a16z Podcast - Fraying Wires: The Decentralization of the Electric Grid

Episode Date: February 15, 2024

The electric grid needs an update. In this explainer, a16z Partner Ryan McEntush discusses the escalating complexity of the grid, unveils its vulnerabilities, and traces the evolutionary path that has led us to this point. From the surging demands of AI to outdated infrastructure, we delve into the potential roles of cutting-edge technologies such as solar batteries, natural gas, and nuclear power in shaping the grid's future.Timestamps:(00:00) - Introduction(02:28) - The Need for Grid Modernization(04:43) - Understanding the Grid's Operation and Challenges(06:47) - The Complexity of Grid Management(08:31) - Increasing Outages and Volatility(11:49) - The Role of New Technologies(17:53) - The Potential and Limitations of Renewable Energy Sources(19:08) - Energy Storage Solutions(24:57) - The Future of Natural Gas and Nuclear Power(29:46) - The Impact of Policy on the Grid(31:47) - The Concept of a Smart Grid(34:04) - Decentralization of the Grid(36:57) - The Role of the Free Market in Grid ReliabilityResources: Find Ryan on Twitter: https://twitter.com/rmcentushRead Ryan’s latest articles: https://a16z.com/author/ryan-mcentushStay Updated: Find a16z on Twitter: https://twitter.com/a16zFind a16z on LinkedIn: https://www.linkedin.com/company/a16zSubscribe on your favorite podcast app: https://a16z.simplecast.com/Follow our host: https://twitter.com/stephsmithioPlease note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures.

We can't afford for the grid to go down at all. One of the key risks for the grid over the next decade is actually policy. If that equilibrium is possible with the free market is, I think, a question on the minds of many people. We have an increasing outages, a lot of this weather-related, the price of electricity is now a lot more volatile. How decentralized can they be? Is it going to be 100%, is it going to be 50? Is it going to completely fail? The new grid, the decentralized grid, is going to look very different than the you.

old grid, and in many ways it's going to be better, cheaper, more resilient. That's the future we should be aiming for. I bet you've heard that our grid needs an update. But I equally bet that a majority of people, myself included, don't have the faintest idea of how the grid actually works. We just assume that when we're cold and turn on the heat, our furnace kicks in and we get a bill at the end of the month. But as technologies like AI heat up, so too does. their demand for power. This trend happens to coincide with several others, including the rise of intermittent renewable sources, the increasing bloat in the approval process for new grid infrastructure, supply chain delays exceeding 12 months, and more. All these things make the fact

that our grid relying on outdated technology, in some cases from over a century ago, something of a national emergency. And that is why we brought in a 16-Z American dynamism partner, Ryan McIntosh, who recently wrote two deep dives on the grid and nuclear power to break down how all this actually works. So in today's explainer, we'll dive into the grid's increasing complexity, what's broken and how we got here, how technologies like solar, batteries, natural gas, and nuclear might play a role in this future, and why solving these problems is essential in allowing our economy and country's technological dominance to thrive. As a reminder, the content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any A16Z fund.

Please note that A16Z and its affiliates may also maintain investments in the companies discussed in this podcast. For more details, including a link to our investments, please see A16c.com slash disclosures. All right, let's kick things off. Maybe an obvious question for some listeners, but why does our grid even need this refresh? And why do some people believe this might actually be one of the most important issues for our country to address? I think at the high level, the grid supports

electricity transfer or industrial capacity in our country. There's this assumption that when you turn on the light switch, the lights are just going to turn on. But behind that, there's a lot of industrial processes, both in the power generation and moving that power around. And for the last couple decades, we really haven't seen a growth in energy demand. So the grid has not really changed that much, but increasingly over the last 20 years, and especially with the increase in data center, AI, for the energy demand on that side,

we're seeing the grid change a lot. Increasingly, people are seeing the effects of that. We have an increasing outages, a lot of this weather-related. The price of electricity is now a lot more volatile. And I think people are becoming more aware of not only the climate-related effects of energy, but how it affects their daily lives. Yeah, absolutely. And you mentioned some of these new technologies.

