Sustainability as Strategy: The New Era of U.S. Electricity Markets

Interactive Transcript

spk_0 Hello everyone and welcome to Sustainability as Strategy.

spk_0 A podcast brought to you by the experts from Roland Berger Americas.

spk_0 I'm your host Sean McMahon and today's topic is the evolution of electricity markets in the US.

spk_0 Joining me for that conversation is Pedro Caruso, a senior partner from the Houston office.

spk_0 Pedro, how are you doing today?

spk_0 Sean, I'm doing great. Thank you for the opportunity to talk to you about this.

spk_0 Yeah, it's great to have you on the show.

spk_0 As I mentioned, today's topic is the evolving landscape for electricity.

spk_0 And as anyone who follows these markets knows policy shifts and are rapidly evolving market dynamic are changing not only where electricity is needed, but also how it's being produced.

spk_0 So to start our conversation, let's talk about the demand side of the equation.

spk_0 How are you seeing things change there?

spk_0 The demand side of the story is fascinating Sean.

spk_0 We're going from exignation to growth and just to just to give our listeners some reference points in the 1990s or electricity demand in the US grew about 27%.

spk_0 That 27% became a 9% in the 2000s and a negative 2.7% in the 2010s.

spk_0 And we were reaping the benefits of better energy efficiency and the consequences well of a bit of the industrialization.

spk_0 That minus 2.7% in the 2010s is going to become a plus 25% in the 2020s.

spk_0 Right? And it could even be a plus 30% in the 2020s.

spk_0 So we're going from stagnant negative growth in the recent past to significant acceleration.

spk_0 And that is driven by mainly three forces.

spk_0 One of them is everybody talks about the data centers with happy to double click, a bit on why they're so data hungry and some of them certain things around the data centers.

spk_0 Then a bit of that on electrification still, you know, even we did some of the policy changes.

spk_0 There's still the expectation there'll be more electrification in the system.

spk_0 And then potentially from industrialization, particularly with reshoring of some key industries.

spk_0 So this stagnant decline to fast growth is a significant change with tremendous repercussions for the industry.

spk_0 Yeah, you mentioned data centers. They're in the headlines everywhere.

spk_0 Nowadays lots of big projections about the kind of, you know, demand they're going to place on the grid.

spk_0 How much of that is real and how much of that is hype?

spk_0 That's a great question, Sean.

spk_0 And I think there's a lot of reality and every time we think a number is hype, then the actual numbers come and they prove to be on the right track.

spk_0 It's just tremendous. I mean, the total data center demand is already over 1% of global electricity demand and there were almost nonexistent in the recent past.

spk_0 And it's just set to growth significantly out of that call it 600 to 900, 10 hour hours of power demand growth in this decade, 3 to 500 could come from data centers.

spk_0 So we're talking about how for the total growth in generation, it come from data centers, electrons, leading those things into into number of power plants.

spk_0 And just for our conversation today, I'm going to use a typical natural gas combined cycle plant as a reference point of 550 megawatt plan.

spk_0 We're talking about data centers alone will need a good, I don't know, 5,200 new of those plants in the US. It is, it is significant.

spk_0 All right, and then on the capacity side, we've heard for the last years about how new capacity has been coming primarily from renewables.

spk_0 You know, there's been some policy changes here in the US that I don't think it's a bold prediction to say that that might change and that the shift is going to maybe lean back towards gas or nuclear.

spk_0 How is that going to change the marketplace?

spk_0 Great point to change of mix. So a lot of our focus on the power generation side has been about adding renewable sources over the last two decades, right?

spk_0 And just as a reference point, we've lost a significant portion of the call generation capacity and almost all the diesel slash petroleum generation capacity in this country.

spk_0 And at the beginning, a lot of those changes were being supplanted by natural gas plants. We had a very large built out of natural gas plants in the 2010s.

spk_0 By the way, even in big part by the advent of a shell gas and then the low cost natural gas, we are enjoying in the US because of that development in the other gas industry.

spk_0 But that natural gas emphasis kind of was replaced by a wind and solar. So we went from virtually zero wind in 2000 to about 140 gigawatts of capacity, which is a good chunk of one point that watts of capacity that we have in this country.

spk_0 And then solar, we added about 90 gigawatts of capacity in the last 10, 15 years alone. So a lot of emphasis has been on that capacity addition and that just changing for multiple reasons.

spk_0 And number one, the intermeetancy of those resources, the need for transmission and an stabilization capacity either in terms of natural gas picking capacity or batteries and so on.

spk_0 As well as when you put all of those pieces together, some of those investments needed some subsidies and regulatory environment that is certainly shifting.

