This Is How Electricity Rates Are Actually Set

Summary

Podcast Summary: Odd Lots – "This Is How Electricity Rates Are Actually Set"

Episode Information:

• Title: This Is How Electricity Rates Are Actually Set
• Host/Author: Bloomberg's Joe Weisenthal and Tracy Alloway
• Release Date: January 9, 2025

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1. Introduction

In this enlightening episode of Odd Lots, Bloomberg's Joe Weisenthal and Tracy Alloway delve into the intricate mechanisms behind electricity rate setting. The discussion is sparked by Tracy's personal experience with solar energy and evolves into a comprehensive exploration of utility pricing structures, the role of regulators, and the challenges posed by renewable energy integration.

2. Tracy Alloway's Personal Experience with Solar Panels

[01:20] Tracy Alloway:
"I'm an electricity generator now. This is big news in my personal life. I am finally the proud owner of a pretty big solar panel that is feeding into the grid in Connecticut."

Tracy shares her firsthand experience with installing solar panels, highlighting the immediate benefits and challenges:

• Lower Electricity Bills:
  [01:40] Tracy Alloway:
  "I got one electricity bill so far and it was about $20 for a few weeks, which is amazing."

• Intermittent Energy Problems:
  [01:39] Joe Weisenthal:
  "Do you have lower electricity bills?"
  [01:40] Tracy Alloway:
  "I have experienced intermittent energy problems because it’s been snowing up in New England, and the solar panels are covered with about 8 inches of snow."

3. The Complexity of Electricity Pricing

The conversation shifts to the broader complexities of how electricity rates are determined, emphasizing the multifaceted nature of the energy grid and the interplay of various factors influencing pricing.

[02:37] Joe Weisenthal:
"I really find this incredibly hard to wrap my head around. I guess, basically the question of why you pay what for electricity."

Tracy and Joe acknowledge the obscurity surrounding electricity pricing, setting the stage for their discussion with Lon Huber.

4. Interview with Lon Huber: Understanding Utilities and Pricing Structures

Guest: Lon Huber, Senior Vice President of Pricing and Customer Solutions at Duke Energy

a. Business Model of Duke Energy

[05:46] Joe Weisenthal:
"Why don't we zoom out really big? What is the business model of Duke Energy?"

[05:50] Lon Huber:
"We have a franchise that enables us to furnish low cost reliable electrons as a precondition to economic vitality for our community. We have essentially a set jurisdiction where nobody else can come in for certain services."

• Geographical Jurisdiction:
  Utilities operate within defined regions, supplying power through a monopolistic framework to ensure reliability and infrastructure stability.

[06:11] Lon Huber:
"We're under democratic control of those prices of the return on equity for investors in this long term infrastructure."

b. Economic Vitality and Subsidies

[07:20] Tracy Alloway:
"To what extent do you think electricity costs are subsidized because we view it as a social good?"

[07:27] Lon Huber:
"It is certainly true that it is an inelastic necessity to modern civilization. But for the most part, there isn't necessarily a large amount of subsidies, at least on the state level."

• Subsidies and Cross-Subsidization:
  Certain customer classes may inadvertently subsidize others, such as industrial customers subsidizing residential ones, due to fixed infrastructure costs.

c. The Role of Regulators and Consumer Advocates

[12:38] Tracy Alloway:
"What's the big friction with regulators? Is it mostly over cost and pricing structure or does it go to environmental?"

[13:02] Lon Huber:
"There's another key party involved, the consumer advocate, meant to scrutinize things from a public lens."

• Public Utilities Commissions:
  Govern and balance the interests of utilities, consumers, and other stakeholders through rigorous scrutiny and formal proceedings.

d. Revenue Requirement and Rate Design

[09:44] Tracy Alloway:
"Can you talk about the building blocks that go into setting electricity rates?"

[10:01] Lon Huber:
"The revenue requirement basically says, how much money do you need to collect from your customers to cover your investments, operations, and returns to investors."

• Revenue Requirement:
  The total revenue a utility must collect to cover all costs and desired returns.

• Rate Structures:
  Balancing fixed charges versus usage-based charges to ensure revenue goals while encouraging energy conservation.

e. Impact of Renewable Energy and Storage Technology

[16:25] Lon Huber:
"Intermittent renewable resources are good at offsetting fuel expenses if they align with the utility's peak demand."

[20:11] Lon Huber:
"Batteries around the four-hour duration have really come a long way paired with renewables, especially in markets with summer peaks."

• Renewable Integration:
  Challenges include intermittency and the high upfront capital costs associated with renewable technologies.

• Battery Storage:
  Enhancing the viability of renewables by mitigating intermittency, though long-duration storage solutions remain a work in progress.

f. Challenges with Load Growth and Infrastructure

[30:19] Lon Huber:
"When it's vertically integrated, we can see the whole system and plan for it. But in a restructured market, it's more complicated."

• Load Growth:
  Rapid industrialization and the emergence of large energy consumers, such as data centers, pose significant challenges for infrastructure planning.

• Infrastructure Constraints:
  Supply chain issues, especially with critical components like transformers, exacerbate delays in scaling up the grid to meet new demands.

g. The Future of Electricity Rates and Grid Management

[39:54] Lon Huber:
"We break up the revenue requirement based on customer classes and their specific energy usage profiles to design rates that recover necessary funds while sending appropriate price signals."

[43:15] Joe Weisenthal:
"It's really helpful to remember that fuel is just as marginal cost as what you're paying for everything else."

• Grid Optimization:
  Continuous efforts to balance cost recovery with incentivizing energy conservation and integrating diverse energy sources.

