Odd Lots - This Is How Electricity Rates Are Actually Set

Episode Date: January 9, 2025

Utilities in the US have a couple big jobs to do. On the one hand, they need to deliver affordable and reliable power to their customers. On the other hand, they also need to maintain and upgrade huge amounts of fixed infrastructure. Balancing those two jobs is getting more complicated thanks to America's aging electricity grid and the shift towards renewables. So how are big utilities squaring those two objectives? How do they decide how much money they need to fund new capital investment? How do they decide which customer pays what rate? And what role do regulators play in all these discussions? In this episode of the podcast, we speak with Lon Huber, senior vice president of pricing and customer solutions at Duke Energy, one of the largest utilities in the US. We talk about why the ramp-up in renewable energy hasn't led to lower electricity prices for everyone, why fuel is ultimately the most marginal cost of electricity generation, and how utilities are handling booming demand from data centers. Read More:AI Needs So Much Power, It's Making Yours WorseUK Set to Spend £1.8 Billion as Wind Power Overwhelms Grid Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

Bloomberg Audio Studios. Podcasts, Radio News. Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. Joe, I have big news for you. Go on. I'm an electricity generator now.

Oh, yeah. Tell me what's up with that. This is big news. In my personal life, I am finally the proud owner of a pretty big solar panel that is feeding into the grid in Connecticut. How's that going, so far? Like, are you know, has it? So I got, do you have lower electricity bills?

I got one electricity bill so far, and it was about $20 for a few weeks, which is amazing. However, I have also experienced my own intermittent energy problems because we are recording today on December 5th. And in case you don't know, it's been snowing up in New England. And the solar panels are covered with about eight inches of snow. So there's no electricity. They're not producing any electricity. Yeah, all the electricity is out. We have a power generator, so that's kicked on.

but I'm now learning one of the downsides of renewable energy. No, it's like perfect. This is the end of the conversation right here. It's cheap, but it's intermittent. It's cheap and intermittent. Yeah, that's basically it. But, you know, it got me thinking. I'm not in Connecticut at the moment.

We are both in Washington, D.C. for a big energy conference. And because I am now an electricity generator of sorts, and I feed into the grid that is owned by a giant utility, we have never actually interviewed someone from a utility. That's right. I don't think we have. I don't think we have either. And I have to say, and now this is starting to make sense to me,

that like how utilities work, how pricing in particular works for electricity, is this incredible black hole in my knowledge. Because this has come up, but, you know, we're not called customers. We're called rate payers. And I know that in many markets, there's this negotiation where there's some utility commission or something like that. and the utilities have to figure out, okay, we spent this much and can we raise our prices this much, et cetera. And then, you know, I know there's in some places sort of live auction markets and how the weather changes, the price changes, but I really find this incredibly hard to wrap my head around.

I guess basically the question of why you pay what for electricity. Yeah, so two things here. Number one, it seems incredibly complex because of all the factors that you just laid out, including the patchwork of different regulations for different states. and the limits there. And also, well, the political tensions as well, that's one thing we can maybe talk about. But the other thing is it feels like the whole system is becoming more and more complex. Because you have more renewable energy coming on, a lot of that renewable energy, you know, you get credits for feeding that into the grid, which means special people like me are no longer actually paying that much for electricity, but we're still drawing on the resources of the utilities. And I guess there's really two things, because there's this rise of sort of distributed energy, rooftop solar and things like that, new forms of energy production, and then something that comes up a lot, the resumption of load growth for the first time in decades. That's right. And so you have the renewables, you have load growth, you have this impulse from the public

and the corporate sector to reduce emissions overall, net zero. There's always net zero press releases going out over the years. And so how this all comes together wildly complex. And usually when people are explaining it to me, I have to pause them every five seconds. Like, wait, what is that term? What's a capacity market? again, all these things. So it's nice of you to warn our listeners in advance that they're going to have to pause this episode quite a bit. No, hopefully we'll be able to explain everything because

