You don’t have to look far to see the vitriol and backlash ignited by the rapid expansion of hyperscaler data centers. While critics and activists tend to focus their ire on resource consumption and residents’ electricity bills, the reality of data center economics is far more complex.
In this episode of Catalyst, host Shayle Kann sits down with Andy Lubershane, head of research at Energy Impact Partners, to unpack the nuances. They crunch the numbers behind utility rate structures, consider the “denominator effect” that can lower customers’ rates, and dig into the supply chain crunches pushing global power system costs higher.
Shayle and Andy discuss:
- Why a new data center can reduce utility rates for locals while contributing to rising costs elsewhere
- How data centers impact utility tariff rates
- Separating public perception of data centers from the reality of the grid
- How soaring demand for transformers, switchgear, conductors, gas turbines, and labor is driving systemic cost increases across the power sector
- Strategies to mitigate rising global grid costs, from load flexibility and distributed energy resources (DERs) to energy efficiency hardware
Resources
- Catalyst: What comes after the data center backlash?
- Catalyst: Enter the electric supercycle
- Catalyst: Can AI revolutionize grid operations?
- Catalyst: Inside the AI power wars
- Open Circuit: As midterms approach, electricity bills are on the ballot
- Open Circuit: Data centers have a Texas-sized energy problem
- Latitude Media: The great home battery financing experiment
Credits: Hosted by Shayle Kann. Produced and edited by Max Savage Levenson. Original music and engineering by Sean Marquand. Stephen Lacey is our executive editor.
Catalyst is brought to you by EnergyHub. Peak season puts every grid to the test — and the utilities that pass are the ones that built flexible capacity before they needed it. EnergyHub works with more than 170 utilities to coordinate 2.5 million devices and 3.4 gigawatts of dispatchable flexibility through a single platform designed to perform when it counts most. See what that looks like at https://www.energyhub.com/.
Catalyst is brought to you by Bloom Energy. Bloom Energy fuel cells deliver affordable, ultra-reliable onsite power for hospitals, utilities, and data centers – at speed and at scale. Learn more by visiting https://www.bloomenergy.com.
This episode of Catalyst is brought to you by ENGIE, the smarter energy supplier. ENGIE doesn’t just provide the power to run your business — they supply the energy to move it forward, with reliable, flexible solutions built for what’s next. Learn more at https://www.engieresources.com.
Transcript
Shayle Khan: I’m Shayle Khan. I invest in early-stage companies at Energy Impact Partners. Welcome to Catalyst. So last week on this show, I talked to Brian Janous about the data center backlash – what else? And I alluded to this piece that my partner and frequent guest on the show, Andy Lubershane, published recently about one component of the backlash, which is the impact of data centers on electricity prices for customers. The question is essentially whether data centers are causing electricity prices to rise, to which Andy’s answer was essentially no, and also yes. And I think it’s really important and a not well understood dynamic why these can both be true. So I brought Andy back on, and we’re talking through it. That’s coming up next.
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Shayle Khan: Andy, welcome back.
Andy Lubershane: I’m so excited to be back once again talking yet again about data centers and energy and the interplay of those two things.
Shayle Khan: As one does. So okay, so you wrote this piece, I don’t know, a couple weeks ago that I thought made one basically one central point that I haven’t really seen anybody else make, and that I think is really important because there’s all of this dialogue right now about the impact of data centers on electricity prices, and it’s wrapped up in the backlash, etc., etc. The key point that I think you made, that I think we should tease out in great detail, is the separation of I would say the local from the global. And distinguishing between those two tells you kind of two very different stories in answer to that question of what is the impact of data centers on electricity prices. So let’s talk about local first. What is the evidence today, like what can we say with any degree of definitiveness about the local impact of data centers on electricity prices? In other words, the impact that a data center within one’s utility territory has on that ratepayer’s bill?
Andy Lubershane: I should say to begin with, the reason that I wrote this piece and the reason I’ve been thinking about this question is of course because so many people in my life, not just professionally, but also just friends and family members, because they know I work in energy, of course, and because everyone in the public now has some association between data centers and energy, which is part of the issue here. You know, I have lots of people like my mom and some random friends being like, “Are data centers making my electricity bill go up?” And I had to – I realized that there is not an easy answer to that. There’s not one simple answer. The answer is nuanced, and it really depends on your perspective.
