Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the All Thoughts podcast.
Speaker 2: I'm Tracy Alloway and I'm Joe.
Speaker 3: Isn't it Joe?
Speaker 2: I have big news for you.
Speaker 3: Go on.
Speaker 2: I'm an electricity generator now, oh yeah, tell me what
Speaker 2: this is big news in my personal life. I am
Speaker 2: finally the proud owner of a pretty big solar panel
Speaker 2: that is feeding into the grid in Connecticut.
Speaker 3: How's that going so far?
Speaker 2: Are you?
Speaker 3: Has it?
Speaker 1: So?
Speaker 3: I got your lower electricity bills.
Speaker 2: I got one electricity bill so far and it was
Speaker 2: about twenty dollars for a few weeks, which is amazing. However,
Speaker 2: I have also experienced my own intermittent energy problems because
Speaker 2: we are recording today on December fifth, and in case
Speaker 2: you don't know, it's been snowing up in New England
Speaker 2: and the solar panels are covered with about eight inches
Speaker 2: of snow, so they're.
Speaker 3: Not producing any electricity.
Speaker 2: Yeah, all the electricity is out. We have a power generator,
Speaker 2: so that's kicked on. But I'm now learning one of
Speaker 2: the downsides of renewable energy.
Speaker 3: No, it's like perfect. This is the end of the
Speaker 3: conversation right here. It's cheap, but it's interman.
Speaker 2: It's cheap and intermitt Yeah, that's basically it. But you know,
Speaker 2: it got me thinking, I'm not in Connecticut at the moment.
Speaker 2: We are both in Washington, d C. For a big
Speaker 2: energy conference. And because I am now an electricity generator
Speaker 2: of sorts and I feed into the grid that is
Speaker 2: owned by a giant utility, we have never actually interviewed
Speaker 2: someone from a utility.
Speaker 3: That's right.
Speaker 2: I don't think we have.
Speaker 3: I don't think we have either there, and I have
Speaker 3: to say and that now this is certain makes sense
Speaker 3: to me that like how utilities work, how pricing in
Speaker 3: particular works for electricity, is this incredible black hole in
Speaker 3: my knowledge because this has come up. But you know,
Speaker 3: we're not called customers, we're called rate payers. And I
Speaker 3: know that in many markets there's this negotiation where there's
Speaker 3: some utility commission or something like that, and the utilities
Speaker 3: have to figure out, okay, we spent this much, and
Speaker 3: can we raise our prices this much, et cetera. And
Speaker 3: then you know, I know there's in some places sort
Speaker 3: of live auction markets and how the weather changes the
Speaker 3: price changes. But I really find this incredibly hard to
Speaker 3: wrap my head around. I guess basically the question of
Speaker 3: why you pay what for electricity?
Speaker 2: Yeah, so two things here. Number one, it seems incredibly
Speaker 2: complex because of all the factors that you just laid out,
Speaker 2: including the patchwork of different regulations for different states and
Speaker 2: the limits there, and also well the political tensions as well.
Speaker 2: That's one thing we can maybe talk about. But the
Speaker 2: other thing is it feels like the whole system is
Speaker 2: becoming more and more complex because you have more renewable
Speaker 2: energy coming on. A lot of that renewable energy, you know,
Speaker 2: you get credits for feeding that into the grid, which
Speaker 2: means special people like me are no longer actually paying
Speaker 2: that much for electricity, but we're still drawing on the
Speaker 2: resources of the utility.
Speaker 3: And I guess there's really two things, because there's this
Speaker 3: a rise of sort of distributed energy, rooftop solar and
Speaker 3: things like that, new forms of energy production. And then
Speaker 3: something that comes up a lot the resumption of load
Speaker 3: growth for the first time in decades. That's right, And
Speaker 3: so you have the renewables, you have load growth, You
Speaker 3: have this impulse from the public and the corporate sector
Speaker 3: to reduce emissions overall net zero, there's always net zero
Speaker 3: press releases going out over the years, and so how
Speaker 3: this all comes together wildly complex, and usually when people
Speaker 3: are explaining it to me, I have to pause them
Speaker 3: every five seconds, like what is that term? What's the
Speaker 3: capacity market? Again? All these things.
Speaker 2: So it's nice for you to warn our listeners in
Speaker 2: advance that they're going to have to pause this episode
Speaker 2: quite a bit. No, hopefully we'll be able to explain
Speaker 2: everything because we do, in fact have the perfect guest
Speaker 2: we're going to be speaking with Long Hubor. He is
Speaker 2: the senior vice president of Pricing and Customer Solutions at
Speaker 2: Duke Energy. So Long, thank you so much for coming
Speaker 2: on the show.
Speaker 3: Great to be here.
Speaker 2: Is it terrible for companies like Duke when their customers
Speaker 2: get solar panels? Is it bad? I keep hearing about
Speaker 2: the agility death spiral.
Speaker 3: It all comes down to pricing and the rate structure.
Speaker 3: So it's not an easy answer.
Speaker 4: If you have the right rate structures, it can actually
Speaker 4: be a beneficial thing, but a lot of times that
Speaker 4: isn't the case. And so in your Connecticut example, you're
Speaker 4: basically getting your fully bundled rate as a credit. But
Speaker 4: that fully bundled rate, although it's in kill a loot hours.
Speaker 4: It's actually made up of a lot of kW and
Speaker 4: fixed infrastructure cost. So that pole outside your house that's
Speaker 4: wrapped into an energy charge, even though as we all know,
Speaker 4: if your energy uses drops, that pole doesn't get cut
Speaker 4: in half. You can't just pull out that pole handed
Speaker 4: to your neighbor. That's fixed infrastructure, and that's seventy percent
Speaker 4: of the grid. Why don't we zoom out really big?
