Speaker 1 (00:01):
This episode of EnergyCents is brought to you by IHS Markit's, Financial and Capital Markets Energy Advisory group. Our team of experts provide the investment community with actual insight, be in integrated thought leadership, and identify the trends and trend makers of global energy markets.
Speaker 1 (00:16):
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Breanne Dougherty (00:30):
Welcome everybody to this episode of EnergyCents, the podcast where we discuss all things at the intersection of energy and finance. This is Hill. I've got Hill Vaden with me again, and I'm Breanne Dougherty, of course, and we are near the end of the year. So this is probably going to be one of our last podcasts for 2020, I think.
Hill Vaden (00:48):
Yeah. We've got what? About 10 or 15 more days, until the end of the year. So this is a wrap up and a look forward.
Breanne Dougherty (00:56):
So, this is going to be a lot of pressure on our guests. Good thing we have three of them.
Hill Vaden (01:00):
Yeah. I feel like we're in a phone booth. We've got a Microsoft Team's phone booth, where we say crowded.
Breanne Dougherty (01:08):
Well, we wanted to make it extra special. We've got three power experts with us, which is always exciting to think that we've got so many of them in one room. It doesn't happen very often. That's the beauty of these virtual, home-working environments, I guess. Right? We're able to corral a lot more experts into one space a lot easier than it would have been if we were having to look around the office all the time, right?
Hill Vaden (01:31):
Breanne Dougherty (01:32):
That's the win that we've had in 2020. We have Doug Giuffre with us. He's been with us before. So, you'll recognize that voice and I think he's got a famous voice. We talked about it last time, right? Because you actually are an announcer? Is this right? As I recall.
Doug Giuffre (01:48):
This is true. Yes, I do some Pee-Wee Football announcing. So, famous in my town, maybe.
Breanne Dougherty (01:55):
Yeah. So, we're hoping to leverage your fan-base and blend it into ours here, because you're a repeat hero, on our podcast. We've also got Wade Shafer, who's also been here before. Welcome, Wade.
Wade Shafer (02:06):
Yeah. Thanks for having me on this powerful podcast.
Breanne Dougherty (02:09):
I love it. I love it. And we have Patrick Luckow, who's a new joiner, which means, I'm just going to go on record and say, it means that Doug and Wade must have given Hill and I a pretty good recommendation that we've been able to lure in a third. So thank you.
Patrick Luckow (02:21):
They definitely did.
Breanne Dougherty (02:21):
Thanks for joining us.
Patrick Luckow (02:24):
I'm excited to be here.
Breanne Dougherty (02:25):
Okay. I'm going to take it as a pat on our back, Hill, that we're very hospitable.
Hill Vaden (02:29):
Yeah, either that, or Patrick lost a bet, and this is his penance.
Breanne Dougherty (02:35):
True, or Wade and Doug had said, "We've got to bring somebody on because we're just sick of talking to these guys." We're going to go with the first one. It just makes me feel better and it's the holiday season, so why not.
Breanne Dougherty (02:44):
So, we're going to start off... We did this last week on a podcast with Reed Olmstead and David O'Shea, who I think, some of you might know. And we had a little bit of discussion... It was a, who would you rather type podcast. We're not going to go through the same type of thing here, but we are going to start off with the same question, which is, when you think about habits that you've picked up in 2020 amidst all of this COVID stress, and change of behavior, which of those habits do you think that you are going to keep when we get to the other side of this?
Breanne Dougherty (03:21):
I'm going to think of one that maybe is a little bit different than the one that I gave before. Actually, do you know what? No, because I can't think of one right now, that's different from before, so instead, I'm going to punt it directly out to Hill. Maybe Hill has thought of one. Well, it's different from the last one he gave.
Hill Vaden (03:40):
Well, so last week I said, audiobooks. That I've been able to listen to more audiobooks because I just walk around the house. And I guess, included with my headphones, allows me to listen to audiobooks. I wear slippers a lot. I don't know, because I don't leave the house very often. And so I think slippers may be something that stay with me, for more of 2021, with or without COVID, because it looks like working from home, flexibility likely will continue.
Breanne Dougherty (04:15):
So, it's not as though you're going to bring slippers to the office though? Because that would be-
Hill Vaden (04:18):
We will see. We will see. I'm not sure I can pull it off, but maybe.
Breanne Dougherty (04:24):
Yeah. I think that might fall into the weird [inaudible 00:04:27].
Wade Shafer (04:26):
It's like it's an opportunity that we make corporate America fashion, right? Athletic wear in the office, slippers. Instead of working from home, bring the home to work, right? Bring the dog.
Hill Vaden (04:36):
Wade Shafer (04:36):
This is a once in a lifetime opportunity.
Breanne Dougherty (04:39):
It will be interesting. That is a real point. I mean, so many environments have gone pretty casual, I think over the last five years any ways. I think it'll be a shame to see whether or not, even offices that had not gone really casual, if really it gears that direction now, because people are just used to being a bit more casual.
Hill Vaden (04:59):
I saw a headline this week that meggings are now a thing? That these are-
Breanne Dougherty (05:03):
Hill Vaden (05:04):
... Leggings that men wear.
Breanne Dougherty (05:06):
Hill Vaden (05:07):
So maybe, meggings and slippers will be the new casual Friday for offices all over the world.