We're talking electric vehicles. We're talking about AI and data centers. But what is that gap really? If we look ahead, are we super far behind the energy requirement that we'll need? Or are we actually pretty close? All the projections seem to indicate a huge gap. A lot of the current world is powered by things like, fossil fuels, like your car, you fill up with gasoline. That's likely going to increasingly

shift as more people adopt electric vehicles. A lot of the things in our home, you look at thermostats, heating with some of these heat pumps. You look at like new induction stoves. Every single device now has a battery, it's connected to the internet. So we were seeing huge demand there. And then also on the industrial side, we're seeing a lot of processes that were previously using fossil fuels, his inputs, now increasingly using electricity. Another good example like data centers, as you noted. These regions where a lot of these data centers are located are expecting huge growth in energy demand, to the point now that some large hyperscalers are looking at things like nuclear to support and make sure that the data centers stay

online in periods of lower reliability or price volatility. This is a huge concern. A lot of people are paying attention to. Absolutely. And it dawned on me that many people, including myself, don't actually have a clue how the grid works. I mean, to your point earlier, we just kind of assume when we flick the light switch on, that the lights turn on and that we get this electricity not just sometimes, but all the time. And so let's just quickly discuss how the grid actually works. What is it composed of? And how do each of those components contribute to electricity actually being generated, but then also transmitted and distributed to all of our homes? I think the most important idea is that the electric grid is not some sort of monolithic

entity that is the same across the United States. It's actually made up with three major interconnections. The grid is made up with AC or alternating current, but between these interconnections, they're a different phase, which means that you can't directly connect these interconnections, and they're split up basically as East, Texas, and West. And a lot of that which is for historic reasons, also as they said, technical reasons with the phase, but also regulatory reasons. Texas is for many reasons wants to have an independent grid, whereas the West and the East Coast are completely fine, having these interstate networks. And then beneath these interconnections are things called RTOs and ISOs. The difference is really mainly that RTOs oversee

multiple states. So these are regional transmission entities, whereas ISOs are really just focused on a state level, which allows that more direct regulatory oversight and funding. Quick note, ISO stands for independent system operators, while RTOs are regional transmission organizations. To put it simply, these entities help ensure that the grid is reliable. Practically, that means balancing the grid, enabling efficient markets, coordinating infrastructure, and more. A good example is California. California's Cal ISO is just specifically looking at California, whereas some other RTOs are looking at the entire Northwest region. These balancing authorities, as they're called, essentially operate these wholesale markets. They also operate a lot of the feasibility studies and planning and oversight of the entities involved in those local grids.

So when we think about it, there's the interconnections, there's different entities that actually generate the power as well, and then there's market and there's regulation. Maybe you could speak to some of those other buckets and how they fit into the broader mix. Yeah, so at a high level, there's two types of entities. I'm going to really simplify this, but there's deregulated markets and there's regulated markets. So in regulated utilities, essentially, it's top-down controlled by the government. Tennessee Valley Authority is a really famous example. There's a lot of these sort of regulated entities. And this of the United States, like Southern Power Company or like a lot of these nuclear facilities were built. And a lot of this in the Western United States, spare California. In this case, the power generation, like the actual power plant, the transmission and distribution lines, and actually interfacing with the end rate payer customer, all of that is controlled by the government with guaranteed profit margins and things like that. The other type are deregulated markets, which started really becoming a thing over the last 20 or so years, largely pushed forward originally by Enron and pushing these policies of these free markets where energy was going to be traded in these wholesale markets. In these areas, the dominant markets

would be California, Texas, the East Coast. There's power generators, people who own the plants, and then oftentimes different companies will own the power lines and be in charge of maintenance and operating the congestion and making sure that the power moves and is delivered. And then there's separate companies that actually interface with the customers. interfacing, providing like a retail experience, the end rate payer. So oftentimes these are completely separate different companies. Sometimes they're the same. Sometimes these are like a little bit of a hybrid structure. It all gets very confusing, but it's part of the complexity of the grid that there's very, very different structures depending on where you are. Yeah, it certainly

sounds complex. And I think there's probably a bunch of misconceptions. I mean, even just the idea that the grid is a monolith, it's clearly not true. Does anything else jump out there in terms of this idea of public misconception around the grid and how it works and ultimately who runs it, who's getting paid, and how people ultimately get their electricity. Yeah, I think there's like a technical idea. People think that you plug something into the grid and it's magic. But electricity is not like a commodity. It's certainly not magic. The electricity is generated basically at the moment it's being used. When people say the grid needs to remain balance, it's measured in terms of frequency. In the United States, it's 60 Hertz. In Europe, it's like 50, I believe, and I think in Japan,

it's 50 as well. But basically, you need to make sure that the demand for electricity, basically people sucking electricity out of the grid, and then other power generators pushing electricity in, is always the same to maintain that perfect Hertz level. And if that ever falters, when people say like the grid is unbalanced, that means it shifts away from that point, in which case a lot of the electrical equipment hooked up to the grid that is calibrated to a specific frequency is damaged. And if things happen too quick, you have to shed load, meaning you have to pull things off. And if you can't do that, then you have blackouts, or essentially, equipment's fried, and you have to completely replace it, which could take weeks or months. It can be very dangerous

