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Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Alloway and I'm Joe.
Isn't it Joe?
I have big news for you.
Go on.
I'm an electricity generator now, oh yeah, tell me what 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?
Are you?
Has it?
So?
I got your lower electricity bills.
I got one electricity bill so far and it was about twenty dollars for a few weeks, which is amazing. However, I have also experienced my own intermittent energy problems because we are recording today on December fifth, 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 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 interman.
It's cheap and intermitt 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 there, and I have to say and that now this is certain makes 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 utility.
And I guess there's really two things, because there's this a 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 what is that term? What's the capacity market? Again? All these things.
So it's nice for 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 Long Hubor. He is the senior vice president of Pricing and Customer Solutions at Duke Energy. So Long, thank you so much for coming on the show.
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 agility death spiral.
It all comes down to 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 kill a loot 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 though 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 seventy percent of the grid. Why don't we zoom out really big? What is the business model of Duke Energy? Ah, all right, this is good. So we have a franchise that enables us to for an 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 geographical jurisdiction, right, and we're supplying the wires 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 policy makers, 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 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. That is inherent in a fixed network system.
Or the non net meter customers paying the net meter customers. I E.
Me, that's right, you explained 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 rate payers, our customers customers, right. So these are a large customers because 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 that, if I'm operating on data information, then I'm happy to be correct you.
But why was that the like, why was that the common term?
I mean, partly there was.
Just not the technology or visibility into customers. There was a mentality there too, 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 ramatically in every category.
I'm updating. I'm updating. My mental framework of how you see, how you use is okay, So you go on with the customer, the pricing.
As 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 to sort of make it all work and do an A to Z to solve customer
problems or goals. So if a customers 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.
Well, it all comes down to something called the revenue requirement. 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 returned to investors, so that is the big number. Then from there you slice and dicee 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. If you know I need to collect one hundred from you, give me a one hundred 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 one hundred dollars every month no matter what you use for the most part, 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 revor 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 there.
Every state has a public utilities commission or okay, 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 are you actually talking 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 up because the 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 you know, 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 then only with parties that sign 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, 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 included and only guests. Ye, supplies to it.
So one question I want 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 specially.
Ready 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 that we're representing the criticisms about pricing and things like that.
Yes, 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 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 way to return, for instance, what you're you're paying for equity and and and that's sort of steady state. And then things can get controversial if something goes wrong on a power plant or 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 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 cool.
That's how like just the mammoth that's just our distribution system. 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 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 our scorel starts gnawing on things. Right, there's a lot in that price of an electric bill. So if you have an intermin 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 plant or purchases on the market for capacity, But it all depends on the individual resource and the location to see if it can
bring that capacity value. But at least it can provide a fuel savings, and so that's a smaller part of the bill, 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 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. And I mentioned regulators and sumer eravocates, 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 from you know, from and that brings recreation, it brings 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 eighty year assets, and back then you needed to have an 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 the long duration storage.
So these are like big landscape changing. So you have extras electricity at some point, maybe during the night with nuclear or during the day with solar, and use that electricity to lift water at a high elevation and then at night it rolls downhill and then it 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 applying 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 in 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 in Arizona, and so a four hour mixed with tracking solar can provide a decent amount of capacity value in Arizona. Switch to say Midwest, Well, where it 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 it could these very cold extreme weather events could last for many days. So that's a very different set of economics and outcomes, and so really depends on where you are. In general, batteries and around the four
hour duration have really come a long way. Paired with renewables, especially in those markets where you have that summer peak, are 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 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 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's great, and then a tire 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 build out don't like the current market structure model because they say, look, we have these 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 really hard to justify the planning and the upfront cost and 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 tracys 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 thousands exactly 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 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's relatively calm and flat to maybe 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 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 Urcott, we're not going to have something specific for
capacity at all. Others have capacity price signals, and so that's the inherent tentions of where do you get that revenue to recover those big investments.
So just on this point, you mentioned or Cott, and so that's Texas, right. So in Texas, basically it's every one 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 got right as long as they show up, and there's big penalty 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 types of conferences.
Yeah, I only hear about them conferences.
Yeah, the 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 behind 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 as dispatchable research.
Think like smart thermostent, 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 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 demand response events during peak times. But it's not like fifty percent 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 thermacy.