Breanne Dougherty (05:14):
Yeah, not excited about that. I'm going to put that on the record, right there.
Wade Shafer (05:19):
[crosstalk 00:05:19] a future workday training perhaps. A workday training [crosstalk 00:05:25].
Breanne Dougherty (05:24):
Yes, I was just going to say, we're going to have to hold a whole new HR intervention.
Wade Shafer (05:26):
Breanne Dougherty (05:32):
I don't plan on going on there. How about you Doug? Do you have anything that you've picked up in 2020, that you think you'll carry on?
Doug Giuffre (05:33):
Well, yes, but I don't think it's a good thing. I mean, I've been working from home since 2010. So what I've changed in my behavior is I stopped going to the gym sometime back in March and I haven't been able to get myself back there. I don't really have a great excuse because the gyms have opened back up. I've just become too accustomed to waking up late, strolling into my office, and then shutting the computer down and watching T.V. So I'm going to have to break this habit at some point but it's proving a difficult one to crack.
Breanne Dougherty (06:08):
Wade, you're up.
Wade Shafer (06:09):
Oh so besides wearing active wear to the office maybe, I don't know, walking a lot. So I've been walking four or five miles a night. So we'll see if that continues once the-
Hill Vaden (06:21):
Breanne Dougherty (06:21):
Wade Shafer (06:22):
I guess, I used to walk to the office, so it's more translating the walk to the office to more of a fun walk through the neighborhood. But yeah, maybe, walking we'll see-
Hill Vaden (06:31):
Do you have a pet or do you just walk?
Wade Shafer (06:34):
Without a pet. Just, yeah. Podcast though. The podcast help and the audiobooks help. So-[crosstalk 00:06:40]
Breanne Dougherty (06:41):
[crosstalk 00:06:41] enjoying the fresh air.
Wade Shafer (06:43):
What's that, Hill?
Hill Vaden (06:44):
Are you one who walks his phone? I see people walking on the street, staring at their phone and it looks like they're walking their dog, but it's as if they're taking their iPhone for a walk.
Wade Shafer (06:53):
The phone is in my pocket, so.
Hill Vaden (06:54):
Wade Shafer (06:55):
So, yeah. I still use my eyes when I'm walking.
Hill Vaden (06:59):
You're more evolved than I am.
Wade Shafer (07:02):
I'm old school like that. I use my eyes and put my phone in my pocket.
Breanne Dougherty (07:07):
Instead of the Google Maps to direct you home. How about you Patrick?
Patrick Luckow (07:13):
I think Hill's got my number, I'm a recent convert to sweatpants.
Hill Vaden (07:17):
Patrick Luckow (07:17):
They're warm and comfortable, and I don't see that changing in the future.
Hill Vaden (07:23):
Do you think with the advent of meggings or are you going to stick with the sweatpants?
Patrick Luckow (07:26):
I haven't seen meggings before. I'll have to check them out. I'm open to it, but sweatpants are pretty nice.
Hill Vaden (07:33):
There you go.
Breanne Dougherty (07:35):
Mine is similar to what I said last time. Last time I said that I probably going to spend more time outside. I think that being at home when I do go outside, I feel like I'm enjoying my time outside a little bit more. And this sounds really cheesy, but I gave some cheesy answers last week as well, so let's just put it out there again.
Breanne Dougherty (07:53):
I think I talk to people in my neighborhood more. I feel like everybody is a little bit more chatty. Maybe because we can't talk to our friends or see our friends as often. But because of it, I feel like when I'm outside and walking around, I recognize people from the neighborhood a little bit more. We give our hellos or you run into them at the same type of spots, and you can have a little bit of socially distanced mask wearing chit-chat.
Breanne Dougherty (08:18):
So, I think that'll probably keep up. I think I'm probably going to be a little bit friendlier. I think 2020 made me friendlier outside of my walls because you just weren't able to be friendly as you normally would have been. So I think I'll keep that up.
Doug Giuffre (08:33):
And in New York. So that's against the normal perception or the normal-
Breanne Dougherty (08:38):
Doug Giuffre (08:42):
... Of New York.
Breanne Dougherty (08:42):
Normally, I have said this, I was one of those culprits that had my headphones in and you are just doing your thing, not really paying too much attention to what anybody else was doing. Now I feel like I'm so starved for love and social connection. Anyone, anything that is within earshot distance is going to hear my hi.
Hill Vaden (09:01):
They're going to hear from you?
Breanne Dougherty (09:03):
Yeah. Can you please talk to me.
Wade Shafer (09:04):
Well, the trick is if you're going to be able to recognize people without masks though, you got to learn who has what eyes.
Breanne Dougherty (09:11):
So true. That is actually... Do you know what's really funny about that though, is that sometimes I find it really hard to understand people with masks on. Right? Because it's sometimes different accents, or people speak in different volumes, that I do just blindly nod and laugh sometimes, because I have no idea what's... [crosstalk 00:09:35]. Because with the masks on, it's just harder to get the social queues from speech and smile and things like that. It's a little bit awkward sometimes. So I'm keen to have the masks off. I think it'll enable a different level of this newfound socialization of mine around the neighborhood.
