Catalyst with Shayle Kann - Navigating the electricity gauntlet

Episode Date: August 17, 2023

Electrification should be a field day for utilities. As we electrify the economy, adding gigafactories, charging stations, and green hydrogen hubs to the grid, the demand for power is growing for the first time in decades. For savvy utilities, there’s a lot of money to be made. But only if they can keep up.  Utilities face massive challenges to deliver the power needed for electrification – years-long interconnection queues, a shortage of transformers, an uncertain regulatory environment—the list goes on. It’s the electrification gauntlet.  Can utilities make it through?  In this episode, Shayle talks to his colleague Andy Lubershane, partner and head of research at Energy Impact Partners.  They cover topics like: Why power demand flatlined over the past twenty years—and what’s changing now Big industrial loads like data centers that face delays because utilities aren’t able to deliver enough power  The differences between big industrial load growth, like green hydrogen hubs, and distributed load growth, like heat pumps. The current EPA’s proposed power plant regulations, which might require carbon capture and storage The shortage of electrical transformers  Why microgrids might become even more valuable as utilities struggle to deliver power Recommended Resources: Reuters: Global power demand growth to rebound in 2024 after slowdown, IEA says Utility Dive: Full industrial electrification could more than double US power demand. Here’s how renewables can meet it. Catalyst is a co-production of Post Script Media and Canary Media. Are you looking to understand how artificial intelligence will shape the business of energy? Come network with utilities, top energy firms, startups, and AI experts at Transition-AI: New York on October 19. Our listeners get a 10% discount with the code pspods10. Catalyst is supported by Antenna Group. For 25 years, Antenna has partnered with leading clean-economy innovators to build their brands and accelerate business growth. If you're a startup, investor, enterprise, or innovation ecosystem that's creating positive change, Antenna is ready to power your impact. Visit antennagroup.com to learn more. Catalyst is supported by RE+. RE+ is more than just the largest clean energy event, it’s a catalyst for industry innovation designed to supercharge business growth in the clean energy economy. Learn more: re-plus.com.

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I'm Shail Khan, and this is Catalyst. We are relying on the electricity sector to deliver here over the long term. But if we can't deliver in the short term, it could cause consumers and voters to decide that this whole thing is not really worthwhile. It's the one challenge to rule them all. Welcome to the power gauntlet. When utilities need flexible capacity, they can count on, they turn to Energy Hub.

Energy Hub works with more than 170 utilities, coordinating over 2.5 million devices to manage 3.4 gigawatts of flexibility, built for the moments when utilities can't afford uncertainty. Energy Hub builds and operates virtual power plants that utilities actually stake their grid planning on, coordinating EVs, batteries, thermostats, and more through a single platform built for utility scale.

Predictive, verifiable, and designed to perform when it counts. Learn more at Energy Hub. Trillions of dollars are flowing into clean and critical infrastructure, but those investments aren't driven by technology alone. They're shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, and host of a brand new podcast, Critical Capital. Each episode, I talk with people deploying capital, shaping policy, and building the clean economy. Tune in as we unpack how progress is actually made. Listen to Critical Capital on Spotify, Apple, or wherever you get your podcasts.

I'm Shail Khan. I invest in revolutionary climate technologies at energy impact partners. Welcome. So here's where my mind has been increasingly focused recently. I'm more and more bullish on electricity demand growth over time for a bunch of reasons you'll soon hear. But I'm also more and more concerned about our ability to serve that demand while maintaining affordability, reliability, and our own decarbonization trajectory, particularly in the short to maybe medium term. It is, in my humble opinion, the single biggest near-term roadblock to significant climate progress, at least in the U.S.

I've been working on framing these issues and sort of trying to identify the solution suite or what might happen if we don't solve these problems with my colleague Andy Lubershane, who leads research at EIP, in whom you've heard. a number of times here before. So this week, a peek inside what is basically an ongoing Slack conversation that Andy and I have been having for months. We've also made a bunch of investments at the IP that fit this thesis already, but there are oh so many more solutions needed here. So hit us up if you have thoughts. In the meantime, here's Andy. Andy, welcome back. I'm always excited to be here. Thanks, Shale. Let's talk about what you have been calling the power

gauntlet and explain a little bit about what that means. But start with maybe a bit of historical context. I mean, I think it's important to frame this. What we're going to be talking about is the changes that we are starting to see happen. And I think kind of in real time in the power sector right now, the challenges that it's presenting for decarbonization, but also for like a bunch of other industries that just use a lot of power and what that might portend for what we think is a good news in the long term, which is using a lot more electricity, decarbonizing that. electricity and then using that to be a big wedge for climate change. But let's start with, like, what's been the story high level in electricity for the past couple of decades,

