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In 2020, the top five Western oil & gas supermajors – ExxonMobil, BP, Shell, Chevron, and Total – saw combined losses of $76 billion. That was caused by the radical drop in energy consumption when Covid shut down the global economy.
That year, BP CEO Bernard Looney called for a 40% cut in oil & gas production in a decade, and promised to invest billions of dollars each year into renewables.
Two years later, thanks to a war waged by Russia that disrupted supply and a bounceback in global oil demand, high prices brought $200 billion in profits for those companies.
BP just decided that it would invest billions more in oil & gas production, rather than make the drastic cuts it initially proposed. Shell is doing the same, expanding fossil fuel extraction while keeping clean energy investments flat. And even with windfall profits, clean energy only accounts for 5% of oil company capital expenditures globally.
At one point, it seemed like there was a real shift happening in the sector. And now, with the global appetite for oil still growing, the allure of high profits is shifting investments back into extraction.
This week: how will this new boom time for oil and gas companies impact investments in clean energy?
Plus, we’ll take stock of some of the hottest emerging sectors, like hydrogen, virtual power plants, and critical minerals recycling.
Jigar Shah and Katherine Hamilton are back on the show this week to dissect all of it.
Full Transcript below:
Stephen Lacey
So Jigar, the comms team at the Department of Energy let you come back to riff with us.
Jigar Shah
Oh, gosh. Well, you know, if you give them a good lunch, they’ll agree to anything.
Katherine Hamilton
And a really solid edit machine.
Stephen Lacey
Well, we’ve got a lot to unpack today. So let’s get into it. I think our first order of business is what is happening in the oil and gas market where we’ve seen some pretty wild swings of late.
TV Host
US oil prices plunged into negative territory. The price settled at, get this, negative $37 per barrel, which is down 305%, meaning people would pay you today to take their oil off their hands.
Stephen Lacey
In 2020, the top five western oil and gas super majors, that’s Exxon Mobil, BP, Shell, Chevron and Total saw combined losses of $76 billion. That was of course caused by the radical drop in energy consumption when COVID shut down the global economy. That year BP CEO Bernard Looney called for a 40% cut in oil and gas production in a decade, and promised to invest billions of dollars each year into renewables. Two years later, thanks to a war waged by Russia that disrupted supply and higher than expected bounce back and global oil demand. High prices brought mind boggling profits for those companies.
TV Host
Exxon for example, Exxon Mobil reported a profit of almost $56 billion for the last year earnings not seen in more than 150 years of company’s history. Shell just announced a record profit of $40 billion. And US company Chevron has doubled its annual earnings to a record 35 and a half billion dollars, which is the biggest in its history as well.
Stephen Lacey
Combined, the top oil majors brought in nearly $200 billion in profits last year, a fact that President Biden brought up in his February State of the Union address,
President Biden
I think is outrageous. Why they invested too little of that profit increased domestic production. And when I talked to a couple of them, they say we were afraid you’re going to shut down all the oil wells and all the oil refineries anyway. So why should we invest in them.
Stephen Lacey
Whatever the response – higher taxes on profits, more incentives for clean energy to cut oil demand faster – the reality is that these massive numbers show how central oil and gas are still to the economy. That was also a fact that Biden acknowledged to some jeers and cheers.
President Biden
So we’re going to need oil for at least another decade. And that’s going to exceed and beyond that. We’re going to need it!
Stephen Lacey
And oil companies? They definitely feel that way too. BP just decided it would invest billions more in oil and gas production rather than make the drastic cuts that initially proposed. Shell is doing the same expanding fossil fuel extraction while keeping clean energy investments flat. And even with windfall profits clean energy only accounts for 5% of oil company capital expenditures globally. At one point, it seemed like there was a real shift happening in the sector. And now with the global appetite for oil still growing, the allure of high profits is shifting investments back into extraction. this is the carbon copy. I’m Stephen Lacey. This week, how will this new boom time for oil and gas companies impact investments in clean energy? Plus, we’ll take stock of some of the hottest emerging sectors like hydrogen, virtual power plants, and critical materials recycling. I’m joined once again by Katherine Hamilton and Jigar Shaw. Katherine is the chair of 38 North Solutions. Hi there.
Katherine Hamilton
Hi. So happy to be here.
Stephen Lacey
How’s all that implementation going?
Katherine Hamilton
Hoo, boy. It’s really great. I will say so many very motivated people on all sides. There are motivated people who want to get it right and I think people are trying to work together to do that. So it’s definitely a lot of work but a lot of energy around it.
Stephen Lacey
Jigar Shaw is the director of the loan programs office at the US Department of Energy. Hi Jigar. How are all those deals shaking out?