Speaker 4: What is the business model of Duke Energy? Ah, all right,
Speaker 4: this is good. So we have a franchise that enables
Speaker 4: us to for an low cost, reliable electrons as a
Speaker 4: precondition to economic vitality for our community. So we have
Speaker 4: essentially a set jurisdiction where nobody else can come in
Speaker 4: for certain services. And so we have our geographical jurisdiction, right,
Speaker 4: and we're supplying the wires in some cases the power
Speaker 4: generation to that territory. And again there's obligations and exchanges there.
Speaker 4: So we're under democratic control of those prices of the
Speaker 4: return on equity for investors in this long term infrastructure, right,
Speaker 4: So there's balances here. So you have this market discipline
Speaker 4: entity that still has accountability to local communities, to policy makers,
Speaker 4: and has a way to spread infrastructure costs in a
Speaker 4: structure that can make long term intergenerational sense for communities.
Speaker 2: So you mentioned economic vitality just then, and one of
Speaker 2: the things I often hear when I occasionally read books
Speaker 2: about electricity or the grid is this idea that electricity
Speaker 2: cost is still heavily subsidized in many ways because we
Speaker 2: still view it as a sort of social good that
Speaker 2: enables us to do things like manufacture stuff and power
Speaker 2: our homes. And I guess my question is to what
Speaker 2: extent do you think that's true.
Speaker 4: Well, it is certainly true that it is an inelastic
Speaker 4: you know, necessity to modern civilization, right, I agree, But
Speaker 4: for the most part, there isn't necessarily I would say
Speaker 4: a large amount of subsidies, at least on the state level.
Speaker 4: There's some federal tax credits, but again a lot of
Speaker 4: those apply more broadly to the sector. But you know
Speaker 4: what you could hear is well, certain types of customers
Speaker 4: might be subsidizing other types of customers, and so that
Speaker 4: can pop up where you have these certain classes, whether
Speaker 4: it's maybe the industrial class could be subsidized by the
Speaker 4: residential class or vice versa. That is inherent in a
Speaker 4: fixed network system.
Speaker 2: Or the non net meter customers paying the net meter customers.
Speaker 2: I E.
Speaker 3: Me, that's right, you explained what Duke is. What is
Speaker 3: your title is Senior VP Pricing and Customer Solutions, So
Speaker 3: what is that role?
Speaker 4: Yeah, so this is all about helping our customers out,
Speaker 4: not rate payers, our customers customers, right. So these are
Speaker 4: a large customers because the industry has changed a lot.
Speaker 4: Just I mean, when I first got in the industry,
Speaker 4: it was rate payer all the time.
Speaker 3: If I'm operating, if I'm operating that, if I'm operating
Speaker 3: on data information, then I'm happy to be correct you.
Speaker 2: But why was that the like, why was that the
Speaker 2: common term?
Speaker 3: I mean, partly there was.
Speaker 4: Just not the technology or visibility into customers. There was
Speaker 4: a mentality there too, a culture built up, but for
Speaker 4: the most part, it's like if you don't have any
Speaker 4: of the analytics, if you don't have the meters, if
Speaker 4: you don't have the communication back and forth, you're sort
Speaker 4: of at a distance, right, And all that has changed
Speaker 4: ramatically in every category.
Speaker 3: I'm updating. I'm updating. My mental framework of how you see,
Speaker 3: how you use is okay, So you go on with
Speaker 3: the customer, the pricing.
Speaker 4: As right, and so I've got economic development as well,
Speaker 4: and so that's new businesses coming in the existing businesses
Speaker 4: that are there that also want to grow, the pricing
Speaker 4: and rate structures all around that. And again this is
Speaker 4: for all of the Duke States and customer load analytics
Speaker 4: things of that nature to sort of make it all
Speaker 4: work and do an A to Z to solve customer
Speaker 4: problems or goals. So if a customers like, hey, I
Speaker 4: want to bring a new manufacturing to the state, my
Speaker 4: team will work in conjunction with the government and we'll say, okay, well,
Speaker 4: here's a great site or here's a great community that
Speaker 4: would really fit the workforce you're looking for, the size
Speaker 4: of business you're bringing that type of thing.
Speaker 2: So when it comes to actually setting those types of rates,
Speaker 2: can you talk to us about I guess the building
Speaker 2: blocks that would go into that, like what are you
Speaker 2: putting presumably into a giant Excel spreadsheet and then spitting
Speaker 2: out as the final number.
Speaker 4: Well, it all comes down to something called the revenue requirement.
Speaker 4: And the revenue requirement basically says how much money do
Speaker 4: you need to collect from your customers to cover your investments,
Speaker 4: to cover operations and then taxes returned to investors, so
Speaker 4: that is the big number. Then from there you slice
Speaker 4: and dicee that based on how the different classes are
Speaker 4: using energy, right, the makeup the load profiles and so forth,
Speaker 4: and you create pricing around that to collect that revenue requirement.
Speaker 4: But it gets really complicated because the easiest way to
Speaker 4: collect that revenue requirement is by just having everybody pay
Speaker 4: a big fixed charge.
Speaker 3: Right.
Speaker 4: That would be the easiest thing. If you know I
Speaker 4: need to collect one hundred from you, give me a
Speaker 4: one hundred each month, right, But that doesn't send the
Speaker 4: best price signals, does it right for you to conserve
Speaker 4: because you would just be using a huge amount of
Speaker 4: energy because it would be one hundred dollars every month
Speaker 4: no matter what you use for the most part, right,
Speaker 4: and there'd be a little bit of fuel there. And
Speaker 4: so that wasn't palatable that type of pricing to collect
Speaker 4: that type of revor requirement. And so then it was well,
Speaker 4: what's the next easiest thing to do given the state
Speaker 4: of technology that we have, And that's where you see
Speaker 4: a lot of the legacy pricing where it's mostly just
Speaker 4: usage kWh based.
Speaker 3: All right, let's talk about the different types of markets. Then,
Speaker 3: so there are markets where there's some commission right that
Speaker 3: determines a legitimate price there.
Speaker 4: Every state has a public utilities commission or okay, how
Speaker 4: they might label it.