which is that despite a fair amount of change in the generation mix, the overall size of the market, at least in the U.S., as measured by the amount of electricity consumed, like hasn't been changing that much. Right. You know, if you go back even further than that, the electric power industry had an amazing 20th century, right? Basically, it was invented. and then from the moment people started to get access to electricity, we found more and more ways to use it because electricity is super useful. So basically from the moment electricity came onto the scene and through the 20th century, power demand growth, demand for electricity just kept growing and growing and growing at a pretty steady clip. And then over the past 15 to 20 years, that curve completely changed. and actually across most of North America, more or less flatlined.

We stopped inventing major new ways to use electricity that were as energy-intensive as everything we'd been doing previously. And the things that we started using electricity for, for example, like computing and data centers, we got really, really efficient at very quickly, as we'll talk about, I think, in a bit. And also, a lot of the existing uses for electricity became much more efficient, like lighting, for example,

as we transition from incandescent bulbs to CFLs and finally to LEDs. And so, yeah, basically the demand for this core product in the industry has been kind of flat for, you know, well over a decade now, coming up on two decades. And there's no industry that can grow, you know, significantly and consistently without actual growth and demand for the product. And so it's been very exciting being anyone in the electric power business looking ahead, to the prospects of this period of decarbonization, where we know that beneficial electrification, that the clean electron is going to be one of the most important tools for decarbonization.

And if you think several decades into the future, there is this prize, right, which is an electric power sector that is two to three times as big as it is today. But I think what we're starting to contend with now, as you mentioned, is that we have to think about what's between here and there. And the period between where we are today and this long-term prize for the industry,

which is playing this incredible role in decarbonization and growing because of it, there might actually be a lot of challenges and to some degree some pain. And what we're seeing is this gauntlet starting to form where there's kind of a narrow passage. And it's actually coming into the picture much more quickly, I think, than I would have predicted a few years ago, where there's kind of these two big challenges on either side of the gauntlet that the power sector has to contend with. Okay, so we're going to talk through both sides of that gauntlet. But, yeah, just to add a bit of context to what you're saying, I think you framed it the right way, which is that my sense is, so the power industry over the past 15 years or so has grown accustomed to this kind of state of affairs,

which is like a changing generation mix but relatively flat demand. I think the industry also has woken up to that long-term promise that you described the sort of couple of decades from now, and just to put some numbers on it, right? Electricity in the U.S. today is somewhere around 20% of final energy consumption, which means there's an 80% of the prize, even assuming no growth in overall energy consumption, 80% of the prize is open to electricity. So I figure we're going to go from, and this is what some of the sort of 2050 net zero model suggest we're going to go from maybe 20% to 40% electricity. And so that's a doubling of the overall

market. It could even be more than that. So I think people have sort of woken up to that part of it. But what I think we want to talk about is much more immediate. It's like what's happening, what's starting to happen today and in the next few years, because the long term gain is pretty clear, but the short term pain is, I think, just starting to arrive. So let's talk about the two sides the gauntlet. Side one is the demand side. Side two is the supply side. So on the demand side, you mentioned data centers before, and data centers have and computing generally, has generally been a success story in the sense that we've, over the past decade plus, done much, much, much, much more of it, but it's become much, much, much more efficient. So the actual load

associated with compute has been flat-ish. And the question is, will that continue to be true in today's environment, particularly with the advent of these large learning models and generative AI. So what do we know about that at this point? I think at a high level, the power sector is going to start having to reckon with a be careful what you wish for moment. And data centers are one element. A couple others we should talk about are industrial facilities and industrial electrification. I think hydrogen production is one. I think EV charging is another, but, you know, beginning with data centers, which you mentioned, like you said, you know, computing, demand for computing has grown, as everyone knows,

it's obvious, tremendously in the past 10 years. I think it's grown by about 10x over that period. But over that same period, data center energy consumption grew by just about 10%, which is actually crazy to me. And that's for a lot of different reasons. I mean, computer. has just become more efficient basically at every level of the computing stack. And the question is whether that is going to hold in this period of the next generation of software, which includes generative AI, large language models, etc. And I have to say this is an area I still have a lot of uncertainty about myself. I think everyone pretty much does.