we do in fact have the perfect guest. We're going to be speaking with Lon Huber. He is the senior vice president of pricing and customer solutions at Duke Energy. So Lon, thank you so much for coming on the show. You bet. Great to be here. Is it terrible for companies like Duke when their customers get solar panels? Is it bad? I keep hearing about the utility death spiral. It all comes down of pricing and the rate structure. So it's not an easy answer. If you have the right rate structures, it can actually be a beneficial thing. But a lot of times that isn't the case. And so in your Connecticut example, you're basically getting your fully bundled rate as a credit. But that fully bundled rate, although it's in kilowatt hours, it's actually made up of a lot of KW and fixed infrastructure

cost. So that pole outside your house, that's wrapped into an energy charge, even know, as we all know, if your energy uses drops, that pole doesn't get cut in half. You can't just pull out that pole handed to your neighbor. That's fixed infrastructure. And that's 70% of the grid. What do we zoom out really big? What is the business model of Duke Energy? All right. This is good. So we have a franchise that enables us to furnish low-cost, reliable electrons as a precondition to economic vitality for our community. So we have essentially a set jurisdiction where nobody else can come in for certain services. And so we have our... This is a geographical jurisdiction, right? And we're supplying the wires and in some cases,

the power generation to that territory. And again, there's obligations and exchanges there. So we're under democratic control of those prices, of the return on equity for investors in this long-term infrastructure. Right. So there's balances here. So you have this market discipline entity that still has accountability to local communities, to policymakers, and has a way to spread infrastructure costs in a structure that can make long-term intergenerational sense for communities. So you mentioned economic vitality just then. And one of the things I often hear when I occasionally read books about electricity or the

grid is this idea that electricity cost is still heavily subsidized in many ways because we still view it as a sort of social good that enables us to do things like manufacture stuff and power our homes. And I guess my question is like to what extent do you think that's true? Well, it is certainly true that it is an inelastic, you know, necessity to modern civilization, right? I agree. But for the most part, there isn't necessarily, I would say, a large amount of subsidies, at least on the state level, there's some federal tax credits. But again, a lot of those apply more broadly to the sector. But, you know, what you could hear is, well, certain types of customers might be subsidizing other types of customers. And so that can pop up

where you have these certain classes, whether it's maybe the industrial class, could be subsidized by the residential class or vice versa. And that is inherent in a fixed network system. Or the non-netmetered customers paying the net meter customers, i.e. me. That's right. You explain what Duke is. What is your title is Senior VP pricing and Customer Solutions? So what is that role? Yeah. So this is all about helping our customers out, not ratepayers, our customers. Our customers. Right. So these are a large accounts. Did you actually use the word customers? Yes. The industry has changed a lot. Just, I mean, when I first got in the industry, it was rate payer all the time. If I'm operating, if I'm operating, if I'm operating If I'm operating on dated information, then I'm happy to be correct.

No, but why was that the common term? I mean, partly, there was just not the technology or visibility into customers. There was a mentality there to a culture built up. But for the most part, it's like if you don't have any of the analytics, if you don't have the meters, if you don't have the communication back and forth, you're sort of at a distance, right? And all that has changed dramatically in every category. All right. I'm updating my, I'm updating my mental framework of how you see how you see it. Okay, so you go on with what you do.

Customer solution. And the pricing aspect. Right. And so I've got economic development as well. And so that's new businesses coming in. The existing businesses that are there that also want to grow. The pricing and rate structures all around that. And again, this is for all of the Duke states.

And customer load analytics, things of that nature, sort of make it all work and do an A to Z to solve customer problems or goals. So if the customer is like, hey, I want to bring a new manufacturing to the state, my team will work in conjunction with the government and we'll say, okay, well, here's a great site or here's a great community that would really fit the workforce you're looking for, the size of business you're bringing, that type of thing. So when it comes to actually setting those types of rates, can you talk to us about, I guess, the building blocks that would go into that? Like, what are you putting presumably into a giant Excel spreadsheet and then spitting out as the final number? Yeah. Well, it all comes down to something called the Revenue Requirement.

Okay. And the revenue requirement basically says, how much money do you need to collect from your customers to cover your investments, to cover operations, and then taxes return to investors? So that is the big number. Then from there, you slice and dice that based on how the different classes are using energy, right, the makeup, the load profiles, and so forth. And you create pricing around that to collect that revenue requirement. but it gets really complicated because the easiest way to collect that revenue requirement is by just having everybody pay a big fixed charge, right? That would be the easiest thing.