• Future Innovations:
  Potential breakthroughs in battery technology and virtual power plants could revolutionize grid management and electricity pricing.

5. Conclusion

The episode wraps up with Tracy and Joe reflecting on the complexities of electricity pricing and the delicate balance utilities must maintain. They acknowledge the multifaceted challenges posed by integrating renewable energy, managing infrastructure, and designing rate structures that are both fair and sustainable.

[42:46] Joe Weisenthal:
"We've discovered that you're the problem."

This lighthearted exchange underscores the intricate dependencies within the energy ecosystem, emphasizing that solutions require collaborative and innovative approaches across all stakeholders.

---

Notable Quotes:

• Tracy Alloway [01:20]:
  "I'm finally the proud owner of a pretty big solar panel that is feeding into the grid in Connecticut."

• Joe Weisenthal [02:37]:
  "How utilities work, how pricing in particular works for electricity, is this incredible black hole in my knowledge."

• Lon Huber [05:50]:
  "We have a franchise that enables us to furnish low cost reliable electrons as a precondition to economic vitality for our community."

• Tracy Alloway [07:20]:
  "To what extent do you think electricity costs are subsidized because we view it as a social good?"

• Lon Huber [10:01]:
  "The revenue requirement basically says, how much money do you need to collect from your customers to cover your investments, operations, and returns to investors."

• Lon Huber [20:11]:
  "Batteries around the four-hour duration have really come a long way paired with renewables, especially in those markets where you have that summer peak."

• Joe Weisenthal [43:15]:
  "Fuel is just as marginal cost of what you're paying for that."

---

This comprehensive discussion sheds light on the often-overlooked intricacies of electricity rate setting, offering listeners a deeper understanding of the energy landscape and the factors influencing their electricity bills.

Transcript

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[Sonali Basak]

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[Tracy Alloway]

Bloomberg Audio Studios Podcasts Radio News hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Alleway.

[Joe Weisenthal]

And I'm Joe Weizenthal.

[Tracy Alloway]

Joe, I have big news for you.

[Joe Weisenthal]

Go on.

[Tracy Alloway]

I'm an electricity generator now.

[Lon Huber]

Oh yeah?

[Joe Weisenthal]

Tell me what's up with that.

[Tracy Alloway]

This is big news in my personal life. I am finally the proud owner of a pretty big solar panel that is feeding into the grid in Connecticut.

[Joe Weisenthal]

How's that going so far? Like, are you. Has it.

[Tracy Alloway]

So I got one.

[Joe Weisenthal]

Do you have lower electricity bills?

[Tracy Alloway]

I got one electricity bill so far and it was about $20 for a few weeks, which is amazing. However, I have also experienced my own intermittent energy problems because we are recording today on December 5th, in case you don't know, it's been snowing up in New England and the solar panels are covered with about 8 inches of snow.

[Joe Weisenthal]

So they're not producing any electricity.

[Tracy Alloway]

Yeah, all the electricity is out. We have a power generator, so that's kicked on. But I'm now learning one of the downsides of renewable energy.

[Joe Weisenthal]

No, it's like perfect. This is the end of the conversation right here. It's cheap, but it's intermittent.

[Tracy Alloway]

It's cheap and intermittent. Yeah, that's basically it. But you know, it got me thinking. I'm not in Connecticut at the moment. We are both in Washington, D.C. for a big energy conference. And because I am now an electricity generator of sorts, and I feed into the grid that is owned by a giant utility. We have never actually interviewed someone from a utility.

[Joe Weisenthal]

That's right.

[Tracy Alloway]

I don't think we have.

[Joe Weisenthal]

I don't think we have either. And I have to say, and now this is starting to make sense to me that, like, how utilities work, how pricing in particular works for electricity, is this incredible Black hole in my knowledge, because this has come up. But, you know, we're not called customers, we're called rate payers. And I know that in many markets there's this negotiation where there's some utility commission or something like that, and the utilities have to figure out, okay, we spent this much and can we raise our prices this much, et cetera. And then, you know, I know there's in some places, sort of live auction markets and how the weather changes, the price changes, but I really find this incredibly hard to wrap my head around. I guess, basically the question of why you pay what, for electricity.

[Tracy Alloway]

Yeah. So two things here. Number one, it seems incredibly complex because of all the factors that you just laid out, including the patchwork of different regulations for different states and the limits there, and also, well, the political tensions as well. That's one thing we can maybe talk about. But the other thing is it feels like the whole system is becoming more and more complex because you have more renewable energy coming on. A lot of that renewable energy, you get credits for feeding that into the grid, which means special people like me are no longer actually paying that much for electricity. But we're still drawing on the resources of the utilities.

[Joe Weisenthal]

And I guess there's really two things, because there's this rise of sort of distributed energy, rooftop solar and things like that, new forms of energy production. And then something that comes up a lot, the resumption of load growth for the first time in decades.

[Tracy Alloway]

That's right.

[Joe Weisenthal]

And so you have the renewables, you have load growth, you have this impulse from the public and the corporate sector to reduce emissions overall, net zero. There's always net zero press releases going out over the years. And so how this all comes together, wildly complex. And usually when people are explaining it to me, I have to pause them every five seconds. Like, wait, what is that term? What's the capacity market again? All these things.

[Tracy Alloway]

So it's nice of you to warn our listeners in advance that they're going to have to pause this episode quite a bit. No, hopefully we'll be able to explain everything because we do, in fact, have the perfect guest. We're going to be speaking with Lon Huber. He is the senior vice president of pricing and Customer Solutions at Duke Energy. So, Lon, thank you so much for coming on the show.

