Why We’re Worried About Electricity Prices

The supply chain for natural gas power plants is backed up till the 2030s. Copper and steel prices are rising, and the Trump administration just raised taxes on solar and wind power across the country. We seem to be setting ourselves up for the mother of all electricity inflation. This week on Shift Key, why Jesse and I are worried about it, what it means, and how climate advocates could respond. It's all coming up on Shift Key after this. Do you want to accelerate your career in clean energy, then explore online certificate programs from our sponsor, the Yale Center for Business and the Environment. Whether you're designing policy, unlocking financing, or developing significant and effective projects, Yale's online clean energy programs equip you with tangible skills and powerful networks, and you can continue working while learning. In just five hours a week, propel your career and make a difference. Learn more about Yale's year-long financing and deploying clean energy program, or their five-month-long clean and equitable energy development program at cbu.y.y.y.edu. Join Clean Energy Leaders at RE+25 from September 8th to September 11th in Las Vegas. As North America's largest event for the modern energy industry, RE+ brings together innovators across solar, energy storage, EVs, hydrogen, wind, and more. It's where industry experts tackle today's challenges to shape tomorrow's energy solutions. RE+ is the epicenter of clean energy leadership, uniting the industry to meet rising global energy demand. And listeners can save 20% with code [email protected]. That's re-plus.com. [Music] Hi, I'm Robert Semyre, the founding executive editor of HeatMap News. And I'm Jesse Jenkins, a professor of energy systems engineering at Princeton University. And you are listening to Shift Key, key maps weekly podcast about decarbonization and the shift away from fossil fuels. And I want to start, Jesse, you did a great job on the Ezra client show. And if anyone is listening to Shift Key for the first time because they heard you on Ezra, and now they're here on our humble shores, welcome to Shift Key. Welcome. Yeah, we're glad to have you. More exciting, scintillating commentary on the energy transition in store for you. Exactly, that's right. On this week's show, we are talking about the budding electricity affordability crisis. It's something I've just was writing about at HeatMap. If you look across trends in the electricity system right now, just about everything is setting us up for a spike in electricity rates above inflation, and potentially a significant electricity affordability crisis. It's something Jesse's talked about. It's something I've been thinking about. This week, we're going to go through all the different trends that are setting us up, what that could mean for the politics of decarbonization, what that could mean for other energy generation technologies, nuclear, advanced geothermal, and how utilities and politicians should respond. We're also going to talk about why all these trends may not materialize, although I think ultimately Jesse, we concluded we're certainly setting us up for a very likely energy inflation here. Yeah, that's right. All right, let's jump into it. Rob, why don't you start by laying out what do you think the major drivers are of this coming electricity affordability crisis? Well, I think the place to start is something we had talked about last episode, and I think the frame for a lot of energy conversations going forward, and that's the repeal of the IRA, the inflation reduction acts, the technology neutral clean energy provisions, specifically it's the repeal of solar and wind provisions. I think before you get into any conversation about the trends in the rest of the system, I want to mention that taxes were just significantly raised on solar and wind. What is so interesting about the Congress's decision to raise, and the president's decision to raise taxes on solar and wind power at this moment, and to put up more financial regulatory barriers to building more solar and wind across the United States, is that as I read my piece, no, my piece is really not as much about this. It's, if you looked across the electricity system earlier this year, even without the chance of the major policy changes that have since come down the pike, a lot of trends, basically every trend you could see was setting us up for an affordability crisis. The first and the biggest trend there is of course the return of load growth for the first time in 20 years as we've talked about on this show, and so I won't belabor it. Electricity demand is rising across the United States again. It's rising not only because of AI, it's rising because we've basically gotten every kilowatt of efficiency out of American homes through the switch to LEDs and through other kind of energy efficiency upgrades, and there's probably still more there to do. But in terms of just what's out there in the grid, homes aren't getting much more efficient at the moment. At the same time, you know, EVs are taking off, and there's been the slow and steady electrification of the vehicle fleet. At the same time that there's been a U.S. manufacturing response, we've seen new factories go up across the country, and at the same time of course as there's this boom in data centers. And the kind of data centers that are getting built are both old school classic server data centers, but also these incredibly energy intensive for now, AI data centers. So suffice it to say demand for U.S. electricity is increasing for the first time in 20 years. Not just a tepid increase to this is expected growth rate of over 2% per year in 2025 and 2026 in total U.S. electricity consumption according to the energy information administration. That actually lines up pretty well with the longer term forecasts that we have from our latest repeat project analysis of the kind of post big bad bill environment. We still see a 2% per year sustained growth rate through the next decade through 2035 at least. And of course with some good uncertainty around that there's an upside case that it could be even faster than that if some of the growth in data center demand and AI demand proceeds at some of the industries, you know, the AI industries expectations or hopes. It could be even faster than that. So, you know, these are not slow numbers. We the last time we saw a 2% plus sustained growth rate was, you know, the 1970s and 80s. Right. This isn't even a return to the kind of 90s baseline. This is real. Exactly. So that's the demand side, right? But then when you look at the supply side, basically every trend is telling a story of constraints. Right. And so the biggest one and the one we've been covering at heat map for a little while now is at the supply chain to build new gas power plants is backed up. Basically, if you want a new gas turbine, you have to wait until 2030. And I think there's like maybe going to be some policy that comes down the line on that. It seems like GE Vernova, which makes those turbines might increase capacity. But still the next three or four years of supply for gas power plants looks extremely congested. On top of that, when you look at natural gas itself, not the machinery used to turn that natural gas into electricity, but just the fuel, it too is going to come under increasing strain in the next few years. And that's because between 2024 and 2028 North America's LNG liquefied natural gas export capacity is projected to double. And that's actually going to happen regardless of what the Trump administration does. The Trump administration may approve more and larger LNG export terminals. But even in a world where we're keeping policy expectations flat, there's still going to be a doubling of North American LNG capacity. Yeah. And because anything that's approved now is like farther out in the timeline right beyond 2030. You can go listen, you're going all the way back to a very first inaugural shift key episode. Where he talked about this under the Biden administration and the fact that federal permitting really was sort of beside the point in terms of the near term trends for LNG, because we already permitted such a huge share of capacity that it be sufficient to double if not triple total US LNG exports. So irrespective of any whoever's in the White House, that is a question of whether there's demand on the global market. And at least now through 2028, there's enough to roughly double our output. Exactly. And I think the key thing is that that's going to increase the amount, you know, how much share this is now I'm