Jigar Shah
I mean, so many deals, deals everywhere. It really is an extraordinary time to be in this space. I think the amount of economic activity is just at an all time high. It’s it’s awesome to see.
Stephen Lacey
You get a deal! and you get a deal!
Jigar Shah
And you get a deal!
Stephen Lacey
Alright, so we’re recording this week before CERAweek, by the time people hear this CERAweek will be ongoing. It’s this massive energy conference hosted by S&P, which brings together the biggest names in the oil and gas sector and the broader energy space to talk about trends there. I presume this clean energy piece, what happens to investments in clean energy, is going to be a big part of the conversation there. So Katherine, to you first, how do you read this apparent slowdown in transition thinking in the oil and gas industry? Like do you see it as a slowdown?
Katherine Hamilton
Yeah, so what’s interesting to me is CERAweek, while I go, it’s like visiting a foreign country for me, because oil and gas is not where I work. So when I have to figure out what’s going on in this industry, I use a lifeline – my “phone a friend” lifeline. And I talked to a friend of mine who was a longtime executive for one of the majors and asked her this question, is it slowing down? And I think we need to look at a few things. One thing is well, did Bernard Looney just get a little bit over his skis? Did he make these pronouncements? Certainly, he made them not knowing that Russia was going to invade Ukraine. He didn’t know that there was going to be this huge COVID issue with an economic recovery that was going to come and bring a big boom back to their business at hand, which would give them 200 billion in profits altogether. Right. So I think we need to think about what does that mean? What is the transition mean for an industry that really is extractive, that uses in a very specific infrastructure, a very specific set of skills that is a commodity based industry? What does that transition look like? Does it look like more investment in renewables? Or does it look like and on the electricity side? Or does it Look like more of an investment in more drop-in type fuels? Like renewable natural gas, like biofuels for sustainable aviation fuels? Does it look like hydrogen? So yes, they’re slowing down in some ways. And maybe Looney was a little bit ahead of what the profitability was going to be for them, and, you know, could not figure out potentially how to be as profitable as he could be on the renewable front. But maybe there are other ways that this industry will be able to transition.
Stephen Lacey
And Bernard Looney came out and said, Hey, we’re not slowing down renewables investments. In fact, we’re actually going to increase a little bit, but we’re not going to cut production as much as we said. So I think people were conflating some of those things. And the question about Shell too, it seems like their investments are going to be flat. So they’re not increasing investments, but they’re not reducing them either. So Jigar, this is a conversation you suggested we have because you’re going to be at CERAweek talking about DOE’s approach to hydrogen in the oil and gas sector. And I want to get to that, Katherine mentioned that. But first, what’s your read on this swing in investment?
Jigar Shah
Well, you know, I think the context of this really matters. And I feel like we sometimes lose that. You know, in 2020, when COVID hit and we were having this conversation, I think we talked about there being a moment where you could have Peak Oil, right. And BP, I think, in 2020d even said that they thought that oil production may have peaked in 2020. I think that today, people still think that’s true, right? So even with all of the oil and gas announcements and how much money people are making, and all that stuff, I think people generally believe that electric vehicles and a lot of the other demand destruction efforts have started to hold root and that the Ukraine conflict has really led the Europeans for sure to implement far faster than even they thought that they could. And I think it’s inspiring the US to do something similar. And so I do think we’re at a moment where Mercedes Benz and others have announced that they’re basically eliminating all R&D budgets for internal combustion engines. Right, and that is the sign of the long decline. The sign long decline is when these large corporations say investing in in really expensive R&D that takes 10 years to come to real fruition is no longer worth doing is really that sign you’re looking for. And I think all of the majors as well as the big oilfield service providers have now decided to start cutting R&D budgets to the point where they’re sending a very clear signal that this is going to be a cash cow business for the next whatever it is 30, 40, 50 years. And that matters, because like last year, when I was at CERAweek, and you know, had a lot of these speaking engagements, and was flanked by Goldman Sachs and other investment banks around me, what they were saying is because of this trend, we are now valuing your stock at just a discounted cash flow to the future, right? We don’t actually see you as a growth stock anymore. And that means that we’re going to trade you at 8, 9, 10 times earnings. And you see that today, right? So Pioneer, and many of the other folks in the hydraulic fracturing industry are also saying circa 2014/2015, we would have done way more drilling. But we’re being way more disciplined today, we’re producing a little bit less oil than we probably could. But we’re maximizing cash flow and buying back shares and doing all the things that you would do as a mature business that no longer is seeking growth, but is now seeking to return cash back to shareholders. I think that that pivot has been lost in all of this noise around whether they will or won’t make the energy transition, they have clearly signaled that they are no longer a growth industry. And that is big, big, big news.
