, and they have a
Speaker 5: funny way of working monodirectionally up over the course of time.
Speaker 5: But these do things trade off against one another. You know,
Speaker 5: you need to invest in transmission in order to facilitate
Speaker 5: the efficient delivery of electricity. You need to invest in
Speaker 5: it in order to open up regions for low cost
Speaker 5: renewable energy production. So they do have an interactive effect,
Speaker 5: but they're regulated in a very different way, and both
Speaker 5: of those land on consumers bills. I think the easiest
Speaker 5: way to understand this is that, you know, consumers in
Speaker 5: a sense had maybe been as a result of the
Speaker 5: regulated charges the proverbial frog and gradually warming water, and
Speaker 5: then when you finally enter a commodity supercycle, people can
Speaker 5: have the sense that, oh wow, someone just ratcheted up
Speaker 5: the heat on this pot. But both of those are
Speaker 5: contributing factors and they require sort of different structural approaches
Speaker 5: in order to reckon with them.
Speaker 3: Jo, this is my perennial frustration talking about electricity prices
Speaker 3: and the electricity system in the US, which is you
Speaker 3: cannot talk in generalities, right, there are different types of
Speaker 3: regulations for different entities. There are different regulations for each state.
Speaker 3: Basically there's you know, the New England system, then there's
Speaker 3: the West Coast, and then there's Texas, which is its
Speaker 3: own special entity. You kind of have to talk about
Speaker 3: every single market in isolation, which is difficult even on
Speaker 3: our long podcasts. So that's going to be the caveat
Speaker 3: throughout this conversation.
Speaker 5: I think it's idiosyncratic and it's funny because at the
Speaker 5: same time restructuring and competition was introduced into this industry,
Speaker 5: it was also occurring in things like telecom. Telecom, you know,
Speaker 5: was substantially deregulated and federalized. At the same time, states, however,
Speaker 5: were left to make their own decisions about the power sector,
Speaker 5: and as a result, you really have a huge patchwork
Speaker 5: quilt of state and federal regulation and different industry models.
Speaker 4: It's true.
Speaker 2: I have another really rudimentary question, I guess what are
Speaker 2: we even talking about when we talk about competition in electricity?
Speaker 2: You know, I don't get to choose which wire I
Speaker 2: get into. There's one utility I have the option from.
Speaker 2: Sometimes there are these people on the street, and they're like, oh,
Speaker 2: sign will you sign up for clean power or something
Speaker 2: like that, and they try to get me to do stuff.
Speaker 2: But I don't really understand how that works, because I
Speaker 2: don't understand how electrons can be directed to anyone's home.
Speaker 2: So I'm always very skeptical of it. What do we
Speaker 2: talk about when people talk about a competitive market.
Speaker 5: Yeah, so think of the electricity system as sort of
Speaker 5: a chain of links. Upstream, you've got the power generators,
Speaker 5: and then after that you've got the high voltage transmission system.
Speaker 5: It patches into a substation that steps down the voltage
Speaker 5: to a lower level. That's what we'd call the distribution system.
Speaker 5: And then there's a meter hanging on the side of
Speaker 5: your home, and beyond that meter, you are the consumer
Speaker 5: of electricity. The most upstream the generation and the most
Speaker 5: downstream retailing have been opened in some states to competition,
Speaker 5: and I think it's fairly intuitive what that means. For
Speaker 5: generation power plants are owned by private investors who make
Speaker 5: investments in them. Those power plants compete against one another
Speaker 5: in auctions for electricity and to sell their power to
Speaker 5: wholesale off takers. Some of those off takers then are
Speaker 5: the retailers of electricity who sort of buy an upstream
Speaker 5: supply of goods and then use the regulated poles and
Speaker 5: wires and pay regulated rates to deliver that commodity to
Speaker 5: you at your home. So some of the value proposition
Speaker 5: of what you're experiencing as a potential retail customer and
Speaker 5: a competitive market is your product selection. I mean to
Speaker 5: give an example, a retailer came to me and marketed
Speaker 5: me a five year fixed price for electricity. Last year,
Speaker 5: I bought it. I locked in a rate, I'm insulated
Speaker 5: from upstream changes in wholesale market volatility.
Speaker 4: As a result, that's.
Speaker 5: Generally the value proposition of competitive retail. Though in places
Speaker 5: like Texas, you're also seeing product differentiation, and that has
Speaker 5: a ring of telecommunications and data competitions sort of like
Speaker 5: more apps. As part of your retail electric supply service,
Speaker 5: people selling you smart thermostats or residential batteries that can
Speaker 5: be packaged onto your retail electricity supply plan to sell
Speaker 5: back to the grid, help manage your costs upstream to
Speaker 5: stabilize pricing. But that's the paradigm of competition in this space.
Speaker 5: It's a regulated system in the middle with competition on
Speaker 5: the edges.
Speaker 3: Can we back up for a second and go back
Speaker 3: to that big restructuring of the market, because I have
Speaker 3: a feeling this will help us understand our current situation.
Speaker 3: But what was the problem that we were trying to
Speaker 3: solve back then? You know, people have short memories. A
Speaker 3: lot of people would say that our electricity system right
Speaker 3: now has its own special problems, and they would forget
Speaker 3: that there were previous problems that this system was meant
Speaker 3: to address.
Speaker 5: Yeah, I mean, it's kind of haunting. It's funny you
Speaker 5: should ask that question, because the problem it was meant
Speaker 5: to address is that regulated utilities, which used to own
Speaker 5: this whole chain of links on a consolidated, vertically integrated basis,
Speaker 5: bet wrong very badly on the amount of demand growth
Speaker 5: in the sector, and they put themselves out there building
Speaker 5: power plants that were intended to be included in what's
Speaker 5: called their rate base, on which they earn a return
Speaker 5: and are able to charge off those costs to a
Speaker 5: captive set of customers. When they bet wrong on the
Speaker 5: demand that would ultimately materialize on the system, they found
Speaker 5: themselves well over their skis in the amount of power
Speaker 5: generation that they either had built or were in the
Speaker 5: process of building. At the heart of regulated utility economics
Speaker 5: is this division problem where kind of a total system
Speaker 5: of fixed costs is the numerator divided by the denominator
Speaker 5: of throughput. So these regulated utilities were adding handsomely to
Speaker 5: the numerator. The denominator wasn't propping up that, and the
Speaker 5: result was that division problems, spitting out a price that
Speaker 5: was escalating higher and higher. Some utilities, at that point
Speaker 5: their state regulators said you've been imprudent. We're going to
Speaker 5: not allow you cost recovery because you've been imprudent. They
Speaker 5: went bankrupt, but that was the exception to the rule.
