Energy has become a primary pain point for the economy. It’s not just that it’s expensive, but also that in some cases it’s just not being delivered. The US electricity grid remains under strain, with blackouts and brownouts a growing phenomenon, particularly during periods of extreme weather. So what work is being done to make energy abundant again? On this episode of the podcast, we speak with Jigar Shah, who is the head of the DOE Loan Program, to discuss his work and the role of public money in accelerating the energy transition. Transcripts have been lightly edited for clarity.
Points of interest in the pod:
What Jigar learned by building Sun Edison — 4:32
The role of the Department of Energy — 6:58
Why the electricity grid is so stressed — 13:28
Making the existing rid more efficient — 15:21
Batteries and the electricity supply chain — 25:44
How public and private money work together — 30:38
How to respond to a commodity supercycle 35:40
The power of hydrogen 38:45
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Joe Weisenthal: (00:11)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway: (00:16)
And I'm Tracy Alloway.
Joe: (00:17)
Tracy a thing that we keep coming back to, I think, is that in this moment of high inflation, high energy costs, there seems to be a tension between long-term planning and short-term pain. In theory, this is a good case to be investing in new energy, perhaps decarbonization technologies that reduce our reliance on fossil fuels in the countries that have particular access to them. But at the same time, there's also a lot of impulse to just get the price down right now.
Tracy: (00:54)
Yeah, to me, it comes back to just the cyclicality of the energy industry. And if you think back to 2015, when we had the oil prices going down quite suddenly, and everyone was talking about a glut in shale oil and all this energy capacity had expanded too quickly. And how, you know, there wasn't enough demand to actually justify it and then fast forward to today — and it seems like we're in completely the opposite problem. And so it just seems kind of crazy to me to be swinging from excess to shortages on like a five- to seven-year timeline. And it seems like it's really bad for planning for the future, right? How are you supposed to attract investment into the space if you're going from feast to famine all the time?
Joe: (01:46)
So I guess one question that arises is can the state, can the government play a role in ameliorating the swings on both sides, essentially reducing the volatility? The government has this infinite balance sheet. It doesn't have to optimize for profits itself, obviously, you know, in theory it doesn't want to waste money, but it itself does not have a profit motive. And can there be sort of a role for planning, for thinking strategically for public investments, such that we don't have these swings, but instead actually have a vision that's not just the whims of these incredible swings that we have in what seems like a fairly short period of time.
Tracy: (02:30)
Absolutely. And I think you put it well, that's the question, whether there's a role for the government to come in as a source of stability in an extremely cyclical market. And also, I don't think anyone's really talked through exactly what the different roles are for the government versus private investors. And I still think, you know, when you look at ESG for instance, there seems to be a lot of onus placed on private capital and this idea that, well, capital's gonna come in and fix everything, but actually I still think you need the government to come in and do a lot of this. But anyway, this sort of question about what the different roles are for private versus public capital, I think is a fascinating one.
Joe: (03:16)
And there's one other phenomenon. You know, we talk a lot about gasoline prices. But the other thing that's going on in energy especially during the summer is concerns about the grid — various regional grid operators warning that blackouts are going to increase this summer, potentially lots of concerns once again about the Texas grid. But not just Texas, it's really everywhere. There's worry that this base load power has seen underinvestment. And so lots of big questions about sort of what role can the public sector play and all of these challenges, both short term and long term.
So I'm very excited. We have a very special guest today. We're gonna be speaking with Jigar Shah. He is the director of the Loans Program Office at the Department of Energy and so he is in a prime spot to be thinking about and addressing some of this stuff. So Jigar thank you so much for coming on Odd Lots.
Jigar Shah: (04:11)
Thanks for having me. You're a staple in my queue.
Joe: (04:19)
Thank you. Absolutely flattered to hear that. So why don't you tell us, like, just give us the sort of quick summary of what you do at the DOE, your background, and how you got into this role?
Jigar: (04:32)
It's a good question. I'm a mechanical engineer by training and my career has really largely been about figuring out why technologies that are already fully proven don't scale. So I started in the solar industry and SunEdison, which largely invented the power purchase agreement, which has now attracted over $2 trillion of capital into solar projects right around the world using that financial structure. And then after that I did some nonprofit work with Richard Branson and understood a lot more about lots of other sectors. And then started Generate Capital with two co-founders in 2014, where we really changed the entire way that infrastructure investors thought about deployment and scaling up new sectors, because you can imagine the vast majority of people before that were in fund structures and fund structures, you know, you get paid more if you make a higher IRR. That doesn't quite work for commercialization. So we flipped the script on that and created the first C Corp to do that back in 2014, before tax rates went down. And then I got tapped for the DOE Loan Programs Office as a perch where we help to commercialize technologies from the US government seat.
Tracy: (05:58)
So I'm going to go ahead and come clean and say that I wrote some very unflattering things about SunEdison, but I did it, I think it was around 2015, 2016. So after you had left the company and it was mostly, it was mostly about the leverage that they had taken on and…
Jigar: (06:14)
[They were] very undisciplined after I left. So yes, they deserved all of the criticism.
