¶ Intro / Opening
Latitude Media covering the new. The energy transition.
Michael, I expected a little green from you on St. Patrick's Day.
Well actually this is green. Remember that thing from a few years ago? Like what color is the dress?
Well and the original colour for Saint Patrick's Day was blue.
Oh,
Really?
Yeah.
Huh. I I did a trivia night with my son the other day, that was one of the questions.
All right, there you go. Well, I did a little research because I realized I didn't know anything about St. Patrick's Day, and it turns out that he was a Very humble missionary who loved his enemies. And so I guess I can't think of a better person to celebrate for today's recording about the fights and energy right now.
Yeah.
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¶ Intensifying Energy Fights & Biased Narratives
From Latitude Media, this is Open Circuit. If you've been following or working in the energy business for a while, you are no stranger to a fight. There have always been heroes, villains, and strong opinions. Scrappy renewables versus entrenched fossil fuels, subsidies versus free markets, activists versus pipelines and coal plants.
But lately, it feels like the fights have multiplied and intensified. People are arguing about everything: the speed of the transition, how to fix broken electricity markets, whether renewables raise or lower power prices. whether AI data centers are about to break the grid. And honestly, I never thought in 2025 the sitting president would still be stoking a fight over whether CO2 warms the planet, but here we are. And this week we're gonna face some of those fights.
Head on. Michael Sembelist of JP Morgan is back on the show. Every year, Michael publishes one of the most widely read deep dives on the global energy system, cataloging the trends, numbers, and contradictions shaping the transition. This year's report is fittingly called Fighting World. So today we're gonna walk through some of the biggest showdowns in energy right now and arm ourselves with plenty of data. That is all coming right up.
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Welcome to the show. I'm Steven Lacey. I'm the executive editor of Latitude Media. Jigger Shaw is my co-host. He's a longtime clean energy investor, podcaster, and provocateur. Jigger, how are you?
Ready. Ready for the fight.
Yeah.
Although I I I I suspect we're gonna agree a lot more than we'll fight.
Well, joining us in the third chair this week is Michael Sembelist. He's the chairman of market and investment strategy at JP Morgan Asset and Wealth Management and the author of the widely read Eye on the Market newsletter. It is if that is not in your media diet. uh eye on the market, then you are definitely missing out. And every year he publishes this sprawling analysis of the global energy system.
Packed with charts, arguments, sharp obf observations, and it is red meat for us here on Open Circuit. So Michael, welcome back to the show.
Thank you very much.
The title of your opus this year is Fighting Words. You frame it around tensions, debates between decarbonization, energy security, affordability. What made you focus on fights? What's different about this moment?
I mean I j I just the vast majority of the people that I meet and read. are in in one of three corners, you know. Um r renewables only. Fossil fuels only and nuclear only. And like I keep expecting the Venn diagrams of those things to start to converge and they don't. There are some people on LinkedIn and and I've c I've curated my LinkedIn feed to where I get a lot of really good energy stuff.
But there are some people that will only tell you one side of the story. And uh for instance in Europe and in the UK specifically, um, look at how much coal has been displaced. But there's never any discussion about needs other than the grid, and there's never any discussion of power prices, and it's everybody's just kind of talking about one segment of of one part of the pie.
Who's winning the argument right now? Like who's the loudest?
Mm.
Well it depends who you're listening to. There are people that wake up every morning and scan the universe for tidbits of information that confirm their point of view. And those are the worst people to listen to. Be um and and I I'm going to mention that, I'm going to name names here. Um there's a guy and this has nothing to do with energy, but there's a guy named Gary Marcus and
I know I read Gary, yes, I know him.
Gary wakes up every morning and tries to find information that that po that ha that is related to flaws in agentic AI. um and evidence that our artificial intelligence isn't isn't really a thing. And and he's he's in my view, he's lost a lot of credibility because you you're you're not gonna get any news from him that's positive about what
agentic AI is capable of doing. And in the energy space, there's too much of that. There's too many fossil fuel people that are publishing reports on bird deaths from wind turbines. um and as if as if that was kind of the ultimate climate barometer. And so if let's let's look at the data.
¶ Transition Pace, Supply Chains, Tariffs
Uh the energy transition is is moving along at a linear pace in most countries. In some countries that linear pace is a little bit faster than others, but something in the neighborhood of 0.7 to 1.5% a year. And I'm referring to the annual rate at which renewables are displacing everything else. And so um the transitions are moving. There's a lot of noise and yelling and screaming, but the transitions are moving and obviously
are set to move a little bit more slowly now that the president and his team have cut subsidies for wind, solar, and EVs. The US is at the lower end of the range of about point five. And in country in Europe and in China, we're looking at a faster pace, but that pace is still about one and a half percent or so. And I'm talking about renewables as a percentage of useful final energy. Not just the grid, but the whole thing.
So it's continuing to move forward. There are a few, there are a few things going on that suggest that that pace may accelerate a little bit. But you know, it's still a linear transition. It's not a it's not an S-shaped technological Silicon Valley kind of transition.
So let's talk about what's happening on the ground. I mean, last year we talked about a bunch of different constraints when you were on this show. You know, we we were facing equipment shortages. Obviously uh tariffs had been recently announced. There were the transmission bottlenecks, there still are major transmission bottlenecks, long interconnection cues, coming federal policy swings. A year later, what's your view on like what actually mattered most?
And were there any that turned out to be less impactful than people feared?
You know, the the tariffs the tariffs are a big deal, uh because By and large, the semiconductor industry has ended up exempt from tariffs. Eighty percent of all goods related to what OpenAI and the hyperscalers are doing are exempt from tariffs. Um, that's not the case with respect to the grid. And so everything related to switches and motherboards and transformers and copper wire and and that's to me, that's the biggest surprise of what the administration is doing.
I can understand them wanting to tariff consumption as part of this argument that Bessant has that there's too much consumption relative to production and investment. But They're they're tariffing all the transformers and other equipment that would otherwise be the widgets of uh faster electrification and things like that. So that's that's having a a cost.
Um and if you look at the PPI, um things related to the grid have the highest rate of inflation of almost all the 40 or 50 categories in the PPI report. So that that definitely matters. Um and and I look I think the The bill that they passed that cut the subsidies will matter. We're already seeing some early evidence that EV adoption rates in the US are slowing in contrast to what's happening in the rest of the world.
Jigger, what do you think mattered most and least for the first time?
From last year? Yeah. Well, I mean, I think that I mean, I like you guys have been talking about, like, try to get to the truth first and then, you know, then we try to evaluate everybody's narratives. Um, it's clear that like on the physical supply chain, just understanding not the cost, but whether we can actually make enough widgets.
That I have now come to the conclusion is not a problem, right? So for instance, when you look at India, Malaysia, Thailand, the amount of transformer manufacturing capacity that it goes underutilized in those markets. Is so large that we can easily drop our availability back down to 52 weeks. And you've got companies like Air Energy and others in. The United States that have like gotten venture capital to do that, right? So that's really more of a trust game, right? People in this sector.
don't buy something out of a catalog that they they don't know anything about, right? They want to meet the people who making the transformers and use it and inspect it and make sure that they, you know, really trust it. Right. So those those kinds of things have to happen.