Speaker 3: And so you talk to us about how you interface
Speaker 3: with the commission. What are the conversations like, how often
Speaker 3: are they and what are you actually talking about with them? Yeah,
Speaker 3: regulators are key to making this all work, and they
Speaker 3: have staffs that work and they scrutinize all of our filings.
Speaker 3: And so we're in there and there's just basic sort
Speaker 3: of automatic oh that's true up because the fuel went up,
Speaker 3: and you know whatever else outside of the control or
Speaker 3: we've got these programs that we're updating to more intensive
Speaker 3: processes like rate cases where you go in and you say, okay,
Speaker 3: well we have made these investments, we're about to make
Speaker 3: these investments, and you know, here's what we think is prudent,
Speaker 3: and here's where we think the capital markets are in
Speaker 3: terms of return and debt markets and so forth, And
Speaker 3: so there's a lot of scrutiny there. There's formal data requests.
Speaker 3: We get thousands upon thousands of data requests formal that
Speaker 3: come in and then they're on the record. Some of
Speaker 3: them are confidential and then only with parties that sign
Speaker 3: certain agreements. But everything is just very well scrutinized in
Speaker 3: these settings. Some of these proceedings are very contentious and
Speaker 3: you're under oath others, you know, most parties agree, they're like, hey, yeah,
Speaker 3: this is a good idea, Yeah, go forth. Or it's
Speaker 3: so routine that it doesn't have a big impact. Remind
Speaker 3: us how many states you're operating in six and seven
Speaker 3: if you included and only guests. Ye, supplies to it.
Speaker 2: So one question I want to ask, and you know,
Speaker 2: hopefully in a slightly diplomatic way, but what are the
Speaker 2: big frictions with regulators? Like is it mostly over cost
Speaker 2: and pricing structure or does it go to environmental Like
Speaker 2: what is it that you you fight about when you're specially.
Speaker 4: Ready that there's another key party involved in all this,
Speaker 4: and that's the consumer advocate. Most states have it. I
Speaker 4: used to be working in a consumer advocate office actually
Speaker 4: in the beginning part of my career, and they are
Speaker 4: meant to really, you know, scrutinize things from more of
Speaker 4: a using and consuming public lens.
Speaker 2: So that we're representing the criticisms about pricing and things
Speaker 2: like that.
Speaker 4: Yes, so they're representing a constituency there, and the Public
Speaker 4: Utility Commission is usually the entity in charge of balancing
Speaker 4: all the different parties and taking in this information. It's
Speaker 4: quasi judicial, and so you have they're the ones that
Speaker 4: everyone gets mad at. Presumably they're the public face sometimes
Speaker 4: a lot of it. And it really just depends on
Speaker 4: the state and what's going on. You know, you typically
Speaker 4: always push back on way to return, for instance, what
Speaker 4: you're you're paying for equity and and and that's sort
Speaker 4: of steady state. And then things can get controversial if
Speaker 4: something goes wrong on a power plant or something of
Speaker 4: that nature. But there's sort of that consistent rate case
Speaker 4: mode that provides some friction there. For sure.
Speaker 3: Let's get into the economics of different types of energy
Speaker 3: production and consumption and so forth. We've added tons of
Speaker 3: renewables to the grid over the years pretty much across
Speaker 3: the country. Some have gone really fast, like Texas and California.
Speaker 3: There's not as fast for obvious reasons. Why does that
Speaker 3: not cause the price of electricity to collapse?
Speaker 4: Great question, And it gets to all the different aspects
Speaker 4: of what makes up that electricity bill and So when
Speaker 4: I mentioned before that a lot of the costs are
Speaker 4: fixed infrastructure costs. Right, this is a huge grid. It
Speaker 4: spans thousands upon thousands of miles. Right, our grid can
Speaker 4: wrap around the world like you know six times.
Speaker 3: That's cool.
Speaker 4: That's how like just the mammoth that's just our distribution system.
Speaker 4: So that's how big that we're talking about. And so
Speaker 4: you have that fixed infrastructure, which includes power plants, the
Speaker 4: power lines, everything of that nature. You have the fuel
Speaker 4: and all the different fuel supply and administration and just
Speaker 4: everything from like tree trimming. Right, if you have that
Speaker 4: many miles, you have to think about the trees, and
Speaker 4: then what if a drunk driver hits one of the
Speaker 4: poles and our scorel starts gnawing on things. Right, there's
Speaker 4: a lot in that price of an electric bill. So
Speaker 4: if you have an intermin renewable resource, well, what is
Speaker 4: that good at offsetting? Well, it's good at offsetting fuel
Speaker 4: expense if it aligns with the peak of the utility system.
Speaker 4: It can also avoid future power plant or purchases on
Speaker 4: the market for capacity, But it all depends on the
Speaker 4: individual resource and the location to see if it can
Speaker 4: bring that capacity value. But at least it can provide
Speaker 4: a fuel savings, and so that's a smaller part of
Speaker 4: the bill, right, And so if you're only offsetting a
Speaker 4: smaller part of the bill, that's why you don't see
Speaker 4: that downward pressure. And another thing is a lot of
Speaker 4: different types of renewables are heavy upfront capital expenses, right,
Speaker 4: and so that initial investment puts upward pressure on rates
Speaker 4: even though it gives a nice long term hedge or
Speaker 4: discount on fuel.
Speaker 2: So you mentioned long term just then. And one of
Speaker 2: the things that I do not envy utility providers in
Speaker 2: having to do is to try to sort out immediate
Speaker 2: energy needs for the state of our economy and our
Speaker 2: society right now, but also try to make those giant
Speaker 2: capital investments for like decades out into the future. How
Speaker 2: do you guys think about that? That seems tough.
Speaker 4: It's a lot of responsibility and it's a collective decision, right.
Speaker 4: And I mentioned regulators and sumer eravocates, other stakeholders policymakers
Speaker 4: in the state. And if you look at utilities in
Speaker 4: the past, they have completely shaped the landscape of states.