Joe: (06:20)
All of Tracy’s harsh blog posts.
Tracy: (06:22)
Okay. But actually I want to go back to something you just said, which is this idea of proven technologies that are nevertheless difficult to scale. So what is the issue there? Because, you know, you would assume that if someone comes along and says, I have this amazing new technology to produce energy, you know, hopefully in a cleaner way than we do traditionally, you would naturally expect people to get very excited about it and for some private investors to start pouring money into it. But historically that hasn't been the case.
Jigar: (06:58)
Yeah. It's a weird thing, right? I mean what happened after the Arab Oil Crisis in the 1970s is we invented the Department of Energy. We put it in place. And what happened on the technology front is America has figured out how to make things smaller and more bite size, right? So the phone in your pocket is more powerful than all the computers that, you know, it took to put a man on the moon. The same thing’s true with solar panels. It's the same solar panel that you put thousands of in one field to make utility scale solar or 12 of them on your roof for residential solar. So when I first started SunEdison back in 2003, we had signed contracts with Whole Foods, Staples, Ikea, and others right away. And people said, that's great Jigar, but you only need $60 million of capital.
And I was like, only? Like $60 million is a lot. And I started this company by taking out a home equity loan on my house. And so, you know, so I feel like that's a big number. And most of these folks are like Jigar, infrastructure investors don't get out of bed for less than $250 million
And so if you can't aggregate up $250 million with projects, then you know, you're not gonna get any attention from us. And I'm like, well, but we miniaturized the technology. It's no longer billion dollar scale just to get in. You could do it at $25,000 scale and up, rooftop. And so we ended up getting money from Goldman's Sachs’ Special Situations Group. And they made a nice 17% rate of return to do the first set of deals. And then once we got to that multi-hundred million dollar scale, we got Wells Fargo and Union Bank of California and lots of other folks to come in.
But, you know, that's happening in battery storage. I mean, when General Capital first started funding battery storage, I think the check size needed at the time was $20 million. And, you know, they had all these battery storage deals like, you know, Behind the Meter. I think one of their first customers was like a printing press company who really needed it because they were paying 50 cents a kilowatt hour because of demand charges. And so you have all these weird niche projects where you have very high rates of return for new technology, but it amounts to like $50 million, $25 million, $75 million initially of capital needed before it goes to trillion dollar scale.
Joe: (09:20)
Can you talk about that model, you know, for listeners? And when I say listeners, I also kind of mean myself. But for listeners who maybe don't understand it, what was that model that you pioneered at SunEdison, that original model? When you say you got these deals with Whole Foods and others, what was the sort of breakthrough business model that you pursued there?
Jigar: (09:42)
Yeah. So, I mean, when I worked with Whole Foods, I remember it was great. The guy who ran the store in Edgewater, New Jersey really wanted to put solar panels on his roof. And he said, Jigar, ‘Yours is the first model that lets me do this because every other model I had to pay $450,000 for these solar panels and wait for 10 years to get my payback.’ What we did was we said, ‘No, we'll own the panels. And we'll just charge you for the electricity every month.’ And so it's pay as you save.
And when I talked to the CFO above him of the Eastern region, she was like, you know, this is 2003 — Whole Foods is growing so fast Jigar that I either can buy a solar system or open a new store. And so I'm not gonna buy a solar system. And so as soon as we were able to give them this ‘pay as you save’ contract, she was like “done.” Like, I mean, really the contract was a way to get past the CFO, right? Because they were saying, ‘look, you know, like we shouldn't be putting our capital into this kind of asset. Like that's not our core confidence.’
Tracy: (11:03)
So if we fast forward to today, you're at the Department of Energy now, what exactly are you doing over there?
Jigar: (11:10)
Well, it's all the next generation of entrepreneurs. Right?
So when you think about where I was at in 2003, and, you know, after we did the Goldman fund and we had a $500 million pipeline, you still had a hard time breaking through with banks. And so a lot of banks would say, “Look, I don't get paid that much. And you know, like you're basically asking me to do something weird. I have to basically write 12 white papers to educate my investment committee on this new asset class. And it's so much easier for me just to do a really weird real estate deal. And so why am I like spending all this time on it?”
And so largely there isn't real technology risk. Sometimes there's perceived technology risk, like in fuel cells, for instance, or in hydrogen where people are just afraid of it. But most of the time it's just getting their attention, right. They just really need someone to be first. And so they come in the Loan Program's Office, we give them money first and do a proper underwriting, due diligence. You know, we're really respected for how much of a pain in the ass we are to get through. And then after we do the first deal, a whole bunch of banks say, ‘alright, we're happy to be the second money in because we can read DOE's white papers, and we can do all of that. We don't have to do that work and we can do the next phase of it.’ And we're proud to play that role across, I think, 20 sectors or so now.
Joe: (12:39)
So I started off in the beginning, we were talking about this tension because in the long term it looks like there's still plenty of returns and possibilities for some of the new energy technologies to change the way we get our energy. But right now in June of 2022 there's concerns about whether just the grid is gonna stay up for Americans this summer and in the Midwest there's warnings about that. And obviously in Texas. Going back to setting aside everything else, like, how would you diagnose the issue? What is going on, whether it's under investment or what is going on such that this is suddenly become a concern again about whether the lights will stay on through the year?