Stephen Lacey
Interesting. So Katherine I’m interested in your take on the policy and politics angles of this. So here’s what the IEA wrote in June 2022 in an assessment of investment trends: “global oil and gas sector income is said to jump to $4 trillion in 2022, more than twice its five year average, with the bulk of it going to major oil and gas exporting states. These windfalls provide a once in a lifetime opportunity for oil and gas producing economies to fund the much needed transformation of their economies and for major oil and gas companies to diversify their spending.” As we heard, only 5% of capital expenditures are going into clean energy at the moment. So, obviously, oil and gas companies are gonna extract more when prices are high, even with some of these longer term shifts that Jigar identified. So is there something that needs to happen on a policy level in the immediate term, or in the coming years to encourage more of that spending to head over into renewables and hydrogen or other drop-in fuels?
Katherine Hamilton
It’s interesting, because globally it’s really different depending on where you are. So the EU right now, it’s $6 equivalent gallon gasoline. Norway is at 90% EVs; they’ve done this massive transition, and yet, they’re one of the biggest oil producers. They’re not going to stop producing oil, they’re not going to stop selling it, they’re going to increase it. They have 50 more years of oil. And yet, they’ve already transitioned to electrification. So there are just so many other dynamics at play in Europe: the heat pump market has gone up 40%. The heat pump people cannot install them fast enough, because of the price of oil and gas over there. In the US, it’s slightly different, but what we have done is we’ve put a lot of policy and market mechanisms in place that can change those dynamics. So we have funding for projects, we have tax credits. For more alternative fuels like hydrogen, we have a lot already in place, I think we still have to kind of see how that pans out. Because hydrogen is still very expensive, and that that’s going to take a lot of work to get it to be as cost effective as like renewable natural gas or biofuels and more drop-in type fuels. So I think we have to see where it goes for hydrogen, how DOE is able to implement those hydrogen hubs and look at the various types of hydrogen. We also need to look at other kinds of technologies that will be sort of adjacent to the oil and gas industry, for example, geothermal that can use a lot of the same kinds of skills and workforce that you could with oil and gas, and see if there are other ways to transition. I serve on the board of Greentown Labs and in 2020 they opened a new lab in Houston, and the city of Houston welcomed it with open arms. They are ready for a transition. They’re ready to do something new; they don’t want to go backwards, they want to go forwards. So the innovation, the entrepreneur space is very, very significant there. And I think that’s also going to get and has already gotten a lot of the majors really interested and involved. So Jigar that brings us to the hydrogen piece, which you are focusing on. The first loan guarantee coming out of LPO when you took over in the office was for hydrogen. This project in Utah that could potentially double green hydrogen production in the US. Companies like BP, Chevron, Total, Shell – they’re all collectively planning to invest tens of billions of dollars into hydrogen production in the coming years, some blue some green. How are you specifically engaging the oil and gas industry on this tech?
Jigar Shah
So the the interesting thing about where we set the Loan Programs Office is we can separate press releases from truth, because everything that wants to be built in this country is coming through our office. And so I can very firmly tell you that the oil and gas industry isn’t even close to 10s of billions of dollars of hydrogen. And in fact, we are on track with announcements in this country to a full 10 million tons of hydrogen being produced in this country that’s clean. Put that in perspective, we produced 10 million tons of grey hydrogen today. So I believe that by 2030, we will have 10 million tons of clean hydrogen in this country. Right now, many people think we need to go above that number right to decarbonize other sectors. But I think just in terms of what we’re using today, that’s all going to be clean by 2030. And almost none of it is being financed by the oil and gas industry. It’s all other industries and companies that are doing it. This is the thing that’s fascinating to me, whether it’s carbon management, or hydrogen, or geothermal, the oil and gas industry has a historic ability to bring their 40,000 applied engineers to the table and actually run roughshod over all these industries. And they’re choosing not to. And so they buy little things here, and here’s an R&D investment I’m making, here’s me buying the existing biofuels business, you know, et cetera, which is wonderful, don’t get me wrong. But in every one of these sectors, they’re not even close to dominant. I would say they are less than 20% of the total capital that we’re seeing going into each one of these sectors, which I don’t know that I care. Because today, we’re at a place where there’s so much capital outside of the oil and gas industry that’s coming in that we’re gonna hit our goals one way or the other. But it’s just fascinating to see the differences between the press releases, and what we’re actually seeing in the capital stacks coming into Loan Programs Office. Are you assessing any potential projects from within the oil and gas industry? Are they just can they just finance those themselves? No, we certainly can assess it. And you know, I don’t know that I can get into the specifics of each individual project. But what I would say, though, is that the reason they can’t do it themselves, because their return on equity requirements are too high. If they can’t get debt for these projects. Well, they can get corporate debt, of course, and that’s how they funded their dividends for the last 10 years. But that’s not the same thing as project finance debt. And this goes back to Bernard Looney’s comments is the oil and gas industry runs off of a singular balance sheet, a unitary balance sheet. And so I don’t even think that the oil and gas industry understands project finance. They don’t, right? I mean, they funded the entire hydraulic fracturing industry off of junk bonds. We’re to a unitary balance sheet, right. And so if someone were to say, you know, like the Shell CEO said I can’t figure out how to make double digit returns in solar and wind. Most of us who’ve been in the solar wind industry have generated 36% annualized returns every single year, since we were in there from 2007. I don’t think that they actually understand how we did that. So it’s not surprising to me that they’re confused as to how to play in this space. And it’s causing them to miss the moment, which, again, may have been a big deal back in 2010. But it’s not today, because there’s so many competitive sources of financing.