asking you, which share of natural gas export. Yeah, so this is a huge amount of total gas capacity. So as of last year, we are exporting about 12% of 10 to 12% range of all US natural gas production projects under construction LNG export terminals are under construction and are coming online over the next year or two are enough to suck up another 10 percentage points of total US gas production. And we've already approved permits for enough projects to export another 17% of our consumption. So you know, if all of those approved projects were built, we could be basically exporting over a third almost 40% of, you know, historic US natural gas production now maybe production goes up a little bit, but that's an enormous amount of natural gas that we could potentially export through those terminals. I want to talk about the bear case in a second because I think it's worth thinking through scenarios under which this doesn't materialize, but it is just going to be it doesn't necessarily be used. Those are primitive projects they won't all necessarily get built, but these are big levers right 10 20 30% of US gas production depending on how many of these projects are completed and how well they're used. Exactly and so none of these trends guarantee that electricity prices will go up, but suffice it to say by the end of President Trump's term we could be exporting one fifth right 20 25% and so that is a huge increase and it's going to increase demand for US natural gas supplies and how the supply side of US natural gas responds is still an open question. But even that isn't the only trend so at the same time the president's tariffs specifically on inputs to production so copper steel have gone into effect they've remained in effect and what we've seen is that for these key ingredients and components to build more grid infrastructure prices have gone up so I think steel prices have doubled copper prices have increased doesn't seem like those prices are coming down anytime soon. And so just the raw ingredients that are required to produce to expand the grid and to increase electricity supply and electricity capacity are going to be more expensive in the world we're living in then in a world you know then in the counterfactual world. Yeah I think if you go further upstream to there's some partly because of the tariffs partly because of the uncertain trade environment and certain kind of macro economic environment we're not exactly seeing the oil and gas industry pouring capital into expanding natural gas supplies so you know you could argue and I've heard the folks from the American gas station argue this that there's no problem with expanding LNG exports as long as we expand supply to match that and there's some truth to that except that we expect supply curves to be increasing meaning the more we produce the more we can do that. Meaning the more we produce of something you know in order to get incremental production up we have to spend a little bit more per unit of energy we produce the characteristic of most markets and so sure we could increase our supply by 10 or 20% but that would also require paying a higher cost per trillion cubic feet or a million cubic meters or whatever unit you want of natural gas we get out of the ground in the US and that alone would put up or pressure on prices. But if the markets if the US is also not expanding supply at the same time that we're expanding exports then that just straight up drives prices up and you know we would see kind of a delayed response from the market from the supply side of the market to those prices and so you're not like you this is partly why natural gas prices are so volatile prices spike that sends a signal to add supply but you can't turn on the spigot overnight you've got a drill new wells identify them you know get drill what we're going to do. You know get real what rigs out there and open up production in some cases you can expand pipelines to get that supply to market and all that takes several years and so the lag time there that often leads to these spikes in gas prices going quite a bit above what you would expect the kind of marginal supply curve picture alone to reveal and I think if you look at the rig counts declining rig counts agnating production and sort of the secular decline of our of our conventional gas resources and oil resources which are all on kind of decline curves as we pump more. Oil and gas out of the ground the pressure falls when we get less and less from those wells all that points to the potential for a relatively constrained supply of natural gas on the near term exactly at the same time that we're ramping a LNG exports exactly and I think when folks look at these trends and they say well look there's a lot of normalizing to the late twenty teens experience because in the late twenty teens we increased our liquefied natural gas exports from the United States basically from zero right because if folks remember previous you know discussions of this in the late aughts the U.S. was expected to run out of natural gas and so developers began building large natural gas import terminals along the Gulf Coast then the fracking revolution happened and next generation drilling techniques to hold the Permian base and exploded the entire oil and gas boom of the twenty teens began suddenly the U.S. discovered it had enormous natural gas resources power prices fell and all of those LNG import terminals long Gulf Coast had to be retrofitted or were retrofitted into LNG export terminals and they began to come online you know around twenty sixteen twenty seventeen and U.S. natural gas export capacity exploded. And U.S. natural gas prices really didn't go up very much in response or at all in response to this sudden new wave of U.S. natural gas exports but and so I think folks look at that and they go look well the U.S. has been able to sustain low natural gas prices through an export boom in the past there's no reason to think we couldn't do it again. And there's especially no reason to be worried about political downside from increasing LNG exports which I think is the argument that really prevails in the Trump administration but when you look at this whole macro economic setup the world was totally different in the late twenty teens right interest rates were low was this feeding frenzy oil in the oil and gas sector there wasn't the same industry wide focus on returning profits to investors as there is now it was just willing to throw free money basically a dream. And we're really basically a drilling as much as possible and where corporate leaders were worried about sitting out a drilling boom rather than sitting around to be profitable. Yeah and there's also I mean that was an era where there was a lot more low hanging fruit in the shale oil and gas sector I mean we had not yet fully tapped into the best kind of tier one share all resources across the United States because we're still in the kind of second phase of the shale boom you know ten years later we've tapped most of those resources those that are high productivity fields that are close to pipe lines that can get that supply easily to market and so the next you know units of production are likely to be more challenging to bring online as well. I think that's all why you know the the US Energy Information Administration short term energy outlook has a natural gas prices rising to four dollars and forty cents in twenty twenty six up from three seventy this year and that's up from under two fifty in twenty twenty three and twenty twenty four. So you know twenty twenty three prices average was two dollars and fifty cents it dropped to two dollars and twenty cents in twenty twenty four. And so basically between twenty twenty four and twenty twenty six the IA is expecting US natural gas spot prices to double over that period that's also a period when we're expected to increase our LNG exports from twelve billion cubic feet per day to sixteen. So a thirty three percent increase in our LNG export capacity just between twenty twenty four and twenty twenty six sorry our export volume not capacity that's how much work would actually be exporting. So yeah the trends in the gas supply side aren't exactly encouraging you know I do think it's important to note. That show gas technology the ability to extract oil gas from shale formations. It has significantly flattened the US supply curve so it's not as steep you know it will be more expensive to get that next increment of gas out but all expectations are that it's still a lot flatter than it used to be and that will put a damper on the overall range hopefully