Jigar: (13:28)
Well, I mean, you know, I think there's entire books that have been written about this. So I don't know that I could answer this question in a minute, but what I'd say is we have a lot of old infrastructure. So the average coal plant in this country is almost 50 years old. And so when people say, ‘oh, those environmental are shutting down coal plants,’ I think old age is shutting down coal plants, right?
And the same thing too, with natural gas plants, we built a tremendous amount of natural gas plants in this country to deal with air conditioning. Remember air conditioning, wasn't a thing in this country until the early eighties. That's when most people got air conditioning. And because it created this huge spike in demand during the day we built a whole bunch of natural gas peaker plants, and those natural gas peaker plants were built in largely the late eighties and then into the nineties.
And so they're all old today, because they were never made to last more than let's say 20, 25 years. And so now we're sitting here and saying, should we reinvest in more coal plants and more natural gas plants? Or should we use the next generation of technologies to provide generation for our grid? And then at the same time, because we weren't really thinking about the dexterity of demand, we were only thinking about the dexterity of supply. So today you can do whatever you want at home and the generators have to ramp up and down to meet what you do at home. But tomorrow you could really easy ramp up and down people's EV chargers at home, people's thermostats. You could do lots of things if you gave them an incentive to do that. And it's 90% cheaper to ramp people's, you know, EV chargers and air conditioners than it is to build a new power plant.
Joe: (15:16)
Wait, what do you mean? Sorry, can you explain that? What do you mean it's 90% cheaper to ramp people's EV chargers?
Jigar: (15:21)
So I live in a nice neighborhood in Bethesda, Maryland. And every time I go for a walk, someone's got a new electric vehicle. You could imagine that these homes in this circuit, when it was built in 1945 or whatever it was, wasn't built for a bunch of electric vehicles to plug in.
So the utility companies coming in and saying, well, we're going to spend $70 million to redo the distribution grid. Well, it's a lot cheaper for the utility just to put in a $1,000 bidirectional charger in my garage and say, ‘when everyone's plugged in at the same time, we're gonna ramp everybody down from 10 kilowatts of draw to only one kilowatt of draw so that we don't have to upgrade this entire distribution circuit. But instead we actually just make sure that we're not overburdening the distribution circuit all at the same time.’
Because most of the time my distribution circuit here on my block, I think the average capacity factor is maybe 30%, which means it's only being used roughly 30% of the time. But they're gonna increase that and pay $75 million bucks to do that and drop it down to 15% just because a bunch of people bought Teslas?
At some point that math doesn't work. So we've doubled the cost of transmission and distribution infrastructure in our country. We used to pay roughly 2 cents a kilowatt hour for transmission distribution. Now we pay roughly 4 cents and that's largely because we keep overbuilding it and then using it less and less on an average. And so if you want to use it more, well, you fluctuate the way the loads work because your house is thermal storage, right? Like when you turn on your air conditioner, unless it's a super leaky house, then it maintains that temperature for like six to 12 hours. So you could put the temperature down to 68 when we have excess power and capacity in the grid and let it float up to 72, you know, when you have a lack of capacity or generation in the grid, but that whole approach is not something that we do.
Instead, Warren Buffet, I think proposed that he wanted to get paid like $6 billion to build natural gas plants in Texas with onsite natural gas storage just in case a polar vortex hit once a year. Why would you do that versus paying poor people or paying middle class people or wealthy people to fluctuate their loads?
Tracy: (17:57)
So I mean, is the issue then — it's not that we don't have enough energy it's that we're not particularly good at, I guess, calibrating the flow of it depending on changing demand, is that right?
Jigar: (18:10)
Yeah. The asset utilization of the entire grid is going down. And when you pay a fixed amount of money for something and the asset utilization goes down, then the cost of it goes way up to use it because you're not using it very often. And so we've got to figure out how to optimize for asset utilization and stop optimizing for costs per kilowatt hour at this particular place.
What we care about is system costs, because all the system costs are shared amongst the rate payers, as they're referred to. And so they don't care that the levelized cost of energy of that solar plant is 1.60 cents a kilowatt hour, or that nuclear plant 7 cents a kilowatt hour or that pumped hydro storage facility cost $2 billion. What they care about is to provide me with reliable electricity, right? What do I have to pay at my house? And so we evaluate things on an individualistic basis as opposed to a system-wide basis. And so that has led to a bunch of individual decision making that has led to, you know, no optimization at the system level.
Joe: (19:21)
At what level, whether it's the federal government or the regional power authorities, like what would have to change in order to get, as you say, a sort of a superior evaluation of the grid so that we stop optimizing for this sort of individual level instead of system-wide allocation? What would that incentive structure or regulatory change [look like], how do you get to that different approach?
Jigar: (19:49)
So, I mean, we do a lot of this modeling at the Department of Energy, but we do it on a nationwide basis, which is not that helpful on the decision making the side of things because the decision is made at the local level, right? So each state has a public service commission and that public service commission is the one that makes this decision. You could imagine the public service commission is hugely under resourced, right? And so they get 10,000 pages of documents from the utility and then they have to read it all and say, here are the 12 assumptions in here that we don't like, please go back and make these changes or whatever it is, but they don't really have the ability to do all of that modeling themselves.