As we’ll come around to, I think globally speaking, the answer is yes, but let’s start with local, because in that context, I think the answer is generally no. Because, you know, if you think about it like, you know, naively, if you think about adding a new large electricity load to any utility system, any utility territory, it’s going to have two impacts. It’s going to cost something to bring that new load online, to interconnect it, to serve it with new generation, to do whatever you need to do to get the energy delivered to that large new load in your system. And then it’s also going to have another impact, which is going to consume a lot of energy over time.
And if you think about like the basic framework for how utilities charge for their services, which is a highly regulated rate structure, regulated at the federal level, regulated at the state level, if you are served by a cooperative or a municipal utility, it’s even at the city or the sort of community level, right? But the basic structure is always the same: the numerator is how much does it cost in aggregate to deliver energy to all the customers across that utility service area, and the denominator is how many kilowatt-hours do you sell? So it’s dollars per kilowatt-hour, and there’s all kinds of nuance and detail in how that basic formula is translated into everyone’s rates, which are different across different customer classes—residential, commercial, industrial. But basically: how much does it cost in aggregate, how many kilowatt-hours are we selling in aggregate?
And again, naively, if you think about adding a data center to any utility service territory, it’s probably going to add like It’s probably going to add more to the denominator of that equation than to the numerator. Because chances are it’s going to Well, let me step back for a second. It’s probably going to add more to the denominator of that equation than to the numerator of that equation. And that was especially true, say, five years ago, where in a lot of utility service territories, there was some spare capacity in the system, some headroom on the grid, right? So that you didn’t necessarily need to make lots of huge upgrades in order to bring a new data center online. Maybe you had enough generation capacity to serve that new data center with some mild transmission upgrades to interconnect it to the grid, but there was enough generation already, or maybe you needed to build a little bit of new generation to serve it, but not to serve the entire thing. But you’re getting the full benefit of that data center’s denominator effect because you’re bringing all these new kilowatt-hours online.
So sort of that basic formula would suggest that in many cases, you should think that bringing a new data center online will reduce rates. In reality, what we’re seeing today, of course, is that in most utility service territories, it’s not the case that there’s a lot of headroom left on the grid. Like there’s no more spare capacity in most places. Which means that there’s no more headroom left in the grid. There’s no more spare capacity in most places, which means that oftentimes you will have to build new power generation. You will have to make some additional upgrades, maybe build some significant new transmission line or upgrades to major substations, in which case the picture is less clear, right? You’re going to add a significant amount to the numerator of the utility’s basic cost equation. You’re also adding a lot to the denominator. It’s an empirical question mark whether in that instance a data center should make everyone’s rates go up or down or stay neutral.
But, you know, that basic equation is a useful formula and a useful framework, but in reality, it’s not how rates are always set. Data centers are extraordinarily large customers in most service territories. You know, for a mid-sized utility, most of the kind of hundreds-of-megawatt-scale data centers we’re seeing today would add 10%, 20%, 30% or more, if we’re getting up to gigascale data centers, to the utility’s total load. So they’re extraordinary customers, and so the utilities are, I think, understandably and correctly, taking extraordinary care to make sure that the specific tariffs that they work out with these data center customers and the specific other negotiated agreements they work out with those customers are ensuring that the denominator effect is bigger, that the data center is paying their fair share, and oftentimes more than their fair share with a buffer, relative to the kilowatt-hours they add to the system. So in fact, I think the utilities and the data centers are doing a pretty good job at the local level, when any given new data center comes to town, at making sure that that data center is not going to raise your rates, and in fact should lower your rates a bit, right?
Shayle Khan: Yeah. I mean, I think, first of all, we’re starting to see now, it’s a little bit more anecdotal because it’s I think it’s just emergent, but we’re now seeing the first like announcements from utilities of going to regulators and requesting rate decreases as a result of large loads in their territory. We’ve seen a few of those now, I think we’re going to see more. I think the reason for that is that, you know, you described the fundamental equation. I think the key thing to understand is that the numerator, the cost to serve, it’s really a in this context, it’s a net cost to serve, right? It’s a question of how much does the utility need to invest net of what they’re getting out of the tariff from the data center.
And so I think the phases that we’ve gone through, like I think we’re in phase three now maybe of how this has all played out. Phase one is what you described, which is like there’s a period when data centers We were already we, you know, we were in cloud world and Bitcoin world, and there were data centers, and they were getting built, and there was headroom on the grid, and the denominator effect was like clear and it was fine, nobody was really upset about it. In fact, if anything, utilities were like creating incentives. Utilities and states, right? Sales tax exemptions and so on, everybody was creating incentives for data centers.