of natural gas price volatility. I'm old enough to remember in a pre-shale boom days of two thousand eight two thousand nine when natural gas prices in the US spiked to a non inflation adjusted thirteen dollars or you know eighteen dollars per Mmb to you you know we're talking about two to four dollars here. So we will probably not see that huge range of volatility that we saw in the past but that doesn't mean we won't see temporary spikes to seven or eight bucks before they fall back down that four dollars and forty cents that the I projects that sort of a central estimate but oil and gas prices can go up and down fairly quickly around you know all it takes us some sort of international supply shock. So we're going to require a lot more LNG exports and all of a sudden we turn up the spigots on the export terminals and that access a big domestic demand shock that could drive prices up in a temporary basis according to the EIA natural gas produced forty three percent of US electricity in twenty twenty three and so when we think back to the electricity story all those fuel price shocks all those natural gas price shocks would feed relatively quickly through into regulators approving. Rate increases for their communities right before first date and that's forty three percent of our electricity by volume that's probably good indicator of the sort of relative impact of gas prices in a vertically integrated traditionally regulated market where ratepayers effectively pay for the average price of electricity. But in competitive or restructured wholesale markets like the PJM region that we're in in New Jersey electricity prices are spent are set by the marginal generator not the average price so it's the price of the most expensive unit that we need at that particular time to meet electricity demand and that is even more often natural gas so while they might be forty percent on average of our production they probably set the market price in PJM more like two thirds of the time or maybe more it's been a while since I checked exactly but this is a very important thing. And that's exactly but this is far more than their average share of total energy supply that's just because when there's a gas plant in the margin you can only needs one gas plant to set the price right and you can sell a bunch of cheaper units underneath that that are you know call or or hydro or wind or whatever. And so for places that pay for wholesale electricity in a competitive market context those gas prices spikes are passed very quickly through to electricity rates that's what happened in Europe during their huge electricity affordability crisis after the war in Ukraine began and they tried to separate very quickly from Russian gas imports the whole European market is structured in that way and so natural gas prices spike to that drove an immediate increase in not just in home heating from gas but also in electricity bills across the continent in the UK. And I want to move to talking about prices in a second but I just want to note the one final trend here that is worth mentioning is not only had the Trump administration repealed making it difficult to access the wind and solar tax credits but at the same time that fiscal policy is being rolled back the Trump administration has also become a less stable financing partner for electricity projects and what's sticking out in my head here is that last week you know that's not the same thing. Last week you know energy secretary Chris right killed a government loan guarantee from the low programs office at the Department of Energy for the grain belt express transmission project and that was a large scale transmission project that was going to move. Largely wind and solar electricity though. In the energy the developer was able to changing that from the great planes to the relatively congested Chicago and Midwestern market and it relied on this giant loan guarantee from the government and it's not a small that was not a small project right it's 5000 megawatts 5 gigawatts over those who listen to our summer school episode on how big is a water gigawatt I mean that's like 5 US nuclear reactors you know worth of capacity it's a huge. Huge extension court right from from the Midwest to the Chicago and Indiana areas that now just won't be delivering low cost supply into that region and contributing to shortfalls exactly it was 4.9 billion dollars of financing so just an enormous deal that now is in energy sets to try to find new finances but I think the point here is that any kind of project in which the government could have acted to either provide low cost financing or has provided low cost financing. In order to increase the supply of the electricity system is now facing greater political risk and I realize the administration says things like we want as many electrons as possible or the energy secretary treated tweeted something the other day where he was like we're in a new economy where electricity can become intelligence. And despite all of those messages what we're actually seeing is that electricity projects that run a foul of soybean farmers as as the grain belt express project did or a small group of soybean farmers or even electricity or energy projects that just become polarized within the republican electorate can face political risk extremely quickly and lose their financing and that invariably is going to produce more constraints across the electricity system. Yeah and that's not just bad you know because wind and solar are clean electricity that's bad because they're 90 plus percent of all the new capacity that we're adding to the grid right now so it's a huge yellow or red light flashing for the deployment of some of the most important new sources of electricity supply at a time when demand is growing and outpacing our ability to add the electricity to the grid. I think the other thing is that about the current administration and I won't linger on it but they're also more willing to get involved and to nationalize what would have been previously local permitting fights or local fights from pieces of infrastructure and I it's probably worth saying that this is not so different I suppose than the techniques that environmental activists develop to nationalize to fight pipelines exactly. - Exactly. - All right, let's see if we can summarize all this up real quick. So we've got electricity demand growing rapidly, 2% or greater per year for the first time in 15 years. - Longer than that for the first time in decades. I mean, for the first time in decades. - Yeah, growing at all at any significant rate for the first time in 15 years and yeah, growing faster than it has in decades. At the same time on the supply side, right? We have basically two options for meeting that electricity demand growth, natural gas and renewables. And both of them are being constrained and held back from meeting that demand. So we've got limits on the amount of gas turbine capacity that we can build, that manufacturers are willing to put out onto the market each year to avoid a kind of boom bust, manufacturing cycle that they've been caught in the past. Prices for gas turbines are there for going up, lead times are long, and if you don't have a turbine already secured now, like good luck building it in the next few years. And you've got pressure on the gas price side of things as well from LNG exports, from tariffs on new drilling, from a kind of broadly uncertain macroeconomic environment that's depressing investment in new supply. And then you've got the kind of increasing war on renewables from the Trump administration and the GOP, whether that's increasing the tax rate through the one big bad bill, or arbitrarily canceling loans, or nationalizing and canceling permits, or just ignoring permit requests at the Department of Fish and Wildlife for Army Corps of Engineers or wherever else, these sort of agencies that would have routinely considered permits, for federal permits that are just ignoring the calls of developers as Gell Holtzman is reported for heat map. All of these things are contributing to quite a constraint on the supply side. And that's before we even talk about the grid operators and the constraints to interconnecting new supply to begin with. So yeah, so that's national political and macroeconomic landscape, all of which is flashing warning light that we are likely to see electricity demand outstrip supply and that the supply we add to the grid is likely to be more costly than it when we thought it might be one or two years ago. Want to build critical skills that are transforming the clean energy sector? Then