Speaker 4: And so Duke Energy, for instance, I mean we were like, hey,
Speaker 4: Hydro and we built a huge amount of lakes all
Speaker 4: around the Carolinas to get that power. Then we there
Speaker 4: are a lot of lakes in the Carolinas, right, yeah,
Speaker 4: and some of them are artificial from from you know,
Speaker 4: from and that brings recreation, it brings you know, it
Speaker 4: brings so many different other things to the state. It
Speaker 4: changes the landscape, you know. Then you get into nuclear. Right,
Speaker 4: these are like eighty year assets, and back then you
Speaker 4: needed to have an even still today pumped hydro to
Speaker 4: store some of that nuclear during the down times of
Speaker 4: the day. And so now you're creating different lakes at
Speaker 4: elevations to move water up and down as the long
Speaker 4: duration storage.
Speaker 3: So these are like big landscape changing. So you have
Speaker 3: extras electricity at some point, maybe during the night with
Speaker 3: nuclear or during the day with solar, and use that
Speaker 3: electricity to lift water at a high elevation and then
Speaker 3: at night it rolls downhill and then it spins a
Speaker 3: wheel or something like that. That's exactly right. I've always
Speaker 3: thought that was just such a fascinating concept. But on batteries.
Speaker 3: So you mentioned that one of the issues with say
Speaker 3: solar or what we think of as renewables is that
Speaker 3: they're intermittent and so forth. Battery technology is getting a
Speaker 3: lot better. And I keep seeing stats about how again,
Speaker 3: in some markets like Texas and California, especially during high
Speaker 3: stress periods, you increasingly see grid level batteries playing an
Speaker 3: important part of the mix that's applying energy. In the
Speaker 3: last few years, how much have you seen batteries and
Speaker 3: the improvement in battery technology sort of change the economics
Speaker 3: of renewables.
Speaker 4: Yeah. Again, And this gets to the beginning of why
Speaker 4: this area is so complex, because not only do you
Speaker 4: have the patchwork of regulation and utilities, but each geographic region,
Speaker 4: when you have weather dependent generation, it brings something unique.
Speaker 3: And so a solar plus.
Speaker 4: Storage facility in Arizona is going to have a lot
Speaker 4: of different economics than say in North Carolina. Okay, right,
Speaker 4: And so you've got more sun, maybe cheaper, flatter land,
Speaker 4: and you have a summer peak that you really worry
Speaker 4: about in in Arizona, and so a four hour mixed
Speaker 4: with tracking solar can provide a decent amount of capacity
Speaker 4: value in Arizona. Switch to say Midwest, Well, where it
Speaker 4: can be the peak. The peak could be winter. Well,
Speaker 4: what does the winter peak look like? Well, it could
Speaker 4: be a week of cloudy weather where you see no
Speaker 4: sun and it could these very cold extreme weather events
Speaker 4: could last for many days. So that's a very different
Speaker 4: set of economics and outcomes, and so really depends on
Speaker 4: where you are. In general, batteries and around the four
Speaker 4: hour duration have really come a long way. Paired with renewables,
Speaker 4: especially in those markets where you have that summer peak,
Speaker 4: are still trying to crack the longer term extreme weather
Speaker 4: event type of peaks.
Speaker 2: So it is kind of true that at the moment
Speaker 2: we sort of perversely solve the problem of intermittent energy
Speaker 2: and the fact that you know, solar and wind tends
Speaker 2: to come on and off with more generation, right, so
Speaker 2: we don't store the extra energy. We just try to
Speaker 2: make up for it with generation from other sources when
Speaker 2: that goes offline, when the solar and wind goes offline.
Speaker 2: How far are we from solving that storage problem? Just
Speaker 2: to press on Joe's point.
Speaker 3: Well, that is the big question.
Speaker 4: Is there a startup out there that has the solution
Speaker 4: that'll be ready in five years and can scale with
Speaker 4: some type of new long duration storage technology. Right, there's
Speaker 4: form Energy, there's others that are out there that could
Speaker 4: be very promising, So time will tell when those breakthroughs
Speaker 4: will happen on the storage side. But to your point
Speaker 4: right now, it takes a great diversity of resources to
Speaker 4: make this all work in all the and that's why
Speaker 4: there's concern of when certain states or advocates say, well,
Speaker 4: we don't like that particular resource, or you know, we
Speaker 4: want you to do more of that. There has to
Speaker 4: be a balance there because they all sort of work
Speaker 4: in synergy, and there's really complex modeling that sort of
Speaker 4: shows how this all works to keep that reliability during
Speaker 4: those extreme events. But what you don't want to do
Speaker 4: is have to build two systems, a renewable system that
Speaker 4: is there when the weather's great, and then a tire
Speaker 4: backup fossil system.
Speaker 2: Right.
Speaker 3: Well, so the third thing that we haven't started talking
Speaker 3: about yet when you talk about like these different conceptual systems,
Speaker 3: the fossil fuel system, the renewables and battery system, and
Speaker 3: that's nuclear. And one thing that's come up on the
Speaker 3: show in the past is that some of the advocates
Speaker 3: of much more aggressive nuclear build out don't like the
Speaker 3: current market structure model because they say, look, we have
Speaker 3: these huge gigantic upfront costs and we need some price certainty.
Speaker 3: And if we're going to have a electricity market in
Speaker 3: which we're not getting any revenue during the really sunny
Speaker 3: days because Tracy doesn't need to pay anything into the
Speaker 3: grid at all, it's really hard to justify the planning
Speaker 3: and the upfront cost and the years of construction and
Speaker 3: work for everything that we know that's difficult about nuclear.
Speaker 3: Do they have a point that when we're thinking about
Speaker 3: market structure for electricity that it's hard to optimize for
Speaker 3: a world that has a lot of nuclear but also
Speaker 3: has a lot of room for the tracys or the
Speaker 3: solar firms of the world.