[Lon Huber]

You bet. Great to be here.

[Tracy Alloway]

Is it terrible for companies like Duke when their customers get solar panels? Is it bad? I keep hearing about the utility death spiral.

[Lon Huber]

It all comes down to pricing and the rate structures. So it's not an Easy answer. If you have the right rate structures, it can actually be a beneficial thing. But a lot of times that isn't the case. And so in your Connecticut example, you're basically getting your fully bundled rate as a credit. But that fully bundled rate, although it's in kilowatt hours, it's actually made up of a lot of KW and fixed infrastructure cost. So that pole outside your house, that's wrapped into an energy charge, even though, as we all know, if your energy uses drops, that pole doesn't get cut in half. You can't just pull out that pole, hand it to your neighbor. That's fixed infrastructure and that's 70% of the grid.

[Joe Weisenthal]

Why don't we zoom out really big? What is the business model of Duke Energy?

[Lon Huber]

Ah, all right, this is good. So we have a franchise that enables us to furnish low cost reliable electrons as a precondition to economic vitality for our community. So we have essentially a set jurisdiction where nobody else can come in for certain services. And so we have our.

[Joe Weisenthal]

This is a geographical jurisdiction.

[Lon Huber]

Geographical jurisdiction, right. And we're supplying the wires and in some cases the power generation to that territory. And again, there's obligations and exchanges there. So we're under democratic control of those prices of the return on equity for investors in this long term infrastructure. Right. So there's balances here. So you have this market discipline entity that still has accountability to local communities, to policymakers, and has a way to spread infrastructure costs in a structure that can make long term intergenerational sense for communities.

[Tracy Alloway]

So you mentioned economic vitality just then. And one of the things I often hear when I occasionally read books about electricity or the grid is this idea that electricity cost is still heavily subsidized in many ways because we still view it as a sort of social good that enables us to do things like manufacture stuff and power our homes. Homes. And I guess my question is like, to what extent do you think that's true?

[Lon Huber]

Well, it is certainly true that it is an inelastic necessity to modern civilization.

[Joe Weisenthal]

Right, I agree.

[Lon Huber]

But for the most part there isn't necessarily, I would say, a large amount of subsidies, at least on the state level. There's some federal tax credits, but again, a lot of those apply more broadly to the sector. But what you could hear is, well, certain types of customers might be subsidizing other types of customers. And so that can pop up where you have these certain classes, whether it's maybe the industrial class could be subsidized by the residential class or vice Versa. And that is inherent in a fixed.

[Tracy Alloway]

Network system or the non net metered customers. Paying the net metered customers, I. E. Me.

[Grammarly Representative]

That's right.

[Joe Weisenthal]

You explain what Duke is. What is your title is? Senior VP of Pricing and Customer Solutions. So what is that role?

[Lon Huber]

Yeah, so this is all about helping our customers out, not ratepayers. Our customers.

[Joe Weisenthal]

Customers.

[Lon Huber]

Right. So very good. These are a large.

[Joe Weisenthal]

Did you actually use the word customers?

[Lon Huber]

Because the industry has changed a lot. Just, I mean, when I first got in the industry, it was ratepayer, okay, all the time.

[Joe Weisenthal]

If I'm operating, if I'm operating, if I'm operating on dated information, then I'm happy to be correct.

[Tracy Alloway]

No, but why was that the like, why was that the common term?

[Lon Huber]

I mean, partly there was just not the technology or visibility into customers. There was a mentality there too, a culture built up. But for the most part, it's like if you don't have any of the analytics, if you don't have the meters, if you don't have the communication back and forth, you're sort of at a distance. Right. And all that has changed dramatically in every category.

[Joe Weisenthal]

I'm updating my mental framework of how you see us. Okay. So you go on with what you do and the pricing aspect. Right.

[Lon Huber]

And so I've got economic development as well. And so that's new businesses coming in, the existing businesses that are there that also want to grow the pricing and rate structures all around that. And again, this is for all of the Duke states and customer load analytics, things of that nature, to sort of make it all work and do an A to Z to solve customer problems or goals. So if a customer is like, hey, I want to bring a new manufacturing to the state, my team will work in conjunction with the government and we'll say, okay, well, here's a great site or here's a great community that would really fit the workforce you're looking for, the size of business, you're bringing that type of thing.

[Tracy Alloway]

So when it comes to actually setting those types of rates, can you talk to us about, I guess, the building blocks that would go into that? Like, what are you putting, presumably into a giant Excel spreadsheet and then spitting out as the final number?

[Lon Huber]

Yeah, well, it all comes down to something called the revenue requirement.

[Joe Weisenthal]

Okay.

[Lon Huber]

And the revenue requirement basically says, how much money do you need to collect from your customers to cover your investments, to cover operations and then taxes returned to investors? So that is the big number. Then from there, you slice and dice that based on how the different classes are using energy. Right. The makeup, the load profiles and so forth. And you create pricing around that to collect that revenue requirement. But it gets really complicated because the easiest way to collect that revenue requirement is by just having everybody pay a big fixed charge. Right. That would be the easiest thing if I, you know, I need to collect 100 from you give me 100 each month. Right. But that doesn't send the best price signals, does it? Right. For you to conserve, because you would just be using a huge amount of energy because it'd be $100 every month no matter what you use for the most part. Right. There'd be a little bit of fuel there. And so that wasn't palatable, that type of pricing to collect that type of revenue requirement. And so then it was, well, what's the next easiest thing to do given the state of technology that we have? And that's where you see a lot of the legacy pricing, where it's mostly just usage KWH based.