And so what has happened in the past is for instance, the city of LA owns one of the largest municipal utilities in the country, LA Water and Power. And they hired the National Renewable Energy Laboratory to do a comprehensive study called LA100. And that has said here are the four ways for you to optimize the system for decarbonization and reducing prices for everybody. And so now they're implementing that LA100 study because they pay the NREL to do their own thing. That made sense. But I think that unless you empower the public service commissions to be able to do their own independent analysis which we could do, we have resources, the Department of Energy, but they would've to ask us to do it — then it's hard to equip them with what they need to negotiate with the utility. Because rremember the utilities are not bad people, but they've been given a monopoly license. And they have shareholders that get paid based on how much iron they put in the ground. So the more money they invest, the more shareholder equity returns they make.
Tracy: (21:33)
So I'm fascinated by the idea of, you know, you mentioned the banks having to write white papers on new types of technology. And I can just imagine someone trying to wrap their heads around some new emerging energy technology and trying to convince their investment committee to put a bunch of money in it. But how does the DOE actually go about it? Like, can you give us some color on what it's like if someone approaches you with a new idea or a new project, what does that process of approval actually look like? And how do you judge one project over another?
Jigar: (22:11)
Yeah, it's a great question. And I'd say that the first part of it's easy because look, what the Department of Energy does mostly is invest in R&D. And we're increasingly doing a lot more on the commercialization side under Secretary [Jennifer] Granholme. But you know, when you think about what we have is we have 10,000 engineer scientists and experts who work on our platform at extraordinary national laboratories across the country. So there's not a single new idea that we ever get pitched, right? That idea is new to the marketplace, but the person who invented the patent probably works at one of our national labs and did it 27 years earlier. So the technology part of it doesn't scare us because we've got all these experts in the platform.
On your, the second half of your question, I'd say that we don't compare projects to each other. If they qualify for the Loan Programs Office and they can get through the gauntlet, then we'll give them a loan. They have to meet our innovation standards. They have to meet our greenhouse gas emission reduction standards. But if they qualify, we don't say, ‘well, this one saves 1% more than you do. So therefore we're gonna give it to this one. Not that one.’ We'll give it to both of them because from our perspective, it's about starting the flywheel, right? It's about putting the first and second and third projects out the door and then they're gonna have to win on their own merits and the battlefield that we call capitalism.
Joe: (23:36)
So what are you doing? Like what specific areas are interesting right now to you in terms of technologies that you are potentially backing or thinking about backing or see as very promising … What's exciting?
Jigar: (23:55)
Well, we spend a lot of time in 28 or so different sectors, right? There's a lot of studies that have been done around how you decarbonize the grid, how you decarbonize the economy, etc. I'd say that where we're getting the most interest, where people are actually submitting applications are in nuclear energy, in carbon circulation and storage, hydrogen battery storage, transmission, EV charging rollouts, but also critical minerals. You can imagine with all of the rise in costs of critical minerals, we're getting a ton of interest for people to, you know, to mine more critical minerals here, to process them more efficiently etc.
Joe: (24:33)
You mentioned battery storage. And I feel like I read very mixed things. Whereas some people talk about like, okay, batteries are really key. And they're particularly going to be crucial for increasing our ability to rely on renewable sources like solar and wind, because then we can preserve the energy at night or when the wind isn't blowing. And then others say, you know what, it's a pipe dream. People have been pitching grid level battery storage for years, it's not going to get cheap enough. And we are not even close to having battery capacity to meaningfully move the needle. And not being an engineer myself, I don't really have any way of evaluating these competing claims. What is the battery storage opportunity and where can battery storage play a meaningful role in accelerating adoption of some of these non-carbon power sources?
Jigar: (25:27)
Yeah, no, it's a fascinating question. You know, the whole narrative around storage fascinates to me. Because it's actually not that complicated, but everyone makes it super complicated.
Joe: (25:40)
I need the simple summary of it all.
Jigar: (25:44)
So you guys have been studying supply chains on your podcast for a long time now. And the largest supply chain in the entire world that is real time-only is the electricity market. Every single millisecond of every single day, the supply and demand has to equal each other. That is exhausting, right? Think about like how transportation fields works or agriculture. There's storage everywhere. You have grain elevators, you have tank farms, you have all these things. We don't have storage on the grid. The only time we built storage was in the 1970s, we had this thing called pumped hydro. And the reason we built it is because you, the nuclear plants of the 1970s were designed to never be turned down. And so you had all this excess power at times. And so we needed to dump the extra power somewhere…
Joe: (26:35)
Pumped hydro is just pushing water up and then you let it down?