Breanne Dougherty (09:54):
For those people in New York that are like, "Oh, you're that crazy person that's just walking through the streets just randomly saying hello to everybody. Please stop. You're making the rest of us uncomfortable." [inaudible 00:10:01]. Somebody's going to email me at work here and say, "Yeah, stop. Everybody wants you to stop."
Hill Vaden (10:07):
Just to be clear, you are wearing your mask as you make people uncomfortable? So you're not endorsing mask-less interactions are you?
Breanne Dougherty (10:13):
No, I am wearing my mask and people probably don't understand what I'm saying and are just doing as I do, blindly nodding and laughing, thinking maybe she'll go away if I just nodding and laughing.
Hill Vaden (10:30):
There's that girl who did talking to us.
Breanne Dougherty (10:30):
Yeah. She's not getting the social queue because she can't see my face.
Hill Vaden (10:33):
Breanne Dougherty (10:35):
All right. Well, those are all good takeaways. Most of them involve us all being a little bit more casual and free loving, it sounds like. So that's good. So those are good things to takeaway from 2020. Although I guess, I don't know Wade if you have them before though? We did it ask Green. Is the beard COVID specific?
Wade Shafer (10:52):
Yes. It came about COVID, but yeah. That's a good point. The beard might stay post-COVID, I think.
Breanne Dougherty (11:00):
Oh. There you go.
Wade Shafer (11:01):
That's a good point. Forgot about that. Yeah. For all those listening, you can listen for my beard. You can see it, but the beard will stay, I think.
Breanne Dougherty (11:09):
Maybe his personality's also grown with the beard? Right?
Wade Shafer (11:14):
Breanne Dougherty (11:14):
Wade Shafer (11:15):
Breanne Dougherty (11:16):
The other thing, and we're bringing this up because actually Hill, as he always does raised a nice little bit of trivia to me today. But we also spoke of the fitness craze. Doug, you mentioned going to the gym or not going to the gym. So maybe the question is to you, have you become an adoptee of either the Mirror or Peloton or the like? Or you're just forfeiting fitness?
Doug Giuffre (11:39):
No, I do have a home gym in my garage that I convinced myself through April and May to use that and then that also faded as well. And that's going to be hard to convince myself to use that in the winter. But no, I have not adopted the Peloton or the Mirror.
Hill Vaden (11:59):
There was an article in the paper this weekend talking about the CEO of Peloton, and apparently, he worked nights while putting himself through college before starting Peloton. And he worked nights at Skittles factory, which seems like a really cool job to have. But my first thought, and I asked my wife, I said, "Which Skittles would you take?" Because I would take the red ones and the green ones because I think they make the best combination. And she said that she would have taken the yellows and the oranges, which are my giveaways. Or which basically makes us the perfect couple.
Breanne Dougherty (12:34):
Which is why you're married.
Hill Vaden (12:36):
Breanne Dougherty (12:37):
Case in point.
Hill Vaden (12:40):
And Bree and I had visions of this thing, like The Charlie in the Chocolate Factory type, Skittles factory.
Breanne Dougherty (12:44):
Oh, I just envisioned Skittles raining from the ceiling. I mean, obviously, this is not the case. As I said to Hill it probably looks just like some GM auto part type of factory. But I'm envisioning bright colors and lively music and Willy Wonka walking around, just tossing Skittles, everywhere.
Hill Vaden (13:02):
Breanne Dougherty (13:03):
Yeah. So, that's what I envisioned would be happening at the Skittles factory, but what a random piece of knowledge? And of course there's a Skittles factory, but who knew that there'd be a Skittles factory. So the question back out to all of you is, if you got to work in a candy factory, which candy would it be that you would want to have all access to?
Hill Vaden (13:25):
Patrick Luckow (13:26):
I'm not a big Skittles fan. I love dark chocolate. I don't know if there's a giant, big, generic, dark chocolate manufacturing factory, but if such a thing exists-
Breanne Dougherty (13:37):
So you're going to go with sophisticated and be eating the Limp chocolate
Patrick Luckow (13:40):
Hill Vaden (13:42):
Wade or Doug, any candy factories?
Doug Giuffre (13:44):
No, for me it would be Swedish Fish, and it's not even close.
Hill Vaden (13:47):
Wade Shafer (13:49):
You could be a fisherman.
Doug Giuffre (13:52):
Wade Shafer (13:55):
I don't know, that's a tough question. I think more in line with Doug's man of the people being a fisherman, I think I would go with M&M's. Those would be pretty good. Although, I guess would your skin start changing colors or whatever from being around all the dye and everything all the time? The melty M&M's and how it gets on your hands and everything, could be pretty interesting.
Breanne Dougherty (14:15):
Oh, we don't need to get into specifics Wade. That seems-
Hill Vaden (14:18):
[crosstalk 00:14:18] Well, that's The Charlie in the Chocolate Factory, right? That the violet's turn violet.
Wade Shafer (14:23):
Breanne Dougherty (14:23):
That's true. [crosstalk 00:14:25] I think I would be in a Reese's Peanut Buttercup factory.
Wade Shafer (14:30):
I think I'd get fired from the Peanut Buttercup factory.
Breanne Dougherty (14:35):
How about you Hill, would you actually choose the Skittles factory?
Hill Vaden (14:39):
Skittles would be close. I'm a big fan of Sour Patch Kids.
Breanne Dougherty (14:42):
Oh. I love those too.