[Joe Weisenthal]

All right, let's talk about the different types of markets then. So there are markets where there's some commission, Right. That determines a legitimate price.

[Lon Huber]

Yeah. Every state has a public utilities commission or okay, however they might label it.

[Joe Weisenthal]

And so you talk to us about how you interface with the commission. What are the conversations like, how often are they and what are you actually talking about with them?

[Lon Huber]

Yeah, regulators are key to making this all work. And they have staffs that work and they scrutinize all of our filings. And so we're in there and there's just basic sort of automatic, oh, that's true ups because fuel went up and you know, whatever else outside of the control, or we've got these programs that we're updating to more intensive processes like rate cases, where you go in and you say, okay, well, we have made these investments, we're about to make these investments. And here's what we think is prudent and here's where we think the capital markets are in terms of return and debt markets and so forth. And so there's a lot of scrutiny there. There's formal data requests. We get thousands upon thousands of data requests, formal, that come in and then they're on the record. Some of them are confidential and then only with parties that sign certain agreements. But everything is just very well scrutinized in these settings. Some of these proceedings are very contentious and you're under oath. Others, you know, most parties agree and they're like, hey, yeah, this is a good idea. Yeah, go forth. Or it's so routine that it doesn't have a big impact.

[Tracy Alloway]

Remind us how many states you're operating in.

[Lon Huber]

6 and 7 if you include an only gas supply state.

[Tracy Alloway]

So one question I want to ask and you know, hopefully in a slightly diplomatic way, but what are the big frictions with regulators? Like is it mostly over cost and pricing structure or does it go to environmental? Like what is it that you, you fight about when you're speaking to regulators?

[Lon Huber]

I would say that there's another key party involved in all this and that's the consumer advocate. Most states have it. I used to be working in a consumer advocate office actually in beginning part of my career and they are meant to really, you know, scrutinize things from more of a using and consuming public lens.

[Tracy Alloway]

So they'll be representing the criticisms about pricing and things like that.

[Lon Huber]

Yeah, so they're representing a constituency and the public utility commission is usually the entity in charge of balancing all the different parties and taking in this information. It's quasi judicial and so you have.

[Tracy Alloway]

They're the ones that everyone gets mad.

[Lon Huber]

At presumably they're the public face of sometimes a lot of it. And it really just depends on the state and what's going on. You know, you typically always push back on rate of return, for instance, what you're, you're paying for equity and investors and that's sort of steady state. And then things could get controversial if something goes wrong on a power plant or you know, something of that nature. But there's sort of that consistent rate case mode that provides some friction there for sure.

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[Joe Weisenthal]

Let's get into the economics of different types of energy production and consumption and so forth. We've added tons of renewables to the grid over the years pretty much across the country. Some have gone really fast like Texas and California, others not as fast for obvious reasons. Why does that not cause the price of electricity to collapse?

[Lon Huber]

Great question. And it gets to all the different aspects of what makes up that electricity bill.

[Joe Weisenthal]

Okay.

[Lon Huber]

And so when I mentioned before that a lot of the costs are fixed infrastructure costs.

[Joe Weisenthal]

Right.

[Lon Huber]

This is a huge grid. It spans thousands upon thousands of miles. Right. Our grid can wrap around the world like, you know, six times. Of course that, that's how like just the mammoth. That's just our distribution system.

[Joe Weisenthal]

Yeah.

[Lon Huber]

So that's how big that we're talking about. And so you have that fixed infrastructure which includes power plants, the power lines, everything of that nature. You have the fuel and all the different fuel supply and administration and just everything from like tree trimming. Right. If you have that many miles, you have to think about the trees. And then what if a drunk driver hits one of the poles and a squirrel starts gnawing on things? Right. There's a lot in that price of an electric bill. So if you have an intermittent renewable resource, well, what is that good at offsetting? Well, it's good at offsetting fuel expense if it aligns with the peak of the utility system. It can also avoid future power plants or purchases on the market for capacity. But it all depends on the individual resource and the location to see if it can bring that capacity value. But at least it can provide a fuel savings. And so that's a smaller part of the bill.

[Joe Weisenthal]

Yeah.

[Lon Huber]

Right. And so if you're only offsetting a smaller part of the bill, that's why you don't see that downward pressure. And another thing is a lot of different types of renewables are heavy upfront capital expenses. Right. And so that initial investment puts upward pressure on rates, even though it gives a nice long term hedge or discount on fuel.

[Tracy Alloway]

So you mentioned long term just then. And one of the things that I do not envy utility providers in having to do is to try to sort out immediate and energy needs, you know, for the state of our economy and our society. Right now, but also try to make those giant capital investments for like decades out into the future. How do you guys think about that? That seems tough.

[Lon Huber]

It's a lot of responsibility and it's a collective decision. Right. When I mentioned regulators, consumer advocates, other stakeholders, policymakers in the state, and if you look at utilities in the past, they have completely shaped the landscape of states. And so Duke Energy for instance, I mean we were like, hey, hydro. And we built a huge amount of lakes all around the Carolinas to get that power. Then we.

[Joe Weisenthal]

There are a lot of lakes in the Carolinas, right? Yeah.

[Lon Huber]

And some of them are artificial from, from, you know, from. And that brings recreation. You know, it brings so many different other things to the state. It changes the landscape. You know, then you get into nuclear. Right. These are like 80 year assets. And back then you needed to have, and even still today pumped hydro to store some of that nuclear during the down times of the day. And so now you're creating different lakes at elevations to move water up and down as long duration storage. So these are like big landscape changing.

[Grammarly Representative]

Just like the original battery.