Stephen Lacey
Katherine, if we think about the hydrogen sector, generally, whether it comes from the oil and gas industry or elsewhere, there are concerns about how that hydrogen is produced, whether it’s gray or blue hydrogen, different processes using natural gas, or whether it’s renewables producing green hydrogen. There is the oil and gas industry has been lobbying for more tax credits that could encompass blue hydrogen, and there are definitely fears being stoked that it could bake in more fossil fuel consumption, rather than support a real transition fuel. So what do you make of those criticisms?
Katherine Hamilton
I think we need to look at what DOE is doing right now. They’re setting up three hubs, one for green, one for blue and one for pink, which you did not mention that’s new from nuclear power. That’s nuclear. We need to look at that. See who’s at the table. See how that kind of spins out. I think back to what Jigar said on profitability. I mean, the number one thing for these companies is making money and they have to figure out how to do that. And I think the path of least friction is going to be the path they’re gonna go down. As we’ve seen, they might dabble elsewhere, and sometimes they like to hold back until they’re really ready to go all in. I mean, hydrogen is still a very inefficient way to produce fuel and so you certainly don’t want it to be taking something bad and making something worse. But at the same time, I think we need to see how how all these hubs spin out and what comes out of them. And what the data are that come out of those – not just the cost effectiveness data, but also the carbon reduction data.
Stephen Lacey
Are you hearing those concerns that I identified, though from from others when you’re talking to them?
Katherine Hamilton
Yes, a lot of folks are concerned that it this is just a way to keep the oil and gas industry going artificially without really cleaning anything up.
Stephen Lacey
Jigar, what do you make of this interpretation? And how does that feed into what you might support at DOE?
Jigar Shah
Well, look, I think that DOE doesn’t use the colors, right?
Stephen Lacey
So you don’t have like a color wheel or behind your desk that you spin each day?
Jigar Shah
Well, we have the SDG goals. There’s like lots of colors and the SDG goals around there. But no, I think we don’t use the colors. We use national labs to do lifecycle greenhouse gas emission analysis and clean is a standard, right? So we use clean, right, and whether it’s from nuclear or natural gas with carbon sequestration and storage or renewable electricity through electrolyzer, it’s got to meet greenhouse gas emission requirements. And so, so I think we’re, I think we’re all very firm there on the science. I think, in terms of this fear of the oil industry, I think it’s totally misplaced, as I just suggested, they’re not even putting any of the money into any of these projects, right. It’s other companies that are doing it, mostly, frankly, renewable electricity companies that are leading the way on green hydrogen. So like, so I don’t, I don’t really understand, I understand the the, the fear. I mean, you know, there’s lots of fear everywhere for all sorts of places, right, but it’s not actually proven out in reality, I think, you know, the goal of the Department of Energy. And the goal of all of us in this area, is to add to the number of tools that we have, that can reach trillion dollar scale, because let’s make no mistake, even the solar and wind industry in the United States today hasn’t saved a gigaton of carbon. This is amazing, it’s fully mature, it has not saved a gigaton of carbon. So the DOE’s objective here is to make sure that each one of these tools gets down the learning curve, and actually gets to a cost effective point such that it can be a viable tool for decarbonization of the electricity grid by 2035, and the entire economy between 2030, 40, 50. And that that’s the same whether it’s carbon sequestration and storage, or whether it’s nuclear power, or advanced geothermal or hydro, I feel like all these people want to make big choices at the nascent stages of a technology, and I get it, I totally get where the fear comes from. But it’s totally misplaced. The goal of the Department of Energy has to be that these technologies are viable and cost effective which isn’t gigaton scale. It doesn’t mean it’s a trillion dollar scale, it just means that it’s viable and cost effective. And then policymakers, whether it’s at the state Public Service Commission level, or whether it’s at regional levels or the national level, can decide which ones they want to provide tax credits to which ones they want to scale up to join our scale.