Hill Vaden (14:43):
So that might be another one that I would hope to be inspired to start a home work-out facility, if ever having a job within a candy factory. I did work at a pizza joint for a long time, and grew so tired. There's only so much you can do with pizza, and our benefit was a shift meal, which was either bread sticks, cheese sticks, or pizza, every night, and working five days a week. So it was all that pizza.
Breanne Dougherty (15:12):
Yeah. I do steer clear of pizza now. Forever and ever.
Hill Vaden (15:16):
No. I mean this was 20 years ago. And so I have warmed back up to pizza, but there was a period that I was less interested in pizza.
Breanne Dougherty (15:26):
I think that's how it works. I worked at a restaurant, and all I remember is the smell of Caesar salad, and I can't. There's something about Caesar salad now forever and ever. Just not my thing.
Breanne Dougherty (15:37):
All right. Those are all very important topics obviously, that I'm sure our listeners were thrilled to hear about. What we're really here to talk about today is the power markets though. Because we have such an esteemed panel with us.
Breanne Dougherty (15:49):
So let's pivot a little bit and talk about that. 2020. First things first, how wrong were the forecasts going in, and what aspect of the forecast were surprising now that we're looking back on 2020 as opposed to forwards on to it?
Hill Vaden (16:06):
Wrong, presumably because of COVID.
Breanne Dougherty (16:11):
Yes. Yes. Of course-
Wade Shafer (16:14):
I was just saying we were-
Breanne Dougherty (16:15):
Not just because of [inaudible 00:16:15] mishaps or anything. I apologize.
Wade Shafer (16:15):
As I was saying, we predicted COVID. Yeah, I mean COVID is what jumps out, and then I think just how quickly the world changed. And thinking back to the spring when it was all unfolding, and the shut downs were happening. States were shutting down, wondering how bad it was going to be. And maybe the surprise is how not so terrible a forecast were even with COVID, and how resilient power was, even despite COVID. And now sitting at the end of the year, looking at the weather and depending how the winter... Well, I guess the winter is over for the most part. Winter 2020 is over. So I guess it's been pretty mild.
Wade Shafer (16:56):
But beginning to look forward to January, February, I mean, the weather, depending on how hot it was this summer or how cold it was this winter, I mean it could have negated COVID altogether, and left the industry not affected that much on an annual basis or even higher. So I guess, to me the big takeaway was just to how not so bad the forecast were, despite COVID, because the effects on the market wasn't as drastic as it has been on economics or on certain industries, service industries, those things.
Hill Vaden (17:30):
And Doug, was that fairly true across all of the power markets within the U.S or were there some or were there maybe more of a noticeable effect in terms of expectations in the beginning of the year.
Doug Giuffre (17:41):
Yeah. I mean, you raise a good point. Wade is correct that when we look back now, sitting in December and looking at electricity consumption, because for us, we spent much of the year thinking through and talking about how is COVID impacting the different customer classes?
Doug Giuffre (18:03):
Some people are all working from home, we know that home residential usage was going to be higher. There was a period in time when businesses were shut down, so electricity from commercial and industrial customers declined quite significantly through the second quarter. But looking back, we're talking about a total decline for the U.S of about three percent in annual electricity consumption. I think that's along or on par with where we were in the last recession. When we sunk and the commercial and industrial loads probably down about six to seven percent for the year.
Doug Giuffre (18:39):
But, yeah. As you mentioned there are regions of the country where the impact was not so severe. So a good example is New England. New England, the composition of customers there as residential is a much larger component of the total. There's not as much heavy industry there.
Doug Giuffre (18:57):
So on that, electricity usage for the year is down, but only modestly because residential helped offset things. Move to the industrial Midwest, and there big businesses, big industrial customers, auto makers. They comprise a much larger share of total consumption, and their electricity demand or usage was down more significantly this year. So if you looked at the forecast in January of 2020, their demand would have looked quite differently.
Doug Giuffre (19:27):
And then that flows through to different aspects of the market. So electricity pricing and some other markets which utilize natural gas, had a much more significant lead in the dispatch. Their power prices are probably lower than we would otherwise have expected.
Doug Giuffre (19:44):
We entered this year expecting natural gas prices to be down relative to last year, but of course, with COVID, the disruptions, and fuel sectors, prices really fell significantly. That all flows through to power sector. So it does vary around the countries for different reasons. Composition of your customer class and also your power generation fleet and how that's stacked up.
Breanne Dougherty (20:11):
So, as you're forecasting 2021, what's that look like? How much of this COVID factor is being integrated into the 2021 outlook, or are you looking at it relatively business as usual, because there wasn't as much of an impact?
Doug Giuffre (20:27):
Yeah, I think this is one of the areas where I felt there were a lot of hot takes in the industry, about how electricity consumption patterns were going to be altered permanently. And there will be some of that. No doubt. More of us will be working from home on a sustained basis, certainly into 2021, even further out. I hope that eventually many people will go back to work, but it's going to change consumption patterns. The question is to what degree?
Doug Giuffre (20:59):
I'm not sure we that have enough information yet, but even if you look at the trends over the course of the year, by the third quarter electricity consumption patterns were fairly close to, I don't want to say normal, but where they were, the average it'll last five to 10 years. Part of that is whether is waiting to adjust itself. When we look out to next year, I think commercial, industrial demand or load from those classes will improve relative to 2020.