Speaker 5: Most of them allowed those costs to be recovered from
Speaker 5: a captive customer base. But some of those states also
Speaker 5: pass laws that said, let's never do this again. There's
Speaker 5: no reason why we shouldn't have power generation invested in
Speaker 5: to meet the levels of demand needed on the system.
Speaker 5: Be a function of investors' competitive bets in the market,
Speaker 5: and so in about you know, call it a third
Speaker 5: of the states, but accounting for more than half of
Speaker 5: the power sold. That's now the business model where companies
Speaker 5: like mine are, you know, have to make guesses about
Speaker 5: what the demand is going to be and try to
Speaker 5: sign up customers to voluntarily contract with us to produce
Speaker 5: revenue for the power generation we might invest in. And
Speaker 5: for the rest of the country. It still works by
Speaker 5: you know, people like me wearing my former hat, you know,
Speaker 5: as as the chairman of a utility commission, like guessing
Speaker 5: what the future is going to be and charging off
Speaker 5: the costs of those guesses to a monopolized customer base.
Speaker 2: Let's talk about your former hat, because one of the
Speaker 2: things you hear about is that the utilities have this
Speaker 2: incentive to overinvest because that might help determine what they're
Speaker 2: allowed to charge on a going forward basis. But why
Speaker 2: don't you sort of talk about your former hat and
Speaker 2: the basic role you played, how you thought about decision making,
Speaker 2: and how we are to understand what the world looks
Speaker 2: like from the standpoint of someone sitting on the regulatory commission.
Speaker 4: Yeah, well, you're number one.
Speaker 5: You're absolutely correct about the incentives at play under the
Speaker 5: style of economic regulation that is widely used really without
Speaker 5: exception the United States to regulate the monopoly industries in
Speaker 5: the utility sector. The companies earn a return that is
Speaker 5: sort of announced and advanced by their state or federal
Speaker 5: economic regulators based on the amount of capital they've invested
Speaker 5: in the system. So spend more, make more has some
Speaker 5: paradoxical effects where the most amount of profit a utility
Speaker 5: will ever make is in the first year that it
Speaker 5: owns a particular asset, and then when they own it
Speaker 5: free and clear, they actually earn zero profits, so sort
Speaker 5: of an inversion of the cash flow paradigm that you
Speaker 5: would expect out of competitive businesses. Regulators also establish the
Speaker 5: depreciation life span for rate making purposes of regulated assets,
Speaker 5: which has some interactive effects with that model. So that's
Speaker 5: basically the grist in the mill of what state regulatory
Speaker 5: utility commissions do. They determine the amount that is quote
Speaker 5: unquote used and useful in service to customers of the
Speaker 5: capital investments that utilities have made. They also establish an
Speaker 5: allowance for so called prudently incurred expenses the O and
Speaker 5: M on the system around which the utility earns no margin,
Speaker 5: just gets a recovery of those costs, and that also
Speaker 5: has the knock on incentive of if I'm a utility
Speaker 5: and I look at a problem that I have to solve,
Speaker 5: I will always want to solve it with capital investment.
Speaker 5: I will never want to solve it with opex, you know.
Speaker 5: And because that one earns return, one does not. So
Speaker 5: ordinary trade offs that would occur in competitive businesses between
Speaker 5: capex and opics tend not to occur in the regulated sector.
Speaker 5: Other countries have done this a different way and have
Speaker 5: tried to establish more of a performance based framework of
Speaker 5: regulation that rewards utilities with profits based on outcomes. But
Speaker 5: you know, the United States has never got there for
Speaker 5: a whole variety of frankly dumb reasons. So that's the
Speaker 5: way those sector is regulated. It's weird to have a
Speaker 5: sector that is really regulated according to early twentieth century
Speaker 5: standard that's trying to serve a modern economy.
Speaker 4: To be fully candid.
Speaker 3: With you, yeah it does feel that way, doesn't it.
Speaker 3: So again I said in the intro, I do not
Speaker 3: know much about the electricity market. I feel like I'm
Speaker 3: constantly struggling to try to understand it. But one thing
Speaker 3: I do know is that a lot of the electricity
Speaker 3: companies seem to complain for years and years and years
Speaker 3: that loads in the US had actually been either declining
Speaker 3: or stagnant. Now we have the situation where everyone is
Speaker 3: talking about data centers coming on stream and they use
Speaker 3: a lot of electricity, so loads are finally rising. Shouldn't
Speaker 3: this be a good thing for the electricity company. Shouldn't
Speaker 3: they be celebrating they have extra money to spend on,
Speaker 3: If not opics, then capex.
Speaker 5: Generally yes, And it's true that for most electricity markets
Speaker 5: in the United States it's been fairly flat. In the PGAM,
Speaker 5: the Pennsylvania New Jersey Maryland market that stretches from Washington,
Speaker 5: d C. To Chicago, they last recorded a record peak
Speaker 5: demand in two thousand and six. They'll in all likelihoods
Speaker 5: set a demand next year twenty years later in twenty
Speaker 5: twenty six. Some markets, like Texas's ERCOT market have been growing,
Speaker 5: but it is definitely the exception to the rule. Most
Speaker 5: of these people less set a record demand. You know,
Speaker 5: before the period of offshoring and de industrialization of industries
Speaker 5: that use a lot of electricity, and that actually facilitated
Speaker 5: the kind of turnover of capital from colt gas and
Speaker 5: to renewables a little bit as well in a lot
Speaker 5: of these places. But net of net, you know, that
Speaker 5: was kind of neutral or even a little bit negative
Speaker 5: in terms of the total installed generation capacity was kind
Speaker 5: of managing to even in terms of generation capacity editions,
Speaker 5: and then in terms of like, shouldn't they be celebrating, Yes, definitely.
