Energy Capital Podcast

This is a free preview of a paid episode. To hear more, visit www.texasenergyandpower.comThere are massive changes happening to electric grids around the world, including here in Texas. Millions of devices, appliances, and increasingly vehicles are grid connected and could, with the proper systems in place to receive price signals, make grids more reliable, bring down energy costs for consumers, and make electric markets more competitive. But it's early days and there's a long way to go. We need practical examples of distributed energy resources and efforts to reduce energy waste. And we can find them at Pecan Street. Pecan Street is a research organization that collects billions of data points on heat pumps, solar panels, electric vehicles, connected appliances, thermostats, and much more every single day. Pecan Street also conducts groundbreaking research on energy, water, transportation, and agriculture, which we reference throughout the episode and you can find more information about in the show notes.For this episode, I had the pleasure of talking with Anissa Rodriguez -Dickerman, the CEO of Pecan Street, and Scott Hinson, the Chief Technology Officer at Pecan Street. Anissa has more than 20 years of experience in nonprofit leadership and is in charge of leading Pecan Street's efforts in partnership development, strategy development, and ensuring program delivery.Scott Hinson, as the Chief Technology Officer, directs the research efforts of the labs, which are focused on integrating renewable energy, electric vehicles, connected devices, distributed energy resources, and the software that enables it all. Both of them are a wealth of knowledge and we're a joy to talk to. We talked a lot about electrification and heat pumps. We talked about the need to mainstream smart technologies and how all of these technologies will be managed. We got into workforce development and the implications there. We talked about Pecan Street's recent award of a grid resilience innovation grant from the Department of Energy. We talked about multi -point charging of electric vehicles, the integration of big data, the need for change in energy policy, and much, much more. This was a great discussion and a deep dive. Thank you for listening and have a great day.I really enjoyed this discussion and hope you do too. This podcast is for paid subscribers only and thus won’t be listed publicly on podcast apps. For details on how to listen to this podcast in your favorite podcast app, please refer to this information from Substack.If you like the episode, please don’t forget to recommend, like, and share on Substack, Apple Podcasts, Spotify, or wherever you listen.I look forward to hearing your thoughts; don’t hesitate to share them with me and fellow listeners in the comments. Thank you for listening and for being a subscriber! Transcript, show notes, and timestamps are below.Show NotesFor more information on Pecan Street and to view all White Papers visit: PecanStreet.orgSmart Cooling: Leveraging Technology and Behavior to Stay Cool and Reduce Energy Demand, published by Pecan StreetIn Nation’s Energy Capital, 45% of Texans Cut Spending on Basics to Pay for Energy Bills, Dallas Morning NewsThe Energy Capital Podcast, Episode 1 with Former PUC Commissioner Will McAdamsTIMESTAMPS3:06 - About Anissa5:55 - About Scott8:26 - About Pecan’s data collection and what that teaches us about EVs and grid management12:38 - What Pecan has done and is doing, including information on the data port they invented to measure residential energy use and optimization17:00 - Major learnings about electrification, heat pumps, and smart technologies in homes21:28 - What we need to mainstream smart technologies and who will be managing these devices and their communication with the grid25:26 - Reaching and addressing communities disproportionately impacted and low-income folks/ making programs for energy optimization and DERs accessible. 27:14 - Workforce Development 29:40 - Increased emphasis on community benefits plans in federal grants 33:08 - Addressing needs of rural communities so they can access benefits related to DERs, EVs etc.37:08 - Future projects and areas of research including multipoint charging, hydrogen, and water 42:45 - Efficient heating and cooling, energy efficiency, and how EE is different from demand response. Discussion of reg up reg down and what it is.48:17 - Newer inverter compressors in heat pumps52:22 - Big data: how Pecan Street uses it and hopes to in the future to understand and find solutions to major problems, such as heat islands55:35 - Future of the grid59:55 - Most important energy policies for the future

Dr. Michael Webber is one of the best known energy experts in Texas. He’s the John J. McKetta Centennial Energy Chair at the University of Texas at Austin, an author of multiple books on energy, and the Chief Technology Officer of Energy Impact Partners, a cleantech venture fund. Michael has a way of explaining and breaking down even the most complex energy concepts and topics into terms that are understandable and engaging to novices and experts alike. We started the conversation with Michael’s views on common misconceptions about energy and what Michael sees as the future of the grid in Texas. We explored the role of fossil fuels and oil and gas companies in the energy transition; talked through the history of energy transitions (there have been several) and what we can learn from the past; and went over the steps to achieve decarbonization. Michael also went into some detail on energy efficiency, demand response, baseload power, hydrogen, heat pumps, electric vehicles, and much more. I hope you enjoy this conversation as much as I did. If you like the episode, please don’t forget to recommend, like, and share on Substack, Apple Podcasts, Spotify, or wherever you listen.I look forward to hearing your thoughts; don’t hesitate to share them with me and fellow listeners in the comments. Thank you for listening and for being a subscriber! Transcript, show notes, and timestamps are below.Show NotesPowering Humanity: Essays on Energy and Society by Michael WebberPower Trip: The Story of Energy by Michael WebberPower Trip: The Story of Energy documentary seriesThe Webber Energy Group at the University of Texas AustinYou Should Be Getting Paid to Prevent Heat Wave Power Outages, New York Times Op-Ed by Michael WebberThe Innovator's Dilemma: When New Technologies Cause Great Firms to Fail by Clayton ChristensenThe Obstacle is the Way by Ryan HolidayHow ExxonMobil Is Planning For A Future Of EVs: Interview with CEO Darren WoodsMore about Michael:https://twitter.com/MichaelEWebberhttps://michaelwebber.com/https://www.energy101.com/ Timestamps3:39 Michael’s roles at UT and Energy Impact Partners4:37 History of energy, PBS series, and books6:12 Conventional wisdom regarding the energy system that is wrong and/or misunderstood. 8:11 Where the Texas grid will be in 10 years and what he hopes will happen11:27 Carbon pricing 14:34 Why oil and gas companies should not be worried about the energy transition, what role they can play, and political dynamics in Texas17:45 The Four Steps to Decarbonization19:30 What role oil and gas companies will play in the energy transition future and political dynamics in Texas26:40 History of energy transitions and sources in the US31:51 Environmental, labor, and national security benefits and challenges of renewables, including precious metals36:18 Unpacking baseload power42:51 Energy efficiency and building codes, challenges for investing in energy efficiency and need for policy51:41 Heat pumps and resistance heat: market signals, effectiveness, challenges, and benefits. 1:03:47 Residential Demand Response and the need for market innovation1:08:16 Hydrogen explainer 1:13:40 Interconnecting ERCOTDoug LewinMichael Webber, welcome to the Energy Capital Podcast.Michael Webber Thank you so much for having me. It's good to be in a conversation with you in this format after all our conversations in person over the years.Doug LewinYeah, I mean, one of the reasons I so wanted to do this podcast just to have conversations like this, I always enjoy talking to you, but I'm not, I'm not sure we've ever just had an hour to talk. So this is, this is great. I've been really looking forward to this. And just before we jump in, you know, just want to acknowledge the influence you've had on me and so many people around the state and around the country. I think it was your, was it Energy Policy and Technology short course back in like 2000? Michael WebberYeah, energy. The energy technology policy, which you took like in 2008 or something? It was a while ago, so yeah.Doug Lewin I think that's right. That's right. And that was one of the first times that I really felt like I could really understand this stuff. Your ability to kind of translate really difficult concepts into plain language and help dumb people like me understand it is so appreciated. So thanks, and thanks for being on the podcast.Michael WebberOh, my pleasure. And thanks for the kind words. It's exciting to be a collaborator with you after all these years.Doug LewinLet's start just with, if you would, just kind of describing in your own words, who you are and what you do.Michael WebberSo that’s great. So I'm a professor of mechanical engineering at the University of Texas at Austin. So I do research and teaching on energy and the environment, really at the convergence of commercialization, technology and policy. I'm really an engineer. But I say the words describe me are engineer, entrepreneurship and energy, the three E's, so to speak, and maybe add the fourth E of environment. I'm also Chief Technology Officer at Energy Impact Partners, which is a four billion dollar cleantech venture fund. And I was formerly Chief Science and Technology Officer at NG in Paris, France. So I was there for about three years, 2018 to 2021. So I was an executive in charge of research innovation for one of the world's largest multinational electric and gas utilities. So I've got a lot of corporate experience, some venture and entrepreneurship experience, and a lot of academic perspective.Doug LewinYeah, and also just this kind of quintessential, like public intellectual, right? Talk also about, just for a minute about the PBS series, because I want people to be able to find that if they want to learn more after this conversation.Michael WebberYeah. So I'm a public intellectual, which means I mouth off in public. I write op-eds and give speeches and publish essays. I've written several books. And one of the books, Power Trip: The Story of Energy has been turned into a 12 part PBS series over two seasons. Season one came out in 2020 and season two just came out a few months ago. It has 12 hour long episodes on energy. You can get it on PBS and Amazon prime and Apple TV. And if you fly American Airlines, it's in their in-flight entertainment. Season One is, you can watch it while you're captive on the tarmac or something.And then I've got a new book coming out on Valentine's Day called Powering Humanity: Essays on Energy and Society, which is a collection of like 65 of my 200 plus op-eds and essays I've written over the last 15 years. And that one's a fun one because I go back and actually assess when I was wrong or when I was right because I made a lot of predictions about the future in those essays. So that's my upcoming book.Doug LewinYes, and you were gracious enough to provide me an advanced copy and I love it. I've been looking through it over the last couple of weeks and it's great, highly recommended to everybody as well as Power Trip: Thirst for Power. Anything Michael's ever written or recorded is worthwhile. All right, let's start with, usually Michael, I save a few questions for the end to kind of wrap up conversations, but I actually wanna invert the order today and start with these because you are an expert in such a wide range of different topics related to energy.I'm really curious to hear what your answers are to these, and I think that'll help guide our discussion. So I wanna start with this question that I ask on most of the podcasts. What is something that's conventional wisdom among energy people that you think is wrong or commonly misunderstood?Michael WebberThere's, I've got so many, there's like three things that come to mind that are conventional wisdom that I think might end up being wrong. One is that, to decarbonize economy, we have to get rid of oil and gas, or oil and gas companies. And I can see a lot of ways we could decarbonize economy with molecules still in the mix, and with those companies still in the mix. Another piece of conventional wisdom is that we will have to have base load power in the future. And I think the whole concept of base load actually is going to go away. And we're going to replace it with dispatchable. But that means dispatchable on and dispatchable off. So we could talk about demand response for things you could turn off, as well as power plants or batteries or things you could turn on. So the concept of base load, I think, is just going to feel very antiquated. And then a third piece of conventional wisdom is that hydrogen or other clean options will always require subsidies to be cost competitive. I don't think that's true. I don't even think it's true today for wind and solar. And I don't think it's gonna