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Texas Continued Permitting Data Centers After Abbott’s Pause, Report Finds | Inside Climate News

Despite Gov. Greg Abbott’s announced pause on data center approvals, watchdog groups say Texas regulators have continued processing applications and issuing approvals.

“TCEQ has continued reviewing applications and issuing approvals that allow data center development to proceed,” the group [FracTracker] said in a press release Monday. “These actions do not signal an agency trying to pause.”

In response, Abbott Press Secretary Andrew Mahaleris indicated that the pause applied to approval, not processing, of permits.

“No permits have been approved,” Mahaleris said in a statement. “In line with the Governor’s directive, TCEQ has not taken and will not take any proactive actions related to the approval of data center permits.”

Solar and Storage Growth Drives Down Summer Wholesale Electricity Prices | SEIA

Texas wholesale prices were down 42% in the summer thanks to solar energy, according to a new report from the Solar Energy Industry Association.

“As the midterm elections approach, delivering affordable, reliable power is a priority that transcends party lines and Texas and California are proof that the growth of solar and storage is driving down prices,” said SEIA CEO Tim Pawlenty.

The impact is particularly notable given how much electricity demand increased over the same period.

Texas data centers could undo years of progress on air pollution | The Texas Tribune

Texas spent two decades reducing major air pollutants even as its population and economy grew. But with at least 288 data center projects proposed statewide, a new report from the Houston Advanced Research Center warns the industry’s growing energy needs could reverse that progress.

By 2031, the report projects that statewide nitrogen oxide emissions could rise 35% — even under a cleaner “net zero” scenario where data centers connect to the grid and deploy wind and solar on site. Under a different scenario where data centers choose traditional on-site natural-gas power sources, those emissions could increase nearly 400%. Such emissions can damage the human respiratory system with long-term exposure, causing chronic lung disease.

Read more

Its author, State Rep. Rafael Anchía (D-Dallas), says no senator would carry it, and he plans to refile it for the session that opens Jan. 12. Lawmakers return to Austin as the large-load queue tops 400 gigawatts, mostly data centers, and Gov. Greg Abbott froze data center development.

On this week’s Energy Capital Podcast, Joshua Rhodes talks with Anchía, who has represented House District 103 since 2005, about how a bill becomes Texas law and what the 2027 session holds for the grid.

• How a Texas bill dies. About 1,200 of the 8,700 bills filed in 2025 reached the governor. Anchía calls the process “a mechanism designed to kill legislation” and tells advocates to build coalitions between sessions.

• SB 6’s price of entry. The Texas Public Utility Commission’s rules under SB 6, the 2025 large-load interconnection law, require a $100,000 study fee for large-load connection to the grid and $50,000 per megawatt in security.

• Predictable rules. Anchía, once skeptical of Texas’s competitive market, says it works when the rules stay predictable, and he names what undercuts it: shifting tariffs, threats to re-regulate, and favoring one fuel over another.

• Upgrades and new lines. He supports the 765-kilovolt lines the PUCT began approving in August. Utilities such as Oncor recover new-line costs more easily than upgrade costs, he says, so he wants grid-enhancing technologies made a condition of new builds.

• Winter risk after Uri. Experts tell Anchía a severe winter storm worries them more than summer peaks. He wants proof the Railroad Commission’s 2022 gas weatherization rules will hold through a storm.

• The 2027 list. Anchía expects bills will be filed requiring data centers to disclose energy and water use and ending their taxpayer subsidies. He also wants a temporary fund, modeled on the old System Benefit Fund, for the Texans least able to absorb price shocks to pay their electric bills.

• Plus: his two decades in the House, from deregulation through transmission line buildout, his predictions for the Nov. 3 Texas House and statewide races, and what a change in control of Congress would mean for Texas energy.

Chapters

• 00:00 – Meet Rep. Rafael Anchía

• 00:58 – How a bill becomes law in Texas

• 06:25 – When public input matters most

• 08:33 – Why HB 5200 stalled in the Senate

• 12:43 – 20 years of Texas energy policy

• 16:46 – What still needs fixing after Winter Storm Uri

• 19:18 – The data center rush and SB 6

• 22:27 – Why the governor paused data centers

• 26:05 – Steady rules vs. picking winners

• 30:29 – Bigger power lines and getting more from the grid

• 35:01 – Rewarding utilities for doing more with less

• 37:51 – Priorities for the 2027 session

• 40:14 – Election predictions for Texas

• 44:02 – If Congress flips: what it means for Texas energy

Resources

Host

• Joshua Rhodes: LinkedIn

  • Webber Energy Group | LinkedIn

  • IdeaSmiths | LinkedIn

Energy Capital

• Energy Capital podcast | LinkedIn | YouTube

Guest

• Rep. Rafael Anchía: Texas House profile | LinkedIn

• Civitas Capital Group | LinkedIn

• Haynes Boone profile

Bills, filings and primary sources

• HB 5200, as filed in the House (89th Legislature)

• SB 6, enrolled version (89th Legislature)

• Texas Legislative Council drafting manual

• ERCOT large-load update to House State Affairs, April 9

• ERCOT Batch Zero update

• ERCOT: 345-kV vs. 765-kV Strategic Transmission Expansion Plan

• Governor Abbott directs comprehensive data center audit

• Governor Abbott directs TCEQ to halt data center permits

• PUCT Texas Energy Fund

• Railroad Commission weatherization standards

• UT Austin report on the 2021 ERCOT blackout

• CRS: H.R. 1 provisions affecting renewable energy

In the news

• Texas Tribune: Abbott orders audit of data center projects

• Utility Dive: Texas hits pause on data center interconnections

• Texas Tribune: ERCOT’s load forecast and the PUC

• Texas Policy Research: PUC approves first 765-kV lines

From Texas Energy & Power

• What Batch Zero settles, and what it doesn’t

• Data Center Pause

• Texas competes on everything except…

Related Energy Capital episodes

• Solutions over theatrics with Texas Rep. Drew Darby

• A Texas power promise with Sen. Nathan Johnson

• It’s easier to build here, with Claire Hao

• Who pays for the new grid, with Pablo Vegas

• The regulator’s test for real load

Transcript

Joshua Rhodes: Chairman Anchía, welcome to the Energy Capital Podcast.

Rafael Anchía: Josh, thanks for having me.

Joshua Rhodes: Yeah, absolutely. But before we get into any kinda like substantive policy positions and other types of things, I actually wanted to get a little bit of a civics lesson, ‘cause I don’t think we do civics enough. And, you know, it’s been a long time since I’ve listened to Schoolhouse Rock, you know, “I’m Just a Bill,” in terms of like how a bill moves through Congress.

Rafael Anchía: I will literally sing that song for you, by the way. I love that song.

Joshua Rhodes: That would be great. If we have time, we’ll get a rendition. Maybe we can get a harmony going there.

Rafael Anchía: Love it.

Joshua Rhodes: That would be amazing. For someone who doesn’t follow the Legislature closely, can you walk us through how an idea becomes a law in Texas? Like, who typically comes up with it, who writes the bill, what happens it’s filed, gets through the chambers, and ultimately gets all the way to the governor’s desk? Can you just give me, like, what’s the life cycle of a bill in Texas?

Rafael Anchía: For sure. And I always let people know that, you know, despite what we learned in Schoolhouse Rock, the legislative process is not a bill-passing machine. It is not—

Joshua Rhodes: Okay.

Rafael Anchía: —a mechanism designed to pass legislation. It is a mechanism designed to kill legislation. And so, you know, when he says, “I think I’m gonna be a law someday, I hope I” anyway. Yes, the bill usually ends up in a pool of blood on those steps and not sort of jumping for joy being signed. And, you know, a lot of times people think, “Wait. Isn’t it designed to pass bills?” Well, there’s only one way to pass bill. There are a million ways to kill bills. So ideas come from everywhere. They come from constituents, cities, agencies, advocates, industry, legislative studies during the interim period, and then oftentimes through a member’s own life experience. And what we do initially is we send a draft of the bill over to what’s called the Texas Legislative Council. They’re a nonpartisan group of lawyers that just make sure that your idea, whatever in your brain, your constituents’ brain, actually fits into an existing place in state law, has all the relevant definitions, et cetera, and makes sense more than anything. And then they send you back a draft, and you iterate that draft, and then finally you get to something that’s ready to be filed. Well, that prefiling period starts right after the November election on Saturday, November 8. And you’ll have people, you know, who are usually wanna file a red-meat bill, and they will literally wait in line at the clerk’s office so that they can be among the first people to file the bill, and they’ll put out a press release, and then they’ll do some media around that. The session, however, does not begin until January 17, 2027. So we meet for 140 days during odd-numbered years. There are 150 of us in the House, and then a really rational number of senators, which is 31. Don’t know how they came up with 31, but there are 31 senators. Our founding mothers and fathers who drafted the structure of our governments said 31. Okay. When you get a bill and you’re really excited about it and you file it, the first gating item is that the speaker has to refer the bill. So I’m a House member, same thing happens on the Senate side where the lieutenant governor’s the presiding officer. The presiding officer needs to refer the bill to a committee. And then the committee chair decides whether or not it even gets a hearing at all. If it gets a hearing and everything goes well, then the committee chair decides whether it comes up for a vote. And then in committee, the members get to vote on it. Most of the bills do not get out of committee, so getting out of committee is a big deal. Then finally, it goes through a procedural committee that’s called the Calendars Committee, and ultimately is placed by this Calendars Committee on the agenda that we have to take up and consider bills on the House floor, and then we vote on it. And once that’s done, you think you’re done, but you’re not done, because there’s this other chamber, the lower chamber, as I call it, which is the Texas Senate, and then we send it over to the Texas Senate and the process starts all over again. And then if it gets through that process, it goes to the governor for signature. So again, I point out there are a lot of places where your great little idea, your great little bill, is gonna get tripped up. And— there’s another piece to it, which I’m sure your listeners don’t wanna hear about. Well, if the House passes one version of the bill and the Senate passes another version of the bill, you have to convene a committee, which is called a conference committee, and they need to work out the differences, and then that gets sent on to the governor. So to give you a sense of scale, members filed almost 9,000 bills last session, and only about just a little over 1,000 reached the governor. Most of them do not fail on a vote. They’re either tripped up on procedural grounds in this bill-killing process, or they simply run out of time.

Joshua Rhodes: Okay. Got it. They wouldn’t wanna put a bill laying in a pool of blood on Saturday morning cartoons, I guess. Like, so that’s probably with the other, the other version of that.

Rafael Anchía: Yeah, no, it doesn’t pair well with “Conjunction Junction,” you know? It’s just doesn’t work.

Joshua Rhodes: Sorry. I guess you grew up listening to those same ones. In fact, I actually remember another one. It was about conserving water, and it was like someone in a house, they’re brushing their teeth, they don’t turn off the spigot, and there’s like a little pond going down, and there’s a fish inside who, like, asks to— them to not, like, keep wasting water.

Rafael Anchía: My favorite was “I Hanker for a Hunk of Cheese.” I don’t know if you remember that one, but that was set to kind of a hoedown theme. I think it got me started on my lifelong addiction to cheese.

Joshua Rhodes: Sure. Okay. That’s great.

Rafael Anchía: That’s niche. Very niche stuff.

Joshua Rhodes: That’s gonna bring up some memories, I think, for a lot of folks. When a bill’s moving through, if it can get through the landmine, the minefield, I guess, of where it has to move through, there’s various different ways where input can come into these from outside the chambers, right? So you’ve got your internal checks, people putting amendments and all kinds of things at some point. But there are places, and I think it’s more so these committee meetings, which are pretty important, where basically anyone, in fact, they’ve let me in there before, anyone can show up, you know, to talk about these types. So can you talk about, like, the public hearings versus floor debates for stuff? Like, when is input from outside put into these things?

Rafael Anchía: I always remind people that even though the legislative session starts in January, it’s really important to work during the interim when we’re not in session during that even-numbered year to get in the ear of legislators to start, you know, winning hearts and minds in that process. Because by the time you get to a hearing, you really want to have a well-choreographed presentation. Hearings. Hearings oftentimes are not about quantity, they’re about quality, making sure that you have the right experts lined up, make sure that you have opinion leaders that are representative of your community if it’s a local issue. If you are doing this right, you will have met with either the staffs or the members themselves of each person on the committee so that they’re not hearing your issue for the first time when they’re walking in. You know, if you do this right, there should be a lot of nodding, there should be a lot of understanding. If it’s a controversial issue, you know, you’ll have people for and people against, and you’ll have members on the dais that are either for or against. I’ll say that about 85 percent of the things that we deal with in the Legislature are nonpartisan.

Joshua Rhodes: Hmm.

Rafael Anchía: So that you may find your allies in one place or another. You might find it, you know, from a rural Republican or, and an urban Democrat. And so I always tell people, build as broad of a coalition as you can in anticipation of a legislative session, ‘cause most of what we do doesn’t involve your, you know, Republican jersey or Democratic jersey.

Joshua Rhodes: Got it. A lot going on in this economy, a lot going on in this state we gotta agree on or get together, or at least, you know, live together with. Let’s use an example of, like, something that happened with one of your bills last time. So let’s use your H— last year, or the last odd, yeah. We always say it’s odd when the Legislature’s in session, right? ‘Cause it’s every odd year. So a couple years ago, you know, you introduced HB 5200 on grid-enhancing technologies. I believe it passed State Affairs 15-0, passed the House 128-0. Sounds like the most bipartisan thing I’ve ever heard of in my life, but it never even received a Senate hearing. So what happened? How can a bill that supposedly has, like, unanimous across the board, like, support in one chamber not even see the light of day in the other one?

Rafael Anchía: Let me just start by saying I don’t pretend to understand the vagaries of the Senate, especially under Dan Patrick. And, you know, I think, I think senators—

Joshua Rhodes: Fair enough.

Rafael Anchía: —senators have de— devolved a lot of their independence to the presiding officer. And if you talk to senators behind closed doors, they say they don’t have all that much autonomy and everything has to get past the lieutenant governor. So who knows? It may have been completely unrelated to the bill. It may have been sort of the industry groups thinking, “Well, you know, we may need Rafael’s support on something else, so we don’t wanna kill the bill, have his bill end up in a pool of blood at his feet. Rather, we’ll do it very, very quietly in the Senate.”

Joshua Rhodes: Yeah.

Rafael Anchía: Again, there are many, many ways to do this. The bill did get filed a little bit late. If you get a 5200, you know, that’s not a high bill number, and that’s because we were working with stakeholders to try to come up with something that made sense. We were trying to work with our TDUs on something that made sense. And in the end, who knows? I say this to groups all the time. The nice thing is that we had a really great result in the first session that we introduced this.

Joshua Rhodes: Mm.

Rafael Anchía: Usually an idea takes a while to germinate, become part of the consciousness of the Legislature, and then usually in your second or your third session you can get something passed. It is not for those who wanna go real fast, you know? We really do take things slowly in the Legislature. I’m hopeful that next session we’ll have a Senate author— I couldn’t get anybody to author it— so that you have two bites of the apple, a Senate vehicle moving and a House vehicle moving.

Joshua Rhodes: Okay.

Rafael Anchía: So we’ll do things to increase the chances of passage. I will say, here are a couple positives. Number one, we worked with the TDUs. They gave us extensive comments. We incorporated all of their comments to where we had nobody testifying against it in committee.

Joshua Rhodes: Okay.

Rafael Anchía: Number two, we had three Republican members of the State Affairs Committee who signed onto it as joint authors. So that’s really telling, and there were some very, very senior members like John Smithee and Drew Darby, who’s kind of the transmission czar in the state. He gets it. And then John McQueeney. Ironically, hey, this is for you, McQueeney. You may have voted against it on the House floor, or at least not voted for it on the House floor. Maybe you abstained. Maybe he wasn’t on the floor. But anyway, he supported in committee, which is the important part. And so we have, I think, a core group now that wants to work on this. Then the other thing that is going to put wind in its sails rather than present headwinds is that you do have a lot of rural Republicans that are hearing about transmission in their communities, and they’re saying, “Do we really need these high-voltage transmission lines? Do they need to cross my massive ranch,” et cetera. There’s a real willing audience for the narrative that, hey, let’s try to squeeze as much as we can out of our existing system—

Joshua Rhodes: Absolutely.

Rafael Anchía: —either alongside or prior to our authorization of these higher-voltage transmission lines. I believe it is not a binary decision. I think we need both. However, I do believe we’ll have a more willing audience among my colleagues on the other side of the aisle.

Joshua Rhodes: Yeah. No, absolutely things. And I want to dig into transmission a little bit later on—

Rafael Anchía: Mm-hmm.

Joshua Rhodes: —in our chat here. Loud and clear, I heard you. I’m pretty sure, I think I heard you with what happened there in the Senate, so I guess we’ll see. Okay. So thanks for the civics lesson. I think it’s good to be reminded every once in a while kind of how things work so we can know how to enter into those conversations if we want to. So let’s start talking about energy issues in Texas. So, you know, you’ve served in the Texas House since 2005. You’ve seen a lot of changes in the Legislature and Texas energy kind of over that time, massive changes in the electricity sector, hydraulic fracturing, all kinds of massive changes in the energy sector. But it seems like lately that energy, and particularly electricity, has really become one of your kind of core issues and a core issue of, like, the state or the general populace understanding. But if you look back over those two decades, like, how has your perspective on the indus— industry changed in the time that you’ve been in the office?

Rafael Anchía: In a couple of ways. I think it’s changed in a couple of ways. I mean, I do spend a lot of time, as you point out, at that intersection between energy production, new technology, and stewardship of the Earth. Wherever those axes intersect—

Joshua Rhodes: Yeah.

Rafael Anchía: —I like to give that a lot of legislative oxygen. The question is why. For two reasons. I was elected shortly after Texas deregulated, and there was a discussion at the time about whether deregulation was working. There were some major energy-related mergers. You’ll recall that the KKR and TPG purchase of TXU at the time.

Joshua Rhodes: Yep.

Rafael Anchía: I was sort of knee-deep in that activity. And then it was the beginning of wind in Texas and—

Joshua Rhodes: Yeah.

Rafael Anchía: —it was exciting how much was happening. We quickly became number one in wind, outpacing, you know, the next three states combined, and I saw how a balanced energy portfolio was very helpful to the state and incredibly powerful vis-a-vis our competitor states and other economies. And so the other thing was, when you come in, you think you know it all, but you realize shortly thereafter that you know absolutely very little, and I found it intellectually interesting. I thought to myself, “My gosh, this stuff is super complex.” My predecessor in office would say, “The only reason to do something in the, in the Legislature is ‘cause it’s hard, so jump into the hard stuff.” And this has been hard. This has been really hard. So dereg, a competitive market. Then we did CREZ, which is the competitive reinvestment zones that built out sort of the long power lines to West Texas to connect energy sources there with our urban areas. Shortly after that, we had Winter Storm Uri. All the while, y— I’m concerned about climate change, I’m concerned about the warming of the Earth and fugitive methane emissions from our industrial activity, which we are now living in real time—

Joshua Rhodes: Yeah.

Rafael Anchía: —and try to, you know, figure out how do we in— incent methane capture, greenhouse gas capture and sequestration. So there’s always been something that has been new and interesting. Then fracking happened, and on and on and on. And then the real pivotal sort of modern point, by modern I mean sort of since COVID, was Uri. That’s what took sort of an intellectual curiosity and put it on everybody’s radar screen, put it on the front page, the blackouts, the, you know, the loss of life. Hundreds of people died. And then, you know, a lot of profiteering where companies during this widespread disaster made a boatload of money— privatized a bunch of profits and then losses were widely socialized. I mean, Texans are still paying for the cost of Uri today. And so we wanted to spend a lot of time mitigating that risk. You’ll never end the risk, especially with the increase of frequency and severity of natural disasters. It seems like between fires and hurricanes and—

Joshua Rhodes: Mm.

Rafael Anchía: —tornadoes and droughts, all these natural disasters, we’ve had a number of 100-year events in just in the last decade, winter freezes. But you’re trying to build a more resilient system to lower systemic risk on the grid, and that’s been an interesting challenge as well.

Joshua Rhodes: Absolutely. And then before we like get to today, I guess like, yeah, it is worth kind of like reflecting a little bit on Winter Storm Uri and the after— the impacts. You’ve already brought it up. I know a lot of work has been done since Winter Storm Uri. Is there work yet to do post-Uri for particularly winter-type events? We set new summer peak demand records and prices were, you know, a yawn, you know, not a big deal. We’ve built a lot of resources. Is there anything that you’re thinking about for like winter risk in the electricity sector still?

Rafael Anchía: Yeah. I mean, the Railroad Commission in 2022 just adopted its first rules on weatherization. The oil and gas industry was like, “Us? Never. We were part of the solution, not a problem.” And they fought tooth and nail, not only at the state level, but then at the federal level to absolve themselves of any culpability in that process, when in fact the generators failed for sure, but so did getting natural gas out of the ground. And so while the generators had to immediately weatherize, it did take a while for the Railroad Commission to publish their weatherization rules. It covers the critical gas facilities, fines up to $1 million, and I think that’s progress. Don’t get me wrong.

Joshua Rhodes: Yeah.

Rafael Anchía: I do wanna, however, see the results, inspections, enforcement, and candidly, how gas supplies hold up in the next Uri, right?

Joshua Rhodes: Yeah.

Rafael Anchía: That remains to be seen, ‘cause we will have another Uri. We have what’s called a 1-in-10 standard in Texas, and that means that you’re gonna have a one Uri-type event every 10 years. It’s what kind of resiliency you’ve built into the system to handle that. And when I talk to experts, they’re less worried about summer peaks, thank you, solar, you know, than they are about winter peaks. Solar and batteries have saved the day. You mentioned we hit a new peak. Yawn. We handled it comfortably with plenty of margin. The real test for us is gonna be another real vicious winter storm.

Joshua Rhodes: Yeah, I mean, I think that’s right, it’s like, I remember I was part of the three-person team that did the official postmortem for the PU— for the Public Utility Commission post-Uri. I think we lost like 85 percent of our natural gas production in Permian, and we have a just-in-time delivery system, right? And so any piece of that system goes down and power plants can’t get gas, they’re not gonna make power. And I think there was about 6,000 MW of like natural gas power plants that listed that they just couldn’t get fuel during that time. So frozen or not, you’re not making anything without fuel going in. But let’s fast-forward to today. In April, y’all had a hearing with ERCOT’s Pablo Vegas where he talked about this 410 GW or 400, make it 500, I don’t know. It’s like a very large number of—

Rafael Anchía: It’s close to 500, yeah.

Joshua Rhodes: Yeah. That’s what my bingo card was on, was 500, by the way. But like 90 percent of that roughly is data centers. You said, “Sounds like we’re gonna need every electron to bear,” and Pablo said, “Yep, we’re gonna need it all.” But like, if you take 500,000 MW, I mean, that like quadruples the size of the ERCOT grid in a few years. Like—

Rafael Anchía: At its peak.

Joshua Rhodes: Yeah, at its peak. I’m of the persuasion you can build fast in Texas, but I don’t think we can build that fast. As you’re looking for to make policy around this, like what do you believe is coming? Like if you have an answer. If you don’t have an answer for that, it’s fine. “It depends” is totally a valid answer right now. But how are you looking at these large load numbers?

Rafael Anchía: As you’re asking me that question, I’m hearkening back to a dialogue I had with Pablo Vegas at the time, and it may have been in the same hearing that you’re referring to. And I asked him, I said, “Hey, how much of this is real?”

Joshua Rhodes: Yeah.

Rafael Anchía: “And how much of it is speculative?” ‘Cause we all know a certain percentage is speculative. And I asked him like, “How much do you discount it at ERCOT?” And it’s a pretty significant discount. I can’t remember if he said they haircut it by like 60 percent or 80 percent.

Joshua Rhodes: Yeah.

Rafael Anchía: But it’s pretty substantial. Many of the requests that are being made in ERCOT are duplicative of requests made in other markets. It’s basically forum shopping to see how quick to sort of ensure speed to market. So everybody’s got a bunch of irons in the fire. The risks, however, they cut a couple of different ways. If you underbuild, we get scarcity and high prices, right?

Joshua Rhodes: Yeah.

Rafael Anchía: And then if you overbuild for transmission for projects that never show up, my constituents bear the brunt of that. And so I totally get why, you know, the Batch Zero process needed to be very deliberate. We passed a bill that tried to separate the wheat from the chaff on these projects. The PUC adopted that forecasting rule where they said that only large loads with a signed interconnection agreement that met the new standards and were going to be put in the queue. So it was like, “Hey, look, we wanna see real money, we wanna see real projects, and we wanna see real planning.” And that’s before anybody starts paying for infrastructure, and we want developers to largely bear the brunt of their infrastructure build-out needs. You know, we passed SB 6, that was important as well. You know, I don’t know how much you wanna get into, but the large loads had to pay study fees of $100,000 to $300,000. They had to post $50,000 of security per megawatt, 100 percent of the cost of their hookup, and there were real penalties if you walked away, which I think creates a lot of risk for the developers, candidly. We finance apartments and hotels, and those are some pretty steep requirements.

Joshua Rhodes: Hmm.

Rafael Anchía: If you’ve got that much equity at stake, it is hard to put that much of a financial commitment at stake on spec. You really need to be well down the road before you start making those commitments.

Joshua Rhodes: Yeah. A lot of the processes, Batch Zero process, kinda PUC’s large-load rule that they, you know, adopted mid-September, so are kinda stemming from SB 6 from, like, last session, which really designed to really kind of help us manage this. I mean, everything is moving so fast, like all these numbers have— even since SB 6 came around and, you know, it’s been rolling out, like things have been changing. Like, are things moving so fast that more needs to be done, like this semester? Like, it’s this semester.

Rafael Anchía: This semester. We have homework, Josh. We do.

Joshua Rhodes: Yeah. Y’all got homework to do. You can cheat on it with AI like all my students do.

Rafael Anchía: Yeah, no, the finals are quickly approaching. Like, I find this period that we’re in incredibly vexing because we’ve got massive investment. I mean, these are investments, these dwarf the investments that we saw post-hydraulic fracturing and horizontal drilling—

Joshua Rhodes: Yeah.

Rafael Anchía: —innovation, right? That big boom. This is, I think, even bigger. At the same time, we’re in historic droughts. At the same time, we have foreign actors who are trying to prevent us from taking the lead in AI. Then there are legitimate concerns—

Joshua Rhodes: Yeah.

Rafael Anchía: —good-neighbor concerns of people who are gonna live next to some of these facilities, and there are process concerns about how much notice I get if I want to contest these facilities.

Joshua Rhodes: Yeah.

Rafael Anchía: And then innovation, like Moore’s Law is no longer five years. Moore’s Law is, feels like five weeks, you know, where—

Joshua Rhodes: Yeah, five minutes, yeah.

Rafael Anchía: —technology, five minutes, it’s changing and changing and changing and changing. And Moore’s Law was based on a, on human innovation, and now we have machine innovation. And by the way, there’s an existential threat out there that even the executives at Anthropic and others are only placing at about 10 to 20 percent. What?

Joshua Rhodes: I mean, yeah. Pretty good odds.

Rafael Anchía: Yeah. Like, I wouldn’t board a flight if my chances of, you know, dying were 10 to 20 percent. So you have all these things hitting us at one time, and figuring— and then separate and apart from all these things that are hitting at one time, guess what? We have a moral responsibility to take care of our constituents. We’ve reflected those values in our laws so that our generators can’t let people die, right? And if not, there are serious penalties. And so we are also experiencing, we’ve also grown by 2.5 million people since the last census was taken.

Joshua Rhodes: Yeah.

Rafael Anchía: I mean, we’ve got all these things happening. We’re growing, all this investment, new technology, and in politics, let’s not forget, you know, the governor just ordered an audit in August, and he halted state permitting in September because data centers have become so unpopular in the public consciousness, kinda like fracking was, you know, back in the day. I think we’re sort of at the same period of kind of public reaction and consciousness. I think the concerns that people were articulating on data centers are legitimate.

Joshua Rhodes: Yeah.

Rafael Anchía: You know, the governor had championed data center growth and location to Texas in the past, championed the tax breaks, and, you know, now I think the reaction to that has been pretty powerful so that he’s saying, “Okay, we have to stop. We have to stop,” and then put a pause on it. The question is, you know, if he wins reelection, does he turn the spigot back on? If there’s a new governor, you know, what is Gina Hinojosa, for example, what is her view? She’s been pretty critical in the past. What does that do to public investment and the need to produce more electrons to meet this growth? As much as we’re preparing for the final, a lot of the prompts are still unclear.

Joshua Rhodes: You said it earlier in terms of like, you know, SB 6 designed to kind of separate wheat from chaff. I mean, I think that’s a pretty apt metaphor for this, and then the— ERCOT’s response to that was this Batch Zero process. We’ve got the governor putting an audit in front of that. I was calling it the step zero to the Batch Zero process at some point. Being in Texas, it is an interesting kind of place, right? Because we generally have been like, “More development, come here, everybody.” But we’re now we’re putting up some roadblocks. Now, I think it’s— we need some because we can’t quadruple the grid in five years. We just literally can’t put that much steel in the ground that fast. And so like— and that puts inflationary pressures on everything, and we’ve got this pushback against data centers. Like, do you think a lot of this is just due to the pace? Just like how fast it’s shown up and how fast it wants to move? Like, that’s what I’m feeling like.

Rafael Anchía: Yes. For sure. And, you know, and there’s some acknowledgement that if you develop a regulatory regime today, is it gonna make sense in two years?

Joshua Rhodes: Yeah. Well, fair enough.

Rafael Anchía: The flip side, if you’re looking to invest capital in the state of Texas, and forget data centers for a minute, sort of oil and gas operations in the Permian Basin, industrial activity associated with that that is not oiling, you know, that is sort of oil and gas adjacent—

Joshua Rhodes: Yeah.