very quickly, as the winter storms in Texas over the last couple years in the East Coast made really very clear. And then also the other big point is about this reliability. It's very hard to predict the demand for electricity on the supply of electricity that's going to come in the far future. Most of the time, it's really just looking at weather. And increasingly so as solar and wind become larger portions of our grid, you can assume the sun is going to shine every day. But not always, like sometimes it can be cloudy and it can decrease the percent. People often say, like, the wind is always blowing somewhere. But that only matters if you have the transmission lines to move wind from one place to another. So like a nightmare scenario,

could be you set up a grid with a large portion of wind and it's winter so everyone has their heaters on but the wind for some reason is not blowing right as like a cold spell hits so that's when you have this issue of huge spike in demand but not enough supply for it and so there's a bunch of scenario studies that these grid operators will do trying to figure out like can we ever guarantee the wind will be blowing in a certain time and it's really really hard to do that so that's why it's so important that it's not going to be all nuclear, all solar, all wind, or all natural gas, because there are situations with pipes freeze. And so it becomes very, very complex. And it's not as simple as just connect as much solar as possible. Reliability is a huge issue. In a modern country

with our modern luxuries, we can't afford for the grid to go down at all. That's such a good point, because it really does feel pretty much binary, right? It's not like we want uptime of 95%. It's like we want uptime of 99.999% or 100, right? Just basically people, we cannot afford for the grid to go down. And so it does feel like people automatically assume like let's add more supply. And there are many reasons it seems like why that is not such a simple solution. We'll get into the energy mix in a second. But maybe you could just speak to this broad dynamic that you mentioned in your article. That is that the price to generate electricity has come down over the years with new technology,

yet the price to actually distribute it or deliver it has gone up. Sounds kind of counterintuitive. Where are things really breaking down there? So I think the most important point to understand here is that when you pay your power bill, for me, PG&E in Northern California, you're paying a combination of prices. You're paying, on one hand, the price of the energy itself, which in deregulated markets is known as like the wholesale price.

So this is the price of like the power out the door cost that the power plant is selling the power to these other entities in these power markets. That's one portion of it. And then there's also the cost of the infrastructure and operational costs of these utilities like PG&E who own the lines and might interface with the customers to deliver that power to you.

And so like if you look at your electricity bill, typically they'll separate out these fees. And you can see like many times and increasingly so in California, the cost delivers like over 50% of the bill. It's becoming increasingly high. And the big reason for that is that the infrastructure to build new power lines, to build new power plants,

is incredibly, incredibly expensive. The interconnection queue is something that people might have heard about before. But basically, there's over like two, I want to say it's like two terawatts in the queue right now, which means that there's like two terawatts of power generating capacity, a nameplate at least,

like what it could max out at, waiting to be connected to the grid. Could you just super quickly ground us and how that compares to how much electricity is on the grid? I believe our grid today is about 1.2 kilowatts. So this is almost effectively double what our current national generating capacity is. So what this shows to me is that it appears like there's a lot of demand for electricity. Now, when you unpack what's going on, there's some interesting, I would say disincentives of how this queue works, where because of what

I mentioned earlier, like the frequency and grid balancing, there's a lot of feasibility studies that go into, can I put a gigawatt of power generating capacity here? And then how does that affect the ability of this localized region as well as the broader grid? And these things take a lot of time, especially when people are sort of, I want to say, spamming projects where there, you know, as a company who puts in like 10 proposals of different power plants, waiting to see which ones are going to have the cheapest interconnection fee. And then they'll pull back all the ones that are too expensive and just end up trying to build the one that's the cheapest. But the problem with that is that all these feasibility studies have to run with the idea that all these plants are

legitimate. And so this has created this massive queue of maybe, I think it's like 10 to 20 percent of projects are actually built. That's wild. It's crazy. And I think there's a lot of really interesting new policy coming from the federal level about how to manage these cues. Texas famously has a way that they handle it. They call it, I believe, connect and manage. If anyone has been paying attention to electric good recently, they'll know Texas has been able to connect a lot of assets. But instead of running these feasibility studies, they'll basically levy that risk of connection to the developer and say, you can connect your solar or wind anywhere. But if it at all risks our grid, we're going to cut you off. Interesting. Whereas in California or other places, they're like, we want to make sure