Jigar: (26:38)
That's exactly right. And so now what we're saying is we basically have found that by adding storage into this supply chain, it makes everyone's job easier. You don't have to do this real time thing all the time. You can just store power. And so when you have some circuit that, you know, has a squirrel that gets fried on it and so it goes down, you can use a battery to fix that problem. If something happens, use a battery. And so that's why we have battery storage. We've been working on it since the nineties. Like I've been working on it like with Sandia National Laboratory since the nineties. And so the technology though got cheap because we started using lithium ion batteries for laptops and cell phones. And then Elon Musk said, well, that supply chain is there. So we should use it for electric vehicles. And so then that got even cheaper.
The cost came down using Wright’s Law. It's not new information, right? The learning curve has been around for decades. And, you know, after five or six cumulative doublings of experience, the cost has come down to the point where people are like, “this is 80% cheaper than building a natural gas peaker plant.” That's what we figured out back in 2010. So they started building a bunch of battery storage because it was cheaper than running their peaker plants. And then people just kept growing. And then, but just the sheer scale of it, I think is hard for people to fathom. So I'll just give you a sense. So when you think about electric vehicles, the president has said that we're gonna have 50% electric vehicles by 2030, right?
We'll need 800 gigawatt hours of battery storage, right? To put 125 kilowatt hours of battery in your Ford F-150 lightning ,in your 66 kilowatt hour battery pack and your Hyundai. And so that's 800 gigawatt hours, right? And just to put that in perspective, you know, we use like 4,000 Terawatt hours, right? So that's like four million gigawatt hours per year in the United States.
So 800 gigawatt hours, the total amount of utility scale battery storage that we expect to be on the grid by 2030 is 150 gigawatt hours, right? So we will have 800 gigawatt hours of batteries sold in people's cars in one year in 2030, the total cumulative amount of battery storage on the grid in utility scale battery storage will be 150 gigawatt what hours, and to then to blow your mind even more, we just closed a loan for hydrogen storage in a salt cavern in Delta, Utah — that one salt cavern will store 150 gigawatt hours worth of hydrogen.
Tracy: (29:44)
So when it comes to designing a supply chain for energy, as you mentioned who should be the ultimate standard setter there, because on the one hand you have the government, which clearly has priorities of its own. And you would assume that increasing battery storage or something like that would be part of it. But on the other hand, you do have pools of private capital that are often funding a lot of these projects and efforts, and I'm sure they have their own preferences as well about how these things should work. So who should be the standard setter here, or how should these two groups work together?
Jigar: (30:24)
It's a fascinating question. And every question you ask, I think like needs its own one hour podcast.
Joe: (30:31)
We could do a series. We could do like a five episode series with you. We might do. Maybe we'll do that later in the year.
Jigar: (30:38)
But like, I think when you think about your question, right? Like who should be the standard bearer? So Department of Energy writes a report right. And says, here's the status of all the technologies that we've done R&D on. And here's where we think the pathways will work and the roadmap and all that stuff.
And then people, you know, whatever, sometimes they ignore it. Sometimes they read it. It's great. And then at some point you've got venture capitalists, right. And then they fund companies and they have, you know, all these different companies. And remember, like in 2009 it was like Heinrik Fisker versus Elon Musk. And there was like Fisker automotive and this kind of thing. And why did Elon Musk win versus Henrik Fisker? It wasn't because his technology was better or execution around like, you know, this particular thing or that particular thing.
It was because like of raw grit and perseverance and all the things that, you know, we herald entrepreneurs for, right? And so he succeeds. And he, you know, now has the most valuable car company in the world. And it's wonderful. But it didn't like come out of some sort of thing that I wrote up in a roadmap at Department of Energy, you know, in 2007 and said, ‘this is exactly how the electric vehicle market will work.’ And so that happens that way. But then when you get to trillion dollar scale, right, then the infrastructure investors don't care. That's the interesting thing, right? What they care about, and they're the large bucket of money that is gonna spend the $10 trillion to decarbonize, the United States and the larger numbers to decarbonize the world. And for them, they want a contract that they think is going to pay them back.
That's all they care about, right? They don't care whether it's lithium ion batteries, or nickel metal, hydrate batteries, or zinc batteries, or iron air batteries, or hydrogen storage or pump hydro or whatever it is. What they care about is, ‘Is this asset likely to be used for the entire period of the loan or the equity I'm investing in?’ Because they're gonna make a 6 to 8% return, right? They're not getting paid to like take a whole bunch of risk. So what they want to know is what is the regulatory infrastructure? Why does the utility want to do this? Like, is this likely to get, you know used for the period of time that's required, etc. And so, so you've got this interplay between the choices that the infrastructure investors have in front of them are limited, right? They don't get to look at the entire landscape and say, here are the 27 technologies for us to look at. And we pick this one. They get to only invest in the things that they get pitched. And so if only two of those 27 entrepreneurs are competent and capable of actually getting to what we talked about at the beginning of the podcast, which is $250 million scale, then those are the only two applications that they get to choose between.
Joe: (33:30)
When we talk about these infrastructure investors, who are we talking about? Like where do they sit in the constellation of private capital, and then how do you see your work with them? And how do they think about you? And you think about, you know, okay, you provide these sort of initial loans, then maybe a handoff to them. Who are we talking about? And how much do you do work with them?