[Joe Weisenthal]

Right. So you have like, you have excess electricity at some point, maybe during the night with nuclear or during the day with solar and use that electricity to lift water to a high elevation and then at night it rolls downhill and then spins a wheel or something like that.

[Lon Huber]

That's ex.

[Joe Weisenthal]

Always thought that was just such a fascinating concept. But on batteries. So you mentioned that one of the issues with say solar or what we think of as renewables is that they're intermittent and so forth. Battery technology is getting a lot better. And I keep seeing stats about how again in some markets like Texas and California, especially during high stress periods, you increasingly see grid level batteries playing an important part of the mix in supplying energy. In the last few years, how much have you seen batteries and the improvement in battery technology sort of change the economics of renewables?

[Lon Huber]

Yeah, again, and this gets to the beginning of why this area is so complex. Because not only do you have the patchwork of regulation and utilities, but each geographic region, when you have weather dependent generation, it brings something unique. And so a solar plus storage facility in Arizona is going to have a lot of different economics than say in North Carolina.

[Joe Weisenthal]

Okay, Right.

[Lon Huber]

And so you've got more sun, maybe cheaper, flatter land, and you have a summer peak that you really worry about in an Arizona. And so a four hour mix with tracking solar can provide a decent amount of capacity value in Arizona. Switch to say Midwest. Well, where can be the peak? The peak could be winter. Well, what does the winter peak look like? Well, it could be a week of cloudy weather where you see no sun and it could. These very cold extreme weather events could last for many days. So that's a very different set of economics and outcomes and so really depends on where you are. In general, batteries around the four hour duration have really come a long way paired with renewables, especially in those markets where you have that summer peak. But we're still trying to crack the longer term extreme weather event type of peaks.

[Tracy Alloway]

So it is kind of true that at the moment we sort of perversely solve the problem of intermittent energy. And the fact that, you know, solar and wind tends to come on and off with more generation. Right. So we don't store the extra energy, we just try to make up for it with generation from other sources when that goes offline, when the solar and wind goes offline. And how far are we from solving that storage problem? Just to press on Joe's point.

[Lon Huber]

Well, that is the big question. Is there a startup out there that has the solution that'll be ready in five years and can scale with some type of new long duration storage technology? Right. There's form energy, there's others that are out there that could be very promising. So time will tell when those breakthroughs will happen on the storage side. But to your point, right now it takes a great diversity of resources to make this all work and all the above. And that's why there's concern of when certain states or advocates say well, we don't like that particular resource or we want you to do more of that. There has to be a balance there because they all sort of work in synergy and there's really complex modeling that sort of shows how this all works to keep that reliability during those extreme events. But, but what you don't want to do is have to build two systems, a renewable system that is there when the weather's great and then an entire backup fossil system. Right.

[Joe Weisenthal]

Well so then the third thing that we haven't started talking about yet, when you talk about like these different conceptual systems, there's the fossil fuel system, the renewables and battery system, and that's nuclear. And one thing that's come up on the show in the past is that some of the advocates of much more aggressive nuclear build out don't like the current market structure model because they say, look, we have this huge, gigantic upfront costs and we need some price certainty. And if we're going to have a electricity market in which we're not Getting any revenue during the really sunny days because Tracy doesn't need to pay anything into the grid at all.

[Tracy Alloway]

It's all my fault.

[Joe Weisenthal]

It's really hard to justify the planning and the upfront cost and the years of construction and work for everything that we know. That's difficult about nuclear. Do they have a point that when we're thinking about market structure for electricity, that it's hard to optimize for a world that has a lot of nuclear but also has a lot of room for the traces or the solar farms of the world?

[Lon Huber]

Yeah. So this gets back to the larger market structures out there. And so some markets are considered restructured, meaning they have opened competition on the generation side of the business. Right. The wires is a natural monopoly. You don't want a thousand zigzagging wires across the street. Right. But generations thought, well, there could be some competition there. And so some markets reformed, others stayed vertically integrated. And like I mentioned, we're in both, so we can see both and what works and what doesn't and where you can get some advantages and where there's some issues. And again, as we talked about, there is a trend of a lot higher load growth. And these markets came about during a time where it was relatively calm and flat to maybe a modest load growth. And they set up their markets where again you have energy and capacity and they have energy markets which are a lot deeper. But capacity markets in the end of the day are fixed infrastructure, big lumpy investments. How do you encourage fix infrastructure out there? What price signals do you send? Because you're either sending too much dollars or too little dollars, it's very hard to get right on the infrastructure side. Some markets just said, like ercot, we're not going to have something specific for capacity at all. Others have capacity price signals. And so that's the inherent tensions of where do you get that revenue to recover those big investments?

[Joe Weisenthal]

Sorry, just on this point, you mentioned ercot. And so that's Texas. Right. So in Texas, basically it's anyone can plug into the grid and sell, but there's no excess capacity. What is a capacity market specifically?

[Lon Huber]

A capacity market is all about providing the payments needed to encourage big new infrastructure investments with generators. Right. So in this example, so it's money.

[Joe Weisenthal]

To a producer of energy that is like you're going to pay them to exist basically, regardless of what that day's market conditions are like for electricity.

[Lon Huber]

And so if you have some, if the energy prices are very low because everybody has zero marginal cost renewables that day, because it's Sunny. Yeah, they're still getting capacity payments.

[Joe Weisenthal]

Got it.

[Lon Huber]

Right. As long as they show up and there's big penalty if they don't.