Okay, then the AI boom comes, and data centers start flooding all over the country in utility territories. And there was a period of time when, I think broadly speaking, utilities were not They had not yet adapted to what they could command, or maybe they couldn’t command it yet, I don’t know, but either way, it hadn’t changed that much, what they were commanding in terms of tariffs and bring-your-own-capacity and all these things. And so then there was this period in between when like, yeah, I think the evidence was sort of mixed, and it wasn’t entirely clear at the local level where data centers are increasing bills or decreasing bills.
And now I think we’re entering phase three, where utilities have wised up to this entirely, it is very clear that they hold all the cards, and everybody is so desperate to get capacity, they’ll kind of do whatever they can. And so it’s becoming standard and commonplace to ensure that when the announcement goes out that the utility has agreed to interconnect a new data center, alongside that announcement, they can say, “And this is, at a bare minimum, not going to increase rates, and, oftentimes now, going to reduce rates.” So I think it is becoming increasingly clear now that hyperscale data centers at the local level, because of how the market dynamics are playing out, are mostly going to keep flat or decrease rates locally.
Andy Lubershane: I agree, and I would say trending towards are going to have to decrease rates locally. Like you’re going to have to be able to say that because of this surge in public opposition to data center development that we’ve seen, particularly at the local level. I thought it was really telling, there was a Gallup poll recently, which is one of the many polls that is showing that the public has turned pretty dramatically against data centers. That much is very clear at this point, that’s kind of like very widely reported on. But what I thought was interesting is if you dig one level deeper into the responses in this Gallup poll, and you ask people, “Okay, why do you” People who are averse to having a data center built anywhere near them, you ask why, the number one reason is water consumption, which was kind of surprising to me. And is actually, as far as I understand it—this is not an area of expertise for me—but I think it’s probably a bit of a red herring in most places outside of very sort of water-restricted areas.
But the number two and the number three reasons people cite have to do with energy use. The number two reason is basically like it’s going to use too much energy, and the number three reason is it’s going to make my electricity prices go up. So for better or for worse, the utilities and the data center operators are pretty much tied hand-in-hand in terms of public perception here. And I think you’re going to have to make the deal sweet enough for people. You’re going to have to make It really behooves both of those parties to be able to say with great confidence, “This is going to reduce your electricity bill,” at least relative to the baseline without this data center in the area.
And I should say like, there’s good data on this already. There was a study that EPRI put out pretty recently, I think just a couple months ago, and they were just looking at different utility territories across the country and the impact of data center load on rates in those territories. And even if you’re not controlling for any kind of correlated variables that might bias the analysis, just kind of like looking at that in a very naive way, you would see that there’s basically no correlation between more data centers and higher electricity prices. And when you do control for other variables that might bias the analysis, EPRI found that basically, on average, data centers are lowering customer bills a little bit already. So we are seeing it’s not a major impact, it’s something like 6%, but data centers have had a beneficial impact for consumers up to this point.
Shayle Khan: I think you sort of alluded to something that I think is like a really key point too, which we’ll talk about in the context of part two of your thesis on the global side, but it’s basically like: Are data centers locally reducing rates in an absolute sense, or reducing rates in a relative sense, relative to what they otherwise would have been? Because I’ve done my own little informal survey of friends and family and spouse and asked them, and I mean I’ve gotten a remarkably negative set of feedback from people about data centers. And basically, the rank order from that Gallup survey that you said is basically what I’ve heard too. It’s like water first, and then energy, and then maybe some other stuff, pollution and blight or whatever, but mostly it’s those things.
But there’s a component of it that I picked up too, which is like, you know, I’ll follow up and ask the question of like, “Okay, but what if it were going – what if the utility told you it’s actually going to reduce rates?” or something like that, “What if I told you that the water consumption was insignificant?” And there’s an additional layer to it, which is that they just don’t trust any of the players who are telling them these things, because it’s either going to be the data center companies, or the utility, or maybe the politicians. And like there’s not a lot of trust in many cases for any of those. And so there is this risk that on a relative basis, data centers do reduce rates, but rates still go up for reasons we’re going to talk about in just a minute, and consumers, you know, you just don’t get the credit for it.