I also think that that's true on the battery supply chain. It's true on the solar supply chain. It's true on a lot of those other things. It's most certainly not true in the natural gas supply chain. Right. So I think you've seen an extraordinary tightening of that supply chain. And Mitsubishi has said they're gonna double their production. GE has said that we're gonna debottleneck stuff, but we don't trust you guys'cause we lost a lot of money in two thousand six.
¶ Data Centers: Grid Fights & Capacity
And Siemens, I think, is in the same place, right? So like so we'll see where that goes, right? I think the other thing that I find fascinating around where we are in this moment is that is that the turf.
fights that Michael's talking about actually is leading to bad decision making and conversations, right? And you see that within the PJM conversations around data centers. You see that within ERCOT and MISO and the way in which these different electricity markets are operating, like they really do have religious fights. and not data driven fights. And so that part of it was surprising to me and was not something that I would have expected from people who are professionally running these markets.
was a paper that I think started at Duke.
Tyler Norris. Yeah. Yeah. It was like one of the most widely cited papers.
Now now, like citations don't always equate to accuracy. Like uh one of my favorite ratios is the number of citations uh academic citations on carbon capture divided by the actual metric tons of carbon capture, which is the highest ratio in the history of science, right? And and green hydrogen's number two. But um, you know, so Tyler wrote this piece. And then followed up with a similar broader piece now because he's at Google. And the premise is that.
With capacity factors averaging 70 to 75% uh within the combined cycle. gas network in the United States, that there was ample room to add more data centers to the grid, um, increase efficiency as long as those data centers agreed to be curtailed or have their own backup generation at moments of peak demand.
And
Uh IMM, which is this monitoring organization that's the oversight entity for PJM, came out with a scathing response basically saying that this was all nonsense. uh and that you had to have dedicated capacity for all these data centers. Um and and and what struck me was they didn't really have any economic skin in the game. They really truly believe that this Google thesis is nonsense.
And um and and and I spoke to Tyler about it. He said, look, we're s we're still trying to figure out why they had the response they had, because they obviously don't agree. But to me, that's one of the really critical issues as we sit here right now. Because if data centers are going to be closed off to joining the grid and they're going to pursue their own behind their meter generation. Eighty percent of that's gonna end up being gas.
Well, and this is where the Department of Energy not weighing in is a huge problem, right? So Google has proven this thesis to a number of players. um through contracts, right? So whether it's in Nevada or whether it's in Minnesota that they announced recently, they announced a deal with DTE and Michigan. And and all of those contracts are under this thesis.
Here is the available capacity. Here's the number of hours that we need to shift. We're gonna fund the form energy battery or the grid enhancing technologies or whatever it is that we need to do to free up this capacity. And that's gonna be cheaper. Right. And so that is exactly what. their thesis, that's exactly what they're signing contracts for. And the independent
Market Monitor and PJM has just gone off the reservation. I mean, they are now in a place where they are anti Bitcoin miners. And so they've limited the amount of demand response that Bitcoin miners can do, even though Bitcoin miners are fully in effect in in demand response markets in Texas, right? Um they're anti, they're just anti-demand response. I get it. Like that is their religious, you know, cross to bear is that they don't like any demand side measure.
Right. And you know, and I but like but there needs to be an arbiter of the science. Like DOE should come in and say, okay, here's what their their arguments are, here's where these arguments are, here's where the data is. And so
I think they did the opposite, right? Because that White House meeting with the P J M governors recommended that PJM hold these kind of specific auctions instead where where the generators would have to fully pay for essentially amortizing the cost of new generation.
So yeah.
There there's there hasn't been a lot of leadership on this front. Again, I'm surprised'cause usually When you when you see people retreating to certain corners and you look under their hood, usually there's underlying ec economic self interest that's behind it. Whereas in this case, it's it's it really is a fundamental disagreement in terms of how the grid functions. And I and I'm I take the IMM report. A little bit more at face value than than you are.
The reason I care so much about this is because when you look at the data from twenty ten till today, right? And you look at retail electricity costs, right? Which is what's animating everybody, right, is this affordability narrative. Um, generation costs are basically below the cost on an inflation-adjusted basis of where they were in 2010. Transmission costs are also at or below where it was in 2010. So the entire game has been distribution costs.
Right. And so if you don't believe in demand response and you you only believe in new generation, upgraded transmission to ship that generation and upgraded distribution to to take it the last mile. Then you're saying that there's actually no way for us to arrest the rate increases that we have today.
Um, because like you need new technologies by which to get more out of the distribution grid we've already paid for. And for a lot of utilities, that's batteries. For some places it's, you know, demand response. For other places it's other things. But you know, for the independent market marketers say we don't believe in that entire body of science. I feel like, okay, like someone's gonna have to step in here. It's not gonna be me, but someone's gonna have to step in here.
¶ Data Center Load Flexibility
Well there's another secondary fight um below the surface and that is
How
demand response will even be used within these data centers. So is it going to be compute level flexibility? Are folks going to use batteries essentially to curtail Um and I think you know, Tyler Norris basically pointed out that like if you curtail for a couple of hours of year a year, you could open up a hundred gigawatts of grid capacity around the country. And Google uh has been working on demand response for like five years now. I mean they've been
They developed this product called uh carbon-aware computing, and then they used it during the uh European energy crisis after Russia's invasion of Ukraine when there were gas supply shortages. They've done it in the Midwest at different data center sites. So I think that they believe that c you know compute level demand response is a possibility.
Bye.
Um, obviously it's a a certain type of workload. And um I think a lot of people are very skeptical of the idea that you are going to go into these AI data centers and ask them to flex compute. when uh they have to maximize the value of these GPUs. And so the question is where is this flexibility gonna come from if we really believe that it is a true resource on at the data center level?
You know, I the the evolution of the conversations I've been having with data center owners has changed. Um, when it started a couple of years ago, it was demand response is impossible. Don't ever mention it again. It's the plague. And then, you know, over time they've kind of softened. But Uh the sense I get, and I also have talked to a lot of the people within JP Morgan who who who run and operate our own offsite data centers.
A lot of creative things can be done with uh frontier model training workloads to adjust those. But most inference workloads, particularly those that support the payment system and other kind of, you know. 24-7 batch processing are very difficult to to curtail. And so you would you would need you would need some pretty immediate backup on-site generation to handle that transaction.
Oh I mean I completely agree with you that no one is no one is flexing inference loads. The whole thing was such an exercise in ridiculousness. We set standards for industrial load in the 1940s, and the data centers are violating those standards. You cannot shift your Use of electricity from 20% utilization of your chips to 100% utilization back down to 20%.
With, you know, in milliseconds. Like that is not allowed. That is illegal. You cannot use power that way. They need to see certain ramps. They need to see the things. So I think software will be used to fix. the illegal nature of how data centers are using power. But I think the notion that you're like gonna take chips that are depreciating in three years and say, we're not gonna run them for these 12 hours um when you can just pay for battery.
According to the hyperscalers, they're depreciating them over six years, but that's not true.