But as business people like to say directionally, directionally, I think it's very unlikely that AI is going to reduce energy consumption. All of the signposts suggest that AI-related computing tasks are generally more energy consumptive than similar tasks that are accomplished in another way, but might not get you as good of an outcome. And we're starting to see this emerge empirically as well as theoretically. If you look at any of the analysts that cover data centers in the real estate market, they're starting to say that data center inventory, basically spare computing resources,

are starting to run low. And anecdotally, we're starting to see this bump up against the ability of the utility sector to serve new big data center load. So, for example, it's been reported that the electric utility in Virginia, Dominion, has basically told data center developers that they don't have capacity. They can't serve additional data center demand in northern Virginia, which is one of the biggest areas for data center demand in the world. They can't serve new data centers until 2026.

And we're starting to hear this anecdotally from more and more utilities and data center developers out there. Yeah, I mean, both of us, I think, have heard anecdotally stories that are like, 2026 is a few years away. we've started to hear stories that are substantially more concerning than that and much later than than 2026. So I think that is, this is undeniably happening right now. You talk to anybody who's in the hyperscaler world and they'll tell you that like the limiting factors on the growth of AI are basically a combination of chips and power. And in some cases power is the limiting factor.

Right. And so this is, you know, we were talking about like the long term prize of decarbonization and all the load growth that you'd expect in electricity from that, this is totally orthogonal to that. This is not due to decarbonization. It's in addition. It just happens to be happening at the same time. Right. This is not beneficial electrification.

This is just new electrification. This is just new energy demand. Another data point or signpost, I guess, is Amazon announced that they've got these three new data centers in Oregon, that they're going to be, at least for the short term, powering with fuel cells. from bloom energy, natural gas-powered fuel cells. And part of that is because they just can't get connected to the grid

and supplied by the grid in time. I think we're going to start to see more and more of that popping up. Right. So data centers and computing is like one category. But I think our point here is that that's one category amongst a bunch. So let's talk about some of the others. Another one that I think is maybe underappreciated, but that you've pointed out, is the electricity load impact of the U.S. manufacturing renaissance,

which is happening right now, largely thanks to the IRA, the infrastructure bill. People talk about, you know, you're starting to see all these factory announcements, some of them within the context of decarbonization, battery factories, you know, solar panel factories, stuff like that. But also outside of it, right? The Chips Act means a bunch of semiconductor manufacturing. Like, what does that all add up to from an electricity context? Yeah, I think it's going to be big, and it's another thing that the industry just had not been anticipating because this is a major change in policy for the U.S. and for Europe, and this wave of real industrial policy that's focused on reshoring or onshoreing new industries in some cases.

And that actually seems to be working. Like if you look at data from the U.S. Census Bureau, you look at construction spending and manufacturing, that held constant for most of the last 10 years, similar to electricity demand growth. But there's been a surge in new investment in manufacturing facilities, basically since the infrastructure bill and the IRA and the Chips Act, this kind of trifecta of new industrial policy in the U.S. And, you know, it's hard to say over time how much this trend keeps up and spreads to sectors that aren't specifically targeted by the IRA and chips. But just one small example, which turns out to be a pretty big example, actually. So is battery manufacturing. You know, the IRA has a lot of incentives for battery manufacturing for electric vehicles and for grid storage. And, you know, we've added up, roughly speaking, about a terawatt hour's worth of,

new battery manufacturing capacity that's really credible and underdevelopment in the U.S. today. And by that I mean a terawatt hour's worth of battery capacity of annual battery production. So you can make one terawatt hour of battery space per year with the capacity under development. And roughly speaking, it turns out that for every terawatt hour of batteries you make, it takes about 50 terawatt hours or on that order of energy. to manufacture those batteries, and a lot of that is going to be electricity demand. And if you add all that up, that comes out to about a little bit over 1% of current annual U.S. power consumption.

That's a ton of electricity, right? Like anything that you can measure in percentiles of current U.S. electricity consumption is really, really meaningful. And that's just one category of new manufacturing that these industrial policy bills are bringing to the U.S. The other thing I want to point out about this, this is also true of data centers, this is also true of actually basically every category we're going to discuss in the sort of large industrial load group, which is where most of these things are, is that they're concentrated.