Andy Lubershane: I hadn’t actually thought about that, but that is obviously Yes, absolutely, that’s a risk. Because if you think at a global level, as we’ll talk about, data centers are absolutely going to be pushing up rates, and other factors, right, in the supply chain. Rates are going up for most people in most places, I think, in the years to come, then they won’t – most people don’t think about the counterfactual, right? And if they’ve heard that this data center was supposed to make their utility bill go down, and their utility bill does not go down, yeah, clearly that will just compound the problem of lack of trust here.
Shayle Khan: Now, there are some places where I think it will go down in an absolute sense, and that’s what some of these some of these recent announcements that we’ve seen of like, “We actually intend to reduce customers’ bills by X dollar average of X dollars per month,” and and maybe people will notice that, so it’s it’s going to be situation specific. But okay, so I think we’ve made the core point of like generally, the direction of travel right now is if a large load shows up in your utility territory, probably it’s going to have a zero to negative effect on your electricity bill currently.
However, let’s talk about the global perspective then. What would you say is the impact of data centers—we’ll start with just data centers and then we can broaden it out—but what is the impact of data centers on electricity prices in a global sense?
Andy Lubershane: So at a global level, data centers are one factor among many, but I’d say they’re the biggest factor that is causing this global growth in demand for electricity, which is happening so quickly now, especially because of data centers and the urgency with which data center developers want to bring them online. It’s happening so quickly that it kind of counts as a demand shock in a macroeconomic sense, at least within this sector, right? There’s a demand shock, and supply chains, like basically every step in the supply chain for equipment for the electricity system, to deploying that equipment and getting it online and hooking everything up, is bottlenecked and cannot keep up with demand.
And because of that, we’re seeing, I think, systemic pressure on prices for almost everything in the supply chain that eventually it takes to get kilowatt-hours delivered to your home. And so this is the big problem, basically. Like we’re in this period of surging demand. Electric system operators, utilities need to build a lot of new infrastructure. They also need to keep up with the existing infrastructure, a lot of which is beginning to reach the end of its depreciation cycle, its useful life, right? Like I thought it was a really interesting stat from the Edison Electric Institute: basically two-thirds of all utility spending across the board in the United States is just for maintenance and hardening of the grid. So keeping up with basic maintenance, like keeping the system running, swapping out new equipment for broken, old, down equipment, and, you know, the most mission-critical hardening things for areas that are being hit by intense storms or wildfire risk and stuff like that. Like sort of two-thirds of the expenditures they’re making today across utilities are non-negotiable and has nothing to do with growth, right? All that stuff would be happening even if the data center boom were not happening.
And so all that stuff is getting more expensive, too, because of the impact that data center growth is having on the supply chain. So two-thirds of their spend is going to be higher because of what’s happening at a global level. In addition, you know, we talked about how today there’s no more headroom in most parts of the electricity system, like there’s no spare capacity. Any new capacity you build is going to be much more expensive than the capacity that we built 20 years ago because of this demand shock and supply chain crunch. And, you know, keep in mind, a lot of the capacity that we already have has been at least partially or maybe fully depreciated over decades. And so we’re adding a bunch of new costs to the system at a global level that there’s very little that – basically nothing that your friendly local utility or data center developer can do about, no matter what kind of, you know, special tariff or agreement they negotiate for that individual facility.
Shayle Khan: All right, let’s be a little more specific. Like name some of the things that have become more expensive and how much more expensive have they become.
Andy Lubershane: It’s hard to not name things that have become more expensive! But like every component of the grid: conductor is twice as expensive, like basic aluminum steel-reinforced conductor. Transformers are two-plus times more expensive, switchgear is two times more expensive, gas power plants are two to three times more expensive, renewables have gotten more expensive to interconnect to the grid.
And by the way, like renewables have been one of the really positive trends for electricity prices in the United States over the past 10 years, because there have been many places in the country, especially when you consider the tax credits that renewables have benefited from, where the levelized cost of energy, the PPA price that you would pay for wind or solar power, is lower than the average cost of fossil fuel generation that that energy is displacing. And so that’s been, you know, a trend that has been very much in favor of lower electricity prices in the past 10 years. Now those tax credits over the next four or five years will be expiring. And in addition, renewables are facing more interconnection costs. There’s been some, you know, issues in the renewable supply chain as well, which have caused costs to increase. So we’re seeing much much higher costs for renewables, much higher costs for gas, like basically every part of the system has gotten a lot more expensive. Oh, labor! That’s something I think you and I have talked about on the pod before, too, right? Like everything is more expensive for adding anything to the power system right now.