Doug Giuffre (21:28):
Residentials probably going to come down modestly, but that's going to be heavily influenced by weather, so I think you have a little bit of a rebound. Electricity consumption probably doesn't get back to 2019 levels, until 2022. So it's going to be a gradual recovery, at least, in our planning case.
Doug Giuffre (21:48):
Other areas though, where I think you incorporate COVID into your forecast for power sector in 2021 would be, what's happening in the fuels market and how does that flow through to the power business. So I mentioned the gas prices fell very low this year. I know you've had previous guests on talking about what's happening in that sector, but pull back of the oil production has impacted natural gas. There's expected to be and you're already seeing it, natural gas price is rebounding. And so our colleagues on the gas side are projecting gas prices next year above $3.
Doug Giuffre (22:29):
That [inaudible 00:22:29] be to you. What that means for the power business is we'll probably have a short term rebound in the coal business. We still have about a fifth [inaudible 00:22:40] of our electricity is generated by coal plants, and if gas prices are higher next year, they're going to continue to fight it out with dispatch stack and in areas like the upper Midwest, we're going to see those coal plants running in high utilizations than where they're used to.
Doug Giuffre (22:57):
That's probably going to be a short-term phenomenon and as dry gas production comes back and gas prices fall again, then we're going to see the longterm decline of the coal sector continue or become reestablished. So I think one of the things when you look at 2021, you're going to see coal generation and U.S power sector carbon emissions have a little short term rebound.
Hill Vaden (23:21):
So that's deeply ironic, given that we will also beginning the presidency of Joe Biden who's made coal as the focus of his campaign than Donald Trump did or coming into office four years ago. Patrick, as we're thinking about the power industry in the US next year and a new president and policy, so it sounds as if Doug was describing in a sense, a higher emitting year in terms of expectations for next year, because more coals can be put back to work and I guess demand will be higher. Is that reasonable expectation?
Patrick Luckow (24:02):
Yeah. I think it's the degree to which emissions are impacted by that remains uncertain, but to go back to the previous question, I was going to say the thing I spend a lot of times on is carbon markets particularly in the Northeast and in California, these market-based greenhouse gas policies. And everyone was worried they were going to really suffer with COVID reducing emissions this year. But they've rebounded really quickly.
Patrick Luckow (24:34):
And some of that is what Doug was talking about. Demand has started to come back, but I think a lot of it is also there's long-term confidence in these programs, in the interest in states across the country reducing emissions and value being placed on that going forward. So there might be near term changes, but I think probably a Biden administration and the state governments across the country are supportive of environmental regulations in the future.
Hill Vaden (25:08):
So any balance for coal is going to be more of a short term [crosstalk 00:25:15] phenomenon.
Patrick Luckow (25:15):
It's definitely a short-term thing. Yeah. I think that the coal industry will struggle in the coming decade and that's what you've seen in our outlooks for quite a while now. Just the economics alone struggle compared to natural gas and declining renewables costs, but the policy pushes there as well. And I think the combination of those different elements is going to really contribute to a rapid reduction in the carbon intensity of the U.S power grid.
Breanne Dougherty (25:47):
I'm going to go back a second to something that we talked about it in the last time we had you guys here, the California blackouts. And I know Wade especially has looked at it a little more closely in a the more time that you're away from the California blackout, now you can see more data. So can we just, as a quick recap, think about the learnings from that, and is there anything as we look to 2021, or even within the 2022 time period that you think we can expect to come off the back of that event?
Wade Shafer (26:17):
I think it really highlights just the pace of change that's coming to the industry. So we might see an uptick in CO2 emissions next year in 2021. But I don't think really any utility is changing their plans to retire coal. I think you're going to see quite a fast turnover in the generation fleet and a shedding of coal capacity, especially in the western U.S that is possibly unprecedented, just the rate of change. And so what happened at that California blackouts this summer really highlights how both extreme weather climate change, right? Just the new normal we're heading into that seems to be reestablished every year as something more disastrous happens than the previous year.
Wade Shafer (27:09):
But really the blackouts highlight how the intensifying climate heat can challenge the current approach the industry takes, the planning for reliability and planning infrastructure can challenge that. And in addition, just the need for regulations and policy and thinking to really keep up with the changing technology and the move to variable, renewable generation and batteries, and just the immense complexity of running a power system like that relative to the past, where it was relatively simpler, in that you had dis-patchable generation technologies that were very deterministic. You could turn them on and off and dial them up and dial them down.
Wade Shafer (27:51):
But now the future is one where you need to be able to predict how sunny it's going to be tomorrow, two days from now, three days from now, a week from now, a month from now. How windy it's going to be. What are the interactions between all that and how are you going to get all the electrons you need to keep everyone happy, to keep the lights on, to keep keep our Netflix go and our Amazon Prime and Disney Plus and whatever equal plugging of streaming services here.
Wade Shafer (28:19):
But anyways, to keep all that entertainment going it's going to take a lot of new thinking and new planning and new systems and processes to ready for that future and supply demand with renewable and lower carbon energy. And so California, let's start thinking about that, you see other grid operators across the west starting to think about that, and thinking about what power infrastructure is needed to maintain the reliability that we've enjoyed historically.