Speaker 5: Everyone in the sector, my business and the regulated utilities
Speaker 5: are excited about the prospect of growth. They're also nervous
Speaker 5: about whether or not this growth is real and to
Speaker 5: what magnitude. Part of what makes it a little worrying
Speaker 5: is that ordinarily electric city demand growth would be a
Speaker 5: composite of growing demand from many different end use applications
Speaker 5: that would kind of diversify the risk of betting on
Speaker 5: growth here, it's like a one or a zero. You know,
Speaker 5: if you take out the data centers, the sector is actually,
Speaker 5: you know, pretty stable in terms of electricity demand. If
Speaker 5: you add the data centers, the sector is really poised
Speaker 5: to grow a heck of a lot. And when you
Speaker 5: look at the projections of the grid operators, I mean,
Speaker 5: just to put some numbers on this, the market PJAM
Speaker 5: in the Mid Atlantic that I was referring to, it's
Speaker 5: currently about one hundred and sixty thousand megawat market. It's
Speaker 5: projecting to add forty thousand megawatts by twenty thirty. The
Speaker 5: URKAT Texas market, you know about eighty five thousand megawats
Speaker 5: right now. Its latest projection is up to nearly one
Speaker 5: hundred and forty thousand megawatts by twenty thirty. Now, that's
Speaker 5: like adding a California to Texas in terms of electricity
Speaker 5: demand in five years. And that's not going going to
Speaker 5: happen because it can't. It just, I mean literally could
Speaker 5: not occur. But therein lies the problem is like what
Speaker 5: are we actually investing toward and what are the regulatory
Speaker 5: policies that can essentially help call the question on the
Speaker 5: amount of off take that will actually materialize from AI
Speaker 5: so that then capital investments can propagate throughout the supply
Speaker 5: chain to end up serving them. That's really the fundamental
Speaker 5: question that policymakers, utilities, and competitive providers like US are
Speaker 5: trying to deal with.
Speaker 2: Those numbers are absolutely staggering the idea of adding California
Speaker 2: size demand to Texas in just a standpoint of a
Speaker 2: few years. When you say you don't think those numbers
Speaker 2: can happen, what is the constraint is it on the
Speaker 2: generation side in a market like Texas or if we're
Speaker 2: talking about what any other region, or because I think
Speaker 2: it's pretty easy to set up, you know, solar farms
Speaker 2: or whatever. Texas seems pretty liber with what kind of
Speaker 2: how easy it is to plug into the grid or
Speaker 2: is it in a state like that there isn't the
Speaker 2: transmission capacity even if you can stand up the production.
Speaker 5: Yeah, it's I mean, it's a little bit of everything,
Speaker 5: everything from stuff that isn't you know, on the power
Speaker 5: sector side of the fence line in terms of actually
Speaker 5: being able to construct data centers and you know, their
Speaker 5: chips and the fiber optics that would back them up.
Speaker 5: And then on our side of the fence, you're right
Speaker 5: getting access to the grid through interconnection, getting all the
Speaker 5: equipment that you would need to tap into the grid.
Speaker 5: We're talking about, you know kind of grid step up generators,
Speaker 5: step up transformers and stuff like that. Joe, I know
Speaker 5: that's topic near and dear to you from listening to
Speaker 5: the pot over the years. And then it is the
Speaker 5: power equipment in terms of like gas turbine availability. You know,
Speaker 5: solar panels probably aren't going to do it for you
Speaker 5: given the demand for you know, kind of consistent power
Speaker 5: production off of these data centers, but they are helpful.
Speaker 5: So it's just the magnitude.
Speaker 4: There is a dilemma.
Speaker 5: And you know, right now, if I were to place
Speaker 5: in order for something like you know, a generator's step
Speaker 5: up transformer, you know, pre COVID, it would have been
Speaker 5: maybe like twelve to eighteen months. Now we're talking about
Speaker 5: three to four years for a spoke piece of equipment
Speaker 5: whose specifications are only available to me after the local
Speaker 5: utility the Polls and Wires company tells me what my
Speaker 5: interconnection study looks like in terms of grid availability in
Speaker 5: our connection to the system. So that that's one, you know,
Speaker 5: and RG is lucky enough to have some gas turbines
Speaker 5: lined up for delivery you know, later in this decades,
Speaker 5: so we would be able to facilitate some of this investment.
Speaker 5: But if you were going to get in line right now,
Speaker 5: that too would be a process that would take several years.
Speaker 5: Some of it's the availability of equipment, and some of
Speaker 5: it is a natural pacing of steps in the kind
Speaker 5: of quasi regulatory process to get projects online. It would
Speaker 5: be better, I think one of the interesting policy innovations
Speaker 5: that's out there is if you had kind of more
Speaker 5: of a market to make use of the scarce remaining
Speaker 5: headroom in our system from sort of a grid interconnection
Speaker 5: point of view without tripping into having to build a
Speaker 5: bunch of capital investments in polls and wires. But you
Speaker 5: know that's not the way the regulatory model is set up.
Speaker 5: You know, right now we have a paradigm where final
Speaker 5: power generator I kind of knock on the door of
Speaker 5: the local utility and say, hey, you know, I want
Speaker 5: to build a power project at this place. Can you
Speaker 5: study it for the sake of its interconnection to the grid.
Speaker 5: They come back with a study and I don't like
Speaker 5: the number, I don't like the specs, and then I
Speaker 5: submit another study and we iterate. So it's a time
Speaker 5: consuming process sometimes to develop these projects, and there probably
Speaker 5: needs to be avenues that are more coordinated between the
Speaker 5: demand and supply side. And even if you don't, you know,
Speaker 5: even if you certainly shouldn't functionally reintegrate the utility business model,
Speaker 5: but there does need to be more coordination between the
Speaker 5: blue on the polls and wires and the people who
Speaker 5: are doing the generation. And that's kind of a missing
Speaker 5: link right now in this policy landscape.
Speaker 3: Other than sheer volume of power needs, I guess sheer megawatts.
Speaker 3: Do data centers have specific energy needs in terms of
Speaker 3: I don't know the type of electricity. I would assume
Speaker 3: a megawat is a megawat, but what do I know?
Speaker 3: But maybe in terms of timing and things like that,
Speaker 3: are there sort of operational considerations that are unique to
Speaker 3: data center's electricity consumption versus say an industrial factory or
Speaker 3: US turning the lights on when we get home.
Speaker 5: Yeah, So, I mean the first experience, you know, at
Speaker 5: any scale that anyone seemed to have with computing technologies,
Speaker 5: you know, were kind of you know, cloud based servers.