Well, that's core weave, but I think that like for a lot of other folks they're at three years. But I think but in general I'm just saying I think you're always gonna find it cheaper to build batteries. to build physical infrastructure that takes the load off the grid, then you are gonna be, you know, shifting a lot of these, you know, um AI related loads. Like separate we're like the cloud, et cetera, that's different.
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¶ Strait of Hormuz Oil Impact
Let's turn to the biggest story in energy right now, which is the fallout from the war in Iran. Uh closure of the Strait of Hermuz has created the biggest oil supply disruption in history in terms of volume. And the big question is: how will this play out relative to other major oil shocks like in the 1970s. Um what is different this time, Michael, is that uh the the energy intensity of global GDP has fallen. So how does that why does that matter for potential outcomes here?
I mean it's a it's a mitigant, right? I mean the oil the um oil intensity of GDP globally and in the US peaked in the nineteen seventies or right around the time of the Iranian Revolution. Then it fell by a third by nineteen ninety's Gulf War. But you could still make the argument at the time that oil intensity of GDP was was pretty high. And it's fallen another two thirds or so since then. And uh which is a byproduct of more efficient everything from cars, planes, refrigerators.
lighting, you know, uh window standards, et cetera. Um that's the primary issue. The secondary issue has been some switching from coal to gas, and then the tertiary benefit has been from the advent of renewables in certain places. So you now have a much lower oil intensity of GDP. And in particular and then, you know, you have countries like China. I mean, I I'm I'm amused by the administration's contention that China should be offering some protection in the straits.
By volume, yes, they import a lot, but as a share of their energy consumption, they're among the lowest countries in terms of exposure to all of this because fifty five percent of useful final energy in China's coal. They get another thirteen percent or so from renewables and another three or four percent from nuclear. So China in certain ways is more insulated um on a normalized basis than other countries are
Well, they also have their new overland pipeline from Russia bringing in gas from from that period. So LNG is
Чана особи. fifty percent or so of its gas consumption.
And it's slowly increasing fracking within the country.
So China's actually way more insulated here than a lot of people think. And so one one of the th we had a webcast yesterday for our clients and one of the charts that we showed is let's look at, let's synthesize oil, uh, oil imports and gas imports. um oil and gas consumption as a percentage of overall primary energy consumption, and then oil and gas consumption as a percentage of GDP. And then we looked at all the countries and you end up with
parts of Northern Europe and Southeast Asia that actually have the highest exposures, but not China and the US is at the lower end. That said, You know, a fifty percent increase in Brent has translated into a hundred and fifty to h percent increases in jet fuel. And one of the crazy things about the energy market is that oil is a global market.
So for as much as the US happens to be a a marginal oil exporter at this point, the US is suffering many of the same economic shocks from high oil prices as every other country in the world, even the ones that import older oil. Whereas the gas markets, very different, right? So LNG and pipeline import prices in Europe and Asia have gone up a meaningful amount, and Henry Hub has barely changed. So when when you kind of decompose all of this.
and normalize the numbers, you get a better picture. And and one of the things that we did was to look at those at our sensitivity index scores and they match up pretty well with changes in in regional equity markets since this invasion began. In terms of where we go from here.
¶ US Gas Market Dynamics
There's nowhere else to go but down.
Yeah, I mean I'm I'm trying to think of a weirder spectacle than what took place over the weekend. in which the president after after kind of belittling, insulting and tariffing most of the OECD for the last twelve months, then reached out to them for help on on uh Strait of Hormuz protections and everybody kind of shrugged. I I I can't remember the last time I saw something like that from a geopolitical
And then he came out and said, Oh, it was just a test. It was uh we didn't really mean it. This was just a test for our allies. Uh
The emergency broadcasting system?
Uh so that I'm I'm really kind of puzzled by that. Um I had uh we had a briefing here the other day with some former army uh general joint joint chiefs of staff who kind of d walked us through what it would take to do destroyer accompaniment of um of tankers and container ships. And um it's it's it's hard. It's real hard. And they reminded me that the Lend Lease program in World War Two, thirty percent of those ships got sunk. So the attrition rate
if challenged by drone swarms, mines, missiles, um, and thing and speed boats um is substantial. And um so I kind of understand why nobody's raising their hands to do it.
I'm kind of curious about what you guys think about uh how this may feed into the US gas market. We are s at capacity for uh LNG export facilities, and so that's one of the reasons um why, you know, not more gas isn't going overseas and prices haven't risen here. Do you expect that to change in any way? Is this a long term insulation? Uh
There aren't as many long term contract counterparties left to sign which will which make some of the newer liquefaction and gasification products harder to finance. So Freeport LNG and a bunch of all those other companies took advantage of the market a few years ago and got a lot of those contracts signed.
I I think some of the projects that are on the drawing board are more uncertain because of how they're gonna get financed. It's a couple of billion dollars each to f to to build those kind of facilities.
Well just to just to poke a little bit at your comment, I just wanna make sure that The assumption that you're making is that no one in their right mind would build a fully merchant L and G facility, that you would need an off tick agreement. And I think you're right to make that assumption. And the and and I think that when you look at the Straits of Hormuz and twenty percent of global LNG being trapped, right? And Qatar really shutting down their uh their facilities.
I don't know an a a single country that I'm talking to right now that is excited about addicting their economy to natural gas right now. Right. And so if they've got an import terminal, they're saying, Great, we're gonna use it, we're gonna buy natural gas and we'll build a power plant at the import terminal, we'll build an industrial park at the import terminal. But they are now canceling
the billions of dollars that they would have to spend to build an inland natural gas distribution infrastructure. They're saying, why would we move from coal to a 50-year investment in an addiction to natural gas. This is destroying the LNG thesis. The LNG thesis that was basically we need to help the environment by converting people from coal to gas.
Like people are looking at this supply chain and saying, I don't want to invest in a fifty year investment cycle for converting from coal to natural gas.
Yeah, so L and G has now reached like ten percent of US production. Um and I it so for all the reasons we're discussing, I I I think it's gonna be hard to go much higher than that. Plus you've got domestic lobbies in the chemical c industry that are pushing really hard on the DOE to prevent that number from going too much higher
Oh, I heard from them when we were serving. Right.
So the other thing too though is that there's a little bit of confusion. Twenty percent of oil moves through the strait. And twenty percent of LNG moves through the straight. That's right. The difference is that LNG is only a s is only fourteen percent or so of total gas consumption. So the it's only a three percent number. Like so only three percent of global gas consumption is trapped because LNG only represents ten to fifteen percent of global gas consumption.
No, I'm not disagreeing with you. I just want to make sure that people understand that like This has been a project that we've been pursuing since two thousand and nine, right? Hillary Clinton was secretary of state and we went to all the countries around the world and said, We figured out fracking, we're gonna have a ton of natural gas. We want all of you to invest billions of dollars to
build natural gas import terminals, LNG import terminals. And, you know, the DFC at the time, right, OPIC funded a lot of those import terminals, all that stuff, right? And so I'm just saying that this conflict. has caused everyone to pause and say, do we still want to continue that 50 year project? Or are we gonna like stop here? We're still gonna use tons of LNG. No one's going back on the stuff they've already said. But are we gonna actually pipe gas to the rural communities in our country?
and build all those pipelines out when it takes 50 years to amortize that investment.