it's always going to be delivering power and it's not going to destabilize our connection. So there's a lot of ways to handle this, but that makes any new construction very, very difficult. But the success of Texas and how much wind and solar and batteries they've been able to connect and why a lot of companies are flooding there, is because of this policy that makes it very, very easy to connect new assets. If you didn't catch that, basically what Ryan is saying is that Urquat, the Electric Reliability Council of Texas is flipping the incentive. Instead of the onus being on them to prove that a project can work, it's on the developer

to make it a reality. And if they don't, well, there are consequences. But there are also other approaches being explored in tandem. There are also interesting ways that FERC, which is a national body overseeing this, trying to bundle up different projects, providing fees. So instead of like being able to sort of just YOLO projects in, you are now sort of taking on some sort of financial risk by putting in fake projects. So trying to disincentivize doing that. But even if you can get these projects approved, things like Transformers are crazy lead times like over a year or more. And not to mention that

it's increased in price dramatically. If you're trying to build out like a new housing project or something like that, and you have to build like the substation. Securing these things is also a huge problem, which are just additional things to worry about, both cybersecurity and physical security. I think of the last couple of years, people have been shooting substations, and it takes down like a local grid. There's very little you can do there besides just paying somebody to just be on site and securing that. And then perhaps lastly, like just the existing power lines, I believe the local, the PG&E fires that people might have seen Northern California,

campfire was one of them. But some of these lines were built in the early 1900s. I was up hiking at Muir Woods the other week, and if you're up at the top of the hill, you can see these transmission lines that are going through, and there's trucks that will go and manually check a lot of them. If one of these lines falls over dry grass, it's likely going to start a fire, and that's what we continue to see, especially if they're that old. When something like that happens, they don't know where the line actually fell. They know on what type of power line it fell, but not specifically the spot. It actually often takes trucks driving through to see where these damages occur. So there are a lot of interesting potential upgrades that need to be

done. And all of this just ends up being pushed onto the consumer. The company has to like handle all these feasibility studies, it has to build upgrades on the lines, prevent fires. A lot of this stuff ends up going back to the rate pair and leading to the increased delivery costs. That's so interesting. I did not realize they can't actually tell where things are breaking down at the local level. So I've heard a few things. You mentioned that the actual cue is increasing in terms of adding more power. I'm also hearing things maybe around supply chain, security. Is there anything else you'd mention in terms of just the overall set of challenges that exist as we're trying to improve this grid? I think this rise of intermittent power introduces a lot of complexity. and not just intermittent power, but where the power is generated.

I think one of the big theses we have is that there's going to be a decentralization of the grid. Now, it's not like we're going to start taking offline all of our large power plants, but as the demand for energy is increasing, it's going to become easier for people to generate power on site. Solar is going to be the big reason for that, but also battery storage. And as I mentioned earlier, people are going to have electric vehicles that can store energy and connect to their house. your stove is going to have a battery likely. Your heating might actually have some energy storage capabilities as well. That power is going to be flowing in many different directions, which is very different from a world where power is generated at a big plant and just going in one direction.

So people need to rethink how grid infrastructure works and functions. It is not as simple as just pressing the button and the power going backwards. So that's something that the grid operators are thinking about as well. Yeah, that sounds really important. And maybe at the crux of us needing to distribute more of the grid is this idea that a lot of our new sources, as you're saying, are more of that intermittent type. So we're talking a lot of renewables. So maybe we can just start there and address the question, why are renewables alone not enough, especially as we increase the capacity of solar and wind? You spoke a little bit to this, but maybe you could just break that down explicitly. I want to be clear, renewables are fantastic and they are cheaper.

Even without subsidies, LCOE is often a metric thrown around, which is the levelized cost of energy. Solar and wind are really, really good. The problem is that you cannot guarantee that they're going to be available when you need it. But it's often the case that, for example, if you look at the demand profile for energy in any sort of modernized economy, it's typically in the early mornings, everyone's waking up and the energy use high, and then there's a trough in the middle of the day, which is right when it's sunny, when the solar panels are generating the most electricity. And then there's a huge spike in the evening when everyone comes home, turns on their TV, starts cooking dinner, and there's a drop as well later into the middle of the night.

So the problem with this, obviously, and this is a phenomenon known as also as the duck curve. If people are familiar with that, but basically the middle of the day, when energy is essentially free, when solar, the sun is blaring, and energy is really, really cheap, but the demand is that it's lowest point. So you need to find a way to capture that energy in the middle of the day and have it available in the evenings when the sun is not shining or when it's dust. And then similarly, it's something like wind. You cannot guarantee that wind is going to be blowing.