You know, I need to collect 100 from you. Give me 100 each month, right? But that doesn't send the best price signals, does it, right, for you to conserve? Because you would just be using a huge amount of energy because it would be $100 every month, no matter what you use for the most far, right? And there'd be a little bit of fuel there. And so that wasn't palatable, that type of pricing to collect. that type of revenue requirement. And so then it was, well, what's the next easiest thing to do,

given the state of technology that we have? And that's where you see a lot of the legacy pricing where it's mostly just usage KWH-based. All right, let's talk about the different types of markets then. So there are markets where there's some commission, right, that determines a legitimate price. Yeah, every state has a public utilities commission or how they might label it. And so you talk to us about how you interface with the commission. What are the conversations like how often are they and what do you actually talk about with them? Yeah, regulators are key to making this all work. And they have staffs that work and they scrutinize all of our filings. And so we're in there and there's just basic sort of automatic, oh, that's true ups because fuel went up and, you know,

whatever else outside of the control or we've got these programs that we're updating to more intensive processes like rate cases where you go in and you say, okay, well, We have made these investments. We're about to make these investments. And here's what we think is prudent. And here's where we think the capital markets are in terms of return and debt markets and so forth. And so there's a lot of scrutiny there. There's formal data requests. We get thousands upon thousands of data requests, formal that come in and then they're on the record. Some of them are confidential and only with parties that signed certain agreements. But everything is just very well scrutinized in these settings. Some of these proceedings are very contentious. And you're under oath. Others, you know, most parties agree, and they're like, hey, yeah, this is a good idea. Yeah, go forth or it's so routine that it doesn't have a big impact. Remind us how many states you're operating in? Six and seven, if you include, and only gas supply state. So one question I wanted to ask, and, you know, hopefully in a slightly diplomatic way, but what are the big frictions with regulators? Like, is it mostly over cost and pricing structure or does it go to environmental?

like what is it that you you fight about when you're speaking of regulators? I should say that there's another key party involved in all this, and that's the consumer advocate. Most states have it. I used to be working in a consumer advocate office, actually, in the beginning part of my career. And they are meant to really, you know, scrutinize things from more of a using and consuming public lens. So they'll be representing the criticisms about pricing and things like that.

Yeah. So they're representing a constituency there. And the public utility commission is usually the entity in charge of balancing all the different parties and taking in this information. It's quasi-judicial. And so you have judges. They're the ones that everyone gets mad at, presumably. They're the public face sometimes a lot of it. And it really just depends on the state and what's going on. You know, you typically always push back on rate of return, for instance, what you're paying for equity and investors. And that's sort of steady state.

And then things get controversial, if something goes wrong on a power plant or, you know, something of that nature. But there's sort of that consistent rate case mode that provides some friction there for sure. Let's get into the economics of different types of energy production and consumption and so forth. We've added tons of renewables to the grid over the years pretty much across the country. Some have gone really fast, like Texas and California. There's not as fast for obvious reasons. Why does that not cause the price of electricity to collapse?

Great question. And it gets to all the different aspects of what makes up that electricity bill. Okay. And so when I mentioned before that a lot of the costs are fixed infrastructure costs, right? This is a huge grid. It spans thousands upon thousands of miles, right? Our grid can wrap around the world. like, you know, six times.

That's a cool stat. That's how, like just the mammoth. That's just our distribution system. Yeah. So that's how big that we're talking about. And so you have that fixed infrastructure, which includes power plants, the power lines, everything of that nature. You have the fuel and all the different, you know, fuel supply and administration and just

everything from like tree trimming, right? If you have that many miles, you have to think about the trees. And then what if a drunk driver hits one of the poles and are. squirrel starts gnawing on things, right? There's a lot in that price of an electric bill. So if you have an intermittent renewable resource, well, what is that good at offsetting? Well, it's good at offsetting fuel expense. If it aligns with the peak of the utility system, it can also avoid future power plants or purchases on the market for capacity. But it all depends on the individual resource in the location to see if it can bring that capacity value. But at least it can provide a fuel safe.