It's not like spread all over the country. There's areas of the country where most of the data center development is going on, as you said, Northern Virginia being a good example. Same thing with all this battery manufacturing. I mean, it's somewhat spread out, but like there's certainly a high concentration in the southeast, for example. We're seeing tons of new battery manufacturing facilities in like Georgia and South Carolina and West Virginia and places like that. So, you know, if it's 1% of overall U.S. power consumption in total in the locations where it is concentrated, it's going to be

more than that. And again, as you said, this is just batteries and just currently already announced battery manufacturing capacity, you know, like expand that to all the other types of manufacturing and the future announcements, and you can imagine where that heads. That's right. I recently heard the term battery belt. I hadn't heard before, but I guess that's what the Southeast in particular is trying to brand this new surge of EV manufacturing and battery manufacturing. And that's totally right. I mean, within the region, it probably means a few percentage points worth of new electricity demand. And, you know, each one of these facilities individually is tens of megawatts, if not on the order of 100 megawatts of new load. That's the same. The same is, true for for semiconductor manufacturing. These are really, really big individual facilities from an electricity demand standpoint. So I don't think we need to belabor all the other categories here, but I think we should at least name them. These ones, I think, are, I don't know, generally a little bit earlier stage in the sense that, like, it's a little bit less certain how much of them

we're going to need, and it might take a little bit longer for them to show up at meaningful scale in the context of total electricity consumption, but over a five or ten year time horizon, you could imagine them being pretty substantial. And those include green hydrogen production, so electrolyzers that are using electricity to split water into hydrogen and oxygen. They include EV charging hubs, either just, you know, big banks of passenger EV chargers or, you know, the sort of emergence of heavy-duty EV charging, truck stops, that kind of thing. And then you even go a little further out if we believe we're going to start doing a lot of things

like carbon removal than direct air capture hubs, for example, which are also super energy consumptive. So I guess I think of those as being all kind of in a common bucket of part of the decarbonization story, potentially huge amount of electricity load in the long term, but maybe not as immediate as like the battery manufacturing stuff and certainly not as immediate as the data center stuff because we know that's happening right now.

completely agree. And I think what's interesting about, especially the first two of those new types of electricity demand that are emerging that you mentioned is, again, these really represent big concentrated new sources of demand, new loads on the energy system. You know, when we're talking about green hydrogen projects, I think you and I agree very much that the best way, the cheapest way to make green hydrogen is going to be to do so at very large scale. And I think that's what we're seeing play out in terms of this early project pipeline development in the hydrogen electrolysis world, which is that individual projects can be hundreds of megawatts, if not gigawatt scale.

And it's been wild to see the emergence of this project development pipeline take shape incredibly quickly, really over the past two to three years, but especially over the past two years for electrolysis projects across the country. You know, again, the DOE right now counts well over basically 100 gigawatts worth of sort of notional green hydrogen project pipeline out there, which is enormous. You know, the U.S. is about 780 gigawatt or so non-coincident peak demand today. And now, I think I also believe, I know you believe as well, that ultimately a lot of that, hydrogen production is going to be probably off-grid, basically paired directly with large-scale renewables

in the cheapest places where you can access renewable power. That said, at least for now, if you want to move quickly, it's easier to try to get a grid connection in some cases. And we're seeing a lot of these projects kind of looking at both angles, both pursuing options for kind of fully off-grid renewable power, as well as grid-connected capacity to make clean hydrogen. Now, that 100 gigawatts of pipeline is very uncertain. And I think that the uncertainty of it in a way is yet another challenge for the power sector,

and especially for electric utilities who are trying to plan their systems for the demand that they're going to see in the next five-plus years, five to ten years, which is their typical planning cycle. And it's really hard to say, is that 10 gigawatts of project pipeline that's knocking on my door legitimate? Is it real? There seem to be some credible developers. There's not a lot of firm off-take contracts yet, but it's really, really difficult to plan for. Right. And then in addition to all of this, just to round out the overall demand growth story for electricity, we've been talking, as you said, about concentrated large sources of news. electricity load. There's also the growth in more distributed smaller individual scale, but ultimately hugely impactful load in the form of passenger electrical vehicle charging and heat pumps, like heating electrification. You know, you add those two things up. I think we've talked about

both of these before, and they're not all in one place, but they can be highly concentrated as well, and the impacts can be as big as, if not bigger, than any of the things we've talked about so far. Totally agree. And in a way that their distributed nature can make it even more difficult to plan for than these big concentrated loads, right? If a data center developer knocks on your door as an electric utility, they tell you where they're going to build and they tell you how much power they want. It's very difficult to see how fast and exactly where electrification is coming for vehicles and where you're going to start to see more and more individuals adopting level two chargers. They don't necessarily have to register that or get a permit for that.