Speaker 4: Yeah, So this gets back to the larger market structures
Speaker 4: out there, and so some markets are considered restructured, meaning
Speaker 4: they have opened competition on the generation side of the business. Right,
Speaker 4: the wires is a natural monopoly. You don't want a
Speaker 4: thousands exactly wires across the street, right, But generation was thought, well,
Speaker 4: there could be some competition there, and so some markets reformed,
Speaker 4: others stayed vertically integrated. And like I mentioned, we're in
Speaker 4: both so we can see both works and what doesn't,
Speaker 4: and where you can get some advantages and where there's
Speaker 4: some issues and again, as we talked about, there is
Speaker 4: a trend of a lot higher load growth, and these
Speaker 4: markets came about during a time where's relatively calm and
Speaker 4: flat to maybe modest load growth, and they set up
Speaker 4: their markets where again you have energy and capacity, and
Speaker 4: they have energy markets which are a lot deeper. But
Speaker 4: capacity markets in the end of day are fixed infrastructure,
Speaker 4: big lumpy investments. How do you encourage fixed infrastructure out there?
Speaker 4: What price signals do you send because you're either sending
Speaker 4: too much dollars or too little dollars. It's very hard
Speaker 4: to get right on the infrastructure side. Some markets just said,
Speaker 4: like Urcott, we're not going to have something specific for
Speaker 4: capacity at all. Others have capacity price signals, and so
Speaker 4: that's the inherent tentions of where do you get that
Speaker 4: revenue to recover those big investments.
Speaker 3: So just on this point, you mentioned or Cott, and
Speaker 3: so that's Texas, right. So in Texas, basically it's every
Speaker 3: one can plug into the grid and sell, but there's
Speaker 3: no excess capacity. What is a capacity market?
Speaker 4: Specifically, a capacity market is all about providing the payments
Speaker 4: needed to encourage big new infrastructure investments with generators. Right,
Speaker 4: So in this example, so it's money to a producer
Speaker 4: of energy that is, like you're going to pay them
Speaker 4: to exist basically regardless of what that day's market conditions
Speaker 4: are like for electricity. And so if you have some
Speaker 4: if the energy prices are very low because everybody has
Speaker 4: zero marginal cost renewables that day because it's sunny, they're
Speaker 4: still getting capacity payments got right as long as they
Speaker 4: show up, and there's big penalty if they don't.
Speaker 2: Well in terms of storage and maybe starting to fix
Speaker 2: some of these problems. We do have things that people
Speaker 2: talk about called virtual power plants or distributed power networks,
Speaker 2: whatever you want to call them. Like, is that a
Speaker 2: big deal for you guys? Or is it still kind
Speaker 2: of something that people are just talking a lot about
Speaker 2: at types of conferences.
Speaker 3: Yeah, I only hear about them conferences.
Speaker 2: Yeah, the same.
Speaker 4: Well, it is a I would say it's new branding
Speaker 4: to something that at least some utilities have actually have
Speaker 4: a lot of experience with and have years of a
Speaker 4: track record with. It falls under the all the above
Speaker 4: categories again, and these are devices or you know, different
Speaker 4: resources that are out in the distribution system a lot
Speaker 4: of times on the customer premise, sometimes behind their meter,
Speaker 4: oftentimes behind their meter, and it could be something as
Speaker 4: simple as energy efficiency, but you know better light bulbs, insulation,
Speaker 4: and it can move and where virtual power plants really sort.
Speaker 3: Of captures it as dispatchable research.
Speaker 4: Think like smart thermostent, think battery storage on the home,
Speaker 4: those types of things, controllable water heaters, and the idea
Speaker 4: is you have an aggregation of all these and you
Speaker 4: orchestrate this so that it mimics a centralized power plant.
Speaker 4: Now we've started decades ago, so we have over a
Speaker 4: million connected devices already out there that we orchestrate. The
Speaker 4: numbers add up to something meaningful when we have what
Speaker 4: we call demand response events during peak times. But it's
Speaker 4: not like fifty percent of the resources out there by
Speaker 4: any means. Right now, it can grow and people are
Speaker 4: excited about it now because you have new resources and
Speaker 4: new technologies that make that orchestration better. So in the past,
Speaker 4: all we had just like a hard switch on an
Speaker 4: AC unit. Now you have the smart thermostat, so you
Speaker 4: can optimize that and make it so that the customer
Speaker 4: doesn't even feel that you're making minor changes to their thermacy.
Speaker 3: Let's feel about load growth. So obviously operate a lot
Speaker 3: of the Southeast. We've seen a lot of the sort
Speaker 3: of new industrialization endeavors battery plants and car plants, et cetera.
Speaker 3: I imagine a lot of these entities are Duke Power
Speaker 3: customers talk to us about Okay, I'm setting up a
Speaker 3: new battery plan, I'm looking for a site. How long
Speaker 3: does it take me to plug in? And what does
Speaker 3: that whole process look like when I come to say, hey,
Speaker 3: I'm thinking about I got some tax credit, I got
Speaker 3: some money from the government. I want to build a
Speaker 3: plant somewhere in South Carolina or something like that. How
Speaker 3: long does it take until I could actually plug in
Speaker 3: and get power from you? Yeah, well, unfortunately it all depends, okay.
Speaker 4: And so when I mentioned there's those restructured markets, there's
Speaker 4: the vertically integrated markets. When it's vertically integrated, we can
Speaker 4: see the whole system. We can plan for it. So
Speaker 4: if we know large customers coming, we would put it
Speaker 4: in what we call our integrated resource plan. So you'll
Speaker 4: often hear IRP. So we're planning making sure that generation
Speaker 4: is there. If you're in a restructured market, it's a
Speaker 4: bit more complicated. A lot of times, utilities aren't necessarily
Speaker 4: in control of that here at the whims of what
Speaker 4: is trying to be interconnected in queues and so forth,
Speaker 4: and so there has to be certain bilatter agreements that
Speaker 4: the customer would have to make perhaps up. But in
Speaker 4: a vertically integrated market and in a restructured market, you
Speaker 4: do have the teams on the ground that work with
Speaker 4: that company. They find sites maybe that have been already
Speaker 4: just made ready for an economic development opportunity, so that
Speaker 4: customer would come in, they would give the specifications, the power,
Speaker 4: the size workforce, and there'd be a matchmaking and that
Speaker 4: matchmaking could actually be pretty quick, depending on if there's
Speaker 4: a site already ready. If there isn't, that will take
Speaker 4: more time, and then they have to acquire the land
Speaker 4: they have to build at the same time they're building
Speaker 4: the utilities, building infrastructure, wires, infrastructure to serve them, and
Speaker 4: so it could be a year, it could be five years.