be true for hydrogen in the near future. I think instead, what we'll do is instead of subsidizing one form of energy another, we'll quit letting emissions pollute for free. I think like you think of like a dumping waste in the atmosphere for free is a form of subsidy. I think if we eliminate that subsidy, then we'll move towards the right answer and won't need to subsidize the clean stuff. So there's this notion like, oh, we gotta have hydrogen tax credits, that kind of thing, make hydrogen competitive. Not really, we maybe just can't let people pollute for free anymore.Doug LewinWe're going to come back to all three of those as we go through. Those are great ones. As I suspected, your answer would be interesting there. Another question I like to ask, and this isn't like asking for big predictions, but just kind of in general, what will the grid look like in 10 years and how will it be different for consumers? Just for people that don't think about energy every day, but obviously depend on the grid, rely on the grid, and pay for it. What's it going to look like in 10 years? How will it be different for them?Michael WebberI've got a couple thoughts and I've got to be careful to be honest and I'm mixing partly what I wish for and what I actually think will happen. So what I think will happen is coal will continue its decline. Coal's already dropped like 60% in the last 15 years. I think it drops another 50% from where it was in the next 10 years. So coal about a decade from now will be about 10% of where it was in 2006. And that's really phenomenal that coal will end up dropping about 90% in two and a half to three decades. A lot of that's because of the natural asset life of the coal plants. The coal plants are coming up at their end of life retirement window and we just won't replace them. There are a few newer coal plants that might hang in there, but most of the coal we use in America will be for like steel and cement, not for power. It'll be very limited coal and power. And I'm pretty confident that will happen. A thing that I kind of wish will happen, but I don't know if it will happen, is that we pass through a lot of the market reforms we've done on the wholesale side to the retail side. So if you look at places like Texas, there's a lot of competition on the wholesale side. A lot of new power plants can come in like wind and solar or clean gas or whatever it is. But most of us on the retail side still pay bills the same way we did 10 or 20 years ago. Our bills look kind of the same. And I think we need to have a lot of evolution there where we can be paid to turn off our power certain times a day. We can be paid to sell power back to the grid if we have solar. We'll have much more net metering, we might even have peer-to-peer markets where we can sell power to our neighbor. There's a lot of things that could happen on the distribution end of the power sector that haven't happened yet. That would be great if they happened, but that's my wishful thinking. Like that's what I wish will happen in a decade. I don't know if that will really happen or not. And then the thing that I do think will happen and I wish will happen is I think we'll have a lot more distributed generation, a lot more rooftop solar panels. However, as a warning to everybody, that distributed generation will also include natural gas generators, maybe fuel cells and things like that, it won’t be just rooftop solar. But I think we're going to have a lot more distributed generation, a lot more generation at the end of the line because of all the difficulties we're having building transmission and for other reasons. So that's kind of a mix of things I think will happen and things I kind of hope will happen. In that middle one, this evolution of having more sophisticated and efficient markets at the distribution end would really enable that third piece of distributed generation.Doug LewinYeah, that's right. I think it's interesting, you mentioned both solar and gas. And of course, I think storage will probably be part of that mix to battery storage would be part of that mix to whether any of these are on the wall. Yeah.Michael WebberAbsolutely, and that battery's, exactly. And we actually, when we remodeled our house a decade ago, we built it a place in a crawl space for battery storage, like a power wall or something. And we will probably never use it because the battery in my electric vehicle is so much larger than whatever power wall I could have bought.Doug LewinYeah, yeah, a lot happening in that space. All right, good, we'll come back to all of those things as we begin to talk too. And then the third question I like to ask when we have time, and I knew if we started talking about other things, we'd never have time. And I wanted to ask you these questions because you do teach a class on policies and technology. So what are the two or three, one, two or three, whatever you like, energy policies that you think could have the biggest impact to increase reliability, lower costs for consumers, and reduce pollution?Michael Webber That is a great question. So I kind of give a hint at this with the first question and part of my answer, which is I think we need to put a price on pollution. Like if I think of the policy we need that's missing today is we allow people to pollute for free. They can dump their greenhouse gas emissions in the atmosphere for free and use our atmosphere as a common dumping ground. That is inappropriate for so many reasons. It's inappropriate economically and ethically and morally and environmentally, you name it. And that's the one policy I really wish we had. And if you ask like 99 out of 100 economists, they would say, put a price on carbon. That's the most important thing you do. And that carbon emission is a proxy for some of the other problems we have around domestic security of our energy sources, reliability of everything else, because that CO2 ends up driving climate change, which becomes a forcing function of strain on the grid. So if we put a price on pollution, it will lead us to cleaner, domestic mix of sources that will end up being more reliable. And then the counterpoint to that is we should have a reliable services price, like a market for reliability services. And we have some of that, like in ERCOT, we'll have spinning reserves and non-spinning reserves and reg up and reg down these different types of markets that pay people for the reliability services they provide. And I would like to see a more enhanced, bigger market for that. Most of the market is just for buying and selling electrons or electricity in the power markets and a little bit of the market is to do so reliably. And I think the reliability part of the market should grow and will grow. And that will incentivize not only more capacity to more things we build, but more things like storage and demand response and dispatchable, firm, clean power and this kind of thing. And so I think having a price on pollution so you can't pollute for free anymore and a value or reward for reliability, those two things hand in hand will do a lot to solve our grid.And we don't really put a price on pollution at all. There's sort of a price on some of the pollutants like NOx and SOx, but not CO2. And we have a little bit of a price or a little bit of value that we attribute for reliability, but I think we need to do more of those.Doug LewinYep. All right, so this is great. I think my instincts were good on this. Asking these questions sort of tees up, because as I was preparing for this, there's like so many things I wanna ask you, but kind of getting a sense of where you wanna head is helpful. So I actually wanna go back to the first thing you said about what is commonly wrong, taken as conventional wisdom, that, the decarbonization requires the end of oil and gas.I want to talk more about that. So obviously you and I both live in Texas. This podcast is focused on Texas. Texas has, back to spindle top, taken a very large share of its wealth. It's not as much now as it was 80 years ago or whatever, but it's still a very large share of the wealth generated in the state. The tax revenue in the state is tied to oil and gas. So I think a lot of people that either... have derived well from that continue to, or tax revenue or whatever, get very worried when they hear energy transition. Why should they not be worried? Why do you think that it could continue? Is this even potentially an opportunity as well as a risk?Michael WebberIt's absolutely an opportunity for oil and gas companies if they choose to be part of the future and not all oil and gas companies wish to be part of the future to be very clear about that. Some of them are at war with the future and I think the future is going to win, frankly. But there are a lot of companies that feel like they have a role to play. There are a lot of solutions in the decarbonized economy that require subsurface expertise. Might include geothermal energy or below ground storage of hydrogen or even extraction of hydrogen from natural reservoirs.It might include CO2 sequestration. It might include pipelines that move different molecules around, including CO2. It might include offshore solutions like wind or solar. It might include a lot of the things that the whole gas industry already knows how to do better than anybody. And so there's like a certainly a skillset that oil and gas has a capability that we're going to need in a decarbonized future. And that includes things as basic as project finance and project management. And how do you do complex engineering projects in hostile environments and make them work? That's something oil and gas knows how to do. So there's a skill set that's very valuable and the people they have on the team, the geologists, the engineers, you name it. In addition, the product they sell, the molecules might also be important. Now the molecules might be different in the future and they might be sourced differently. The methane might not come from below ground fossil reserves or if it does, it might be converted into hydrogen or it might be methane that's manufactured from biological processes like decomposition of animal manure or something like that, or might be other molecules like ammonia, formic acid, or hydrogen methanol, you name it, but the world of moving molecules around and converting molecules is something that oil and gas knows very well. So these molecules might play a role. And then as you especially think about the molecule of CO2 and removing it from the atmosphere and putting it somewhere else, that's something oil and gas companies might know how to do. So that I just feel like there's a bucket of incredible capability and expertise and assets like rights of way and pipelines and platforms and ships and welders. There's… welding equipment, there's a lot of assets as well as skill sets that can be really useful. So that's kind of my view, but you don't have to take my word for it. You can listen to ExxonMobil CEO Darren Woods, who said on the record in the middle of 2022 in an interview that his view and therefore ExxonMobil's view, because this was on the record, is that 100% of light duty vehicles sold in the world in 2040 will be electric. So this is a man who sells gasoline for a living saying…the new cars that you buy by 2040 will be electric and will not need gasoline. And he said, that's okay. Those cars are gonna need a lot of lightweight materials like plastics and other base materials. Well, we make those materials, we'll be fine. And so if one of the world's biggest sellers of gasoline says the market for gasoline will disappear, but that's okay because we'll make the materials those cars need, for example. He didn't say this, but they'll also produce the natural gas that will make the electricity for those cars. They're fine. And so that's one view. Another view tends to be like smaller independent oil and gas companies who don't care and are gonna ride to the fossil tail. Like they're just gonna ride the curve down and make a lot of money before they retire and that kind of thing. So they're not gonna switch to the future, but some of the big ones, the multinational companies for sure are switching to the future. So that's my view and that's their view, frankly. But the way I put this in sort of a logical hierarchy of decarbonizing is it's kind of a four step process. Step one is efficiency. We should make things as efficient as possible. Light bulbs, cars, homes, you name it. We need to reduce the height of the hurdle we have to clear or reduce the height of the mountain we have to climb, whatever your analogy is. We have to use less. That is the best thing we need to do. By the way, that's a very hard thing to invest in as a venture capitalist. And so efficiency doesn't always get there with market forces alone. It's a great place for policy, especially around building codes and fuel economy standards and that kind of thing. But efficiency is where we start.The second thing is electrification. We need to electrify as much as is reasonably possible, especially light duty vehicles are a great example. Building heat for new buildings in mild climates is really obvious, we should use heat pumps, this kind of thing. And those light duty vehicles and the heat pumps actually help fulfill that first goal of efficiency because the light duty electric vehicles and the heat pumps