They just hire an electrician, and if they've got spare capacity in their panel, they add it in. And the same thing is going to be true of heat pumps. We're going to start to see more and more instances in which that distributed load begins to have to be coordinated with the utility because it's going to overwhelm the capacity of network transformers and individual households who want to add a new EV charger or more heat pumps are going to have to knock on the door of the utility. But at least for now, again, it's kind of hard to see. Virtual power plants are becoming a reliable way for utilities to manage capacity. But enrolling devices is just the start. What really matters is confidence, knowing those

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We're living through a profound economic shift, and energy sits at the center of all of it. Trillions of dollars are flowing into power plants, transmission lines, battery factories, data centers, but the future of energy isn't shaped by technology alone. It's shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, the capital platform for the clean economy. Join me for my brand new show, Critical Capital, as I talk with people deploying capital, shaping policy and building projects. Together, we unpack how risk is priced, how incentives are structured, and how progress is actually made.

Listen to Critical Capital on Spotify, Apple, or wherever you get your podcasts. Okay, so add all this up, and I think the point that we are making is that there is obviously long-term, there's a good long-term reason to be bullish on electricity demand, but there's especially a good short-term reason to believe that demand is going to show up pretty quickly, sometimes in highly concentrated sources, and from a variety of different sources. So you might look at that and think fantastic, right? We all agree that electrification is a big part of the journey toward decarbonization. It might be the single biggest part, depending on how you think about it. And if you're in the electricity industry, awesome. Like we've been, you know, we went through a period of 10% annual

load growth back in the 1950s, and then we settled to load growth that looks more like GDP growth in the like 0 to 2% range for the past couple of decades. And now we're going to resume a high load growth world again. And so awesome. Like, you know, this is totally where you want to be if you're in the electricity business. So let's get to the other side of the gauntlet, which is like, how do we supply all of that electricity? And what are the challenges there? And I think there's two pieces to it. There's the generation side where we're going to get the power from. And then there's the T&D side where we, how are we going to deliver the power? Let's talk about the challenge on the generation side first.

What do you see as being the reason why we can't just flip a switch and turn on all the generation that we would need in order to serve all this load, you know, virtually overnight? If only it were so easy. I think what we're seeing is that this new big opportunity for the industry, which is a fantastic opportunity that we've just been talking about, is coming at a tough. time for the planners of the power generation and transmission and distribution system. On the power generation side, there's really kind of a pinch that these system planners are feeling, and that pinch is coming from a few different factors. One is already planned coal

retirements, coal power plant retirements. Another factor is, you know, new carbon policy, and even non-mandatory but very public net zero power generation commitments that a lot of, you utilities and other power suppliers have made. So on the coal retirement side, there's still another 50 gigawatts of coal-fired power generation capacity in the U.S. that is basically on track, already well planned, to be retired by the end of the decade. Now, some of those retirements might get pushed out, but I think for the most part, a lot of that retire, those retirements are fairly locked in. And then meanwhile, you know, over the past decade plus, we've been able to retire coal fire generation capacity, which is what the power grid was basically built around,

because we've been able to substitute it with new gas fire generation capacity. For the most part, although there's a lot of nuance and complexity there, that's been a real net positive for greenhouse gas emissions. But moving forward, it's not going to be so easy just to say, okay, we'll retire coal and we'll add new gas in its place. And that is partially because of these just general, this atmosphere of net zero carbon commitments. But now it's coming in the form of real mandatory policy where the EPA has now proposed new regulations, which would really constrain new investments in large gas-fired power generation additions, especially starting in 2032. So, you know, that's less than a decade away, where if you were to build new gas-fired

capacity to serve this new electricity demand that you're seeing today, you need a plan to begin to decarbonize that capacity substantially beginning in 2032. And the way that the EPA has proposed you might do that is either by substituting the gas that it burns with hydrogen or some other hydrogen derivative clean fuel or through carbon capture, both of which you really have to start planning for today if you're starting to build new generation capacity today. Of course, you can also build renewables and storage. And don't get me wrong, I think I'm very bullish on the long-term future for the combination of renewables and storage. But first of all, there's really no solution today, right now, if you're seeing this load growth right now, that combines renewables and storage that is fully ready to scale up to supply multiple gigawatts of real firm 24-7 power. Now, I think there's some really promising solutions coming as quickly as you can imagine, but if you need new gigawatts of firm 24-7 power, like in the next three years,

there's nothing that can really supply that from renewables and storage. There's also transmission and distribution constraints that you mentioned, and transmission constraints in particular are really difficult for renewables. Right. So we've talked about the problems with building new transmission on this podcast before, and I'm sure lots of folks are familiar with it, but just to restate it, so we have these compounding issues, which is, as you said, like the generation, and particularly the pace of build of new generation, you didn't talk about interconnection a whole lot.