Speaker 5: And then really on the other side, like crypto mining
Speaker 5: facilities and both of them data centers. But the two
Speaker 5: could not be more different, right, I mean, doak and
Speaker 5: it becomes uneconomic at a certain strike price for cryptocurrency
Speaker 5: to continue mining. And so it's a highly flexible load
Speaker 5: that drops off the system when conditions become tight in
Speaker 5: an electricity market, and we see that all the time
Speaker 5: in Texas. On the other hand, for you know, cloud
Speaker 5: services that are providing kind of real time instantaneous hosting capabilities,
Speaker 5: you know, they kind of need they have a very
Speaker 5: high what's called load factor of their power consumption. They're
Speaker 5: drawing from the system on a relatively consistent basis, and
Speaker 5: of course they need to be highly reliable. You know,
Speaker 5: they can't really be interrupted without having cloud fare or
Speaker 5: aws interruption style problems, so very different. And you can
Speaker 5: look back to analogues of you know, other industrial customers,
Speaker 5: you know, aluminum smelters, high load factor when they were
Speaker 5: doing the batching of smelting, couldn't be interrupted. Paper mills,
Speaker 5: maybe you could interrupt them. So the industry has some
Speaker 5: like kind of learnings from this and have been markets
Speaker 5: designed around the flexibility of demand to try to do
Speaker 5: for the power sector what previously happened to say, the
Speaker 5: airline sector, which had used to have, you know, a
Speaker 5: very low load factor, and then after restructuring and deregulation
Speaker 5: in the seventies, suddenly everyone's you know, everyone's airplanes ended
Speaker 5: up full, you know, and two full in some cases
Speaker 5: where you know, people get bumped and compensated for it.
Speaker 5: So we've yet to achieve that though in the power sector,
Speaker 5: where load factors continue to be you know, fifty sixty
Speaker 5: seventy percent, so there's a lot of headroom during certain
Speaker 5: hours and very little headroom during other hours. So kind
Speaker 5: of the primary question in terms of the network economics,
Speaker 5: is if you end up with a bunch of high
Speaker 5: load factor data center customers, the type that can't be interrupted,
Speaker 5: how do you get them online without tripping into a
Speaker 5: bunch of necessary capital investments to serve that last few
Speaker 5: percent of hours where they're demand needs to be served
Speaker 5: in firm or can you source flexibility out of the
Speaker 5: system somewhere else, like from residential air conditioning or something
Speaker 5: like that. That's a question again, that's very important to
Speaker 5: figure out. People have kind of issue spotted it, but
Speaker 5: we've really yet to solve in any meaningful way. The
Speaker 5: markets like Texas are kind of geared towards solving it
Speaker 5: in more of a free enterprise premise. Other markets seem
Speaker 5: to be struggling a bit.
Speaker 2: It's funny to think about getting an alert on your phone.
Speaker 2: It's like GPT six is completely against training run. Sorry, no,
Speaker 2: we would like you to turn down your air conditioning
Speaker 2: right now. No, I don't know if that would happen.
Speaker 2: But the part of the reason everyone's interested in data
Speaker 2: centers period, well, there's a lot of reasons, but people
Speaker 2: are worried when they hear these numbers. They're like, oh, am,
Speaker 2: I as the consumer. Let's say I lived in Texas,
Speaker 2: which I sometimes have am I as the consumer going
Speaker 2: to in some way or another, be paying the price
Speaker 2: for this massive expansion of demand thanks to data centers. Intuitively,
Speaker 2: it seems like, well it shouldn't be. They could pay
Speaker 2: for their own electricity, they can pay for their own upgrades.
Speaker 2: But how does this massive increase in demand play out
Speaker 2: from the sort of the ratepayer perspective.
Speaker 5: Yeah, so we go back to the kind of segmentation
Speaker 5: between the regulated grid costs and the commodity costs. In
Speaker 5: answer to that question. On the commodity side, you know,
Speaker 5: this tends to be a marginal cost pricing environment where
Speaker 5: if you have demand growth outstripping supply editions, the system
Speaker 5: becomes tighter, the supply curve moves up for the kind
Speaker 5: of last unit that's necessary to serve demand, and its
Speaker 5: marginal costs in a very real way dablish the clearing
Speaker 5: price that all demand has to pay unless and to
Speaker 5: the extent to they are bilaterally contracted with some kind
Speaker 5: of hedging instruments, which everyone should be. No one should
Speaker 5: be in an ideal market exposed to that spot price.
Speaker 5: But we find that many people are for a variety
Speaker 5: of reasons. So some policy interventions that people have contemplated is,
Speaker 5: you know, usually we would let these markets kind of
Speaker 5: equliberate on their own. We would expect sort of organic
Speaker 5: growth to be met with organic supply editions. Here people
Speaker 5: have observed, like, wow, this demand growth seems really out
Speaker 5: of scale with what the markets have organically been able
Speaker 5: to achieve. Maybe we should have a requirement to just
Speaker 5: bring your own generation. You know, we're not going to
Speaker 5: let the power markets on a forward traded basis send
Speaker 5: the right signal and hope that enough generation shows up
Speaker 5: to serve this demand. As sort of part of the
Speaker 5: social license or even a four normalized regulatory requirement for
Speaker 5: them to get online, you've got to show us the
Speaker 5: megawots that you bring on in the system. So that's
Speaker 5: one of the debates. On the other side of the ledger.
Speaker 5: The regulated costs, that too can be a problem usually,
Speaker 5: and again this division problem of network economics. For the
Speaker 5: regulated costs, if you're adding to that denominator of throughput
Speaker 5: at a rate that is higher, then you're adding to
Speaker 5: additions to the fixed costs of the system. Everyone's rates
Speaker 5: go down produces a lower quotient, which is the price
Speaker 5: of grid consumed electricity. The problem here is that in
Speaker 5: a kind of an inflationary environment for all the materials,
Speaker 5: the transformers, the cabling, everything that goes into the polls
Speaker 5: and wires, if you're adding demand and you're not just
Speaker 5: using headroom that already exists on the system, if you're
Speaker 5: not increasing that capacity factor on the system, if you're
Speaker 5: tripping into a lot of new capital expenditures, then even
Speaker 5: if you're adding demand that's paying regulated rates, it may
Speaker 5: not be enough to offset at the total amount of
Speaker 5: expenditures incrementally you're making on the system. So there's policy
Speaker 5: interventions there too, where you can try to directly assign
Speaker 5: the costs that are caused on the grid back to
Speaker 5: the data centers. But those are pretty nascent approaches, and
Speaker 5: some of the ones that have been tried are kind
Speaker 5: of aiming at the wrong thing. So a lot of
Speaker 5: policy work remains to be done here. And all of
Speaker 5: this is kind of a political debate where you know,
Speaker 5: a lot of state governors, the people who are really
Speaker 5: the ones kind of in charge of, you know, with
Speaker 5: their state utility commissions, setting these policies, they simultaneously want
Speaker 5: the economic development of data centers, but they don't want
Speaker 5: any negative externalities around reliability, affordability, clean energy and all
Speaker 5: those things trade off against one another. But you know,
Speaker 5: political actors will want to maximize all of those variables,
Speaker 5: which is not possible in the current environment.