in mild climates are more efficient than your alternatives. Then the third priority is clean molecules for the parts of the economy that are hard to electrify. And I'm thinking industrial heat, maybe building heat in cold climates in old buildings, aviation, marine shipping chemicals. And then the fourth one is carbon management, which is to remove the carbon that we couldn't avoid through clean molecules and electrification. So, like the first few steps are kind of like do your best, and then the fourth step is, clean up the rest. So that's kind of saying “do your best, clean up the rest.” So the four steps, efficiency, electrification, clean molecules, carbon management.Well, those last two, clean molecules and carbon management are in the molecules business, probably gonna be oil and gas companies or oil and gas adjacent companies. And those clean molecules could be biomolecules, biomethane, it could be fossil molecules, a carbon capture, that looks pretty expensive to me. Could be hydrogen from a variety of sources, ammonia, methanol, formic acid, you name it. There's a variety of ways to get clean molecules. But in our analysis, if you wanna get to zero carbon or net zero as quickly, affordably, reliably and equitably as possible. It's cheaper, faster, more reliable and equitable to keep molecules in the mix and to exclude them. If you have to go 100% electrons, it delays the path, makes it more expensive and might make it more fragile or less robust because you have single point vulnerabilities and that kind of thing. So that's kind of my long sweet, I think molecules have a role and I think it's in our interest that molecules have a role and I think it's certainly in our interest for the companies that know molecules to be on board with decarbonizing and we can sort of map out a pathway, here are all the ways an oil or gas company might make money in a decarbonized future, because I'd much rather have those companies on board with the future than against it.Doug LewinYeah, I think two things are true here. One, electrifying everything possible, everything that makes sense from an engineering and physics and financial perspective. That's good. There generally is energy efficiency, as you pointed out, right? The electric car is what, you're the engineer, what 80, 90% efficient versus an internal combustion engine car that wastes so much heat, right? And is only 30 or 40% efficient. So that's great.It's also, I think, important for people to understand that at this point, only 20% of all energy is electric. Even in International Energy Agencies’ net zero scenarios, at the very high end of the spectrum, you're talking 50 to 60% electrified energy. You still have a lot of molecules. Having those molecules be clean molecules, whether it's 40% or whether it's 70%, that's still a lot and they need to be clean, right?Michael WebberIt's a lot that need to be clean and even beyond that, we want those companies who know how to do it to be a partner for all the other things we need them to do, drilling and offshore and everything. So it's the same companies often. And I see this role for molecules in the future. Now, another way I'd say it is, I think the total volume of molecules is gonna be much lower in the future because we're gonna replace a lot of molecules with electrons. But the use of those molecules will be more valuable.And so when I talked to oil and gas, I was like, okay, would you rather sell more oil and gas or molecules, or would you rather sell fewer molecules, but more profitably because you're selling them for very valuable procedures or processes, making cement or whatever it is, or doing backup power if you have no other options. So you're only using it for really critical times or valuable times or valuable goods. I think like, backup power is a great use of molecules. But when you need backup power, the prices tend to be very high. So that's a very profitable time to have natural gas for a natural gas power plant. But if you're using natural gas when it's really windy and sunny, well, that's a pretty dumb time to use natural gas because it doesn't really add value to society and you're not making money off the gas itself either. So we burn a lot of natural gas that we don't really need to burn when we could be using wind and solar. And so I'd rather save the gas for the high value critical times. And I think that's better for the gas sellers too. I think they'll make more money.Doug LewinYeah, I think it's really interesting on this question of oil and gas companies and what their role in the energy transition is. You know I named my company Stoic Energy. I'm very into Stoic philosophy and for instance, the books of Ryan Holiday, a fellow Austinite, or nearby in Bastrop. He wrote a book where the title is The Obstacle is the Way. And I think there's something really true there… a lot of people view this as oil and gas companies are in the way. And sometimes that's quite true.But some of them are trying to figure out how to get through this transition. And I think the ones that just continue to be stubborn and intractable, eventually there's gonna be a decline there. This is like Clayton Christensen, Innovator's Dilemma stuff. They have to look around for the other things that are gonna start to grow. Clean molecules, hydrogen, carbon capture. Exxon bought a lithium mining operation, right? Not long ago. I mean, it's fascinating what is starting to happen and it's slow. It's too slow. There's probably a lot of people listening right now that are like, “What are you talking about?” and are frustrated by this. And I acknowledge it's too slow, but that's not the same as saying it's not happening at all.Michael WebberWe actually, the good news is we're making progress. The bad news is we need to pick up the pace a lot, right? It's just way too slow. On the oil and gas companies, there is a big distinction between the multinationals and then the independents, the smaller mid-majors or domestic producers. And even among the multinationals, there's a distinction between the European multinationals and the American multinationals. Although the American multinationals are catching up to the European multinationals. European multinationals, Equinor, Total, others are fully on board. They're investing money. They have ambitious plans to ramp up their electrons business, to decarbonize their molecules business, that kind of thing. Equinor is really doing it. Orsted we think of as an offshore wind company. Orsted used to be Danish oil and gas company, right? That's a European oil and gas company that is now fully on board with offshore wind and electrons. So I think we can look to the European multinationals for leadership on this. The American multinationals, you mentioned ExxonMobil, but there's others like Chevron and others who are also doing it.The smaller invaders tend to be the laggards on this. They don't have the resources for it, but sometimes the leadership is just not on board philosophically with this. Or they're in a position where like, I'm gonna retire in 20 years, that sounds tough. I'll just kind of ride the tail and make a lot of money in the next 20 years and not worry about it. So there's a myth that, the oil and gas industry is not quite monolithic on this. There's a lot of disagreement within it. And it's fascinating to me as a Texan, I think you see the same thing. The multinationals in Texas, are not influential with Texas government, which is kind of a fascinating thing that the local independents have much more say with the Governor, Lieutenant Governor, other people than the ExxonMobiles. And that's not true for ExxonMobil, I would say in every other place where they're active, they're probably very influential. So we have some unique to Texas experience that might inform our opinion on this too.Doug LewinIt is a fascinating dynamic here, as so many things in Texas are. I want to back up and just kind of widen the aperture here. In your book, Power Trip, you talk about, and I'm kind of a student of history, I love talking about history, I love taking sort of this broader view, and you do this so well, sort of the evolution of energy sources and how we have seen better and sort of better, however, you can define that different ways, more energy dense, I guess, would be the best way to define that in this context, but cleaner as well, sort of one after another supplant energy sources before them. Can you just kind of run through that and bring us up to where we're at right now with the energy transition?Michael WebberYeah, and the history teaches us that transitions are common in energy, and there tend to be episodes where transitions happen faster. So I think we're 10 years into a 30 year transition right now. And we've had them before with the rural electrification from like 1930s and 1960s, with the second industrial revolution in the 1800s, the industrial revolution of the 1700s. So we have these episodes where innovation happens more quickly, innovation on the energy conversion devices, making new machines like a steam engine or gasoline car or electric computers, we have new devices that convert or consume energy and new forms of energy available. And when you have rapid convergence of changing forms of energy and changing uses of energy, that's an energy transition. So we're in one, this is to my eye, at least the fourth or more. So they're more common than we think and the prior ones instruct us on what to expect. If I take just one example, in the United States when we cut down most of the virgin forests in America, we deforested and cut down these trees to get the wood as both a building stock and material for fence posts on the prairie and also to build our homes, but also for heat, for cooking, home heating, as well as industrial uses. We would like use the wood to make industrial heat, but also to do coking, to make different charcoal or different things. So we use wood as a fuel and a feedstock for materials and energy. And we cut down so many trees. We did so much environmental damage that trees became very expensive. So if you go to Maine today, they're a beautiful forest by the way. Those are all second growth and regrowth forests. Those are not the original forest, we cut them down. And as we cut down the forest in New England, then the Eastern Seaboard, we moved further west through Pennsylvania. Eventually we cut down most of the trees in the upper Midwest, like Wisconsin and Minnesota. Well, it's getting harder and harder to cut down the trees and move them to the markets. The markets being Philadelphia, New York, and Boston. The trees are farther and farther away, and you have to go longer and longer distances to get the trees. That wood became very expensive.Meanwhile, coal in Pennsylvania is closer to market. Coal is a higher performing fuel than wood. It gives you more energy density per pound and it burns more cleanly than wood. It gives off less smoke and generates less ash and gives you less CO2, frankly, per unit of energy as well. So coal comes along and it's closer to market. It's higher performing, it's cleaner and it's cheaper. So we start to use a lot of coal in the 1800s and that leads us to stop cutting down the trees and the forest grow back. It's an incredible environmental solution at the time.Same kind of concept with whale oil as an illuminant, where we used whale oil, we'd kill these whales just to get the blubber, to get the whale oil as an illuminant, as a lighting fuel. And we killed so many whales, whale populations declined so rapidly, it became much more expensive to get the whales and therefore the whale oil, the expeditions would take like two years instead of two months. And so whale oil became more expensive. Meanwhile, Pennsylvania comes to the rescue again, drill for oil in 1859 in Titusville, Pennsylvania, and we get the oil out of the ground. And if you refine or distill, think about it that barrel of oil, the middle slice the middle distill it is kerosene, which is a great illuminant, and it burns brighter and more cleanly and without the pungent smell of whale oil. And it's closer to market and it's cheaper. So with wood to coal and whale oil to kerosene we went to these fossil fuels because they were cheaper, cleaner better higher performing closer to market and that let whale populations recover and let the trees grow back. And that was a great environmental solution. But now we're trying to clean up those messes. So one of the lessons here is there are solutions. We tend to move towards cleaner, cheaper, higher performing options. We tend to introduce new problems with those solutions. So coal and kerosene were solutions, but now are problems. And now we're trying to solve that with electricity or wind and solar, which is great. But if we do a lot of solar and a lot of wind at scale, they will introduce different problems, land impacts or mining or blight on the land or whatever your concerns might be. So you have to think about how to avoid those problems of doing them at scale and what we might do in the future to clean up whatever problems they introduce. And by the way, wind and solar are cheaper and cleaner. And I would say even higher performing in a variety of ways. They're not dispatchable the same way, but they're domestically located and they have all these security benefits, which is China and Vladimir Putin can't