Like we could, you also, we have a lot of renewables that are sitting in an interconnection queue, and there's lots of reform to be done to try to get those things through the queue as fast as possible and shed all the sort of phony projects that just got into the queue in order to determine what it would be like to get interconnected but are never really going to move forward, like all these kinds of things. So you have a tough time getting the capacity that you need with the reliability that you need. You have a tough time connecting it to the grid. Then you have a tough time building out any new transmission to deliver that power from wherever it's going to be generated to these new sources of load. And then there's this additional and very immediate and real term challenge

that we have not talked about before, but is a real issue, which is that, you know, we had during in the middle of COVID, everybody will recall that there was a supply chain shortage of lots and lots of different things. And, you know, we were discovering all the challenges of globalization, all that kind of stuff. Most of those supply chain shortages then went away and we're sort of like back in a normal world. One place it did not go away is in some electrical equipment and particularly in things like transformers. So this may not be a long term problem, but it's definitely a short term problems. So talk a little bit about the situation with just supplying, why are transformers important in this context, I guess? And then like, what's the situation today? So transformers step

down or step up the voltage of electric power moving from one place to another. And so if you are interconnecting a big generator, you have to use transformers to make sure that the voltage going into the grid aligns with the voltage of the lines of the lines that you're putting that power onto. And then once you get to, the distributed level, you need transformers to step down the voltage going to homes and businesses. Basically, nothing gets interconnected to the electrical grid either on the generation side or on the demand side without having a transformer somewhere in the mix. And like you said, we're seeing this big, at least short-term supply chain pinch when it comes to transformer production capacity and a bunch of other related sort of not super sexy

but really critical grid interconnection equipment. So just for example, the average price for a 25 to 50 kilowatt transformer, so pretty low level, something you would see at the edge of the electric distribution system, increased by up to nine times from 2020 to 2023. It used to pay, you know, $3,500 for one of us. of these, now you're paying $20,000 if you're a utility. And then also the time it takes to get the equipment has also just skyrocketed. So you used to be able to order a distribution level transformer, and you'd get it within about two months. Now it's taking a year to two years or even longer

to get the equipment that you need. And so, you know, I think any kind of supply chain issue like this seems resolvable over the medium to long term. But I think, you know, it's another symptom of the fact that the industry overall has grown fairly accustomed to a period of very low growth. So basically, we've had to produce this equipment at the rate that it's been having to be turned over as old equipment has failed or needs to be replaced. And so we need to step up manufacturing capacity for this type of equipment. And again, this presents a plan. challenge, in this case, for the equipment manufacturers, which is how much do you step it up? How much new transformer manufacturing capacity do you build? And when do you build it? And again,

this gets back to the problem of the uncertainty of all this new electrification and electricity demand. How fast is it coming and when is it coming and exactly what scale is it arriving at? Yeah. And on the on the transformer supply chain pinch, I mean, there's even more nuance to it as well, which we probably don't need to get into, but it could actually get worse before it gets better because there are new standards that are being contemplated right now for transformers, which would make them more energy efficient,

but also make the supply chain even a little bit more challenging. Transformers require in the U.S. this particular kind of steel, electrical steel, and there's only one domestic supplier of that kind of steel. There's all these things that we are discovering as, as you said, this sort of like, the paradigm shifts. And I think for me, this is the high-level point to this whole thing about the gauntlet,

which is that it's kind of just like we're in this period where there's a wake-up call for the power industry, which is that despite the fact that if you've been in the industry for a long time, as you and I both have in one form or another, there has been a lot of change, right? And again, the generation mix is probably the biggest one. We have retired a lot of coal. We have added a lot of new natural gas. We started to add a lot of new renewables.