And so that's a smaller part of the bill. Yeah. Right. And so if you're only offsetting a smaller part of the bill, that's why you don't see that downward pressure. And another thing is a lot of different types of renewables are heavy upfront capital expenses, right? And so that initial investment puts upward pressure on rates, even though it gives a nice long-term hedge or discount on fuel. So you mentioned long-term just then, and one of the things that I do not envy utility providers in having to do is to try to sort out immediate energy needs, you know, for the state of our economy and our society right now,

but also try to make those giant capital investments for like decades out into the future. How do you guys think about that? That seems tough. It's a lot of responsibility. And it's a collective decision, right? When I mentioned regulators and consumer advocates, other stakeholders, policymakers in the state. And if you look at utilities in the past, they have completely shaped the landscape of states. And so Duke Energy, for instance, I mean, we were like, hey, hydro, and we built a huge amount of lakes all around the Carolinas to get that power. Then we... There are a lot of lakes in the Carolinas, right? Yeah. And some of them are artificial from, you know, from... And that brings recreation.

You know, it brings so many different other things to the state. It changes the landscape. You know, then you get into nuclear, right? These are like 80-year assets. Yeah. And back then, you know, you know, needed to have, and even still today, pumped hydro to store some of that nuclear during the down times of the day. And so now you're creating different lakes at elevations to move water up and down as long-duration storage. So these are like big landscape changing. Just like the original battery, right? So you have excess electricity at some point maybe during the night with nuclear or during the day with solar and use that electricity to lift water into a high elevation. And then at night,

it rolls downhill and then spins a wheel or something like that. That's exactly right. I've always thought that was just such a fascinating concept, but on batteries. So you mentioned that one of the issues with, say, solar or what we think of as renewables is that they're intermittent and so forth. Battery technology is getting a lot better. And I keep seeing stats about how, again, in some markets like Texas and California, especially during high stress periods, you increasingly see grid level batteries playing an important part of the mix that's supplying energy. In the last few years, how much have you seen batteries and the improvement in battery technology sort of change the economics of renewables? Yeah.

Again, and this gets to the beginning of why this area is so complex, because not only do you have the patchwork of regulation and utilities, but each geographic region, when you have weather-dependent generation, it brings something unique. And so a solar plus storage facility in Arizona is going to have a lot of different. economics than, say, a North Carolina. Okay. Right. And so you've got more sun, maybe cheaper, flatter land, and you have a summer peak that you really worry about in an Arizona. And so a four-hour mix with tracking solar can provide a decent amount of capacity value

in Arizona. Switch to, say, Midwest. Well, where can be the peak? The peak could be winter. Well, what does the winter peak look like? Well, it could be a week of cloudy weather where you see no sun. And these very cold extreme weather events could last for many days. So that's a very different set of economics and outcomes.

And so it really depends on where you are. In general, batteries around the four-hour duration have really come a long way, paired with renewables, especially in those markets where you have that summer peak. But we're still trying to crack the longer-term extreme weather event type of. peaks. So it is kind of true that at the moment we sort of perversely solve the problem of intermittent energy and the fact that, you know, solar and wind tends to come on and off with more generation, right? So we don't store the extra energy. We just try to make up for it with generation from other sources when that goes offline, when the solar and wind goes offline. How far are we from solving

that storage problem just to press on Joe's point? Well, that is the big question. is there a startup out there that has the solution that'll be ready in five years and it can scale with some type of new long duration storage technology, right? There's form energy, there's others that are out there that could be very promising. So time will tell when those breakthroughs will happen on the storage side. But to your point, right now it takes a great diversity of resources to make this all work in all the above. And that's why there's concern of when certain states or advocates say, well, we don't like that particular resource or, you know, we want you to do more of that. There has to be a balance there because they all sort of work in synergy. And there's really complex modeling that sort of shows how this all works to keep that reliability during those extreme events. But what you don't want to do is have to build two systems, a renewable system that is there when the weather is great and then an entire backup fossil system, right? Well, so the third thing that we haven't started talking about yet when you talk about like these different conceptual systems, the fossil fuel system, the renewables and battery system, and that's nuclear.