Yeah, do you buy that, Michael?
¶ Electrification, Solar, & Sovereignty
I don't know. I don't know. Um when you look at the numbers. the the potenti the the geologically recoverable amounts of gas around not just in the US but around the world that the potential gas committee keeps revising, those numbers just keep going up. So from a from a purely mercantile economic perspective, the the the gas thing still has momentum because of the amount that that are c increasingly deemed recoverable around the world.
But the question is is whether you believe the electrostate technologies that China is pushing, that you talk about within your report. are gonna compete with natural gas consumption because the state has to invest a huge amount of if you build it, they will come money to actually addict those rural communities to natural gas.
And the the the r the real critical question to me is, is electrification compared to solar wind hydro batteries. So I I'm going to put a proposition out there and we're not going to solve it on this call. But even at a higher, even assuming an LNG import price of somewhere around$10 a BTU. The solutions that we're talking about are more expensive than gas.
So th and let's just take that as a premise, okay? And I've run my own numbers, other people have other numbers. You know, whenever Ember has numbers that they publish, they come out in a different way. I think sometimes their conclusions are predetermined. But
Uh i it the the question is how much of a premium is it worth paying for in order to have the national security benefit of not being subjected to the kind of price wings that we're seeing? Like the biggest mistake that I've seen people make.
And this is where we're probably gonna all fight with each other. The biggest mistake that I've seen people make is looking at these nonsense marginal, you know, L C O E numbers from Lazard and saying, Okay Wind, solar, batteries is a much cheaper solution than gas, except it doesn't do anything to tell you about the systemic cost of meeting grid demand in a more electrified
I'm not I'm not arguing that point. What I'm arguing is is that on a remember, we're talking about the fifty emerging markets in the world that import oil and LNG. That's who we're talking about here, right? We're not talking about OECD countries, right? They've already built their LNG uh import terminals, they've already built all their inland natural gas infrastructure. We're right now we're talking about Kenya. or Tanzania or Nigeria or other places, right? So now the question becomes, right?
They don't have the money to begin with to build out all of this natural gas infrastructure, right? They're getting pressured by XYZ lobbyist or this person or that person to do it, right? So now like it was hard enough for them to raise the money to be able to do this from private sector capital sources, right? The guarantees, the this, the that, the like IMF, the whatever. And so now the question becomes if you're an industrial facility in you know inside Kenya.
My sense is that the government is less interested in spending all this effort to like get you subsidized natural gas subsidized by the people of Kenya than they are facilitating. an off-grid system. Like this is not about Ember versus like Lazard. This is just about like it's really freaking easy to raise$20 million.
to actually like build a microgrid in rural Kenya right now. Like I could find fifty people to invest in that. It's not easy to get a billion dollars to build out if you build it they will come natural gas.
Right, okay. And I yeah, I just I'm not sure how much discussions of rural Kenya, Tanzania and Mozambique are gonna be moving the needle on global energy consumption.
That's where the growth is. That's where the population is. Everyone else has got a negative birth.
Birth rate. Population, yes. No, no, I disagree with you. I disagree with you. Population, yes. Energy usage per capita, no. So I think you're wrong.
Well so in this environment Who on the electricity side? What's gonna win? Is it j is it gonna be a lot more coal burning? Do you think that sort of a configuration of renewables and batteries will benefit? Look.
This solar adaptation is skyrocketing. Skyrocketing, right? And and particularly when compared with paired with batteries. And I would expect that trend to continue. And that's happening in Pakistan and it's happening in developed markets, happening everywhere. Um and and courtesy of uh the Chinese government, which has mandated their solar companies to operate at deeply unprofitable margins that would make them go out of business in any other country in the world.
So we have this peculiar situation where you've got a bunch of money-losing Chinese solar companies that have built massive amounts of capacity, which are facilitating the this solar transition. And if you're from the from a climate perspective, this is fantastic.
Well, but let's but let me push you a little bit there. I have used the same argument that you're using. So I totally agree. So to be clear, I'm not disagreeing with the fact that these companies run profitable. But I think if you benchmark them to the manufacturers in India, Turkey, Ethiopia, Jordan that are not unprofitable, you're adding five cents a watt to the module price. So instead of 10 cents a watt, these are 15 cents a watt modules. At that price.
It's still damn competitive, right? And then and and and the battery costs are, you know, coming down as well. So if you add another ten dollars a kilowatt hour to the cost of the battery, they're more profitable. It's still Penth. I think the bigger thing that was in your eye in the market report, which I found fascinating, was you were saying basically that the trade credit that the Chinese government is providing all these countries exceeds the US Marshall Plan.
Yeah, it's enormous. It's the the amount of money that they're pushing out. um is enormous. And that the the chart that was most resonant to me was the one that looked at the amount of capacity in solar, EVs and wind, even compared to Chinese consumption. Um was massive. So they they have built so much capacity, there's almost nothing for them to do with it except provide export benefits to move that stuff overseas.
And the part that I think you didn't really cover in your Eye in the Market report, which I think I care more about, particularly on the national security and the economic security side of things, is that for many of these oil importing countries, right, you've got
James Gottman, who've taught who, you know, is one of the co-authors of the New Jewel Order that Carlisle put out last year. What he's saying is that these fifty emerging market countries that are the largest importers of oil and natural gas right now are um are basically not wanting to addict themselves to this importation because you've got to use
you know, like your your foreign currency reserves to import this stuff and they'd rather use that foreign currency reserves to build data centers or or do things that are more productive for their economy, right? And so a lot so there is this big trend around energy sovereignty. And localization of these supply chains.
I think to me, the eas there there's the easy part and the hard part. The easy part here is Adding wind solar battery and and hydro when you can do it. to the grid to displace gas and coal when possible.
¶ Decarbonization, Transition Speed, & Additions
The heavier lifting comes in when when you're talking about the other two-thirds of energy consumption. which is not electricity based, at least right now, but has to do with thermal heat used for in industrial production, for home heating, for offices and for transportation. And so that's really where the rubber hits the road in terms of whether or not
you can meaningfully accelerate the electrification of these economies the way that China's doing, right? So China is is right now showing the fastest pace of electrification. um in the world, um, the pace of electrification is much slower elsewhere. It's stagnant in in the US. And in a lot of the emerging economies, it's also pretty stagnant.
But if you take what you're saying to its logical conclusion. I think you're making a comment there on net the net zero uh challenge and like the decarbonization challenge. But the argument that I'm making is that is that the technology exists and the I think the paybacks exist.
To match China's electrification level. It may not be a hundred percent, but I think that everyone in the world can increase their electrification levels by ten percentage points in an economically productive, profitable way. Right. The the technologies exist to do that. And that, if you believe that, is a game changer, right? Because you've got this Straits of Hormuz issue.
You've got everyone rethinking everything on the energy security, national security point. With a point that Jason Bordoff, right, from Columbia is making is that, is that this kind of disruption, which was what occurred in 1973, had a far bigger impact. on moving people's behavior than the Paris Agreement in twenty fifteen. So we are entering another period of this, you know, st instability, right? Yeah.
I just I what I what I want to continue to do is is to focus on the specifics of what we're talking about, which is When when we're talking about electrification, um, a big part of what we're talking about is the benefit of things like industrial and residential and commercial heat pumps. Which have like a three to one.