Stephen Lacey
I want to take a step back for a second and talk about why there’s so much attention on the hydrogen space and why the oil and gas industry is so interested in it. So hydrogen is a flexible energy carrier hydrogen is used in petroleum refining, and fertilizer production can be used for electricity and power and heat. And you can use it for a variety of applications. And so why is there so much attention on hydrogen given that? Jigar?
Jigar Shah
I honestly don’t think that they’re interested in hydrogen; the oil and gas industry. I think they’re interested in the concept of hydrogen. But when you look at the investment that’s been made over the last 12 months in hydrogen, almost none of it is from the oil and gas industry. So I don’t think that we should keep continuing to repeat this narrative. Almost all of it has come from the renewable electricity industry. It’s NextEra. It’s SK Group. It’s LG Chem. There’s a lot of these big strategic players that are investing in hydrogen. You have ACME in India. There are all these companies that have gone all in on hydrogen, and none of them are oil and gas companies. And so I think the oil and gas companies love the government relations part of this the PR part of this – the “we could be replacing natural gas in our pipes going to our homes” with hydrogen. But DOE is firmly saying that’s never going to happen. The notion that we’re going to be heating our homes with hydrogen coming through pipes. I think that is that’s never going to happen. And so what we’re focused on right now in the immediate term is that we make 10 million tons a year of gray hydrogen that we use in the United States, those applications need the molecule of hydrogen, not hydrogen for future, turning back into electricity or hydrogen, for storage or hydrogen for something else, they physically need the molecule to make ammonia to make chemicals, to take sulfur out of out of diesel, etc. And all of those molecules will be converted to clean by 2030. We have the policy lined up, the subsidies lined up with the technology, lined up with with the ability to get the financing. And I would say that almost none of that is coming from the oil and gas industry.
Stephen Lacey
Well, I want to loop back around to the initial premise of this conversation, which is this macro economic environment. I know the word historic is is thrown around a lot. But the last couple of years really have been historic, bringing unprecedented disruptions of supply and then unprecedented drops and surges and fossil fuel consumption. When we look back on this period, and try to make sense of how it influenced the energy transition how do you think we’ll interpret it?
Katherine Hamilton
So I think it will depend on where you are. If you are sitting in France, if you’re sitting in Germany, you’re saying this was an inflection point because of this war. And it made us really see as a transition as necessary. If you’re in the US, I think we see this as an enormous opportunity. The Inflation Reduction Act is is helping us get to a place where we’re not at necessity yet. This is an opportunity for us to show leadership, for us to bring back more manufacturing, to get to build big things as Jigar likes to say, and to really change the arc of where we’re going as a country.
Jigar Shah
So when you think about what happened last year in Ukraine, and the US role in helping the Europeans off of Russian gas, it really was a huge triumph of American ingenuity and power. We are putting in motion today, because of the bipartisan Chips in Science law and the IRA, the ability to make sure that 12 additional sectors will reach full cost effectiveness and commercialization by 2030. All of that will be commercialized and built in the know how we’ll be here in the United States of America. And we will export it to all of our allies that have very strong commitments in their cop around the world. And I think you will see a flexing of American power. That is just breathtaking, right? I mean, there are many countries around the world that are blessed with the ability to to you know, do geothermal or advanced hydro or nuclear or carbon management or all these other things, and they don’t have the know how they don’t have the EPC technology, you know, companies, they don’t have all of those things that they can do to fully exploit it. And the United States will lend all of those things to those countries. It is honestly breathtaking in scope, we are going to have to hire probably an extra 500,000 trades people over the next five to seven years to be able to do that here. And to continue it frankly through 2050. But then, you know, I just think that what it means for America to bring down the cost of all these technologies and make it you know, something that people can reach and afford around the world, I just think is a huge flex of American power.
Katherine Hamilton
We had just a few years ago, at the World Economic Forum, we were all tearing out our hair over hard to decarbonize sectors. We’ve talked about these: steel, cement, shipping, aviation, and now there’s a line of sight of decarbonization, and I think as Jigar says it’s breathtaking.