And one thing that's come up on the show in the past is that some of the advocates of much more aggressive nuclear buildout don't like the current market structure model because they say, look, we have this huge, gigantic upfront costs. and we need some price certainty. And if we're going to have a electricity market in which we're not getting any revenue during the really sunny days, because Tracy doesn't need to pay anything into the grid at all, it's all my fault. It's really hard to justify the planning and the upfront cost in the years of construction and work for everything that we know that's difficult about nuclear. Do they have a point that when we're thinking about market structure for electricity, that it's hard to optimize for a world that has a lot of nuclear but also has a lot of room for the tracies or the solar firms of the world? Yeah. So this gets back to the larger market structures out there. And so some markets are considered restructured, meaning they have opened competition on the generation side of the business, right? The wires is a natural monopoly.

you don't want a thousand's exacting wires across the street, right? But generation was thought, well, there could be some competition there. And so some markets reformed, others stayed vertically integrated. And like I mentioned, we're in both so we can see both in what works and what doesn't and where you can get some advantages and where there's some issues. And again, as we talked about, there is a trend of a lot higher load growth. And these markets came about during a time where it's relatively calm and flat to maybe a modest load growth. And they set up their markets where, again, you have energy and capacity, and they have energy markets, which are a lot deeper.

But capacity markets in the end of the day are fixed infrastructure, big, lumpy investments. How do you encourage fixed infrastructure out there? What price signals do you send? Because you're either sending too much dollars or too little dollars. It's very hard to get right on the infrastructure side. Some markets just said, like Erkot, we're not going to be. have something specific for capacity at all. Others have capacity price signals. And so that's the inherent tension of where do you get that revenue to recover those big investments.

So just on this point, you mentioned Urquhart. And so that's Texas, right? So in Texas, basically, it's anyone can plug into the grid and sell, but there's no excess capacity. What is a capacity market specifically? A capacity market is all about providing the payments needed to encourage big new infrastructure investments with generators, right? So in this example, so it's money to a producer of energy that is like, you're going to pay them to exist, basically, regardless of what that day's market conditions are like for electricity. And so if you have some, if the energy prices are very low because everybody has zero marginal cost renewables that day because it's sunny, they're still getting capacity payments, right, as long as they show up.

And there's big penalties if they don't. Well, in terms of storage and maybe starting to fix some of these problems, we do have things that people talk about called virtual power plants or distributed power networks, whatever you want to call them. Like, is that a big deal for you guys or is it still kind of something that people are just talking a lot about at these types of conferences? Yeah. I only hear about the big conferences. Yeah. No, same. Well, it is a, I would say it's new branding to something that at least some utilities have actually have.

a lot of experience with and have years of a track record with. It falls under the all the above categories again. And these are devices or, you know, different resources that are out in the distribution system a lot of times on the customer premise, sometimes behind their meter, oftentimes around their meter. And it could be something as simple as energy efficiency, but, you know, better light bulbs, insulation. And it can move and where virtual power plants really sort of captures it is dispatchable research. Think like smart thermostat. Think battery storage on the home. Those types of things. Controllable water heaters. And the idea is you have an aggregation of all these and you orchestrate this so that it mimics a centralized power plant. Now, Duke, we've started

decades ago. So we have over a million connected devices already out there that we orchestrate. The numbers add up to something meaningful when we have what we call like demand response events during peak times. But it's not like 50% of the resources out there by any means, right? Now it can grow and people are excited about it now because you have new resources and new technologies that make that orchestration better. So in the past, all we had just like a hard switch on an AC unit. Now you have the smart thermostat. So you can optimize that and make it so that the customer doesn't even feel that you're making minor changes to their thermostat. Let's talk about load growth.

So obviously you operate a lot of the Southeast. We've seen a lot of the sort of new industrialization endeavors, battery plants and car plants, et cetera. I imagine a lot of these entities are Duke Power customers. Talk to us about, okay, I'm setting up a new battery plan. I'm looking for a site. How long does it take me to plug in? And what does that whole process look like when I come to say,

hey, I'm thinking about I got some tax credit, I got some money from the government, I would have built a plant somewhere in, you know, South Carolina or something like that. How long does it take until I could actually plug in and get power from you? Yeah. Well, unfortunately, it all depends. Okay. And so when I mentioned there's those restructured markets, there's the vertically integrated markets.

When it's vertically integrated, we can see the whole system. We can plan for it. So if we know a large customer is coming, we would put it in what we call our integrated resource plan. So you'll often hear IRP. Yep. So we're planning, making sure that generation is there. If you're in a restructured market, it's a bit more complicated. A lot of times utilities aren't necessarily in control of that.