Or electric vehicles.
Or electric vehicles. And the the issue is is is the the cost per joule of electricity in a lot of countries in the world. is a lot higher than the cost of of a joule of natural gas or petroleum. And so that's so that that's w and that's if if what you're saying we would see we would be witnessing a faster transition than what we're witnessing. I'm judging this simply by looking at at what we're seeing as the facts on the ground on a country by country basis and we track this for
95% of the world's energy consumption on a country by country basis. And we're looking at the speed with which things are being electrified and the speed with which um renewables are displacing. other things as a percentage of final energy. And if the if the incentives to electrify were as as great as they're sometimes advertised, I just I believe that we would be seeing a faster transition.
But I I guess what I'm saying is I think where Vaclav Schmiel has been proven to be wrong over and over again, is that when he looks at his historical
I don't know how that came in here, but okay.
Well, because he's the main perpetrator of this th like school of thought in my opinion, is that he's basically saying energy transitions take a lot longer than everyone thinks they will. And I think that he believes that what we mean to say is that when you look at your range of point five percent to one point five percent, right, electrification.
Like that, we mean to say that electrification has to happen at five percent. But we don't mean to say that. I think that the underlying data shows that, like, for Places that, you know, are petrostates basically, which is what the United States has become, right? You're at you're at 0.5%, right? Got it, right? Because you've got cheap natural gas at Henry Hub. But for places that are importing these fuels, you are closer to 1.5%.
The difference between 0.5% and 1.5% is massive on an annual basis where you're like increasing, right? And that I think is why China claims to have a lot of overcapacity. Or people accuse them of having a lot of overcapacity, but it's not clear to me that they do have a lot of overcapacity. I think with this, you know, like Straits of Hormuz issue and then Ukraine in twenty twenty two, there are a lot of countries that are oil importing and LNG importing countries saying
We're gonna be closer to the 1.5% number. We're not gonna be at 0.5%. And we're gonna make sure our policy aligns with that because it's in our financial and economic security best interests.
You also have unf you also have some unfortunate countries like Taiwan, which are not just oil importers and gas importers, they're also coal importers. Totally. And ninety five I think something like ninety-five percent of energy consumption in Taiwan is imported through two easily blockadable ports.
Well, they were dumb enough to shut down a couple of nuclear plants early, which they're now trying to turn back on.
I just wanna step back And ask a really simple question that I think a lot of people might be asking themselves, which is, are we in? An energy transition or are we seeing energy addition? Right? This is sort of the debate around um how Voslav Smiel has sort of looked at previous uh energy transitions. They're they take a lot longer than expected. And in fact we're um We're actually just like adding renewables on top of continued growth of fossil fuels globally. So, like, what are you seeing?
I try to avoid adjectives, right? So when I look at the chart that we have that monitors all of these different we have like a hundred and sixty charts in the paper. I don't use adjectives to define any of them because they are what they are and one person's adjective is gonna be different from somebody else's adjective. So I I you know, I'm I think it's important for our clients to simply understand the transition math that's going on.
I think that to answer your question, you have to look at China, right? Because China uses more energy than the US and Europe combined and is the pace setter on a lot of things going on, whether it's fission or fusion or solar or or, you know, trying to reverse deter desertification. They are um they're they're the ones that are developing these new sodium ion batteries. Like they're the pace setters here. And
If you're going to get trapped in a war of words, because if you look at shares of energy consumption, renewables are displacing fossil fuels. If you look at joules of energy consumption, they're not. And so you you get trapped in this kind of debate that I don't think it help is is particularly useful um when you're trying to understand the economic benefits and incentives of of the transition itself.
Well this is why I thought your graphic was so important, like, you know, where all three, you know, sides are shooting at each other. I think if you talk to Chinese
Planners.
What they will tell you is that solar and wind can handle the growth of our economy, but they cannot handle the replacement of our coal. Right. That like that that has become crystal clear to them. And so that is why they are scaling up nuclear as fast as they can. And they have done a good job, as you talk about in the eye on the market uh report.
And I think that if they are successful at scaling up nuclear, the Chinese have said that their stated goal is to replace their coal with nuclear, not with solar and wind. Solar and wind is good for growth. but it's not good for replacing the baseload because they also use all the heat. Like the thing about the Chinese is they need the heat from that nuclear power plant too. They don't want just the electrons.
My my my energy report is actually underneath this computer, so I don't want to take it out because it'll be like a Jenga disaster. But um I I will say e based on all the Chinese plants under construction, nuclear. Even if we pencil them out by twenty thirty, their wind and solar generation will massively eclipse the nuclear generation.
2030. Yeah. But through 2040, I mean you could imagine it going much faster. And the Chinese are also installing Gen 4 reactors now too, which optimize heat production, right? And so like because the Chinese are really efficient. at using all of the parts of the coal, right? It's not just the electrons coming out of the coal. They also have combined, you know, um heat and power really from these coal plants, right? And so they need something that replaces that combined heat and power function.
¶ Data Centers Driving Electricity Costs?
All right, I want to move on and see how many other uh fights, controversies we can get to. And I think to go back to Data centers, this is an important one. Um obviously a lot of people are um very concerned that data centers are driving up electricity costs. Um US power prices, as you point out.
have only risen by two cents per kilowatt hour in real terms since twenty twenty two, and um electricity spending is only one point four percent of household expenditures. W is there a disconnect between fears over data centers and actual impact?
I don't think so. Um, you know, I this was the longest section in the piece because it deserved to be, you know, dissected carefully and and and dispassionately. Um uh You know, there there are certain locations within Data Center Alley where some academic work has been done to suggest that there is an impact uh from from data centers showing up on on residential power prices. Um, in other places th that hasn't been seen. What was mentioned earlier is the right thing, which is, you know, the
Some of these things can be very disruptive in terms of the speed with which they're either ramping up or down their loads, and and that has to be solved for. Um I I have a feeling that the the backlash that's taking place'cause there are already some data center projects that are being protested and canceled and things like that. Um, I I have a feeling that that w w sooner than later we'll kind of end up in an equilibrium
where the data center and the hyperscaler companies are gonna end up having to foot whatever somebody else tells them the the bill is. And remember, power on an on a levelized basis is only 10 to 15% of the cost of one of these data centers over its lifetime. Right. Jensen Wang is making most of the money. So i i I I think the hyperscalers will be willing to pay a little bit more for the certainty of power because economically it's more important for them to get these facilities up and running.
but I think you missed the political angle to this, right? Which is that the fact that the data centers are willing to allow the utilities to do dumb things and to accommodate their load in the most expensive way possible. doesn't mean that Republican governors find that to be good for their state.
Right. I think that at some point, and this is again where DOE has failed to provide the leadership that they're supposed to provide, right? Someone needs to come in and say, What Google is doing is actually genuinely cheaper for ratepayers, and they should pay for 100% of their cost of whatever that form energy battery was or whatever it was.