it's time to discover the Yale Clean and Equitable Energy Development Online Certificate Program from our sponsor, the Yale Center for Business and the Environment. This fully online five month program is designed for working professionals who want to build projects that serve people and the planet. You'll dive into energy fundamentals, project finance, key phases of development and operations, and learn how to center community engagement. In just five hours a week, you'll learn from leading experts, develop practical skills, and gain actionable insights by engaging in video lectures, live sessions, and a real world group project, Yale ensures that you have the expertise to advance clean energy solutions that benefit communities and drive economic resilience. Are you ready to elevate your career and make a difference? Then visit cbey.yl.edu, that cbey.yl.edu to learn more and enroll in the Clean and Equitable Energy Development Program, that cbey.yl.edu or look in the show notes. So I want to talk, Jesse, about what's happening in the electricity markets, because there are dynamics in the electricity markets that I think people may see headlines around, and that also point to the increasing rates and increasing supply constraints, but not in a direct way. So over the past week, PGM, the country's largest electricity market, and the electricity market you live in, held its capacity auction for next year, and the results of that auction were that it hit the price cap. And I was wondering, could you just explain, first of all, how, what is a capacity auction, how does it work, and then what is the significance of this, of this most recent auction that like hit the price cap? Is this pointing to the same constraints that we see across the supply of the electricity system, or is this really like something else, or this is more of a market-specific dynamic, and so it might be a big deal of PGM, but it's not like of national importance. Yeah, I mean, this is where the electricity price story, what are actually causal driver of current electricity cost increases, is really hyper localized. There's a lot of different dynamics going on, and every state's gonna have a fairly complicated and different story, but I think the PGM capacity market at its core is an example, or a symptom of what happens when you can't connect new supply, fast enough to meet growing demand. And so what the electricity market in PGM, as well as most of the other organized markets across the country, the regional transmission operators, or independent system operators, whether that's in New York, or New England, or the mid-continent ISO, ISO, or California, they run some kind of forward procurement of capacity. And the idea there at its core is that it takes time to add new electricity supplies to the grid, right? You can just like on the gas supply side, you can't build a power plant overnight. And so while we have these sort of spot electricity prices that are going up and down every day, and every hour, and changing every year, that provide a revenue, and might provide sort of an expectation of future revenues that could induce somebody to want to invest in the market if returns look really good right now, there are lagging signal in some ways, right? Say the wholesale price spikes, you can't say, okay, great, now I can make a lot of money building a power plant, I'm gonna build my power plant next month. You're gonna build your power plant, and it'll open three, four years from now, and the market environment three, four years from now is quite uncertain, maybe this current price spike dissipates by the time you actually get to the market. And so these forward procurements of capacity are effectively a way to send a leading price signal. And in the case of PGM, what they do is they estimate the total peak demand or aggregate peak demand in each of the regions of the PGM system. So I'm running an auction now for delivery three years from now of enough capacity to meet our expected peak demand in the PGM region, plus a planning reserve margin to make sure we have some wiggle room, in case we get to some extreme conditions or power plants fail when we might otherwise have counted them. So the planning margins are usually on the order of something like 15% in the summer, sometimes in the winter, they're even higher than that. Power plant failures tend to be more severe in the winter. So we hold an auction now, and the people eligible to bid in that auction include existing power plants, who can use the money they clear from the auction to pay for their kind of fixed costs of maintenance and staffing and taxes and all the kind of fixed O&M that they have to incur. But also it can act as a signal for new generators saying, we're willing to pay you a certain amount as a fixed price per day or per month. If you can deliver capacity three years from now. Now it's only a one year contract. So it's not a great hedge. It's not like a long-term power purchase agreement that's guaranteeing you what you're gonna get paid over, say, 20 years. But it does provide some degree of clear revenue expectation for the future when your power plant might come online. And what we've seen in the past for PGM is an over capacity situation, where in the past in the 2000s, 2010s, the market built enough capacity, particularly a big broom and natural gas plant buildout right after restructuring, and demand was flat or declining in most of the region. And so it had more existing capacity than it needed. And so market clearing prices were really low. They were on the order of 20 to $30 per megawatt per day. The most recent auction cleared at $329 per megawatt per day and that's up from over $200 last year. So an order of magnitude jump in the clearing prices in 2024 and 2025 auctions. And that reflects the fact that we need new supply to come online now that demand is growing robustly again. And the grid operator has failed to connect new supply fast enough to allow for affordable new entry into the market. And so prices basically went from floor set by existing generator cost to a ceiling that was set in settlement based on a lawsuit that Prince of India governor Shapiro led to force PGM to actually reduce the price cap expecting this to happen. It basically says we need more capacity than we can get. And we're willing to let the price spike to however high it needs to be in order to get very expensive capacity on the margin which is probably coming from something like a diesel generator at a hospital or something else that's not really meant to be playing this role, but they might be willing to do if the price rises to a really high level. What keeps you as the owner of a natural gas plant from saying I'm actually gonna run my natural gas plant 80% all the time. And then you have to pay me to run the extra 20% during these. Like I'm gonna hold that back till these moments when then you're gonna pay me to be capacity. Or is that maybe the market working exactly as intended? So the energy dispatch decisions on an hour by hour, five minute by five minute basis are determined by the actual demand at that given time and the energy market clearing prices reflect the value of that energy. And so you are also getting paid for that energy, you're getting paid $10 or $50, $150 or whatever the clearing price is per megawatt hour that you generate at that time. And so the incentive for a generator is that as long as that clearing price is greater than your marginal cost of producing another megawatt hour, the cost of burning the fuel and paying for the variable operation of maintenance, then you wanna generate as much as you can because you're making money on every megawatt hour. You're earning $100 and cost you a 50 and your gross profit for that megawatt hour is 50 bucks. That all still happens, but because you've basically that the PJM market is designed to avoid these price spikes that you would find otherwise. That sort of gross margin that you earn from selling your power for more than it costs in the energy markets is generally not enough to cover all of the fixed operation of maintenance or new capacity entry costs. Now the fact that you've gotta take out a mortgage to pay for your power plant, it doesn't cover all those fixed costs in expectation. And so the capacity market is effectively like a top up where what people are supposed to be bidding into that market is this is how much more revenue I want on a daily basis in order to cover the rest of my fixed costs after what I think I'm gonna earn in the energy market. I see. And then if you participate in the energy market that day basically, then you get the extra payment. Well, no, you get the capacity payment every day. If you show up when you're called upon. I see, I see. You're good. If you don't show up, then you're basically paying a huge penalty for not showing up. In addition to not earning the energy revenue for that hour, you're also paying a very large penalty. For noncompliance, it's an effective financial set up where basically the generators are incentivized to be available whenever needed because otherwise they're subject to a very large penalty. But they are getting a more consistent revenue stream which helps them build and finance their power plants to some degree. Yeah. And just to be clear, the alternative here is the Texas model which you've been alluding to which is the, you know, ERCOT is the power market. And in ERCOT, we don't have forward year capacity markets. What we have instead is just like, sometimes you let the price of the marginal kilowatt hour of electricity or megawatt hour get really high. So like in 2021, during the winter storm, I think it was in some places like $9,000 for kilowatt hour when it's normally 50 bucks. Exactly. 