You're at the whims of what is trying to be interconnected in cues and so forth. And so there has to be certain bilateral agreements that the customer would have to make, perhaps. But in a vertically integrated market and in a restructured market, you do have the teams on the ground that work with that company. They find sites, maybe that have been already just made ready for an economic development opportunity. So that customer would come in. They would give the specifications, the power, the size, workforce, and there'd be a matchmaking. And that matchmaking could actually be pretty quick, depending on if there's a site already ready. If there isn't, that will take more time. And then they have to acquire the land. They have to build at the same time they're building, the utilities building infrastructure, wires infrastructure to serve them. And so it could be a year. It could be five years. It really depends on the site. and how fast that customer wants to ramp up. But we know a lot of times to build new manufacturing, they can't do that overnight.

Right. Right. And then you have the new complexity of supply chain. There's supply chain constraints on some key equipment out there. Oh, this is our chance to talk about transformers, right? Yeah. That's been going on for what? Like four years now?

So for the latest ISM, electrical components have been in shortage now for four years and two months. That's crazy. How are you guys handling that? Yeah. Luckily, you know, we can use our size and, you know, move things between states if we need to and work with suppliers. And there's the utility industry in general is very collaborative, especially when you have emergencies. Right. So we, when we were hit with all these hurricanes this last season, we had to replace, I think it was like 18,000 transformers, right? And so there was, there's industry collaboration that makes that all work. But the real issue gets into these large power transformers for large customers. And, you know, those just takes such a long time to build and there's limited production lines for them. And so it definitely, you know, keeps folks up at night as we look to expand and reshor manufacturing. So Joe asked you how long it would take to plug in a battery manufacturing plant or something like that. I'm not starting a battery manufacturing plant.

I'm doing a data center. How much more complicated or different is that process if I'm. I'm running a data center versus batteries might not necessarily fit into this box, but a sort of of run-of-the-mill manufacturing base. Most standard manufacturers are a lot smaller in size than a data center. Actually, some of the newer data centers, and you can think some AI data centers, those can be a gigawatt. And most manufacturing is, you know, 500 megawatts tops, typically.

You know, you always have outliers. And for the most part, it's below 100 megawatts. So all of a sudden you have this big size differential. There can be a little bit of speed differential there too where the data center could move quicker. But this really impacts, especially smaller utilities. Duke has a huge system so we can absorb some of this. But if you're a smaller utility and you have a two gigawatt peak and all of a sudden a data center comes in with a gigawatt load, that's huge. And what if they don't materialize or what if they're in business for 10 years and then they go away,

that fundamentally creates the stranded cost that all the customers have to pay. So these are the tricky issues that are popping up, and then you layer on clean energy, right? Do you want to have to build new fossil for that? And a lot of data setter companies, also, they have clean energy goals. So how do you start to marry these complexities? Yeah, how do you marry them? Multi-dimensional. Long's like, how many more hours do you have?

A lot of tools in toolkit. You start with smart contracting and tariffs, the front end to protect all customers in case something doesn't happen. Basically, it would be saying, hey, you have obligations customer. As we build out the grid for you to connect, it'll be X amount of dollars. You've got to pay that even if you don't show up. Just like a purchase commitment kind of. Yeah, pretty much. So, you know, letter of credit. And then there's longer term agreements too where, and these are newer, where if you said you were going to use 500 megawatts and you're only using 200, you've got to compensate for a portion of that. Because we've had to build new reasons.

resources, generation resources, to handle you, right? And so you've got to cover that. And then you can get into different pricing elements where you have maybe time of use-based rates, and then you marry that with new ways to bring them clean energy and for them to contribute to clean energy. And that is really sort of the frontier and the exciting stuff. And Duke announced a partnership with a lot of the hypers and New Corps earlier this year that gets into exactly that how do you accelerate clean energy in a sustainable way financially. Is it inevitable that, like, non-metered, that system is going to go out of style in a lot of jurisdictions?

I know Hawaii ended it recently, I think. And then I think you guys did something in North Carolina relatively recently that went to court. Am I getting in at exactly the wrong time? Well, you're probably getting in the right time if you're thinking about you individually and your maximization and not societies. And so because... Yes.