[Tracy Alloway]

Well, in terms of storage and maybe starting to fix some of these problems, we do have things that people talk about called virtual power plants or distributed power networks, whatever you want to call them. Is that a big deal for you guys, or is it still kind of something that people are just talking a lot about at these types of conferences?

[Joe Weisenthal]

Yeah, I only hear about them at conferences.

[Tracy Alloway]

Yeah, no, same.

[Lon Huber]

Well, it is a. I would say it's new branding to something that at least some utilities have actually have a lot of experience with and have years of a track record with. It falls under the all the above categories again. And these are devices or, you know, different resources that are out in the distribution system a lot of times on the customer premise, sometimes behind their meter, oftentimes around their meter. And it could be something as simple as energy efficiency, but, you know, better light bulbs, insulation, and it can move. And where virtual power plants really sort of captures it as dispatchable research. Think like smart thermostat. Think battery storage on the home, those types of things. Controllable water heaters. And the idea is you have an aggregation of all these and you orchestrate this so that it mimics a centralized power plant. Now, Duke, we've started decades ago, so we have over a million connected devices already out there that we orchestrate. The numbers add up to something meaningful when we have what we call like demand response events during peak times. But it's not like 50% of the resources out there by any means right now. It can grow, and people are excited about it now because you have new resources and new technologies that make that orchestration better. So in the past, all we had just like a hard switch on an AC unit. Now you have the smart thermostat. So you can optimize that and make it so that the customer doesn't even feel that you're making minor changes to their thermostat.

[Grammarly Representative]

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[Joe Weisenthal]

Let's talk about load growth. So obviously you operate a lot of the Southeast. We've seen a lot of the sort of new industrialization endeavors, battery plants and car plants, et cetera. I imagine a lot of these entities are Duke Power customers. Talk to us about, okay, I'm setting up a new battery plant, I'm looking for a site. How long does it take me to plug in and what does that whole process look like when I come to you and say, hey, I'm thinking about, I got some tax credit, I got some money from the government, I want to build a plant somewhere in, you know, South Carolina or something like that. How long does it take until I could actually plug in and get power from you?

[Lon Huber]

Yeah, well, unfortunately it all depends.

[Joe Weisenthal]

Okay.

[Lon Huber]

And so when I mentioned there's those restructured markets, there's the vertically integrated markets. When it's vertically integrated, we can see the whole system, we can plan for it. So if we know a large customer is coming, we would put it in what we call our integrated resource plan. So you'll often hear irp, Yep. So we're planning, making sure that generation is there. If you're in a restructured market, it's a bit more complicated. A lot of times utilities aren't necessarily in control of that. You're at the whims of what is trying to be interconnected in queues and so forth. And so there has to be certain bilateral agreements that the customer would have to make perhaps. But in a vertically integrated market and in a restructured market, you do have the teams on the ground that work with that company. They find sites maybe that have been already just made ready for an economic development opportunity. So that customer would come in, they would give the specifications, the power, the size workforce and there'd be a matchmaking and that Matchmaking could actually be pretty quick depending on if there's a site already ready. If there isn't, that will take more time. And then they have to acquire the land, they have to build at the same time they're building the utilities, building infrastructure, wires, infrastructure to serve them. And so it could be a year, it could be five years. It really depends on the site and how fast that customer wants to ramp up. But we know a lot of times to build new manufacturing, they can't do that overnight. Right, Right. And then you have the new complexity of supply chain. There's supply chain constraints on some key equipment out there.

[Tracy Alloway]

Oh, this is our chance to talk about transformers, right?

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

That's been going on for what, like four years now.

[Joe Weisenthal]

So for the latest ism, electrical components have been in shortage now for four years and two months.

[Tracy Alloway]

That's crazy. How are you guys handling that?

[Lon Huber]

Yeah, luckily, you know, we can use our size and you know, move things between states if we need to and work with suppliers. And there's. The utility industry in general is very collaborative, especially when you have emergencies. Right. So we, when we were hit with all these hurricanes this last season, we had to replace, I think it was like 18,000 transformers. Right. And so there was, there's industry collaboration that makes that all work. But the real issue gets into these large power transformers for large customers. And you know, those just take such a long time to build and there's limited production lines for them. And so it definitely keeps folks up at night as we look to expand and reshore manufacturing.

[Tracy Alloway]

So Joe asked you how long it would take to plug in a battery manufacturing plant or something like that? I'm not starting a battery manufacturing plant, I'm doing a data center. How much more complicated or different is that process? If I'm running a data center versus batteries might not necessarily fit into this box, but a sort of run of the mill manufacturing base.

[Lon Huber]

Yeah, most standard manufacturers are a lot smaller in size than a data center, especially some of the newer data centers. And you can think some AI data centers, those can be a gigawatt. And most manufacturing is, you know, 500 megawatts tops. Typically, you know, you always have outliers and for the most part it's below 100 megawatts. So all of a sudden you have this big size differential. There can be a little bit of speed differential there too, where the data center could move quicker. But this really impacts especially smaller utilities. Duke has a huge system, so we can absorb some of this. But if you're a smaller utility, and you have a 2 gigawatt peak and all of a sudden a data center comes in with a gigawatt load. That's huge. And what if they don't materialize or what if they're in business for 10 years and then they go away? That fundamentally creates the stranded cost that all the customers have to pay. So these are the tricky issues that are popping up. And then you layer on clean energy, right. Do you want to have to build new fossil for that? And a lot of data center companies also they have clean energy goals. So how do you start to marry these complexities?

[Joe Weisenthal]

Yeah, how do you marry them?