40 bucks. Yeah. So it's like two doors of magnitude higher during those periods. And that's when basically generators print money and consumers pay out the ears. Right. Well, if you're a generator as long as you hit one of those jackpot days every so often, you're expecting to make enough money to justify your power plant. But clearly that's a lot riskier proposition for both the generator and the consumers because some years, the generator makes no money and some years they make a good trillion dollars. And some years we're paying a reasonable price for electricity and some years we're paying thousands of dollars per year extra. Does PGM, so this capacity auction that hit the high market cap, does that feed directly into what great payers are paying in New Jersey or Pennsylvania or Maryland or DC? Or is it a little complicated in every state because every state, you see like a different set of rules and a different set of formula? And so suffice it, we can just say, it feeds into our rates over one, I would say it generally feeds into our rates over like one to three years. In New Jersey, unless you've signed up for a competitive retail electricity supplier, which is something you can choose to do, if you want to, most people don't. And you're on the sort of basic generation service product, which is regulated, then basically what we do is we procure a third of our energy supply every year in a fixed contract. And then that rolls over and next year we get the next third. And so every year we're always buying a third of our supply, but the other two thirds are hedged over a three year contract from the last couple years. So basically it would take three years before our rates fully reflect this very elevated capacity price because part of our rates are going to reflect the price we signed three years ago or two years ago. In other places, if you're on a retail, like a competitive retail supplier, it's up to them how they want to hedge you. And they might only have you signed up for one year contract and so they might only hedge one year. And so as soon as your contract renegotiates, your price is going to go up 30% or whatever. And so it really depends on what the market construct is, but generally speaking, it'll take somewhere between one and three years before these very high prices start to escalate your rates. And we should know, like this is a pretty significant increase. In 2024, PGM customers were paying on average only about $4.365 per megawatt hour of what they were paying for wholesale price, which was about $55 per megawatt hour. So $4 out of $55 roughly was paying for capacity in 2024. Most of the rest, $33 was paying for the energy supply and then the rest was transmission and an ancillary services to keep the grid stable. That $4 is likely to be on the order of $40 per megawatt hour now as those capacity prices stay elevated. Now again, the wholesale prices and all we pay, we pay for a lot of other stuff in our retail bills and that's why the retail price impact that we're expecting is somewhere on the order of 20 to 30% increases in average retail bills. If you don't live in New Jersey, Maryland, Illinois, et cetera, part of the PGM region, this is the same dynamic that's at play in the Mid-Continent ISO where winter capacity prices spiked in the most recent auction in New York ISO. New England, all of these are seeing the same kind of general pressures as just PGM has been the most dramatic outlier at the moment. She's saying California, they do this over a long-term bilateral contract. It's a little bit different constructs so the pricing is less transparent. But I've also heard that those prices are settling much higher now in the markets as well. So the biological question is why? Why are we not able to add new supply fast enough to keep up with demand? And I think while going forward, part of that answer is going to be because the Trump administration is messing with our ability to add new wind solar and batteries to the grid quickly. Right now, I think the central reason that we're not able to add supply fast enough to keep up with demand is the very interconnection process that these regional grid operators manage themselves. They are in charge of connecting new generators to the grid and making sure that those connections don't overload the grid at any time. And if they would charging the generators and interconnection costs to upgrade the grid to accommodate them. And that process today can take three to five years to complete for a new generator. And then we've done a show off. This is the interconnection. The interconnection period. And so if it takes you years to add a new generator to the grid, it really doesn't matter what next year's capacity price is. You're still stuck in the queue and you're waiting for somebody to give you the permission to connect. And then finally, once you connect, you might feel a cash in on that opportunity. But like, you've already locked that in years ago. And when you signed up to get in the queue. If instead it takes three months to connect after submitting an interconnection request, then I can look at next year's capacity auction and say, OK, great. Two or three years to now, I'm an earnable load of money if I can get on the grid. Now I'm going to enter the interconnection queue and I'm going to remove my project for it and I'm going to hope it's online in three years from now. But if just getting through the queue alone takes longer than three years, what good is that forward price signal? It's basically irrelevant because I can't-- It's just a form of extracting rents. I think there's a lot of people who, including as a client, Derek Thompson, who want to analyze problems in housing, the problems in energy. And you can criticize him about how energy and housing policy are actually quite different. But in this way, having a market that clears every day or at least one year ahead, but has no way to adjust supply. And so it just becomes a mechanism for extracting rents because supply can't be-- Can't react. Yeah. Can't react. It's quite similar between urban housing and the electricity grid. And I say that's exactly why Governor Shapiro led this lawsuit to try to cap the clearing price. Because after last year's very high auction, they anticipated that no matter what the price was in the next auction, it wasn't going to be successful to clear the market. Right? It was going to clear some really high level. And so the cap used to be $500 per megawatt day and based on a settlement of that lawsuit, they dropped it to $329. So we would be paying $8.3 billion more for capacity in this most recent auction if it had cleared it $500 instead of this new cap. So this is, I think, an astute move by Governor Shapiro to recognize that the price signal is not what we're lacking to drive new capacity into the market. It's all of the processes required to get through interconnection and permitting and expand the transmission system to bring cheap new supply online. And so it was able to get a settlement to cap that price at a still quite high, but not quite as high at level. I mean, how are you thinking about this world we're likely to enter then? Which is a world where electricity prices are for the first time in a while inflating faster than general inflation, where people are going to be quite shocked to see their power bill. It seems at a first glance to be, I can think of reasons why it's good for decarbonization. I can think of reasons