Rafael Anchía: —manufacturing activity that is non-data center, non-oil and gas, they all need power. So I’ll tell you the things that don’t help. The staccato pace of tariffs, maybe, that change on a regular basis do not provide predictability for the marketplace, for oftentimes delicate supply chains, all of which feed this ecosystem of energy that we’re talking about. That doesn’t help. Immediately changing the rules of the game each session or threatening to—

Joshua Rhodes: Yeah.

Rafael Anchía: —with market design, that doesn’t help. I mean, I was in a conference committee with a pretty prominent member of the Senate on the Texas Energy Fund, and they were like, “You better take the Senate approach or we’re just gonna re-reg.” It’s like, “What? You are from which party, sir?” You know? I mean, like, wait, re-reg, like, so this is like the Chinese Communist model for state-owned control of energy. Then you had the Berkshire Hathaway plan that was proposed by members of the Senate and seemed to be kind of like a favored state-dispatchable system that would compete with the private market. So none of that stuff helps.

Joshua Rhodes: Yeah.

Rafael Anchía: None of it. I maybe started as in a place when I first got elected, I was skeptical of the competitive market. I am no longer. I believe that it largely functions if the market is permitted to function without sort of anomalies, where the marketplace is able to respond to the rules of the road with some predictability. And then the last thing I think doesn’t help is when, you know, members of the Legislature say, well, they wanna favor one type of fuel source versus another—

Joshua Rhodes: Yeah.

Rafael Anchía: —which we’ve seen, you know, repeatedly. And my mantra is like, every electron, every electron, every electron, the market will tell us, you know, what the favored fuel sources are. The market will invest in what is most efficient. That has happened to be over the course of years, it’s been wind, and increasingly now it’s solar, it’s batteries, and maybe we’ll see peaker plants. But the narrative in the Legislature is, “We need baseload combined cycle,” which we do, which we do, but we can’t pick winners and losers. That does not help.

Joshua Rhodes: Yeah, I mean, I think it’s loud and clear. I mean, I think business in general has been very clear, it’s like we’d prefer bad policy over uncertain policy. Let us know where the goalposts are. Like even if they’re 200 yards that way, we’ll figure out how to kick the ball through it, right? If they’re moving back and if they’re moving side to side, that just makes it tough. And I think you’re right on like the market when given clear rules and allowed resources to compete with each other, I think we end up in a better spot. I was on a panel for the Texas Economic Development Council last week in Houston, and we were talking about firming and all this other stuff, and, you know, it’s really— I was like, my hope is that like if we adopt some of these things, we make them technology agnostic ‘cause maybe the answer is gas right now for some of these things. But like let geothermal compete, let longer duration storage compete. You know, it’s like the more things that are able to show up, you know, the better off it’s gonna be. And right now, as you said, we need it all and we need it all for the cheapest, you know, we can do ‘cause that’s how Texas miracle works. At least that’s how it works from where I’m sitting. So yeah, I mean, I think that makes a lot of sense. Let’s talk about transmission a little bit. We’ve brought it up. So it’s like, you know, you talked about the CREZ lines a little bit earlier. It did a great job of connecting the eastern and western parts of the state is, you know, we nominally built those to gather sources of energy and bring them over. Ended up figuring out, hey, it’s really, you know, helps oil and gas if you electrify these downhole pumps, you can get more out of it. Now we’ve got this, you know, 765 backbone STEP lines nominally designed, at least the western portion to, you know, electrify oil and gas operations. But that op— also opens up a lot of good solar resources and other places like that. But they become pretty contentious, right? So the PUC’s approved two of these lines and has kicked a third of the western lines kind of back down for more. So where are you landing on this? I think clearly we need more transmission, but like, you know, how do we make sure we get the right balance in terms of like, you know, getting the input of the folks that, you know, these transmission lines are gonna cross?

Rafael Anchía: I’d love to see a world and the Public Utility Commission said, “Hey, if you want to be one of the developers of what we call these import paths, right, import path one, two, or three—

Joshua Rhodes: Mm-hmm.

Rafael Anchía: —Oncor or LCRA, AEP, you have to install grid-enhancing technology in your existing system,” right? ‘Cause right now the way the incentives work, and I’ll use my hometown friends here at Oncor, they get a thing called a certificate of convenience and necessity, which is basically a little monopoly to build out one of these import path, one of these corridors. And they love that ‘cause that’s new revenue beyond their current system, and this certificate of convenience and necessity does not require them to go before the public and try to make a rate case. It’s like, build it—

Joshua Rhodes: Mm.

Rafael Anchía: —you’ll get reimbursed, and so it really is attractive for their bottom line. What they don’t wanna do— you know, the incentives are not there for them to put in grid-enhancing technology in their existing system to squeeze more out of it and make it more efficient, because then they have to go to a rate case and they may not get a, you know, full reimbursement on it. So we have to figure out a way to align their financial incentives and make them invest in more efficiency in their current system before or coterminous with them doing a build-out. I am for 765 lines. I think they’re really important. Texas needs to continue to be a leader in transmission, and I’m for it for a couple of different reasons. Number one, we already have about $3 billion in stranded electricity. Everybody thinks, well, you know, our electricity system is like a highway system and it’s just a matter of bottlenecks. But actually some areas are not served and you have parts of the system that are not connected to the broader ERCOT grid. It causes dispatchability problems and it drives up costs for everybody.

Joshua Rhodes: Yeah.

Rafael Anchía: So we need 765s to eliminate some of these bottlenecks, or we need transmission to— more transmission to eliminate these bottlenecks. That’s $3 billion, not per biennium, it’s $3 billion a year. So let’s say over a five-year period, if you’re eliminating these bottlenecks, you’re actually saving about $15 billion, which is probably the cost of a large part of this import pathways, these corridors. Not all of it, though. It’s a pretty big price tag. So number one, it eliminates the bottlenecks. Number two, there is a lot of inefficiency in the oil patch, not just the Permian, but other parts of our oil and gas infrastructure where they’re running on— because they don’t have predictable power, they’re running on diesel generation, tons of methane emissions—

Joshua Rhodes: Yeah.

Rafael Anchía: —very inefficient. So we need to get it. They’re electrifying—

Joshua Rhodes: Expensive right now, too.

Rafael Anchía: —and super expensive, right? And that inures to our detriment as consumers. We need to make sure that they can electrify, reduce emissions, and at the same time have predictable power. That’s really important. And then, as I said earlier, hey, we need to keep our population alive. We cannot let it die. We have a moral responsibility.

Joshua Rhodes: Yeah.

Rafael Anchía: And when you add 2.5 million people to your state in a matter of, you know, half a decade, you have to meet that growth. Like, hey, we have to. We just have to. And then finally, everybody thinks about data centers. But with the electrification of all industrial processes, not just data centers, not just oil and gas, you have a lot of other uses that require additional transmission and distribution, yet another reason to invest in it if we wanna continue to be the eighth-largest economy in the world.

Joshua Rhodes: Yeah, absolutely. I’ve been— it’s one of the things I’ve been saying, it’s like I’ve been talking about electricity load growth since when data centers were still cool, I guess, is the way that I’ll put it, like, before the current— but I wanna pull that thread just a little bit before moving on to, like, the legislative session on grid-enhancing technologies. Like, I mean, I think you hit it, you hit the nail on the head there. It’s like it’s about incentives, right? Incentives matter. And, you know, right now with a lot of, like, the regulated, the wires and poles companies, they make more money the more money they spend. And for operational expenses, that’s just a pass-through, so they just don’t make as much money, you know, doing that. And so it’s like, do we have ideas for how we realign incentives around some of these things that right now just don’t look as good on a balance sheet as, you know, building a new greenfield line?

Rafael Anchía: Couple ways to do it. You condition the building of greenfield lines on a stair-stepped implementation of grid-enhancing technologies. That’s one way. You can deem grid-enhancing technologies to be reimbursable expenses, y— and even provide like a little vig on top. I don’t love that idea, but it’s a way through this process, and I don’t love the idea because it increases ratepayer—

Joshua Rhodes: Yeah.

Rafael Anchía: —costs slightly. There is a way to apply a formula that mandates GETs if it achieves a certain cost benefit, you know?

Joshua Rhodes: Okay.

Rafael Anchía: They don’t— mandates make the t— poles and wires companies grumpy. They don’t like mandates, and makes some of my colleagues in the Legislature very grumpy. So you really need to align financial incentives so they can make more money by doing the right thing, but getting that balance is tough. We’ve been battling on using, you know, the programs that allow you to use less energy, you know, conserve energy ‘cause it’s the cheapest energy, and we’ve tried to install incentives and they fight us every session. It’s been a little frustrating.

Joshua Rhodes: Yeah.

Rafael Anchía: Energy efficiency is what I meant to say.

Joshua Rhodes: No, I mean, it is tough, and I mean, I think we don’t have to talk about this, but zooming out to the federal level right now with, like, the siting bills and things like that that are going through, I mean, I think that’s one of the big arguments that, like, the green and clean groups are having about this is like it’s around incentives, right? And so it’s like if you have a functioning market like Texas, if you can just make the clean thing cheap or, you know, make clean energy cheap, like that’s just gonna win out in the system ‘cause that wins out for everybody. And if you align incentives such that it doesn’t matter if you spend money on building a new transmission line or grid-enhancing technologies if it looks the same on the book. I mean, I know that’s probably easier said than done like that. I mean, incentives matter.

Rafael Anchía: Or you get a bonus for selling less of your product.

Joshua Rhodes: Oh, yeah.

Rafael Anchía: I mean, that’s another way to do it. You know, they wanna sell more electricity, and if they’re conserving electricity or they sell less electricity ‘cause their system is more efficient, you know, maybe they get to share in some of the upside.

Joshua Rhodes: Yeah, that’s a good idea. Okay. Let’s look a little bit forward. So, you know, legislative session starts in January. What are the two or three biggest energy policy changes or things that you would personally are looking forward to for the session?

Rafael Anchía: First of all, I’m not looking forward to the regular session, for the record. That’s not true. I actually am. I think there are gonna be some pretty significant changes this election cycle, which, you know, I’m not making any predictions.

Joshua Rhodes: That’s for the next section of the chat, is predictions, so we’ll get there.

Rafael Anchía: Okay. But, you know, I think the people in positions of power may change a little bit, and that may put a new lens on how we view energy here. So first and foremost, this entire data center discussion has required us to revisit ratepayer protection, right? And we’re in an inflationary environment, the economy, you know, inflation is going through the roof in the economy. People are getting hit everywhere, and so ratepayer protection, affordability, has to be, you know, at the top of the list. I imagine we’ll have some energy— and, you know, we’ll have some transparency, increased transparency around energy usage and water usage for data centers.

Joshua Rhodes: Okay.

Rafael Anchía: We’ll eliminate taxpayer subsidies. I’m fairly certain all those things get done.

Joshua Rhodes: Yep.

Rafael Anchía: And what I’d like to see is the creation of— remember the System vet— Benefit Fund? Remember that old thing?

Joshua Rhodes: Yeah.

Rafael Anchía: That was used to balance the budget primarily, but create a new fund that would allow Texans who can least afford increases in their electricity bill with some sort of, you know, temporary adjustment or subsidy. Again, temporary is the operative word, but—

Joshua Rhodes: Yeah.

Rafael Anchía: —to protect everyday Texans against price shocks. You know, second, get more out of the existing grid. We talked about that. Thirdly, we’ve heard that the PUC is looking at possibly ending energy efficiency and load management programs. We need to not do that. Energy efficiency is the highest yield, best ROI that we can have with respect to electricity, so rather than end, we need to double down. And then on SB 6, I think we’re gonna have to come back to it and make some targeted fixes—

Joshua Rhodes: Okay.

Rafael Anchía: —where once we evaluate whether there are any gaps in the rules that the PUC adopts, I think something targeted rather than a reopening the whole law would make sense.

Joshua Rhodes: Got it. Okay. Yeah. No, that totally makes sense. Now we’re to the part where I’m gonna try to get you to make predictions about November ‘cause we’re getting toward the end. But, like, I will say, like, it does feel like that there’s a lot of things in play right now, like in terms of at the national level, maybe, you know, here at the Texas level. And maybe one of the issues is like the two biggest forms of the way that energy shows up or that hits people’s pocketbooks is front and center, right? There’s, you know, diesel hitting $6, $7, you know, a gallon, gasoline at $4, and everyone, you know, fears around ele— electricity prices have gone up, fears around them going up even more. So as we’re recording this, we’re only a couple weeks away from the November elections, and obviously I won’t hold you to any of this. Like, do you have any predictions you’d like to share? Like, a lot of these races are a lot closer than I think I’ve seen in a long time. Like, how are you feeling about it?

Rafael Anchía: So I do think that creating, you know, mechanisms to keep prices down have been kind of a consistent discussion among Democrats. It’s really awesome now that Democrats are anti-tariff. I’ve, by the way, I’ve been there the whole time. But I think eliminating a lot of the things that make things more expensive, whether it’s, you know, industrials pushing more costs onto average Texas consumers because they’re able to arbitrage the energy market, ending things like that. Or instead of ending things like that, maybe opening it up, you know, to consumer dis— demand response, doing more on energy efficiency, all that stuff. I’m hopeful that Democrats winning more seats, which I absolutely predict, and if Democrats are not in the majority, I think we’re gonna be really close. I think that’s gonna send a pretty strong signal to Republicans to course-correct whether in the we’re in the majority or not.

Joshua Rhodes: Mm-hmm.

Rafael Anchía: I’m hopeful that they do instead of, you know, sort of doubling down. You’ll recall the Republican autopsy about 2012—

Joshua Rhodes: Yeah.

Rafael Anchía: —you know, when, where Barack Obama, President Obama won reelection, and then Republicans sort of were wringing their hands and thinking about, “Hey, you know, we need to broaden the tent.” And then Trump comes along and takes the autopsy and he puts it back in the morgue. He’s like, “Forget this. You know, I’m gonna drive a wedge in this country.” And it was successful. It’s been successful for him. And I think that’s fundamentally changed our politics. We’ll see if Republicans course-correct after this, what I think is gonna be a pretty significant loss of seats in the House. And then in the statewides, you know, the races I’m really following, obviously my former deskmate, Jon Rosenthal, who’s running for railroad commissioner, you know, against a bona fide white supremacist. I’m not even calling him names. Members of his own party have called him out as racist. That one’s one to watch. And then obviously James Talarico, who, you know, has been in the driver’s seat in virtually every poll. I think it’s his to lose. I think we will have a Democratic senator unless things change, you know, materially. And then finally, the governor’s race is a lot closer than Greg Abbott would’ve hoped. We’re seeing polling that has Gina Hinojosa now in the margin of error or ahead in some polls. And Abbott had that firewall of hundreds of millions of dollars’ worth of campaign contributions that he was gonna deploy to help others, and now he’s using every penny of it to defend himself. So I think that one is maybe a surprise. And then, you know, we’ve got a bunch of down-ballot races that I think are gonna be closer than anybody expected. So the one thing I’m gonna predict is that in the Texas House of Representatives, we’re either gonna be in the majority or really darn close after election night.

Joshua Rhodes: Okay. When was the last time—

Rafael Anchía: Last time we’ve been in the majority?

Joshua Rhodes: Yeah.

Rafael Anchía: So I’ve been in the Legislature 22 years, and in 2009, after the 2008 Obama election, we got 76 Republicans and 74 Democrats with one race decided by less than two z— dozen votes. It would’ve been interesting if we were at parity.

Joshua Rhodes: Okay.

Rafael Anchía: But what we mi— we missed out on it by a vote. And then before that, you have to go in early 2000s to find a Democratic majority in the House.

Joshua Rhodes: Okay. So we may have some changes in the state House. We’ve touched a little bit on kind of the federal. If— just one question on the federal. So it does seem like that there’s maybe a bigger chance that the federal House of Representatives changes hands or possibly so. Do you think that would have any ramifications for Texas for energy? Would it be enough to move the needle or are we insulated enough from the feds in Washington on that? Or like how might that impact us if that happens?

Rafael Anchía: You’re correct to point out, you know, most nonpartisan forecasters expect Democrats to win the House. In Texas, however, because we’re mostly islanded in ERCOT, we have our own grid rules. However, Washington sets the economics, you know, tax credits, tariffs, environmental rules, permitting LNG exports, which is really important to Texas. You know, the 2025 federal law that cut wind and solar credits, they cut those solar credit deadlines short. We’ve been leading in solar, but, you know, project cancellations have risen nationally since then. We’re likely to see divided government, in my view, at some level. I think Democrats will also win the Senate, by the way. So what I believe that means is just more oversight, which many would argue has been lacking on the executive branch and a reinstitution of checks and balances as our founders designed. So I think you’ll see a lot more of that at the federal level.

Joshua Rhodes: Got it. All right, Chairman Anchía, good luck in November, and thank you for coming on the Energy Capital Podcast.

Rafael Anchía: Thanks, Josh. It was a pleasure. Really enjoyed it.

Joshua Rhodes: Absolutely.

For a hundred or so years, despite some stumbles along the way, the model of a centralized electricity system held up fairly well. Insull and his colleagues were familiar with the concept of people generating power in their own homes, but they could not have predicted the modern boom of renewable energy bringing intermittency to the baseload generation from coal and natural gas fuel.

They also could not have predicted renewable energy assets in homes contributing to the grid’s power supply in a two-way exchange that could disrupt both the simple business model of a power provider and the physics of the grid.

So why are we still running the grid like it is the days of Insull and Edison? We run a grid that is mostly reactive, as if it were a centralized system, when we have the technology that can enable us to run the grid as a network of nodes that are full participants in the operation of the system.

Build an antifragile grid

The future grid will not serve us well if it is purely the digital version of a century-old system. I call the grid we should build the antifragile grid. A grid that learns from every asset, shock and disruption not just to survive but to strengthen the system.

Read more

In addition to these R&P Picks, paid subscribers receive access to the full archives, Grid Roundups, and select episodes of the Energy Capital Podcast. Please subscribe today.

Entergy Texas opens $1.6 billion power plant as customers face a new charge on their bills | Houston Chronicle

Entergy Texas is betting on a massive new natural gas plant in Beaumont to help meet the need for reliable power. But it comes with a cost to both the company and consumers. The plant will be located in an area of the state outside of ERCOT, served by the Midcontinent Independent System Operator.

The electric utility also sent a notice to customers that they would see a “new energy charge” on their bill tied to the cost of building the plant. The size of the charge will depend on how much electricity customers use and will be offset by the efficiency provided by the new plant, according to Entergy.

Vance announces plan to use wartime authority to boost fuel production at Texas refinery | The Hill

The Trump administration is turning to wartime authority to boost domestic fuel production, invoking the Defense Production Act to expand the Delek refinery in Tyler. However:

“Refineries that are currently in operation are already making as much diesel as they possibly can,” [Lipow Oil Associates President Andy] Lipow told The Hill last week. “There’s very little that the administration can do today to get more diesel fuel out of the refineries that are already in operation.”

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Return on equity is the one item in utility rates without an invoice. Customers pay it plus federal corporate income tax, so 9.6 percent costs them about 12 percent. The Supreme Court has tied utility return on equity it to what investors could earn elsewhere at comparable risk.

Utilities argue wildfire risk, inflation and growth justify higher returns. Ellis, who handled cost of capital at Sempra, Oncor’s majority owner, uses a capital asset pricing model common among utility expert witnesses, and gets 6 percent to 6.5 percent. He estimates the national excess is about $60 billion a year.

On this week’s Energy Capital Podcast, Joshua Rhodes talks with Ellis, now research director at MarketClear Utility Policy Research and an expert witness for consumer groups in rate cases. They discuss why the gap persists and how an auction could close it.

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The rest of the conversation:

• Credit ratings: why a lower ROE need not cost a utility its rating, and what Connecticut did by cutting both ROE and the equity ratio.

• How commissions land near 10 percent: split-the-difference rulings, models benchmarked to other commissions’ awards, and, Ellis says, Illinois formula ROEs in the 7s.

• Iberdrola’s two numbers: the U.S. discount rate it reports to investors, and why Ellis says it undercuts Central Maine Power’s 9.8 percent request.

• The auction: offer part of each equity raise to bidders, stack the bids the way ERCOT stacks generator offers, and let the clearing return set the price.

• What Ellis calls the bigger effect: a utility earning only its cost of capital stops gaining from every dollar of rate base, which he says makes performance-based ratemaking work and removes the reason to fight non-wires alternatives.

• Plus: the Pennsylvania House’s unanimous vote on a market-based ROE bill.

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Chapters

• 00:00 – Introducing Mark Ellis

• 00:57 – How utilities make money

• 07:08 – From Sempra insider to utility critic

• 12:53 – What makes a return fair

• 17:56 – The math behind a 6 percent return

• 22:39 – Lower returns and credit ratings

• 28:08 – Walking through a $10 billion project

• 33:15 – What utility stock prices reveal

• 36:49 – Why regulators keep returns high

• 42:12 – Letting investors bid: the MarketClear auction

• 45:11 – Who would invest, and how much

• 50:09 – How the utility business would change

• 54:12 – Why utilities resist non-wires alternatives

Resources

People & Organizations

• Joshua Rhodes

  • Energy Capital (Podcast - LinkedIn - YouTube)

• Mark Ellis

  • MarketClear Utility Policy Research

  • American Economic Liberties Project

Company & Industry News

• Texas Scorecard - Reformers say Texas regulators are raising utility profits

• Spectrum News Maine - Consumer advocates challenge Central Maine Power’s requested returns

• The Maine Monitor - Iberdrola must open its books, regulator says

• Inside Climate News - A former utility executive on why electricity bills are so high

Books, Articles & Filings Discussed

• American Economic Liberties Project - Rate of Return Equals Cost of Capital

• MarketClear - Proper utility ROE does not threaten credit ratings

• MarketClear - FAIR Act model state legislation

• Texas Senate Business & Commerce Committee - September 30, 2026 hearing

• Pennsylvania HB 2224

• New York S10424 - FAIR Act

• FERC - Revised utility ROE methodology (2020)

• Bluefield Water Works v. Public Service Commission (1923)

• Federal Power Commission v. Hope Natural Gas Co. (1944)

• BlackRock - Larry Fink’s 2024 letter to investors

Related Podcasts by Energy Capital

• Why are energy bills rising so fast? with Charles Hua

• Who pays for Texas grid growth? Roundtable

• Inside the PUC’s cost-allocation overhaul with Chairman Thomas Gleeson

• How much are Texans’ power bills going up? with Margo Weisz

• Texas power companies and utilities see stellar 2Q on data center expansion

• Texas competes on everything except transmission

Transcript

Joshua Rhodes: Hey everyone, and welcome to another episode of the Energy Capital Podcast. I’m excited to have Mark Ellis here to talk about how utilities make money and talk about how he thinks that should change. Mark is— He’s got a BS for mechanical engineering from Harvard, so it’s great to have another engineer on the podcast. We rarely have other engineers on the podcast. And you have an MS from MIT’s Technology and Policy program. He was an engineer at SoCal Edison and Sanyo Electric, an analyst at ExxonMobil. He’s been a consultant at McKinsey before. He spent 15 years at Sempra, leaving as the chief corporate strategy. He also served as the chief economist. Now he’s a senior fellow at the American Economic Liberties Project, an independent consultant and expert witness in finance and utility regulatory proceedings. He’s also a co-founder of MarketClear Utility Capital, which we’ll get to. Mark Ellis, welcome to the Energy Capital Podcast

Mark Ellis: Thanks for having me. It’s great to be here.

Joshua Rhodes: When we talk about energy in Texas, a lot of the focus is on deregulation, like, you know, generation is independent, a lot of retail or generation is, has been unbundled, a lot of retail is in the competitive market. And so a lot of the times, if we’re not talking about munis and co-ops, you know, a lot of times if we’re talking about, you know, investor-owned utilities or if we’re talking about the concept of a regulated rate of return, we’re talking about the wires and poles, the transmission, the distribution networks. And so I think a lot of folks in Texas at least kind of understand the electricity market per se, but can we start with the basics of a lot of things that ratepayers don’t see? Like how does investor-owned utility actually, you know, make a profit when they’re in a regulated space?

Mark Ellis: Right. So as you mentioned, Josh, in Texas, for most of the market, there’s two components. There’s the wholesale generation part, which they typically call, you know, energy.

Joshua Rhodes: Right.

Mark Ellis: And then there’s a delivery charge. So the wholesale component is there’s a competitive market and plants and the owners of those plants compete against each other to provide the most competitive pricing. In addition to that, there’s a delivery charge, and that basically accounts for the poles and wires, the transmission and distribution that bring the energy, the electricity from the wholesale market to your home or to your business. And while the generation market is competitive, and there’s multiple parties competing for your business, the transmission and distribution part of it is still a regulated monopoly, and that business model really dates back to the time of Edison, right? It’s a more than a century-old business model.

Joshua Rhodes: Right.

Mark Ellis: And the basic ideas is Edison and his right-hand man, he had a business partner named Samuel Insull, and they convinced, uh, state authorities, legislators that they’re what they call a natural monopoly. It didn’t make sense to have multiple sets of wires running down people’s streets or through their neighborhoods. And so they said one company can control all of the transmission and distribution infrastructure within a geographic area. But when they granted that, they said, “Well, wait a minute. If you’re the only provider, we have to put some conditions around that to make sure that you don’t abuse your monopoly power.” And there’s basically two primary conditions. One is you have to serve every customer who’s willing to pay your rates, and then those rates will be regulated by the regulator, by a state commission, and the intent of that regulation is to ensure, what they called it at the time was just and reasonable, to make sure it’s fair to customers, that you’re getting a fair return on your investments in all this infrastructure, but you’re not taking advantage of customers. So the, the general principle is just and reasonable, and then there were a series of Supreme Court precedents in the 1920 and 1944 that codified, well, what do we mean? How do we actually implement just and reasonable in terms of calculating a number? So the general principle, though, is cost of service regulation.

Joshua Rhodes: Mm-hmm.

Mark Ellis: So not cost plus. And the idea is these are for-profit companies, so profit is considered part of their cost.

Joshua Rhodes: Okay.

Mark Ellis: And so that’s part of the cost that they recover. Basically, you can think of it as they take all the different costs, operating costs, fuel costs, labor, taxes, and then in addition, they add on their investments, which are recovered over time. So a portion of their investment is recovered each year. Then they add on a profit. They divide that roughly by the number of kilowatt hours, and then that’s what’s charged through to customers. In that calculation, every single item except for one, there’s basically an invoice or some traceable piece of paper that helps them determine what the cost is, right? So, you know, there’s accounting records that say how much they paid their employees, how much they paid for rent. The one item, how much they pay in interest on their debt.

Joshua Rhodes: Mm-hmm.

Mark Ellis: The one item that does not have a record behind it is their profit, and that profit level is determined in state regulatory proceedings. That is the most contested part of these regulatory proceedings. The technical name, they call it the return on equity, and it’s basically the profit on shareholder capital.

Joshua Rhodes: Okay. And so maybe if you use some of the terms a little different, is that regulated rate of return? Is that what you’re talking about, is it return on equity, regulated rate of return? Is that interchangeable there or—

Mark Ellis: Not quite. So the regulated rate of return is the interest plus the return on equity

Joshua Rhodes: Okay, got it. So it would be more?

Mark Ellis: Yeah. The return on equity is typically expressed as a percentage.

Joshua Rhodes: Okay.

Mark Ellis: Right? So it’s a weighted average co— a weighted average percentage, so the interest rate on their debt is typically lower than their expected return on equity. So the return, ROR, the rate of return is generally a little bit lower than the return on equity. One other wrinkle about this, that return on equity is the after-tax return to investors, so it’s typically grossed up. The taxes are passed through to customers.

Joshua Rhodes: Okay.

Mark Ellis: So what customers actually pay is higher than that authorized return. They pay the authorized return on equity plus taxes. To illustrate, so in Texas, if the authorized ROE is, it’s roughly about 9.6 in Texas.

Joshua Rhodes: Yeah.

Mark Ellis: And then the corporate tax rate is 21 percent, so that works out to about 12 percent is what customers are effectively paying.

Joshua Rhodes: That’s corporate taxes, not taxes on electricity, right?

Mark Ellis: Correct. That’s the corporate tax.

Joshua Rhodes: Okay. But the rate of return is on CapEx spend, ‘cause there’s OpEx is just pass-through, right? Like trimming the grass and maintenance and stuff like that. Do you know what portion of what shows up on people’s bills ultimately comes from, like, the CapEx versus, like, the OpEx?

Mark Ellis: Yeah. So the numbers are always changing. The CapEx portion or the T&D portion, the distribution charge is an increasing portion of the bill over time. I think the last I looked at the numbers for Oncor, I think it’s up, like, 60 percent since 2019 versus the wholesale energy charge has not gone up as much, so it’s a bigger fraction.

Joshua Rhodes: Yeah.

Mark Ellis: And then of that T&D charge, in Texas it’s a little bit different than other states, a little bit lower in Texas than other states. About 15 percent to 20 percent is the profit plus the tax on the profit in the delivery charge.

Joshua Rhodes: Okay. Well, I think I got it.

Mark Ellis: Yeah.

Joshua Rhodes: We’ll see. We’ll see as I ask more questions. I know it’s a complicated thing. Let’s take a step back. So you spent 15 years inside of Sempra, and you finished as its head of corporate strategy, and today you’re one of the most prominent critics of how utilities, you know, earn money. How did that happen? How did that switch happen there?

Mark Ellis: So I lived in Houston at the time. I was working for McKinsey. I worked for ExxonMobil and then McKinsey, and I joined Sempra in early 2004 when— At the time, this was like the beginning of the era of deregulation, and utilities all over the country were focused on their unregulated businesses. So Sempra had it, you know, they were a pioneer in LNG, they had a big trading group, they had an unregulated or merchant generation, unregulated generation. I’ve joined at the corporate center to really focus on, on those unregulated businesses, in particular LNG and wholesale generation, mostly in California, but also we had some coal plants in Texas and really focused natural gas pipelines and storage, just all the unregulated stuff. And that was like the first 10 years I was there was really focused on that. We built, you know, did a lot of really cool stuff. We built the first utility-scale PV project in North America of this sort of current generation. The very early ones were built by ARCO in the ‘70s, but like the current generation of these going out in the desert and putting gigawatts of panels, our site was outside Las Vegas and it was the first 10 MW, and now there’s like gigawatts out there, like the whole area is just covered.