Jigar: (33:52)
Yeah, it's a good question. They're generally not American. So the American names are generally insurance companies and they've got their own conversation that we can go through. But it's usually Canadian and Australian companies. So this is like Oz Super QIC, Ontario Teachers, Aimco out of Alberta, CPPIB he Canadian pension board.
These are the folks who, you know, remember when like City of Chicago sold their parking meters or someone like invest in toll roads. It's always them. They're the ones doing the cool stuff on the infrastructure side. And so it's not CalPERS or Calsters or some of those folks, it's usually those big infrastructure investors. And what they're looking for is outsized returns. Because if you have a municipal bond backed project, you're making 3%, right?
So they're looking to make six to eight, which is higher than three. And so that's what they're solving for. And they're saying, well, they’ve got to be early. They have to move a little faster. They've got to have bigger staff. Right. So they can like network with folks, etc. And sometimes they invest in the company. So like CPPIB bought out Pattern Energy, which is one of the largest wind and transmission line developers in the country, because that's how they could get access to proprietary deal flow. Otherwise they were getting outcompeted by other cheaper forms of capital.
Tracy: (35:16)
So is it just inevitable that people will have to choose between paying higher rates for energy in order to incentivize investment or we'll just have to deal with, you know, creaking infrastructure because no one wants to actually pour money into it. Like, is that just a tension that we can't get around?
Jigar: (35:40)
Well, it's certainly the default point of view, right? The default point of view is that, you know, you wait for things to break, supply chain costs,go up, then it incentivizes a bunch of people to invest and then, you know, supply chain costs come down. So that's the default view.
I mean, you know, when you think about the speech that Biden gave on industrial policy and then, you know, Ezra Klein wrote that big piece in the New York Times about it, and I think he defined it, industrial policy, as the idea that a country should chart a path to productive capacity beyond what the market would on its own support. And so I think we are at a crossroads where I think we're asking ourselves, should we be proactively dealing with all these supply chains?
And if we are going to do that, what tools do people want us to use? Remember when you think about a commodity supercycle, right? Which we went through during the Bush administration, you know, there's three ways to dealing with the commodity supercycle. One is you’ve got to get more of the raw materials. You gotta mine more. You gotta produce more. You gotta do whatever it is.
The second thing is you use what you have more efficiently, right? Like you get cars that have better miles per gallon. You have batteries that use less lithium than the previous version did to get the same amount of output.
And then the third is you fund substitutes, which is largely what I do for a living, you know, you find all of the different technologies, all the different things that would, you know, reduce the amount of the base commodity that you need. And that process is slow. So that process is not something that's gonna happen in 12 months, but you need to do all of those things. And that can be planned, but there needs to be a framework that everyone agrees to. And then each of the technologies fits into one of those three things.
Either you're, you know, streamlining permitting so that you can get more mines built or more things built. You're investing in R&D so that you can like make the use of those minerals more efficient. Or you're investing in alternatives and scaling up those investments early when you don't need them. That's the biggest problem is when commodity prices are low, people are like, ‘well, why are you making that investment? We don't need it.’ Well, because it takes 10 years for that technology to get to maturation so we can scale it to trillion dollar scale.
Joe: (38:09)
Speaking of funding alternatives, and you mentioned that just today, we're recording this on June 9th, but just today that you funded a hydrogen project and I'm still a little unclear in my head like where hydrogen fits into all this. When we think about cleaner fuels or cleaner source of energy, lots of talk about solar, lots of talk about wind, some talk about nuclear. How should we understand, you know, when we talk about this vision for expanding capacity, how should we understand in your view, the role that hydrogen has to play in all this?
Jigar: (38:45)
That's a good question. Look, I think that people get confused because they're thinking hydrogen and what they should be thinking instead is energy carrier, right? So if I say to you, the wind and solar industry — and also natural gas and coal and other things — they have a lot of surplus capacity in the spring and the fall because there's not a lot of air conditioning or heating being used then. And so, and we have a lot of excess grid capacity. So what could we do to store all of that capacity so that we can use it in the winter and summer when we need it? Like put it all into big batteries, but those batteries have a degradation rate of like, you know, whatever it is, like 0.2% per day. So if I store it and I stick it there for 90 days, then by the time I need it, it could be like 30% gone.
So that's not a great energy carrier for seasonal storage. I could use pumped hydro but then if I just sit it up there, it might evaporate. There's some evaporation that happens etc. And then I could put hydrogen in a salt cavern and guess what? That doesn't degrade at all. So the hydrogen just sits there. And a lot of people argue with each other over points that are meaningless. Like, so for instance, people will say, ‘well, hydrogen doesn't make any sense because the round trip efficiency is way lower than it is for lithium and battery storage. ‘Okay. Factually true. But lithium and battery storage is not good for seasonal storage. On top of that, you can't get paid only like four times a year to like use lithium and battery storage. You have to get paid to use that every day or else it doesn't [work[.
For hydrogen storage, if I store a bunch of hydrogen in a salt cavern and then Texas needs it at $9,000 a megawatt hour for like two days, that whole thing is paid off, right? And so each thing has its own like thing that it does within a system. That's why I'm saying like, everyone's like, ‘well this is more expensive. This is like worse round trip efficiency.’ I get it. But on a system-wide basis, each one of these technologies helps to make each other resilient so that when we have more extreme weather, when we have all these other issues, we actually have tools that we can use to keep the grid going.