Stephen Lacey
Let’s talk about a line of sight for some other technologies, emerging technologies. We talked about hydrogen, you’re both following a few different sectors. Jigar, you’ve got critical materials on the brain: lithium, nickel, copper, neodymium, etc. There’s this worldwide push right now to diversify the sourcing of these materials. And there’s a huge investment push in recycling them, which we’ve touched on on this show previously. So you’ve issued a conditional loan commitment to a battery resource recovery facility. What activity interests you in this space right now?
Jigar Shah
We’ve mapped out all the critical minerals. So the US Geological Survey and others have mapped out where all the critical minerals not only in United States, but here’s where we think it is in Chile and Argentina and all these trade allies that we have right where we might do friend-shoring. And then you say, well, what’s theoretically possible, right? So, so we’ve mapped it all out, but what do we think we can cost effectively actually get out of the ground based on available technology or where we think technology is gonna go? And then you have one further select, which the Loan Programs Office is involved in, which is, where have you actually attracted capital where somebody has actually started doing the work, right, because it’s six years right to go in test whether the actual, you know, lithium or or, you know, nickel or whatever Cobalt is there, then actually proving it to somebody and then, you know, figuring out how to start the NEPA process, and then going through consultation and getting all the permits and all those other things, right. And I’d say that, so the Loan Programs Office is fixated on where it has investment actually flowed, such that we can actually get some of these critical materials to market within this decade. And and, you know, once you do that select, it is very obvious that the first and best place to get it from is recycling. I mean, lifecycle in Rochester, New York, will produce 8500 tons of lithium carbonate once it’s fully scaled up. To put that in perspective, the United States as a whole produces 5000 tons per year, it’ll be the single, single largest producer of lithium carbonate in the United States, when it it fully scales up. And that’s what only 10% of all the household lithium ion batteries being recycled. If we actually figured out a way to create a campaign in this country, to get people to start looking through their drawers and actually like recycling those batteries, we could get much more volume of lithium, in this country from recycling.
Stephen Lacey
So I could just power all the phones and stuff in my desk here, my standup desk, I could power 10% battery production.
Jigar Shah
So I want to start by saying there is a lot in garbage for us to collect and extract back out right, then we have all this material. You know, look, I think lithium, we’re clearly on track, whether it’s the Salton Sea, or whether it’s in Nevada, or whether it’s, you know, some of the other mines that we’ve already identified in the processing facilities that the loan programs office will fund. We are on track on lithium to be able to meet a lot of our needs, within the United States. And then certainly with some of our friends, we are more challenged in places like graphite, where we don’t have a lot of naturally occurring graphite. There’s a little bit in Alaska, but most of it, you know, is going to come from this extraordinary mine in Mozambique, where we’re processing the ore here in the United States, in Vitaly, Louisiana. We have some small deposits of other things. And so I do think there’s a level of intentionality required to solve this problem. And there’s a good reason for that. I mean, in the same way that we didn’t want to get all of our oil from one country or a set of four countries. And we wanted to make sure that we diversified that to reduce the market power of one country. I think we’re saying the same thing here. We cannot build an entire industry off of the back of one geopolitical risk. And so we have to diversify those things. And that’s not just us, all of the countries around the world want to do the same thing before they scale up electric vehicles and some of those things in their continents as well. So I think this is actually quite a normal risk reduction strategy that someone would pursue. I don’t think it as anti-China or jingoistic as people like to portray it,
Stephen Lacey
Katherine, sourcing of domestic materials is a huge deal for tax credits under the Inflation Reduction Act and we’re still waiting on guidance. How do critical materials fit into the picture?
Katherine Hamilton
This is really important. I’ve worked on critical materials for over a decade. I’ve been working with a company, Umicore, that in the 1980s switched from being a zinc mining company to a recycling company. So they recycle dozens of critical materials, they have a pilot plant in the EU that is for electric vehicle batteries. So they’ve been doing this for a long time and experimenting with different with their smelting technology to make sure that they can actually extract a lot of these materials. Now they’re not saying you’re going to be able to recycle your way out of it at this point. But I do think public policy is going to have a lot to do with it. So whether it’s the tax credits or really setting some targets. And I’m not saying command and control because I think EPA is coming out with a recycling strategy. And maybe tracking or some kind of an ENERGY STAR type program or a battery passport program like they’re developing in the EU, where you’re tracking where the materials came from, whether they’re recycled, what their origins are, that will help you reduce the dependence on countries that are unstable, that use child labor practices, bad practices, things like that. I think there are ways we can do that in this country too. And it looks like based on the companies that are already moving ahead that it’s going to be a robust industry, and I think there’s gonna be a demand for it. Because we’ve talked about earlier how EVs are increasing exponentially right now. We didn’t have enough batteries to start recycling a year or two ago, but we’re going to have a lot of them. And we have to think about it now. And think about it in a circular way so that all those materials will go back into the economy and back into new batteries for our OEMs.