Joshua Rhodes: 10 MW is like community solar now, right? Like—

Mark Ellis: Yeah. Then what happened is, is after the financial crisis, you know, and a lot of, based on a lot of the work that I did, they realized like, you know, these unregulated businesses, they have a lot more risk than we expect, and the returns are a lot lower precisely because they’re competitive. Those sleepy old utility businesses that we thought were just earning their cost of capital are actually, that’s where the value is. And over the next roughly decade, Sempra kind of jettisoned on their unregulated businesses. As I said, we were the first to build utility-scale PV. We built like a gigawatt and got out... Shouldn’t say we.

Joshua Rhodes: Okay.

Mark Ellis: Sempra built like a gigawatt, and then got out of it within like 3 years, I think, ‘cause just the returns got bit down. You know, they sold off the merchant generation business, just sort of jettisoned all that and doubled down on their utilities. Huge CapEx expansion in San Diego Gas & Electric. The icing on the cake was the purchase of Oncor in 2019, and basically the idea was, hey, you know, we kind of understand, like return on equity is much greater than our cost of equity. More CapEx means more shareholder value. We wanna replicate that in Texas. And the idea was Texas was, you know, Oncor was going through the Energy Future Holdings, so they were probably not investing ‘cause the parent was capital constrained, and when they’re going through a bankruptcy, when you are

Joshua Rhodes: Yeah

Mark Ellis: So the idea was, hey, there’s kind of a backlog of capital to spend. They were gonna go in there and provide the capital to expand the rate base, and I think, you know, the growth in oil and gas production and the transmission build out and now data centers, you know, it’s pretty much as they, maybe even better than was envisioned.

Joshua Rhodes: Yeah.

Mark Ellis: You know, I kinda give this long story is I came in to focus on all the unregulated stuff. The company had this transition to the regulated, and frankly, my skills weren’t needed that much, and kind of the work was starting to wind down. In addition, you know, they went through several CEOs. The most recent one who’s still there, I didn’t necessarily see eye to eye, and so when he came in, I kinda knew the writing was on the wall. There was cost-cutting study that I actually oversaw, and then one of the results of that was, “Hey, we don’t need you anymore. We’re gonna eliminate your job, but here’s a nice severance package.” And truth be told, it was blessing in disguise. From a personal perspective, I had four kids. First was just entering college. Not a good time to lose your job. But in terms of like pushing you out of the nest to find something new that you’re really passionate about, it was just awesome. I kinda fell into the expert witness work serendipitously just through a friend, a, a Sempra colleague who introduced me to one of the main intervenors here in California called TURN.

Joshua Rhodes: Yeah.

Mark Ellis: And my first case was related to the PG&E wildfire, sort of a... Basically, there was a stub of wildfire victim claims that was left unpaid, and they had this whole financing scheme that was very creative, and they asked me to provide testimony on it. I had never done any expert witness work and never been cross-examined. My very first time being cross-examined was the senior utilities lawyer at Munger, Tolles, which is a very, very high-powered litigation firm. Munger is Charlie Munger. And I was crossed for 5 hours. It was a, you know, baptism by fire, kind of like a boxer going up in their first match against Mike Tyson, but I felt like, “Hey, I held my own.” And kind of felt like this is my true calling. I know I’m getting a feel. So that’s how I kind of fell into the expert witness work. And in that first case, ROE was not the primary focus, but it was an issue. And I started digging into it, I’m like, “The expert witness testimony on this stuff is just garbage.” Even the consumer advocates are repeating the utility’s playbook. They don’t really understand finance.

Joshua Rhodes: Okay.

Mark Ellis: One of my jobs at Sempra was I was responsible for the cost of capital. So I knew, like, what they’re telling themselves internally was very different from what they’re telling the regulator. And so I decided, like, hey, you know, this is an area where my expertise and experience as a former insider could make a difference, and so that’s why I really started to focus on that.

Joshua Rhodes: Got it. And I’ll say, like, I’ve been in that expert witness seat, cross-examined for, you know, 5, 6 hours at a time. Hardest day you’ll ever work in your life. Just about having to be completely on and being so guarded with all the words you’re saying and be extremely precise. So been there, done that. So one of the things you’ve done recently is you’ve written a paper or you’ve got a paper called The Rate of Return Equals Cost of Capital.

Mark Ellis: Yeah.

Joshua Rhodes: What’s the difference between those two things? Why do you think the distinction matters so much in this conversation?

Mark Ellis: Yeah. So the rate of return refers to what the regulator authorizes, right? So I mentioned before there’s this one item in the revenue requirement that there’s no invoice, it’s set by the regulator, that’s the rate of return. And then I also mentioned there’s a series of Supreme Court precedents, 1920 and 1944, that basically said, “Well, what do we mean by a just and reasonable rate?” And in particular for that profit, that rate of return, the standard was, oh, it should be equal to the market-based cost of capital. The specific language they use refers to the returns available to investors on investments of comparable risk. In economic and finance parlance, that is the market-based cost of capital or the opportunity cost of capital. And so, you know, that is the principle, the rate of return should be equal to the cost of capital. That is codified in some states. Maine actually has... Their highest court actually had a decision in 1960 that codifies that, hey, the rate of return should be equal to the cost of capital. It’s just a given. Everybody agrees to that. NARUC agrees to that. Utilities agree the rate of return should be equal to the cost of capital. And again, it’s why? Because that is the cost of service regulation principle, right? It should be equal to... It’s not cost plus, it’s the actual cost. So the difference is, one is set by a regulator, right? The rate of return, the cost of capital is set by the market. The challenge is, we mentioned before, the rate of return is a weighted average of the cost of debt and the cost of equity. The cost of debt is easier to determine because there’s a contractual number, right? It’s the interest rate on the debt. So it’s a pretty perfunctory exercise to determine the cost of capital for debt. In contrast, the cost of equity, it’s not in the contract anywhere, you can’t look it up on the Bloomberg screen, so it has to be estimated. The good news is that this is one of the most thoroughly researched topics in all of finance, and the methodologies have won Nobel Prizes starting back in the ‘70s, and they’re very simple and straightforward. A first-year undergraduate finance student could estimate the cost of equity for a utility. But what we find is that what is done in regulatory proceedings is completely untethered to finance as practiced, you know, in academia or in corporations, or what’s taught in business schools and undergraduate institutions.

Joshua Rhodes: So one criticism of that is, like, you’re subbing in, like, a broad equity market return forecast for a utility-specific cost of equity, and I guess, like, some of the things with utility, like the obligation to serve, and, like, the wildfire risk and other types of things like that, also things have been used to kind of, like, push back, I guess, against some of your arguments. Like, what’s your response to those and when they say that we’re different than everyone else?

Mark Ellis: So first, just a correction. We’re not substituting in just the market-expected return.

Joshua Rhodes: Okay.

Mark Ellis: That’s a benchmark, and then everybody agrees utilities are lower risk than the market. So in principle, the cost of equity is lower than the expected return on the market. So market forecast, you know, the expected return on the market, you know, that’s a very widely studied number, and there’s lots of different sources for estimates of that. Federal Reserve does a survey. Financial institutions like BlackRock and Vanguard, Goldman Sachs, JP Morgan, they all publish their estimates of the cost of equity on a routine basis, update it annually, if not more frequently. So that’s a benchmark, kind of the ceiling, and then there’s adjustments. In terms of the methodology, in principle, you know, we’re using a CAPM, what they call the CAPM, which is the Nobel Prize methodology. It’s kind of the gold standard. They’re using a CAPM, it’s just whose assumptions are more reasonable. So the criticism around, you know, you’re not accounting for certain risks and so forth, it’s like we’re using the same methodology. If your methodology accounts for those risks, mine does too. You know, the fact that it may not account for certain risks, you know, it’s no different, right? The other point is a lot of times when they try to account for these idiosyncratic or company-specific risks, there’s a financial theory that says, hey, they shouldn’t be compensated. That’s actually called modern portfolio theory. Two, when they do the analysis, they actually just a hand wavy, “Oh, just add 100 basis points for risk.” And it’s like, well, how did you come up with that number? They don’t have an answer, and it’s like, well, maybe it’s 10 basis points. Maybe it’s zero basis points, right? But they’re adding 100, so it’s just not a very rigorous analysis. We’re getting kind of in the weeds, but the criticism like, “Hey, you’re using the market,” no, we’re not. We’re actually using the same methodology. We’re not accounting for the risk. Well, in general, we are accounting for the same risks. When add on adders, the onus is on them to justify them and quantify them, and they generally don’t.

Joshua Rhodes: So if you’re using the same equations, are you just like, do you have different values in those equations for various different risks? ‘Cause like you’ve argued that a fair return on equity would be about 6 percent or maybe a little bit over for like most utilities, and the 2024 like average electric gas utilities rates is, I think, 9.7 percent or so. So walk us how you get from, you know, the average right now being 9.7 down to, you know, 6 percent.

Mark Ellis: Yeah. So I’ll just start with the CAPM framework, right? So the CAPM, it’s called the capital asset pricing model. It’s a very simple model, and the whole idea is that it’s a model of compensation for risk. The idea is, at any given time, you know, you always have the option of investing in what they call the risk-free asset, which is like a Treasury. So in utilities, they say, “We’re interested in the long-term cost of equity,” so they typically benchmark it to a 10, 20, or 30-year Treasury rate. So it’s the Treasury, the long-term Treasury rate, plus some risk premium to account for the risk. And so you say, well, there’s a benchmark out there. The risk is relative to the market. This is the concept of the CAPM. You know, because utilities are lower risk than the market, the return has to fall somewhere between that Treasury return and the return on the market, right? And the level of risk where it falls along that line is what they call beta. And beta for utilities, it varies, but long-term average is about 0.5. The expected return on equity or the cost of equity for a utility should be somewhere, you know, halfway between the Treasury rate and the expected return on the market. The most recent Fed survey of expected return on the market, the median is 7.

Joshua Rhodes: Okay.

Mark Ellis: Treasury rates are 5 right now. When they did the survey, they were about 4, right? So if you were to take half the difference between 7 and 4, that’s 4 plus 1 and, 1.5 is 5.5. If you take half the difference between... And, you know, say, “Okay, we’re gonna take that same increment, and we’ll add it to 5,” so you get 5 plus 1.5, about 6.5 today because interest rates have gone up.

Joshua Rhodes: Okay.

Mark Ellis: So that’s how you get the, oh, we expect it to be about 6, 6.5 percent today.

Joshua Rhodes: I think you’ve estimated that 6 percent gap was roughly about 50 billion per year nationwide?

Mark Ellis: Yeah. So the numbers change. That number is from the ALP paper, and it’s based on data from the end of 2024.

Joshua Rhodes: Okay.

Mark Ellis: I’ve updated that methodology. It’s about $60 billion nationwide, including the tax gross up. That’s the excess profit, not the total profit.

Joshua Rhodes: Does that also have baked in there, like... I mean, one of the things we talk about a lot right now is we’ve actually talked for about 20 minutes and haven’t said the word data center, so I feel like we need to talk about them now. Okay. ‘Cause in energy conversation... No. Just in the context of, you know, with demand for electricity growing and supply chains being constrained, like everything just costs more. I’m no longer, but I was recently was a commissioner for Austin Energy, it’s local municipal utility in Austin, Texas.

Mark Ellis: Yeah.

Joshua Rhodes: And I would see like every transformer, you know, cost double, triple what it did a few years ago, every power line, everything costs more, and part of it’s just I think still hangover from COVID, but other parts of it is like there’s just so much demand for all of this stuff that like there’s pressure being pushed up that. So i— is that why your 50 went to 60, or would it go higher now, like if you were to redo—

Mark Ellis: The 50 went to 60 just because utilities have grown their rate base in the last almost 2 years since I did the last calculation. In other words, it’s just utilities have been growing a little bit faster than they have historically, so the number goes up. You would expect the number to go up over time just because the economy’s getting bigger, utilities are getting bigger kind of thing. They’ve gone up more because their rate base is expanding faster than it has historically.

Joshua Rhodes: Okay. So on that 50 billion you estimated that that save, that’s about 300 per household. Is that just dividing by kilowatt hours, like 1,000 kWh a month estimate or something like that?

Mark Ellis: That number was a very, very complex, trying to push it down in the residential bills how much it would be. That took a lot of work, and I don’t like to repeat that, so now typically the way we calculate it now is we just take that 60 billion divided by the number of households in the country Period. And assuming like, hey, even though an individual customer may not face that directly, ‘cause there’s industrial and there’s commercial users who also pay these inflated rates, it flows through to them for the most part, right? So restaurant prices are higher, rents are higher when they go to the dentist, and that gets passed through in their, you know, the fee that they pay the dentist, so forth. So 60 billion divided by 133 million households, it’s like 480 or 470. I don’t remember what the exact number is per household. Like, that’s the sort of the average cost per household net.

Joshua Rhodes: Got it. Okay. One of the things is like u— so utilities will argue that, you know, wildfire risk, inflation, enormous CapEx, growth of electricity all justify kind of these higher returns, and that cutting their returns would hurt their credit ratings and the ability to raise capital. And there might have been somewhat of an example of this, correct me if I’m wrong, this is your space more than it is, than it is mine, and some people point to the Connecticut tried, apparently tried to do this. They tried to cut or aggressively cutting these returns, and then ended up reinstating them back to somewhere closer to the national average. So is there anything to their claims? Like there’s anything that makes them different? Or what happened in, and then what happened in Connecticut, I guess?

Mark Ellis: Yeah. So you’re quickly getting into some, like, pretty technical stuff.

Joshua Rhodes: Sure. It’s dangerous for me, too.

Mark Ellis: You know, I’ll start at the high level. Whenever utilities always come in and they say, you know, “Oh, we want this ROE and we want this equity ratio,” and, you know, the equity ratio is the amount of equity in the capital structure. Just on its face, it’s a little strange because most companies, right, they don’t like to raise equity, right? Raising equity is just sort of like they scarce and they don’t like to raise it and accept it. But when you think about, like you mentioned data centers And when you look at how this dynamic is going, nobody wants it on their balance sheet, right? It’s like—

Joshua Rhodes: Yeah.

Mark Ellis: I don’t want to put up the capital, I want you to put up the capital. Utilities, they like to come in and say, “No, no, I want equity ratio to be as big as possible,” right? Which on its face tells you something like why would they do that? Well, the reason why is because that ROE is really profitable, right? So they come in and they say, “I want a high equity ratio.” Usually it’s, they want more than they currently have on both the equity ratio and the ROE. And then they say, “And if you don’t get what we want, it will adversely impact our credit rating and our ability to attract capital.” There is a tiny grain of truth to what they say. In other words, any reduction in ROE and/or the equity ratio at the margin will be adverse to their credit rating in and of itself. Like all else equal, they ask for X and you give them X minus on either or both of those, it is worse for their credit than what they requested. It doesn’t mean it’s worse than what their current credit rating is, ‘cause typically they’re asking for something more generous than what they currently have. You know, they typically do not clarify that. In other words, they have a certain credit rating, you know, based on wherever they are today, they ask for more.

Joshua Rhodes: Mm-hmm.

Mark Ellis: And they say, you know, “Oh, if we get what we want, it will improve our credit rating,” right? They don’t really clarify that, and then they just say, “And if we don’t get what we want, it will have adverse consequences for our credit.” So there’s a bit of like sleight of hand going on there. So that’s one point. The other point is there’s a trade-off between the ROE and the equity ratio. So you often hear and, and they, you know, I think this is a flaw that many regulators make is they kind of wanna do both. They wanna hit ROE hard, and they wanna reduce the equity ratio. And when you kind of run the numbers, ROE is a much more powerful lever to reduce customer costs than increasing the amount of debt or reducing the equity ratio. And so you’re much better off like, “Hey, let’s just focus on ROE to reduce the customer cost,” because remember, it’s high to start with and it’s grossed up for taxes, right? So that’s a very powerful lever. And then they say, “Well, what about the impact on credit?” And the counterintuitive thing, it’s counterintuitive in regulatory land, it’s not counterintuitive in finance to say, “Well, if I’m hitting your profits to keep your credit where it is, I actually have to reduce the amount of debt.” Right? It actually increased the equity ratio. They’ll say, “Well, wait a minute. You’re increasing the amount that they earn a profit on.” But the reduction in that ROE more than compensates for the increase. So it’s like a 20 to 1, like for any given credit metric or credit rating you’re trying to achieve, the benefit of reducing ROE versus the equity rate versus increasing the equity ratio is like 20 to 1. So you always would just say, “Okay, I’m gonna reduce the ROE, and if I have to give back a little bit on the equity ratio, it’s fine ‘cause I’m way ahead of the game. I get 95 percent of, you know, what I get just from the ROE and the credit.” So what happened in Connecticut is they kind of went after both and then, you know, the utilities were... They said, “Well, look, it adversely impacted our credit rating,” and made a big deal out of that. Of course, they exaggerate it. You know, most people don’t realize, like, a one-notch downgrade for utility credit rating increases their marginal cost of debt 10 to 15 basis points. And, like, when you run the numbers, it’s like, it doesn’t really affect customer costs. They say, “Oh, it’ll increase customer costs.” It doesn’t that much. That said, I’m an advocate like, “Hey, there’s a variety of reasons why utilities wanna maintain strong credit other than just the direct cost and the rate of return, because they have all kinds of counterparty obligations with their lenders and their trade credit.” So my approach is, we’re not gonna touch credit. Like, if you come in with a triple B plus, we’re gonna keep it a triple B plus. But we can reduce that ROE and make a, a modest increase in your equity ratio and, you know, investors are all happy, creditors are happy or happier because there’s less debt, right, which they tend to be happy about that, and equity investors are getting a fair return, not an excess return, and customers are way better off. Typically, it’s about a 10 percent reduction when you optimize the, you know, make the ROE quarter the cost of equity, and then make adjustment to the equity ratio. Realize that’s super technical. I’ve never had anybody g— get into that. When I testify, this is 30 pages of testimony just walking through all this.

Joshua Rhodes: Okay. So let’s just like zoom out for just a little bit and try to use some round numbers. All right? So you can tell me if these numbers are close. So like if a utility’s gonna build a project, say they’re gonna spend $10 billion on a suite of, you know, transmission lines or substations or whatever it is. Okay. You’ve talked about like equity ratios and then I guess the other side of that, well, there I guess there’s either cash or debt percentage that they’d go after, right? So can you give me a feel for like, how does that pie get sliced up in like, in terms of how does that $10 billion... We’ll try to keep them round numbers. Where does it go, and then what is this piece applying to? Does that make sense?

Mark Ellis: Yeah. I mean, that’s typically what happens. A utility comes in and says, “I wanna invest $10 billion,” and then there’s a negotiation around how much is financed with debt and equity. Typically, that is the capital structure, debt and equity. That’s just what, it’s long-term debt and equity. They don’t use cash per se, that’s equity.

Joshua Rhodes: Okay.

Mark Ellis: And generally 50/50. I think in Texas it’s 46 or 48 equity. They’re a little bit more debt heavy there. In this case, you’re talking about issuing new debt, so whatever the cost of debt would be right now, utility debt, I guess is, I don’t know the exact number what a newly issued utility bond would be. Somewhere in the sixes, I think.

Joshua Rhodes: Mm-hmm.

Mark Ellis: It’s just, okay, whatever the debt costs you to issue, you know, you have to make it competitive. You issue bonds and there’s a market out there that sort of determines it. You know, for example, Oncor would never go in and say, “I wanna get the debt from Sempra. They’re gonna charge me 7.5 percent.” They’d be laughed out of the room and kind of rightly so. It’s like, well, of course you issue bonds and let the market figure it out. It’s the equity, that 5 billion of equity in your scenario, where they say, “I’m gonna raise 5 billion of equity,” and then there’s the ROE. The ROE isn’t just on that incremental amount, it’ll be on everything that’s outstanding. If they had 25 billion already outstanding, and there’s 5 billion more, that return on equity that they’re negotiating with the regulator applies to the 25 that’s outstanding plus five that’s new.

Joshua Rhodes: Okay. There’s also depreciation happening in the background, right, on these—

Mark Ellis: Yeah. The way it works is you have this, what they call rate base, which is, you know, all the investment net of depreciation. So it’s cumulative net investment is roughly rate base. They also deduct from rate base deferred taxes, because deferred taxes are considered an interest-free loan from the government. So rate base is essentially cumulative net investment. In other words, everything you’ve ever spent, less depreciation, less deferred taxes. That’s rate base. And then how that’s financed is 50/50 debt and equity. Well, as you depreciate, you’re reinvesting that depreciation to keep the rate base where it is, right? ‘Cause, you know, constant... It’s not just the, the incremental, but there’s ongoing maintenance CapEx and so forth. So in general, rate base is always growing, and there’s just like this churn, right, where, as, you know, the depreciation gets reinvested, plus you’re building new stuff

Joshua Rhodes: Okay. I’m gonna try to ask it, like, a slightly different way in terms of, like, there’s debt and then there’s equity.

Mark Ellis: Yeah.

Joshua Rhodes: Right? Generally. It’s like generally, so there’s a 50/50 split, maybe it can be a few points either way. How is this treated differently? ‘Cause we’ve talked about rates. So this rate is about 9.7 percent. You said it should be 6 percent. Does that apply to both of sides of that, debt and the equity? Like, what is—

Mark Ellis: So it only applies to the equity component. In your hypothetical, there’s 5 billion of debt, 5 billion of equity.

Joshua Rhodes: Yeah.

Mark Ellis: The cost of the debt is just, you issued a bond, what’s the rate on that bond?

Joshua Rhodes: Okay.

Mark Ellis: You recover that from customers, and you pass it through to the lenders. It’s kind of frictionless. It’s just another cost. It’s just a pass-through. The equity is like, well, what’s a fair return on equity? There’s no contract anywhere. It’s just when they issue equity, there’s no promise in the issuance of the equity, like I’m gonna pay a certain amount based on what the regulator determines. So that’s the part that’s negotiated. So the, the ROE is just for the equity, return on equity.

Joshua Rhodes: Right. Okay. So I think, like, in conceptually, I can understand, like, the debt, like a bond. Like, you pay back... And I know that all the freshmen in project finance are gonna be laughing at, you know, me not, not, not knowing this, but what is that equity instrument? What is actually being either created or borrowed or what? Because at some point it’s 5 billion of something.

Mark Ellis: Oh, yeah.

Joshua Rhodes: Right? Like, what is that something?

Mark Ellis: So most utilities are held by, like, a holding company owns the common equity, but let’s just assume like, hey, you know, that equity is, that’s what stockholders own. Like, you take up that equity and you slice it up, and each one of those slices is a share of common stock. That ROE, the ROE times the amount of shareholder capital invested is their net income or their profit, right? Net income, profit, same thing. After-tax profit.

Joshua Rhodes: Yeah.

Mark Ellis: That’s the connection you’re trying to make. So this ROE, like, why should I care? It’s because that is the profit. ROE times the amount of equity is net income. These are for-profit companies, so that is the entire equation for a utility business. Simplest business model in the world, it’s this number that’s set by a regulator times the amount of capital the regulator allows you to invest, equals your net income. That’s it. Very, very straightforward.

Joshua Rhodes: Okay. Is there any way that, like, we could tie that to, like, equity? We brought it down to shares. So someone owns five shares of a company and they go up $2.

Mark Ellis: Yeah.

Joshua Rhodes: Can we tie those things together to just try to make it people understand. Yeah.

Mark Ellis: Now you’re getting into like, okay, how do we know that these ROEs are too high? So there’s a principle in finance called net present value or present value, right? So the value of an asset is the, you know, you take what the cash flows, right, the profits you expect in the future.

Joshua Rhodes: Mm-hmm.

Mark Ellis: And then you discount them today, right?

Joshua Rhodes: Right.

Mark Ellis: At what? At their cost of capital. So if it’s equity, you discount them at the market-based cost of equity to today. And just as like the foundational principle of finance, like if those cash flows are just equal to the return, equal to the cost of equity, then when you discount them back, the present value is equal to exactly what you have invested. So like if I buy a Treasury bond today, just today, right, and the interest rate today is 5 percent, right, then if I bought it for $100, it’s worth $100. If interest rates go down tomorrow to 4 percent and I’m still getting 5 percent, guess what? Now that bond is worth more than $100. Tomorrow, somebody who pays 100 is only getting four. I’m getting five. So my bond is now worth roughly 20, 25 percent more.

Joshua Rhodes: Yeah.

Mark Ellis: Right? So that’s a really important concept, is if you’re just earning your cost of equity, then whatever you have invested, that’s what the market value should be equal to. And so when you look at utility stocks, this is well known, this was articulated by economists, you know, in the 1970s, is how do we know if ROEs are being set appropriately? We look at their market value, the stock market price, relative to what they call the book value, which is the amount of capital actually invested, right? So that price to book value is like the benchmark on are we setting ROEs appropriately or not. This is like foundational finance, and this has been known, like I said, for over 50 years. Utility stocks routinely trade at twice book value.

Joshua Rhodes: Okay.

Mark Ellis: So that tells you on its face that the profits that they’re earning, the return, right, is much greater than the cost of equity.

Joshua Rhodes: Okay.

Mark Ellis: So a way to think about it is every dollar of shareholder capital that they invest in wires, because their cost is six but they’re earning 9 to 10 turns into $2 in their market price. So I like to give an analogy, “Hey Josh, I got a deal for you. Give me a buck, and I’ll put two in your retirement account. Do you wanna invest?” And I’m pretty sure I know the next two things you’re gonna say. One is, “Yes, I want to invest,” and the second one is, “Am I limited to a dollar? Can I do $10?” “Can I do a million dollars?” That is essentially the utility business model in a nutshell. And so when you look at this price to book, you know, it’s like you can go on Yahoo Finance right now and look up utility price to book. It’s not a mystery. This is just staring everybody in the face. You know, you can cite writing from Alfred Kahn, who was President Carter’s deregulation czar. He talked about this in his textbooks. Peter Navarro, the Trump advisor, wrote a paper about this, about, “Hey, the price to book tells us whether utilities are earning a fair return.” He wrote about this in the ‘80s for the DOE.

Joshua Rhodes: Mm-hmm.

Mark Ellis: One on the left, one on the right. This is all, like, very well-known, well-established sort of financial facts in utility regulation, and it’s just kind of staring everybody in the face and people ignore it.

Joshua Rhodes: So yeah, so you say it’s staring everyone in the face and people ignore it. I guess it’s like you’ve testified before a fair number of public utility commissions around the country, but it doesn’t seem like it’s moved that much off of, like, the 9 percent. So what’s the pushback you get, or, like, what does that conversation always look like then?

Mark Ellis: So it hasn’t moved that much but, you know, regulator never comes out and says, “There’s the utility, and there’s three or four intervenors, and I’m picking this one.” They kind of say, you know, “Utility said this, intervenor one said that, intervenor two said that, and I pick a number somewhere in between.” And you never get feedback on like, “Hey, is this argument making a difference or not?”

Joshua Rhodes: Okay.

Mark Ellis: So that’s one point. Another point is, unfortunately, regulators often don’t understand, like, basic Financial principles. I will give you an example. I mentioned before, like the CAPM is kind of the gold standard model. There’s another commonly used model called the discounted cash flow. It’s sort of mathematically legitimate. It’s kind of bespoke. It’s only used in regulatory proceedings, but it’s commonly used, and you can do it in a reasonable manner with reasonable assumptions. In utility regulation, they use two other models that are self-referential. They’re circular. They’re not based on a market-based cost of equity. They look at other authorized returns from other commissions. So FERC has come out and said, “Hey, those two models, you can’t use them anymore.” And their, their language was they’re circular, and they defy general financial logic, and they said they’re based on the book return, not the market return, and investors can’t buy at book value. I can’t say you’re trading at price to book of two, I only want to pay one, right? Can’t do that. You have to pay the market price. So FERC has banned these models But they’re still used all over the country. In fact, I testified in Texas last week in the Senate Business and Commerce Committee, and the chair of the committee asked the number two from the PUC, the Texas PUCT, “Do you use these models?” First, the PUC member was asked, “How do you determine ROE?” And he said, “We look at what other authorized ROEs.” He admitted that in the hearing.

Joshua Rhodes: Mm-hmm.

Mark Ellis: And it’s like, people who understand regulation know that’s not the standard. Then he was asked by the chair, “Do you use these models that FERC has banned because they’re circular and defy general financial logic?” And he said, “I don’t know.” And he says, “I know. I’ve actually looked into it,” and they do. And they say, “This is the primary model we use.” Primary risk premium model they use. You know, so if regulators don’t understand sort of the basic principles and are using defective models, it’s not surprising that they’re approving ROEs that are too high. Look at what they’re saying, look at the models they’re actually using. It’s no surprise that they’re ending up with really bad results. And I think just in general, regulators are very cautious, and, like, nobody wants to be the first to deviate from the pack. And, you know, you can look at the history of these ROE decisions, and they’re very, very tightly clustered around, you know, 9 to 10 percent for decades. Interestingly, there have been examples where authorized ROEs, there was a formulaic ROE in Illinois for a number of years, and they got into the sevens. And you’d think, oh, if what the utilities say is true, investors must have fled, and their credit must have tanked, and the lights must have gone out. And it’s like, their credit was fine. The parent company continued to invest. The lights stayed on. It’s like nothing happened.

Joshua Rhodes: Yeah.