why President Trump and the Republican majority in Congress have made a political mistake by repealing some tax benefits and making it much harder to build wind and solar at this moment when electricity prices seem quite set to spike. Yeah, I mean, I think what this is going to do is it's going to elevate electricity prices and maybe energy prices more broadly into a much higher and more politically salient issue. And that's going to involve lots of spin from different directions. This is all complicated stuff. It's taken us this long to, you know, what the KELD capacity market is and how it works, right? Most people are not going to put in more than 10 seconds on this, you know, question. So this is a complicated set of causes for a comp-- and a complicated set of solutions to a complicated issue. But that's not how politics works, right? Politics is going to try to come up with very simple, you know, and effective narratives that make intuitive sense to people. And we're probably going to start hearing a whole bunch of conflicting maybe partially true, maybe totally made up, but maybe totally accurate. Rationale that politicians are going to use to explain to their constituents why their bills are going up and try to deflect blame off of their party and their decisions onto the other party and their decisions. But I think we're going to see this. We're just going to see finger pointing across, you know, as we've already seen at the federal level, people trying to blame renewable energy for these price increases, saying that renewables are actually the most expensive forms of energy we can add as Trump declared about wind power today and a press conference in Europe that, you know, because they're unstable, even if their energy prices are low, they're driving up grid prices elsewhere. But they're going to go on the offensive. And what proponents of clean energy need, ever political stripe they are, is a very clear and compelling counter to that narrative. And a set of clear and compelling solutions, because I think it's not just enough to say, oh no, this is actually prices are going up because the grid operator can't connect supply fast enough. Or prices are going up because Republicans raise taxes on energy supplies, both of which are true statements. You also probably need a solution that sounds compelling because their solution is stop building wind and solar or stop electing Democrats. Right? I mean, I think the political story of Republicans repealed the Emplacian Reduction Act and electricity inflation happened. And therefore, Democrats should reinstate the inflation reduction act. This is going to be very strong. And I would like to see policy become way more supportive of wind and solar again. But I agree with you that Democrats are going to need answers about electricity affordably that go beyond just like we need to put more renewables on the grid. I do want to say, in decarbonization world, our plan is to get people to electrify everything. And if electricity prices are going up, then that seems like it will be hard. Now, at the same time, in some of the scenarios we're describing, natural gas prices would be going up too. And so maybe that comparatively, it will still be cheaper to electrify things. But I think it's worth just flagging that as a concern going forward. I think the other thing that I want to mention is that it seems to me, and you should feel free to disagree here, that there is not a good side of high prices per se. But high prices do help drive new generation technologies onto the market. And so, whereas back during our episode about why modular nuclear reactors didn't take off, one of the big historic alternations is that, well, in the late '20, in the late 'OTS, when there was a lot of excitement about nuclear, people thought electricity prices were going to go up. And so they were looking for anywhere that could supply relatively expensive megawatt hours, because it seemed like that was going to play within the market. Then, of course, fracking happened, and natural gas surged onto the market, and electricity prices did not go up. And a lot of those small-match-learn nuclear reactor companies failed. But it seems like now going forward for geothermal, for large-scale conventional nuclear, maybe even for advanced nuclear, there is potential if electricity prices go up to get some new technologies onto the market. And maybe onto the market faster than we would have in account of actual. Yeah. And also, even to make up for some of the higher prices, or higher costs that come from losing the tax credits for a wind and solar. So if market prices are going up, you are in more revenue that can offset the fact that your tax rate also just went up, because of those tax credits. So it will, I think, help keep some wind and solar projects in the black as well that would otherwise maybe have been knocked off by the loss of the tax credits. I mean, I think that's all great for suppliers of new electricity. What it's not great for is consumers of electricity. It's not great for electricity or gas intensive manufacturing or other economic drivers, right? And it's not great for households that are, in many cases, already struggling to pay electricity bills. So yeah, I think that we'll lead a little bit more headroom for new technologies or for a wind and solar to continue to be deployed. What I think it is going to also do, though, is make force a rethink, I hope, amongst decarbonization advocates and clean energy advocates and their elected allies, to make sure that whatever pathway we're pursuing to add clean electricity to the grid is as cost-effective as possible. And that is not exactly what we've done in the past in many cases, right? And just look again at New Jersey to bring up the consistent example, or California, to be fair, or others. We often actually pursue much more expensive forms of clean energy because they tend to deliver other perceived benefits or avoid other risks or conflicts that we don't like. So, you know, Sierra Club loves rooftop solar, but they might fight you if you want to build a solar farm in an area that might cut down some secondary forest in order to connect a large scale, much more affordable utility -scale solar project, for example. We can't really do onshore wind in places like New Jersey or Eastern New York or Massachusetts because we don't have the land and wind potential for it. So, we have two options. We could build transmission lines to where the wind is in other states, or we could build very expensive offshore wind here that creates lots of local jobs and economic activity. And consistently, politicians have chosen that option over the less expensive imports of wind from Indiana or solar from North Carolina or whatever else is the cheaper option that delivers the less economic benefits and jobs in the state. And so, we've tended to choose for either kind of economic development rationale or perceived environmental benefits or less environmental conflict, pretty expensive options for decarbonization. And I think that there's just going to be much less tolerance for that or much less room to pursue a strategy of decarbonization that doesn't pretty relentlessly focus on finding lower cost options whenever possible. That also would suggest that maybe in, you know, there's transmission, that's an option, and there's also conventional nuclear, right? I mean, the Trump administration is trying to build, they say they're trying to build 10 conventional nuclear reactors by the end of decade. Which is an exactly a cheap option, but maybe it is delivering value for money in the current environment, especially compared to other options that some states have. Maybe you saw Governor Holtchell in New York and now Mickey Cheryl, the candidate for governor in New Jersey, both embracing the idea of potentially building new nuclear reactors in those states. So yeah, we're starting to see the politics around nuclear shift. Last thing, and then we should wrap up, but I just do want to get the bear case in here. Yeah. And say we've been talking-- Maybe we're overreacting. Maybe we're overreacting, right? So I tried in my story to try and put together a world where every trend that we see, virtually every trend that we see suggests supply constraints and therefore higher costs. But what would need to happen for us not to see those higher costs? Like what could we be getting wrong here? And ultimately, the world I put together was one where number one, one thing we learned from talking to Peter Fried on the show, whose meta-sformer head of energy strategy, is that the current