Speaker 3: Can I ask a very basic question, and I'm struggling
Speaker 3: to think of a way to frame it that doesn't
Speaker 3: sound like I've just taken an elderly family member to
Speaker 3: a medical office or something. But what is a node?
Speaker 5: A node usually would be a place like a substation.
Speaker 5: It is the place on the physical grid at which
Speaker 5: electricity is bought and sold. It's a physical destination on
Speaker 5: the grid. When we say nodal markets, which is a
Speaker 5: way to describe electricity markets, we're referring to markets where
Speaker 5: electricity is priced on a so called locational marginal price basis,
Speaker 5: and the LMPs as they're called, are based on physical
Speaker 5: destinations on the grid called nodes. I'm just estimated, guess here,
Speaker 5: but a market like Texas will have a few thousand
Speaker 5: nodes at which electricity is traded on an individuated price basis.
Speaker 3: That seems like such a weird way of doing it
Speaker 3: to me, and I'm sure there are very valid reasons
Speaker 3: for doing it in this way, But like nowadays, given
Speaker 3: all the data at our disposal, given the rise of AI,
Speaker 3: can't we work out some sort of average cost across
Speaker 3: the system. It seems really weird that we're taking it
Speaker 3: at like physical points, although I guess you know there
Speaker 3: are plenty of commodities that do trade based on particular locations,
Speaker 3: but it just seems strange to me.
Speaker 5: Well, it is important that you have nodal pricing in
Speaker 5: the system only because it sends a powerful price signal
Speaker 5: for the accurate location of necessary power generation. There are
Speaker 5: certain markets, I'm thinking of Alberta, some of the European
Speaker 5: markets that actually do establish a zonal price across their
Speaker 5: entire market. But there you end up with power plant developers,
Speaker 5: you know, who develop wind in a particular area far
Speaker 5: away from demand to capture the average price, but then
Speaker 5: that energy ends up being undeliverable because there are transmission
Speaker 5: system constraints and congestions. So the nodal pricing formulation is
Speaker 5: intended to reflect a market that, unlike the stock exchange,
Speaker 5: isn't just trading bits of data to represent kind of
Speaker 5: paper securities. It in a very real way, is meant
Speaker 5: to simulate a kind of flow of electrons on a
Speaker 5: system constrained basis, And then it provides valuable information too,
Speaker 5: because if you continue to see locational marginal prices you know,
Speaker 5: in one place that are very high and twenty miles
Speaker 5: away they're very low, that's a signal to the people
Speaker 5: who plan the transmission grid that hey, you know, we
Speaker 5: should probably build a transmission line here, because the addition
Speaker 5: of the transmission line will be the thing that flattens
Speaker 5: out that price differential and creates a market that looks
Speaker 5: more like a you know, a copper plate rather than
Speaker 5: two separate swimming pools.
Speaker 3: Interesting. Just to be clear though, if I want it
Speaker 3: to be public enemy number one, could I build a
Speaker 3: gigantic data center next to a locational marginal price point
Speaker 3: node and affect the cost of electricity for you know,
Speaker 3: a greater area.
Speaker 5: Yes, you absolutely could, And in fact, I mean I
Speaker 5: know of at least one example. You know, North Dakota
Speaker 5: is actually a good example of this. A place that
Speaker 5: is doesn't have a lot of robust transmission infrastructure does
Speaker 5: have a lot of renewable resources that cause and those
Speaker 5: renewables are almost kind of dumping on the market in
Speaker 5: a way that causes the energy price to go down
Speaker 5: and even negative at times in North Dakota. And you know,
Speaker 5: some of the first data centers that we've seen in
Speaker 5: this wave of expansion chose to locate in North Dakota
Speaker 5: because they had access to wholesale prices that were lower negative.
Speaker 5: They were just following the price signal. And so there's
Speaker 5: you know, there's certain data centers out there that are
Speaker 5: literally being paid to consume electricity because there's such an
Speaker 5: oversupply and so little transmission into the area.
Speaker 2: I you know, I got to ask this question on
Speaker 2: a podcast recently and I didn't have a good answer,
Speaker 2: and I so now I want to ask So you mentioned, Okay,
Speaker 2: all these different pieces of electrical gear, they're in short supply.
Speaker 2: You might not be able to get some key equipment
Speaker 2: until twenty thirty. Is it strain going to ease at all?
Speaker 2: Is there any additional capacity coming on the market. When
Speaker 2: I was asked this, I like sort of like hesitated.
Speaker 2: I was like, well, maybe they're not sure about the future,
Speaker 2: so they're like reluctant to do the capital expending involved.
Speaker 2: But do you think there's any like is capacity growing
Speaker 2: for some of this core infrastructure As far as you
Speaker 2: can tell.
Speaker 5: My impression is yes. I mean you've seen public announcements
Speaker 5: from the largest gas turbine manufacturer, ge Vanova about new
Speaker 5: manufacturing base editions, you know, some of the transformer equipment
Speaker 5: as well. I think you're seeing some incremental investment in.
Speaker 5: You're certainly seeing power generators like NRG, you know, take
Speaker 5: positions in lining up their optionality to have power projects
Speaker 5: that can be deployable to either the Texas market or
Speaker 5: the mid Atlantic market, depending on where consumer demand actually arises.
Speaker 5: So I think there is some development in that market.
Speaker 5: I will say, I think what people are waiting for.
Speaker 5: You know, everyone looks around the supply chain and you
Speaker 5: know is reasonably asking, well, who's got the deep pockets here?
Speaker 5: And then everyone turns to big tech. You know big tech.
Speaker 5: Obviously if they signed a power purchase agreement for fifteen
Speaker 5: years or even less to take power at a certain price,
Speaker 5: some of this supply chain would fall into place pretty readily,
Speaker 5: I would say. And so people are kind of waiting
Speaker 5: in a sense for big tech to make those big
Speaker 5: bilateral contracting moves that would serve to propagate sort of
Speaker 5: rationality around response to the perceived demand up and down
Speaker 5: the supply chain. And I think that's kind of the
Speaker 5: leading indicator to watch for in the sector. How many
Speaker 5: of those contracts are actually being signed.