turn off the wind or the sun, right? So they give us some other performance benefits. So that's where we're headed. But because they all have their limits, we'll do more than wind and solar. We'll do… these clean molecules or geothermal, or we'll have other options because they all have their different upsides and downsides. So that's kind of the story of energy transition is they happen quite often. It gives us some lessons. We typically move to a better place.Doug LewinYeah, and there's a couple different places I want to go from there, but let's actually, there's something you just said there that was really interesting at the end, and I do want to ask you about this. So, yes, China can't turn off the wind or the sun, but something like 90 plus percent of solar panels are coming from China. There was a major change in US policy in the Inflation Reduction Act, which I've heard described as not so much a climate bill as an industrial policy bill.Are you starting to see, I know you, again, through not only being a professor, but with Energy Impact Partners, you see things going on in the market. Are you seeing that have an impact on manufacturing here in America?Michael WebberAbsolutely. So first of all, the wind world is different because most of the wind turbines are made by Vestas or GE or Siemens. So these are Danish, German or American companies. So the wind turbine manufacturing is not dominated by China the way solar panel manufacturing is. And one of the reasons why solar panel manufacturing is dominated by China is partly because of the mines for the silicon, the raw materials. The bigger concern I have is the, I don't know, lithium or cobalt, or different, name your material material. China probably dominates the market for the upgrading and refining of it, if not the original extraction. So China has a stranglehold on particular materials that are very important. And those materials might go in that wind turbine made in Germany, but they will go into things like batteries and solar panels as well. So there is a national security risk for these new options, but it's a capitalized risk. Like it's a risk in the manufacturing, not in the operation. So China might be able to turn off the flow of solar panels, but won't turn off the sunshine.And so, they could disrupt our ability to build solar, but they don't disrupt our ability to operate solar. That's a pretty important security benefit. So there's still some security risk. It just shifts in terms of scale of disruption and where in the supply chain or the lifecycle of a facility it might be impacted. And because of that concern, and this is not a new concern, I was at a briefing in 2007 or 8 with the Department of Energy where they were talking about this back then. They're like, we're really concerned about molybdenum and yttrium and erbium, like these different rare earth materials, as well as the silicon, the lithium, the cobalt, and graphite and things like that. So they've been concerned for a while. They've been raising the flag of concern. So there's been a while to look at it and bipartisan interest in solving this. And the latest policy push with the Inflation Reduction Act and others has these domestic sourcing requirements or supports for domestic manufacturing capacity. In effect, there's been tremendous uptick in domestic manufacturing capacity of electric vehicles and batteries and things like that. Probably won't go to solar panels that much, frankly, it'll be a little bit for solar, but. It's more likely on the other materials. And where my venture capitalists had, we're seeing some producing startups on domestic sourcing capabilities for new alternatives to graphite or new ways to manufacture anode, geocathodes for batteries, that kind of thing. We absolutely see startups that are ready to solve this problem. And not only is there like a federal policy support potentially for the startups, but there are a lot of buyers who are willing to pay more for a shorter, more secure supply chain. But it's just like they wanna have a supply chain that works.Doug LewinMichael, is that specifically about cobalt or are there other issues? When you talk about anodes, cathodes and the, and the different ways of…Michael WebberGraphite. I think like so there might be ways to do the lithium ion or the graphite to produce you want. Cobalt's fascinating. Cobalt, there it's less about China more about the Congo for example. Where, in there it's more of a labor justice issue than environmental justice. You have to worry about both: you have to worry about dirty minds, extracting materials that pollute the environment. You have to worry about labor justice issues which might be 12 year old boys in these mines in Africa getting cobalt out of the ground. Or prisoners or slave labor in China making solar panels.You also worry about the security risks of bad actors turning off the supply of the materials we want to make things. And China has already said they're gonna do that. So these are all real risks. Cobalt's a little interesting, different to me in my perspective. When I was at NG in Paris, we were very sensitive to labor issues. And for NG, it was easier just to find an alternative to cobalt, like use a different material than it was to find an alternative cobalt source. So you could either find a different place to mine cobalt so you don't have the child labor issues or you just find an alternative to cobalt. And companies are looking at, okay, how do we avoid that material? Or how do we avoid that country or that mine or that company, that kind of thing? So you can do a combination of the two, but there's some materials like graphite and lithium there. It's going to be hard to avoid those materials. And frankly, of all the things I just said, the one I'm actually worried about the most in terms of total volume is copper. I don't know how you avoid copper in an electrified future. And I'm less worried about the environmental labor risks there, but more just the… volume, like is there enough and can we get it at a price that's manageable without depending on countries who hate us.Doug LewinI want to come back to something else you were talking about earlier. One of the things you thought that was wrong or commonly understood is the need for base load power. That's interesting, because I do think there is a very, very common perception out there, like maybe 90%, even to people still in the industry, that you gotta have base load power, you gotta have stuff that's always on. Why is that wrong?Michael WebberI think it is hard for people to let go of that term because we've built up the concept of it over a century plus. The way we built our grid in the United States and elsewhere is to be load following. So you and I, we're turning on our lights on and off, we're turning things on. So people like you and me, multiplied by hundreds of millions in America, we're turning on or off our loads. And then we ramp the power plants up and down to follow the loads. So we set up the power sector to be load following. The loads change, however the loads change based on the weather or temperature or time of day, whether we're at work or home or how big our refrigerator is or whatever, and the power plants must follow. So it's load following. And then there's certain minimum load that happens throughout the year. We call that the base or the base load, and we have enough power plants that are on all the time to be base load to meet that minimum demand. And then we have peakers or mid-merit dispatch or other things we ramp up and down to meet the variability in the load above the base load. We built up that concept over a hundred years and we had trouble letting go of it. We need baseload power plants. And we might need baseload power plants, but we're moving into this new world where we don't just have variable load, you and I changing our habits and patterns during the day with light bulbs, things like that, but variable supply, because we have more supplies that depend on meteorological or astronomical conditions, like the weather or position of the Earth relative to the sun with wind and solar or hydro and that kind of thing. So add to the mix variable supply and variable load. I think load following doesn't make as much sense. In fact, I think we probably need supply following loads. Rather than turning power plants on and off to match when the load is, we should turn the loads on and off to match when the supply is. And those loads could be some non-critical data centers, water treatment, certain types of steel mills. There's a lot of things, cool pumps, water heaters, a lot of things we can turn on and off to match when the power is available, rather than turn the power on and off to match when the load is desired. So I think we need to switch our mindset from load following to supply following. And then if you do that, base loads are a ridiculous concept.The way Brad Jones used to say it, and I miss Brad dearly, and I'm really sad that he died not too long ago. Brad was just a great executive in the power sector. He was a public servant at ERCOT. He was a public servant in New York, ISO, and at New York Power Authority. Then he came back to ERCOT, just as a gentleman to be an interim CEO after Winter Storm Uri, and recently died. And the way Brad would say it, and I really liked it, he said, I need things I can turn on and off. He didn't use the word baseload.And it's like, it was way, almost like the way he was addressing this, like we need to change our thinking and our language even, because I need dispatchable things. And a thing that I can turn off is dispatchable and a thing I can turn on is dispatchable. And Brad would say nuclear power plants are not dispatchable because I can't turn them down. Months are all on their own. At least that's true for American nuclear, by the way. French nuclear is very different. And so we would talk about nuclear as baseload because it's on all the time, it serves its need, but Brad would not call it dispatchable, and I agree, frankly. And so we need to get to this dispatchability, things we can turn on and off. And I think that's the future and the dispatchability terminology should replace the base load terminology. And by the way, designing nuclear power plants to turn on and off is entirely possible. We do it in other places around.Doug LewinYep. And I think it's dispatchability. I think it's also important to consider, right there next to it, like a twin, flexibility. Right? Michael WebberFlex, absolutely. Yeah, agility, absolutely. Yeah, that's right.Doug Lewin Yeah. Right. So and if you start to think about, I mean, you went through a list of the sort of demand that is flexible. It's, I'll just add a few to it because we were talking earlier about carbon management, you know, big carbon dioxide capture machines, right, can be flexible. You don't need to run them 100% of the time. If you run them 90%, that's more carbon than we were capturing before, right? Michael Webber Totally.Doug LewinFlexible loads, green hydrogen you were talking about, or you just talked about hydrogen generally, the green hydrogen desalination. There's all these different things. And actually, I think it's important for us to start thinking of storage itself, not only as supply, but as a flexible load, right? Michael WebberTotally. Yeah.Doug LewinBecause a lot of people say, well, yeah, like data centers are this big growing demand, but they're not very flexible. A, that may be wrong, because there's certain kinds of data centers that will be flexible, but there's others that aren't. But if you put storage there, right, now you do have a flexible load and a supply. So I really think that in many ways, battery storage is sort of the ideal, dispatchable and flexible demand and supply, right? It works both ways.Michael Webber I agree. In fact, the way I think about it is electric vehicles will either save the grid or destroy the grid entirely, depending on what time of day you charge them, because they are this flexible load. And if we all charge at peak times, it can break the grid. But if we all charge it off peak times, it will save the grid because it will help us amortize our entire cost of grid across more kilowatt hours and therefore lower the cost for all of us and give the money we need to do the investments to modernize upgrade. So.And that's because the battery inside is very flexible. You can charge it easily. You can turn it on and off. You can do it at different times. Batteries have a response time of like 100 milliseconds. So they're really fast. So batteries are an important part of that flexibility, dispatchability, both on and off. That's really great. Some things we can only turn on or things we can only turn off, right? So it's nice to have the two-way capability with the battery.Doug LewinYeah. And in many ways that then becomes a battery storage and its ability to be a flexible demand matched up with supply. It becomes another form of energy efficiency. And you talked about efficiency earlier when you said there's kind of these, these four steps, efficiency, electrification, clean molecules, and then carbon management. And efficiency is number one. I know you've done a lot of work on this. You've done a number of studies on energy efficiency. You, you've read a lot and talked a lot about energy efficiency.Can you talk a little bit