Joe: (41:00)
Sorry, Tracy, just one real short question here. Can give me the real sketch of hydrogen stored in a salt cave? Like what do we actually talk about here? How does that work?
Jigar: (41:11)
So salt caverns have been used for years, right? We use it for the Strategic Petroleum Reserve. We use it to store all the natural gas that everyone is like on pins and needles about every single day. And we've been using it for temporary storage for hydrogen refineries for decades, like 40 years. So it's not like a new technology. This is the first ever commercial salt cavern storage. This particular salt cavern just happened to be there. So there's an 1800 megawatt coal plant that's on top of this salt cavern. And Paddington Ventures looked at it 12 years ago and says, this is a really cool salt cavern. At the time, they didn't know they were gonna use it for hydrogen. They just said salt caverns don't happen every day. And salt caverns basically trap things.
So even though hydrogen is super light — it's number one on the periodic table — it doesn't escape from a salt cavern. The salt cavern has this crystal sort of lattice. And so it keeps things in. And so there's some money that has to be spent to make it usable, to pump stuff into it and then pump stuff out of it. But otherwise it's a natural phenomenon and it's, you know, when you see it and right now there's a run on salt caverns. So everybody and their mother is trying to buy up salt caverns in the Western United States right now. So it’s always interesting.
Joe: (42:32)
This discussion is already inspiring 10 follow-up episodes coming up. We’ve got to find someone who’s making a salt cavern REIT. That has to exist somewhere. Anyway, sorry, keep going.
Jigar: (42:52)
This one salt cavern can store 150 gigawatt hours of hydrogen, which is an enormous amount of hydrogen, right? I mean, it's the same amount as we expect to be on the grid for lithium ion utility scale battery storage by 2030. And so it's this extraordinary thing. And then they've got 220 megawatts of electrolyzers, which turn excess electricity into hydrogen, right? Splits water into hydrogen and oxygen. And then, you know, but because there was an 1800 megawatt coal plant there now, which has extended its life through 2025, the grid capacity to run those electrolyzers is already there because it's there for the coal plant. So it's the perfect project because the grid is already built around this site. And so you don't have to add another billion dollars worth of grid infrastructure because it's already been built and it's already there.
And so they could probably expand the electrolysis and electrolyzer capacity there to 2000 megawats under the existing grid conditions there. So you could imagine in the future, this project, you know, being an anchor for a hydrogen hub and people co-locating a green ammonia plant, right? And then turning that hydrogen, instead of turning it back into electricity, they turn it into fertilizer or they turn it into green chemicals. People use hydrofluoric acid, hydrochloric acid, you know, things for industrial processes. And so it's a pretty exciting time to think about all these things because supply chains are getting disrupted and people are wanting to see how we do things here in this country. And well that happens to be the president's goal as well is to onshore and, you know, build up a lot of the capacity that we have here in the country.
Tracy: (44:41)
What's the most exciting project or technology to you right now? Like where do you see the most potential or what gets you the most excited?
Jigar: (44:50)
Honestly, it's hard to answer because I'm excited about things in all sorts of sectors. I'll give you an example. There's a company that has figured out a way to take, these sort of like, you know, these like nutrients, right? When you have a chicken farm and they say that their manure like pollutes the ocean and creates algae blooms. They have a way of just spinning all of the nutrients into their component parts and going back to nitrogen and phosphorus, etc., and then selling it. It's groundbreaking, right? Because right now, there's a lot of these, what do they say? Like birth control and that kind of stuff that's in wastewater treatment plant waste. Right now wastewater treatment plants have to spend money to dispose of what they call PFAS. This company can just spin it back out into its essential elements and sell it back into the marketplace. I mean, it literally could be game changing, right? We don't have to mine for as many of those elements because we can get it from our waste stream.
There's other folks who've created next generation business model innovation around car rentals. I mean, you know, 50% of Americans basically just live from car payment to car payment and you know, and for those of us who don't live on the coast, I mean, many people's car payments are larger than their house payment. They're paying like 700 bucks a month for that F-150 and they're paying 400 bucks a month for their mortgage. And so, you know, figuring out how to get people off of car payments, but instead into something that looks like cars as a service where you never have to do maintenance on your car, you never have to do anything because electric vehicles don't require maintenance compared to internal combustion engine cars.
So you can just rent it for 150 bucks a week for as long as you need it. And whenever there's a problem, you just give it back and get another car that works. I mean just the amount of reduction of stress for people is worth every penny, right? I mean, but there's just technology after technology. Manufactured homes, right? There's a lot of innovation in manufactured homes now wherethe old school manufactured home industry basically, you know, continues to sell you these houses for like $500,000, $600,000 a year because of the auxiliary dwelling unit market in California and other places, there's all these startup companies who can now 3D print a home that's basically net zero for 90,000 bucks. And so you could just radically change home affordability, but also make them net zero energy users.