Speaker 2: Big tech is just going to do everything. They're going
Speaker 2: to build nuclear plants, so they're going to build their
Speaker 2: own ships, and they're going to build their own fabs,
Speaker 2: and everything will be this entire ecosystem that it is
Speaker 2: just alphabets from down the line. I want to go
Speaker 2: back though, to something you said, which is that part
Speaker 2: of what's tricky about the data center thing is that, Okay,
Speaker 2: here's this big boom in demand, but it's not because
Speaker 2: of like general like trend economic growth. And you could
Speaker 2: be perhaps that a year from now or six months
Speaker 2: from now or tomorrow, people say, oh, I want to
Speaker 2: slam the brakes on AAI spending. We're not getting this return.
Speaker 2: Fears of a bubble, you know. Fourth I talk to
Speaker 2: us a little bit more. Howady commissions are dealing with
Speaker 2: this risk and this very binary state of planning.
Speaker 5: Yeah, so commissions at the state level have dealt with
Speaker 5: this in a very different way. Some of them have
Speaker 5: candidly and regulated utilities themselves have said we want no
Speaker 5: part of this risk. Like we're a small MidCap utility
Speaker 5: and someone is knocking at our door asking us to
Speaker 5: invest in power generation that would be like a third
Speaker 5: of our total existing balance sheet that's remained stable for decades.
Speaker 5: We're just not doing it. You can get on our grid,
Speaker 5: and you can pay the cost to get on our grid,
Speaker 5: but in terms of power generation, you've got to bring
Speaker 5: your own project. We're not involved in that. Other utilities
Speaker 5: that have larger balance sheets, the Southeastern utilities, are using
Speaker 5: their regulated balance sheets to build out generation and supply
Speaker 5: data center customers. Devils in the details on those heavily
Speaker 5: redacted commercial agreements that would I would desperately love to
Speaker 5: see about the degree to which they protect consumers. And then,
Speaker 5: of course, the other side of the industry, the competitive industry.
Speaker 5: You know, it's companies like mine and data centers that
Speaker 5: enter into commercial agreements for the purchase and sale of power,
Speaker 5: and neither of those parties have recourse to a captive
Speaker 5: base of customers. So they could go bust, we could
Speaker 5: go bust. It's not going to you know, be skin
Speaker 5: off the teeth of a set of quote unquote ratepairs.
Speaker 5: Again on the grid costs, it's about whether or not
Speaker 5: state commissions, and in this case of federal regulator, the
Speaker 5: Federal Energy Regulatory Commission, are going to style take or
Speaker 5: pay contractual agreements to require large data centers that come
Speaker 5: onto the grid to essentially collateralize a revenue stream associated
Speaker 5: with the incremental costs of developing the grid to serve them.
Speaker 5: And so far there seems to be relative unanimity that
Speaker 5: that is the right way to go in order to
Speaker 5: protect legacy customers. But again, the devils in the details,
Speaker 5: and I have a problem with some of the math
Speaker 5: that's being done in those regulatory approaches. So it's not
Speaker 5: as if this problem is invisible to the people who
Speaker 5: are economically regulating this industry, but they are trying to
Speaker 5: in a very real way. They are trying to figure
Speaker 5: it out on real time, and I'll be the first
Speaker 5: to say their solution set is far from perfect.
Speaker 3: So just on this note, it strikes me that the
Speaker 3: difficulty in the system, I mean, setting aside the patchwork
Speaker 3: of fifty different states all having their own different regulations,
Speaker 3: like the heart of the difficulty in the current system
Speaker 3: is we're trying to preserve the market signal for further investment,
Speaker 3: but also smooth out some of the volatility so that
Speaker 3: Joe and I don't have to spend an inordinate amount
Speaker 3: of time thinking about what is like the most cost
Speaker 3: effective time to blow dry our hair or do our
Speaker 3: laundry or something like that. So we're kind of trying
Speaker 3: to have our capitalism cake and eat it too. Cake italism,
Speaker 3: cake italism. That kind of works. What is your platonic
Speaker 3: ideal of a electricity market. Do you have one, either
Speaker 3: in the US or elsewhere in the world that you
Speaker 3: would say, look, here is a system that actually manages
Speaker 3: to do both these things.
Speaker 4: Yeah, man, I love that question.
Speaker 5: I mean, I will say that one of the real
Speaker 5: flaws in the US electricity system is that it is
Speaker 5: not as robustly a two sided market as you would
Speaker 5: hope for. It's still demand. It just exists on the system.
Speaker 5: It's coming onto the system based on people's on the
Speaker 5: supply side guesses about what will happen, and then the
Speaker 5: supply side is expected to solve all of it. There's
Speaker 5: very little in the way of demand elasticity, and that's
Speaker 5: been for a variety of historical reasons. I mean, the
Speaker 5: first and most obvious one is that you didn't even
Speaker 5: have the technology in the form of advanced metering infrastructure
Speaker 5: to understand when people were actually using the power in
Speaker 5: relation to a highly time variable set of upstream costs.
Speaker 5: Now you do have that. You are also increasingly having
Speaker 5: the software that allows financial settlements on the part of
Speaker 5: the people retailing electricity to end use consumers to be
Speaker 5: settled on the basis of that advanced metering infrastructure's actual
Speaker 5: meter reads so on a time interval basis. And finally,
Speaker 5: because you shouldn't have to think about when you're going
Speaker 5: to blow dry your hair, you have a significant amount
Speaker 5: of device automation in the form of smart thermostat, battery storage,
Speaker 5: electric vehicles, manufacturing, and industrial processes which can be sort
Speaker 5: of a set it and forget it to automatically respond
Speaker 5: to high prices to try to increase the system's load
Speaker 5: factor and avoid using electricity at very high cost times.
Speaker 5: So that is just starting happen in the American electricity sector.
Speaker 5: I would tend to look to the UK and Australia
Speaker 5: as places that have gone a bit ways further in
Speaker 5: trying to solve that problem and embrace the inherent flexibility
Speaker 5: of a system as versus the United States, which is
Speaker 5: kind of stuck in this sort of supply does something
Speaker 5: to demand framework of industry. So that's definitely on my
Speaker 5: It's always on the top of my homework list, if
Speaker 5: only because I think a lot of people are thinking
Speaker 5: about solving this problem highly conventionally with supply editions, which
Speaker 5: is going to be really important. But that demand flexibility
Speaker 5: comp is actually essential to get to a market that
Speaker 5: looks like every other efficient and competitive market in the world,
Speaker 5: which has two sides to it.