Speaker 4: It really depends on the site and how fast that
Speaker 4: customer wants to ramp up. But we know a lot
Speaker 4: of times to build a new manufacturer, they can't do
Speaker 4: that overnight. And then you have the new complexity of
Speaker 4: supply chain. There's supply chain constraints on some key equipment
Speaker 4: out there.
Speaker 2: This is our chance to talk about transformers, right, Yeah,
Speaker 2: that's been going on for what like four years now.
Speaker 3: So for the latest ism, electrical components have been in
Speaker 3: shortage now for four years and two months.
Speaker 2: That's crazy. How are you guys handling that?
Speaker 3: Yeah?
Speaker 4: Luckily, you know we can use our size and you know,
Speaker 4: move things between states if we need to, and work
Speaker 4: with suppliers. And there's the utility industry in general is
Speaker 4: very collaborative, especially when you have emergencies.
Speaker 3: Right.
Speaker 4: So we when we were hit with all these hurricanes
Speaker 4: this last season, we had to replace I think it
Speaker 4: was like eighteen thousand transformers, right, and so there was
Speaker 4: there's industry collaboration that makes that all work. But the
Speaker 4: real issue gets into these large power transformers for large customers,
Speaker 4: and you know, those just take such a long time
Speaker 4: to build and there's limited production lines for them, and
Speaker 4: so it definitely you know, keeps folks up at night
Speaker 4: as we look to expand and reshore. Manufacturing.
Speaker 2: Ye, so Joe asked you how long it would take
Speaker 2: to plug in a battery manufacturing plant or something like that.
Speaker 2: I'm not starting a battery manufacturing plant, I'm doing a
Speaker 2: data center. How much more complicated or different is that process?
Speaker 2: If I'm running a data center versus batteries might not
Speaker 2: necessarily fit into this box, but sort of run of
Speaker 2: the mill manufacturing base.
Speaker 4: Ye, most standard manufacturers are a lot smaller in size
Speaker 4: than a data center spertusly some of the newer data centers,
Speaker 4: and you can think some AI data centers, those can
Speaker 4: be a gigawot in most manufacturing. As you know, five
Speaker 4: hundred megwats tops typically you always have outliers and for
Speaker 4: the most part it's below one hundred megawats, So all
Speaker 4: of a sudden you have this big size differential. There
Speaker 4: can be a little bit of speed differential there too,
Speaker 4: where the data center can move quicker. But this really
Speaker 4: impacts especially smaller utilities. Douke has a huge system, so
Speaker 4: you know, we can absorb some of this, But if
Speaker 4: you're a smaller utility and you have a two gigawat
Speaker 4: peak and all of a sudden a data center comes
Speaker 4: in with a gigawat load, that's huge. And what if
Speaker 4: they don't materialize, or what if they're in business for
Speaker 4: ten years and then they go away? That fundamentally creates
Speaker 4: the stranded cost that all the customers have to pay.
Speaker 4: So these are the tricky issues that are popping up.
Speaker 4: And then you layer on clean energy, right do you
Speaker 4: want to have to build new fossil for that? And
Speaker 4: a lot of data center companies also they have clean
Speaker 4: energy goals. So how do you start to marry these complexities?
Speaker 3: Yeah, how do.
Speaker 2: Multi multi dimensional longs like how many more hours?
Speaker 4: A lot of tools and tools. You start with smart
Speaker 4: contracting and tariffs on the front end to protect all
Speaker 4: customers in case something doesn't happen. Basically, it would be saying, hey,
Speaker 4: you have obligations customer, as we build out the grid
Speaker 4: for you to connect, it'll be X amount of dollars.
Speaker 3: You've got to pay that.
Speaker 4: Even if you don't just like a purchase commitment kind
Speaker 4: of yeah, pretty much, so you know letter and then
Speaker 4: there's longer term agreements too where and these are newer
Speaker 4: where if you said you were going to use five
Speaker 4: hundred megawats and you're only using two hundred, you've got
Speaker 4: to compensate for a portion of that because we've had
Speaker 4: to build new resources generation resources to handle you, right,
Speaker 4: and so you've got to cover that, and then you
Speaker 4: can get into different pricing elements where you have maybe
Speaker 4: time of use based rates, and then you marry that
Speaker 4: with new ways to bring them clean energy and for
Speaker 4: them to contribute to clean energy. And that is really
Speaker 4: sort of the frontier and the exciting stuff. And Duke
Speaker 4: announced a partnership with a lot of the hyperscalers and
Speaker 4: new Core earlier this year. That gets into execuve that
Speaker 4: how do you accelerate clean energy in a sustainable way financially?
Speaker 2: Is it inevitable that, like non metered, that system is
Speaker 2: going to go out of style in a lot of jurisdictions.
Speaker 2: I know Hawaii ended it recently, I think, And then
Speaker 2: I think you guys did something in North Carolina relatively
Speaker 2: recently that went to court. Am I getting in at
Speaker 2: exactly the wrong time?