Generally, you can look at trends to have this idea of wind's going to be blowing and generally at night, it's windier. But this is really, really hard for operators to rely on. So this is why energy storage is so critical. If you're doing intermittent sources, you need some way to sort of level it out. So operators know that we're going to have enough energy

when we need it. And this is coming from a world where we used to have natural gas plants that could chug along 24-7, say but nuclear, which is, these are things that are our baseload. Geothermal is another one. Previously in our country, almost all of our energy storage, I think it's like 90 plus percent today is through hydro, through dams. So when there's a shortfall at all, we would open the floodgates a little bit on the dams and the water would trickle through and be able to make up smaller changes in energy fluctuation or major ones. And so if, we're going to increase the amounts of solar and wind on the grid. We also need to proportionally increase the amount of storage.

And this is going to be very significant challenge. Yeah, I mean, to your point, it sounds like we need some balancing mechanism. We'll talk about natural gas and nuclear in a second. But let's speak directly to batteries. Something that I found really fascinating from your article is the point you just made about hydro. When I think about storage and many people think about storage, they automatically think of batteries. And only 2% of our U.S. storage in 2022 actually came from lithium ion batteries, which was surprising to me. And 94% from pumped hydro.

Like, talk about misconceptions from earlier. I did not know that in any capacity. And so can you just speak to where we are today and storage demand, whether that comes from battery or otherwise, how do we get to where we need to be? Is it just a matter of creating a bunch more batteries or hydro capacity? is this all really feasible to do in the next few years? Yeah, so it's difficult to make projections here because a lot of this comes down to the cost of batteries. If batteries are $10, $30 a kilowatt hour,

then a lot of this steps becomes meaningless. Obviously, there's critical mineral concerns about where we access this stuff, this newer generation of batteries that are less energy dense, like sodium ion becomes less of concern. Regardless, that's going to be the key thing to pay attention to. What I will say is in the near term, batteries have already dominated this very, very short time frame markets.

So I mentioned these wholesale markets earlier, but they're sort of structured in different time durations. So depending on how quick you need to supply energy. So I mentioned sort of the fact that you need to maintain a certain frequency. There's a market that's called broadly ancillary services, which is really just focusing on power quality. So if it moves from 60 hertz a little bit, the grid will sort of seek more energy or less energy to balance it out. batteries already dominate that because they're very, very good at moving very, very fast, but it's a very, very small amount of energy. Increasingly, as batteries enter the grid, which, as you've noted from the chart, it's not

that significant penetration yet. They will start to cycle over a daily timeframe. So, as I mentioned earlier, taking energy from the middle of the day and allowing its use in the evenings when people actually need it. If you didn't catch that, batteries currently only cycle from minutes to hours. But the hope is that their storage duration will become hours to days, just like hydro, which composes the lion's share of U.S. current storage capacity. Now, the problem with batteries is they can't solve these longer duration spells.

So I mentioned this case where if your grid is a huge wind component, it might be not windy for weeks. Unlikely, but it's possible. Batteries are not very good at storing energy for long periods of time. When I say long, days or weeks, you'll need alternative methods of storing that energy. There are a lot of things proposed, a lot of companies trying novel solutions, like synthetic natural gas or hydrogen, there's gravity batteries, there's sort of iron air batteries, a bunch of different ways to do this. But these are essentially trying to do almost weeks to months to seasonal storage. And that's also going to be a component as well that I'm excited to see continue to build out.

Batteries in the energy sense, but not the same batteries you'd see in cars. And then let's jump to natural gas and nuclear, which are two other, you could say, balancing mechanisms that have been used in different capacities, in different places. They have their pros and cons, at least with nuclear, has a level of public discourse around the use of it. And so, yeah, just tell me a little bit more about where natural gas and nuclear currently play a role and then also the potential for them to play a different role as we look ahead. So natural gas is dominant on our grid. The United States is a major natural gas producer. Fracking was huge for this country in terms of energy independence. Today, there are two different types of natural gas plants. There's some that are running 24-7. There's some plants called piquar plants that essentially if there's a shortfall or

if there's no other sort of generating capacity, peak-your plants were bid to fulfill that gap. And it's more expensive. Let's say you're building a natural gas plant and you can amortize it 24-7 and it's going to be cheaper to run that power plant as opposed to some of these pfure plants might run at a 1% capacity factor, respectively 1% of the time, that they could be running. And those are going to be way more expensive to generate that power, but it'd probably be cheaper than using solar and storing it and batteries today. Now, natural gas is also good because you don't really rely on the weather, so you can always turn it on, and you can typically ramp it up pretty quickly. There's a lot of benefits there as well. Also, I would note that the relationship between natural gas and nuclear,