Or it's not, and we should build a bunch of behind the meter recovered aircraft and ship engines behind our thing, right? But I'm just saying that like we're allowing people To sort of figure it out at the local level where they have no expertise whatsoever. A mayor of a city has no expertise, a county commissioner.
has no expertise. A governor of a state has no expertise. And so the DOE needs to come in and say, yes, what Google is suggesting or what grid care is suggesting or whatever these groups are suggesting. is a viable way to do this as opposed to letting, you know, a thousand Twitter handles bloom.
Yeah. I mean, I'm not holding my breath for this Department of Energy to kind of establish those kind of frameworks. Um, everything has become extremely ideological. And um I I I've I think the whole thing that's going on with the with the XII projects in Tennessee and Mississippi and an example of that, where they got a waiver. from the nitrous uh you know the NOX restrictions just because they put
the the um turbines on mobile devices. So all of a sudden they got some kind of waiver. Like th I agree. There's a lot of experimentation that's taking place on a local basis and it and there's no kind of coordinated
Well we've had uh uh some extensive conversations on this, and I want to get your view on what it means for data centers to pay their own way. Um we had the signing of the ratepayer protection pledge at the White House a couple of weeks ago, and the policy conversation is increasingly focused on like how to get data centers to pay their own way. And as uh we've talked about, you can ring fence the cost of you know, data center cost.
But l if you're not um if you're taking a very CapEx heavy approach to grid modernization um and you're failing to maximize the current grid, you could still ratepayers could still pay a lot more money. Um And then to your point, like there are wildly different views on how to build energy on site. Do you want to put you know, d gas turbines on m uh mobile tractor trailers, or do you wanna like
build the long duration battery and batteries in people's garages and, you know, d add demand response and try to get capacity that way. What do you like, what do you make of the the argument right now about how data centers should pay their own way?
¶ Data Centers Paying Their Way
Um I I'm I in my mind I'm look I'm My job is less about some of these policy solutions. It the big picture for me is two years ago. The data centers were simply kind of driving their RV into your garage and plugging in. And now there's like an increased focus on how is this working? How should this work? So I I think we're in a better place because than we were a couple of years ago where nobody was really paying attention to this.
Um and you know, I I think there's a lot more people that are focused now on and
If if they're if they weren't really paying any of the integration costs, whether they're paying seventy or eighty percent, I'm kind of indifferent. Like it's a that's a big move and and and will make things better and will be fairer for the for local ratepayers if we get closer to a point where people are identifying the real incremental generation, transmission, and distribution consequences of having these data centers built.
But I think what you're glossing over on this, I think, is that The electric utility sector is the one sector that has extraordinary amounts of unstructured data that they have not made decisionable. And the one Technology that can do that is AI. And they are the one sector that is not using AI. Right. And so the question becomes, we have all of these people who are running the grid using a slide rule.
We have the ability to take all the smart meter data, all of the sensor data, all the stuff that they have, which is not in their grid operations module, and we can answer these questions in an exact way. And like instead, we're still hand waving. And I was like, why are we hand waving when we have supercomputers at all of the national laboratories? Why are we hand waving when we have all of these PhDs that work there that know how to answer the question?
Yeah, I mean I I'm just taking it as a given that when I see a five to seven year queue for hooking up wind and solar to the grid, that we're dealing with extremely complex routing systems and
We're not. That's what I'm saying. In Texas, they can get them online in 18 months. So it's not. It is it is a human problem. It is not a technical problem. And that the thing. And what the reason I care about this so much is I think it translates into. Private credit, right? And the blue owl stuff. And I think it it goes into what's going on with open AI and whether they're gonna be in business in four years and and like
How does it connect to those? How we'll explain more why does it connect to those?
Because because initially we thought all of these people were triple A credit and that when they came in and they provided deposits into the grid and then they built an AI data center that like they really were gonna pay a hundred percent of their own way. But now those contracts are dependent upon them paying their own way for 25 years, right? If they go bankrupt.
And then no one else decides to go in their spot because one day we all decide, which I think is happening any day now, actually, that these 1000 megawatt data centers are stupid. They've always been stupid. And we need to go to inference on the edge.
And build a bunch of five megawatt data centers and 100 kilowatt data centers because that's where inference is better, the latency is lower. Then you're gonna get stuck with all this infrastructure for this 1,000 megawatt data center with a bankrupt. counterparty, right? And then who foots the bill on that? Right? The ratepayers that are there.
Right. Shorem part two.
No. I mean there are a couple big questions in that, which is like how do we feel about the financial health of these AI labs and tech companies that are pursuing uh a zero sum game in AI. Like do you have your thoughts changed on the bubble dynamics at all over the last year, Michael?
Um, a little bit. Um, you know, if you roll back the clock six months. The hyperscalers and Oracle were financing almost everything through free cash flow. And they finally hit the wall at the end of last year in the fourth quarter, out of nowhere, we had this explosion of data center related financing. And and the the blue owl meta one was really
um explosive for the markets in a lot of different ways. I mean, first of all, it was structured to be off balance sheet, which is kind of ridiculous because it's obviously full faith and credit of the of the less of the you know, the less or and But it it it was the first time that you saw um a lot of data center financing in the debt market. Um, which is a sign I think of things to come. And just in the in the last six or eight weeks
we're starting to see free cash flow margins drop pretty sharply uh on the hyperscalers as well as Oracle. So we're we're getting closer to where there's more and more debt financing that's gonna be needed to continue this build out. Um, and and that, you know, that makes me nervous. Um,'cause that's what so far has distinguished this build out from the fiber build out and from other the natural gas build out and other big capital build outs in the past.
You know, the data center industry still says, what is everybody worried about? We have ninety-eight percent, you know, occupancy and pre-leasing of data centers. But that's now, right? I mean, I don't know where we're gonna be in a few years.
¶ Small Modular Reactors Debate
I have so many different sort of scenarios and data points that I wanna walk through, but I wanna give you the opportunity to pick something from the report. Like what is something that surprised you? Are there any storylines that we haven't talked about now that you think are really important to address? Well
You know, at the at the again, at the risk of getting some of your listeners upset, um we we had a section on SMRs, uh small modular reactors, and I I think that to me Simple. The premises, you can definitely build them. There's some of them are using the same light water, boiling water reactor technology. Others use different technology in terms of gas cooling and things like that. Small module reactors can be built.
The big debate that matters now is are two. Number one, how much is it going to cost? Because you're starting to see TVA and other entities start to price them out. And I would argue that Anything in the neighborhood of a hundred and thirty dollars a megawatt hour would be a home run. I I I Strongly doubt that even the nth-of-a-kind SMRs can get there, but that's what the industry has to prove. Um, and just for context.
A high utilization combined cycle plant in the US, assuming four to five dollar gas prices, is somewhere about eighty dollars a megawatt hour. So um, you know, so that's still a big premium. But at 130, okay, maybe there's some kind of benefits to it. And we're unfortunately we're just a long way away from the kind of proof statements that would let us know where those are going to end up.
And if you remember with Oclo and New Scale and things like that, most of the contracts that you read about are cancelable by the people signing them at the at the eleventh hour if it turns out that the costs are too high. The other thing is this administration is is is likes nuclear and and really wants to do things to help nuclear. They have been gutting almost every government agency related to science, public health.
And energy.