Because a lot of times your grandfather did once you make that, so you'll be protected for 10, maybe 20 years. So you probably made the right individual purchase decision. Net metering has been reformed in most major markets already. And it's just reflecting the fact of, hey, does this add value to the network or subtract value? Is it financially scalable? And then also, if you're a clean energy advocate, you would look at the price per carbon saved. And so in Connecticut, you have a lot of nuclear clean energy, right? And so you're just how much CO2 savings.

You're swapping one clean energy for another one. There's actually not that much nuclear in my mind because I think we send it elsewhere is part of the problem. Looking at the overall grid mix, it's always good to calculate what you're paying per CO2 saved. And I've done this for Connecticut in my past life. And back then it was one of the most expensive ways to reduce carbon. Oh, was rooftop solar in Connecticut. So the future of solar is centralized solar farms or if like, or something like that. No, we need it on every scale.

But really, there's a lot of promise in distributed energy resources. You just have to get the pricing right. And you have to get that combination of technologies right. So at the home, if you had a controllable thermostat and you had battery storage and things to complement that solar system, then it's creating all these other values. And that's what we did in South Carolina in partnership with the solar industry. As we said, hey, how can we make these resources more valuable? And then form compensation structures that the industry can sell customers on.

And so that's what we did. And so we launched PowerPair, which is a large solar plus storage program. That does exactly that encourages solar plus storage coupling. And then it's tied to time of use rates and also controllable batteries. So we're using that during peak time. So there's room for that. There's good space for that. including on like commercial industrial scale.

And then you also absolutely need the centralized large scale that bring just great economies of scale to the system. What happened to the grid or the price that people pay for electricity? So there isn't a lot of new nuclear. There's some restarting of plants. And there's that one in Pennsylvania that one of the big tech companies is behind, though I don't even think it had been closed all that long. The only like sort of like true recent nuclear were those reactors in Georgia. What happens the day after?

So you spend billions of dollars on tons of upfront costs, tons of upfront time getting these new reactors on. What happens the next day when there's just tons more at that point, kind of free electricity on the grid? Yeah. So it gets to unit order and dispatch. And so grid operators are constantly trying to optimize the system for economics. for the most part, right? And so when you have a new generation resource that has a very low marginal price of production, that's going to then reduce the output from plants that have a higher cost of production. And so things sort of get restacked and reordered in terms of the

merit of what's going on in the system. And that's why natural gas is such a versatile resource because it can go from sort of higher output to a lower output, more of a peaking capability. And so that's why gas is just such a great sort of intermediate type of technology to balance all of that. And so that's essentially what happens. And then, you know, you have load growth and other things that then start to reform the original set of conditions. Okay. So you mentioned the revenue requirement as the sort of all-important number that you are working towards. how do you actually start to design the rates so that you hit that magic figure?

Right. Great question. So first, you've got different classes of customers. Industrial load profiles are going to look different than a residential load profile, right? And then you have classifications of what type of system assets you're recovering for. So are you covering for energy-related, capacity-related, fixed infrastructure, like the, you know, pole outside your house? And so you break this all up, and then you have certain methods to know, well, hey, this

customer classes using a lot more transmission versus distribution. And so you have these allocations. From there, you figure out, well, what pricing can I set to recover the revenue requirement? Because, again, this is recovering the investment that investors have made, right? Like, this is critical. Like, if you don't capture this, your credit metrics just go south and it's extremely expensive to borrow money.

And this infrastructure game is all about long-term investment. So a change in your borrowing rate has a huge ripple. effect on the cost for all the customers in that jurisdiction. So that's why it's really important to collect that revenue requirement. But at the same time, you have to send the right price signals to customers because you don't want to just have them pay that $100, right? And in the past, it was all volumetric because we didn't have the meters, this is especially for residential, you didn't have the meters to do anything other. You can do a demand charge, you can do time of use rates. At some point, we actually did have meters, but you have to roll out a truck to the

customer to get them on a time of use rate. So you had to drive somebody there, swap out the meter, right? It's incredibly expensive. We've now with advanced meter, and we can get around that. So now we can introduce pricing that's more accurate to like how the system actually works, right? But there's still reluctance to go much more complicated on the residential side because of just how customers understand their energy. The last question, when Tracy gets a big discount on her electricity because of her solar, you know, there's still all of these costs that have to be born and you mentioned that earlier. So who's paying the cost now? Basically, everybody else that does not have that solar. It gets reconstituted. Don't tell your neighbors, Tracy.