spk_0 But let me just double click on the natural gas side, which I think is where a lot of the changes going on. But from the natural gas side, we went from about 100 gigawatts of capacity in 2000 to about 400 gigawatts of capacity in 2010.

spk_0 And at this point, we're sitting on a slide to over 500 gigawatts of capacity of natural gas.

spk_0 So we basically saw a significant period of growth and then a bit of a slow down on that capacity. And that has translated into just to give you a rough sense in a number of plants per year is this magical 550 megawatt plant that I'm talking about.

spk_0 We went from about 40 plants per year in the 2010s to about 15 plants per year so far in the 2020s right and our expectation or expectation that everybody has is that that has to be over 25 even 40 plants per year.

spk_0 So you see a big swing on the number of plants that are needed and that and that therefore comes with more turbines and more of everything that needs to be in place for the plants to be built.

spk_0 So significant change in the natural gas side of the question.

spk_0 Okay, and then earlier you mentioned reindustrialization right and you know here in the US President Trump, you know, a big part of his agenda is to, like you said, reshore manufacturing or just build out new manufacturing for new industries.

spk_0 So I guess the question is two parts do we have the capability to generate enough energy for those projects and do we have the grid that can get that energy where it needs to be.

spk_0 That's the one trillion dollar question Sean the answer is I mean we're America of course we can do it right we can do we can do anything we set our mind to achieve.

spk_0 And it probably will be different to the way you can dream it today we have significant abundance of risk natural resources we have tremendous amount of natural gas in this country to provide for an advantage fits talk or advantage.

spk_0 So we have a lot of energy for the future we have tremendous amount of salt and wind and so on our infrastructure is lacking right particularly not only on the generation side but the transmission side and of course the reindustrialization we're talking about a new manufacturing plan.

spk_0 The man for those plans are on an off based on on the time of day or whether they're clouds on the sky or there's wind or not so there's a mismatch between some of that demand pattern and the generation pattern and it costs money to be able to breach that gap either through you know new gas power plant or new nuclear power plant which we could talk about or or because we're going to have to add batteries or other sources of resiliency we should probably talk about what we might respond to.

spk_0 And also as well which is a great tool to smooth the the grid changes so do we have the infrastructure needed to achieve that dream of reindustrialization not at this time could be built with a lot of effort and regulatory support.

spk_0 Okay so when you talk about building out that new generation new power generation is to say to meet that demand what does that mix look like you know i'm hearing a lot about you know obviously we talk about gas significantly a lot of talk about nuclear but there's a build out time associated with that too so talk to me a little bit about just the overall mix of what that generational look like.

spk_0 Yeah that's a great question Sean we know something that is that we're going to need almost everything we can get our hands on to satisfy the demand so renewals are for all to play.

spk_0 Nuclear a lot of people in the industry are expecting the extension of licenses so the expected plant closures can actually be be avoided maybe the comeback of a couple of recent closures or not so recent closures as well a lot of excitement about a small nuclear reactors and for listeners that are not.

spk_0 Obsessed about the industry this small reactors are not necessarily that small we're talking about the definition of less than 300 megawatts or less so they can be very large you know it's not it's not the generator you're going to put on the back of your house when the storm goes out this dessert massive industrial units but nonetheless small compared to the historical.

spk_0 Size of the nuclear reactors and plans and the expectation of the hope for the small nuclear reactors is that because.

spk_0 There going to be more modularized you can build more of them repeatedly and therefore you can have better economies of learning right so that the end unit is significant cheaper than the first unit and so on so there's a lot of excitement.

spk_0 And about small nuclear reactors a lot of serious companies with very interesting technology progress on that end i'm not an advertisement to other people in Rottenberger that we actually have people that know nuclear very very deep so i'm not going to try to speak speak as much as I could but the potential is real but unknown and that talked a lot about the uncertainties and that unknown comes with a lead time that you pointed out to Sean which is is not happening tomorrow right we're not adding.

spk_0 50 gigawatts of nuclear capacity in the next two years not even five right maybe not even 10 and it shouldn't come as a surprise to anybody that will have in supply chain constraints and gas torments but when you go from 40 plants a year to 15 plants a year.

spk_0 To now back to 25 to 40 you cannot expect manufacturers of the key pieces of equipment for this plan to just keep the capacity for levels of of demand that they don't have so the demand is seriously outstripping the capacity the ability of the big gas torments we can talk about what they are the numbers everybody knows who they are and they're all having backlogs like serious multi year backlogs so what used to be a typical.