about its importance, specifically in a Texas context, right? We've just come through another winter cold blast. Obviously, Uri is only three years in the rear view and I don't think is getting much further from anybody's memory, even the further we get, it's still sort of with us in all these conversations. But talk a little bit about energy efficiency and how it also plays into this flexibility discussion we were just having.Michael WebberIt's great. And from the United States perspective, the two biggest opportunities for efficiency are the building stock, our homes, especially, but homes and businesses. And then second is our vehicles, our cars. And those are the two biggest opportunities. There are many other things. Light bulb efficiency, for example, has been very dramatic for the United States. Our energy consumption has dropped as a nation, partly because of the switch to LED light bulbs, which are much more efficient. But the light bulbs are much smaller than gasoline combustion engines and cars or how much energy we consume in our homes. Light bulbs are part of the homes, but truly heating and cooling is a dominant part.And so efficiency there, we'll do a variety of things. And efficiency of the home could be better installation, better windows, better design, not having your windows face south in an unshaded manner if you're in Texas, but maybe face south unshaded if you're in a Northern climate. So you can think about how you design your house, how you orient your house, the materials you use, the type of installation, the type of windows in a lot of passive things. And then you can think of the active devices, the heaters or coolers and what kind of device and how efficient they are. Are they modern vintage with high efficiency ratings? Are they pretty old and unreliable and more energy-consumptive? There's a lot we can do there. And I mentioned earlier that I think that's a place for building codes. Our building codes are non-existent a week in the United States compared to, say, France, where I was for a long time. France and Germany have much stricter building codes. They tend to have national building codes. In the United States, it tends to be either a state by state or city by city. We don't have a national efficiency code really, other than maybe for the devices like light bulbs. California has some strict building codes. They've avoided a lot of energy consumption over the last few decades. They call it the Rosenfeld effect because Rosenfeld really pushed for these efficiency rules. So the building stock in California is much more efficient. It's also a milder climate. And so they save energy, but their energy consumption wasn't as high to begin with. In Texas, our climate is less mild. We have drought and freeze and flood and heat wave, we tend to have it all. And we don't have strong building codes, maybe City of Austin does, but it's not universal across the state. If you have a stricter building code around the devices and the passivity with which you design the home in a way that keeps it more efficient, you reduce how much energy you need dramatically. And therefore you can have a smaller air conditioner, for example, and if it's a smaller air conditioner, it costs less, you can afford to pay more for a more efficient one. And then the safety benefits are remarkable. If the power goes out, your home will stay cool for longer. So you have this human health benefit and this quality of life benefit where you're less likely to die if you're a retiree and you're in a home that doesn't get as hot as quickly. And this happened in places like France in the 2003 heat wave, tens of thousands of people died, especially the elderly, because their homes were designed to stay hot in the winter and they could not shed heat in the summer. So even there with their efficiency, their envelope was so tight, it actually kept the heat in. They didn't design around cooling. So elderly people can die if it gets too hot.That's a risk in Texas. Or if it gets too cold and the power goes out, like in Winter Storm Uri, your home will stay comfortably warm for longer. So efficiency has the benefits of saving the consumer money, making it easier to increase your efficiency again. They get these amplifying gains of a more efficient house, needs a smaller air conditioner, which becomes more efficient. So it can be smaller again. And then you get better safety. That's a huge opportunity for us in the United States. We just aren't tackling it. And the analog is lightweight. You think of major airplane manufacturers. If they go to a lighter design by removing redundant components, then they can have a smaller fuel tank. And if you have a smaller fuel tank, the plane is lighter again, which means you have smaller engines. Well, if you have smaller engines, you don't need as much fuel. And you can just get this, like, accelerating gains as you improve that way. Efficiency has the same kind of amplification or acceleration. The other one is gasoline cars. And going from gasoline cars to electric cars is a huge step in the right direction. And going even further, not just cars, but mass transit, walkable cities, bikeable cities, and the e-mobility or micro-mobility, e-scooters and e-bikes, that's really where you get efficiency gains. And that’s, you might call that more conservation because it's more about the design of the system rather than just the individual device. But between conservation, how and where we lay out our transportation networks and homes with urban planning, and then the efficiency of the devices, the installation, the drive train or whatever, we can save a lot of energy. That solves our problems, that avoids a lot of CO2 just in the reduced energy consumption. Then if you decarbonize the energy, you get additional gains, and then it saves money for consumers. So it's just like win-win-win while improving resilience. So this is the obvious thing to do, but I will tell you as a venture capitalist, it's hard to find investable startups in this space. It's a very awkward business case, and that doesn't mean it's impossible. There's certainly business cases for the industrial sector where they have really big energy bills and they have dedicated experts on staff just to look for cost savings in energy. It is already cost effective and market based for like school districts, but for an individual homeowner efficiency can be hard to get to. So I think that that's where you have an opportunity for policy.Doug LewinYeah, there's so much there. It is difficult because it's such a diffuse market, right? By definition, you're talking about, what are we, 11 million residential units in Texas or something like that? It's just…Michael WebberYes, and the payoff is delayed. So the big mismatch right now is, because we don't put a price on pollution, the cleaner things, which are often the more efficient things, cost more upfront. You pay more CapEx, more capital expenses. But they cost less to operate. So your OpEx or operational expenses go down. And so we're doing a more expensive thing upfront to have something less expensive along the way. And an EV today often is more expensive than gasoline engine, but cheaper to operate. Triple pane windows are more expensive to install, but cheaper to operate. More efficient air pressure is more expensive to install, but cheaper to operate. And if you are an individual, you're gonna be pretty price sensitive to that upfront price. If you're at the University of Texas, or if you're the federal government who owns a bunch of buildings, or if you're ExxonMobil with a refinery, you can do that trade-off of CapEx versus OpEx, because you're pretty sure you're gonna be at that site for decades. But if you're a homeowner, you might leave in three years, and your payback might be in four years.And so it's harder for us at the individual level to make that trade off. Also, we're pretty bad at math in general, but even if we can do the trade off, that doesn't mean we can get the loan for the extra $10,000 on the house price. So there's some pretty fundamental…Doug LewinAnd even if we could get the loan, it's like, do we really want a loan for that?Michael Webber Yeah, exactly.Or would we rather upgrade the kitchen or a bathroom? And everybody deals with this…Michael WebberExactly.Doug LewinSo you are a mechanical engineer. I wanna ask you about heat pumps and resistance heat. So you were just talking about efficiency, right? And I think a lot of times when people don't understand about efficiency, still a lot of people's perception of efficiency is you're asking me to suffer, but it's actually the opposite. You're getting the same output or sometimes better output, but just using less units of energy. So LEDs are just a great example of this. You're using 1/10th or even 1/20th the amount of energy, but the light's actually better. It's dimmable, it's programmable, you could control it. It's all of these added features and it's using less.Michael Webber And it lasts longer. Now it lasts 20 years instead of eight months too, right? So you design how's it with light bulbs, with the expectation you're never gonna change the bulb. It changes the way you might design things.Doug LewinSo let's talk about that in a heating and cooling context. I mean, you were talking about how hard it is to invest in these companies, and you just have this mismatch in the economics here, right? So most homes are built with an air source heat pump that will heat it down, because we're 60% electric in Texas. So most homes are built with that heat pump that is only going to heat the home down to about 32 degrees and then have resistance heat as a backup. My understanding from talking to folks in the industry is that you can install resistance heat for a couple of hundred bucks. But on the power grid side, to build generation to serve that $200 resistance heat can be 10 or $20,000, right? But the homeowner, the builder, whoever's paying the bill for that resistance heat isn't thinking about that, understandably so, right? But we’re all going to pay for that power generation to serve that resistance heat. There are now resistance heaters that are cold weather rated, that will go down to zero or even below that. And I think to a lot of people, it's like, well, how does that even work? How can it still be efficient? And of course it gets less efficient the colder it gets, but can you give just a brief tutorial on, again, you're a mechanical engineer, so heat pumps and why they're so magical and how the sort of newer generation is changing things?Michael WebberI think it's great. So the heat pump technology, and also will vary on where you are. So its value in Texas might be different than Vermont or France. Not gonna walk through all that. So the cold weather heat pumps get better and better every year. But if you're a homeowner, you're at some point confronted with a choice, do I wanna get the heat pump that can keep the house warm when it's 32 degrees outside, like you said, or the one that works even when it's 15 degrees outside? And the difference in price might be a thousand or $2,000. Okay, do I pay a thousand or $2,000 more for the cold weather heat pump, or do I just get the sort of cold weather heat pump and add a couple hundred bucks of resistance heating? And for the homeowner, the resistance heating feels a lot cheaper, right? Looking at math, that's saving me 800 bucks or whatever it's saving me. But then your electric bills will be more than $800 higher over the next 20 years. But that's really hard math to do. It's hard to imagine, you don't know how long it'll be in your house as well, but how much higher will the rates be for electricity because I and all my neighbors are adding resistance heaters, therefore, we need to build more power plants. The cost of those power plants are spread across my bill and others, and I'm gonna pay for it one way or another. And so that heat pump for the cold weather rating, even though it's more expensive, is probably cheaper across the system, though it might not be cheaper to you in a very direct, obvious way. So that's part of the challenge. And I would say, without a doubt, in mild climates, heat pumps for new construction are the way to go. They will save you energy, they're cleaner, they don't have the fumes, they're more reliable, all that kind of thing.If you are in a cold climate like Vermont, you can argue a little bit more about whether it makes sense. And if you are doing a cold weather heat pump, they exist now, you can extol them, they work just fine. We know people have them, they work fine. It costs more and that heat pump is probably instead of fuel oil, which is particularly expensive and dirty, so you might not mind paying more for the heat pump because you're off this expensive fuel.However, your other option might be natural gas furnace. The natural gas will be cheaper and cleaner than fuel oil as well, but not as expensive as a heat pump. So in many ways, like it gets more complicated in cold weather environments, especially if it's a retrofit. So if it's a new house you're building in Vermont or Maine, you can build the panel the right way and all that kind of stuff through the heat pump. But if it's a retrofit, or you don't have a big panel, and you could just swap out gas or propane for fuel oil and you're changing the tank for 400 bucks and