And don't let your, yeah, directly. Because this is a member, this is a fixed infrastructure system. So this is not like tennis shoes or or candy, right? This is a big network, one of the, the largest, most complicated networks, the first network of modern civilization pretty much. Yeah. And so that fence that infrastructure gets just, you know, spread out to others, right? cry harder about con Edison Joe I'm free I'm I'm an independent energy supplier now kind of Lon Hubert thank you so much for coming on all thoughts thank you for having me Joe that was pretty fun to learn why I'm the problem I was just because we we've discovered that you're the problem I mean I do think like there are so many renewable energy solutions

out there and all of them do seem to come with some form of downside whether it's like the very significant capital investments that you have to pony up for stuff that ends up being like very intermittent, whether it's the idea of net metered customers being subsidized by non-net metered customers for their grid use. Everything just seems very complicated. First of all, it's really helpful. I know this is the most basic thing, but it's really helpful to remember that like fuel is just this marginal cost of what you're paying for. Yeah. That there's everything. There's the line maintenance. There's the production. You know, he mentioned, tree trimming, which is huge because that's a source of wildfires in a lot of areas when the

lines touch trees. So there's all these huge costs. And so it becomes very intuitive that you can add a bunch of solar panels either on individual households or across the grid in general and see why not only does it not like move the dial down. I don't know if it moves the dial at all. It just moves the dial to other people. Well, he did say it was marginally helpful on the fuel cost. But to your point, the fuel costs are not the big thing here. But it was also very interesting to just hear how a utility kind of thinks about designing those rates and all the different considerations that go into spitting those final numbers out. I guess I hadn't realized like how individualized some of them actually are. Like I know that we're not all paying a flat number,

obviously, but like the differences across residential and commercial and data centers versus a battery plant or something like that. It's also here just very interesting hearing the different types of, because there's two things, right? There's different types of electricity and market structure. And then there's also different types of markets by virtue of their weather. Oh, yeah. We're talking about Arizona versus the Midwest versus the southeast. Yeah.

But it's interesting to think, you know, like every couple of years now, or maybe every year you hear about a blackout in Texas. And Texas obviously makes it incredibly easy for pretty much the producer of any kind of power to plug in and start selling their generation instantly. And they've got lots of sun, lots of other stuff. They've got a lot of wind. They got everything. But what they don't have is any guaranteed.

payments to that spare capacity that is not getting paid during most of those sunny days, but then on the day, when it's like crazy sunny or crazy snowy or whatever, suddenly needs to be turned on. Well, you asked that question about how do you, like, actually incentivize big nuclear power plants that cost a lot of money when, you know, someone knows that if they build a nuclear power plant, they might not get, like, a particular rate for X amount of years. And I think we're back to why solar is the problem. No, I don't think it even is that.

But I do think it's like, I mean, look, I just think it'll be very interesting under this next administration because I do think that there are a lot of people who are like solar is part of the solution, nuclear is part of the solution. And by when I say solution, I mean, the problem of how do you get more electricity? Right. Not more. But put it all together. It's not really a solution.

They fit together and it almost does seem at least in some markets, like you sort of have to pick one or the other. So lots of facts. fascinating, I guess, question marks about how this evolved. Or figure out a new way to design the grid or new storage is probably what we really need. Battery breakthrough, which could solve everything. All right. Someone please, you know, start working on that battery now because you probably haven't realized it's

this much of a problem. So you can get started now. All right. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

And I'm Joe Wisenthall. You can follow me at the stalwart. Follow Lon Huber on Twitter at Lon Hubert. Follow our producers, Carmen Rodriguez, at Carmen Armin, Dashel Bennett at Dashbot, and Kail Brooks at Kail Brooks. Thank you to our producer, Moses, Andam. For more oddlots content, go to Bloomberg.com slash oddlots, where we have transcripts, a blog, and a daily newsletter, and you can chat about all of these topics 24-7 in our Discord,

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