And so the amount of innovation Americans are capable of is amazing. And a lot of what we're doing at the loan programs office is figuring out how to tie them to institutional capital at infrastructure scale because they’re innovators, right? Their brain is like, ‘how do I make this technology work? And how do I manufacture it at scale?’ I mean, what did Elon must say? The manufacturing hell that he was in, in like 2017 or 2018. They're there. So they need partners like us to help figure out, okay, if you do this, this, and this, here's a billion dollars that can actually like get the rollout to occur.
Joe: (48:06)
Jigar Shah. This was a great conversation actually kind of inspiring there at the end. We have so many like negative conversations these days about shortages. It's exciting to be reminded that there are people working on big solutions to these things and maybe they'll come to fruition. And, uh, no joke, we literally have like 10 episodes to do. Maybe five of them with you alone. Thank you so much for coming on Odd Lots. That was a real treat.
Jigar: (48:32)
Thanks for having me.
Joe: (48:49)
I wasn't joking. That was a kind of inspiring, like, it is good to be reminded that there is entrepreneurship and potential technological breakthroughs or technological breakthroughs that are already proven that just need commercialization or investment, that not everything is so dire that people are working on. People are working on a lot of this stuff.
Tracy: (49:12)
Well, totally. And I know we've talked a little bit about the fertilizer shortage, but it's nice to hear that there's a company that has, you know, an active solution to actually try to capture some fertilizer from wastewater and things like that. But it does seem like Jigar’s emphasis on the scaling-up problem and I guess the problem of incentives, and it's almost like every time you come up with a new technology, a new way of doing things, it feels like it's hard for the system to adapt to it because they've already adapted to the way things are being done. And they've become very good at extracting money from the current system. And so once you start messing around with the way the whole system is functioning, it just feels like it's hard to get everyone on board. Does that make sense?
Joe: (50:05)
No, it does. And it's pretty clear that the existing system has all kinds of perverse incentives. And this is something we’ve talked about before and he mentioned it now, you know, if the publicly-owned utilities are largely, their shareholder return is a function of, ‘well, we spend X on investment and so we are going to raise the rate to X plus some Y percent.’ Does that create the incentive to just spend more, even if it's not the most efficient thing, is there an existing incentive to come up with ways to use the grid more efficiently, such as that we've talked about in the beginning of the conversation. They're hard economics problems. Like the technology is exciting. The financing is exciting, potentially, but the economics to get to that state is tricky.
Tracy: (50:59)
Yeah. I think that's exactly right. And that's really where it feels like energy infrastructure investment is different to traditional infrastructure investments. So, you know, if someone proposes, ‘oh, this bridge is really old and we need to redo it. That, you know, sure it might be complicated in certain ways, but you're basically building another bridge. Whereas if someone says, ‘oh, we need to talk about hydrogen power. We need to talk about how we're storing electricity. We need to think of new ways to capture waste products from the energy that we are producing.’ It just feels like you're almost building a new system every time, or at least it's hard to sort of bolt those on to the existing system.
Joe: (51:41)
You know, it was also interesting, you asked that question at the end — ‘what's most interesting to him?’ — and sort of one of the striking things that I sort of got throughout the whole conversation is sort of [how there are] different solutions to different problems. Like some places maybe it's pumped hydro, some places maybe it's hydrogen, some places, maybe it literally is putting more lithium ion batteries directly plugged into the grid.
But I guess this is the ‘all of the above’ way of thinking, because the electricity system is obviously extraordinarily complex. And so the idea that there's just gonna be sort of one fuel that solves it, or one new thing, it really is just like, what do we have here? What infrastructure is here? Oh, there's a salt cavern here or something like that. Like how do we get it so that what we have in place, or what exists locally that can be used in the best way.
Tracy: (52:38)
Yeah. Which again comes back to that scale problem. And almost the beginning of the conversation where Jigar was talking about SunEdison and creating basically micro solutions that are extraordinarily efficient for one particular house or building or one particular area, but they become hard to do at scale. And almost everything in this world, certainly in finance, is a scale business. It's a volume business. And so it becomes very hard to get people I think, excited about these individual solutions.
Joe: (53:09)
I think we should a Salt Cavern REIT by the way.
Tracy: (53:12)
<laughs>
Joe: (53:12)
Seriously, buy up all the salt caverns that we can and then float it on the market. I think that could be a good business.
Tracy: (53:22)
So I was Googling a little bit during that and first of all, salt caverns are beautiful. And second of all, yeah, it looks like a lot of big energy companies have been snapping them up. I saw Trafigura was buying some of them. Yeah, let's do the salt cavern Reit first-person episode.
Joe: (53:40)
Oh, it looks like there might be a REIT already that has salt caverns. Anyway. Unironically, like 10 episodes out of that one.
Tracy: (53:49)
Yeah, I think so. Wait. Oh, there is a salt cavern Reit. Oh my gosh. Okay. Well, yeah. Okay. Now we have to do an episode on salt caverns. Okay. Shall we leave it there before we start there planning like an entire 10-part series?
Joe: (54:01)
Let’s leave it there.
You can follow Jigar Shah on Twitter at @JigarShahDC.