Um, and so I have to and there's a chart we have that kind of shows the the cliff like nature of across multiple like 10 or 12 different government agencies, they've canceled all sorts of special technical advisory committees. And so the question I pose on the report is a little bit more than a little bit of a Is this administration capable and qualified to be overseeing the build out? of of the kind of power technology that if something goes wrong is potentially catastrophic.
when they're gutting the science and public health agencies that you would assume would be part of that review process. And so uh it's an unpopular question and it's not a riskless question to ask. for anybody and given the current environment in Washington, but that's the question I'm asking.
Yeah. I mean weirdly I'm less concerned about safety on the nuclear front just because I think that there's such a culture of safety in nuclear and I'm more concerned about just the deal making. Like I think that, you know, like we were told, you know, six, nine months ago that the Koreans and the Japanese were going to fund VC Summer through, you know, a fund that Howard Lutnick put together that Brookfield was going to operate.
I don't know about you, but right now I don't think Korea and Japan is in the invest in America mood. And so like I don't know that that deal is gonna come together.
I yeah, I mean, okay. Th a lot of people who I trust and and respect, like Alison McFarlane, who's the former head of the NRC, have raised some really big red flags. I would s I I would suggest that anybody interested in the SMR space just take a look at some of the stuff that she's
You're right. I mean that people should pay attention.
And and the the early nuclear industry realized that you have to build bigger.
Premise of the whole renewable transition over the last 15 years has been the learning curve. Yeah. And people should remember the original learning curve in nuclear was don't build them at fifty megawatts, you gotta build them to a gigawatt. Right. And that was the those lessons were learned. And so can you really modularize some of these things? I I I think the the jury is out is the nicest way that I can say it.
Well, so but but I do think that's a big
Topic.
that we should we don't have to talk about now, but I do think it's an important thing to highlight, which is that a lot of the cost reductions have come from the learning curve, right? Whether it's solar or battery storage or even offshore wind in a cells, right? And so the question is, should that be a gating item for nuclear? Should we say
that the United States is not capable of doing large complicated construction projects in a cost-effective manner. So we should be moving to whatever size nuclear plant can be manufactured in a factory. you know, like whether it's Kairos or whether it's Alo or whether it's Radiant or whether it's whatever, like those are manufactured units, right? So should we be
limiting ourselves to things that you can manufacture. And sure, it's gonna come in at a dollar a kilowatt hour for the first unit and then the second unit will be fifty cents a kilowatt hour and the third unit will be twenty five cents a kilowatt hour. But then, you know, the Trump administration is trying to figure out what to do with$500 billion of excess money that they tried to put in the Defense Department. Put one of those things at every one of the bases.
Yeah. Um, we also have a defense action forum here conference that I work on every year. And I I do think the military will probably be the first. place of deployment for mobile SMRs that are gonna be used in remote bases and things like that. But if you look at the history of nuclear submarine, I mean th they're they're price insensitive.
No, no, I'm not suggesting we're ever gonna get to three cents a kilo hour, but I could imagine that if you produced a hundred units. uh per year out of a factory that you could get uh 15 cents a kilowatt hour, which is not horrible.
It's not horrible. That's that's a Manhattan project lift to get to the point where the US can be producing a hundred to a hundred and fifty
I endeavor the United States to be able to do a Manhattan project lift again.
All right, let's run through a few other sectors really quickly. I realize that we might lose a little bit of nuance and depth here, but I just want to go through a couple other sectors and have you you just Describe it, maybe react to it with one word, and then we'll have you briefly explain it.
¶ CCS, Green Hydrogen, SAF Reality
Carbon capture and storage.
Wake me when we get there.
What are the big limiting factors there right now?
The big limiting factors have always been the same, which is that Is that the the vet the the largest emitters, and this is another example of where people get distracted by little things in the corner. The largest emitter is a coal and gas plant. Where where the CO two is call it five to twelve percent of the flu gas.
And so thermodynamically, it's very expensive to strip out something that is five to twelve percent of the air handling. It's an inherently expensive thing to do. And Um, you know, the last twelve months have seen a lot of data coming out that supports that and and and the notion and all this direct air carbon capture stuff is a waste of everybody's time.
Mm green hydrogen.
Similar story, which is the thermodynamics are just really difficult. And m a lot of analyses don't fully load. all of the costs because the electrolysers are just one piece of it. It's a it's a it's a complicated process. Um and um even if the cost of electricity goes to two cents a kilowatt hour you still have all the other costs.
And
Uh the market's telling you something. Every year, way more green hydrogen projects are canceled in favor of other things. than um than are being adopted. And so it's that's been a lot it's a waste of people's time and attention as well. If you could replace the existing brown hydrogen, which is about a hundred million tons a year, with green hydrogen, that would be great.
But all of this other hydrogen economy use cases in transportation and home heating and stuff like that is is is very far fetched.
All right, I'm gonna lump all the fuels together. Sustainable fuels, aviation, motor, shipping.
You know, I there I I I don't have a huge horse in the race. We just have models that are tracking what's going on and we're not seeing anything. And so, um relative to the targets, they're they're kind of not moving. Um uh and so A lot of that has to do, I think, with the with the difficulty in aggregating the kind of feedstocks that are necessary here. Um, you know, whether it's used cooking oils or, you know, and certainly green hydrogen is a very expensive way if you're using that pathway.
And so all the pathways have turned out to be pretty expensive. um sustainable shipping fuels, e methanol, um, you know, the the the The amount of subsidies those industries would need to compete with existing fuel costs, even if you had a carbon tax in place, are extremely high.
¶ Balancing Decarb, Security, Affordability
So I just wanna revisit sort of the the interplay that we talked about at the top of the show as we round out here. And that is there's this tension right now between decarbonization, security priorities, and affordability. When we, you know, go back and read your energy transition paper ten years from now, do you think there's going to be any countries that have mastered all three of those?
To me, the the low-hanging fruit that as as I understand it, right, is if you bucket energy consumption into kind of residential and transportation. And commercial office heating and industrial use. Industrial energy consumption is globally is the biggest piece. A lot of that's been outsourced from Western countries to developing countries, but globally, that's that's a very big number.
And within industrial energy consumption, there are certain things like cement, which require extremely high temperatures of a thousand degrees Celsius or higher. Based on some analyses that I've seen. Something like 30 to 50 percent of all industrial energy consumption is taking place at temperatures that would allow them to be electrified.
And so like to me that that's that's an interesting one because I think five to seven years from now, maybe we look back and we s and uh somebody like me would say, I underestimated the speed. which with with which that energy consumption could be essentially electrified from gas and oil and and then with renewables providing the power to do that. So to me that's That's the most interesting one. I don't know if you guys agree with
I live for that moment, Michael. I mean look, I mean I I totally agree with you. I mean look, I think that ten years from now, several things I think will be true. One is is that um China will have perfected the ability to build nuclear plants not only within China, but also for fifty emerging markets around the world and they'll be exporting that technology around the world.
And I think that is a big deal. I think this the second big thing is as a result of the electrostate stuff that they're exporting around the world, I think you will see zero oil demand growth ten years from now. And so they will have figured out how to either through efficiency or through displacement, like, you know, make sure that we stay at a hundred million barrels a day um of of production. I'm not suggesting it goes down to fifty.