Mark Ellis: It’s just, you know, how to explain why regulators are resistant to this, I don’t know. I mean, partly that’s why I do this because, you know, most of the other intervenors, even the ones who work for consumer advocates and the state, they’re all doing it wrong. And it’s like, well, I can try to introduce sort of corporate finance as it’s actually done by utilities. I’m working on another case just to kind of elaborate on this point. It’s, uh, in Central Maine Power. Central Maine Power is owned by Iberdrola, which is a Spanish company.

Joshua Rhodes: Mm-hmm.

Mark Ellis: They don’t report under GAAP, they report under IFRS. So IFRS has a different standard for impairment test reporting and—

Joshua Rhodes: What does IFRS stand for?

Mark Ellis: Oh, International Financial Reporting Standards.

Joshua Rhodes: Okay.

Mark Ellis: Yeah. In the US, they call it GAAP. IFRS is the international equivalent.

Joshua Rhodes: Okay.

Mark Ellis: So long story short, they have to report to their investors every year their internal cost of capital, so it’s the rate of return, not just the cost of equity. To their investors. It’s a number that’s audited by their independent auditor. It’s signed off by their board of directors. It’s reported to their investors and their securities regulator. So this is a public number and it’s specific to their US utilities, and it’s dramatically lower than what they’re asking from the regulator at the same time, right? So they’re saying one thing to their investors and another thing to their regulator. The one they tell to their investors, there’s all kinds of repercussions if you deliberately mistake that number, right? There’s, there are penalties, like, because you’d be lying to your investors and lying to your regulator, right? You can’t do that, right? Lying to your auditors.

Joshua Rhodes: Right.

Mark Ellis: But in the regulatory arena, it’s just advocacy. So if they ask for something egregious and the regulator says, “No, I’ll give you something less,” there’s no repercussions for that. It’s just like they move on to the next rate case and, you know, see you in a few years. So you have one that’s a very high standard of accuracy, and then another one where they can just ask for the m— you know, shoot for the moon, and if they fall short, so what? So we’ll see. That case is still ongoing. Iberdrola has a number of US utilities that this would apply to. National Grid also has a number of US utilities that this would apply to. They’re all dramatically lower than what they’re asking from their regulator.

Joshua Rhodes: Okay. Let’s turn to MarketClear. You and a business partner launched it to introduce competition into the utility financing.

Mark Ellis: Yeah.

Joshua Rhodes: So what is this product? How does it work?

Mark Ellis: Yeah. I wanna clarify the name. You know, you said MarketClear Utility Capital. That was an early effort. It’s now MarketClear Utility Policy Research, and it’s a 501(c)(3) nonprofit.

Joshua Rhodes: Oh, okay.

Mark Ellis: If you could clarify that. Yeah, so when you go on our website, it’s MarketClear Utility Policy Research. Again, some of this stuff is just serendipitous. So we started thinking like, “Hey, we’re gonna work with potential investors.” We had some early conversations. We know that if we were to create this security that we’re talking about, like... I’m sorry, I should just back up. What is the basic idea? Is the utility industry is the only industry in the entire economy where you have this major price, the price of capital is set by a regulator, not by some type of competition, right? There’s no other... And even, like, defense contractors, right, the government’s approving how much, but there’s a competition in it, right? So Lockheed has to compete against, you know, Boeing and so forth. There’s some kind of competition that determines the price that’s ultimately paid. Utilities is the only industry where you have a regulator setting the price, a major price in the economy, right? Why is that? It’s a vestige of, you know, this industry got set up over 100 years ago in the days of Edison and JP Morgan, right? And, you know, the example I give is, like, back in those days when the US went to finance the Panama Canal, they couldn’t just issue debt. The markets weren’t liquid enough and deep enough. They actually went to JP Morgan and he arranged the financing. But today, like, there’s markets on, like, what color shoes LeBron James is gonna wear in his next game. I mean, there’s markets in everything, right? So it’s trivial, right, to say, “Hey, we wanna create a market for utility equity.” Like right now, the way it works is the utility sets a certain profit and they said, “Oh, they bid up. We only pay twice book value for that stream of cash flows.” And what we’re saying is, like, why don’t we just say, instead of bidding up the price, bid down the return. So we say, “Hey, I’m issuing,” in your example, “5 billion of equity.”

Joshua Rhodes: Mm.

Mark Ellis: Right? And, you know, people can submit bids for all or a part of it, you know, 100 million or whatever, and here’s the return I want. And you stack up the bids, you know, whatever clears the market, right, that’s the clearing price. Very similar to how the bids are stacked up in ERCOT, right? And then there’s a clearing price where the demand and supply meet, you know, that’s the market-clearing price. Everybody gets the market-clearing price. So the basic idea is, like, why do we have regulators set this price? There’s no reason for it. It’s just this relic of the late 1800s. Let investors bid, you know, compete to provide equity. And it’s the fulfillment is the epitome of the Supreme Court cases were called Bluefield and Hope. It’s the epitome of satisfying that requirement, which is, has to be sufficient to attract capital. Well, that’s obviated, right? They are saying, “This is what I need to attract to provide capital, but no higher.” This kind of epitomizes, it’s the exact fulfillment of the Supreme Court precedent.

Joshua Rhodes: Who do you think the investors would be in that? Like, who would be submitting these bids?

Mark Ellis: Yeah. So it’s gonna be investors who are interested in long-term predictable returns, and it’s kind of somewhere in between a bond and a current utility investment.

Joshua Rhodes: So you have, like, like pension funds or other types of—

Mark Ellis: Yeah. It’ll be pension funds, you know, very long-term predictable returns. The way it’s designed is kind of unique. The instrument would be the 10-year Treasury plus a fixed margin. So you have this protection if interest rates go up, then your return goes up, they go down, but that’s the basic concept of the instrument. There’s another couple of interesting wrinkles where the distribution is, uh, income, and it’s the depreciation. So the balance goes down over time, right, so that you get this recycling of capital over time. But we have tested, reached out to potential investors, and there’s a lot of interest in this. You know, one of the things I like to cite is, I think it was his ‘24 or... ‘24 annual shareholders letter, Larry Fink, that chairman of BlackRock, he talked about, hey, there’s two big challenges facing our industry. In other words, investment and asset management. He says there’s this tsunami of retirement assets, and, you know, they’ve been pushed in the past into sel— sort of self-guided 401(k)s. It hasn’t worked out for them. We need to find home for those investments with long-term predictable returns. That’s on the supply side. And on the demand side, there’s this giant sucking sound of demand for capital for infrastructure, and in particular, electric infrastructure. And he basically said BlackRock’s next tr— transformation is to put those two together, and it’s like this is the ideal instrument to do that, right? This tsunami looking for long-term predictable returns invested in energy infrastructure and in... Or infrastructure, but particularly energy and electric infrastructure. So that’s kind of a proof point that there’s a huge demand for this type of investment.

Joshua Rhodes: It’ll be like turning a 401(k) into a pension, is what you’re—

Mark Ellis: Well, I mean, that’s not our job per se.

Joshua Rhodes: But using words that most people understand. Maybe like, it’s like the investors would be those types of people who would be doing that kind of thing.

Mark Ellis: Yeah, so that’s BlackRock’s business model, that’s Apollo’s business model, and then we would provide the assets that they could put into their portfolio. Like, not we. This auction process would provide the assets that they could put into their portfolios for retirees. That it wouldn’t be limited to pension funds, but you know, that’s kind of like the natural—

Joshua Rhodes: How much equity would need to be satisfied per year? Say tomorrow everything goes to this, this type of arrangement, all right? How many billions, tens of billions, hundreds of billions of dollars like would need to go through this process?

Mark Ellis: Yeah.

Joshua Rhodes: ‘Cause it’s an auction on the other side, right? I mean, it’s like, I guess in theory, the auction value could be high. Like it could be even higher, in theory, if there wasn’t enough to go into it.

Mark Ellis: Yeah.

Joshua Rhodes: Right?

Mark Ellis: Yeah.

Joshua Rhodes: So like is there enough appetite with that with the amount of money that needs to be spent, particularly with like growth and all this other kind of thing, too? Does that make sense?

Mark Ellis: There’s a couple of things. One, we kinda know that there’s appetite there because they’re building this stuff and they’re financing it through the public markets anyway, right? They are raising equity. Utilities are net issuers of equity, so we know like the capital is already there. The amount of capital that’s needed is growing more quickly than in the past. I forget the numbers How much equity utilities issue, it’s on the order of like 100 billion a year, but it could be 50 billion, it could be 200 billion, but it’s, it’s not 5 billion.

Joshua Rhodes: Yeah.

Mark Ellis: It’s, you know, that order of like, uh, 50 to maybe 200. It could be even higher than that. But it’s a big amount of equity that’s US utilities. Their current equity base is like 800 billion, something like that.

Joshua Rhodes: Okay.

Mark Ellis: Yeah, it’s c— about 800 billion, maybe a little bit less, 700 billion. So if you figure they’re growing at like 10 percent, right, right now, so that gets you to around 70 billion.

Joshua Rhodes: It wouldn’t be a niche product.

Mark Ellis: Yeah. So that’s one point, like, hey, they’re raising this equity, the equity’s being provided anyway, we’re just saying it’s not gonna be provided through purchases of the parent’s common stock, it’ll be equity provided directly to the utility operating company. That’s one point. The other point is if the utility comes in, in your hypothetical and says, “I wanna raise 5 billion of equity,” we could say, you know, “You’re only gonna auction a billion of that or half a billion of that.” Like, that’s a big enough auction to get a price. And then the price is, the rest of it is from the parent, you know, and they’re raising it in the public markets, but that ROE applies to the incremental equity or to all the equity anyway. We’re just trying to get the price. The auction doesn’t have to cover all the incremental equity. It can just be a sufficient fraction to get a good price signal.

Joshua Rhodes: Well, you leave for price discovery is what—

Mark Ellis: Yeah, that’s the entire point, price discovery.

Joshua Rhodes: Okay.

Mark Ellis: In the Texas hearing, one of the senators, Senator Kolkhorst, asked exactly that. It’s like, “How are we pricing this? Let’s talk about pricing the risk appropriately.” And there was a robust discussion around that.

Joshua Rhodes: Got it. Okay. We’ve kind of danced around a little bit, but like if you won this argument, what does the business look like in 10 years? What would the utility business model look like in 10 years?

Mark Ellis: Oh, that’s a good question. I should step back in terms of like, hey, we’ve made a quite a bit of progress. We have model legislation on our website, marketclear.org, and it’s been introduced in New York, in both houses, and in Pennsylvania in the House, where it passed unanimously, 102 Democrats, which we’re very proud of the bipartisan appeal of this, ‘cause it’s about affordability and it’s about free markets. You know, it’s about economic efficiency and economic dynamism.

Joshua Rhodes: Mm-hmm.

Mark Ellis: And it’s about reducing costs for all customers, not just one particular class, right? We’re shrinking that entire revenue requirement pie, and it doesn’t touch, like, hey, whatever policy goals you have around transmission, or renewables, or what have you, doesn’t have, doesn’t touch that. We’re just reducing whatever it is you wanna build, we’re just gonna make it a lot cheaper. That’s it. That’s all we’re trying to do. So what does the future look like? There’s one other element that we kind of touched on but really needs to be emphasized. So I said before, like, hey, reducing the ROE, when I testify, it works out to about a 10 percent reduction in the customer bill.

Joshua Rhodes: Yeah.

Mark Ellis: That’s kind of the immediate impact, but there’s a more important impact, which is it changes the utility incentive structure. So I talked about, hey, you know, give me a buck, I’ll put two in your retirement account. It’s like, what incentive does that create for the utilities? It’s like, I wanna maximize rate base. I wanna spend as much capital as I possibly can, right? Goes back to the very beginning, right? I want more equity. No other business wants to put in more equity. You know, equity is precious.

Joshua Rhodes: Yeah.

Mark Ellis: But theirs is like, “No, more equity, more equity.” So we completely remove that incentive. If they’re just earning their cost of equity, then every dollar of equity is a dollar in their market price. And the details of the instrument where the capital is, all the income is returned and the capital is returned as well, means each investor doesn’t benefit from growth. They just get their return on their initial investment. Every time the utility wants to grow, they have to go back to investors and the regulator and justify it. And so it completely changes the dynamic where, hey, if you’re not doubling your money, your incentive to just grow as much as possible goes away. And so you just invest what, you know... Then when the regulator says, “Hey, I really want to focus on your outcomes, performance-based rate making, customer re— you know, reliability, customer satisfaction, low cost,” now you can start to have meaningful conversations around that. Another example we give is, like, if you tell your kid, “I’ll give you a dollar if you take out the trash,” put down the VAVN controller, young kid, preteen, you know, he might be interested. But if you give that same kid a $50 a week allowance, they’d be like, “Nah,” you know? “The incremental money isn’t that meaningful to me.” And that’s kind of the existing business model. They make so much money just from investing that performance incentives just aren’t worth their while. It’s very hard to create a performance incentive that can compete. Take away the $50 allowance and now performance-based rate making, which is kind of a hot topic right now, can start to make sense, can start to be effective. The business model of the future is where utilities, you know, they’re rewarded and penalized for their performance, right? And not for just how much they invest. And you could, you know, talking, you know, there’s a lot of people out there, this is not my area of expertise, but others talk about, like, a distribution system operator, like taking the TSO model and putting it at a distribution level. This opens the way to that because, you know, under the TSO model, you separate ownership and operations in many instances, and this, you could start to affect that where, hey, somebody puts up the capital and then somebody else operates it, and you can create a performance contract around really efficient operations around that, and then somebody else is just providing the capital to keep the business going. So looks like long-term is we’ve completely obliterated this perverse incentive mechanism. I like to quote Charlie Munger, “Show me the incentive, and I’ll show you the outcome,” right? And then his corollary, “If you have a stupid incentive you get a stupid outcome.” And I think that’s the problem we have right now with this R— current ROE model.

Joshua Rhodes: Yeah, so one of the things, like, in my space that, like, that people often... I think is kind of, that brushes up against that or runs into that is like, uh, you know, non-wires alternatives, other types of, like, ways of, like, serving load flexibility, demand response programs, energy efficiency, all these other things find it hard to compete, I guess, with, like, the return on equity. And so I guess is what you’re saying is, like, those are on a better footing to compete—

Mark Ellis: Yeah, I’m glad you brought that up. My take on all of this is more efficient technology behind the meter resources, why do they find it so difficult? The typical refrain is the utility makes it really hard, right? Why? Because it competes with services that they wanna provide and that they wanna put in their rate base to earn this rich return. I’m not earning this rich return anymore, so you take away the reason for them to fight. Then all these arguments around technical issues and so forth, like, you kinda smoke them out a little bit. ‘Cause they make technical arguments around it’s difficult to integrate or what have you.

Joshua Rhodes: Yeah.

Mark Ellis: But at root, it’s like there is this incentive to hoard the capital investment opportunities, right? Like, EV charging, I wanna put it in rate base, what have you. But if you take away that incentive, obviously it’s never been done, so you can’t prove it. Like, there’s nothing you can point to and say, “Oh, they won’t care.”

Joshua Rhodes: Yeah.

Mark Ellis: But, you know, basic economic principles suggest, like, hey, if they’re not making, generating a lot of shareholder value from, you know, these opportunities because they’re just earning their cost of capital, they’re not gonna hoard them as much. One example I had at Sempra was, you know, in California they have something called CCAs, community choice aggregators. We don’t have a competitive retail market, but community said, “We wanna be more aggressive in our renewable portfolio standards, so we wanna do the procurement for local communities.” And, you know, at least at Sempra, they were kind of like, “As long as you step into our h— legacy contracts and make us whole on those, if you wanna take over procurement, procurement’s just a cost that we pass through. It’s not like we generate a lot of shareholder value, and there’s actually quite a bit of risk. So as long as we’re made whole, like, you can have it,” right? So utilities don’t wanna do things if they’re not making profit on it, right? Just like any other company, they don’t wanna do things if they don’t make a profit on it, you know, in terms of an economic profit, right?

Joshua Rhodes: Yeah.

Mark Ellis: Right, and their cost of capital. Another example I talked before about, you know, we were pioneers in building utility-scale PV and then got out of it very quickly. Why? Because the returns got bit down, and it was like, we could keep building these things, but we’re just earning our cost of capital.

Joshua Rhodes: Hmm.

Mark Ellis: We earn a much better return in the utilities, so we wanna redirect capital there.

Joshua Rhodes: Awesome. I think we’re at time. Mark Ellis, thank you for coming on the Energy Capital Podcast.

Mark Ellis: All right. This was great. Thanks for having me on, Josh.

In addition to these R&P Picks, paid subscribers receive access to the full archives, Grid Roundups, and select episodes of the Energy Capital Podcast. Please subscribe today.

Explaining the Senate Permitting Bill, the Bipartisan American Affordability and Jobs Act | The Bipartisan Policy Center

The biggest energy news this week is the Senate’s release of a long awaited permitting reform bill, the BAAJA. BPC walks through the 417-page bill section by section compared with current law. It covers

• National Environmental Policy Act scope.

• Deadlines and judicial review.

• Historic preservation reviews.

• Transmission siting, planning, cost allocation and data center ratepayer protections.

• Clean Water Act changes.

• Permit certainty and disparate treatment.

• Endangered Species Act timelines

• Geothermal, hydropower, offshore and mining titles.

A cloture vote is expected November 9.

Data centers face a sweeping new power regime | Axios

Axios explains the purpose and scope of the legislation in its get-this-information-into-my-brain-immediately style.

The big picture: Congress has been talking about overhauling permitting for years. The AI boom has given lawmakers an urgent reason to finally act: America suddenly needs enormous amounts of new power infrastructure, fast.

Faster approvals for power plants and transmission lines could directly benefit data centers struggling to secure enough electricity for their expansion.

How it works: The bill reaches into virtually every part of the relationship between large data centers and the electric grid.

What’s up with the new federal permitting reform bill? | Volts Podcast

For more on the bill, David Roberts talks with Daniel Palkin of Arnold Ventures about BAAJA’s provisions and the odds of a lame-duck vote. Palkin, a former Senate staffer on earlier permitting efforts, puts the bill’s chances of passage at 50-50.

“Both sides have faith in their preferred technologies. And I’ve actually heard some of the negotiators of this bill describe it plainly in those terms… our policymakers on both sides of the aisle believe that their resources are genuinely better… and will succeed in a level playing field.”

Read more

President Trump said he supported restricting diesel exports. Politico reported the White House was preparing a 90-day ban. Within hours of that reporting, a White House official denied it, and Energy Secretary Chris Wright called the idea a “blunt tool.” Then on Friday, after …

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In addition to these R&P Picks, paid subscribers receive access to the full archives, Grid Roundups, and select episodes of the Energy Capital Podcast. Please subscribe today.

Abbott declares disaster in Texas over diesel prices, waives restrictions on commercial shipping | The Texas Tribune

Gov. Gregr Abbott declared a statewide disaster in response to diesel prices, which have reached $5.86 per gallon in Texas. The order allows farmers and truckers to use dyed diesel on public roads for the first time since Texas Panhandle fires in 2024.

Dyed diesel is chemically the same as regular diesel available at gas stations, but it is tinted the color red and used in off-road farm and construction equipment. Because it’s exempt from federal and state motor fuel road taxes, typically its use on public roads is prohibited and violators are subject to fines for tax evasion, according to state law.

Removing restrictions on the use of dyed diesel could reduce prices by increasing the supply of diesel available for everyday use.

ERCOT batteries: boom, bust, or rebound? | Catalyst Podcast Latitude Media

Latitude Media’s Catalyst podcast interviews Brandt Vermillion, U.S. market lead at Modo Energy, about the outlook for grid-scale batteries in Texas in light of a massive build-out and changes to data center policy.

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There are a few reasons for this; surging power demand from artificial intelligence and industrial reshoring, capacity market spikes in places like PJM, and aging grid infrastructure and the capital requirements are among the most obvious. So when a similar promise about AI surfaced during the period when ChatGPT became the most popular AI chatbot in 2022, it felt familiar. Abundant artificial intelligence. On tap. At a low, low price. For everyone. Every time. But that is not the reality we are experiencing.

While the price of a token has gone down about 60 to 70 percent, according to Goldman Sachs, we are spending more on AI. Expenditure on tokens, the building block of text that AI uses to read and write, has continued to go up as more advanced AI models are released and AI agents take over from simple chatbots. The reason for this increase has little to do with the technology itself and, as is the case with power, has everything to do with who is capturing the value the technology creates.

Despite my desire to move on from this topic, (I’ve told colleagues and friends the conversation about the convergence of AI and power has become stupid, a topic for another post), I cannot put it down. The stories of abundance (cheap power, cheap intelligence for all!) are the same story. It will likely end the same way if we do not understand why and create policies that ensure the little guys (you and me) do not get left holding the bag.

Read more

In the study, 80 megawatts of batteries would clear every transmission constraint created by a 100 MW data center near Burleson, Texas, on Oncor’s system. A battery beside a strained line relieves it about one-for-one, while curtailing a more distant data center may relieve half as much. Any battery near the line has that edge.

On this week’s Energy Capital Podcast, Joshua Rhodes talks with Chase Dowling, head of market operations for Austin battery company Base Power. The business model is Base Power retains ownership of the batteries it installs for retail customers, and homeowners subscribe to the service.Dowling puts the batteries’ reach at “80 percent, 85 percent of all of the constraints.” The rare failures that sever part of the system, he says, still need new transmission or generation.

• The limits: the battery fleet needed grows faster than the load, and West Texas lacks enough homes for large fleets. No market yet pays batteries to act as transmission.

• Who pays: Dowling proposes that a data center facing curtailment fund a battery fleet near its constraints, and the host homes get outage protection.

• Utility fleets: for El Paso Electric and CoServ, Base builds co-branded fleets and hands control to the utility. It now installs in Chicago, in PJM.

• Backup: Dowling says a portable generator can stretch a Base battery through a multi-day outage like Winter Storm Uri.

Dowling says the challenge now is getting ERCOT to model these fleets at the transmission substation, where planners can see them.

Chapters

00:00 – Chase Dowling and the new Base Power study
01:01 – What Base Power has built since 2023
02:22 – Manufacturing home batteries as a grid resource
05:10 – The homeowner value proposition
07:50 – Base Core's generator port and extended backup
11:43 – Deployment speed and what limits it
14:43 – Regulated utilities and who controls the batteries
16:28 – Lessons from Texas for PJM
18:23 – Flexibility Without Curtailment: the paper's premise
22:32 – Why location matters: 100 MW at Burleson Switch
26:52 – How 80 MW of batteries hosts 100 MW of load
28:47 – Bigger loads, the long tail, and the 80/20 rule
35:13 – Batch Zero, curtailment risk, and who pays
38:17 – Data center PR and how big this can get

Resources

People & Organizations

• Joshua Rhodes (LinkedIn)

  • Energy Capital (Podcast - LinkedIn - YouTube)

• Chase Dowling (LinkedIn)

  • Base Power Company (Website - LinkedIn - Base Core)

Company & Industry News

• Base Power raises another US$1 billion in Series D financing for US residential BESS

• Base Power brings cheap batteries to residents in power-starved PJM

• Base Power to launch 100-MW home battery network for Texas utility

Books, Articles & Filings Discussed

• Piq Energy and Base Power - Flexibility Without Curtailment

• ERCOT - Aggregate Distributed Energy Resource (ADER) pilot project

• ERCOT - Trending topic: new batch connection process for large electricity users

• Texas Legislature - SB 6, 89th Legislature, enrolled bill text

• El Paso Electric - El Paso Electric and Base Power install first home battery in El Paso as part of new reliability pilot program

• Farhad Billimoria and Conleigh Byers - The value of compute load: what cloud markets reveal about the potential for flexible data centers

Related Podcasts by Energy Capital

• Creating a Distributed Battery Network with Zach Dell

• How Load Flexibility Could Unlock Energy Abundance with Tyler Norris

• What batch zero settles and what it leaves open

• How Texas plans to serve infinite demand

• How Data Centers Can Strengthen the Texas Grid with Camus Energy CEO Astrid Atkinson

Related Posts by Texas Energy & Power

• $6.5 billion in transmission projects, batch zero closure, and the questions that follow: Texas Grid Roundup #93

• Flexibility and Speed to Power, Reading & Podcast Picks, December 7, 2025

Transcript

Joshua Rhodes: Hey everyone, and welcome back to another episode of the Energy Capital Podcast. I’m really excited to have Chase Dowling here from Base Power Company to talk about what the company’s been doing, as well as a new study they’ve put out looking at the impact of distributed energy resources on the ability to unlock firm load for places like large loads, data centers.

But yeah, really excited to have Chase here to talk about it. Chase has a PhD in electrical and computer engineering from UW, University of Washington. In and around there, he also worked 10 years at the Pacific Northwest National Lab, ending as a senior applied scientist before switching over to machine learning at Tesla.

Very recently, actually, as of recording this podcast, he’s a founding power systems engineer at Base Power Company. Chase, welcome to the Energy Capital Podcast.

Chase Dowling: Thanks, Josh. Sorry for the mouthful. Yeah. Ten years at DOE and then a couple years at Tesla working mainly in energy.

Joshua Rhodes: Yeah. Yeah. Well, energy’s kind of the thread that brings us all together these days, right? It’s like energy is AI, is transportation—

Chase Dowling: Is everything.

Joshua Rhodes: —is now politics too, which we won’t get into. So it’s been a while since Doug originally interviewed Zach about Base Power, and so, you know, a lot has happened since the last time we checked in. You know, you started as a pretty novel combination of retail electricity and batteries in Texas, but now you’re manufacturing your own hardware, working directly with utilities.

Kind of before we get into kind of the specific study, what’s going on at Base right now? Like, what are y’all working on?

Chase Dowling: Yeah, no, it feels like a while, but it’s crazy to say founded at the end of 2023 that we’re scaling up. We’ve got 600 MWh of batteries in the ground, and we’re just now speeding up.

We’re installing all over Texas, and we’re now entering our first new markets outside of Texas, installing in Chicago and trying to get at the capacity problems in PJM. But the biggest changes maybe since you talked to Doug or since Doug talked to Zach was we’re installing in deregulated territory as a retailer, but now we have a lot of regulated utility partnerships as well, where we come in and help facilitate the construction of a large distributed peaking resource for these regulated utilities.

But that’s the story since then, is that we’ve been scaling, growing, and installing resources faster.

Joshua Rhodes: I mean, you’re manufacturing these units in Austin. I know you’re looking— you’re also building a new facility out by the airport, but, you know, you’re currently in the old, you know, Austin American-Statesman building.

I actually took a tour of the place, I wanna say, like 7 months ago, and you had, like, you know, half of a line going. But I was there last week. I mean, you had multiple lines going, robots following magnetic tape all around, and lots of folks putting stuff together. Tell me about the manufacturing process and kind of what you’re doing, you know, here in Austin.

Chase Dowling: Yeah. So this is a big piece of being a vertically integrated designer, manufacturer, developer, and operator of an energy resource and how we build our kind of like technological advantage that we’re providing to the grid. And so manufacturing is like a key piece to the advantage here. If you look at distributed resources, and this is what we do as a company, we go and we install batteries on homes, residential batteries on homes, and we can talk more about like how this model works or what the value proposition to the homeowner is.

But we’re manufacturing these home batteries to be a grid resource first. If you go out on the market today and you look at, like, what are your options, you could buy a battery from Enphase, you could buy a Powerwall. These are very modular, very flexible consumer products that carry a margin for that manufacturer.

But we’re a grid resource first. And so to be a grid resource, you need to be robust, you need to be easy to install, you need to be capable of certain functionalities that you don’t necessarily need on, like, a consumer home battery. You need to be thinking about it here, like in Texas. You may have noticed it’s hot in Texas.

Batteries don’t like super hot and super cold, and so we have designed a battery that is exceptionally good at rejecting heat, and is gonna be available when the grid needs support from that peaking resource when it’s super hot outside and load is super high. And so in order to build such an effective resource, you need to control the destiny of the hardware that you’re deploying with.

And so by manufacturing, we’re able to assure that the batteries that we put out in the world are gonna be able to stand up to the Texas summers and the Texas winters, and now the Chicago winters. It’s like an important key piece of why manufacturing is so important. And what’s really cool about it being in the Austin American-Statesman building right across the street from the offices is that, for example, I work a lot on the software that does the grid coordination and the grid participation of the aggregate resource.

But whenever we notice a problem of like, oh, an inverter maybe derates under certain conditions, we just walk across the street and say, “Hey guys, check this data streams that we’re seeing. What’s going on?” And we can fix that problem right then and there. It’s a super incredible advantage to building a really performant resource.

Joshua Rhodes: Let’s talk about the value proposition to the customer, right? ‘Cause like you’re a grid asset, but you’re chasing a totally different interconnection than, say, you know, a multi-hundred megawatt battery that has to get maybe its own substation and its own gen-tie, maybe has to do all these different kinds of studies like on the system.

So like you’re chasing interconnections that already exist kind of at the home, and so what’s your value proposition, the Base model of getting those Base batteries into those connections at homes?

Chase Dowling: This is the best question. So I like to think of Base from the homeowner’s perspective first, either in a place with retail competition or on like a vertically integrated utility, like say here in town in Austin Energy.

So if I’m a homeowner and I look at Base, what is Base doing for me? In areas of retail competition, Base Power is a retailer, and we go to the customer and say, “Hey, sign up with Base. You can get a discounted time-of-use rate on your energy costs, and for an extremely low cost to get the battery installed, you don’t pay for the battery.”

Base pays for the battery. We install it on the home, and then the customer pays a monthly subscription fee. I think it’s like right now it’s like $12 a month in certain deregulated territories. But it depends a lot on where in the country you are. But a customer pays like a subscription fee to have that battery in their home, and it’s a very large battery.

Base retains the operations of the battery to offset the customer’s cost to serve, our cost to serve that customer. But then that battery’s quite large, where our Gen 3 Ma— our, our Base Core that we’re manufacturing at the factory is a 20 kW, 40 kWh battery. You know, a lot of consumer batteries that you see on the market today, they’re like 7 kW, 14 kWh.