Shayle Khan: Right. And then, in addition to that, you’ve said this a couple times, like it’s not the only factor. There are other factors too that are like inflationary pressure on electricity prices, and so we should acknowledge those. And those are those are market specific to some extent, but in the United States, just to like some examples of things that I think about as being risking inflationary pressure on electricity prices: we have tariffs on various things, I mean that also has affected the cost of renewables and batteries; we have LNG exports that on balance should increase the cost of natural gas in the United States; we have general inflation and cost of capital. I mean, there’s like a bunch of stuff that is historically orthogonal to the rest of this, but also just like adds to the otherwise inflationary pressure on electricity.
Andy Lubershane: Yeah, and I’m especially worried actually now about that macroeconomic pressure, right? I mean, we seem to be moving into a higher interest rate environment in general, certainly in kind of global capital markets. And the power system is a big capital expenditure for society that we make sort of generationally. And it would be really great to have been making that investment at the scale we’re making it today 10 years ago when money was so much cheaper.
Shayle Khan: Yeah, though I think back to our mutual friend Nat Bullard had this like one of his a great chart in his annual massive deck that went back to, I don’t know, the 1950s or something like that, and it showed the share of GDP per capita, so basically the share of any given average person’s wallet that is spent on electricity each year over time, versus the share that is spent on I think oil or gasoline, some, you know, version of that. And the electricity share was remarkably stable. It’s like the same amount of our collective income is spent on electricity for the past 70 years, whereas it’s actually pretty volatile when it comes to oil and gas, oil and gasoline, I should say.
And we’ll see if that changes. But here’s the thing from – okay, so this gets to the crux of your analysis, right? At the local level, data centers seem to on balance probably decrease electricity prices currently. And at the macro level, they are definitely a factor contributing to an increase in electricity prices. So the logical thing then would be we should all want as many data centers in our utility territory as possible, right? In this specific context, that’s the right way to think about it, I think.
Andy Lubershane: Yeah, if we’re in a data center version of the prisoner’s dilemma of sorts, absolutely. Like get it all to my territory to lower my electricity bill, for sure.
Shayle Khan: Yeah, and make sure that, you know, my utility negotiates the tariff well, and they bring their own capacity or pay for their own capacity, either way, you know.
Andy Lubershane: Yeah, I mean, that’s why I I mean, this is veering off course a little bit, but I do wonder how much of the public perception and public acceptance problem is really related to energy use and electricity prices. Like people say those are the things that they care most about to a Gallup pollster, but as you noted, like there seems to be something a lot more deep-seated here for a lot of people around trust of the various parties involved, probably around their feelings toward AI more broadly. And so I don’t know for sure if there’s anything like this if you really focused on electricity rates and data center operators and utilities came to these incredibly generous agreements for the other ratepayers in a territory, like whether that would really move the needle or not. That’s a question mark, a hypothesis that we need to test.
Shayle Khan: There’s an extreme version, which I don’t know if you’ve seen this, so Vivek Ramaswamy, former presidential candidate, is running for I think governor of Ohio now, and his platform is that data centers that come into I guess a utility territory in Ohio should result in free electricity for the local residents. Now, set aside the that’s not how electricity tariffs work, like you don’t like, you know, give a particular municipality a different rate from a different municipality in the same territory. But conceptually, he’s like they should just make electricity free for those people. I haven’t actually run the math on like how much extra But the extreme version of this is something like that, right? Like how much willingness to pay do these hyperscale data center operators have, and how much can they There is a point where maybe it’s not free, but if they reduce everybody’s bill by 20%, that’s going to be noticeable. Depending on the size of the utility territory, that could be completely impossible or not, right?
Andy Lubershane: Yeah, I wrote a post like maybe a year and a half, two years ago, it was called “For AI, Energy is Everything and Energy is Nothing.” And it was all about how like if you’re trying to build a data center, an AI data center, computing of whatever kind, you obviously need power. Like you need power capacity, you need to be hooked up to the grid or hooked up to something that can Like you need the capacity to get started. But then once you start running, energy is a pretty small share of the total cost of goods sold for that data center, right? It’s something like 5% to 10% of the total cost. And so, yeah, you could, you know, if if…
Shayle Khan: What if you double it?
Andy Lubershane: What if you double it? What if you triple it? How much impact could that have on the rates for the rest of the community, the ratepayers in the system? I think that would start to become pretty meaningful. So we’ll see. We’ll see if that’s where if that’s where this has to go in order to secure community buy-in.