is a historic one. Natural gas was, I don't want to say the reason that nuclear found a lot of competition, but from a price point, as we looked at nuclear in the late 20th century, was the same time the natural gas became very big. Interesting. Natural gas quickly became very, very cheap, and nuclear became very expensive. So natural gas became a very big piece of our grid, and will likely continue to be a major piece of our grid, as long as our domestic production continues, and there's no sort of radical change in energy source. Now, if we can make nuclear fission incredibly cheap, we can have nuclear fusion become incredibly cheap, then a lot of this need for dispatchable or ready-to-go energy sources will change. But until then, natural gas will

probably remain a significant piece of our grid because it is reliable. We've been working on nuclear for decades, right? And it would be surprising. I know there's a long charted history of what's happened in those decades, but it does seem like even just purely from the technological perspective, we have new reactor designs coming online or at least being developed, and maybe in a new renaissance of public discourse around it. Absolutely. I think the main thing to understand for nuclear, particularly the historic nuclear, which are these gigawatt scale power plants, the newest of which the designs, with AP 1000, this is Vogel, this is the Southern Power Company that is a regulated utility

that saw a lot of government support to build this. In fact, the local companies, a lot of times when people are building nuclear power plants, but utilities will go out of business, the government needs to step in to help them. It's been a really, really difficult journey for utilities to

buy large nuclear power plants. So I think that's the primary reason you haven't seen it done. And those who have tried, like Google, you see these horrible cost increases and a lot of problems. And I think I go into that in detail, my assay of those causes are. But it is sort of rational. Like, why would a utility risk bankruptcy? Or even more so, like, I don't know when the power plant's going to be up. Is it going to be 10 years? It can be 20

years. You don't really know. And so it's really hard to make that $10 billion bet. So that's why it's very, very hard for especially deregulated utilities. It really takes a government, which is why nationally Japan and France and even, like I said, our regulated utilities in the United States, a lot of our nuclear power plants are government supported. It's very, very hard to take on that risk is a private entity. Now, the future of nuclear, I think what we're seeing is the rise of SMRs in smaller reactors. I think that the reliability of power, I think, is going to become increasingly relevant for a lot of people. In the news, you've seen Microsoft, some of the other hypers talk about we want to do nuclear power data centers. We want to have access to clean

energy that is available 24-7. Now, you could achieve this with a large solar farm and batteries. you can do it with geothermal, which some of these hyperscalas are also looking at. But nuclear is one of the most compelling. If you're one of these data centers, you want to ensure reliability. You want something that you plug it in. It's going to last 15, 20 years. Nuclear sort of uniquely provides that. So in terms of this decentralization trend, solar and batteries are going to be a piece

of it residentially and perhaps like these local communities. It's likely that these off-the-grid or this focus on reliability over sort of cost, nuclear is going to be a very compelling option. Now, all that's to say that we solve some of the issues on the regulatory side and some of these new designs get approved and built. Since we're on the topic of policy, does anything jump out at you in terms of where policy can help kind of usher this new grid forward or help solve some of the gaps that we just talked about in terms of like the interconnection queue or the different energy mix that we're

discussing? FERC is the federal body that oversees a lot of the transmission and grid infrastructure. structure. The stuff I've read, at least, seems very positive. People are aware a lot of these issues. And there's a separate group called the NERC, which is a semi-government associated, but they run these risk reports. And they have highlighted that one of the key risks for the grid over the next decade is actually policy. So a lot of people will say things like, we need to go completely renewable. We need to be completely solar and winds expeditiously. The problem with that is, as I said, like the reliability concerns, it's going to create a lot of, a lot of issues. But I think when we

think about what are our climate goals, like these are human goals, like we want to live in a better world. That better world near term is not a world with increased blackouts. There are a lot of countries that were once had great grids. South Africa, great example. They have nuclear power, but much of the day in South Africa, the grid is actually completely down. Really? So this function from a policy perspective, there are worlds where it can revert. And the reliability that a country once had disappears. And I don't think it will get that bad in the United States, but there are a lot of interesting warning signs and people in utilities and people who have been in the power industry for a long time are beginning to speak up. The last thing I'll mention