Speaker 4: Well, you're probably getting in in the right time if
Speaker 4: you're thinking about you individually and your maximization and not
Speaker 4: societies and so because because a lot of times your
Speaker 4: grandfather did once, you make that, so you'll be protected
Speaker 4: for ten, maybe twenty years, So you probably made the
Speaker 4: right individual purchase decision. Net metering has been reformed and
Speaker 4: most major markets are ready and it's just reflecting the
Speaker 4: fact of hey, does this add value to the network
Speaker 4: or subtract value? Is it financially scalable? And then also
Speaker 4: if you're a clean energy advocate, you would look at
Speaker 4: the price per carbon saved And so in Connecticut you
Speaker 4: have a lot of nuclear clean energy, right, and so
Speaker 4: you're just how much COQO saving one clean energy for
Speaker 4: another one?
Speaker 2: There's actually not that much nuclear in my mind, because
Speaker 2: I think we send it elsewhere is part of the
Speaker 2: problem looking at the overall grid mix.
Speaker 4: It's always good, it's always good to calculate what you're
Speaker 4: paying per CO two saved. And I've done this for
Speaker 4: Connecticut in my past life, and back then it was
Speaker 4: one of the most expensive ways to reduce carbon was
Speaker 4: solar in Connecticut.
Speaker 3: So the future of solar is centralized solar farms or
Speaker 3: if like somebody.
Speaker 4: Like that, you know, we need we need it on
Speaker 4: every scale. But really there's a lot of promise in
Speaker 4: distributed energy resources. You just have to get the pricing
Speaker 4: right and you have to get that combination of technologies right.
Speaker 4: So at the home, if you had a controllable thermostart
Speaker 4: and you had battery storage and things to complement that
Speaker 4: solar system. Then it's creating all these other values. And
Speaker 4: that's what we did in South Carolina and partnership with
Speaker 4: the solar industries, we said, hey, how can we make
Speaker 4: these resources more valuable and then form compensation structures that
Speaker 4: the industry can sell customers on. And so that's what
Speaker 4: we did, and so we launched power Pair, which is
Speaker 4: a large solar plus storage program that does exactly that
Speaker 4: encourages solar plus storage coupling, and then it's tied to
Speaker 4: time of use rates and also controllable batteries, so we're
Speaker 4: using that during peak time. So there's room for that,
Speaker 4: there's good space for that, and including on like commercial
Speaker 4: industrial scale, and then you also absolutely need the centralized
Speaker 4: large scale that brings us great economies of scale to
Speaker 4: the system.
Speaker 3: What happened to the grid or the price that people
Speaker 3: pay for electricity? So there isn't a lot of new nuclear.
Speaker 3: There's some restarting of plants, and there's that one in
Speaker 3: Pennsylvania that one of the big tech companies is behind,
Speaker 3: though I don't even think it had been closed all
Speaker 3: that long. The only like sort of like true recent
Speaker 3: nuclear were those reactors in Georgia. What happens the day after.
Speaker 3: So you spend billions of dollars on tons of upfront cost,
Speaker 3: tons of upfront time getting these new reactors on what
Speaker 3: happens to the next day when there's just tons more
Speaker 3: at that point kind of free electricity on the grid.
Speaker 4: Yeah, so it gets to unit order and dispatch, and
Speaker 4: so grid operators are constantly trying to optimize the system
Speaker 4: for economics for the most part, right, And so when
Speaker 4: you have a new generation resource that has a very
Speaker 4: low marginal price of production, that's going to then reduce
Speaker 4: the output from plants out of a higher cost of production,
Speaker 4: and so things sort of get restacked and reordered in
Speaker 4: terms of the merit of what's going on in the system.
Speaker 4: And that's why natural gas is such a versatile resource
Speaker 4: because it can go from sort of higher output to
Speaker 4: a lower output more of a peaking capability, and so
Speaker 4: that's why gas is just such a great sort of
Speaker 4: intermediate type of technology to balance all all of that.
Speaker 4: And so that's essentially what happens. And then you know,
Speaker 4: you have load growth and other things that then start
Speaker 4: to reform the original set of conditions.
Speaker 2: Okay, so you mentioned the revenue requirement as the sort
Speaker 2: of all important number that you are working towards. How
Speaker 2: do you actually start to design the rates so that
Speaker 2: you hit that magic figure?
Speaker 3: Great question. First, you've got different classes of customers.
Speaker 4: Industrial load profiles are going to look different than a
Speaker 4: residential load profile, right, And then you have classifications of
Speaker 4: what type of system assets you're recovering for. So are
Speaker 4: you covering for energy related, capacity related fixed infrastructure like
Speaker 4: the pull outside your house, And so you break this
Speaker 4: all up, and then you have certain methods to know, well, hey,
Speaker 4: this customer class is using a lot more transmission first distribution,
Speaker 4: and so you have these allocations. From there you figure out, well,
Speaker 4: what pricing can I set to recover the revenue card,
Speaker 4: because again, this is recovering the investment that investors have made, right,
Speaker 4: Like this is critical, Like if you don't capture this,
Speaker 4: your credit metrics just go south. And it's extremely expensive
Speaker 4: to borrow money. And this infrastructure game is all about
Speaker 4: long term investment, So a change in your borrowing rate
Speaker 4: has a huge ripple effect on the costs for all
Speaker 4: the customers in that jurisdiction. So that's why it's really
Speaker 4: important to collect that revenor requirement. But at the same time,
Speaker 4: you have to send the right price signals to customers
Speaker 4: because you don't want to just have them pay that
Speaker 4: one hundred dollars.
Speaker 2: Right.
Speaker 4: And in the past, it was all value metric because
Speaker 4: we didn't have the meters. This is especially for residential
Speaker 4: You didn't have the meters to do anything other you
Speaker 4: can do a demand charge, you can do time of
Speaker 4: use rates. At some point we actually did have meters,
Speaker 4: but you have to roll out a truck to the
Speaker 4: customer to get them on a time of use rates.
Speaker 4: So you had to drive somebody there swap out the meter. Right,
Speaker 4: it's incredibly expensive. We've now with advanced meter and we
Speaker 4: can get around that. So now we can introduce price
Speaker 4: and that's more accurate to like how the system actually works. Right,
Speaker 4: But there's still reluctance to go much more complicated on
Speaker 4: the residential side because of just how customers understand their energy.