[Lon Huber]

Multidimensional Lon's like how many more hours do you have? A lot of tools in toolkit. You start with smart contracting and tariffs on the front end to protect all customers in case. What are tariffs? Basically it would be saying hey, you have obligations customer as we build out the grid for you to connect, it'll be X amount of dollars. You've got to pay that even if.

[Joe Weisenthal]

You don't just like a purchase commitment kind of.

[Lon Huber]

Yeah, pretty much. So you know, letter of credit. And then there's longer term agreements too where, and these are newer. Where if you said you were going to use 500 megawatts and you're only using 200, you've got to compensate for a portion of that because we've had to build new resources, generation resources to handle you. Right. And so you've got to cover that and then you can get into different pricing elements where you have maybe time of use based rates and then you marry that with new ways to bring them clean energy and for them to contribute to clean energy. And that is really sort of the frontier and the exciting stuff. And Duke announced a partnership with a lot of the hyperscalers and Nucor earlier this year that gets into exactly that. How do you accelerate clean energy in a sustainable way financially?

[Tracy Alloway]

Is it inevitable that like non metered that system is going to go out of style in a lot of jurisdictions? I know Hawaii ended it recently I think. And then I think you guys did something in North Carolina relatively recently that went to court. Am I getting in at at exactly the wrong time?

[Lon Huber]

Well, you're probably getting in in the right time if you're thinking about you individually and your maximization and not societies. And so, so because, because a lot of times your grandfather did once you make that so you'll be protected for 10, maybe 20 years. So you probably made the right individual purchase decision. Net metering has been reformed in most major markets already. And it's just reflecting the fact of, hey, does this add value to the network or subtract value? Is it financially scalable? And then also if you're a clean energy advocate, you would look at the price per carbon saved. And so in Connecticut you have a lot of nuclear clean energy. Right. And so you're just how much CO2.

[Joe Weisenthal]

Savings, one clean energy for another one?

[Tracy Alloway]

There's actually not that much nuclear in my mind because I think we send it elsewhere is part of the problem.

[Lon Huber]

Looking at the overall grid mix, it's always good. It's always good to calculate what you're paying per CO2 saved. And I've done this for Connecticut in my past life. And back then it was one of the most expensive ways to reduce carbon was rooftop solar in Connecticut.

[Tracy Alloway]

So I'm the problem.

[Joe Weisenthal]

So the future of solar is centralized solar farms or if like.

[Lon Huber]

No, we need, we need it on every scale. But really there's a lot of promise in distributed energy resources. You just have to get the pricing right and you have to get that combination of technologies right. So at the home, if you had a controllable thermostat and you had battery storage and things that complement that solar system, then it's creating all these other values. And that's what we did in South Carolina in partnership with the solar industry is we said, hey, how can we make these resources more valuable and then form compensation structures that the industry can sell customers on. And so that's what we did. And so we launched Power Pair, which is a large solar plus storage program that does exactly. That encourages solar plus storage coupling. And then it's tied to time of use rates and also controllable batteries. So we're using that during peak time. So there's room for that. There's good space for that. And including on like commercial industrial scale. And then you also absolutely need those centralized large scale that bring just great economies of scale to the system.

[Joe Weisenthal]

What happened to the grid or the price that people pay for electricity? So there isn't a lot of new nuclear. There are some restarting of plants and there was that one in Pennsylvania that one of the big tech companies is behind, though I don't even think it had been closed all that long. The only like, sort of like true recent nuclear were those reactors in Georgia. What happens the day after? So you spend billions of dollars on tons of upfront cost, tons of upfront time getting these new reactors on. What happens the next day when there's just tons more at that point kind of Free electricity on the grid.

[Lon Huber]

Yeah, so it gets to unit order and dispatch. And so grid operators are constantly trying to optimize the system for economics. Yeah, for the most part. Right. And so when you have a new generation resource that has a very low marginal price of production, that's going to then reduce the output from plants that have a higher cost of production. And so things sort of get restacked and reordered in terms of the merit of what's going on in the system. And that's why natural gas is such a versatile resource because it can go from sort of higher output to a lower output, more of a peaking capability. And so that's why gas is just such a great sort of intermediate type of technology to balance all of, all of that. And so that's essentially what happens. And then, you know, you have load growth and other things that then start to reform the original set of conditions.

[Tracy Alloway]

Okay, so you mentioned the revenue requirement as the sort of all important number that you are working towards. How do you actually start to design the rate so that you hit that magic figure?

[Lon Huber]

Right, great question. So first you've got different classes of customers. Industrial load profiles are going to look different than a residential load profile profile. Right. And then you have classifications of what type of system assets you're recovering for. So are you covering for energy related, capacity related fixed infrastructure like the, you know, pole outside your house. And so you break this all up and then you have certain methods to know, well, hey, this customer class is using a lot more transmission versus distribution. And so you have these allocations. From there you figure out, well, what pricing can I set to recover the revenue requirement? Because again, this is recovering the investment that investors have made. Right. Like this is critical. Like if you don't capture this, your credit metrics just go south and it's extremely expensive to borrow money. And this infrastructure game is all about long term investment. So a change in your borrowing rate has a huge ripple effect on the cost for all the customers in that jurisdiction. So that's why it's really important to collect that revenue requirement. But at the same time you have to send the right price signals to customers because you don't want to just have them pay that $100. Right. And in the past it was all volumetric because we didn't have the meters. This is especially for residential. You didn't have the meters to do anything other. You couldn't do a demand charge, you couldn't do time of use rates. At some point we actually did have meters. But you have to roll out a truck to the customer to get them on a time of use rate. So you had to drive somebody there, swap out the meter. Right. Incredibly expensive. We've now with advanced metering, we can get around that. So now we can introduce pricing that's more accurate to like how the system actually works. Right. But there's still reluctance to go much more complicated on the residential side because of just how customers understand their energy.