Like, things have changed. But fundamentally, the supply demand balance has been pretty steady for quite a while. And everybody appreciated, I think, that that was going to change over a longer period of time. What's becoming clear is that that's changing over a short period of time. And there's kind of a wake-up call moment right now where I suspect what you should be doing if you're in this industry is saying, like, okay, we need to revisit our two-year plan. not just our 20-year plan. Completely. I mean, the future is now, basically. I think all of these theoretical transformations,

these theoretical big trends in the industry, which we sort of expected to gradually ramp up over a decade or two decades in terms of electrification and the need to transform the generation side of the fleet are happening really quickly and are happening at the same time in a way that even five years ago,

I think very few people would have anticipated. Okay, so obviously, there's no single path through this gauntlet. And there are a lot of things that clearly need to happen, right? Like interconnection reform and figuring out how to build and transmission permitting. And like all these things, they all need to happen. This is a yes and.

But like, paint me a picture. What do you think is our most likely path through the narrow window that we've got here? Like you said, there's a bunch of macro level changes that I'd like to see a lot of which really do require some kind of policy intervention at this point. It doesn't have to be federal policy necessarily. The biggest one I think, and I'll beat this drum over and over, is transmission permitting reform, right? We need to be able to build new high-voltage, long-distance transmission assets to interconnect more renewables, to interconnect more

regions and deliver clean power all over the country, no matter what country you're in. But kind of, like you said, setting aside some of the big picture things, which are hard to change and could be the topic of multiple podcasts themselves, there's a couple small opportunities, or maybe not small opportunities, but specific opportunities that I think come from this near-term pinch that we're facing, the near-term gauntlet. The one is distributed generation and storage and the concept of a microgrid, which I consider basically any amount of distributed generation and storage that is connected to the distribution system, but can also provide prime power, can fully island a customer, whether that's

an individual household or a neighborhood or a large campus or a, you know, manufacturing facility for a really extended period of time, potentially indefinitely in some cases. And I think microgrids have been this really fun, interesting concept, as long as I've been paying attention to the industry. They tend to be the kind of thing that like engineers and dreamers get really excited about. But I think that the practical time for microgrids might finally be here. And I think we're starting to see more of that get deployed in terms of

critical loads that are intended to run with some regularity on distributed generation and storage as well. Yeah, I mean, I think what's different about the new wave of microgrid interest and development is the motivating factor is a little bit different, right? Like in the early days of microgrids, we were talking about them 10, 15 years ago, it was all about reliability. And so the point of a microgrid was to be able to island in the event of an outage. And there are some customers for whom, and some locations for whom that actually

is incredibly important, and they will pay for it. And a bunch of interesting businesses have been developed around that. But what we're saying here is that there's a new, maybe additional motivation for some version of a microgrid, which is the problem that we've been describing, which is if you are a new source of concentrated load, or you're going to increase your load substantially and you either cannot get additional capacity or it's not going to come soon enough for you. And in particular, you mentioned the Amazon Bloom thing in Oregon, right? These data centers, generally speaking, are somewhat price insensitive but time sensitive.

And when you have that dynamic, it creates a different kind of an opportunity to say, like, well, okay, we got to deliver power sooner, even if it is a little more expensive than the grid, because otherwise we're just going to have to sit around and wait. So I think there's this additional layer of reason for being for microgrids, that when you layer that on top of the resiliency and reliability thing actually starts to become totally a different paradigm. That's a great example. I think that exemplify as one extreme end of the spectrum,

which is anticipating getting the majority or all of your power supply, at least for some amount of time for the next few years, for example, from a microgrid and distributed. to generation. At sort of the other end of the spectrum, I think an example is these EV charging hubs, these sites where you're going to start to see more large-scale charging for heavier-duty vehicles, for example, kind of all coming together at a depot where they're charging overnight. Or, you know, I think this is a little further down the road, but highway rest stops where you're going to see, potentially megawatt scale charging for larger, longer-haul types of electrical.

vehicles. And in those cases, resiliency is a part of the value. In most cases, you're not going to see sites that are entirely supplied by a microgrid, but the real value to the site is being able to reduce the peak amount of electricity that you draw from the utility so that you can reduce the size of the transformer that you need to hook up to the grid and also reduce the the amount that the electric utility has to charge you for that peak demand. And I really believe that's a category we're going to see a lot more of, and already are starting to see pop up as this kind of electric vehicle chargers paired in some way with storage to buffer their demand against the grid.

And generation, for what it's worth, for some reason I've gotten targeted on, I think on LinkedIn by Plug Power, which is a fuel cell provider who is posting ads. that are targeting me incorrectly for using fuel cells to power charging depots and presumably using hydrogen fuel cells to do so, which is thermodynamically not probably the smartest thing of the world, but it may it be the reality if you're trying to build a depot and you can't get your electricity capacity in time.