But I am suggesting that it's not gonna keep going up by a million, million and a half barrels a day.
In which case that that oil intensity of GDP number just continues to plumb.
That's exactly right. And then I think the third piece, um, which I am most excited about in ten years from now, is I think we will have universal electrification as per the sustainable development goals. What via the UN. I think the 700 million people around the world today who don't who are in extreme energy poverty, we will have solved that problem within 10 years. And that gives me extraordinary hope because when you think about
where the greatest amount of GDP growth comes from, it's from taking those people and bringing them into the economy. And I think providing them basic levels of electricity is essential to accomplishing that goal.
¶ Political Pendulum: Decarb vs. Security
To grossly oversimplify this If we were to look back and compare the impact of decarbonization versus security as the primary force driving the energy transition, which of those do you think wins out?
I think there was a pendulum here, right? And I and I I your co host is gonna is already getting ready. But I think there's a pendulum. And just let me tell you just from my perspective what it's been like to be doing this job. So for the first ten years I wrote the energy paper, nobody read it. Because from like
two thousand five to two thousand fifteen, I enjoyed it. Most of our clients weren't paying attention. Then all of a sudden they started to pay attention. And under the Biden administration, The pendulum swung really ho far towards prioritizing.
decarbonization over national national security to the point where Manchin, who was without which there would be no energy bill wrote an open letter complaining about how the various cabinet agencies were misinterpreting the spirit of the original bill and overpriorit over prioritizing decarbonization over national security. So now we get this kind of crazy pendulum to the point where even when the private sector is willing to do an offshore wind project.
in New York Harbor, the administration says, no, you know, boy, would it be a shame if somebody took your permit away, boink, and then it gets yanked for no legitimate reason. And eventually I think it was reinstated. But so now we have this kind of pendulum swing. And think about think about the irony of this.
The bill they passed last year cuts subsidies for wind, solar, and EVs, which are the things that have the clearest benefits, but left them in place for green hydrogen and carbon capture, which kind of was is very puzzling to me.
Eventually the the I think the pendulum will kind of swing partially back. I I I had a section that I always like including that from methane sat and other similar studies showing that the emissions that are reported To the to to the Department of Energy from the oil and gas industry, for better or for worse, are are grossly different than the satellite measures. And so I do think eventually you'll have a a a partial swing back here and where where you know we can have conversations about both.
But we we have to kind of go through it's it's not that different from unfortunately it's not that different from the immigration debate. The United States had eight hundred thousand people a year come in of undocumented workers every year for twenty years. That number then went to three and a half million under Biden, and now it's zero. So we're we're go as a country, we're going through this kind of withdrawal reaction, violent reaction pendulum to these policy issues.
And and I'm hopeful and I don't use that word a lot. I'm hopeful that by twenty twenty eight and thereafter we'll kind of recognize that there's middle ground that we need on all of this stuff.
Yeah. I think that was very well said. Um Jager, any final thoughts on sort of the w which how the pendulum swings among those frameworks or which framework dominates?
So I think what Michael said is exactly right. I mean, m Joe Manchin became a good friend of mine while I was serving and he and I shared a view that like that the Biden administration was not doing a good job on the national security front. And um
And and that was what he passed into law. Um, and so, you know, I obviously worked hard to get the critical mineral stuff funded and we did, and we got a lot of the nuclear stuff funded and other things. And so I think Um I I think that it's important to note that the electorate cares a lot about climate.
Right. I think that the decision makers in general in every part of the world care much more about national security and economic security than they care about climate. It happens to be that the Venn diagram between those things. is so overlapping because the technologies of the electrostate are so cheap now that like you can do most of this under the national security and economic security. framework. And on top of that, I think when you think about
Where this is gonna go, I think, you know, when the pendulum swings back, is we're gonna move away from restricting supply. And you're starting to see that already with Democrat talking points. Is that the notion that we're gonna kill pipelines and kill the ability to drill for oil or whatever else was always a dumb idea, right? The way that you actually, you know, hurt the oil and gas industry is by getting people to use less of their product.
Right. It's by destroying demand, by having superior solutions that people want to use. I mean, I like my electric car because I can beat any internal combustion engine car. off the line because it goes zero to 60 in two seconds. And that's awesome. Right. And I think that in general, like that is where this whole thing is going to go is through superior products, not by restricting choice.
¶ Future Grid: Data Centers, Geothermal
Yeah, and I I'm encouraged there was another section in the piece, I'm encouraged by the bits and pieces of specific virtual power plant and demand response programs are picking up and and you're you're s you know at some at some point soon we'll all start hearing about the retirement of Pika plant.
And I think that will help build some momentum for the understanding that some of the old infrastructure can be safely retired, um, without jeopardizing grid safety and things like that. To to circle back, I think It it I'm now just from this discussion, understanding that this issue about data centers in a way, even though they're only three, four, five percent of total power consumption, is critical because the because how do you handle
the those moments of peak demand on those really hot days, and you have a power spike for for either heating or or air conditioning. How do the data centers kind of fit in with that big picture and how does the whole system work so that you can go ahead with electrification in the electrostate without worrying that you're gonna break the grid? And so data centers probably are a central part of how you do that.
Absolutely. And we've been talking a lot about data center development models and what it's doing to potentially unlock the demand stack and change the way utilities build infrastructure and these hard questions about market reform. And the business models to, you know, bring serve the capacity to the market to meet these data centers is really critical. And so like that's why it's become such a big part of the conversation for us.
The only thing that we haven't talked about um is uh geothermal. Um the Secretary of Energy is is very hot on geothermal and you know, there are some interesting productivity taking place with with enhanced geothermal drilling, borrowing some fracking techniques, but
It it looks marginal. It looks marginal. The vast majority of geomethral geometheral energy is used for thermal heat rather than power and um It's it's a great thing in the toolkit if we can improve it because it's it's you know, it's homegrown and doesn't have any national security issues, but they're very site specific and I don't you can't it's not to me it's not scalable like like wind and solar and battery.
Well, I think that's another thing that we'll re we'll revisit in ten years.
Um, this is great. There's so much more in the report that we couldn't even scratch, you know, a a lot on country level transitions. Uh in the case of Germany, regret over the uh nuclear phase out, uh the EV manufacturing business, whether it's gonna be a structurally low margin business. Um there's just so much in there. So go Check out uh Michael's energy paper. Uh that's the Eye on the Market newsletter. And I'm so glad people are paying attention to it now, Michael.
It's a pleasure to kind of speak on this uh podcast. It's wonderful to talk to people who who care a lot about this stuff. So I really appreciate being asked to join.
Absolutely. Well, we'll link to it in the uh show notes. Michael Sembelis is the chairman of market and investment strategy at JP Morgan Asset and Wealth Management. Thanks again, Michael. Michael. Trigger, thanks so much. Good conversation as always.
Always.
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Open Circuit is produced by Latitude Media. The show is edited by me, Sean Marquand, and Anne Bailey. You can find all of our episodes of Open Circuit on YouTube, subscribe to Latitude Media. And you can find the audio version, of course, anywhere you get your podcasts and transcripts at latitudemedia.com. Thanks so much for being here.
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