This is a pretty sizable battery. You’re looking at like a small EV in terms of energy storage capacity. So it’s much larger than a typical single-family home that we would install on. A typical single-family home’s peak summer load is on the order of 4 to, 4 to 5 kW when you level out like the AC’s duty cycle. It’s a really big battery.

When we put it on that home, all of the members of the Base coordinated network, whether or not you have a battery, say, if you’re a Base energy customer, we use those batteries to manage cost to serve for everyone in that coordinated network. And so the value proposition to the customer that gets that Base battery is, “Hey, I’ve got a really, really low-cost backup solution, and I’m getting cheaper energy.”

And then what we do to make money as a business is we go and make that resource part of a coordinated network to manage our costs as a supplier.

Joshua Rhodes: Nice. One of the things I noticed different in, I think you said Gen 3, but you’re calling it Base Core. Is that right?

Chase Dowling: Yeah. Yeah. Yeah. A little slip of the tongue. We— our, like, product name, Base Core. Yes.

Joshua Rhodes: Okay. It was interesting seeing a little mock-up there as we were walking in. We actually got a tour from Justin and Zach, so it was like we got the C-suite tour, which was great. But one of the things that Justin was really interested to show, it had, like, a generator port as well, and it also connected to solar, right?

So if, like, you have a multi-day outage, like, he was basically saying, he’s like, “You can buy, like, you know, a cheap couple hundred dollar generator on Amazon that will charge the battery, that will then allow the battery to kick 20 kW out if it needed to or whatever,” which was really cool. It actually sounded like the concept for, like, an extended-range EV, but you were using it for, like, the battery for, like, the house. Did I make that connection right?

Chase Dowling: This is an excellent connection. I love this feature of the Core battery. It actually exists on a lot of our prototype hardware as well. This is such an important feature, so I’ll take a step back for a moment. So there is a generator port on the battery, and why? The value proposition of the battery to the customer is home backup, is peace of mind.

Texans lived through Winter Storm Uri, and the power was out for 4 days. And no matter what you do with a battery, there’s only so much energy in it, right? It’s only gonna last you so long. You can only ration that energy out for so long. You gotta be able to put more energy in to be able to use it to manage your cycling load.

But this is such a slept-on feature of the Core. I get so excited about it. What people are trying to do, when they get a backup generator for their home and they wanna make sure that their heating and their cooling is gonna run, they gotta size that generator to meet the demand of an AC pump, for example, you know, a 10 kW AC pump, a 14 kW AC pump.

And at that kind of power range, you need to get a pad-mounted generator that’s $12,000, $15,000 to meet that peak demand to turn that AC pump over. But if you ever, like, listen to how your AC runs, it only runs for a few minutes. The duty cycle of an AC is very short. And so what we can do with the 20 kW inverter on the battery is just push that pump over for a few minutes. And so long as you can charge the buffered-up energy in the battery at the rate equivalent to, like, your hourly average consumption, f— which on a home is, like, 4 kW, then you never actually run out of energy in the battery, and the inverter gives you that, like, oomph to get that AC pump turned over when you need it.

And a 4 kW genny on Amazon’s, like, 500 bucks. And so now what I need to do, if I subscribe with a Base battery, I pay my monthly fee, I get that discounted energy rate. I also get this generator port. I can get, you know, like, an unlimited duration of backup for 500 bucks for the cost of a portable generator to plug in.

And by extension, works with solar panels. The inverter can natively accept connectivity to solar panels, and a lot of folks don’t— didn’t realize that, you know, like, solar panels alone aren’t a grid-forming tool. They can’t back up a home alone. So just getting that inverter plopped on your house, that piece of power electronics, is such a huge power-up for all kinds of peripherals that you can attach to it.

Joshua Rhodes: Yeah. I mean, I was one of those Texans who lost power for 4 days too. I’m actually currently right now, like, I’m in Nacogdoches. I’m at my, my mom’s place, and she actually got a Generac in... She lives out in the country, and she got a Generac installed, like, 2 weeks before Winter Storm Uri hit. You know, lost power, but sailed through the whole thing.

Also burned 500 gallons of propane, which ain’t cheap. It worked. But you’re right, it’s like whenever that thing was running, it can only run at a minimum level so long, right? It can only run so low, and so I know it was sitting there burning, like, extra fuel that it didn’t really have to do if it were able to cycle and kind of buffer through.

And it’s really cool that the battery can do that. And so the value prop seems to be working out. I mean, it says, like, you’re currently is, you know, energizing roughly about 2 MW a day or so. Are you still on track for, like, a gigawatt by the end of this year? Is that, is that the goal or is that the stretch goal?

Chase Dowling: We set ambitious goals, but we set goals that are achievable, and we’re getting there. We’re a little over 600 MWh in the ground today. We won’t hit on a power basis a gigawatt till next year. We’re shooting for a gigawatt hour on the storage capacity. But we’re getting there, and it’s gonna be tight.

It’s been an exciting, exciting ride. That, that installation rate, 2 MW a day energized, that puts us at the top of the range. If you take utility-scale batteries and if you take what we’re giving to regulated utilities and what we’re bringing to the bulk power system as a bulk resource, if you take utility-scale battery developers, if you take a site, a 200 MW site, they take 3 years at best to get interconnected onto the grid, and you’re waiting those full 3 years for those 200 MW to show up.

And if you, like, divide up the time it takes to get those 200 MW online, that 2 MW a day that we’re energizing puts us at the top of the storage developers in Texas. Base is one of the fastest storage developers in Texas right now, and—

Joshua Rhodes: Yeah. If I do the math right in my head, which it’s easy math, so this is dangerous, you’re doing like 200 MW every 100 days. That’s a big battery every 100 days, every 3 months. You’re, I mean, you’re moving fast. What’s the limit now to moving faster? Is it manufacturing, in s— installing, customer acquisition, distribution, ERCOT rules? Like, would you wanna move faster, or is it just time? Like literally you’re just moving as fast as you can.

Chase Dowling: I think it is working on all of the elements of that flywheel simultaneously. On any given day, one thing may be the constraint. On any given day, it might be our ability to recruit enough trained installers in a particular geography, or on another day it might be part of our supply chain for our manufacturing that might be the constraint.

But then kind of being vertically integrated, we can work on these constraints independently, parallelize, increase the installations, like the net energization speed of the resources that we add to the grid simultaneously.

Joshua Rhodes: And when you say vertically integrated, I mean, you’re, you’re all the way down from manufacturing to, like, also the people who are installing these in homes, they work for you, right?

Chase Dowling: Correct. For Base, yeah. Through to the operations of the resource, the application that the customer sees, the maintenance of the installation of the hardware in the homes. And that’s actually an important piece when we go to our regulated utility partners that are looking to improve their peaking capacity in their portfolio. You know, like a regulated utility like Austin Energy, for example, needs more peaking resources on their system.

We facilitate a lot of these functionalities for them, and it’s just plug and play. Their ability to control the resource in the wholesale market, the ability to operate it like a grid-scale battery, just day one. Having control over each of those pieces allows us to offer that up as a resource to a regulated utility as well.

Joshua Rhodes: Okay. It’s a little bit more clear in, like, the deregulated space where you’re the rep and, like, you’re also bidding in ancillary services and things like that. When you’re working with a, with a muni or a co-op or other, are they controlling the batteries? Are y’all controlling the batteries? Is the arrangement different there?

Chase Dowling: Yeah, so for a regulated utility, they’re controlling the battery, and we’re almost kind of like EPC, but a very, like, well-instrumented EPC. So a regulated utility puts out an RFP, and they need peaking capacity, and they need it soon. And what are the options on the table? I could go out and get up a gas peaker.

I could go out and get a grid-scale battery. And as you know, a lot of these are hard to come by nowadays with the construction on the bulk power system. And what we’re able to do is we come up and say, “Hey, we take this utility-scale battery, we cut it up into residential battery-sized pieces. We help you. We build up a program with you to install it on your customers’ homes, and then we can give you the keys to that fleet. And the best part about it is that we can get you that 100 MW you need in 6 months, not 3 years.”

And that’s been a very attractive proposition to utilities that are facing acute peaking capacity needs on their system.

And so it looks like from utility to utility it’s slightly different depending on the problem they’re trying to solve. Say like El Paso procuring a fleet of Base batteries to manage a constraint on a particular substation versus CoServ procuring a large fleet of batteries to become part of their peaking, uh, resource portfolio.

In either case, the customer program that’s offered is co-branded with that utility. But we just simply hand the keys over to that utility through a control surface integrating into their EMS or ADMS, and they can facilitate the operations of that resource directly.

Joshua Rhodes: Well, that makes sense. I mean, one of the things about the energy sector writ large, I always kind of say, is like, if it doesn’t work in Texas, it’s probably not gonna work anywhere else since, like, a lot of folks kind of start and work in Texas.

You cut your teeth in Texas, so what lessons are you taking from Texas to other regions? Or have you found other regions that are maybe easier than Texas? What are you seeing elsewhere as you move into other areas?

Chase Dowling: Well, one of the markets that we’re going to right now, PJM, it’s all over the headlines that there is a significant need for capacity, and that capacity cannot be built fast enough.

So we’re just super excited to be stepping into that market with a new form of resource that can address those capacity needs. The lessons that I, I think that we have been taking away is building the muscle to build a resource that has never been built before at a scale that’s never been built before to solve a new kind of capacity problem.

The transmission system, the bulk power system, we spent 100 years building this giant synchronous machine, and we got really good at building it a certain way. And now with this, like, renewed voracious demand for energy on the transmission system, we need to find capacity everywhere. We need to put more dispatchable power generation wherever we can.

And so the lessons that we’ve been taking away from Texas are like a multitude. One, it’s like, how do you build up the warehousing capability? How do you manage truck rolls and device maintenance? How do you learn to work with the permitting authority in that geography? How do you integrate with that market or that utility? And exercising this muscle that works collectively such that when you show up to that new market, in one month, you know the list of problems that you need to burn down to start effectively putting that batteries on those homes and start energizing those resources quickly.

Joshua Rhodes: Yeah, that makes a lot of sense. But let’s turn to this paper that y’all recently put out, I think the beginning of September. It’s called “Flexibility Without Curtailment.” And so walk me through kind of the high-level executive summary of this paper, and particularly the title. What does that mean?

Chase Dowling: Yeah. I definitely wanna give credit to our partners for Piq Energy and Tom Nudell. They’ve been fantastic to work with on this paper, and it— they did a lot of that heavy lifting. And definitely credit to Tom for that title. That was his baby. But the title is getting at a contract that most balancing authorities in North America are beginning to realize needs to occur. We’re building these multi-gigawatt data centers that are being added to the grid, that, like, an individual data center, if it trips off grid, just the data center turning off creates material balancing and dispatch challenges for that balancing authority that needs to ensure stable frequencies, stable power supply.

So it’s kind of becoming accepted knowledge that, like, the data center needs to facilitate the safe operations of the data center. They become a responsible counterparty to it. And a lot of people have been talking about, like, well, they need to be flexible. They can’t just show up and operate however they please.

They almost become their own kind of resource on the grid. And when people think of flexibility on the load side, generally what they think about is like, “Oh, I can turn it down.” Texas, for example, has a history of a lot of steel mills being able to turn down when there’s severe shortages, and that was kind of a novel thing to add to the grid.

You know, we built a grid over the last century that just kind of assumes that load was inelastic. You designed the coordination of generation, dispatch, and transmission around meeting whatever demand was at the time that demand occurred, and there was no expectation that demand would be this fully equipped counterparty in the balancing of the power system.

And so that curtailment proposition, if you, like, dig a little bit deeper, in order for some of these data centers to curtail, their opportunity cost to curtail is tremendous. There was a recent paper, I don’t know if you saw it, by, uh, Farhad Billimoria and one of his colleagues, that looked at the value of lost load or the opportunity cost for certain data centers to turn down, and these numbers were upwards of $40,000 a megawatt hour, in some cases six digits, hundreds of thousands of dollars a megawatt hour to turn down.

If the only option was for a data center to turn down to ensure the stability of the grid, that hundreds of thousands of dollars of opportunity cost would be felt by ratepayers one way or another. And so what could we do to ensure that that opportunity cost doesn’t get dumped onto people who, like, we are privileged to pay for 4-cent-a-kilowatt-hour energy, right?

And that would just be a tremendous cost burden on ratepayers all over the country. So the core level is simply just add more resources to the grid, increase the operating envelope, and add flexibility to the grid directly. And that’s something that we showed in the paper where using this novel program that ERCOT has, the ADER program, which we could talk about, the advantage of these residential resources, these residential batteries, is because we can install them so quickly, speed to power is the name of the game nowadays, and so, like, this is one of the fastest resources to install.

And if we can install them at meaningful scales, those batteries aggregated at target substations can help facilitate the flexible operations of that grid and help make it more robust in the presence of these very large data centers.

Joshua Rhodes: Yeah, and I think my understanding for, like, a training data center is that it just can’t, like, stop for, like, a 15-minute interval, because if you wanna move all of those weights that you’re tuning from RAM to disk, it can take, like, 4 hours to, like, stop and then 4 hours to start again.

And so, like, for a 15-minute interval, it’s like an 8-hour interruption. The IT load is not inherently as flexible. I know that there are companies working on that, like Emerald AI and other folks, but at least I believe that that is kind of how a lot of that works. And again, I probably got the, the terminology kind of all wrong there.

But I think one of the things that I was really stoked about this paper was that it really pointed out that location mattered, right? Because these new large loads that you’re putting in places, like, they put an acute stress on particular pieces of infrastructure of the grid. The whole grid growing by 100 MW is, like, that’s just in a, a rounding error.

But, like, a couple hundred megawatts at this particular place, that has real implications for the system. So I was wondering if you could talk through those physics in hopefully relatively plain English. One of the things in their paper, you know, you talk about is if you put 100 MW of new load at Burleson Switch, which is, like, a particular bus, like, on the grid in just around the Dallas area, in the Oncor region. You put 100 MW there, what happens? What does the paper show that you’re trying to do?

Chase Dowling: Whenever you put a big piece of new load or new generation on a part of the transmission system, there’s a whole list of, kind of like a checklist of problems that you care about when you connect to this big synchronous machine.

But one of ‘em is, like, is there simply enough room on the transmission lines? And the way the TDUs and the way Oncor assesses whether or not there’s enough room on these transmission lines is they look at operating conditions, different times of year, and different failure modes. Those failure modes, we call them contingencies in the industry, and then they watch them.

They form what are called constraints on the system. Constraint is like a transmission line and a contingency. A contingency is like a power plant goes out or a meteor hits the Earth, and these sit on a spectrum of probabilities, right?

Joshua Rhodes: Hopefully the latter one’s at the tail end of that probability there, but okay, I’ll let you have it.

Chase Dowling: Super fun digression about solar storms, but it gets really interesting on the kinds of things that they’re monitoring on the contingencies. The short story here is that there’s only so much room on these transmission lines, and if I add a new big load, given that the system is coupled, if the load operates the way the load wants to operate, there may not be enough room on that transmission line.

Now a lot of constraint violations on the transmission system today are quite brief. Not all, but many are less than a couple of hours. And so when you add things to the transmission system, you affect a whole bunch of transmission lines all around you, not just like the one that you’re literally connected to.

So as you saw in the paper, if I add this 100 MW load to that spot, a whole bunch of constraints pop up, like, oh, this transmission line, that transmission line, that transmission line. And what we show is that when you put it in a spot, when you hit this transmission line, it doesn’t mean that like one extra megawatt of load at this data center site is one extra megawatt on every single one of these constraints.

It could be as few as, you know, half a megawatt or a third of a megawatt. This is, in the industry it’s called a, a shift factor or like the locational impact to all of the things around you. Now, that constraint, if it’s very far away, it might happen to be in a part of Dallas where there’s a lot of homes, a suburban part of Dallas where you can put a lot of batteries, where is really close to that constraint that cannot be ameliorated unless you were to increase the size of that transmission line or install new resources.

And those resources have like a mechanical advantage by being so close. One megawatt of injection from those batteries can realize 1 MW of relief on that constraint, whereas the data center perhaps a little further away, 1 MW of curtailment on that data center only realizes, say, like half a megawatt of constraint on that transmission line.

So as you saw in the study, there was an example data center in Burleson where a 100 MW data center, all of the constraints that it creates can be ameliorated by 80 MW of strategically sited batteries. And if you s— look closely, there’s like 10 to 20 MW pockets in a number of places that are all strategically dealing with the numerous constraints that arise.

And that’s kind of the short of it, what’s happening with the connection of the resource and what is preventing that resource from being operated safely under all the contingencies that ERCOT analyzes.

Joshua Rhodes: At the risk of getting too wonky here, please don’t answer anything that uses imaginary numbers, ‘cause even me as an engineer won’t be able to understand what you double Es do.

But you brought it up. This was 100 MW, like, additional load, but you only needed roughly 80 MW of resources to, like, effectively make that load okay to host. I mean, people might think of it as like, okay, if you put in 100 MW of load, you need at least 100 MW of stuff on the system, but you’re able to do it with less. How does 80 MW of resources allow 100 MW of new load?

Chase Dowling: Yeah, yeah, yeah. So if you look at the transmission system in Texas, there’s tens of thousands of buses where you can go and, like, install electrical hardware, and there’s not tens of thousands of buses that can host 100 MW of load.

You need the land. You need the high-voltage transformers. It takes a ton of space. It actually limits, like, where on the transmission system you can put these things. But the constraints are everywhere. They’re in the middle of the city. They’re in the suburbs. They’re in, out in the rural parts of the state where the transmission lines are running.

And you can place batteries physically closer to where the constraint is occurring, depending on where the data center’s being built. And so by very simple mental model that works is, like, by virtue of just being closer to where the electrical need is, not where the load was built, you can more effectively control the problem that’s arising.

It’s like I’m in a room, and the data center’s in the room with me, and we both need to shut off the light, and the data center is on the other side of the room, has, like, a stick to turn the light, and I happen to be right next to the light. It’s really hard to reach the light switch with that long stick, and I happen to be right next to it, and I don’t need to work as hard to turn that light switch and effectuate the control.

Joshua Rhodes: Okay, so one of the things I really also appreciated about this paper there is it didn’t stop there. It’s like you next go to a 200 MW case, and instead of less than 200, you actually need more than 200. You need about 300 MW to alleviate 25 of the 30 constraints. And to get to all of them, you would need like 1,200 MW.

So it was like the problem got exponentially harder as you made the loads bigger and bigger and bigger. And so, one, I appreciate you putting that in the paper to be realistic about it. Can you talk about, like, how did it work so well for that 100 MW? What became harder as those loads got larger?

Chase Dowling: Yeah. So there’s almost like two questions in here. Why does it work for some data centers, not others? And then why is there like a long tail? Why does it to— take such a large fleet of batteries to deal with all the constraints that materialize as the load grows? So with the first question, residential batteries aggregated at a load substation are not a panacea for all the problems, right?

Like if there’s a data center being built in West Texas, there simply aren’t enough homes in West Texas to aggregate a multi-hundred megawatt fleet of batteries. It depends a lot on like the local topology of the network, the available real estate to work with to put more resources on the system. It’s case by case.

But if you look at the data center map and where a lot of these systems are being constructed, that middle of the road, the 100 to 300 MW set of data centers, they’re getting built all around the exurbs of the major metropolitan areas, and a ton of them are getting constructed. And so there’s a ton of constraints that are gonna be able to be managed where there’s proximity to big residential communities where we can stack up tons and tons of batteries.

Now, is this gonna solve a problem out west of like Abilene, where there’s very small neighborhoods and not a ton of places to put residential batteries? Probably not. So one, it depends on the topology of the network and what’s available to work with. And then on the like tail of contingencies. Now, like the number of situations that the TDUs and ERCOT look at as failure modes on the transmission system are huge.

Like NERC has like this special ranking system for all the different failure modes that the transmission system can go through to the most extreme, where like our most important transmission lines outright fail, they fall down, they break. We saw a transmission line failure like that down in the Houston area not— about a year ago after a hurricane.

But those are exceptionally rare. And to deal with those constraints, it oftentimes severs whole parts of the system. And in those extremely rare occurrences when you sever that part of the system, you need to make up for all of that lost generation on both sides. And so to fully ameliorate that particular extreme constraint, you do need a ton of generation.

But back to that title, back to that recognition that there’s a realization that these enormous loads joining the system will have to form some amount of flexibility that can be offered to the balancing authority to deal with these extreme cases. I mean, this is kind of what SB 6 was getting after, where like in the most extreme cases, you gotta be able to help the grid from collapsing.

And you don’t need to spend a billion dollars to deal with the most common, the preponderance of the various failure scenarios where a breaker opens, a power plant trips, there’s some sort of problem. These problems happen daily on the transmission system, and they cause these shocks to price that we s— we all see on the grid status dashboard of the nodal price even just yesterday.

Those are things like transmission outages occurring, and breakers opening, and power plants tripping, and things like that. Quite common. And you can deal with a reasonable sized fleet of batteries that are much, much, much, much cheaper than a data center curtailing for several hours. You can deal with 80 percent, 85 percent of all of the constraints that are monitored, all of the contingencies that they map to, the very effective resource.

And so we wanted to show, which is really important, and not a lot of grid planners like think of the grid in this almost good enough way, but you can deal with a ton of the problems with so little work, with so little cost if you’re able to aggregate up these, these small batteries and manage the system more dynamically.

But as you point out in the paper, as you get up to those extreme ends, that’s kind of, I think, what’s on people’s minds when they think of like, what was SB 6 for? How do you deal with the most extreme failures in the transmission system that virtually never occur?

Joshua Rhodes: Yeah. That sounds like the 80/20 rule strikes again, right? You can take care of 80 percent of the problem with 20 percent of the effort or the resources or things. And so, I mean, I think that’s what your paper is kind of getting at. It didn’t take that next step, but it teed it up, I think, really well in terms of like, okay, we can aggregate these resources strategically placed to alleviate, you know, part of the issue, but it doesn’t take away the need that sometimes you just need to build new transmission. Sometimes you just gotta move more bulk power around the system. Am I summarizing that correctly?

Chase Dowling: This is totally accurate. There’s like a question of like, if I had just built more big transmission, maybe that’s an alternative to this problem here. But where all of the threads are converging to take a— another step forward, if we look at what the batch process is doing in Texas, the batch process is looking at data centers that are electing to be curtailable resources, provisional curtailable resources, and they don’t wanna have to do that. Sure. And if I’m signing up to be curtailable, that means I’m gonna do it all the time. I’m gonna have a large opportunity cost to do it. And we have this resource now, this resource that ERCOT can see in their dispatch mechanisms through the ADER program that we can build in less than 6 months to the data center that’s signing up for that risk of curtailment, oh, we can deal with most of the scenarios that you will— can be confronted with when being forced to curtail.

Now, yeah, there’s those extreme emergencies where for the safety of the state’s grid, we need to turn some things off that y— the only way to deal with it is to just build a ton more extremely expensive transmission, extremely expensive generation on both sides of a failure mode.

But if I have multiple hundreds of gigawatts of data centers electing to be curtailable, they’re taking on a lot of risk there for their business, and we can come in with these resources strategically and prevent the preponderance of that risk that they’d be taking on.

Joshua Rhodes: It sounds like, and this is probably work that’ll happen in the Lege coming around, is like, so you got the Batch Zero process, you got the PCLR, and I think what most of these loads want is actually a combination of both of those, so they’re able to, like, be flexible but have the generation also interact.

It sounds like you would need that combo, which may come in the Batch 1 process. I wanted to talk about these assets, you know, being able to allow more load, like who should be paying for that? Is there a business model you have or that you could develop that would allow the cost of these strategically placed assets to be borne by the data center who wants that 100 MW? Like, how would that work out?

Chase Dowling: There’s like two pieces to it, but this is where those threads in the batch process that I was talking about combine. If I’m a data center and I’m joining the batch process, and in order for me to get connected faster, I’m gonna elect to be curtailable, virtually any alternative form of generation to curtailing at hundreds of thousands of dollars a megawatt hour is good news for me.

And so the question on my mind is like, what generation can I pay for to prevent that curtailment? What causes the curtailment and how can I prevent it? And what we’re showing is that, like, the strategic siting of these resources can prevent that curtailment, and we can build them fast and cost efficiently.

And so that sets up a natural commercial transaction where the data center can pay for an aggregate fleet of batteries at these target substations to prevent their curtailment in operations. And so in this case, the data center would pay for the batteries. And there’s kind of like this fabled win-win-win-win-win-win where the data centers that are struggling with just general public concern over their impacts to the grid can pay for a resource that directly benefits the rate base, right?

We’re gonna put these batteries on home o— homes that are, you know, at risk of outage. Now we can offer you a tool that provides outage protection while also being able to recruit all those resources and prevent the very expensive curtailment of the data center, which would eventually land back on a ratepayer’s energy line item, right?

And then outcome there is that the grid’s more resilient, reliable, and data centers paying for that capacity that can deploy very quickly. So that’s what the commercial transaction would probably look like. The piece here, kind of the challenge and what the ERCOT is proposing as the fourth phase to the ADER pilot, is having these resources, these aggregations of batteries modeled and dispatched at transmission substation level so that they can be recognized at the transmission planning phase and in the operational phase when these constraints actually materialize.

Joshua Rhodes: That’s a very wonky point, but I think that’s really important, right? Because the location of these resources matter, you gotta see them in the SSWG files, the PQs for the thing, for the grid topology files. You gotta be able to see them, you gotta be able to model them. And to just pull a little thread on kinda what you said, the part about, like, the data centers and the PR, public relations, that is not great right now.

The value prop is more about just reducing loads. Like, it— you’re actually putting infrastructure at people’s homes. It’s not just, like, nebulous, it will reduce your bill, whatever, add it all together. It’s like now there’s this box on your house that gives you power whenever the grid goes down. Running short on time, so zooming all the way out, we got a lot of data centers coming to Texas, a lot of large load.

How large can this concept realistically get? Have you looked at that? Are you able to extrapolate from what you’ve done? How big could you go if you didn’t have annoying things like supply chains and time to deal with?

Chase Dowling: Yeah. Yeah, yeah. So if we’re looking just at Texas, the question is what is the opportunity space for storage acting as an energy resource or an ancillary service resource, or now, like, additionally as a transmission resource?

And backing me into a corner, no one is building batteries in a fashion as a transmission resource today. There isn’t quite, like, a market for that yet.

Joshua Rhodes: I don’t think you can. Like, transmission can’t own generation, right?

Chase Dowling: Right. But it’s gonna take us 10 years at best to get these 765 kV lines built to improve the availability of the transmission system, make it more robust.

I think the opportunity is quite large in Texas, definitely on the order of gigawatts. But to spread the good word of Base just a little bit, if you humor me, like, I think the aspiration of the company is we see these distributed energy resources and just the proliferation of power electronics onto the distribution system, a means to help electrify the entire world more effectively.

And so we see the upsize, the volume, how big can this go, to be extremely large. We built grids designed 100 years ago, and now we have the ability to reimagine how that grid is built. And so we’re viewing the upside as quite large, quite unlimited in terms of what we can build on the system today.

Joshua Rhodes: Awesome. Love to hear it. I think this is a good place to stop. Chase Dowling, thank you for coming on the Energy Capital Podcast.

Chase Dowling: Thanks, Josh. It was great to see you.

In addition to these R&P Picks, paid subscribers receive access to the full archives, Grid Roundups, and select episodes of the Energy Capital Podcast. Please subscribe today.

Federal Judge Rules Against Trump Administration Over Canceled Clean Energy Grants | Inside Climate News

A Trump-appointed federal judge ruled the Environmental Protection Agency’s termination of the $7 billion Solar for All program (of which Texas received around $450 million) was unlawful. That’s because the One Big Beautiful Bill Act repealed only unobligated funds, and these grants were already obligated.

The ruling means the EPA will have to release the funding, said Nick Torrey, senior attorney at the Southern Environmental Law Center.

“We have seen this administration try to resist and appeal and fight,” Torrey said. “They don’t have any excuse for sitting on this money anymore. They have to get this money out.”

The EPA argued the court lacked jurisdiction over the plaintiffs’ claims and that the claims were meritless. The federal agency told Inside Climate News it is “reviewing the decision and considering options for appeal.”

Gov. Greg Abbott broadens moratorium on data center approvals to include environmental permits | Texas Tribune

Earlier this week, Gov. Greg Abbott ordered the Texas Commission on Environmental Quality to stop issuing data center permits until the ERCOT and Texas Water Development Board audits are complete. That covers the behind-the-meter projects that bypass grid approval and applies to parts of the state outside ERCOT that his August grid moratorium missed.

“Because the information sought by the PUC, ERCOT, and TWDB is necessary to make informed decisions by each of those agencies, no other state agency shall move forward with regulatory approvals related to data centers until this information is acquired,” Abbott wrote in the letter to TCEQ Monday. “This action is consistent with my whole-of-government approach to ensure Texans’ natural resources and way of life are protected.

Read more

ERCOT recently took a step much further than other system operators have been willing to take; it sorted the interconnection queue between load that is real and load that is unlikely.

ERCOT sorted the queue into tiers and shared numbers, all true, that large load requests totaled about 474 GW (with around 90% of the requests from data centers, PDF Link). ERCOT placed 205 GW of that load into the batch zero study, classifying 66.4 GW, or 204 the projects as base load. Of that, 158 projects, 127.9 GW, met the qualification to be included as a studied load. And only about 3.9 GW of that load counted as large load peak consumption.

Late in 2025 Exelon applied a filter to its own queue of data center load requests with firm commitments, and found the portion of high-probability dropped to 40%. Reviewing 18 GW of power need at the end of 2025, Exelon Chief Financial Officer Jeanne Jones and her team saw the demand drop to 11 GW. The filter was a requirement to sign transmission security agreements backed by collateral and committed revenue and shortfall payments to be considered real.