And just following up on another point you made that’s kind of related on the share of global GDP—or sorry, share of national GDP in the US, the share of our wallets effectively, of all of our labor that is going to energy and electricity specifically. Like completely that chart from Nat’s deck is very telling. Like it has been pretty consistent and actually remarkably low in the scheme of things for decades and decades. Electricity in particular, like I was looking at some data going back just to 2010, you know, for the average consumer, it’s been between 1% and 1.5% of average personal income over that period, and declining a little bit over that period since 2010 so far. And like that that seems like a very small price to pay for most of us, but I will say like where this really matters is for lower-income consumers, fixed-income consumers, for whom electricity could easily be 5%, 10%, maybe even more of their wallet. And so, you know, for those people, if you were able to reduce the cost of power by, you know, via getting a new data center in your territory by, I don’t know, 30% or something, you’re saving up a meaningful amount of their annual budget for them to spend on other good stuff that they like. So I think it could matter.
Shayle Khan: I would love to see one. Maybe this should be a muni or something who does this, or a very small IOU, because that’s the only way this would actually work. But I’d love like I’d love like some very small utility to issue basically an open call and say, “We’ve got a site in our territory. We’ll put a gigawatt-scale data center here, so now you’re in like pretty rarified air. We’ll put a gigawatt-scale data center here, and we’ll interconnect it fast. What you have to commit to is a rate that we’ve calculated would be sufficient to lower all customer bills in our territory by 25%,” I don’t know what the number is, and then just see if anybody goes for it.
Andy Lubershane: Yeah, I would love to see this experiment as well. Let’s see if anyone listens to this and decides to give it a shot.
Shayle Khan: Okay, so then the last question obviously is like what to do about this in a general sense. I mean, the and again, this is what more to do about the global problem of all this, because we’re not headed into a world anytime soon, in my opinion, where these supply chains suddenly become really loose. Like they’re tight, and they’re going to stay tight for a little while. I don’t know what the ceiling is going to be on like gas turbine prices, right? But, you know, every data point that I hear currently is like a new high number that I had never heard before, right? Some CCGTs are getting sold for like $4,000 a kilowatt or whatever.
Andy Lubershane: Yeah, I was going to say, I think I just saw one come across my desk at like 3,600, so that would be uh I think that’s one of the higher ones higher price points I’ve seen. But yes, yeah, it seems to uh seems to keep going up.
Shayle Khan: So what can we do about that, if anything?
Andy Lubershane: I mean, you know, the problem, as I said, is everything. Everything costs more, and we need to build more of everything. So in a way, like it’s a cop-out answer, but the answer is do everything. I mean, there’s such a panoply of potential solutions, things that can be done in the supply chain and by electric utilities and by data centers that like have theoretical benefits for reducing, you know, the total cost of deploying all this stuff, that it’s hard to figure out where to start.
It’s funny, at Energy Impact Partners, where we both work, we thought it would be fun to put together a deck full of solutions on, you know, things that can improve affordability from our portfolio of companies that we’ve invested in. And we quickly, you know, we thought at first that we’d get to like maybe 10, 15, 20 companies and that would be it. But the more we started putting this together, we realized that like, well, we’re investing in things in general that have a claim to, for the most part, be cheaper, faster, better, and so like everything can make a difference.
But, you know, there’s a few areas that I in particular think this will cause more focus on, you know, this will raise the profile of a few opportunities relative to a historical trend. One of which, I’m crossing my fingers, I’m sort of forever a believer, is energy efficiency. And that can come sort of just natively from consumers who start to see higher electricity rates and decide now is the time to invest in that next more efficient piece of equipment or whatever it is, insulation for their home, just because the economics pencil in a way they didn’t before. Or it could come more from utilities, who for a long time now have looked at these energy efficiency programs as sort of like a regulatory requirement, something we, you know, we put in the back room, we’ve got to do it, we think it probably makes a difference over time, but it’s not something we can really plan on, these efficiency dollars going to work. You know, maybe this causes utilities to rethink energy efficiency, sort of bulk kilowatt-hour savings in a way that has to be more of a planning resource. So that’s one place I’m hopeful that, you know, higher prices will move the needle for.