Speaker 2: We've been telling you a lot about sort of the future,
Speaker 2: looking forward and figuring out, you know, how that we're
Speaker 2: going to get all this new capacity on to the market,
Speaker 2: et cetera. Let's look at the last several years, like
Speaker 2: what happened. Part of the reason we're even having this
Speaker 2: conversation is because electricity bills are on people's minds, right,
Speaker 2: and they've been high, and it's a little unclear like
Speaker 2: how much of this is just keeping up with inflation.
Speaker 2: I presume that, like grid maintenance is actually straightforwardly in
Speaker 2: effective labor costs and inflation, et cetera. One thing we
Speaker 2: do know, however, is that the pace of electricity price increases. Really,
Speaker 2: since the pandemic seems to have been a level step up.
Speaker 2: What's driven that? How would you characterize the last several
Speaker 2: years of electricity prices and perhaps the role of load
Speaker 2: growth in driving those increases.
Speaker 5: Yeah, so so far load growth is really not the
Speaker 5: contribute to what has happened here is almost an awakening
Speaker 5: to the fact that we had, already, without any more
Speaker 5: load growth, a less reliable system than we thought we did,
Speaker 5: and that's due to a variety of reasons. You know,
Speaker 5: we retired a lot of coal, which you had a
Speaker 5: lot of emissions, but we replaced it with a bunch
Speaker 5: of natural gas. That created a you know, a sort
Speaker 5: of more of a dependency on an interrelated network system,
Speaker 5: the gas supply and pipeline system, which, while usually very
Speaker 5: robust and very economically efficient, in winter conditions where there's
Speaker 5: a lot of residential heating drawn, that system can show frailties,
Speaker 5: and so market operators in these electricity markets sort of
Speaker 5: de rated the value of that capacity in how they
Speaker 5: set up these markets, which meant effectively a sort of
Speaker 5: administrative withdrawal of supply from some of these markets similar
Speaker 5: to that renewables were seen not as a one to
Speaker 5: one replacement for reliable generation in the parts of the
Speaker 5: country the middle of the country, especially where they were
Speaker 5: heavily invested in, but they were really being leaned on
Speaker 5: as an effective substitute for more dispatchable power. And I
Speaker 5: think everyone in the back of their head knew that
Speaker 5: wasn't the case. But only recently, as things have gotten tight,
Speaker 5: have people begun to do a lot of hard math
Speaker 5: around it. And then finally, you know, we've just seen
Speaker 5: a few really traumatic winter storms, in particular, one in
Speaker 5: the East and one in Texas that have sort of
Speaker 5: reshaped the way in which the people who have responsibility
Speaker 5: to operate the grid think about the operational posture and
Speaker 5: need for reliable resources on the grid. And so there
Speaker 5: were a variety of regulatory changes that were made that
Speaker 5: had net of net the effect to tighten up the
Speaker 5: understanding of what generating capacity was available in the system
Speaker 5: relative to a base of demand that really didn't change.
Speaker 5: But suddenly, because of all of the retirements that had
Speaker 5: happened of coal and older gas due to economics as
Speaker 5: well as environmental regulation, we suddenly found ourselves pretty tight.
Speaker 5: And then this demand growth started to happen, so we
Speaker 5: were not particularly well positioned for the present moment of
Speaker 5: demand growth. We'd already driven the system to Some might
Speaker 5: call it a tight and efficient system if you had
Speaker 5: demand growth that was level, but it was not well
Speaker 5: situated to pick up tens and tens of new gigawatts
Speaker 5: of demand.
Speaker 3: I have a hypothetical question, but just as a theoretical exercise,
Speaker 3: if we are all in the pursuit of cheap and
Speaker 3: plentiful energy, and if as part of that pursuit, you
Speaker 3: could choose between two options. You could either wave a
Speaker 3: magic wand and get a bunch of nuclear reactors scattered
Speaker 3: around America, or you could wave ad and get huge
Speaker 3: advances in battery technology across America. Wish of those would
Speaker 3: be most conducive to having that cheap and plentiful energy supply.
Speaker 5: Yeah, I mean, I'm going to make a lot of
Speaker 5: my friends unhappy with this one, but I'd probably go
Speaker 5: batteries and storage. I think there are some natural economic
Speaker 5: advantages and wide swaths of the country for relatively affordable
Speaker 5: even without subsidies, solar production in particular, and batteries seem
Speaker 5: like a pretty good natural match to that. It really
Speaker 5: has been in the kind of Texas story to date,
Speaker 5: the pairing of batteries and solar together with natural gas
Speaker 5: additions that have supported really the only electricity market that
Speaker 5: has been growing without data centers. So I would take
Speaker 5: that as the leading indicator. That's not to speak ill
Speaker 5: of my friends in the nuclear bro community. I hope
Speaker 5: that technology pantses that seem to be occurring in the
Speaker 5: small modular space come to fruition. I just so far,
Speaker 5: I don't see a lot of people laying down serious
Speaker 5: capital on that from a commercial perspective, but I do
Speaker 5: see people laying down money on storage.
Speaker 2: I just have one last question, and it's kind of cheating.
Speaker 2: I'm actually this question. I'm kind of going to have
Speaker 2: you do our work for US et cetera. You know,
Speaker 2: I'm trying to think of a really good title for
Speaker 2: this episode. But if you look out over the next
Speaker 2: five years, you know, you mentioned adding a whole California
Speaker 2: to Texas. How are you thinking about the scale of
Speaker 2: the challenge overall that the US electricity system, that the
Speaker 2: grid overall really faces in this moment? Like how big
Speaker 2: is it that everyone from companies like yours to the
Speaker 2: various utility commissions. Like, how big is this a challenge
Speaker 2: going to be?
Speaker 5: It could be a substantial one. I mean, I think
Speaker 5: that AI demand growth for electricity consumption is real. I
Speaker 5: also think that that growth needs to pony up financial
Speaker 5: commitments to engender capital investments in the power sector that
Speaker 5: it intends to rely upon. I think those will be
Speaker 5: the table stakes of their social license to operate in
Speaker 5: a grid that, even where competition has been introduced, remains
Speaker 5: pretty heavily regulated. So I think we're going to get there.