you're getting cheaper fuel versus having to upgrade the panel… For cold weather retrofits, going to a cleaner fuel will be cheaper and cleaner, but not as clean as a heat pump, but it'll be cheaper than a heat pump. So you have to distinguish between is it retrofit building stock or is it new building stock? And is it cold climate or mild climate? And certainly for new buildings and mild climates, it should always be heat pumps. Probably for new buildings and cold climates, it should be heat pumps. For retrofits and cold climates, that's kind of complicated. So we just got to talk. Oh, the other thing is like, we start moving a lot of power on those cold climates through the wires and you can move more energy by pipe than by wire. So it might be cheaper just to decarbonize the fuels and use synthesized methane from hydrogen or something like that. And that's the case in France, probably. So France is a cold climate situation that they have trouble upgrading their panels in those old buildings, but they already have the pipes for gas. So probably cheaper for them to do biomethane.However, in France, you get a different benefit. If you install a heat pump, you get air conditioning. And most of those homes don't have air conditioning. So in France, there's a movement for heat pumps, not so much because it improves the quality of heating, but it's hot in the summer, they kind of want the air conditioning you get for free. You also get the benefits of avoiding Russian gas, that kind of thing. So the motivation between a Texas new building versus old building, Vermont new building, old building versus France will be kind of different based on what you already have.Doug LewinSo, let's talk about Texas a little bit more since we're focused on Energy Capital on Texas. I think there's, a lot of the heat, no pun intended, in these discussions is around electrifying everything and converting from gas to electric, and that's its own conversation, but let's set that aside for one second. We are more than 60% electric heat in Texas. So as somebody's HVAC is breaking and they're considering a replacement, a heat pump that has that cold weather rating, which like you said, will cost a little bit more. And you've said this before too, but I wanna just drill into it a little bit more. This is the place where policy comes in because it is a clear market failure in the sense that to the individual homeowner, if you just let the free market, and I'm generally a free market guy, I do believe in the Texas competitive electric market, I believe markets are very powerful to drive change and to improve lives and all that stuff. But there are places where it just doesn't work because the incentives don't line up. Me as a homeowner, like you were just saying, it's just cheaper for me just to have that heat pump down to 32 and let resistance heat do the rest. Well, if I do that, I'm now using four times as much in my home as I am on a hundred degree day and just leaving it to ERCOT and power generators to figure out how to supply that 15kW. How did that turn out for us during Winter Storm Uri? And, and even if you do figure it out, it's expensive and now I'm leaving it to everybody else to pay that. That doesn't mean I'm a bad person for making that decision. I'm making a logical financial decision. It’s cheaper for me to pay the 200 bucks. So that's where government comes in and, and the utility programs can come in. The Inflation Reduction Act can come in and close that gap down to zero to make that decision easy for people. Is that, does that all make sense or did I miss something in there?Michael WebberNo, no, I think you got exactly right because there's this mismatch in economics speak and I'm not an economist so I might get this wrong. It's really called like mixed agency or you have an agency problem The people who are making a decision about what to pay are not the only people who are affected by that decision. This happens a lot with landlords where landlord has to pay for the new water heater, but it's the tenant that has to pay the electric bill for the water heater. And so the landlord doesn't want to pay for a $3,000 water heater that's better, when you can pay for a thousand dollar one. They don't care because it’s someone else. So there's a mismatch.When you're doing your resistance heating tape, you're not really fully aware of all the costs you're imposing on the system. Because it's not directly exposing. It might show up to you indirectly later on, blend it into your bill in a way that's hard to decipher. So maybe your bill's $10 more a month for many months in the future because of that. But that's hard to anticipate or know or even decipher once you get there. And so that's part of the system cost problem. The other thing I'll say is with a heat pump, if you get down to 30 degrees Fahrenheit, whatever, your electricity's 10 cents per kilowatt hour, say at home. That's not that big a deal. But if you're turning on that resistance heating tape below freezing, usually that's a time when it's really cold and electric prices are really high. So you're paying 10 cents a kilowatt hour at that time because you're on a residential rate. But the actual cost in the system is more like several dollars per kilowatt hour, which means someone's paying that, which might be you indirectly at some point or industrial customers or someone.And so we're not exposed to how steeply the price is increasing. The more you're using resistance heating, the more likely the prices are to be higher than normal. So there's a great non-linearity that happens or exponential rate increase. And you're not exposed to that. So that's a real problem. If you're, you don't see any benefit for doing the better thing, other people are bearing the cost of you having made that choice. That's a great place for policy to rectify this market failure, either putting the full price on the system onto you with that decision or whatever it is or doing low cost loans or incentives to just install a better system because there's some system benefit to it. This, I mean, the market fails in many ways on this. Part of it is because we have mixed timelines. The power plant has a 50 year timeline or maybe 25 year timeline if it's solar wind. Your HVAC system has a 10 to 20 year timeline. You're making a decision in the next 10 minutes because it just broke and the technician's there and you gotta decide. So there's operational decisions in a crisis in minutes. Heating, cooling over days or seasons, asset life's mixed from one decade to five. It's hard to make that all bridge together in one market.Doug Lewin Yeah, and I think that almost ironically, those that are just sort of like ultra-fanatical and religious about markets end up doing damage to them because if you just have that small help to the consumer to make that right choice, then the market has a better chance of actually functioning and working. It's just too much to put on the market to create that really expensive power in those times of scarcity for the 4 million homes that have resistance heat. It's just, it's too much to put on the market. You can, you can, it's like a release valve, right? It's like, just let some of that pressure out so the market can work.Michael WebberIt is so hard, and ERCOT doesn't know who's got what, right? So they can't see beyond our meter and know what we have, and they also don't know how we're gonna behave. They can do some models, this kind of thing. And if you look in the past, they really under-predicted what the demand was gonna be when it was cold, because probably they don't see how many of us have these resistance heaters. And so people yelled at ERCOT, hey, you need to improve your modeling to account for all the resistance heating that kicks in when it gets really cold. So then ERCOT did update a modeling that showed the demand was gonna be much higher than it really was.And so it's easy to be wrong where you're too low, or easy to be wrong where you're too high. And I'm very sympathetic to ERCOT, because I don't know how you model this thing where you don't have the data or can't see it. But that's part of the lack of transparency. They don't know what we have. But also there's human behaviors involved behind the meter. And it might be, they were correct with the high estimate of 85 gigawatts of load. And we all saw that and thought, holy crap, I'll do my part. Who knew, maybe we responded behaviorally, we don't know, right? So it might be everyone's bad at projections or might be we are responding to correct projections and therefore the projection gets adjusted. We don't really know, but it’s the, resistance heaters just make it harder because it's such a big load that kicks in all of a sudden and it’s invisible to ERCOT until it's already happened.Doug LewinYou know, so there's two more things I want to talk about before we end. And one is you talked earlier about one of the things that'll be different, you know, a decade from now as they'll be, you know, you hope and predict, there'll be more sort of retail competition. You talked about more distributed generation and solar. I think one way this could go is we could start to see sort of markets for dispatchable, dispatchability and flexibility. Flexibility markets would be one thing you call them on the distribution side. And if you actually have markets for that, you can start to see, you just said, ERCOT doesn't know what's going on beyond the meter. If there are markets where people could be paid to reduce, right? Then you start to see how much are you using, how much are you reducing, and the retailers can start to see, they already have some awareness of this, obviously already, but I don't think it's very granular, who's got that really inefficient heat that maybe I can target some incentive to help. And by the way, that's gonna make them more comfortable. It's gonna lower their bill. And they can always say no, that's how markets work. It's voluntary. You wanna pay a higher bill and be less comfortable? Have at it, freedom, right? Great. But if you wanna participate in this market, here's the potential to get paid for that flexibility. And you wrote a great op-ed in the New York Times about how Texas has these very advanced systems for paying large users, steel mills, Bitcoin miners, big box stores, but really hardly any on the residential side. How do you see that kind of playing out? Is it, I mean, it's kind of opaque, it's hard to tell, but is it just retailers offering more products and services, some of these upstarts in Texas like Tesla and Octopus, David Energy and Ohm Connect, the list goes on.Or do we need some kind of more organized market where buyers and sellers can find each other on the distribution side? Or is it something else entirely I haven't thought of yet?Michael Webber I don't know and I'm surprised it hasn't happened yet in many ways. We do have retail competition in many parts of Texas where you can choose who your retailer is. So we have that level of competition. And there was some market innovation within that where people for a while used to do free nights and weekends or lower rates or different things or lower overall rate. You're exposed to the market volatility and that really caused some people to lose a lot of money and go bankrupt. So there was some market innovation, but not a lot. And it was mostly just competing by brand loyalty and fidelity. Do you like my company’s logo or do you like me or not. So there's some competition, but not a lot of competition. And that competition is mostly on who is sending you the bill for the electrons you got, maybe some differentiation of whether it's green choice or clean energy or that kind of thing. But I feel like there's more, and I just can't explain why there isn't more aggressive competition there. I think the next piece, and this makes a lot of people, now when I say that, especially distribution utilities, is to open up the distribution wires and poles the way we've opened up the transmission wires and poles.So when deregulation happened before that, it was integrated. A power company would own the power plant, the transmission lines, the distribution lines, and then they would own sort of the retail customer. But they broke that up. So now there's competition at the front of the wire. It's regulated for the wire, moving it from the power plant to the customer. Then you can choose who your retailer is. But we haven't done that kind of opening up of the distribution service areas. Think of the different parts of Texas where there's owners of the wires where I can participate. And over these wires, I could sell my electrons to my neighbor. I'm going to be out of town for a month. I got solar panels, boy, I'd sure love to sell that power either to my neighbor or local utility or whatever it is. So those kinds of peer-to-peer markets or those distribution level markets don't happen. And it might take regulation to do that where those wires become common carriers. Think of like what happened with AT&T where AT&T had to open up its wires for telecom in the eighties and all of a sudden you had Sprint and T-Mobile, a bunch of other companies popped up, so we have more choices and that drove down the cost of long distance. Same kind of thing happened, but I think there might have to be some opening up of who owns the distribution, not just the