Shayle Khan: Yeah, and I think a derivative of that also would be load flexibility, which is a different means to the same end, right? Conceptually, load flexibility is basically just a way to get our collective demand for electricity to better match the resources that we have on the grid, such that it’s a lower cost to serve overall. And so you could do it by lowering the total number of kilowatt-hours, you could do it partially by shifting where the kilowatt-hours are consumed, and that’s what load flexibility is all about. Load flexibility is less unloved, I guess, than energy efficiency, so to speak. So maybe it’s like, you know, it doesn’t need the profile boost quite as much, but I think it will certainly be a beneficiary here.
Andy Lubershane: Yeah, load flex, distributed batteries, that sort of thing at least has been has been gotten a lot of attention, and has been sexy for people like you and me and a lot of the circles that we we run in, who are who are DER nerds and attend the DERVOS conference every year. But but I think, you know, again, it’s it’s getting more attention from utilities, and again, not just as sort of like, “Ah, we got to do some demand response because the regulator tells us every year we have to spend X dollars on demand response,” but to something that they should they should be planning on and planning for, and in some cases like procuring much more directly.
You know, our portfolio company at EIP, Sparkfund, has been out there promoting this model of, you know, distributed capacity resources, distributed capacity procurement by utilities, where a utility will go out and say, “I want 300 megawatts of load flex and batteries in these specific areas, and I’m willing to go pay for it, and I’ll just like We’ll pay for the batteries on customer properties in these places so long as the customer agrees to sign up.” So, and, you know, I think they’re getting some traction with that. So yeah, the time is very different for distributed energy broadly.
Shayle Khan: Right. And then, of course, as you said, there are hundreds and hundreds of different things we can do. Like every part of the value chain it has inflationary cost pressure, and thus there are ways to make every part of the value chain cheaper: conductors, generation, transmission, distribution, labor, hardware, software, all sorts of stuff.
Andy Lubershane: Yeah, I mean, you know, it’s like the answer to high prices is high prices, right? And to some extent, I think that that formula is working out in the market. Like, transformers are more expensive, so we’re seeing more companies that are trying to figure out ways of assembling a supply chain for transformers, like one of our companies, ER Grid, or alternatives, like solid-state transformers like Heron Power is making. So, not to belittle those efforts, like I’m glad those companies are out there, you know, taking really creative approaches to building the equipment we need.
But I worry less about those steps in the supply chain because there are companies out there responding to this market signal, which is price. Labor’s one, I know you and I have talked about this a lot, like that moves slower. It’s harder to find and train people who can do the kind of work we need done in field settings. Like, you know, it takes at least a few years to train someone, probably takes, I don’t know exactly, to become like a master electrician, but well more than a few years. And first you have to find people that are capable and want to do the work. I mean, that’s one that I worry more about in like a 10-year timeframe.
Shayle Khan: I think there’s lots of reasons to worry about that one. It is a more intractable problem. That said, I think it is a pretty small contributor to the overall cost of electricity. Like the, you know, what is the portion of the cost of electricity that is that is electricians? It’s probably not that big, right? It’s a big issue, but in this context, it’s probably not the biggest one.
Andy Lubershane: You know, it may be like energy for data centers, like it’s everything and it’s nothing. You know, like it’s not a huge contributor, but if you can’t find the electrician to plug your thing in, or if you can’t find a line worker, enough line workers to build the, you know, the new substation, then then you got nothing. So I think that’s probably how that dynamic will play out.
Shayle Khan: All right. Well, it’d be interesting to have this conversation again in like a year or two when there’s more data from this third wave. Right now, I’m you know, you see announcements, but I think there’s going to be like fast forward 12 months, there’s going to be a bunch of new studies that’ll come out with good data on the direct and the direct impact for sure in a local sense. I haven’t seen anybody actually try to do a comprehensive look at the the macroeconomic question, but maybe somebody will listen to this and do that, because I think it would be interesting as well. Either way, we will see where it goes, and I appreciate you coming on again.
Andy Lubershane: Yeah, thanks for having me on, Shayle.
Shayle Khan: Andy Lubershane is a partner and the head of research at EIP with me.
The show is a production of Latitude Media. You can head over to latitudemedia.com for links to today’s topics. This episode is produced by Max Savage Levenson. Mixing and theme song by Sean Marquand. Anne Bailey edits the video version of the show. Stephen Lacey is our executive editor. All of our episodes are on YouTube. Subscribe to Latitude Media for episodes of this show and Open Circuit. You can find the audio version of the show anywhere you get your audio podcasts.
I’m Shayle Khan, and this is Catalyst.