data center build out is way more full of speculators than it was in the past. There are merchant data center developers basically going around procuring sites, even procuring power, putting their projects into the interconnection queue on the demand side, and then expecting to find a tenant later. If some of the heat and light came out of the AI boom, or some of the air came out of the AI bubble, whatever you want to see, call it, then you would expect some of those merchant developers to drop off the grid. The next thing is we know the interconnection queue on the demand side that is like who gets to hook up to the grid and use electricity, not supply it, is pretty opaque. And like the same companies often will bid in multiple utility areas or multiple jurisdictions to figure out where the cheapest price is. And so maybe that's also driving some inflation on the expected demand side. Now we know data centers are maybe 30% to 40% of incoming load growth. But then if you look across the whole economy, and you say, OK, well, let's say the AI CAF X dries up, you say the president's reconciliation bill does manage to really slaughter EV demand. And so EV factories get canceled. And maybe-- so maybe you say, OK, well, that's new manufacturing goes away. Data center demands MVEC goes away. And then if there's a recession, you could maybe then imagine-- at least for me, this is the story I put together-- then you could imagine load growth not showing up in some of these constraints on the supply side of the power grid, not materializing into cost inflation. But that's an aggressive scenario. You had to make a lot of assumptions in a road there. It's an exactly-- Exactly. --to come out right. And then with your link to assumptions, if AI fell apart, then you would expect a contraction of some kind. It would be contractionary, at least. Maybe all that money that goes into residential, I don't know. But it's a long story to tell a story where we don't see these supply constraints turn into inflation. Yeah, I mean, it's really a story of anemic economic opportunity in the United States. It's a story where the major drivers of new economic activity and investment in capital, whether that's AI or manufacturing, Peter out or disappear where the economy goes into recession, et cetera. And so another way to put that is, unless you're banking on the economy falling apart, you should expect electricity prices to be going up. And the only way to sever that link between economic opportunity and faster than inflation or agro-thin electricity prices is to do two things, I think. One is to add new supply faster to the grid. And the other piece that we didn't talk about at all here and maybe deserves a whole other episode is there are a lot of fixed costs on the grid. Think about a transmission line that's just sitting there waiting to be used, or even a peeker power plant that's only used occasionally that we're paying for in our capacity markets. Those fixed costs probably represent on the order of half of the retail bill that we pay at the end of the day, the other half being the actual energy that we're paying for and consuming. And so if we can improve the utilization of all of that fixed capital, then demand growth can actually drive down costs, because we have more kilowatt hours or megawatt hours of demand to spread those fixed costs over. If we're not also piling new fixed costs on at the same rate or faster than the rate the demand is growing. And so to give a concrete example of that, if electric vehicle demand continues to grow, and people are adding EVs to their driveways, and adding EV chargers to their garages and their driveways, there's two ways that can play. One is the dumb way, where we add what's the equivalent of another doubling of your peak house demand in terms of a new charger. It's six to 12 kilowatts. That's a couple of whole home heat pumps or 12 window mounted air conditioning units that you're plugging in now, and you charge your car. If you charge when the demand is on the grid is already at its highest and your transformer and your local distribution lines and your substation are already stressed, then that's adding directly to the need for more fixed costs. We have to upgrade substations. We have to switch out transformers. We have to put in new distribution lines, put in new transmission lines, et cetera. And so that will actually drive a huge increase in our retail bills. Or we could unlock flexible charging, where we ensure that people have the economic incentives or the direct control signals if they sign up for aggregated smart charging programs, to avoid those few hours of the year or few hours of the summer, right, or winter when the grid is at its maximum usage, in which case you're not adding anything to fixed costs. But now you've added a lot more kilowatt hours that I can spread some of those other fixed costs across. Or I can choose a different rate design, where I don't pay for those fixed costs at all for my EV charging, and I have a much more affordable cost of charging my car, which could help continue the electrification trend. So we have choices about how we manage in particular demand to be more flexible, and things like distributed generation and batteries throughout all scales throughout the grid. They could allow us to make much better usage of our transmission and distribution networks without having to drive a lot more fixed capital investment to accommodate this peak demand growth. And so there's a real fork in the road there that I think a key question that hopefully more state regulators are paying much more direct attention to, because most of that choice is in their hands, in how they regulate the utilities, and what kind of incentives they provide to consumers of electricity through a rate design and through virtual power plants and through demand response programs and other things that regulators and regional grid operators kind of have under their preview. I think one big trend I'm hearing is that electricity is becoming more important to the American economy, not only because electricity prices are likely to go up as we've been discussing, but because of AI, because of manufacturing, because of all the things we want to do with the economy. It's becoming an electrification. And because of the EV, exactly, it's already an incredibly important input, but it's becoming really important, the frontier of economic development, and that's going to drive necessarily, they have better drive innovation across the regulatory and financial structure of the system as well. And that there's going to be a lot for us to talk about it on the future of electricity. Exactly, we're going to actually leave it there, and we're going to come back just in a few seconds with Upsift downshift for the week. Join clean energy leaders at RE+25 from September 8th to the 11th in Las Vegas. As North America's largest event for the modern energy industry, RE+ brings together innovators across solar, storage, EVs, hydrogen, wind, and more. RE+ is the epicenter of clean energy leadership uniting the industry to meet rising global energy demand. Shift key listeners can save 20% with code heatmap20 at re-plus.com. That's re-plus.com. And we're back every week here on Shift key. We do a little segment. We call Upsift downshift where we take a look at climate and decarbonization news from the past week. Each of us kind of pulls an item out of the more ass of climate and decarbonization updates to share with the class. And if that update is making us feel more upbeat about the energy transition, then it's an Upsift befitting our name Shift key. If it's making us feel more downbeat, it's a downshift. Jesse, as always, you go first. What do you have for us today? I think I have an upshift for you. It's prefaced by a downshift, but a general upshift. And that's the state of the EV Rapid Charger network across the United States, which is really expanding quite well right now, quite rapidly. Inside EV news reports that despite the fact that we might see a decline or at least stagnation in overall EV sales this year, thanks to the end of the tax credits, thanks to Tesla's continued struggles to find a new source of growth. The number of charging stations out there, particularly DC fast chargers, those rapid chargers that you see might use and you're on the highway or traveling further from your home charger situation, those are actually expanding quite significantly as more and more charger network developers invest in new chargers. So there's a report that notes that the US is on track to add 16,700 public fast charger