spk_0 Give me two and a half two years of lead time and you have your gas your gas turbine can now be even up to seven so to the point that the company that have been able to place place holders on demand ahead of others are even getting a premium on some of evaluations because they're expected to be the ones that can add that capacity and given that the data centers.

spk_0 The industrial capacity as well but the mega centers the data centers in particular can be placing multiple areas of the country whoever deals the capacity to supply them will win they will be the ones getting the demand and that that's very exciting part of why utility companies have gone from boring stable utility companies from evaluations time for where people think of them as bonds to actually be in gross stocks in many cases so a lot of concerns about the supply chain in general particularly gas torments which is a very important thing to do.

spk_0 So one people typically expect to be to be the ones to complot in the short term.

spk_0 Are there any other spots in the supply chain that you know people maybe aren't thinking about but then when you see it you're like oh wow that that could turn into a pretty serious choke point there whether it's just an individual part I know that like inverters you know talk about that in the solar side and then we've discussed you know turbines on the gas side but any other pieces out there that you know you think deserve a little more attention.

spk_0 When you double click on all the equipment and materials needed their parts where you see this can be particularly a triggering but the one I like to talk about the most is engineering capacity right the human ability to design and build these plans not only from the engineering and procurement contractors but also from from the standpoint of the companies themselves so back in the day just to use a phrase all these power companies will have very strong.

spk_0 Capital projects teams with experience building multiple large scale capital projects plans and the distribution centers and the transmissions and so on with the shift in with with with the withdrawing demand and the shift of whatever capacity was being added to renewables those renewal projects look very different from the from the large scale projects.

spk_0 But not necessarily the turbine once because turbines can be large capital projects on themselves but the way you build a solar form is very very different from the way you built a new plant and different from the way you built a natural gas plant so a lot of those capabilities are have to be rebuilt and enhanced and they have to be rebuilt and enhanced at the time where the way things are being done is very different and it's going to continue to look very different from the past we're seeing a lot of our clients that are thinking about.

spk_0 So how do I actually improve my ability to deploy capital projects because capital projects is not only about putting the capacity so the degree of reliability exists and of course these companies have a responsibility to guarantee the reliability for supply but it's also linked to their growth ambitions and they know that there is a competition between different regions and different companies to be the ones that put the capacity on the ground first.

spk_0 So to question I'll be paying a lot of attention to the the engineering and then the ability to build like the welders and all that part of the supply chain.

spk_0 Yeah, I like that the the human capital might be the supply chain king that gets in the way of some of the major cap X projects themselves.

spk_0 Yeah, we have been putting a lot of emphasis on college education for a lot of the right reasons and we're going to need a lot of very good paying blue color jobs to fulfill the promise that is the growth in power generation and supply carriers with it.

spk_0 Anything else that's out there that companies need to be thinking about that's again kind of under the radar at this point.

spk_0 Thanks for the question Sean I will not presume that these are under the radar topics for companies but part of my job as a consultant and part of our job in rolling burger is to synthesize what companies need to do so that they can they can try focus and and emphasis on particular areas.

spk_0 I think at the same level of improving the ability to deliver capital projects there's also the need to make sure that they're getting their full potential for the existing assets and that and that typically includes work around maintenance and reliability.

spk_0 Incluses work on the bottom neck in includes work around the resiliency of the whole great so the operation teams at this company is not only have to work on making sure they can deliver the capital projects.

spk_0 They also need to make sure that the existing production and distribution infrastructure is up to par and continuously to the next level so they can extract more value from from those assets.

spk_0 Now the advice is not only from the people that deal with the operations is also for the people that deal with the customers and from a customer side you see and agree that companies should be putting a lot of energy on intended on capturing that data center growth.

spk_0 So we're entering a unique moment in history where industries change and those are able to develop those capabilities sooner will benefit disproportionately from it.

spk_0 So getting to know the link or getting to understand who's building them building the sales force and service capacity around that so they can capture that demand is paramount.

spk_0 And also related in the customer side of now in the interface between customer and capacity is a significant opportunity on the demand response side of the question.

spk_0 The man respond basically means that that somebody has the ability to consume less power when the demand on the grid is very high.

spk_0 So that in absence of ability to add capacity to the grid you're reducing that big demand which has the same effect some people actually talk about the man response as an additional source of capacity and the reference to that in that way.

spk_0 Historically, the man response had been an opportunity tackle with commercial and industrial customers, which are the ones that have the biggest source of the man is becoming more and more distributed asset on on residential houses.