Hill Vaden (28:55):
I mean, has there been a change, I guess in 2020 and how you, and I guess more broadly the whole energy observing landscape views renewable in the power mix. There seem to be renewables as a bucket for many years that this is what is going to be filled by a vague renewables. Are you looking at it more distinctly now? And is that new 2020, where now I need to look at solar and wind as discreet leavers, as opposed to just something that is not gas or not coal?
Wade Shafer (29:26):
The pencil has been sharpened, or it needs to be sharpened in the current environment we're in. So historically the power markets in North America have enjoyed a large surplus and so there was lots of extra power generation capacity, extra power plants that were built in previous years when the expectations for demand growth were higher before the financial crisis, which led to just demand destruction, just big energy, intensive industries closing and never coming back.
Wade Shafer (29:55):
So before that time [inaudible 00:29:57], the power plants were being built because the expectations were that, demand was going to keep growing. But now that we've gone more than a decade of basically flat demand growth in the long run, there has been and still is and most of the eastern U.S there still is all these extra power plants.
Wade Shafer (30:12):
And so and utilities, the industry developers, regulators, everyone basically was going to be able to rely on that surety and build renewables as just energy resources, right? Because you had all these power plants there that were able to keep the lights on. If it happened, the sun wasn't shining or the wind wasn't blowing, but now in California, and really across western U.S, you're at the point where there is not much extra capacity. Now there is extra capacity like the industry plans for with the reliability studies and planning, but there's not extra capacity on top of that. Right.
Wade Shafer (30:52):
And so then really one needs to sharpen their pencil and think really carefully about the amount of solar, the amount of wind, and how do you not only supply the energy from solar and wind, but how do you continue to provide the capacity that historically we've enjoyed from gas or coal, but now maybe that capacity needs to come from batteries, it needs to come from demand response and or solar and wind partially.
Wade Shafer (31:17):
And so California shows that in an environment where demand is a lot higher than everyone planned for, because of the intense heat wave that hadn't happened in many years, that shows the future of what could happen, if there are not sufficient capacity resources that can keep the lights on, in addition to the solar and the wind that provide us with energy.
Breanne Dougherty (31:43):
So from a technology standpoint, there should be a continued focus on batteries and the improvement of that technology specifically, do you think that's going to be the focus or-
Wade Shafer (31:54):
[crosstalk 00:31:54] For sure, yeah. So batteries paired with solar and wind, so it's historically the whole power generation portfolio was largely tied up in one asset, right? So you have a gas plant that provides energy by burning natural gas. It provides capacity because it can ramp up and down. And it's flexible because it can respond very quickly to commands from a central dispatcher. The future is one where the natural gas molecules become sunshine and wind that's the energy is created from solar panels and wind turbines, but then those resources need another asset that's capacity and flexibility. And so that other asset is a battery potentially.
Wade Shafer (32:34):
And so together a battery, solar, and wind and a power system they can provide a lot of the attributes that a gas and a coal plant have provided historically. It's just the future is one where the whole portfolio is going to do what previously an individual power plant could do.
Doug Giuffre (32:52):
Yeah, and as Wade said, he mentioned the need to sharpen the pencil. I mean, that is what's ongoing now. And a lot of the grid planning and a lot of the transmission operators, it's not enough anymore to say, "Okay, I've got so many gigawatts of wind on my system." And typically you get 15 percent of your installed capacity from wind. They'll be available on a hot summer's day, so you just D write them down, you assume you get a certain average capacity from them, and that's enough to help maintain liability.
Doug Giuffre (33:28):
There are so many dynamics now between how solar and wind are affecting load, how batteries can affect load, how dis patchable load and real-time load reductions, all of these have to be planned together. And so a lot of these regional transmission organizations, case of being one of them, are doing a lot of very detailed analysis of how these interact and importantly, how the interactions can evolve over time as you add more and more, both wind, solar, and batteries on the grid.
Doug Giuffre (34:00):
So it's planning to meet reliability much different than we have done in the past. The industry is still exploring the right techniques and approaches to model this out but that's where we are. I mean, I think there's a recognition that certainly batteries are going to play a big role, and a presumably much longer duration batteries. So if the industry standard today is say four hour batteries, we know that 10, 15 years from now, typical grid scale batteries are going need to be six to eight hours, maybe longer in duration. I mean, that's just how the industry is going to evolve.
Doug Giuffre (34:38):
And then it leads you in, the other hot buzz word today is hydrogen. And that the question is when will that realistically play a role in terms of providing that much longer duration resource that is carbon free, and that's why there's so much conversation about it today.
Breanne Dougherty (35:00):
So Batteries... We're talking 10 to 15 years before we get to that six to eight hour or 10 hour time period? We think we're going to be in a four hour battery window.
Doug Giuffre (35:11):
The technology may be there, I think the question is when does the need emerge? So one of the things you need to worry about is when solar production on the grid begins to fall off because the sun is setting, you have a rapid decline in the amount of generation that's coming from solar, and one asset that can help fill in that gap as solar ramps down, is have your batteries ramp up? And today for our batteries sufficient in most markets to be able to provide that ramp on until other resources are ready, as we move out into the future and you've got more and more solar on the grid, you may need more like a six to eight hour battery.