Stephen Lacey
And will there be a financial payoff through that activity through incentives in the IRA?
Katherine Hamilton
Yeah, absolutely. There will be tax credits for that. The Department of Treasury put out a white paper on critical materials and how they’re starting to think about it. They’re taking a lot of commentary. Now, the great thing about the IRA implementation is that they’re bringing in a lot of companies that understand this and understand the global market for these materials, and how to think about it. And I think that’s helping inform the regulations and what will be the final kind of rule making when it comes out.
Stephen Lacey
So let’s go into virtual power plants, which Katherine mentioned, this is a topic that three of us have talked about over the years. It’s something that we just recently covered on this show in the context of grid interactive homes. And the modern virtual powerplant concept, which is tying lots of disparate distributed energy resources, batteries, solar smart appliances, EV chargers together to act like a central power plant, has been around for decades. There’s been work going on in Germany for 20 years on this. We’re starting to build them in the US in very limited ways. But Jigar you actually write a blog at the DOE on VPPs, which clearly shows that there’s like interest at LPO on this area. Where’s this space headed? Why are you so focused on it?
Jigar Shah
Well, you know, I think we’ve talked about this a number of times, the energy gang podcast before and then now here. I think the bottom line here is that we have been doing it for 40 years, 40 years, right? DOE has been providing grants and hardware and software and all sorts of stuff. It is very clear to everybody that in 1979, we hit our peak in terms of capacity utilization of our grid, and every single year since then, we have gone down and capacity utilization. So when you think about what people do with trillion dollar machines, they usually try to use them more. We somehow have this systematic desire to use them less every single year. That has led to much higher electricity bills; it is a one to one correlation. The only way to reverse that trend is to start using the capacity we’ve already paid for more efficiently. That’s it full stop. So now the question becomes how do we do that, given the political nature, the regulatory system, all the things that we say that are in the way? How do we do that? Version 1.0 of this was that people were demanding that they get a virtual power plant contract, and then they go out and subscribe the customers. That’s what STEM and Advanced Micro Grid did. That’s what Auto Grid did with Puget Sound Energy, all these other folks; that model clearly fails. Like that is never gonna happen. The notion that you’re gonna get gigawatts and gigawatts of contracts signed by utilities upfront, and then people go out and subscribe customers to do that is never going to work. But what’s different today is that we are now adding two gigawatts a month of devices into our homes and small businesses that can be controlled by an app on your phone. Whether it’s your car, whether it’s your water heater, whether it’s your smart thermostat, whether it’s your battery that you put into your garage with your solar system, you now have the ability to turn that device on and off with your phone. Once that occurs that means the communication layer and all the other things that are required to be able to enable it to subscribe to a VPP can be instantaneous. And you saw that with Sunrun and Tesla doing that for California and getting paid $2 a kilowatt hour. You also saw that was Sunrun signing a contract in Puerto Rico. So you now have an ability to actually just sit there and subscribe a bunch of VPPs without any revenue. Because people are not buying these things for the VPP revenue. They’re buying them because they want electric cars or a battery backup in their house or a smart thermostat. So now you have the power to go to regulators and say why are you still raising rates at 10% a year when you can actually just leave rates flat if you paid poor people? If you paid justice communities? Do you hate justice communities so much that you would rather raise rates 10% than pay them for flexibility. Like what is it about you and your misunderstanding about virtual power plants that causes you to decide not to pay them, and instead, pay another natural gas peaker plant? It’s mind blowing to me just how difficult this conversation is going to be for regulators and for utility starting next year. And then the last thing I would say, it is very obvious to everyone that electric vehicles will break the current grid, it is not possible to do what we’re currently doing, letting people just charge whenever they want, do whatever they want, whenever they want. And the grid has to just keep updating everything forever. This is why we have a three year backlog on distribution transformers. It’s not because we have a shortage of distribution transformers in this country. It’s because everybody wants to fix the problem using 1980s approaches, instead of virtual power plants, and the distribution transformer companies are “Why are you guys forcing us to increase production by 3x? Because you guys won’t use virtual power plants.” And so I think the amount of pressure on everybody to use virtual power plants is going to be so overwhelming that the dam will break.