That gap, the one ERCOT revealed with batch zero and the one Exelon calculated, is what we in the industry now call bragawatts. That is, announced capacity that may never get built. While the word captures the imagination (it is quite catchy), it isn’t a true reflection of what is actually going on. Bragawatts are not lies. Bragawatts are a predictable result of a rush to get an option on scarce grid capacity. A queue position is not a lie.

Read more

In addition to these R&P Picks, paid subscribers receive access to the full archives, Grid Roundups, and select episodes of the Energy Capital Podcast. Please subscribe today.

Land Commissioner Buckingham Announces Push for New Energy Production on State Lands | The Texan

The Texas General Land office will open a request for information about developing geothermal, small modular reactors and natural gas across the state. Land Commissioner Dawn Buckingham sees these technologies as “very different approaches to the same challenge: producing dependable power right here at home.”

In a press release shared exclusively with The Texan, Buckingham said that “Texas built its economy by putting our natural resources to work, and we cannot afford to stop innovation now.”

“Our state needs dependable energy to power homes, businesses, manufacturing, and the next generation of American industries. We have an opportunity to look beyond traditional energy sources and develop the resources and technologies that can keep Texas powered for decades to come,” she said.

ERCOT to survey more than 400 data centers as part of Gov. Abbott’s audit | KERA News

The state’s power grid managers plan to launch a survey of 461 data centers’ water and energy usage as part of an audit ordered by Gov. Greg Abbott…

The survey’s participants include 247 large data centers, classified as projects that are requesting at least 75 megawatts of power from the Texas grid — enough to power 18,750 Texas homes during a hot summer day or cold winter night. It also includes 214 “medium” data centers, which are requesting between 25 and 75 megawatts of power from the grid.

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Michael Webber’s answer is that Texas has run this experiment. CREZ, the Competitive Renewable Energy Zone program finished around 2014, was primarily 345 kV and lowered costs, cut emissions and improved reliability. His case for 765 kV is right of way: more capacity per corridor means fewer corridors, and corridors are what landowners object to.

The same answer runs through most of what is moving on the grid. On this week’s Energy Capital Podcast, Joshua Rhodes talks with Webber, a professor at the University of Texas at Austin.

• The case for AI: Anthropic, OpenAI and xAI leaders called for a global slowdown in September. Webber says nobody has explained what the technology is for. “The case has not been made strongly.”

• Who is resisting, and why: degrowth politics on right and left, a youth movement against data centers, and law firms pushing associates toward AI while the partners who would have trained them work remote. Webber reads the water-and-noise objections as displaced anxiety about AI.

• Where the gas goes: a bigger grid lets Texas sell gas at $8 to $15 rather than burn it at $3, and lets Houston draw West Texas solar instead of adding gas plants to its airshed.

• Hormuz: about 20 percent of world oil moves through the strait, plus fertilizer and chip inputs. US diesel averaged $6.06 a gallon on September 11. Texas will be fine, Webber says; Bangladesh and Pakistan will not.

• Affordability in November: electricity bills creep up through distribution costs, transformers and wildfire hardening, while fuel prices move by the day. Webber expects an anti-incumbent mood.

• Scarcity and abundance: US electricity demand was flat for 20 years and is growing again. Webber wants data centers treated as a way through scarcity, not its cause.

• Plus: why the headline numbers frightened everyone inside six months, what the next six months hold, and why the grid needs helicopter pilots.

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Chapters

• 00:00 – Introduction

• 01:03 – Where Texas is building fast, and where it is not

• 02:19 – Why the data center mood flipped

• 05:18 – The AI slowdown letter

• 08:45 – Why younger workers are pushing back on AI

• 12:32 – Junior lawyers, junior engineers, and mastering the fundamentals

• 16:42 – Whether energy for AI is a social good

• 19:26 – The case the hyperscalers have not made

• 21:51 – The argument for 765 kV

• 26:34 – West Texas solar and Houston's peak

• 28:54 – Hormuz, molecules, and what Texas exports

• 33:00 – Affordability heading into November

• 39:05 – Scarcity, abundance, and a drama-free summer

• 42:02 – What the next six months hold

Resources

People & Organizations

• Joshua Rhodes (LinkedIn)

  • Webber Energy Group (Website - LinkedIn)

  • IdeaSmiths (Website - LinkedIn)

• Energy Capital (LinkedIn - YouTube)

• Michael Webber (Website - LinkedIn - X)

  • LBJ School of Public Affairs (Faculty page)

  • Walker Department of Mechanical Engineering (Faculty page)

• Kay Bailey Hutchison Energy Center (Website)

Company & Industry News

• Regulators approve controversial southern 765-kV transmission line

• Texas grid expansion splinters conservatives as data center backlash grows

• Facing an estimated 474 GW of interconnection requests, Texas hits pause on data centers

• The AI industry faces a bipartisan grassroots fight

Books, Articles & Filings Discussed

• Economic impacts of 765kV transmission development in support of Texas and Houston-area reliability

• ERCOT - Trending topic: 345-kV and Texas 765-kV strategic transmission expansion

• ERCOT - Reliability plan for the Permian Basin region

• PUCT - Approval of the first extra high voltage transmission lines in the ERCOT region

• Judges recommend regulators reject proposed 765-kV line

• Top regulator recommends remanding transmission project to administrative law judges

• Costs and emissions reductions from the Competitive Renewable Energy Zones wind transmission project in Texas

• Anthropic, OpenAI CEOs call for slowdown in AI development

• Using AI, mathematicians find hidden glitches in fluid equations

• EIA - Strait of Hormuz is chokepoint for 20% of world’s oil

Related Podcasts by Energy Capital

• Build Fast or Fall Behind with Michael Webber

• Texas competes on everything except transmission

• Inside the PUC’s Cost-Allocation Overhaul with PUC Chairman Gleeson

• What the Sierra Club wants from the Texas grid

• Texas Got Tested, Grid Stayed Upright

Related Posts by Texas Energy & Power

• Data centers say they pay their way; Texas will hold them to it

• More Generation, More Transmission, More Load, More Challenges: Texas Grid Roundup #90

• A Tale of Three Performance Reviews: Texas Grid Roundup #94

Transcript

Joshua Rhodes: Hey everyone, and welcome back to another edition of the Energy Capital Podcast. I’m really excited to have Michael Webber back. I think we’re probably gonna get on some kinda six-month rotation with him just to kinda talk about all things energy in Texas, ‘cause there is never a shortage of things to talk about related to those.

But for those who may have not seen the first episode that we’ve had about six months ago, we’ll put that in the show notes. But Michael’s a professor at the University of Texas at Austin, where he’s a Sid Richardson Chair at the LBJ School of Public Affairs, as well as the Cockrell Family’s Chair in Mechanical Engineering in the Engineering Department.

He’s also the former CTO at Energy Impact Partners, a former Chief Science and Technology Officer at ENGIE in Paris, and the founding partner of IdeaSmiths. Since then, has been— is now running an energy opinion column regular every couple weeks for the Houston Chronicle. His work sits at the intersection of energy, engineering, policy, and commercialization. Michael Webber, welcome back to the Energy Capital Podcast.

Michael Webber: Thank you. It’s always fun to have a chance for a conversation with you.

Joshua Rhodes: For sure. So about six months ago, you know, one of the big themes in the podcast when we were talking was that Texas needed to build faster or kinda fall behind, or one of your big things was Texas needed to build fast or fall behind.

So looking back since then, do you think we’re building fast enough? Or are we falling behind? Challenges changed? What’s really changed in the last six months?

Michael Webber: We are building quickly on some things. We’re building new power plants, especially solar and some power capacity like batteries and a little bit of wind and gas.

So we’re doing a good job building new sources of power. Doing a pretty good job building load, new factories, gigafactories, advanced factories or data centers. So that’s a good news story in terms of our ability to keep up with things. We are not as fast today at building transmission, although we have been fast in relatively recent history, so I’m optimistic we can do that again.

And we’ve had issues building gas pipelines and sometimes water facilities we’ve been slow at. So there are places where we have a lot of success on the power side, some success on the gas infrastructure side, but also some shortages on transmission and other things. So it’s like we got a mixed record, but still pretty good.

We’re better at it still than anywhere else in the United States and almost as good as anywhere in the world.

Joshua Rhodes: Absolutely. Are there two or three developments in the past six months that have maybe has challenged your view the way Texas is headed? You have any idea what they’d be?

Michael Webber: Yeah. The two big political things that have emerged that I see is sort of a anti-development or degrowth movement on the right and the left politically around data centers and transmission.

So we’re seeing non-traditional political bedfellows in opposition to getting some things done, so that feels relatively new, especially the flipped opinion on data centers. That’s gone from very exciting to data centers are gonna pay all our property taxes and save the world, to now a lot of suspicion and concern around data centers and also the environmental impacts or anything else.

So a lot of flipped mood on data centers, some of that’s rippled over to transmission lines. So that has changed. I haven’t really perceived that to happen as much for batteries and solar. We’ll see if that happens there as well. So some changes in the last six months since we’ve spoken before that I really didn’t see coming.

Joshua Rhodes: The conversation really kind of went pretty quickly from how do we attract these projects? And so I’m talking about data centers, like, how do we attract these projects to, can the grid actually accommodate all of this stuff that’s gonna come to, wait, do we actually want all that? Do we need to slow this down?

And that’s really kind of happened over the past kind of six months. What do you think is really happening there to really shift something so big, so fast?

Michael Webber: I think there are so many things happening, it’s hard to fully digest in real time what’s going on. But part of it, the pace of construction and the pace of the headlines is really jaw-dropping.

The headlines especially, and I don’t believe that we’ll build anywhere close to what the headlines say. So if we put numbers on it, data centers might require over 400 GW of new power. You’ve talked about that on your show several times already. I don’t believe we’ll build all that. We might only build 10 percent or 20 percent.

Even 10 or 20 percent is still a lot, but it’s really just incredible headlines. And so that has freaked people out, like, whoa, that’s a lot. Can we really do that or not? And we’re already concerned maybe about reliability of the grid or cleanliness of the grid or cost of the grid, and then you add in 400 GW of headline load, that is a challenge.

So I think that’s part of the change, just the numbers and this kind of this race to get things built has changed things. Another thing that’s changed is more and more sort of blinking red lights about whether AI is good or bad for humanity. I think there’s more concern about the ethical implementation of AI.

Will AI be good because it will help us get pharmaceuticals and cancer treatments, or it will be bad because it will lead to the devastation of the planet and the world? So I think we’re confronting the ethical sort of lack of guardrails on AI at the same time. And then there’s a tech villainy, like the tech villains and the oligarchs and the big companies, so a lot of suspicion around the companies.

So there are a lot of factors converging all at once around power, and I think we mentioned water, noise, and light, all the other issues. The headlines, concerns about the people, the individuals or the companies that are implementing AI, it all converges together, and now we have a campaign afoot with major races underway with elections already November.

And so it’s a campaign issue, and that means we’ll give more attention. So all these things are happening now in a way they weren’t six months ago, and I feel like that’s bringing a lot of attention to it.

Joshua Rhodes: Yeah, I mean, just recently as we’re recording this episode or kind of over the weekend, some of the big AI companies just kinda released a letter, yet a letter originally was coming from Anthropic, but signed on or at least, you know, given some cheerleading by OpenAI and even xAI to slow down, calling for a global slowdown in AI development.

You’ve had folks calling for this for a long time. Like, you’ve had a bunch of folks like talking about like the dangers of AI and other types of things, and we’ve had calls to slow down before, but we never have. But w— now we’ve got this other one. One, do you think this will slow down data center development at all if we slow down, like, you know, the development of AI?

Or do you think this is kinda like some of the previous ones where we’ll say we should slow down and then not slow down?

Michael Webber: I feel like this call for a slowdown is different because it’s internal. It is from the AI companies. It’s not the outside ethical watchdogs who are saying, “Whoa, you guys need to slow down.”

It’s people developing going, “We need to slow down.” It reminds me of the Manhattan Project and developing nuclear weapons, where there was a moment where the scientists basically came together and said, “Good God, what have we done? We’ve unleashed this new capacity that could end all of humanity.” And there was this really dark realization of that.

And this AI letter or this internal AI call to slow down its development reminds me of that, where they’re like, “Good God, what have we done? We’ve created this new capacity, and is this good or bad?” And frankly, I don’t think you can slow it down. I think the genie’s out of the bottle, so I think it’s too late.

However, maybe we can take their warning sign seriously, and I think it is serious, and it makes me wonder, what do they know that we don’t know? Makes me think that there’s something they are aware of internally that hasn’t made it to the news yet. So we probably can’t slow that down, but we could speed up the regulations, and we could speed up other things.

And so with nuclear weapons, once they were developed, the genie was out of the bottle. There was a race for other countries to get it. We couldn’t really stop it. Once the knowledge was available, the knowledge was available. It’s hard to go back to ignorance once you have knowledge. But we could speed up the development of strong international institutions and watchdogs and inspector groups and treaties.

There are other things we could do that would make us feel safer. It took decades, frankly, to feel safe. It took things like mutually assured destruction. These are horrible phrases. Maybe we need mutually assured AI destruction or something. But I doubt it we’ll be able to slow it down, but maybe we can speed up these other things.

And I would say if the internal experts are saying this is serious and we need to take it seriously, I think we should listen.

Joshua Rhodes: So what do you think the name of the movie’s gonna be about this? It was Oppenheimer

Michael Webber: for the nuclear scientist. Yeah. It was American Prometheus or something. What was the name of it?

Right? The person that stole fire from the gods. I r— can... I can’t remember. I’m mixing my different Greek mythologies. But I feel like there’ll be some movie about this for sure. There are already documentaries emerging. I don’t know if it’ll be about the character or the person, is it Sam Altman or someone else, or is it about the industry as a whole.

But the fear with World War II and weapons development during and after World War II was bad countries would have nuclear weapons, but now we’re not talking about countries. We’re talking about companies or individuals. It’s a little bit different in terms of who is developing, who has access to it. And I feel like that concern is part of the context that people are absorbing and expressing angst.

Like, AI, like AI as a tool, it’s really handy. I use it in my day to day life, but by the way, it might lead to the end of humanity, or it’s really bad for the environment. And so I think it’s, like, all wrapped up at the same time. These concerns from the AI tech leaders aren’t gonna make it easier to do it. Hopefully it’ll make it easier to develop the guardrails. I

Joshua Rhodes: mean, do you think, you were talking about genies out of... Genie is out of the bottle. Genies typically don’t go back into bottles, so we’re probably gonna, you know, continue to build this stuff. Yeah, I mean, that was some of the pushback. A long time in AI is, like, the last year, last month or so.

But, I mean, one of the things is, right, around some of the pushback against, like, data centers and siting is more than just about the infrastructure that’s in your community, but it’s about the thing that it’s creating, right? The AI. Is the AI gonna take 50% of white collar jobs away or other types of things?

Sometimes it feels like that’s what people feel like is the only lever they have to pull, right? Is to, like, push back against, like, this infrastructure. And so you hear these stories about, like, different firms and things around, like, you know, the older folks in the firms are maybe pushing for more AI use, and it seems like it’s some of the younger generation that’s kinda pushing back against, like, some of the AI use.

Like, I haven’t seen people pushing back against AI use in college. I feel like they’re using it as much as they possibly can, but maybe that’s a separate sphere. But, like— You... Different use case kind of.

Michael Webber: Yeah. This is fascin— Yeah, so there was a New York Times article a few weeks ago about how younger generation is among the loudest activists fighting against data centers, so there’s a movement.

It’s an anti-authoritarian movement. You know, every youth movement has some anti-authoritarianism structure. They don’t wanna be told what to do by other people, so now it’s around data centers. So there is a youth movement against data centers. You and I have been part of conversations with students we know who’ve been interns in the firms.

Elders are pushing AI, and the junior members of the firm are resisting that, which kinda jinks with what we find at the university environment, is students are using AI comprehensively. By that I mean every student’s using AI just about. They might not use it for every class or every assignment, but it shows up a lot.

So I look at younger students as AI natives who use it quite frequently, yet it seems like a lot of resistance to AI is also by younger generations. So I can’t quite square that circle. I don’t know what’s going on, but I think it reflects a variety of concerns around control and who gets access to what.

Does this democratize access to intelligence? Is this consolidated control around a government? You might be suspicious if the government has control. You might be suspicious if it’s the five oligarchs or the magnificent seven or whatever names we have for the companies and individuals. It’s kinda messy right now as people are finding their way.

I think it’s triggering every concern that people might have, so elderly people who retired in the rural areas might not like the way data centers are disrupting their way of life. Younger students or younger career entrants might be worried about AI taking away their power or sense of control. Other people might not like it because of who gets the money from all the AI.

Like, it might take my job and make someone else rich, and that person who gets rich might get even richer. So it’s like triggering every concern. It’s like a uniquely unifying part of society. Unifying in that a lot of people are resisting it. You and I have talked before about, we wonder, is this gonna undermine the ability for people to master the fundamentals of engineering and sciences, or just make it easier, right?

So we all have some of the concern. It doesn’t matter who you are, you’ll look at AI and go, “Yeah, there’s something in there that’s triggering some fear,” right?

Joshua Rhodes: There’s a couple things. So you know, you and I were talking to... Or hearing from the student who had the inter— who had the internship over the summer, where they were talking about the older folks wanting it, the younger folks not.

I was thinking through that. There was a couple things were kinda coming up. One is like, in this case, they were architects, right? And it felt like the younger folks, they wanna be architects, not computer scientists. They actually want to, like learn the craft and do the thing. And then there was like, typically in those types of environments, you have, like the younger folks doing a lot of the work, and then you have the older, more senior folks who come in and ask questions and like point out and say, “Why’d you do this?”

Or, you know, “Change this and that and the other.” And they’re expected to know what they did, right? I mean, there was no way to do it without knowing what you did. But now with some of these tools, you can do it without knowing what you did, which can be an awkward conversation if, like your superior’s asking you, like, “What did you do here?” Have you seen any of that with students?

Michael Webber: Yes. So I heard this similar a couple years ago in law firms, but it’s almost from a different sort of context. So law firms have two contexts that have changed in the last few years. One is the rise of AI and pressure to be more productive. And if AI makes you more productive as a lawyer, then you should use AI.

It’s like better for the client, better for everybody, better for the billable hours, for the firm, everything else. But also with COVID and beyond, not as many lawyers are working in the offices. A lot of them are working remote, especially the senior partners who are often wealthy, have a second house at the coast of Cape Cod or whatever.

So you have the senior partners working remotely more often and putting pressure on everybody to use AI more often, but they’re not there to mentor the junior partners. And so the junior partners are not getting the mentorship. A way to become a good lawyer is to get a lot of interaction with senior partners.

You can learn from their mistakes, you get a lot of guidance. And if the senior partners are not in the firm or not in the office because they’re at their coastal home or whatever, and they’re putting pressure to use... on you to use AI, so you’re not even mastering that through your own sort of suffering through the different cases and precedent-setting decisions that have been made.

That is like a double whammy for junior lawyers. So I think like the rise of remote work and AI is a double whammy for entry-level lawyers. And now that kind of thing might be happening for engineers, maybe not as much the work from home thing, but AI, where putting pressure on junior engineers and firms or elsewhere to be more productive, to move faster, maybe even in the research environment. But there’s something about taking the time to master the material that will lead to fewer mistakes, we hope.

So AI makes it easier to learn, makes it faster to learn, but might make it a little harder to master the fundamentals because you’re not as close to it. It’s a magic black box. However, the AI might have mastered the black box, like it might have mastered the fundamentals, and so actually mistakes might go down because there’s some calculations that are pretty standard across different settings, so this all might be fine.

And I don’t think I know, and I think we’re in that sort of awkward adolescence of AI where we haven’t quite gotten on the other side of it, so we don’t know if it made it better or worse. But I do worry that AI will make us think we’re smarter while making us dumber. So that’s the risk we have, right?

That we will have bridges and buildings fall down because we didn’t know we made a mistake and AI didn’t catch it. But we thought we were smarter because we were able to design the bridge or building faster. And so that’s like kind of this metaphor, yeah. And I know this is sort of an energy podcast, but it’s hard not to talk about those other elements because this is actually the anxiety that people might be having, but they don’t know how to express that, so instead they say, “Well, I don’t like the energy, water and noise and light and everything from the data center,” which is also a concern.

Not to say that those aren’t real concerns. Anyway, so I feel like you and I are grappling with this as instructors and mentors and researchers, like, okay, when is the AI tool appropriate because it’s accelerant and it’s a good check on our work? Where is AI inappropriate because it undermines the sanctity of our analysis?

Like, does it make our analysis worse or better? And that will come a time, I think, and we used to say the same thing going from slide rules to calculators and from T-squares and drafting tables to CAD or whatever. So these kind of technology transitions have happened. This one feels different because the pace feels faster and because it’s not replacing a tedious task, it’s replacing an intellectual task, a mental task.

So we’ll see. I’m apt to be an optimist on this, but it makes me nervous, frankly. I’m nervous about whether students in my classroom are learning. It makes me nervous about whether the students in our research projects are learning as well.

Joshua Rhodes: The pushback I always have against like that calculator slide rule thing is like, you know, that’s a deterministic thing and, you know, it doesn’t matter how you do it, the answer like is gonna be the same, you

Michael Webber: know? There is a right answer, and we know if it’s right or wrong.

Joshua Rhodes: Yeah, there is a right answer. Every other revolution just got you information faster, and this one is actually trying to, you know, approximate synthesizing that for you, which is definitely feels new to me. But yeah.

Michael Webber: Yeah, it’s a ca— Like if you do a calculator, you know, if you put in four times eight, it gives you the same answer every single time.

But if you ask an AI agent, platform, bot, whatever it is, a question, you might not get the same answer every time because there’s some natural variability by design. And so there’s not a predetermined fixed answer that it will give you, even though you and I might know what the right answer is, we could test it.

So, and also has hallucinations and everything else. So yeah, it’s not deterministic in the same way, and that’s one reason why this transition’s gonna be different.

Joshua Rhodes: So one of the things in the last time I taught my data analytics class is we actually trained a very small large language model neural network, and you could watch it go through like there was some randomness in the number of like, I’m blanking on the terms now ‘cause it’s been a while, but it would trim off pieces of the model as it was building, like randomly just to try to like add some of that stochasticity in there, like, so it’s not always getting you to the same thing.

I’m butchering that, but anyways, it’s one of the reasons why you never get the same thing. But we’re using this stuff. But this is an energy podcast, but it’s one of the things is like the big story in energy has been AI, but then, you know, now it’s kind of a whole like societal story and become a, like a political story.

Michael Webber: It’s worth asking these other questions because it does tie into is the energy provision or the energy made available for AI going to be a social good or not? And with all the other expansions of the energy system for the last 160 years, there was a very clear and obvious societal good that came out of it.

You got better steel or you got better railroads, you got cars and personal mobility, or you got heating and cooling a lot. Like, there are all these things you can say, “Yes, this expansion of the energy system gives me something that’s very obviously good that I crave.” The expansion of the energy system to serve AI is more nuanced because there are some certainly good things in there.

Like it makes my searches better on the internet. I can do a little bit of analysis here and there, and maybe it can help us accelerate the development of treatments and vaccines and everything else, but it has all these bad things with it too. And the societal good is not as obvious. The societal bad is really hanging in there.

The prior expansion of energy had a societal bad, really land impacts or water pollution or air pollution, but they were less visible or less obvious, or they’re far away, like the energy I’d feel in my home and that felt good, but the pollution was somewhere else. But with AI, we don’t have the separation of the downside physically the same way.

Like we’re just like, we see it with our algorithms or human. So I feel like this is part of the challenge is every prior expansion of energy came with obvious personal and societal good. This one, because of our suspicions, concerns, whatever it is, our skepticism about the companies and the people makes it more of a discussion, for sure.

And I think there’s maybe responsibility on AI companies to explain what the social good is, and not just better cat videos. You and I have joked about some of the tweets out there. They’re gonna use AI, a major airline now said they’re gonna use AI to extract more money out of travelers by fine-tuning their preferences, and that didn’t feel like a simple supply and demand argument of we’re gonna use price changes to fill our planes to get better performance for everyone.

It felt more like we’re gonna use everything about you to find your weak point and your vulnerabilities and manipulate you. This was something that a CEO of a major airline said. That doesn’t build a lot of confidence. And sorry, okay, what’s the social good here?

Joshua Rhodes: We were just both at the KBH Energy Conference this past week and ran into...

There was a bunch of different hyperscalers and things there, and we ran into one and were just having a conversation, and this is one of the things that I was a little blunt. I was like, “We’re waiting for you to make the actual argument for th—” Like, there’s a bunch of pushback. Why haven’t you made the value proposition? If you have one, why haven’t you made one?

Michael Webber: And clearly they believe there’s one. The level of CapEx is so high, so they believe that there’s something there, and maybe it’s just because they think there’s a lot of money to be made. But, like, we’re ready to be told or, you know, at least give them their best shot to make their pitch, right?

So I think we can be a willing audience for that. Okay, make your pitch why this is good. I’m listening. But in the meantime, we’ll fill it with our own stories.

Joshua Rhodes: Yeah. I mean, do you think they’re saying anything? You think good things are being said about it, but we’re just ignoring them because we’re, like, so fixated on the initial downsides?

Michael Webber: There’s some— I mean, there have been some pretty interesting mathematical sort of advances in the last few months. There’s been some development of better understanding of discontinuity in the Navier-Stokes equation. By the way, almost no one cares about the Navier-Stokes equation, but it’s a deeply important scientific principle of fluid mechanics.

It’s kind of cool that AI can help find a point where it doesn’t hold up the way we thought it did. There have been development of vaccines have been accelerated, so th-there’s some pretty interesting scientific stories and some pretty good advances. It gets coverage. There’ll be a news article and kind of people forget about it the next day.

So it’s not like there’s a steady drumbeat of successes, and that’s part of the problem because we feel the impacts today, but the successes come tomorrow. And so there’s a real mismatch in time between the negative impact and the positive benefit. There’s also a mismatch in location, at least for the data center.

The data center will impact a location where it’s built, and you and I might not feel that if we’re not living next to the data center, but we might use the AI tool or platform. So there’s mismatches in time and place for this, and that’s part of the problem. But I think the mismatch in time between the impact is felt today, the risks are felt today, but the benefits will be enjoyed tomorrow, that’s a problem.

And it’s almost like the opposite of climate change, where the benefits of energy are felt today, but the downside risk of climate change are felt tomorrow. So we have like a flipped problem with AI. And interestingly, AI could be an accelerant for solving climate change if we can do it. So I feel like the case has not been made strongly.

There are some positive examples. They’re here or there. They get a one-off story. They’re not going viral the same way as a noisy data center might, and that’s part of the challenge.

Joshua Rhodes: Yeah. Bringing things back to kinda like more core of Texas energy and infrastructure, one of the things we will need to build infrastructure to build the data centers, to site the data centers in terms of we’re gonna need to build transmission, but not just for data centers.

In fact, we’re still now trying to figure out how much for the 765 transmission lines that we’re gonna build in the state. I saw the Public Utility Commission just the other day approved another line. I think there’s two out of the three paths that are going out to the Permian have been approved, and the other one’s been kinda kicked back for reanalysis.

You just wrote an op-ed piece about transmission 765, like, what are you looking to make?

Michael Webber: The short argument I made is that we’ve expanded the transmission system before. We did it with CREZ, the Competitive Renewable Energy Zone program that was really launched in the 2000s and then came to fruition around 2014 or so.

We expanded the grid. It was good for us in terms of lowering the cost, improving reliability, which is not something people believe easily after Winter Storm Uri, by the way. But it improved reliability, lower costs, and lower emissions. Like, it really helped enable the rise of new power infrastructure that was good for all of us.

We did it before, then we had a slowdown, and I just basically say we should do it again. If we expand the grid, then we will get economic, environmental, and reliability benefits. But what we did with CREZ was primarily 345 kilovolts with some upgrades to the 138-kilovolt system, so we did upgrades on the legacy system, expansion of the newer higher voltage system.

This time we should go even higher voltage, 765 kilovolts, because you get more throughput or more capacity per right of way. And the thing that I’m most sensitive to and that I think a lot of landowners are sensitive to is the rights of way. The corridors where you’re gonna build this, they’re ugly, they’re impactful.

You take a lot of land. You might degrade the views or the vistas in different places. And so the fewer of those corridors we need, the better, and one way to get fewer corridors is with higher voltage. So I basically said, “Look, we’ve done this before. We know how to do it. We had a lot of benefits. Let’s just do it again, but let’s go even higher voltage.”

And then this will facilitate better performance, reliability of the grid, lower cost, more cleanliness. It also lets us inject more wind and solar into the grid, which is something I really like because that will reduce emissions and reduce water use while making more gas available for export, and I think that’s really important from a geopolitical and national security perspective.

But frankly, that’s actually one of the things some people are worried about. They want to burn more gas. They don’t want to use less gas. So this trigger is one of those things like, yeah, people have their preferred fuels and technologies, and I keep thinking our gas is most useful in Europe or China.

It’s not really that useful in Texas, but there are people who really wanna burn it in Texas. That’s maybe an aside, but I feel like expanding the infrastructure is something that’s good for us. We’ve done it before. We’re actually pretty good at it. We shouldn’t be afraid of it. We know what the outcome will be ‘cause we’ve seen this story before, and the sooner the better.

The data centers tie in because they are one of the high-profile sets of customers that really want this, in addition to oil and gas and factories and cities and just people with all our population growth and use of air conditioning and electric vehicles and everything else. So there are a lot of customers who want the bigger, better grid.

The data centers are the most visible ones, and they’re the richest, and so these stories get coupled together in ways that are sort of not obvious to a typical consumer.

Joshua Rhodes: Also really resonate with that argument about, like, having more, not necessarily getting more gas out of the ground, but putting it to better use, right?