is the IRA. So the inflation reduction act put a lot of policies forth for energy. So a lot of companies, for example, batteries, manufacturing credits, various incentives to both bring onshore a lot of this production, also make available a lot of of funding for grid enhancement, both locally and sort of regionally. So there's a lot of funding available for this, which is very exciting. And so a lot of the things that need to be done, it seems like, are beginning to happen. So I'm optimistic. Me too. And maybe one other area of optimism can come from this idea of a smarter grid. I mean, something you spoke to earlier is just this idea that transmission lines are a century old, or they're not updated to the point

that we are at today in 24 where we are in terms of other technologies. And so what does that even mean when people talk about a smart grid? What would that really look like? Yeah. So I think at a high level, a lot of this big power plant to customer, you plug something in the wall, it's there. All that is very dumb, for lack of a better word. There's no skills coming back. They'll monitor the frequency. They'll monitor some of the local sort of substations to make sure that everything's okay. but they don't really know very much. Similarly, like I described looking at energy demand, like trying to say in a week,

how much energy will be demanded of the certain region. A lot of that is just guessing the weather because heating right now is like the biggest component and increasingly on the supply side as well, like will there be sun or will there be wind? So that is growing in complexity. The spark rate is really just introducing a lot more data and a lot more connectivity across the different nodes on the grid.

So it's not just using AI to support, supply and demand. It's also like making sure everything is producing data, this telemetry, you're able to connect to your EV, the smart thermostat, your whatever may be, your stove in your house. And that sends signals back to the grid, back to other entities that help not only figure out what is happening live, but also what will continue to happen. What are the behaviors of individuals? How can we better model and predict future use? How can we then know what to build? So these are all very, very interesting things that are changing. And this happens both behind the meter.

So like I said, all this like home energy storage type solutions. Also ahead of the meter, like how do we enhance these grid enhancing technologies, dynamic line rating, like making sure infrastructure is more set up, better transformers, all that. And then obviously there's a huge software component forecasting, making sure that these feasibility studies are done a lot more efficiently. So a lot of things we think about. And increasingly so, the complexity is growing. And frankly, I think we need our best builders to go and tackle these problems today.

So it's clear that there's a lot we can do in this new age of technology with new software. But there's also this idea of decentralization. And I feel like I've heard of all of these different kind of early experiments where we're thinking about the virtual power plant that is a bunch of Tesla's on the road and they can actually send electricity back to the grid. Is that what people mean when they talk about decentralization? or is there some larger trend here when we're talking about the full grid? What's your take on this future of the potential to decentralize the grid versus the very centralized grid today? So this is, I think, the philosophical question that a lot of people working in the energy space and the grid particular are debating, which is the centrally planned top-down electric grid

that like France or Japan or a lot of other countries utilize that might enable more nuclear power because the government steps in this, we want to take on that risk, versus one that's deregulated that is like a free market approach, which seems to incentivize a lot more of the lowest marginal cost generation of electricity, because you're constantly competing over generation, which might incentivize solar and wind, for example. I think what's interesting and why I personally think, and one of our theses is decentralization,

because a lot of the advancements are coming at the edge. It's leaning into this decentralization trend. So you mentioned virtual power plants. Obviously, we've talked about these home energy storage, a lot of the interesting software, trying to solve a lot of this growing complexity. But a lot of that is innovation that can happen in spite of whatever the broader grid does. The energy demand is increasing. So someone needs to meet that demand. Solar, batteries, SMR, nuclear reactors, these are things that are inherently decentralized.

They don't necessarily take advantage of the scale of large thermal power plants, which have increased economies of scale. as they get bigger, they're able to be closer on site to where the power is needed. And by doing so, you also avoid having to build these incredibly expensive grid infrastructure. No longer do you need transmission lines crisscrossing the states or going near woods. You can generate it in your local community or next to a sort of like a factory area where many people are joining together to pay for an SMR or maybe even data centers or something like that. And so as this demand increases, I think we're going to see increased amount of energy being built at this. edge. Now, what I'm not saying is that people will completely defect. I think there are arguments

to be made that perhaps certain people, particularly wealthy people, can perhaps complete defection, have their own solar and energy storage systems. I'm not saying that. Some people are. But I think what's going to happen is the amount of power that you're going to be buying from the central sort of utility versus generating on your own will be increasingly shared. And I think there's a lot of opportunities for entrepreneurs to help facilitate that. At the end of the day, I think that's going to be creating a more decentralized resilience grid and hopefully a cleaner and cheaper one as well. Yeah. So I think you're right. There are a bunch of trends that are kind of inching us towards this more decentralized grid. But I think it's worth just reflecting on the fact that the grid historically