Are you sure they're not micro-targeting you because they know you have a podcast and would talk about them on the podcast like you just did? If so, then kudos to you, plug power. Well done. Okay, so microgrids one potential, as you said, not small, but specific sort of outcome of this. Others that you think are worth noting? I think the other big category that really emerges from this near-term pinch in the gauntlet, this really narrow passage that the utilities have to get through, is, is new gas generation assets basically.

I mean, if you do need to serve gigawatt scale new loads within, let's say the next three, maybe even up to five years, it's really hard to find to think of another option that will really work, especially if that's more than very low capacity factor kind of peaking type of load, which storage is a pretty good solution to today. But if you're going to build new natural gas power generation assets today, you need a way to future-proof them. I think of it as kind of carbon future-proofing them. And that can come in a couple forms.

One is fuel optionality, the ability to build something today, like a new gas plant that can be relatively easily and cheaply retrofitted to burn hydrogen or ammonia over time. And fortunately, that's something that I think the natural gas turbine OEMs have been very proactive about in developing products that are starting to meet that kind of roadmap where you can build something that is, you know, low-level hydrogen capable today, you know, capable of blending in, say, 30% hydrogen by volume. But if you build the plant today with the future of burning more hydrogen in mind, then it will be relatively low cost to retrofutable. for much higher levels of hydrogen generation moving forward. I think the same thing in a different way is true for planning for carbon capture. I've not yet seen as much sort of design for future carbon capture on the natural gas power plant side. That hasn't surfaced into my visibility, at least yet. But if you are a power generation asset developer and you want to build new gas and you think that

the pathway to carbon future proof it is CCS, then you better start developing and planning for how you're going to do that CCS today. Because one thing we have seen is that the S part in particular sequestration sites can take quite a long time to develop. So I think that we are going to need to see more investment in new natural gas power generation capacity in the near term. But I think it would behoove anyone who's building that capacity to really start planning for, and like creating a credible, plausible path for decarbonizing that stuff over time. I'll add one more category, which is I think the suite of things that can help alleviate transmission constraints without needing to build new transmission lines is another category that like should certainly should benefit.

And that could be, you know, reconductoring, that can be dynamic line ratings, that can be long-duration energy storage, that can be placed strategically on places on the grid. There's a bunch of things you could do to try to get more power over the existing lines. This has been a thing, you know, utilities have wanted to do for a long time. It's just more urgent than it has been before.

So I remain hopeful that we're at least going to start to do more of that stuff. I remain hopeful, too. And the nice thing about, you know, necessity, right, is that it is going to make people move. I think on some of these ideas, and technologies that otherwise there just wasn't the urgency to try, especially when there was at least the perception of some amount of risk involved on these really long-lived, you know, steadfast assets like transmission lines.

But we just are running out of options. And if you're going to make it through this gauntlet, you need to try a bunch of different things. All right. I think we've beaten the gauntlet metaphor as, hard as we can. So we'll leave it at that. But I continue to think, I know you and I agree on this, I continue to think this is like, this is the issue. And certainly in electricity, obviously, but like this might be the issue in decarbonization at the moment. And I think it deserves all the attention we can give it. It is. And part of that is because if this, if this doesn't work,

right? If the power sector isn't able to, to make it through this period, and it results in people unable to build new manufacturing facilities, new data centers in a timely fashion, and if it results in kind of costs starting to spiral out of control, electricity costs spiraling out of control for customers, like that puts at risk basically the whole project of decarbonization, because we are relying on the electricity sector to deliver here over the long term.

And as we've talked about, like, that means this enormous opportunity for the electricity sector, which is the prize. But if we can't deliver in the short term, it could kind of throw the whole thing out of whack and cause consumers and voters to decide that this whole thing is not really worthwhile. All right, Andy, more to come. But as always, thanks for joining. Thanks, Shale. Good conversation. Andy Lubreshane is my partner at EIP and our head of research. This show is a co-production of PostScript Media and Canary Media. You can head over to canarymedia.com for links to today's topics.

PostScript is supported by Prelude Ventures, a venture capital firm that partners with entrepreneurs to address climate change across a range of sectors, including advanced energy, food and ag, transportation and logistics, advanced materials in manufacturing, and advanced computing. This episode was produced by Daniel Waldorf, mixing by Roy Campanella and Sean Marquand,

theme song by Sean Marquand. I'm Shail Khan, and this is Catalyst.