Doug Giuffre (36:00):
I think in our outlook we're probably on four hour batteries into the early 2030s. Some markets, California is probably one of them, you'll lead six hour batteries earlier, but by and large, I think the standard will be for it's in the early 2030s and through the mid 2030s, that six and eight hour batteries will likely become the standard, until the 2040s, it'll be eight and 10 hour batteries-
Breanne Dougherty (36:26):
But are we not seeing battery technology is not a limiting factor right now. That four hour battery technology for instance is and we think preventing the proliferation of a certain type of renewable generation?
Doug Giuffre (36:40):
I don't think it's a limiting factor today. Some of the PPAs, Ray put out really interesting research earlier this year, looking at solicitation in California, which looked at pairing solar with batteries and comparing that cost against other technologies. And it's very favor... I mean, the cost is high, but the value it provides is even higher. So if you're judging these things on a cost benefit analysis, that looks like an optimal resource in a market like California.
Hill Vaden (37:14):
So you mentioned 10 to 15 years for the step change and battery storage or energy storage, which seems to be on the same timeline as what we're hearing for hydrogen to really mature and we often hear of hydrogen and batteries and solar and wind competing for market share against traditional fossil fuels. Should we be looking at hydrogen investment and battery investments almost in competition with each other? Are they both trying to hit the market at the same time?
Wade Shafer (37:48):
They're a little different. So I think each one has their own value proposition for the market. And I think what Doug was speaking on, to me, it really hits on just how disruptive battery technology is, right? So today four hours is sufficient and cost competitive and increasingly more and more markets with a traditional gas peaker. Now 10 years from now, maybe we need six hours or eight hours. Okay, well then go back to some of the existing battery sites, and let's add some more battery modules on that site and turn it from four hours to six hours.
Wade Shafer (38:15):
So you're extending the duration storage capability of an existing battery site, but it's megawatt rating, its interconnection rating, which is it plugging into the power grid. That's still the same. So you can within possibly, I mean, these are all an unanswered questions down to the technical details, but possibly one could expand existing batteries to then continue to keep up with whatever the grid requirements are.
Wade Shafer (38:42):
Now with that said there are detailed engineering requirements studies that the grid operators do to make sure that going from four hours to six hours at a site, doesn't mess up the whole grid and knock everything out. So the pencil will need to be sharpened on that as well. But nevertheless, I mean the batteries are so modular you can just expand as needed and keep up with the changing grid conditions and continue to disrupt and mess with the business of existing gas CTS and gas combined cycles.
Wade Shafer (39:16):
And so that said, I mean, so batteries I think are most similar to CTS and maybe a little bit slight like CTS. Maybe a little bit like combined cycles once they have to cycle a lot when renewables are high, but they're largely well-positioned for daily cycling.
Wade Shafer (39:34):
So say moving the sunshine from the afternoon to 8:00 to 12:00 AM, or beyond midnight into the early morning hours, that's really what a battery can do really well and cost-effectively is every day shift the solar generation from the daytime to evening or shift wind generation around. Where hydrogen comes into play is more like natural gas, in that it can hold energy and inventory very cost-effectively. So it scales up really well on a inventory cost basis. And what I mean by that is being able to store solar energy produced in May for use in December.
Wade Shafer (40:12):
And so a battery is never going to be well-positioned to do that because even if a battery is super cheap CapX wise, it's incredibly inefficient and incredibly expensive to discharge a battery in May and have it sit there until December. Discharge and then recharge again in the springtime, and then sit there until the winter, whereas hydrogen, you can produce it from the excess solar energy in the springtime or in the summertime store it underground in salt caverns. Like we do with gas, right? Store gas underground, and then draw on it, during the winter time, pull it out of the salt cavern, put it into some pipes and deliver it to other fuel cells or combustion turbines and burn it. And that's something that hydrogen could do cost effectively that sitting here today, I don't see batteries ever being able to do that cost effectively.
Breanne Dougherty (41:00):
So maybe a question for you Patrick, I mean, hydrogen, obviously people are talking about a lot here in the U.S but from a policy perspective, it's really taken hold in Europe, for instance. Do we think the policy is required here in the U.S to drive hydrogen as part of the generation stack going forward? Do we think that's something that we're going to start seeing, or do we think that hydrogen is going to start making inroads, even in the absence of direct policy related to it?
Patrick Luckow (41:27):
In the power sector, I think you definitely need a very strong policy for hydrogen. There's a lot of runway. There's a lot of room to integrate very low cost renewables, particularly with low cost batteries, before you get to the point that Wade was talking about, where you really need to think about seasonal storage. I think potentially in the near term where hydrogen becomes relevant is in other sectors of the economy. If you want to start decarbonizing transportation or industrial energy use.
Patrick Luckow (42:02):
And their policy would also play a role, but it begins to be much more competitive and much more useful very quickly. And that has big implications for the power sector too, because it's likely, I would say that much of that hydrogen is produced via electrolysis. So there's a substantial electric load demand and if it's tied to renewable energy, there's demand for new renewable resources alongside of that. So that's one of the places I look at when we're thinking about hydrogen in the next decade or two in the power sector, is how can the power sector contribute to fulfilling the demand in other sectors.
Breanne Dougherty (42:41):
So really it's a demand story potentially at least at the onset for the power sector?
Patrick Luckow (42:47):
Yeah, I think so.
Breanne Dougherty (42:48):
For supply story.