Let's feel about load growth. So obviously 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 want to build a plant somewhere in 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 large customers coming, we would put it in what we call our integrated resource plan. So you'll often hear IRP. 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 here at the whims of what is trying to be interconnected in queues and so forth, and so there has to be certain bilatter agreements that the customer would have to make perhaps up. 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 a new manufacturer, they can't do that overnight. And then you have the new complexity of
supply chain. There's supply chain constraints on some key equipment out there.
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 eighteen thousand 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 take 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 reshore. Manufacturing.
Ye, 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 running a data center versus batteries might not necessarily fit into this box, but sort of run of the mill manufacturing base.
Ye, most standard manufacturers are a lot smaller in size than a data center spertusly some of the newer data centers, and you can think some AI data centers, those can be a gigawot in most manufacturing. As you know, five hundred megwats tops typically you always have outliers and for the most part it's below one hundred megawats, 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 can move quicker. But this really impacts especially smaller utilities. Douke has a huge system, so you know, we can absorb some of this, But if you're a smaller utility and you have a two gigawat peak and all of a sudden a data center comes in with a gigawat load, that's huge. And what if they don't materialize, or what if they're in business for ten 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 center companies also they have clean energy goals. So how do you start to marry these complexities?
Yeah, how do.
Multi multi dimensional longs like how many more hours?
A lot of tools and tools. You start with smart contracting and tariffs on 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 just like a purchase commitment kind of yeah, pretty much, so you know letter and then there's longer term agreements too where and these are newer where if you said you were going to use five hundred megawats and you're only using two hundred, you've got to compensate for a portion of that because we've had to build new 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 hyperscalers and new Core earlier this year. That gets into execuve 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 in the right time if you're thinking about you individually and your maximization and not societies and so because because a lot of times your grandfather did once, you make that, so you'll be protected for ten, maybe twenty years, So you probably made the right individual purchase decision. Net metering has been reformed and most major markets are ready 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 COQO saving 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, it's always good to calculate what you're paying per CO two 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 was solar in Connecticut.
So the future of solar is centralized solar farms or if like somebody.
Like that, you know, we need 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 thermostart 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 and partnership with the solar industries, 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 power Pair, 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, and including on like commercial industrial scale, and then you also absolutely need the centralized large scale that brings us 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 cost, tons of upfront time getting these new reactors on what happens to 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 out of 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 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?
Great question. 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 pull outside your house, And so you break this all up, and then you have certain methods to know, well, hey, this customer class is using a lot more transmission first distribution,
and so you have these allocations. From there you figure out, well, what pricing can I set to recover the revenue card, 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 costs for all
the customers in that jurisdiction. So that's why it's really important to collect that revenor 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 one hundred dollars.
Right.
And in the past, it was all value metric 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 rates. 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 price and 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.
Last question. When Tracy gets a big discount on her electricity because of her solar, 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 let you directly because this is a member. This is a fixed infrastructure system. So this is not like tennis shoes or candy, right. This is a big network, one of the largest, most complicated networks, the first network of modern civilization pretty much. And so that ncent infrastructure gets just you know, spread out to others.
Right, So cry harder about con Edison. Joe, I'm free. 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.
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, and there's the production. And 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. Well, just move other people.
Well, he did say it was marginally helpful the fuel cost, but to your point, the fuel cost 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 like 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 so.
Also are here just very interesting hearing the different types of because there's two things, right, There's different types of electricity market structure, and then there's also different types of markets by virtue of their weather. It's about Arizona versus
the Midwest versus the southeast. 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 others stuff.
They've got a lot of wind, they got everything. But what they don't have is any guaranteed payments. That's spare capacity that is not getting paid during most of those sunny days, but then on the day when it's that crazy sunny or crazy snowy or whatever, suddenly it 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?
But no, I don't think it even just did it. 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?
And it's not really that they get 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 fascinating I guess question marks about how this evolves.
Or figure out a new way to design the grid or new storage is probably what we really need.
Battery breakthrough, ye, 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 Wisenthal. You can follow me at the Stalwart, Follow Lon Huber on Twitter at Lon Huber. Follow our producers Krman Rodriguez at Kerman Arman, dash Ol Bennett at Dashbod and Kilbrooks at Kilbrooks. Thank you to our producer Moses On. For more odlogs content, go to Bloomberg dot com slash od loots, where you have transcripts, a blog and a daily newsletter and you can chat about all of these topics twenty four to seven in our discord discord dot gg slash odlines.
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