Speaker 5: I do think that in terms of the regulatory policy
Speaker 5: that I deal with, there's too much small ball thinking
Speaker 5: on this, and there's too much trust in the way
Speaker 5: we've always done things. It's probably a time to really
Speaker 5: have kind of regulatory policy innovations like we've seen with
Speaker 5: the FCC regulating spectrum and the deregulation of the airline
Speaker 5: industry that tries to allocate the capacity on the grid
Speaker 5: to the highest value the people who are actually willing
Speaker 5: to pay the most for it, and those payments, which
Speaker 5: would likely exceed the incremental cost of serving them, could
Speaker 5: then actually be a revenue source back to consumers that
Speaker 5: helps on the affordability side. So I you know, it's
Speaker 5: almost a call to your listeners that, you know, if
Speaker 5: you're doing a mundane corporate job and want to do
Speaker 5: something completely different, consider becoming a utility regulator and applying
Speaker 5: some market based principles to help solve some of these problems.
Speaker 5: Because really, when you think about it, utility regulation they
Speaker 5: need to be an agent of capital formation here in
Speaker 5: the sector and to clarify this moment in terms of
Speaker 5: demand uncertainty. And that is the kind of challenge on
Speaker 5: a conceptual basis that we're grappling.
Speaker 2: With Crevis Kavila. You know, we could talk to you
Speaker 2: for hours actually just on you know, I have a
Speaker 2: million more questions just about specifics from your time in
Speaker 2: Montana and how all those things work, but we'll let
Speaker 2: you go. Really appreciate your time. Let's do it again sometime.
Speaker 2: And I did learn a few things on this episode.
Speaker 2: So appreciate you coming on our luck.
Speaker 3: Thank you so much, Thank you so much, Travis.
Speaker 2: That was great, Tracy.
Speaker 4: I really like that.
Speaker 2: I really like the way you put it there in
Speaker 2: your question of we want to have a market ish
Speaker 2: environment and demand signals are pretty important, et cetera, and
Speaker 2: we want capital to flow where it's going to be
Speaker 2: profitable and all that, we just don't really want anything
Speaker 2: associated with the market.
Speaker 3: Yeah, And I mean the irony is that the market
Speaker 3: could be functioning as intended in the sense that a
Speaker 3: large consumer of power, like a data center, decides to
Speaker 3: relocate itself to a place where energy costs are actually
Speaker 3: quite low. Yeah, and then because it does that, it
Speaker 3: ends up distributing, you know, the cost of its own
Speaker 3: power needs across a wider area. And it all seems
Speaker 3: I mean, I'm just going to go back to what
Speaker 3: I said earlier. It all seems so convoluted, yeah, and
Speaker 3: so idiosyncratic across different jurisdictions. I do actually really respect
Speaker 3: Travis's coll Just then, if you're interested in markets and
Speaker 3: want to have an impact on people's everyday lives, consider
Speaker 3: trying to clean up the mess that is energy regulation.
Speaker 2: But you know, even in the non convoluted version of it,
Speaker 2: if we just imagine the platonic ideal of a normal
Speaker 2: market and there's this commodity electrons, and it's well, what
Speaker 2: if AI is this really valuable thing, and it's more
Speaker 2: valuable than blow drawing your hair. I mean, for real,
Speaker 2: this could be a thing like you know, we were
Speaker 2: talking about making cars or making steel, et cetera. Like, Oh, yeah,
Speaker 2: well this is this thing.
Speaker 3: I wasn't going to do it. I wasn't going to
Speaker 3: But now I'm going to bring up that time you
Speaker 3: wrote that mining crypto could theoretically be a more valuable
Speaker 3: activity than running a fridge.
Speaker 2: Well, right, this is the question in a normal market.
Speaker 2: The reason why that example seems absurd. I'm glad you
Speaker 2: actually brought up because the reason why that example seems
Speaker 2: absurd is because very few people could ever wrap their
Speaker 2: heads around, well, could cryptomning be more valuable or value
Speaker 2: add than running a fridge. That being said, when it
Speaker 2: comes to something like AI, there really is a debate,
Speaker 2: and some people would say that's a total waste because
Speaker 2: AI is just a costly way to make fast poems.
Speaker 2: And other people would say, no, this is the fourth
Speaker 2: Industrial Revolution or whatever. And so I think part of
Speaker 2: the reason we're sort of uncomfortable with the oh, let's
Speaker 2: just move the electrons to where they're who's going to
Speaker 2: pay for them most is because I don't think a
Speaker 2: lot of people there are a lot of people who
Speaker 2: intuitively are skeptical that this is a good allocation of
Speaker 2: real resources.
Speaker 3: Right, I mean, I think politically, the message that the
Speaker 3: cost of your electricity has to go up so that
Speaker 3: AI can do its thing, Yeah, you can lose your job.
Speaker 3: Is it an extremely unpalatable one.
Speaker 4: No, it's totally.
Speaker 2: It's totally. I think this is why I'm just going
Speaker 2: to break a lot of people's brands. But on the
Speaker 2: other hand, if we accept that, you know, the belief
Speaker 2: that markets are generally good allocators of resources, et cetera,
Speaker 2: they're like, well, it's not really our job to have
Speaker 2: an opinion on this is a good use. So this
Speaker 2: is not a good use. But anyway, I did find
Speaker 2: that to be a very interesting conversation. It does seem
Speaker 2: like those commissions that have to decide what is an
Speaker 2: appropriate amount to spend on upgrades and capacity, they really
Speaker 2: have their work cutout for them right now.
Speaker 3: Yeah. The way I would put it is they are
Speaker 3: not always the most popular people among their respective jurisdictions,
Speaker 3: that's for sure.
Speaker 2: Well, someone has to have the job of doing the
Speaker 2: unpopular stuff, right.
Speaker 3: Someone has to have the job of adequately compensating investors
Speaker 3: in utilities for the risks that they take on in
Speaker 3: providing a necessary commodity for life and the Fourth Industrial Revolution.
Speaker 2: That's right, all right?
Speaker 3: Shall we leave it there?
Speaker 2: Let's leave it there.
Speaker 3: This has been another episode of the Odd Thoughts podcast.
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy al the.
Speaker 2: Way, and I'm Jill Wisenthal. You can follow me at
Speaker 2: the Stalwart. Follow our guest Travis Kavula, He's at Tkavula.
Speaker 2: Follow our producers Carmen Rodriguez at Carmen armand dash Ol
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