[Joe Weisenthal]

Last question. When Tracy gets a big discount on her electricity because of her solar, you know, Tracy, there's still all of these costs that have to be borne, and you mentioned that earlier. So who's paying the cost now?

[Lon Huber]

Basically everybody else that does not have that solar, it gets reconstituted.

[Joe Weisenthal]

Don't tell your neighbors, Tracy.

[Lon Huber]

Don't let your directly. Because this is a. Remember, this is a fixed infrastructure system. So this is not like tennis shoes or candy. Right. This is a big network, one of the largest, most complicated networks. The first network of modern civilization, pretty much. And so that fence infrastructure gets just spread out to others. Right.

[Tracy Alloway]

So cry harder about Con Edison, Joe. I'm free. I'm an independent energy supplier now, kind of. Lon Hubert, thank you so much for coming on odd lots.

[Lon Huber]

Thank you for having me.

[Tracy Alloway]

Joe. That was pretty fun to learn. Why I'm the problem.

[Joe Weisenthal]

I was just gonna say you're the. So we. Yeah, we've discovered that you're the problem.

[Tracy Alloway]

I mean, I do think, like there are so many renewable energy solutions out there and all of them do seem to come with some form of downside. Whether it's like the very significant capital investments that you have to pony up for stuff that ends up being like very intermittent, whether it's the idea of net metered customers being supplemented, subsidized by non net metered customers for their grid use, everything just seems very complicated.

[Joe Weisenthal]

First of all, it's really helpful. I know this is the most basic thing, but it's really helpful to remember that like fuel is just as marginal cost of what you're paying for that. There's everything. There's the line maintenance, there's the production. And he mentioned tree trimming, which is huge because that's a source of wildfires in a lot of areas when the lines touch trees. So there's all these huge costs. And so it becomes very intuitive that you can add a bunch of solar panels either on individual households or across the grid in general and see why. Not only does it not like move the dial down, I don't know if it moves the dial at all. It just moves the dial to other people.

[Tracy Alloway]

Well, he did say it was marginally helpful on the fuel cost, but to your point, the fuel costs are not the big thing here. But it was also very interesting to just hear how a utility kind of thinks about designing those rates and all the different considerations that go into spitting those final numbers out. I guess I hadn't realized how individualized some of them actually are. I know that we're not all paying a flat number, obviously, but the differences across residential and commercial and data centers versus a battery plant or something like that.

[Joe Weisenthal]

It's also here just very interesting hearing the different types of. Because there's two things, right? There's different types of electricity, market structure, and then there's also different types of markets by virtue of their weather, whether we're talking about Arizona versus the Midwest versus the Southeast. But it's interesting to think, you know, like every couple of years now, or maybe every year you hear about a blackout in Texas. And Texas obviously makes it incredibly easy for pretty much the producer of any kind of power to plug in and start selling their generation instantly.

[Tracy Alloway]

And they've got lots of sun, lots of other stuff.

[Joe Weisenthal]

They've got a lot of wind, they got everything. But what they don't have is any guaranteed payment to that spare capacity. That is not getting paid during most of those sunny days, but then on the day when it's like crazy sunny or crazy snowy or whatever suddenly needs to be turned on.

[Tracy Alloway]

Well, you asked that question about how do you like, actually incentivize big nuclear power plants that cost a lot of money when someone knows that if they build a nuclear power plant, they might not get a particular rate for X amount of years. And I think we're back to why solar is the problem.

[Grammarly Representative]

But no, I don't think it even is that.

[Joe Weisenthal]

But I do think it's like. I mean, look, I just think it'll very interesting under this next administration because I do think that there are a lot of people who are like, solar is part of the solution, nuclear is part of the solution. And by when I say solution, I mean the problem of how do you get more electricity, right?

[Tracy Alloway]

Not more, but put it all together. And it's not really.

[Joe Weisenthal]

It's not clear that they fit together.

[Grammarly Representative]

And it almost does seem, at least.

[Joe Weisenthal]

In some markets, like, you sort of have to pick one or the other. So lots of fascinating, I guess, question marks about how this evolved or figure.

[Tracy Alloway]

Out a new way to design the grid or new storage is probably what we really need.

[Joe Weisenthal]

Battery breakthrough, which could solve everything.

[Tracy Alloway]

All right, someone please start working on that battery now because you probably haven't realized it's this much of a problem. So you can get started now. All right, shall we leave it there?

[Joe Weisenthal]

Let's leave it there.

[Tracy Alloway]

This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me raceyallaway and I'm Joe Weisenthal.

[Joe Weisenthal]

You can follow me at the Stalwart. Follow Lon Huber on Twitter on Huber Follow our producers Kerman Rodriguez Ermenarman, Dashiell Bennett Ashbot and calebrooks Alebrooks. Thank you to our producer Moses Andam. For more Odd Lots content go to bloomberg.com oddlots where we have transcripts, a blog and a daily newsletter and you can chat about all of these topics 24. 7 in our Discord, Discord, GG Oddlauts.

[Tracy Alloway]

And if you enjoy Odd Lots, if you like it when we record these Energy episodes then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcast and follow the instructions there. Thanks for listening. Join Bloomberg in Atlanta or via livestream on February 11th for the future investor finding the opportunities this 2025 event series will examine how companies are investing in their business businesses to create efficiencies, innovate their products and services and improve the customer experience. This series is proudly Sponsored by Invesco. Q. Q. Q. [e-mail] futureinvestoratlant.