spk_0 You see companies investing in helping control the terms that a lot of offerings on a power bank or a battery on your house and you will be able to draw from the grid when it's cheaper and and using your house when it's more expensive and so on.

spk_0 So a lot of opportunity on on that end and customers are willing to pay for it right there's value in having that either because a customer's one that ability to arbitrage between the high cost or the low cost.

spk_0 Or because they're very willing to give you some of the value share the value of them drop into demand when the money's on its peak.

spk_0 So just to recap right so so a few things that the CEOs of our companies into having mine from power generation, other way to customer will be mature your assets are running to the full potential make sure you are building the ability to add the capacity that's needed.

spk_0 And avoiding overruns and delays built on these demand response opportunity and then captured the demands from data centers and when you put all that and you compare it to the agenda.

spk_0 Over the last few decades and how that agenda has changed this is shown just an exciting time to be in power.

spk_0 It really is an exciting time to empower and you can feel it when you walk into the power companies and you see the people motivated to do a good job.

spk_0 The not only is foundational to the way we live but it's actually foundational to to the economy we're building for the future and that's real.

spk_0 You know that your job is related to that and you know you're competing with others for it.

spk_0 It's exciting and you can feel it.

spk_0 Okay and now so you know we're talking a lot about different things that kind of all need to happen at the same time.

spk_0 And so you know if I'm a utility company what advice would you have for me in terms of how to make sure I can execute on all these projects like I said at the same time it's not just one focus it's about eight or nine or ten all with different lead times and different supply chain challenges and and you know so many different variables.

spk_0 So what kind of capabilities would I need?

spk_0 That's a great question Sean thank you for asking me I'm going to answer it and then I'm going to touch on other areas that I know most of our clients and our companies are considering when it comes to capital projects the key is to have a very robust capital projects organization that to a certain extent centralizes the capital project activity.

spk_0 And centralizes is in a way that smart enough to recognize that not all capital projects are done the same way.

spk_0 So if you if you apply the standard processes and procedures you do to build a nuclear plan and you apply them to a solar farm I'm going to show you that solar farm is going to be late and with excess cost and a lot of headaches along the way.

spk_0 Just from applying the wrong processes and it is obvious when you when you put the two extremes on the table but but it is also different to build a natural gas combined cycle plan and it's very different to build transmission and it's very different to build the last mile distributions and upgrading the trans the other transformers and so on.

spk_0 So so companies has to look at their portfolio of projects and segment them and decide which ones are going to need the full rigor of a massive capital project plan which ones need a more flexible approach so that you can build them faster and which actually just a repetition of projects that look very similar to each other so you're not reinventing the will every time you do one.

spk_0 And once you have a company segment you prefer your projects that way then you need to redesign the systems you use to deliver them you need you need the the tailor capital project common process you need the tailor controls you need the tailored scheduling with you know the way to do scheduling the way to do the work of the whole operating model around how you deliver this capital project needs to be tailored or you're going to pay in terms of excess cost or or excess duration on the project.

spk_0 Now to make it more exciting you're doing all that in the context of the very least two changes I need to be taken into account one is all the digital and artificial intelligence tools are now available there are amazing and incredible and they're moving so fast that humans and organizations are having a very hard time you know staying up to speed what's possible and very importantly selecting of what's possible what you actually want to apply to your own process right now.

spk_0 And that every time you change something you have to train people and bring them along and so on the second change is the globalization of engineering right and and along gone sort of the days where you would just hire an NPC company everybody would be in the team room in in high cost location that's just not the way things work anymore.

spk_0 So you know just to bring it back centralization of capital projects with a segmented view on how you actually deliver them so you actually have the right set of processes and tools to get each of those different projects done and that's easier said and done and and components that do well have a competitive advantage.

spk_0 The other piece that goes hand in hand with that is improve supply chain capabilities right you know you in order to deal with complex supply chains that have bottlenecks you need supply chain people are able to understand the market dynamics deal total cost of ownership help the project teams challenge their own designs and those are capabilities are built on purpose right they have to be invested over time.

spk_0 And we are seeing a lot of effort and energy from from supply chains that want to you know see the opportunity to become not just the people that optimize spend but the people that actually enable growth and that's very exciting to a lot of the supply chain professionals in the industry.

spk_0 Well Pedro listen I can sense that excitement that you're talking about and as far as our conversation goes today you know this podcast is called sustainability as a strategy for a good reason and I think you've shared excellent strategy ideas for business owners out there who are navigating this evolving landscape so thank you very much for your time.

spk_0 Sean thank you very much for the opportunity and the code session really enjoyed it.

Sustainability as Strategy: The New Era of U.S. Electricity Markets

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