Stephen Lacey
Katherine, this is your thing, you focus so much on integration of distributed resources, I think you’ve probably suffered a lot of brain damage because of it working on the state level with regulatory agencies. I mean, right now you’re digging into a lot of state resource plans where distributed resources are like not even being considered. I just saw the news recently that the California Public Utilities Commission rejected Sunnova’s request to become a micro grid developer in California. This is a company developing solar and storage systems and they want to network those systems for grid reliability. So after all these years, why isn’t this planning keeping up with the technical potential?
Katherine Hamilton
Yeah, and that’s California. So try being a party in Louisiana. And this is just one state that I’m quite involved in, in all of the different utility integrated resource plans. And and I’m hoping that we can leapfrog and go to VPPs. I mean, right now, a lot of those states won’t even allow aggregated demand response and demand response is just like, the most simplest, that’s just the gateway drug to all the other stuff that you could do with distributed energy resources. So first, we got to get over this; why are we so opposed to just the concept of this. Aggregators are able to bring portfolios? As Jigar said, there’s so many different pieces that you could put into an aggregation, whether it’s efficiency, or storage, or solar, and bring all of that together. Or heat pumps, heat pump water heaters, like bring all of those together to provide a real flexible resource and have the customer actually be seen as a resource and not just as load, and then be able to turn that into something that is a business. And that’s what the utilities have not really grappled with. I just got done reading a staff report for one of the utilities in Louisiana, and this is the Louisiana Public Service Commission. And they said, so you did a demand response and energy efficiency assessment and a study, distributed energy resources holistically, were not included at all in that. And yet, none of the potential for DRM EE was included in the integrated resource plan at all. And we had pointed this out to them and our filing. But this is something that utilities don’t even build into their thinking. And they kind of don’t know what’s coming. What they also didn’t build into their thinking was all of the policy and the tax credits in the IRA, they’re gonna bring down the cost of all those resources, and will increase exponentially the ability for customers to access all of these resources, including low income customers that have not previously had access to them. And so they don’t really know what’s coming, it would behoove them to, to try to do a little periscoping here, and the periscope isn’t seeing around too far of a corner either. But I’m hopeful that we’ll get folks to think about VPPs, especially public utility commission’s and I think DOE is in a position to helping them kind of navigate that, which would be wonderful to do that. Because the resources will be there. And the issue is, what are we going to do with them?
Stephen Lacey
Alright, so we’re going to wrap here, you’re both headed over to CERAweek in Houston next week. By the time people hear this, you’re going to be there. So what would make a successful event like what would you want to hear people grapple with it to make you think that it’s a successful event with a real conversation happening in the oil and gas sector about the transition?
Jigar Shah
Yeah, you know, CERAweek has been going on for over 30 years, and it is largely a place where oil and gas executives meet to discuss issues within their industry. Last year, they added a feature called the Agora Stage, which is where all the innovation occurs that oil and gas should invest in and you know, and should be featured, right, whether it’s hydrogen or geothermal or carbon management, etc. DOE is bringing a very large contingent to CERAweek this year because frankly, we have a lot to talk about – a lot of work in the IRA and other places from hydrogen to DAC hubs to work on long duration energy storage, nuclear, critical materials, etc. I do think that there’s probably over 2000 non oil and gas CEOs coming to CERAweek this year, because of this Agora Stage. And because they’re actively going to try to fundraise from oil and gas companies. My sense is they’re going to have more luck with oil and gas private equity firms that have now been exited from the Permian Basin as the super majors have bought them out. But I think that the fact that these people are meeting each other, and viewing each other as peers means a lot, right? Like, I think that the word alternative in front of the energy has now long been retired. And these folks are coming here with an equal seat at the table. And that, I think, is an extraordinary achievement by CERAweek to really make this an Energy Conference, and not just an oil and gas conference.
Katherine Hamilton
Yeah, they started the Agora panels a few years ago. I’ve spoken at those. In fact, those were always my people. We’re the ones that were kind of in the marketplace. My brother is a classic philosopher, and he can tell you all about agora. And now it seems like it’s much more as Jjibar said, embedded into the full way that they’re thinking about CERAweek. And that is enormously hopeful. So many of my clients that are not in the oil and gas space will be there. I’m super excited to see them and to meet other new people, and have conversations that are really hopeful and really are taking what we’ve seen as a massive disruption in our energy systems into something that’s going to be much more sustainable and longer term.
Stephen Lacey
A delightful panoply of topics today, Katherine Hamilton is the chair of 38 North Solutions. Thanks, Katherine.
Katherine Hamilton
Thanks so much. It’s so much fun.
Stephen Lacey
And Jigar Shah is the director of the loan programs office at the US Department of Energy. Thanks, Jigar.
Jigar Shah
It always warms my heart to be with you guys.
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