Speaker 3: Last question. When Tracy gets a big discount on her
Speaker 3: electricity because of her solar, there's still all of these
Speaker 3: costs that have to be born and you mentioned that earlier,
Speaker 3: So who's paying the cost now?
Speaker 4: Basically everybody else that does not have that solar It
Speaker 4: gets reconstituted. Don't let you directly because this is a member.
Speaker 4: This is a fixed infrastructure system. So this is not
Speaker 4: like tennis shoes or candy, right. This is a big network,
Speaker 4: one of the largest, most complicated networks, the first network
Speaker 4: of modern civilization pretty much. And so that ncent infrastructure
Speaker 4: gets just you know, spread out to others.
Speaker 2: Right, So cry harder about con Edison. Joe, I'm free.
Speaker 2: I'm an independent energy supplier now kind of, Lon Hubert,
Speaker 2: thank you so much for coming on all thoughts.
Speaker 4: Thank you for having me, Joe.
Speaker 2: That was pretty fun to learn why I'm the problem.
Speaker 3: We've discovered that you're the problem.
Speaker 2: I mean, I do think like there are so many
Speaker 2: renewable energy solutions out there, and all of them do
Speaker 2: seem to come with some form of downside. Whether it's
Speaker 2: like the very significant capital investments that you have to
Speaker 2: pony up for stuff that ends up being like very intermittent,
Speaker 2: whether it's the idea of net metered customers being subsidized
Speaker 2: by non net metered customers for their grid use. Everything
Speaker 2: just seems very complicated.
Speaker 3: First of all, it's really helpful. I know this is
Speaker 3: the most basic thing, but it's really helpful to remember that,
Speaker 3: like fuel is just this marginal cost of what you're
Speaker 3: paying for. Yeah, that there's everything. There's the line, and
Speaker 3: there's the production. And he mentioned tree trimming, which is
Speaker 3: huge because that's a source of wildfires in a lot
Speaker 3: of areas when the lines touch trees. So there's all
Speaker 3: these huge costs, and so it becomes very intuitive that
Speaker 3: you can add a bunch of solar panels, either on
Speaker 3: individual households or across the grid in general, and see
Speaker 3: why not only does it not like move the dial down,
Speaker 3: I don't know if it moves the dial at all. Well,
Speaker 3: just move other people.
Speaker 2: Well, he did say it was marginally helpful the fuel cost,
Speaker 2: but to your point, the fuel cost are not the
Speaker 2: big thing here. But it was also very interesting to
Speaker 2: just hear how a utility kind of thinks about designing
Speaker 2: those rates and all the different like considerations that go
Speaker 2: into spitting those final numbers out. I guess I hadn't
Speaker 2: realized like how individualized some of them actually are. Like
Speaker 2: I know that we're not all paying a flat number, obviously,
Speaker 2: but like the differences across residential and commercial and data
Speaker 2: centers versus a battery plant or something like that so.
Speaker 3: Also are here just very interesting hearing the different types
Speaker 3: of because there's two things, right, There's different types of
Speaker 3: electricity market structure, and then there's also different types of
Speaker 3: markets by virtue of their weather. It's about Arizona versus
Speaker 3: the Midwest versus the southeast. But it's interesting to think,
Speaker 3: you know, like every couple of years now or maybe
Speaker 3: every year, you hear about a blackout in Texas, and
Speaker 3: Texas obviously makes it incredibly easy for pretty much the
Speaker 3: producer of any kind of power to plug in and
Speaker 3: start selling their generation instantly.
Speaker 2: And they've got lots of sun, lots of others stuff.
Speaker 3: They've got a lot of wind, they got everything. But
Speaker 3: what they don't have is any guaranteed payments. That's spare
Speaker 3: capacity that is not getting paid during most of those
Speaker 3: sunny days, but then on the day when it's that
Speaker 3: crazy sunny or crazy snowy or whatever, suddenly it needs
Speaker 3: to be turned on.
Speaker 2: Well, you asked that question about how do you like
Speaker 2: actually incentivize big nuclear power plants that cost a lot
Speaker 2: of money when you know someone knows that if they
Speaker 2: build a nuclear power plant, they might not get like
Speaker 2: a particular rate for x amount of years, and I
Speaker 2: think we're back to why solar is the problem?
Speaker 3: But no, I don't think it even just did it.
Speaker 3: But I do think it's like, I mean, look, I
Speaker 3: just think it'll be very interesting under this next administration
Speaker 3: because I do think that there are a lot of
Speaker 3: people who are like, solar is part of the solution.
Speaker 3: Nuclear is part of the solution. And by when I
Speaker 3: say solution, I mean the problem of how do you
Speaker 3: get more electricity?
Speaker 2: Right, not more, but put it all together?
Speaker 3: And it's not really that they get together. And it
Speaker 3: almost does seem, at least in some markets, like you
Speaker 3: sort of have to pick one or the other. So
Speaker 3: lots of fascinating I guess question marks about how this evolves.
Speaker 2: Or figure out a new way to design the grid
Speaker 2: or new storage is probably what we really need.
Speaker 3: Battery breakthrough, ye, which could solve everything.
Speaker 2: All right, someone, please, you know, start working on that
Speaker 2: battery now, because you probably haven't realized it's this much
Speaker 2: of a problem, so you can get started now, all right,
Speaker 2: shall we leave it there?
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the All Thoughts podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 3: I'm Joe Wisenthal. You can follow me at the Stalwart,
Speaker 3: Follow Lon Huber on Twitter at Lon Huber. Follow our
Speaker 3: producers Krman Rodriguez at Kerman Arman, dash Ol Bennett at
Speaker 3: Dashbod and Kilbrooks at Kilbrooks. Thank you to our producer
Speaker 3: Moses On. For more odlogs content, go to Bloomberg dot
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