It’s like, because we can’t really export wind and solar. Texas is an island of electricity, like we can’t export that really to anyone, anyone else, but you can export molecules. And so if we could have all the electricity that we need here, and also then be able to sell something to someone else who will pay more money for it, it makes a...

I don’t know. I’ve written op-eds on that. I know you’ve written op-eds on that, that it makes a lot of sense, right?

Michael Webber: I think it’s, like, why would we buy and burn gas for $3 in Texas when we can sell it for $8 to $15 to Europe or Japan? It’s like, they’ll pay us so much more. I know there’s transport fees, everything else, but I feel like the story of Texas molecules liberating countries was the story of World War II, where we had the Allies float to victory on Texas oil, and people say, “Let’s burn Hitler and Texas oil,” this kind of thing.

We can do it again by using Texas molecules and gas to liberate Europe from under the thumb of Vladimir Putin and Russian exports, or we can export to Asia to get them out from under the heavy environmental burden of coal. So there’s just, like, such high value from Texas gas. It’s so clean compared to some of those other options.

We’re so secure and safe compared to bad actors out there. And if we have a bigger, better grid, then we’ll have more gas to export, which means we need to improve the export facilities also. That’s the companion piece. You can’t export gas if you don’t have the facilities, but we’re building those. We just need to free up the gas for it, so to speak.

Joshua Rhodes: Yeah, totally. You and I are both on a report looking at the benefits of the 765, or looking at the impacts and the trade-offs, and we, you know, came across that it was, you know, had a lot of benefits to build out the entire, not only the western, but also the eastern, being able to better move that energy around.

It’s like Zephyr CREZ. We built the CREZ to nominally get the wind, and ended up electrifying oil and gas. And so now we’ve got the step or the 765 lines to nominally electrify oil and gas, but it does unlock a lot of resources in parts of the state that are currently, basically have no backbone, have no access, but have some of the best solar resources in the state, and they’re even further, you know, west than our current system, right?

So they’re, like, even better aligned with places like Houston’s peak and other places. So I think, yeah.

Michael Webber: That point’s really subtle but important, which is West Texas solar around El Paso or Pecos County or wherever it is aligns really well with Houston’s peak demand. Whereas solar in Florida does not.

It’s kind of the opposite. You wanna go further west for your solar resources to get better alignment with the peak. And so bigger, better grid lets us do that. And it makes much more sense for Houston to tap into western solar than in location solar. And also with Houston, with the airsheds as filled as they are with refineries and everything else, it’s not great to build natural gas plants locally either, because you don’t want to add even more pollution to a busy or full airshed.

It’s better to push your natural gas further out, which means you need a bigger, better grid. So the bigger, better grid lets us site resources where they are less environmentally damaging or lets us access resources where they are more naturally and abundant and at a more convenient time. So just all of it is good, and kind of no surprise that we found benefits from the transmission.

Most analysts find that if you make a better grid, a bigger, better grid, you get nice results out of that. Same thing’s true for natural gas infrastructure. If you have a bigger, better gas grid with more pipelines and more connectivity, you get more market efficiency. You tend to have less of the price spikes that happen on occasion and less of the glut where you have low prices or negative prices.

A bigger, better gas grid smooths out the volatility, improves the efficiency of the market. A bigger, better power grid does the same. We have gluts of wind and solar with curtailment that lowers the prices falsely, or we have price spikes in some locations where you have a lot of demand, but you can’t get the power to it. So having a better market system is really the result of an improved infrastructure.

Joshua Rhodes: Yeah, speaking of bigger, better grid, gas grids, getting gas to other places or pay more for it anyways, put it to better uses, like, you know, on the other side of the world, there’s also a lot of things going on in terms of like the movement of energy.

Like, you know, Strait of Hormuz has been kind of choke point for a while now. It looks like other straits are getting choked out with, you know, Houthis and stuff and blocking off access to the Red Sea. Can Texas molecules help in this? Are we able to tie anything there?

Michael Webber: It’s hard to sort of talk about. The disruption that’s happening right now is so large and so unprecedented because the Strait of Hormuz is like the worst possible closure you can have in the world because it’s like 20 percent of the world’s flow of oil, but you also have flow of gas, urea, and fertilizers like ammonia, sulfur, and helium.

There’s like so many things that come through that strait that affect certainly energy prices, but also food security, the ability to manufacture semiconductor chips, the ability to extract copper out of mines in Africa, like you name it. There’s so many things affected by that closure. Oil had some other routes they could use with the East-West pipeline, for example, through Saudi Arabia or the pipeline to bypass the strait through UAE, the United Arab Emirates.

But those pipelines are under attack, as you mentioned, or other choke points are getting attacked. So this looks like it’s going to be sustained. It doesn’t look like the negotiations are making progress between Iran and the rest of the world, so prices might be high for a while. The buffers that we had, strategic reserves at different countries, commercial reserves, the ability to change patterns with refining or switch to electric vehicles.

A lot of things happen to reduce demand and tap into those reserves, but those reserves are often hitting their bottoms now. Like they’re running out of additional capacity. That’s especially true in the United States. The other routes are getting attacked, and it seems like now we’re starting to see a lot higher prices.

Prices have gone up tens of cents per gallon for gasoline in the last few days alone, gone up like 5 to 15 cents per day. Like this is pretty dramatic for gasoline, even more for diesel. So th-this is very consequential for the world. The buffers in the system that we’ve had for the last six months have been very helpful.

Those buffers are running out of their capacity to be useful, so that’s a challenge. What does that mean for Texas? Well, Texas, as a major molecule producer, will feel this less than others, but we’ll probably make more money. There are a lot of oil and gas extraction companies that are making plenty of money because prices are higher.

Refineries are especially making money. The crack spread is like $100 a barrel. The crack spread is the difference between what you pay for the crude, say $100 a barrel today, and what you sell the refined products at. Diesel’s selling for $200 a barrel. So $100 per barrel profit on the diesel, but also other products and distillates is really across.

So this is a big moneymaker for parts of the Texas economy. The parts of the economy that depend on those outputs, say farms that use diesel or semiconductor manufacturing that needs helium, will see a lot of inflation in prices, but this will be bad for Texas. All in all, we’re still a major producer and exporter of molecules, so we’ll be okay in Texas.

I’m more worried about like Bangladesh and Pakistan, India, places where people will starve because they can’t get the fertilizer, and that might be millions or tens of millions of people. But Texas will be okay. This is one of the advantages of Texas having electrons and molecules, is that we can adjust our behaviors to match what the markets are making available to us.

Joshua Rhodes: Yeah, totally. I mean, one of the things I was, even kind of the beginning of some of these conflicts, was kind of talking was like, “Well, are you tired of the price of, you know, gasoline going up? Get an electric vehicle.”

Michael Webber: I mean, my prices for my transportation have not gone up in my electric vehicle, right? I got solar panels on my roof and my electric car, and that’s a very privileged situation, but that is no longer the, be the privileged situation. It’s gonna be the smart situation.

Joshua Rhodes: Yeah.

Michael Webber: And that’s the normal situation in Norway and China and other places that have electrified transportation specifically to get away from this price exposure to the volatility. So some of us in the United States, we’re a laggard compared to everywhere else in the world because we don’t have access to the cheaper EVs, or we don’t have the high prices for gasoline the way other countries do, or at least not quite as high.

So yeah, EVs are a great solution. Electrification in general of industrial processes will be one solution as well.

Joshua Rhodes: Yeah, totally. We’re heading into a political season. Feels like in the US we’re always in a political season. Yeah, I was like—

Michael Webber: Do we ever? Yeah, it’s like, it’s like when does the political season end? ‘Cause that’d be awesome if we had that.

Joshua Rhodes: Seriously, a break would be great. But it feels like there’s two... That energy is like front and center in political races, like all across. And we’ve seen this in other regions. I think, you know, Georgia flipped a public service commissioner seat from, you know, Republican to Democrat, a long-serving commissioner there.

But now there’s all this pushback against like data centers, infrastructure, people worried about electricity prices. I think diesel’s on average $6 a gallon. Used to $200 a barrel, $6 a gallon for like the first time, I think ever. And just it feels like there’s two big pieces of energy, like the two big ways that people consume energy, you know, electricity, you know, and transportation fuels, like are both kind of front and center in ways where we were both of them being at the same time, although maybe you can correct me if I’m wrong. But like how do you see this going into November?

Michael Webber: I think there will be political upheaval that happens November. It’s already happened. You mentioned the public service commissioner in Georgia. I mean, you and I follow those things closely because we’re energy nerds, so most people aren’t paying that close attention to who their public utility commissioner or public service commissioners are.

The fact that people were so mad they threw out a long-serving incumbent is a sign that people are frustrated. It’s mostly around the discussion of affordability. President Trump in 2024 ran and won on a platform of affordability. A lot of frustration with the Biden administration around inflation, for example.

So talking about and running on affordability helped his electoral chances, and I would say is a major explanation for why he won. It’s a major vulnerability for him now because everything’s gotten more expensive, so that’s a challenge. And so you’re seeing James Talarico running for Senate in Texas or Gina Hinojosa running for governor of Texas talk about affordability.

And so affordability is a political issue for sure. The incumbents are different, so the affordability story will play out differently now than in 2024 ‘cause now Trump’s not the insurgent, he’s the incumbent. Governor Abbott is the incumbent, has to defend his record on affordability. And the affordability shows up for the power sectors, the molecule sectors a little bit differently.

For the power sector, it’s been a slow-moving crisis where prices have been going up every year, mostly because of additional expenses at the distribution level. Distribution level being the wires and poles in your neighborhood or your homes. They’re expanding or replacing or updating transformers to accommodate new loads like electric heating or electric vehicles, accommodating solar panels, and that’ll drive up distribution costs, but especially wildfire costs, extreme weather costs have driven up distribution.

So higher costs for electricity has been a creeping story for a couple years now. And then you add in the sudden price spikes in gasoline and diesel. So oil and gas and diesel prices move much more quickly. You can see it every day as you drive by a gasoline station. The prices are very visible. They’re very large numbers and pronounced by, “Here’s our price today,” and you can remember what it was last week or a few weeks ago.

So the movement is much faster, much more obvious and visible. The movement in electricity bills is on a monthly rate with the bills. It kind of creeps up bit by bit, but a slow-moving crisis. So you combine the slow-moving affordability crisis of increasing distribution costs and electric bills, the very obvious and visible price spikes for especially diesel, but also gasoline in a visible way, and it’s all converging together.

And when that happens, people get frustrated and scared and angry, and it tends to translate into an anti-incumbent mood. We’ll see how it goes in November, what the outcomes are, but people look upset. And the way the political candidates are talking about it means that they see it’s something that people are concerned about, and so they’re talking about it. And especially the challengers are talking about it.

Joshua Rhodes: Yeah. What do you think on the energy front is a winning stump speech? Like, what does that look like?

Michael Webber: I’m pretty bad at politics, so I don’t know, but I just feel like there is room for a can-do attitude and optimism like, “Hey, we hear you. Affordability is a big issue.

Here’s how we’re gonna tackle it. We’re gonna tackle it by making the system bigger and better and cheaper by making it more reliable, ‘cause one thing that’s really expensive is outages. We’re gonna make sure the cheapest resources have a way to connect online. We’re gonna make sure that new customers, these gigafactories or data centers, pay their fair share and maybe even help subsidize the system to lower the cost.”

There’s a variety of ways to go about it, but I would say affordability can be solved, but the way to solve it is not to quit building stuff, actually. And this is counterintuitive because building things sounds expensive. Building transmission lines costs tens of billions of dollars. Building data centers costs tens of billions of dollars.

It all sounds expensive, but actually, if we build and operate it the right way, it will lower the cost for everybody. So I think there’s a story that if we work together to build it all and expand the system, it will actually lead to better outcomes and lower prices for everybody, ‘cause then you don’t have scarcity.

If you have abundance, prices go down. If you have scarcity, prices go up. And we’re in this kind of scarce moment, and I think we need to address that, and the way to deal with scarcity is expand the system. I’m actually kind of excited about the convergence of data centers and transmission because the data centers might pay to help us get through the scarcity.

We think of them as a cause of scarcity because they will demand so much power, but if they invest in expanding the system, they can help be a pathway to abundance. Let’s make sure they’re a pathway to abundance and not a pathway to scarcity. And I think that’s a challenge. People feel like power is scarce ‘cause we haven’t had to expand it very quickly in a long time.

Let’s do that. For the price spikes, volatility of oil and gas, the thing I’ve been saying for a long time is what you said earlier is like, well, let’s make sure you have options, that you have the option to have an electric vehicle or to work from home or to use mass transit or to have a walkable city.

There’s a lot of ways to deal with the exposure to the price spikes of gasoline, for example, for commuters, or the price spikes to diesel for an industry as a whole and logistics. That is harder, but we can think about more efficiency of the diesel trucks or electric long-haul heavy-duty trucking. There are other things we could do, and we’ll probably have to do all of it.

There’s gonna be no one solution. We’ll have to do every single solution we can. We’ll have to implement them all together.

Joshua Rhodes: When you bring up the concept of scarcity when it comes to electricity, can you unpack that a little bit? Like, what are some of the time those scarcity but help us get it to a time of abundance? What are you meaning there?

Michael Webber: So one of the challenges with electricity is that overall consumption in the United States hasn’t grown for about 20 years, and now it’s growing rapidly. And if we cannot expand the system as a whole to meet that growth, then we’ll have scarcity, which is we have more demand than supply, and if you have more demand than supply, then prices should spike.

We already have that a few hours of a few days of the year when it’s really hot outside and the air conditioning’s going, and we don’t have as much supply maybe, and so we might have scarcity then that may lead to price spikes. But if we expand the system really quickly, and we have abundant energy, and then actually prices should go down because then we have plenty of excess and plenty of spare reserves and everything else.

So part of it is the rate at which we expand. Part of it is the time and location. The scarcity only happens some times during the year. Most of the year we have abundance, so we have to think about what resources we build that are available at the times we need them, and with the summer cooling season with air conditioning, that tends to be solar.

With the winter heating season, that might be wind or some other option. We gotta think about what we’re building for which region based on what time of day we have scarcity or abundance. But there’s also the location of scarcity or abundance. We have parts of Texas where we have so much wind and solar that they get curtailed even though we might need the power in Houston.

And so there’s a location where we have abundance here, but scarcity there, or there’s constant negative prices in West Texas, but high prices in Houston. Well, that’s where the transmission comes in handy. We can mash the places of scarcity abundance together across great geographies, and then if we have energy storage or flexible workloads, we can match the time to scarcity abundance by time of day.

And so if we can bridge the gaps in scarcity abundance by time and location, that will be the great system. And that’s kind of what we’re moving toward. We’re building more storage, we’re building flexible loads, we’re building some transmission, but we kinda need to do all of it. And I think right now we’re acting as if there’s a scarcity mindset, like there’s not enough to go around.

I’m like, “No, no. Seek abundance mindset. Let’s expand and build and operate better.” We’ve had that mindset before. We had that mindset with rural broadband in the 2000s. In the Bush administration, we expanded rural broadband and fiber optics. We did that with highways in the ‘50s. We did it with canals and railroads in the 1800s.

We’ve had abundance mindset before, and I think it’d be good for us to have that mindset again.

Joshua Rhodes: I definitely agree. Looking at the grid this past summer, the grid, it grew for actually for the first time in a couple years, but it seems like there wasn’t that much drama around it.

Michael Webber: I mean, the best grid is a drama-free grid, right? You actually don’t wanna think about the grid. Yes, when you’re thinking about it, it’s because something went wrong or prices are high or failed and people are dying, so it’s nice to have a drama-free grid. And the primary reason is because we’ve been able to expand the number of power plants on the grid, which is great, primarily solar, but also some additional capacity support for batteries and then wind and gas.

And that’s a good news story that we’ve been building faster than demand has grown, and therefore hasn’t been a problem for the most part.

Joshua Rhodes: Absolutely. Okay, when I have you back on six months from now, what’s gonna be the big Texas energy story that we’re gonna be talking about?

Michael Webber: I think we’ll talk politics again because by then, the outcome of the elections this November will be known, and new officers’ position will be in place, or the same officers’ position will be in place.

Although there are some incumbents that are have retired, so we’ll at least have some change. But either the story will be the political leadership’s the same, and what does that mean? Or the political leadership is different, and what does that mean? So we’ll be talking about the new leadership at the state and federal level because I think that will be consequential no matter which way it goes.

I think we’ll talk about, in six months, a little bit of the winter heating season as we have the rise of solar, which is an excellent performer in the summer. We’ll wanna see how that performs if we have a winter cold snap. And El Niño and weather patterns will affect whether that’s a cold snap we need to worry about or not.

There’s gonna be a lot of growth in data centers by then that have broken ground will be connected to the grid. We might have a few data points, additional data points on whether those data centers are good or bad for grid performance and everything else. So I think we’ll talk with more data with a different season, a different political season for sure, and we’ll talk more about all those things and how they might affect Texas.

By then, we might have broken ground on some transmission as well. Like, with these approvals happening now, we might have shovels in the dirt for a few places by, say, March. So I think that’ll be pretty interesting. There’s always something we don’t expect. I don’t think you and I expected six months ago the change in attitudes around data centers.

So what will be the change in attitudes by six months from now? I guess that’s hard to predict as well. Maybe we’ll have a massive geothermal renaissance or nuclear renaissance. We’ll see. We’ll have plenty to talk about, that’s for sure.

Joshua Rhodes: Yeah, if they’re breaking ground on the lines, I wonder if, like on the, some of these by helicopter again.

Did you ever see that? Do you ever see them, like, stringing the CREZ lines by a helicopter?

Michael Webber: I did. I drove in West Texas once when they were stringing the lines by helicopter. This was not 2014 when they were doing the massive build out. It was a little later. I’ve seen that. They’ve also— I didn’t see this, but they had done hot live reconductoring, where you actually don’t de-energize the transmission and you lay new conductors.

And so they workers have to wear special Faraday suits to make sure they don’t get electrocuted. So some of those different approaches accelerate the development of the transmission lines. The hard part’s the permitting and approvals. But then once you’re going, it’s just a matter of years, really, a couple years to get things built. So we should see progress month by month, which will be kind of exciting.

Joshua Rhodes: Yeah. I remember seeing it. It was, like, in 2012 during the CREZ lines when they’d hook up a line to a helicopter, and the helicopter would almost turn, like, sideways and just, like, pull the cable or at least the leader line to, like, the next tower that they were, like, pulling through.

It was insane to watch. So if we’re gonna string long, long lines again, I imagine we’ll see some more of that, yeah.

Michael Webber: Incredible. Super skilled pilots, a lot better than doing a bunch of ladder trucks, especially as the pylons get so tall. So helicopter’s really, really specialized, really high risk, but really expedites the whole process.

So that’s one thing when I talk to, like, high schoolers and others, like, the energy industry needs everybody. You wanna be a pilot? The energy industry needs you. You wanna be an artist? Well, we need you as well. You wanna be an engineer? Okay, there’s places for engineers. But helicopter pilot is one of the places that’s a growing industry for the power sector.

Joshua Rhodes: Michael Webber, thank you for coming back on the Energy Capital Podcast.

Michael Webber: Thank you for having me.

In addition to these R&P Picks, paid subscribers receive access to the full archives, Grid Roundups, and select episodes of the Energy Capital Podcast. Please subscribe today.

US Power-Demand Forecast Cut After Texas Pause on Data Centers | Bloomberg

Projected electricity sales growth in 2027 fell from 2.9 percent last month to 1.8 percent this month. Analysts say this change is a result of Texas’ paused data center construction.

The revision comes after Texas last month ordered an audit of proposed data center projects seeking to connect to the state’s power grid, a requirement that has effectively halted development. Texas’ grid operator is considering about 474 gigawatts of connection requests, more than five times the state’s record peak demand. One gigawatt is roughly equivalent to the output of a traditional nuclear reactor.

Disbanding city-owned utilities won’t lower costs, officials say | The Texas Tribune

On the campaign trail last month, Gov. Greg Abbot proposed ending municipality owned utilities, arguing that increased competition would lead to lower prices for consumers.

San Antonio and Austin have the state’s two largest city-owned electric utilities, which say they offer among the cheapest electricity rates in the state because they operate as nonprofit electric companies that send every dollar they earn back to their communities, city and utility officials said. That money funds city services like libraries, parks and first responder operations, and the governor’s proposal would actually drive up electric rates for customers and be costly to enact, they said.

Read more

In addition to these R&P Picks, paid subscribers receive access to the full archives, Grid Roundups, and select episodes of the Energy Capital Podcast. Please subscribe today.

Texas’ halt on powering data centers reflects US reckoning over ‘ghost’ demand | Reuters

Nobody actually knows how much of the data center planning hitting grid operators right now is real. Drawing on Governor Abbott’s data center moratorium, Reuters looks at why this is a national problem, not just a Texas one.

The uncertainty around data center electricity use, said Tyson Slocum, director of the Energy Program at consumer advocacy group Public Citizen, raises the risk that utilities either under-build and threaten the stability of the grid, or overbuild to serve projects that never materialize, leaving average Americans footing the bill.

“I think part of what (Texas) is trying to do is to create some order, and impose some transparency, on an industry that in much of the country is still like the Wild West,” Slocum said.

Tesla ditches solar roof — and embraces regular solar panels | Canary Media

Tesla’s solar roof never really took off as the company anticipated. Canary Media reports the company is now putting its marketing behind standard solar panels instead, with a possible Texas factory in the mix.

Tesla’s Texas solar factory — if built — would be an enormous, though not inconceivably large, investment relative to the domestic supply chain. The filing does not disclose capacity figures, though it notes the facility would create nearly 10,000 full-time jobs. In May, trade publication PV Magazine reported that the U.S. had, in total, $14.5 billion worth of operational solar manufacturing facilities. Another $22.2 billion were under construction.

Read more

In addition to these R&P Picks, paid subscribers receive access to the full archives, Grid Roundups, and select episodes of the Energy Capital Podcast. Please subscribe today.

The Texas Grid Has Had a Boring Summer Thanks to Batteries | Heatmap News

This summer ERCOT issued zero conservation calls, compared with six in 2023. Massive discharge from batteries offered inexpensive supply when solar dropped and before wind picked up.

“We’re really seeing peak demand divorced from peak prices,” Joshua Rhodes, research scientist at the University of Texas, told me. This means that when demand is at its highest on a summer day — say around 4 p.m. this past Monday, when load was over 90 gigawatts — real-time prices were about $46 per megawatt-hour, according to Grid Status. At that time, natural gas made up about 42% of the grid and solar 36%. Compare that to the same time in 2023, when real-time prices were $85 per megawatt-hour during peak usage times and wind and solar combined made up around 20% of the grid.

As Abby Lestina, principal market analyst at Grid Status, put it to me, “The lack of pricing action would lead to the conclusion that the grid is more stable.”

Data Center Developers in Texas Plan Massive New Gas Power Projects | Inside Climate News

New data from Global Energy Monitor show Texas’ 12 largest planned power plants are all intended to run data centers, showing 50% growth in planned gas over the past six months.

“They must not take power from the Texas power grid,” Abbott said Sunday on ABC News. “They need to make sure that they are not disturbing neighborhoods or rural communities.”

GEM data accounts for 81.7 gigawatts of operating gas power generation, 99.4 GW in development and 22.4 GW recently announced.

Texas’ data center, transmission line pauses could be risky | The Texas Tribune

Industry leaders are continuing to react to the announcement of the pause on data center approval and ERCOT’s subsequent decision to pause its batch zero process.

Without the study, large-load users like data centers, along with traditional industry, do not know when they will be approved to receive power, creating delays in construction timelines. ERCOT officials testified to the House Committee on State Affairs on Wednesday that several projects have already dropped out of Batch Zero because of the delay.

Baker said the uncertainty goes beyond the data center industry because traditional manufacturers are stuck in the same queue with the hundreds of data centers that have disrupted ERCOT’s study process.

“It’s not going to be perfect, but (Batch Zero) is thoughtfully setting out how you narrow the funnel,” Baker said. “The key thing for all of these businesses is how to do that in a predictable and stable and credible way. Various wrenches being thrown in the process make that really hard to call it a predictable stable process.”

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The conversation now is all about hyperscalers and data centers. And, consequently, all the policy talk is about data centers. The North American Electric Reliability Corp. (NERC) projects peak demand rising by about a quarter over the coming decade. PJM is having to contract with said data centers to keep the lights on, and ERCOT hit record peak demand of 91.1 gigawatts in July.

But in the background, there are some new technologies (thermal batteries, grid forming inverters, direct air capture and advanced chip factories, which are related to data centers but their own unique vector) that will require serious policy consideration for the impact they will have on the power sector. By the time one of these becomes the next crisis, we might have lost the window to address it.

Any new technology added to the grid will have to serve some need. And those needs are shaving (even lowering) peak demand, improving reliability, cutting emissions and sharing the economic cost of upgrading our grid. So here’s some future casting for what these technologies are and what impacts they will have.

Read more

Rayburn is also putting batteries in members’ houses. Both run on the same logic: Rayburn generates the power and owns the transmission, so it earns on both. An independent power producer earns on energy alone.

On this week’s Energy Capital Podcast, Matt Boms talks with Christian Nagel, senior director of power supply and production at Rayburn.

• Home batteries as a transmission asset. Texas allocates transmission costs on four summer peaks, so discharging batteries then cuts Rayburn’s bill, worth more, Nagel says, than the energy.

• Telling real load from speculative. Rayburn screened data centers with its own questionnaire before ERCOT standardized one. Abbott’s audit has since pushed ERCOT’s Batch Zero study past April 2027.

• Plus: the 12CP fight and what comes after gas.

Whether Rayburn is a model or a special case turns on rules the PUCT has not written.

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Chapters

• 00:00 – Introduction

• 01:36 – Wind development and the landowner conversation

• 06:02 – The video that went viral

• 08:17 – Using your service to open doors

• 10:23 – The Atlantic Council years

• 12:19 – Her graduate research on energy and national security

• 14:44 – From Annapolis to flying Growlers

• 19:54 – Grounded, and the move to cryptologic warfare

• 23:59 – Why veterans run down their own service

• 30:08 – Advice for veterans trying to get into energy

• 32:56 – How to plug into Project Vanguard

• 34:49 – Closing thoughts

Resources

People & Organizations

• Matt Boms (LinkedIn)

  • Texas Advanced Energy Business Alliance (Website - LinkedIn)

• Christian Nagel (LinkedIn)

  • Rayburn Electric Cooperative (Website - LinkedIn)

Company & Industry News

• Rayburn Energy Station: A Cooperative’s Answer to Texas-Sized Risk

• ERCOT aims to complete Texas governor’s data center audit by December

• El Paso Electric and Base Power install first home battery under new reliability pilot

Books, Articles & Filings Discussed

• Governor Abbott Announces Texas Energy Fund Loan For 570 MW North Texas Natural Gas Power Plant

• Rayburn Electric Cooperative Breaks Ground on Rayburn Energy Station II

• Governor Abbott Directs Comprehensive Data Center Audit

• PUCT Project No. 58000 - Transmission cost allocation and the 12CP proposal

Related Podcasts by Energy Capital

• Inside the PUC’s Cost-Allocation Overhaul with PUC Chairman Gleeson

• Creating a Distributed Battery Network with Zach Dell

• How Texas decides which data centers to connect

• How will data centers pay for power?

Related Posts by Texas Energy & Power

• Hitting the Breaks on Data Centers

• Connecting the Regulatory Dots Shaping Texas Energy

Transcript

Matt Boms: Welcome, everyone. We’re here today with Christian Nagel. He is Senior Director of Power Supply and Production at Rayburn Electric Cooperative, where he oversees power supply strategy, generation planning, load forecasting, risk management, and participation in ERCOT. Before joining Rayburn, Christian held several trading and management roles at ACES, ultimately serving as Portfolio Director for ERCOT and SPP.

He began his career as a commodities trader and holds a degree in public finance and economics from Indiana University. Christian, thanks so much for joining us today.

Christian Nagel: Yeah. Thanks so much for having me.

Matt Boms: Well, I want to start by giving folks an introduction to Rayburn, and maybe for a listener who has never encountered a generation and transmission cooperative, what is Rayburn and what does it do?

Christian Nagel: Yeah. So we’re a generation and transmission cooperative, and really what that means is collectively with our distribution cooperatives, we are a vertically integrated utility within a mostly deregulated market. What sets us apart, I think, is that structure. And so Rayburn, as the G&T, we’re focused on the wholesale side of things, so we’re going to be managing all the ERCOT exposure for our members, all the power supply for them that’s on the grid scale, of course, and then transmission.

And so our members are then charged with the retail side and the distribution side of things. So collectively, you know, a vertically integrated utility within a deregulated market.

Matt Boms: It’s such an interesting setup, and we’re gonna get into the differences there between a co-op like Rayburn and the other utilities that are not vertically integrated, but we’ll get to that in a second.

For now, I wanted to stick with the Rayburn story and ask you more about Rayburn’s members and how is the membership model there different within a co-op like Rayburn compared to those IOUs that we were talking about?

Christian Nagel: Sure. Yeah. So we’re very community oriented, right? Because the members that we serve live in the communities that we serve.

And so we’re a nonprofit, of course, so all margins that are made, that’s what we call them in the co-op space, are returned to our members ultimately. So really our focus is 100 percent on member services, member benefits. So there’s no equity or no shareholders to be concerned with. So the community aspect is huge.

And, you know, with Rayburn, we do have a very collaborative and great relationship with our distribution co-ops, so I think that really plays well into our ability to be agile, versatile, and innovative at the end of the day.

Matt Boms: Absolutely. And for you personally, how did you end up at Rayburn? Like, I love talking about folks’ origin stories before we get into the energy, the tough energy topics, so-

Christian Nagel: Yeah.

Matt Boms: how did you go from being a commodities trader to finding yourself in this role?