reports by the end of this year, which is a pace that's 2.4 times faster than the pace of additions in 2022. So maybe this is an area where the inflation reduction act was actually working. There are, we should note, a tax credit for business installations of chargers that covers roughly 30% of the cost. And that tax credit actually is still available into the middle of next year, after passage of the OB/B. But I think it's also just a sign that the scale of demand, the number of EVs on American roads is growing to the point where it's able to support a more competitive and rapid build out of EV charger networks. So it's not just Tesla superchargers out there anymore. And if that pace continues, could even accelerate, if it continues, if it continues, at the pace of additions in 2025, the US would have over 100,000 public fast charger ports by 2027. That's a pretty substantial pace. So in other words, it's like a 20% year over year growth, even just this year, in the number of new ports coming out there. All that, despite the fact that the Nevy program, the federal direct grant program that was supposed to roll out thousands of chargers, has still yet to distribute a large amount of funding and under the Trump administration seems unlikely to ever do so, unfortunately. It seems that the private sector is continuing to plow money in there, perhaps supported by that 30% tax credit. This is so important because if EV prices effectively are going to go up due to the end of tax credits, there are two big holdups for people to adopt EVs, the price and concern about charging and range anxiety. And if we're at least making pretty substantial progress on one of those, that's better than nothing. And I'll call that up shift. Yeah, I think so. If you talk to someone who thinks EVs are a cool technology, who doesn't own one, they're often like, well, where would I charge? Yeah, so that's the first question, right? Exactly. And it's a fair question is what you kind of-- you develop charging brain when you drive one, especially if you don't charge your home. So it's a totally fair question. And one interesting thing I wanted to note in here is just the way in which Tesla builds out its supercharger stations continues to be very different from others, which is that the average for non-testless stations is 3.8 ports per station, so roughly for charging ports per charging station, whereas Tesla supercharger stations average 15 ports at each location. Are they buying greater, more power hookups for that? Or is everyone just charging a little slower when they all charge in? That's a good question. I don't know. I'm sure some of our listeners might, but I imagine they are connecting a larger capacity to the grid, too, although in some locations, I think they might even be using batteries on site to manage that peak. But I just say as an EV driver, now that I have my Tesla adapter, the fact that when you pull into a station, there's 15 ports on average or 12 or whatever. Means it's so much more likely that you can just pull right into an open bay than if there's only three or four. The average experience on one of those three or four port stations is that one of them is broken. And two or three of the other three are occupied when you roll in, and then you have to wait for a turn. And it's just such a worse customer experience than the Tesla stations. And so Tesla continues to really, I think, show a very seamless customer-friendly experience that I hope more and more charger operators will adopt going forward, because at this point, if I ever have the option to go to Tesla versus non-testless, I'm always going to take a Tesla station. And the big factor is just the number of ports available. I guess all those fast chargers that were built this year were almost all using a Tesla-style charger, right? Like a-- The next American-- Yeah, I imagine that's true, or at least they have built-in adapters, like they come with an adapter on-site for either. Yeah. But yeah, it's interesting. Their interoperability is improving both on the vehicle side and on the charger side. Well, that is an upshift. Yeah. So hopefully if you're out there on the great American EV road trip, you're going to face a better experience than before. I mean, I can say this. My first summer after buying our EV and I guess summer of-- so it'd been summer 2023. My family and I made our annual vacation trip up to Cape Cod. And charging was not a great experience. We couldn't use Tesla chargers, so we would drive past these stations with 12 open ports and go to the electrify America station or whatever, and one of them was broken. And they were metering back their rates, because it was some peak demand day. And they didn't have the capacity to do it. And we had to charge twice as often as we thought we would. And it was quite a hassle until we got to the Cape. This last time we just bombed up there, no trouble at all. Charged once while the kids went to the bathroom another time while we had a snack. And that was like no inconvenience. It was the same times that we would have stopped anyway to stretch our legs and take a bathroom break. Rob, what about you? What's your shift for today? Well, unfortunately, I was not able to supply an upshift for today. And I have a downshift. Just yesterday, Jay Turner, who's a professor of environmental studies at a well-es力 college, released the newest set of his data. He's been tracking, I think, since the beginning of the Biden administration, EV factories and facilities and really factories and manufacturing facilities across the EV supply chain. So from mines and mineral refining centers, all the way up to EV final assembly facilities, since before the IRA passed, since the first few months of the Biden administration. And that team on Tuesday released its first full set of data now six months into the Trump administration to see, OK, well, what's happening to the EV manufacturing build out across the US? And the answer is, unfortunately, it's slowing down. Over the past six months, 26 projects totaling $27 billion in capital investment and that were announced to create almost 19,000 jobs have been paused, canceled or closed. And at the same period, 29 new projects totaling only $3 billion in capital investment and 8,300 jobs were announced. Now, I should say, at the same time, a lot of projects remain on track. So since January 20th of this year, 68 projects worth about $24 billion have continued to advance during production. And a lot of projects, I think, more than almost 500 projects, there's been no change. They seem to be in the same place they were at the last time we've data about them. But I think it is worth noting here that we talk a lot about how the President's Reconciliation Bill is going to kill demand for EVs, especially forward demand, that you've done good work, Jesse, showing that getting rid of the EV tax credits as the President's mega reconciliation bill did is going to kill any additional demand beyond that, which we already have manufacturing capacity here for in the US for electric vehicles. And I think what's big bummer is that we're seeing that play out that the US did actually mount a successful attempt to reshore and build the next generation of EV manufacturing capacity here under the Biden administration in response to policies. And now as the Trump administration gets rid of those policies, we see at the same time, those projects getting cancelled and the US retreating. It's a big shame. Yeah, it's up to see that bearing out in the actual stats and cancellations now, but it's exactly what I expected. It can't only subsidize the supply side. If there's no demand, there's no need for the manufacturing activities. And so while we did retain the 45X advance manufacturing subsidy that directly supports battery manufacturing in particular, not there's no subsidy for EV manufacturing, but there is for battery cells and components and packs and critical minerals that go into them. Demand for those facilities is going to drop if demand for the vehicles that need those batteries contracts. And that's exactly what we expect to see as these EV tax credits go away. We're going to have to leave it there. If you have thoughts on this week's episode, you loved it, you hate it. You can always email us at [email protected] or just me personally at [email protected]. Shift key is a production of Heatmap News. Our editors are Julian Gubin and Nico Louriccella, multimedia editing, audio engineering, is by Jacob Lambert and Nick Woodbury. Our music is by Adam Kromelow. Thank you so much for listening. And see you next week.