transmission. How do you make that accessible to everybody? And how do you let even individuals participate? Then you get some more innovations that will happen then. And because there are a lot of people like, well, yeah, I'll put a battery in my basement if I can sell it to my neighbor in the summers when I'm in Colorado or something like that. You might get more active participation that way.Doug Lewin Yeah, there's obviously more resistance than openness to that from what I've heard…Michael WebberYeah.Doug Lewin…in the transmission distribution utility world, but I think there's starting to be a little opening there partially because the utilities are understanding how big this challenge is, Michael WebberYes.Doug Lewin … and they also live in these communities and see the reliability problems and see the cost going up. And I think there's becoming more of an openness. I think the other thing, Michael, the reason why there might be some openness to that is because there is such demand growth happening from electrification of transportation, new things like hydrogen or industrial heat being electrified. Their growth opportunities are so much that I think some of that, maybe somebody else is doing some of the smaller stuff, doesn't scare them as much as it once did. That's my hope anyway.Michael Webber Right, me too. So we'll see, yeah, we'll see how it goes. But I think there'll be some changes there. And we talked about distributed generation. If you have distribution level markets, it'll be easier for people to invest in distributed generation at their home. And you can kind of get to there with net metering, but net metering is a partial solution, but that's not quite a competitive market in the distribution level.Doug Lewin I got to ask you just one more thing, and this is kind of just a 90 degree turn, but I tried to loop it together there with the electrification piece. I don't know. It wasn't very elegant, but maybe I connected it, is hydrogen. You said earlier that one thing you think is wrong is that hydrogen will forever require subsidies. So you think hydrogen's coming down the cost curve pretty fast. I know you've done a lot of work on hydrogen and you're doing some work now right on some of these natural seams that exist for hydrogen. You think this kind of big thing.Talk a little bit about where you think hydrogen's going.  Maybe just talk a little bit about the difference between what is commonly called green and blue hydrogen, and there's other kinds too. But what do you think is most promising? Why do you think it's not gonna need the subsidy? And how much are these natural seams gonna play a part?Michael WebberIf you talk to the companies that make hydrogen, they're happy to have the subsidies, frankly, right? Who doesn't like to be paid extra for the thing they're already gonna do? And the reason why I think hydrogen will eventually not need subsidies is just like all the other industries that might've received subsidies for a while. Once they develop maturity and a more robust supply chain, costs come down with learning. And hydrogen can be done at a variety of scales, small scale or large scale. We'll just do a lot of it, and as you do, more costs will come down. The ways you can make it include electrolysis using electricity to split water to get the hydrogen out. Some people call that green hydrogen, especially if it uses like wind or solar. You can use nuclear electricity or geothermal, whatever clean electron you want to split the water. You can use steam methane reforming with carbon capture. We start with methane, convert it into hydrogen in a synonymous carbon wave, you have carbon capture. And if your methane system is not leaky, you can also do pyrolysis. We start with methane and then you use plasma or catalyst or some sort to strip out the carbon. You get the hydrogen, but there's no CO2, you just get carbon black. And that carbon black can be used for graphite or solar memos, that kind of thing. And pyrolysis looks really efficient and clean and lets you leverage existing infrastructure like natural gas pipelines, that kind of thing. So that's really interesting. There's photolysis and photobiological techniques and photoelectric techniques. My father looked at photodiodes to get hydrogen with xenon lamps out of water in the 1980s, as a chemistry professor, there's just a lot of pathways.And the one you mentioned is natural hydrogen or geological hydrogen. There are places where the Earth makes it. You can make hydrogen by reacting water with iron rich or magnesium rich rocks under the right conditions. And we have those kinds of conditions many places around the world. And then you just have to extract the hydrogen from the Earth or capture it from these seams. And then it doesn't take all this natural gas or electricity to get it. And so it ends up being cleaner and cheaper and less water intensive and doesn't impact the land. It just looks like there's a lot of it, and that's gonna drive down the cost a lot. So there's some surprises on the horizons, and the headlines are really focused on electrolysis, but we just wanna remind people there's a lot of ways to make hydrogen. The markets haven't chosen the winner, and the winner might look a whole lot better in the future than it does today. It reminds me a little bit of where we were with computers in the 1990s, where every year computers got cheaper and better. So it actually became a problem. Like I used to buy computers for my research at grad school. I could buy a $1,500 computer, or if I waited six months, I could get a $1,500 computer that was like 50% faster. And this happened like every six months. I feel like we're entering one of those curves for batteries. We've been on that curve for batteries for maybe a few years, but we're about to enter that curve for hydrogen where every six months or year, it'll be a little bit better and prices might come down. And eventually that means the subsidies really aren't necessary. Maybe they're good to get the industry started. And I would say, as long as you let other people pollute for free, you got to do the subsidy, bring it into balance. I think that won't be necessary at some point.Doug LewinWhat do you think hydrogen is mostly gonna be used for and what do you think it's not gonna be used for?Michael WebberI think hydrogen will be used primarily as a building block for high value chemicals like fertilizer. And I think we might want more fertilizer and if we use more fertilizer, we might need less other forms of energy to reap our crops and protect our foods and refrigerate and that kind of thing. So I think we'll have more agrochemicals and hopefully not the kind that are cancer causing and that kind of thing, but the kind that help us lead to food abundance. I think we'll use hydrogen as a building block for things that are hard to electrify like aviation fuels, for like long haul aviation, short haul aviation maybe we can electrify. Probably for marine fuels, and that might be ammonia or methanol or something like that we might build from hydrogen. You can also get there from alcohols by the way, if you ferment bio matter, you might be able to get to the jet fuels or marine fuels. And then industrial heat, there's certain applications where you need high temperature heat, where we burn gas today, burning hydrogen instead would be better. Some of the industrial processes can be electrified, but a lot of them just want heat. So that might be hard to get there with a heat pump, for example. And then maybe for long haul, heavy duty trucking, I mean, there's a battle right now between electricity and hydrogen, or not necessarily hydrogen, but hydrogen as a building block for diesel. Long haul trucking might be another place where hydrogen is valuable. So, there are a few places outside of the power sector, but then the power sector, hydrogen itself might be a good backup fuel because you can store it more easily than a battery for long duration. And I think that's a pretty good use of hydrogen. I wouldn't want to use hydrogen for around the clock operation of the power sector, but there are episodes where it's neither windy nor sunny where it'd be nice to have a power plant that you could turn on. So I think that will be either backup or peaking times for reliability purposes in the grid. So that's it. I mean, I think, I don't think it'll be light to any vehicles and I don't think it'd be home heating. I think a lot of things hydrogen won't do.Doug LewinYeah, and with that backup piece, you can actually make the hydrogen with the wind and solar when it's abundant and then use it when the wind and solar is not.Michael WebberYeah, yeah. Especially for island communities where it's so expensive to bring in diesel that they have abundant sunshine or wind, they would use electricity to make a storable form of electricity, say, with hydrogen, that they can then use to make power later on.Doug LewinI know I said that was going to be the last thing, but when you said island communities, I have to ask you about interconnecting ERCOT. You've talked about this a lot. We need to interconnect. This will be the last question, I promise. I need to let you go. But yeah, we got to talk about that. Do we need to interconnect, Michael?Michael WebberI mean, yes, if we interconnect, it will make us money, it will save us money, it will reduce pollution, and it will improve reliability. Like it's the most obvious kind of thing we need to do. And this is where Texas jingoism and nativism and patriotism gets in our way, where we don't wanna do it because we don't wanna deal with the feds or something like that. But we deal with the feds for natural gas exports, liquefied natural gas exports, crude oil exports, refined oil exports, wood pellet exports, you name it. We deal with the feds for a lot of exports of energy because it makes us so much money. So we're willing to deal with the tedium of federal regulators if it makes us money. But for some reason, we decided, well, we're not going to do it for electrons. We don't want to make billions of dollars a year. We don't want to save billions of dollars a year for consumers. We don't make landowners royalties. And we don't want to improve the reliability grid because we'd rather just build gas plants here. But if all we did was build gas plants here, which is the preferred policy solution in Texas, that will be much more expensive and dirtier. And we sort of cut off our ability to export a lot of clean wind and solar to other states who would like it but can't build it. Like California is running out of room to build stuff. They would love to import solar wind from Texas. So I just think it's silly that we haven't done it. I know there are groups trying to do it with DC ties, different, like Grid United and other people are trying to do projects to do these interconnections. It's a great idea. I'm really amazed we're taking this long to make this much money.Doug LewinMichael, thank you so much for doing this. Anything you wanted to say that you didn't get a chance to, and also where can people find you on social media or the web, your books.Michael WebberYeah, regrettably, I'm very active on Twitter and LinkedIn and just my research group at UT is WebberEnergyGroup.com and I'm also at Energy Impact Partners and there are a lot of ways to find me. My email is pretty easy to find, so send me a note. Really appreciate the conversation with you. You've become really one of the important thought leaders in this space. And despite it all, we end up often at the right answers in Texas, even if it doesn't look like we're going to get there. But we're kind of making our way towards the right answer, which is good news.Doug LewinWe take strange paths, but we sometimes end up in the right place. Michael, thank you so much. Appreciate it.Michael WebberThank you. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.texasenergyandpower.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.texasenergyandpower.comFor the second episode of the Energy Capital Podcast, I spoke with Beth Garza the former Independent Market Monitor (IMM) for ERCOT and current Senior Fellow at the R Street Institute.Throughout the episode, Beth did a great job breaking down complex concepts to make them more easy to understand. We talked about the challenges of the changing supply and demand mix, and how the societal trauma Texans experienced during Uri complicates these problems even more.Beth emphasized the need to increase ERCOT’s interconnections to other grids, the legal challenges to doing so, and how increased interconnection could have helped mitigate past outages. We also talked about who will need to help with the integration of demand side resources and how it can be done. Beth also provided listeners with a helpful explanation of real-time co-optimization, an incredibly important ERCOT initiative that’s necessary for a well functioning electric market. Beth and I delved into the dangers of an unwinterized, barely regulated gas system in Texas and how its current set-up undercuts market competition and shortchanges consumers. Of course, given her background as the IMM, we talked about market design and some of the controversial proposals to alter it, including the Performance Credit Mechanism (PCM) and ERCOT Contingency Reserve Service (ECRS). We wrapped up our conversation with a discussion of ways the energy industry needs to shift its approach to communicating with the public.I really enjoyed this discussion and hope you do too. This podcast is for paid subscribers only and thus won’t be listed publicly on podcast apps. For details on how to listen to this podcast in your favorite podcast app, please refer to this information from Substack.If you like the episode, and I think you will, please don’t forget to recommend, like, and share on Substack, Apple Podcasts, Spotify, or wherever you listen.I look forward to your feedback on the episode. Thank you for listening and for being a paid subscriber! Transcript and timestamps are below. TIMESTAMPS1:58 - About Beth 3:32 - The role and responsibilities of the Independent Market Monitor5:57 - Understanding and managing the challenge of a changing supply mix combined with increasing demand13:54 - Real time co-optimization: what it is and why it’s important19:13 - ERCOT and interconnection with other grids24:00 - How increased interconnection could have changed the outcomes during Winter Storm Uri28:45 - Natural gas system36:20 - The role and potential of smaller distributed energy resources as a competitive force in the market42:30 - Do we need a new entity to be a distribution system operator (DSO), or could utilities or ERCOT play that role?46:00 - Texas’s market design and ideas for improvement, including discussion of PCM53:10 - Discussion of the ERCOT Contingency Reserve Service (ECRS) and the IMM’s analysis of its costs59:52 - Conservation calls and shifting public communications strategies