Christian Nagel: I think it definitely was not the trajectory I thought I would take coming out of college. It was actually during the financial collapse of ‘08, ‘09. And really it came down to work ethic and being, you know, a hustler in terms of like showing that I was willing to go a step above everybody else, I think.

So, I started actually with internships just after my senior year of high school in Chicago. And so, you know, when you’re that young and cutting your teeth in that regards, really just efforts most of it, right? Showing dedication. So I would take a 4:45 AM train from Northwest Indiana, where I grew up, around Lake Michigan to Chicago that summer, and I think that’s really what set me above others in terms of especially coming out of a not-so-great financial situation in job market upon graduating high school, rather.

But then what really got me to the energy industry was just the fact that at the time, I was looking to maybe get out of the Chicago market and saw that there were some trading opportunities at ACES, and that’s really what got me into it. So the transition from more speculative trading and commodity trading to really just electricity and pure focus on energy.

And then I just sort of worked my way up from there, became more of a consultant role within ACES, and Rayburn was a client of ours at the time, and so really what led me to Rayburn was Winter Storm Uri. So following that event, got a call from the CEO about his interest in me helping to start a power supply group here at Rayburn, and that’s really my entry into it.

Matt Boms: That’s awesome. And I love what you said at the top because that’s what I tell young people who might be listening to this podcast is, you might be smart, but there’s a lot of smart people out there, and ultimately what separates you is your work ethic and how dedicated you are to your career. So I love that.

That explains where you are today, Christian. So one more question about your background. What did you learn when you were at the trading desk that still shapes the way you evaluate physical assets today?

Christian Nagel: Yeah. I think going back to the prop trading experience I had in Chicago, I always mention that even though it is a little step change, I guess, from where I’m at today, which is very much risk management, risk aversion type of setup with electrical utility, basically, right, a co-op.

But that gave me a great foundation for risk mitigation and really unique understanding of risk. And so when you’re kinda tasked with trading, right, you’re really kind of at the front lines of managing risks, right? You could be, whether you’re a trading desk that’s hour to hour or whether you’re looking longer term, right, you’re focused on kind of the frontline mitigation of risk, and that’s where contingencies happen in the real world.

You’re kind of there to make sure those risks are mitigated right up front.

Matt Boms: Amazing. So you get to Rayburn, and this is a very unique cooperative. My understanding is that Rayburn was created because a group of co-ops decided to challenge what looked like the default path for the industry. Can you talk to us a little bit more about the origin story there, and how does that still show up in the organization?

Christian Nagel: Yeah, I think it boils down to one of the quotes our, CEO always says, which is, “Status quo is not company policy.” And I think status quo, going back well before I was even born in ‘79 when Rayburn was formed by our cooperatives, I think the status quo probably would have been to go down that path, but that wasn’t the choice that the board at the time took.

And so they decided to form Rayburn and really kinda go about it in their own way as opposed to joining that alliance back then.

Matt Boms: And when Rayburn moved from contracting for power to owning major generation assets, what changed strategically? Like, what was behind that change in your mind?

Christian Nagel: Yeah. So it kinda started with our first entry into owning generation.

That was Freestone Energy Center, and that was in 2010 when Rayburn was still, I would say, considered mostly a paper G&T. We basically, even though we’re responsible for the power supply on the wholesale side for our members, we were contracting, you know, multi-year contracts with providers for that requirement service.

And so when we purchased a minority stake in Freestone Energy Center with Calpine, that was sort of our first entry point into it. So that gets us through the decade of the two twenty tens, right? And at that time, you know, ERCOT was putting in a lot of wind, and there was a lot of downward pressure on wholesale pricing, at least the, you know, the marginal pricing.

What Rayburn actually does, even though we’re not in the competitive space of ERCOT, we definitely track what the competitive market’s doing and use that as a benchmark to how well we are doing. And so Rayburn looks at it from the wholesale side, of course. So really we’re looking at all transmission costs and power supply plus our overhead combined.

What does that translate into in terms of a wholesale rate to our members, right? And then we take that wholesale rate, and we compare it to, you know, what is the average, like, 12-month Oncor rate, for instance. That’s the competitive spa— you know, area of North Texas. And so that difference between what the retail rate is and what our wholesale price is essentially what our members have to work with to remain competitive. Right?

And so you’re looking at a timeframe where there was downward pressure on pricing in the 2010s with a lot of renewables coming onto the system. Really outside of 2011, there were not very many blips in terms of severe weather. Of course, you’re gonna get the occasional hot summer or occasional winter storm, but really nothing to speak of in that pretty much decade between 2011 and Winter Storm Uri.

Really in the late 2010s is kind of what got us away from, I guess, the paper G&T model because we started to see that headroom shrink in what I was talking about between the wholesale price and the retail price. So basically that wiggle room that our members had to work with on the retail side started to shrink down.

So that’s when Rayburn start- decided to kind of go about it independently in terms of our power supply. We got out of those four requirements contracts, and then we started to manage our own supply. Now, getting back to your question about when did we decide to go from more contracted power to own generation, really that was Winter Storm Uri, right?

Because ultimately, we decided after Winter Storm Uri that the best way to kind of be in more control of your destiny is to actually have steel on the ground that you can control as opposed to leaning more on the market. So that’s really the difference in when we went from more of a, I know that’s long-winded, but paper G&T to contract, mostly contract only to an actual strategy change to owning our own generation.

Matt Boms: It’s a great answer. And for a lot of guests that we’ve had on this podcast, Winter Storm Uri was really a line in the sand, and there’s a pre- and a post-Uri. It’s really interesting hearing that from co-op and how that changed your perspective as far as steel on the ground within your territory. I wanted to ask you about the member model because as someone who runs a trade association, I can relate to having a lot of different members and a lot of different cooks in the kitchen.

How do you get all four member cooperatives to agree on different strategic decisions that you make? Some of them have different load shapes or maybe different views in the strategy that Rayburn should be adopting. So what does that process look like? That sounds like a really complicated and difficult job.

Christian Nagel: It can be. I will say we do only have four members, so that is something that is going for us. It really comes back to the way we set up our tariff with them. So we actually have a subscription-based model on power supply for our members, meaning that our members are allowed to basically come up with, in conjunction with us, a bespoke or customized power supply plan.

Of course, when it comes to the larger transactions that we’ve done and actual long-term investments, such as acquiring or building a power plant, that’s when it certainly becomes more of a challenge if we don’t have unanimous board support. But technically, as long as Rayburn has 100 percent backing by whether it’s one, two, or all four members on long-term investments, we can go ahead and move forward with those power supply acquisitions or development projects.

As it turns out, all the members were in unison when it came to Rayburn Energy Station and wanting to move forward with the acquisition of that following Winter Storm Uri.

Matt Boms: That’s great. And does the model mean that you can move faster than other utilities, or does the consensus become a limiting factor for the decisions that you’re making?

Christian Nagel: So far, it hasn’t been a challenge for us, right? I think we’ve been agile. I think, you know, I’ll speak to how quickly we did do the Rayburn Energy Station, the former Panda Power Plant up in Sherman acquisition. I mean, we were competing with a lot of private equity firms, right? And I’m not sure who all the suitors were for that plant, but certainly the fact that the cooperative pursuing that, you know, was able to stand up against those private equity firms and come out on top, I think speaks to how well we’re able to sort of get our ducks in a row at the time and come up with a great strategy in terms of how we went about the bidding process.

I’ll speak to the, it’s kind of the agility side and how quickly we move. Really, it’s what, you know, we- surprised we got this far into the podcast without mentioning data centers, but obviously there’s quite a bit of change happening right now as it relates to the data center front. But I can say that we’ve been working with several data centers and their consultants and, you know, they speak extremely highly of the way that we approach things as a cooperative, as opposed to, I think, a more rigid approach in terms of deregulated part, simply because it’s kind of all under one roof, right?

You’ve got the interconnecting entities, Rayburn, the power supply provider would be Rayburn, and the transmission provider would be Rayburn. So all that under one roof, and the fact that we, I guess, are a little bit, you know, quite a bit smaller than like an Oncor, very member-oriented in the way we approach our business is really, I think, what sets us apart, allows us to move much more quickly.

I think, you know, we’re definitely, again, oriented to be able to stop, get on the phone at a moment’s notice with these types of customers and members, and I think that’s really what sets us apart from the other models.

Matt Boms: No question. And we’re gonna get to data centers. Don’t worry. We- I got a bunch of questions on data centers and large loads for you.

When you’re planning the trade-off between near-term affordability and long-term reliability, can you walk us through what that looks like just from a day-to-day standpoint in how you make those decisions?

Christian Nagel: It’s definitely a huge trade-off, right? And you’re seeing sort of a disconnect happen right now in what’s happening since summer of 2023, right?

We’re setting record after record in the ERCOT market load records as we speak this summer with how hot it is. And you’re not seeing that materializing pricing, right? So you make a long-term decision to invest more and having steel in the ground, you’re definitely gonna have to make sure that you’re poised to mitigate years where that is more of a challenge, and the spot market is obviously where you’d like to be in situations like that.

That’s also the benefit of having newer technology, relatively newer technology, and really dispatchable power. You can call on that power when you really need it. But then you can also lean more on the spot market during times when there’s a lot of renewable penetration, ‘cause we continue to see that grow.

I know I mentioned wind when I was talking more about our power supply strategy shifts, but obviously solar is now the new thing in town, and then you’ve got also the amount of batteries that are on the system. So all those things working in conjunction together have really suppressed the price volatility in the markets.

The strategy still for us, looking long term, understanding that there’s gonna be ebbs and flows, and it’s not always gonna be our preference to have our own generation actually online around the clock to fill our load. And that’s where the- I think that it dovetails well with the energy-only market in ERCOT.

Matt Boms: It absolutely does. Well, let’s start getting into data centers. I wanna start with the load forecasting question because in light of Governor Abbott’s audit of data centers that has recently come down, I wanna ask you from the utility perspective, how much confidence can any utility place in a 10-year load forecast today, given all the fluctuations and all the changes that we’re seeing almost on a daily basis?

Christian Nagel: Yeah. The data centers just turned this whole world upside down in terms of load forecasting. I try to focus more on what we have direct control over and manage around that. So certainly when I’m looking at our data center queue, I’m able to have much more insight into what’s real versus what’s not, right?

When I look at that globally across ERCOT, you know, you can tend to get a little bit biased, right? Because I don’t know exactly once the Batch Zero process finally moves forward, what that number’s ultimately gonna look like. But I do know that for us, it’s looking very likely that we’re gonna see at least a doubling, if not a tripling of our actual peak load.

And then of course, I hadn’t touched on this yet, but we’re basically 90 percent residential in the makeup of our current membership, right? So because of that, there’s a lot of weather sensitivity, risk mitigation that we have to put into place. But the load factor of our actual load is low, relatively, because of how much weather sensitivity plays a part.

We don’t have a ton of base load, industrial or large commercial right now. The data center influx is really going to change that quite a bit for us. And so I think it comes down to what we can control, following along with sort of the goalposts as they move within the regulatory framework, and then just managing around that.

Matt Boms: Sure. And I think the utilities themselves have their own goalposts, right? So does Rayburn have its own criteria of, like, what makes large load real enough for you to plan around?

Christian Nagel: We’ve actually- We’re a little bit, in front of this. It’s becoming a lot more standardized now, but our engineering and transmission team, because of the, ultimately the interconnecting end, you know, from day one kind of had a questionnaire that they’ve used to kind of vet the veracity of these data centers from day one. And we’re very risk-averse, right?

We wanna make sure that these data centers, as they approach us, we’re definitely open to serving them, but we wanna make sure that they’re not gonna do any harm to our existing membership, right? Which again, is largely residential. So that questionnaire and that process really was our first way to vet how serious the data center was.

And it did come down to certain things like, have they actually gotten an engineering design done? Do they actually know, have they secured equipment? What type of equipment have they secured? Are they willing to upfront pay for the interconnection studies, right? Because really how our model works on the interconnection side, which I don’t think is that different from others, we’re not gonna float that risk on our balance sheet.

So we’re gonna make them pay for the interconnection studies. We’re gonna make them, once we get to the point of procuring long lead time items and the supply chain criticality there, we make them post financial security to that level so that as we’re going through the interconnection process from point A to point Z, we’re not at any time really holding the bag on any of that risk.

Matt Boms: Mm-hmm.

So on that question, like neither you or I have any skin in the game on this, and I’m just wondering if we play the devil’s advocate here, is there a way that these data centers could help lower costs for your customers? Is there a universe where that’s possible?

Christian Nagel: Yeah. I think, again, the what we can control is our tariff and the way we do rate design around these data centers.

We’re still working through that because, again, the rules are being set, and we have to make sure that we’re playing within those guardrails of how that’s gonna work. But in how we’ve structured these agreements up front, just us in a bubble, it should lower our members’ rates, or at least, I guess, stave off any increase in rates, so to say.

Now, what we can’t control, but we certainly are following along with, is, you know, kinda what’s happening on the regulatory front. So a big thing right now has been the transmission cost allocation approach that the PUCT and the legislature is trying to really undertake right now with the stakeholders.

So we’re definitely really keen on what’s happening there because that’s ultimately gonna decide, I think, how that approach is set, this large influx of load. Like, how does it actually impact the current ratepayer in Texas?

Matt Boms: Absolutely. I’m so happy you raised that rulemaking because it’s something I’ve been thinking a lot about, and to the extent that these data centers are flexible, and there’s a question mark there, you would want them to help out when we have some grid stress in Texas.

And for whatever faults there are in 4CP, and there are many faults with 4CP, it’s still the most effective form of demand response we have, right, as of today. So my concern is, if you just look at it from, like, a grid reliability standpoint, do you wanna remove the most effective tool that you have in the shed if you’re putting that flexibility at risk and saying, you know, maybe it’s not worth it for a data center to move to their backup power, right?

If we’re saying that there’s gonna be some minimum demand charges, the rule is still evolving. We don’t know what the final rule is gonna look like. But I guess this is an open question for you, Christian, as far as where is the balance? Like, you want these data centers to bring their own backup power and hopefully provide some flexibility to the grid.

That’s the ultimate goal here.

Christian Nagel: Right. It’s a very complex problem to solve, so I’ll put that out there up front, right? Because you have the enormous amount of investment that it’s gonna take to interconnect these data centers on one side. As you said, you want to have an incentive for demand response or some sort of grid flexibility, load flexibility to be there such that they are not adding to the stress of the grid at the most critical times, at least one for one.

But at the same time, if you go down that path and you think about what that actually does to private investment, right? If you’re backfilling everything you’re adding with required generation, you know, how does that impact downstreams the investment? And especially in the energy-only market where there’s not a capacity payment stream for private investment to have.

So that’s sort of like it’s a double-edged sword, right? Because you solve one problem and it’s kinda like a whack-a-mole. You solve one problem and then all of a sudden another problem’s gonna pop up. So it’s very complex problem to solve. I think load flexibility is key though, because we’re not gonna be able to snap our fingers and just add...

Let’s say we add 100 GW of load in the next five years, six years. I’m just throwing that number out there. There’s no way you’re gonna add 100 GW of supply within that same timeframe, right? You’re seeing what turbine lead times are from the major OEMs of these, gas turbines. And again, there’s also downstream effects to having a concentration in gas like that you can’t solve at all with simply a supply.

So I think load flexibility is key. I mean, we’re following along with some of the technologies that are happening in load flexibility. Emerald AI is a startup you may have heard of and some of the listeners may have heard of, but certainly they’re able to demonstrate some load shifting, and I hope that there’s further advances in that sort of technology because I do think that’ll really help bridge the gap.

Matt Boms: I agree with you, and we could spend another hour on data centers, so I’ll move off of it. But I agree with your main point, and you don’t want either extreme, right? So you don’t want all of these data centers just powering themselves essentially and not connecting to the grid, because then they’re not paying for the grid that we already have.

But then you don’t want the other extreme, which is none of them have backup power, and then none of them are flexible when we need them to be. So the idea is to get somewhere in the middle of those two. But I think probably neither of us has the solution, and we also don’t have the crystal ball ‘cause, you know, a year from now, who knows what the policy will look like.

This is all kind of unraveling in front of our eyes.

Christian Nagel: Yeah. It’s a very fluid situation. I think-

Matt Boms: Yeah...

Christian Nagel: obviously uncertainty’s a huge disruptor of progress, but I also understand that, again, I can’t speak to how important it is that from a policy standpoint, things get done right, because otherwise I think most people are in the policy front are focused on the impacts to the ratepayers.

And so I think that the pause here is, certainly warranted given the implications of the infrastructure build-out, and if it’s not done right and the incentives aren’t done right, then what the downstream impacts would be to the actual ratepayer in Texas.

Matt Boms: Yeah. Absolutely. Well, let’s talk distributed resources.

I know you mentioned that Rayburn is predominantly residential. I wanna know what value Rayburn sees in DERs for its residential customers, and how can that become a meaningful portfolio resource for y’all?

Christian Nagel: Yes. We’ve been going down this path for about three and a half years now in DERs. I will say the adoption rate has not taken off the way I thought it would, but we’ve learned a lot along the way, and I think it’s hitting a critical point, as I mentioned before, with the amount of load growth that we’re seeing actually hit not just Texas, but the entire US as a whole. There’s not a one solution fits all, right?

There’s no one panacea that’s gonna solve this entire problem. So DERs, I think, are in a good position right now to actually increase their adoption rate. Also, to mention, I think one of the other hurdles with DERs was just how expensive they were relative to grid scale technologies. And with how much those have gone up in cost, it’s certainly starting to converge on a good opportunity for DERs.

So Rayburn actually started with, I would say, low-hanging fruit here. Again, it makes sense. Don’t solve all the world’s problems on the first crack, right? But we started off with home standby units because a lot of these home standby units were installed following Winter Storm Uri, and really the work from home aspect that we saw following, COVID in our service territory.

So we knew of thousands of Generacs and other types of home standby units that were installed. So that was sort of our first entry point into it. I guess I would say, you know, one of our members here, Farmers Electric, they’ve been very pivotal in us investing in DERs and going down this path, so we certainly wouldn’t be to where we are today without their dedication to it.

They’ve had a thermostat program, Nest thermostat program for time, I guess, preceding this three-year time right now, just kind of spelled out. But that’s more passive, right? Really focused on more home, all home solutions is kind of our next strategy. So we started off with Generacs in that program, and ultimately it ended up being during the summer of 2023, so that was not a bad time to start because you saw high energy prices.

You know, what we found with home generators, they’re very dispatchable, but they also have a very high marginal fuel cost, right? Because you’re not talking about grid scale fuel, you’re talking about residential distribution level fuel costs. The marginal cost is high, but that gets back to our business model as a essentially a vertically integrated utility.

We’re able to see the benefits not just from the energy side, we’re able to see the benefits on really the most valuable aspect of DER right now, at least in my view, which is on the transmission cost side. So we’re able to deploy these assets during the peak times for coincident peak, which, you know, is evidently on its way toward the 12CP.

And so that strategy has worked out well for us. The end of last year, we started to look more at batteries, and we were kind of looking for our entry point there. We’ve talked with a lot of the major battery manufacturers, and we still have discussions going on with them, but we started to focus in with our member Farmers on Base Power.

And so we did launch a program with Base Power at the beginning of the year, and it’s so far been a huge success for us. Because of the fact that we are in the non-competitive areas, we had to structure it slightly differently than how Base Power is normal business model works. That’s a good benefit for us, right?

Because that allows Rayburn and our members to be more in the driver’s seat. It also allows for us to divest of any of the installation and maintenance and that side of thing, because that’s something that Base Power still wears the hat on. The batteries are much more deployable, I would say, from a utility perspective and from a grid solutions perspective so far than what we found the home standby units to be.

Matt Boms: And really a disrupting technology because they’re also working with El Paso Electric and have found success with this model specifically, right? In the vertically integrated utilities, it tends to work out really well. In the competitive areas as well, it’s just a different business model like you mentioned.

Where do you see that moving forward, Christian? Like, over the next few years, considering all the load growth that’s coming, do you see that DERs could help defer more transmission and distribution, especially distribution costs, right? Because a lot of this is, I imagine, translating into distribution savings for Rayburn, right?

If you know that a substation will be overloaded in the next five years, then maybe DERs could help with some of that stress.

Christian Nagel: Yeah, they certainly could. I hadn’t mentioned this yet, and I’m surprised I haven’t gotten to it, but with how fast we are growing just organically, we know we mentioned data centers and how much that’s certainly gonna change our world.

We’ve been at sort of the forefront of some of the most aggressive organic growth, I would say, across the country here in Rayburn, in our territory. Just for some perspective, the last nine years, 2017 through 2025, we’ve had a aggregate growth rate of almost 60 percent across our membership.

These aren’t small distribution co-ops to begin with, right? These are 500 to 600 MW peaking distribution co-ops. So that amount of growth, you mean a CAGR of 5.5 to 6 percent on average across that entire timeframe, you know, that in and of itself has had us— you know, led us to down a path of just constant substation adds and adding resiliency to the distribution system and to the transmission system within what we can control.

So it hasn’t quite yet translated into any sort of direct investment savings and upgrade savings like that. But I will say that with how quickly we’re seeing Base Power scale the program that we’re in, success story for me really looks like that scaling of that continuing within Farmers Electric and then we, you know, adding that to other distribution co-ops that we serve.

That in and of itself, that peaks shaving attribute and really that shorter duration battery deployment to kind of complement the more resilient, longer duration, more dispatchable technologies that we’ve current already invested on the utility scale side, I think that’s really gonna help us be a lot more diversified and a lot more versatile.

Matt Boms: Yeah, certainly for a vertically integrated utility, it makes a ton of sense because all the incentives are aligned there, right? Like it’s a no-brainer. It’s a little harder in the areas that are competitive and you don’t have utilities that are vertically integrated. That’s for another podcast, but it’s just good to hear that Rayburn is moving forward with these technologies, and ultimately it’s just about saving money for your members, so that’s great to hear.

Christian Nagel: Yeah. And again, the scalability’s been huge because ultimately the DERs, they’re just one home at a time, right? At least from our perspective. But the way that we— that Base Power and Farmers have worked together to, scale these at the distribution level’s been really quite impressive. And when you look about it— when you think about it over a timeline of otherwise choosing utility scale batteries, at the rate they’re going, by the time you get through the study process, the interconnection study process, you order the equipment, transformers, things that are multi-year lead times, I mean, I honestly think we’re gonna be scaling at, a comparative rate.

Then you add to it, like, you mentioned, that the vertically integrated benefit of transmission cost savings, it’s a, it’s a no-brainer to continue to scale that program for us.

Matt Boms: Yeah. If you add up all the megawatts, it’s pretty astounding what’s going on in Texas right now, right? And it’s easy to see in 5 to 10 years every home or business having battery attached to it, right?

So it’s pretty cool. I agree with you. It’s fun to see all this stuff getting deployed so quickly, especially in our state, ‘cause we’re just like, we’re known for speed. We do things quicker than other parts of the country. Well, I wanna talk Texas Energy Fund before we wrap up, because this was obviously a huge piece of legislation that passed back in 2023.

I know that Rayburn has been involved in the TEF, so I just wanted to give you a chance to talk about that and tell us what you’re building in Rayburn as part of the Texas Energy Fund.

Christian Nagel: Yeah. It starts a lot with our acquisition of Rayburn Energy Station. I know I mentioned that before, but I’ll maybe go a little bit deeper into that before getting to the new development project.

But so following Winter Storm Uri, we really took a strategic look at how we approach power supply. When I came on board in the summer of 2021, we just started looking at more dispatchable resources, and really, again, stealing the ground, being more in the driver’s seat of our power supply. And we looked at what types of resources performed well during Uri.

I know a lot of gas generation did not. A lot of that was due to, you know, improper potentially winterization, but a lot of it was just the actual gas supply itself. But Panda Sherman performed extremely well during Uri, and so when that came on the market at the end of 2022, we jumped on it. Again, it was a very competitive process with other private equity suitors. But we ultimately landed that and closed on that deal the first half of 2023, which was, you know, in hindsight, extremely well-timed with the summer we had that year.

But with how fast we’re growing organically, we had to start looking already, even after that major acquisition, right? It’s a 750 MW combined cycle. We already had to start looking ahead to what’s the next thing for us to do. And around that exact same time, right, they introduced that Texas Energy Fund in the legislature.

So we started on that process. We looked at what sort of technologies are deployable today, right? Number one, our board and Rayburn still were desiring a longer duration, more resilient types of technologies. And so that’s when we continued to focus on natural gas. But we had already a couple combined cycles where there were partial owner or fully owning in Rayburn Energy Station.

So we looked at diversifying, and so we came up with the solution of these Siemens SGT-800s. And so these are quick start, simple cycle gas turbines. A lot of synergies with RES today because it’s, first of all, it’s an add-on to the same site, so a lot of the infrastructure’s already in place at Rayburn Energy Station.

Control systems can speak the same, so our operators in the control room don’t have to learn new control systems. So a lot of those things really made sense for us to pursue this type of technology. Now comes the question of, is it feasible from a financial and rates stabilization side of things? And that’s really where the Texas Energy Fund fit into it.

So obviously, 3 percent rate on up to 60 percent of the cost of the project was huge. Initially, Rayburn actually had to work with the legislature to get some changes made to the way we were able to finance it. Really, that taking a step back, what that means, cooperatives, we finance it 100 percent with debt, right?

But the way the structure was at the time, the seniority of the Texas Energy Fund note had to be higher than supplemental debt we had to raise. So what we did was we worked with the legislature to allow for that to be all secured under our entire system, basically on even foot. Pari passu is the term for that.

I didn’t know that I would become fluent in Latin when I went down the endeavor of, working on this project, but you know, that’s the way things go. But we worked with PUCT, the consultants that they hired, and it was a two-year diligence project on this. We closed on the loan in June of this year.

Obviously, there’s going to be a lot of regulatory requirements when you’re getting a government loan. I think that’s a positive for the PUCT and for the state. It really was a rigorous process and very well vetted from the side of the PUCT and their consultants that they used to go through that diligence process.

So, you know, at the end of the day, I think that we’ll, we’re, you know, a 20-year note, 3 percent is really gonna end up, you know, putting us in a good position going forward with this project. So all in all, time will tell exactly how successful that project will be, but I certainly think we’re off to a good start just with the financing itself.

Matt Boms: Yeah, it sounds like it’s not a question of whether it will be successful, it’s just how successful will it be. And the criticism I remember back during that legislative session was that the barrier to more dispatchable generation was not necessarily a lack of access to capital in ERCOT. It was more supply chain issues, which I think are still true today.

But I can see how this is different because from the co-op perspective, the access to low interest capital was a really key, part of the decision for y’all, right? So it works a lot differently than in the competitive parts of Texas where these are just private investors coming to build their own gas plants.

So obviously they’ve got plenty of low interest capital that that’s not necessarily the barrier to growth.

Christian Nagel: Yeah. And honestly, we have a pretty low access to capital too. We’re investment grade rating. But I definitely s— the Texas Energy Fund in hindsight looking, it’s certainly more geared towards a util— a vertically integrated utility type model, and that’s why it fit us so well.

A lot of the IPPs, they look at returns on capital differently than we do. It’s just a different structure altogether. Again, we are looking for something that was dispatchable, something that looking ahead at our modeling and the way we perceive risk over here, looking for something that would stabilize and even lower our rate projections into the future.

From that perspective, the 3 percent note dovetailed with the lower cost of capital we had on the other 40 percent, and all in all, it really was

Matt Boms: I think a really exciting time for Rayburn, given all the different strategy decisions that you’ve walked us through today, Christian. Before we wrap it up, I wanna just hear your thoughts on where you go from here in an era of unprecedented load growth.

We talked about data centers. Where do you see Rayburn’s future, and what will be success for you over the next several years?

Christian Nagel: I think our main focus is still gonna be on member services, member benefits, and low stable rates. That’s really what’s driving us. We’re already looking ahead at next steps as it terms for power supply, whether that’s gonna be joint ventures with some of these data centers, and we’re certainly having discussions there on some opportunities.

Again, we’re mainly focused on what’s gonna add the most value for Rayburn, divesting ourselves from being tied to any type of technology. Again, we’re, gonna do what makes sense for us, what makes sense for our members, and what leads to the lowest rate possible for our members, but also understanding that with that, you have to have reliable solutions.

So we’re following along with a lot of the newer technologies. We’re not ready to dive in on them yet, SMRs, things like that. But I do think that what I mentioned earlier about there’s no one panacea to solve this load growth problem that we have, or I see it as an opportunity, honestly. You’re gonna have to look at all the above options.

You’re gonna have to be innovative, which is one of our core values, so that’s certainly something we’re gonna continue to march toward. And you have to look at, you know, what’s gonna ultimately lead to the most reliable low-cost power for our members long into the future.

Matt Boms: Absolutely. Well, huge credit to you and the leadership team at Rayburn.

It sounds like following Winter Storm Uri, you really took matters into your own hands and started building your own generation and coming up with new solutions to a really complicated problem. So just congrats and wishing you all the success moving forward.

Christian Nagel: Yeah. So thanks so much for having me on, Matt.

It really was a pleasure.

The latest reports and executive commentary suggest that large-load demand growth in Texas is continuing at a breakneck pace. All major Texas utilities or merchant power companies at the very least reiterated rosy earnings outlooks despite the sound and fury coming from Gov. Greg Abbott, the Texas state house and countless local politicians. Even as Texas legislators tap the brakes, Texas is still likely to surpass Virginia as the global leader in data-center power markets by 2030.

“In terms of robustness of the large-load backlogs [executives expressed] confidence in their ability to execute on those backlogs,” said Alex Kania, a longtime utilities analyst at brokerage U.S. Bancorp/BTIG. “There was a uniform sense that they felt OK about the political environment.”

The kind of double-digit percentage growth in revenue that was once unheard of for the steady utility business is now the norm, thanks to the artificial-intelligence boom.

Houston utility CenterPoint’s revenue rose 11% to $2.15 billion in the second quarter.

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