has been pretty centralized. How have we benefited from that more centralized grid to date? And do you really see that changing, that kind of benefit from having the economies of scale? Yeah. So this is really the big question. Particularly if you look at it on the international level, China does not have these like free deregulated markets of trying to balance supply and demand with their own firms competing. They all just build hundreds of nuclear power plants, a ton of solar, a ton of high voltage, DC lines, like large scale transmission lines crisscrossing the country. This is something they've needed to ensure sort of industrial competitive China previously had a bunch of issues of blackouts in the early 2000s. They've solved a lot of

those. They've been able to build up the infrastructure very quickly. That's because the government was able to step in and spend a lot of money to do this. When we look at like France or Japan countries with a ton of nuclear, as I mentioned previously, that's government. Government is the one who's ensuring that those things are funded and supported. I think the interesting question that a lot of people ask, particularly I would say people who've been in these sort of energy markets for a long period of time are how can do regulated? How can the free market incentivize reliability? Right now, if I'm a solar developer, I want to make as much money as I can. And so I'm only going to really care about the profitability of my generation selling it into the wholesale market. I'm not really

paid to ensure that the grid as a whole is reliable. So people often use like levelized cost of energy. Like what does it cost to generate? But on a system level, like if someone had solar, someone else has to add batteries or you have to put a peak your plant somewhere and build that to make sure that if something happens to the solar, you're still going to have that energy to be able to be delivered and keep the lights on. That's like a system level thing that the grid operators have to think about. And like in Urquat in Texas, you might see like the price spike to $10,000 a megawatt hour during these storms, which is crazy. They have no price ceiling for this stuff. And that plant may run one day a year. But on that one day, it'll make

hundreds of millions of dollars and pay itself off. And so there's like market incentives that will try to balance this out over time. In theory, these price spikes will introduce people to that market and increase competitiveness to drive down those spikes to the point where these margins are healthy, but nothing crazy. How long that equilibrium takes to reach. And if that equilibrium is possible with the free market is, I think, a question on the minds of many people in this world. It's going to be very hard for, as I mentioned earlier, utilities to want to build large-scale nuclear power plants. Generators are likely going to look at solar and winds that because they're low marginal cost production and very cheap, it's very easy to throw those on. And as batteries get

really, really cheap, throwing those on as well. And maybe that does work out. But it does introduce a lot of complexity. You do have to figure out exactly how much extra wind should I build. How much extra solar should I build that then I have to store to prepare in case the wind goes down? Now, these are a lot of models you can do to try to figure out how that works. Or you could build an extra natural gas plant that was always going to be there, or build a nuclear power plant that's always going to be online. Like I said, the power generators are not necessarily going to care about the reliability, but the grid does all the citizens do. So you're seeing in like Urquot, for example, building this emergency reserve market that sits sort of on top of their free market

trading system. Right. And so where this ends up, I'm going to be looking very, very closely to Urquat to see how much intermittent power can they have, how much batteries can they have, how decentralized can they be? Is it going to be 100%, is it going to be 50? Is it going to completely fail? And we're going to have to figure out how do we build more large-scale utility solar or whatever it may be. These are the questions that people are interested in. Personally, and I think as a firm, we're very interested in technology in solving these problems. As I've noted previously, as historically very obvious, immense problems are solved by technology going after and basically reducing the complexity and making things a lot easier to get

done. And so where are we able to build at the edge? We're not going to be competing with gigawatt scale power plants, but hundreds of homes with solar on their roof or thousands of EVs might end up having this gigawatt battery storage that is distributed. And the new grid, the decentralized grid, is going to look very different than the old grid. And in many ways, it's going to be better and cheaper, more and more resilient. So I think that's the future. we should be aiming for. I'm excited for it. Absolutely. And to your point, a lot of people are looking to Erkot. At least we have a testing ground. We can see the results. And it's not to say that that is the final destination. I'm sure

there will be many other experiments on the horizon, but I'm equally excited about how technology can be applied to this space. Likewise. All right, that is your call to build. Clearly, the grid is no monolith and solutions can't standalone. They need to be thoughtfully interwoven into the matrix of an already complex energy mix, dated infrastructure, changing regulation, and more. And if you did enjoy this episode, be sure to check the links in our description to two of Ryan's articles that break down the grid and nuclear energy even more deeply. We'll see you next time. If you liked this episode, if you made it this far, help us grow the show. Share with a friend, or if you're feeling really

ambitious, you can leave us a review at rate thispodcast.com slash a 16c. You know, candidly, producing a podcast can sometimes feel like you're just talking into a void. And so if you did like this episode, if you liked any of our episodes, please let us know. We'll see you next time.