Patrick Luckow (42:49):
Yeah, there's a role in the power sector to play in the stack of resources to draw upon, but the demand side is definitely more relevant in the near term, I think.
Hill Vaden (43:01):
All right. Well, thinking, I guess, near term in terms of 21, what more broadly, and I'd like to ask all of you this question maybe as a wrap up question for the podcast today, and I guess piggybacking on the sharpening pencils image as well. As we're thinking about headlines in 2021, so one of the big surprise headlines, I would say it surprised many was NextEra market cap exceeding that of Exxon for a period, earlier this year. And I think all of the major newspapers republished the same idea within weeks of one another, because it caught so many people by surprise.
Hill Vaden (43:42):
As we're looking at the North America power market in 2021, obviously COVID headlines were another surprise to everybody as well. What would be the surprise headlines that you guys are perhaps less surprised by next year as it relates to North America power? And we'll throw it out to any of you. I don't want to call on one of you because one of you might not be ready, but they will.
Patrick Luckow (44:06):
The one I would pick, might be increased corporate procurement of renewable energy. I think you're going to continue to see a lot of announcements of goals, but also specific procurement of projects to meet corporate demand, to meet sustainability goals at big corporations across the country. Historically, a lot of those resources have been in places like Texas, where wind is really cheap, but I think you're going to start to see that expand across the country as companies want to procure their supply from closer to where they're using it.
Hill Vaden (44:40):
Wade Shafer (44:43):
I would not be surprised to see large energy companies or power companies continuing to transform into a new version of themselves. So there's lots of shatter about changing business models, shutting certain business units from large integrated energy companies, maybe unwinding the integration that has happened over the past decade or more. As companies continue to think about this changing world that we just talked about and how they position themselves in value chains to capture the most profitable opportunities. So I would not be shocked to see something shocking and seeing some company that has been around for a long time or been the way it's been for many, many years dramatically changing what they look like from a business structure side of things.
Doug Giuffre (45:37):
I don't know this prediction, I'm going to make a bold prediction here. I don't know if we'll see it in 2021, but I'm fairly confident that we're going to see a rebound and development of new natural gas power plants in this country. We've been on a decline since early 2018. The pipeline is really getting bare in terms of new projects that are being developed, and conventional wisdom today is that there's such a move to wind and solar and batteries. This conversation we were just having, that there's little room for new gas. There'd be a lot of opposition to building it, but I think reality is going to require some development toward the mid 2020s. Maybe say the back half of the 2020s, because the coal fleet is under so much pressure, we're going to see a lot of retirements.
Doug Giuffre (46:27):
Wind, solar batteries will step up and play a very important role, but I think many utilities are going to lean on the historically reliable natural gas, and we'll have a bit of a build cycle. If that is true, you're going to start seeing orders and projects enter queue pipelines within the next year or two, partly 2021 into 2022. So they have their three-year lead time for development. So I may be a little premature in this prediction but maybe we revisit this next year. I'll be more firm that's coming in 2022.
Hill Vaden (47:06):
Well, this is being recorded, so.
Breanne Dougherty (47:08):
I was going to say, and do you know what, we never quite know when you put out a general question like that, that sometimes you can get some lame duck answers on that. All three of those, I'm actually pretty excited to follow up on, because I think all three had enough meat to them that they weren't just a toss away prediction for 2021. So good on all three of you.
Hill Vaden (47:29):
Yeah. And they're not mutually exclusive.
Breanne Dougherty (47:32):
Hill Vaden (47:32):
So we could have a turkey, is that the [inaudible 00:47:38] reference?
Breanne Dougherty (47:39):
So something to look forward to at the end of 2021 there guys, is a revisit of these predictions and possibly a turkey, which I'm not going to lie is probably going to be an emailed image of a turkey. It's not.
Wade Shafer (47:51):
We'll see if Hill still has his slippers on at the end of 2020. [crosstalk 00:47:54]
Breanne Dougherty (47:53):
I think he'll be wearing some turkey slippers for it.
Hill Vaden (47:58):
Maybe some new slippers. All right.
Doug Giuffre (48:00):
Can I make one last prediction?
Hill Vaden (48:02):
Doug Giuffre (48:04):
I don't think that, what was it? Meggings? I don't think we'll see them in corporate America in 2021.
Breanne Dougherty (48:11):
I'm going to go on record and agree that I hope I never see meggings in the office in particular, because that's just a lot of bad all over.
Hill Vaden (48:21):
Yeah. Maybe they'll be the first gas plant that is approved and Doug's prediction is built by a team in meggings, so there's another non mutually exclusive prediction for us.
Breanne Dougherty (48:36):
All things to look forward to and follow up on.
Hill Vaden (48:38):
Yes. All right. Well, thank you guys for joining us again Wade and Doug, and for a first time Patrick, and I hope you will come back at some point. Hopefully this was enjoyable, at least not too painful, and have a good new year if we don't talk before then. Thank you all.
Wade Shafer (48:57):
Happy new year.
Breanne Dougherty (48:58):
Patrick Luckow (48:59):
Thanks for having us.
Doug Giuffre (48:59):
Speaker 1 (49:01):
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Speaker 2 (49:22):
This podcast contains information and insights copyrighted by IHS Markit. To learn more about IHS Markit Energy Solutions, visit ihsmarket.com/energy. That's I-H-S M-A-R-K-I-T.com forward slash energy.