For the inaugural episode of the Energy Capital Podcast, I spoke to Will McAdams, the former Commissioner of the Public Utility Commission of Texas (PUC) who left the Commission just a few weeks ago.We spoke about his appointment to the PUC in the immediate aftermath of Winter Storm Uri and the challenges he faced during that tumultuous period. He told me what he was proudest of from his time on the Commission, including his efforts to wintererize power plants and “hold the line” to ensure a stringent standard was adopted, a stance that likely paid big dividends over the last few days during Winter Storm Heather. We had a great conversation about distributed energy resources (DERs) and how they are likely a major part of the future of the grid. Commissioner McAdams led the effort to create a Virtual Power Plant pilot, allowing small customers to get paid for injecting storage to the grid and, eventually, for reducing their use.He talked about the difficulties in the first few months on the job, after all three commissioners had resigned following Uri. He also reflected on his own possible responsibility for Uri, something I’ve rarely heard in the last three years.We went in-depth into the evolution of energy markets and how they might need to change to provide higher reliability at lower cost. That discussion included his views on the energy-only market, the large volume of ancillary services in recent years, and the controversial Performance Credit Mechanism (PCM). We also talked, of course, about energy efficiency, renewable energy, battery storage, demand response, and much, much more. (We discussed IRA incentives, if you’re interested in learning about which incentives you can access to upgrade your home, see this calculator. If you don’t qualify for tax credits, see this article for information on when additional incentives may become available, hopefully later this year.)Time stamps and a transcript are below. Thank you for being a subscriber. Please consider becoming a paid subscriber. I’ll have a subscriber-only chat during the upcoming PUC meeting this Thursday and you’ll have full access to the archives as well as subscriber-only events. And some podcast episodes will be for paid subscribers only.If you like the episode, and I think you will, please don’t forget to recommend, like, and share the Texas Energy and Power Newsletter.I look forward to your feedback on the episode.Time stamps:2:30: McAdams’ background and path to being a Commissioner6:00: The first days and months at the Commission after Winter Storm Uri10:38: Diagnosing why Uri happened14:50: What McAdams is most proud of from his time at the Commission: strong winterization standards for power plants18:00: What he wishes he had more time to work on: cost allocation for distribution infrastructure costs23:10: The need for distribution resource planning and the potential for a Distribution System Operator (DSO) model; discussion of the PUC’s award-winning virtual power plant (VPP) pilot30:25 Deeper dive into the VPP pilot and the Aggregated Distributed Energy Resource (ADER) Task Force, and the potential for Texans to earn revenue for their DERs36:00: Potential of demand reductions to contribute to VPPs40:25: Are conservation calls inevitable?45:15: The challenge of winter reliability and how energy efficiency can help51:15: The potential of energy efficiency funds from the Inflation Reduction Act, and the need for better education and incentives for HVAC equipment58:15 McAdams’ views on the evolution of energy markets1:02:01: Are capacity markets the answer, and McAdams’ view on the Performance Credit Mechanism (PCM)1:05:30: Do we need all the ancillary services we have? Will we need them if the PCM is implemented?1:08:00 Comparison of PCM with McAdams’ idea for Dispatchable Energy Credits (DECs)1:14:30: The criticality of load forecasting and how bad load forecasts were for Winter Storm Elliott1:17:15: Is Texas a good destination for clean energy investors?1:21:54: What are the 2-3 energy policies McAdams thinks will have the biggest impact on increasing reliability1:25:20: What will the grid of the future look like for consumers?TranscriptDoug LewinWill McAdams, welcome to Energy Capital.Will McAdamsHey, thanks, Doug. Glad to be here.Doug LewinSo excited to talk to you, obviously a whole lot to talk about, but let's just start with your background. What was your path to being a Public Utility Commissioner?Will McAdamsYeah, no, so I landed in Austin around 2009. I was fresh out of the U.S. Army, and I went to work as a sort of jack-of-all-trades legislative aid staffer, policy analyst to a state senator, and that senator happened to be Troy Frazier. And Troy Frazier was a pallet manufacturer from West Texas who was a long-serving legislator. And as a part of being a manufacturer, his number one cost of doing business was electricity. And so he always had a passion for energy, electricity, industrial policy, and was actually one of the co-authors of SB7. And so his policy focus was always in that area. Over two years of working for Frasier, he began to shift me into that policy area as his aid analyst designated to focus on energy, especially the Public Utility Commission. He eventually regained the chairmanship of the Committee of Jurisdiction over the Public Utility Commission and ERCOT, oversight of ERCOT. I was his legislative director and kind of his point staff person on grid related issues.And I held that spot for both Frazier and several other members of the legislature for the next, oh, eight years. And so I worked for Frazier. I worked for Charles Schwartner, who authored Senate Bill 3 during the 2021 session. I also was the director for Senate Business and Commerce, the Senate Committee on Business and Commerce under Kelly Hancock, who authored Senate Bill 2 in 2021.So I had a strange nexus in terms of the issues. I also worked for Speaker Dennis Bonham for a period where I was his advisor on regulated industries, for business in regulated industries. And then energy had burned me out in 2019 and I decided to step away and became president of a statewide trade association, Associated Builders and Contractors of Texas, and happily focused on employment and construction related policy for a year and a half. And then Winter Storm Uri happened in 2021, and I got a call. And that was after the recording of Arthur DeAndrea broke. Um, and the, the final resignation was announced at the PUC and, um, and the rest is history. I onboarded shortly thereafter.Doug LewinSo you were appointed on April 1st. There's a lot of jokes that could be told there. But I'm sure at many points you felt like that, what am I doing here? What have I taken on? What have I walked into, right? I mean, it was an extraordinary set of circumstances where I'm not sure it has, I'm pretty sure it doesn't have any precedent that all three commissioners were gone. There were no commissioners for a period of some weeks. You're appointed on April 1st. Can you talk a little bit about what those days and weeks and even the first couple of months were like? You know, clearly the dust had not settled from Winter Storm Uri. People were still processing it. There's all sorts of what's gonna happen next. What, it must have been some form of chaos. What was that like?Will McAdamsYeah, it was not an orderly transition of authority and responsibility, I'll say that. But we made the best of it. As you recall, the legislature was in session. I was over at the Capitol lot doing my job as president of ABC, and I remember sitting down in a legislative office watching the marathon hearings just on the telecast, watching the Q&A between the senators, the House members and the Commissioners at the time… it was painful to watch. And I was, it was tough to watch. And people would ask me what's wrong. And I'm like, look, I feel partially responsible for this. I mean, I had a hand in crafting policy over the last eight years, decade. And this collapse of the system was… it was personal to me and it was personal in trying to stabilize the system, recover, rebuild. So that's what I wanted to do. And when I got that call, I was like, yes, absolutely. Let's do this. Let's help. And so my history in the State Senate was very important in terms of that first nomination. Any of the Commissioners who were going to be on board at that time had to undergo Senate confirmation. And if the public was questioning the competence of the Commission, the State Senate certainly was. And you could even multiply the intensity of that skepticism on the part of the Senate. And so, you know, I had spent 10 years in the State Senate by the time I had left. And I knew all the senior senators. I knew all the senior staff.The Lieutenant Governor and I had met before. I'm sure he kind of put the face with the name when we had our first meeting, which was an hour and a half meeting, before my name was even put forward on an appointment list. And that was a tense meeting. I will tell you, I've never been in a more high magnitude interview than with that meeting. Because he wanted to know somebody was gonna come in here and do their duty.And so I passed muster. He said, I believe you'll do your best and I'm going to support you. Uh, everybody was relieved to hear that the governor's office was relieved to hear that and, uh, and then they put my name out, uh, within 24 hours. And, um, and then I began to lead the way. Uh, again, I wasn't going to be the chair. Um, Peter Lake followed two weeks later.But I was going to onboard first assess the situation and then get confirmed ultimately which the Senate did in short order and start to rebuild at PUC. I remember walking over to the PUC two days before the vote and actually… no I didn't walk over it was it was the day after the vote when I was confirmed and I said look, I'm going to onboard and I met with Arthur and the place was dark. All the cubicles were empty because they were still on COVID staffing. Only the senior staff was present. It looked like an empty ship. Just cold, dark, and quiet. And met with Arthur and you could imagine a man under tremendous strain and he was. But he also looked like a weight was being lifted.It was a tough time for them. But we just assessed the situation, got with Peter, and then we started putting things back together again.Doug LewinSo you said it was personal and you felt some responsibility. It's interesting, and I want your perspective on this too, how much of Uri do you think was, and I understand that sentiment because that's your character as a human being and your army background and probably the way you were raised and all that, and that's admirable and I appreciate that sentiment. That's the way I think we want public servants to think that, you know, um, I have some responsibility here and all that having been said, I still don't view Uri as a quote unquote market failure. It may be, I want, I want to know your view on this though. Forget mine for a minute. What, you know, you had other failures as well, right? Of gas supply of, um, you know, forecasting of load going as high as it was. So energy efficiency comes into this.And then, and then the market maybe is a piece of that. What is your sort of diagnosis of Uri and where the sort of, what were the major problems and how does the market structure fit into that puzzle?Will McAdams Yeah, no, it was a confluence of events. It was not a market failure. I can say that emphatically, clearly now. What happened in 2020, and I started alluding to this from my statements from the dais shortly after we had the new commission composed. I said, look, this was a confluence of events. It certainly appears that way. The last two years and eight months have only affirmed that in my mind.And you got to remember what was happening at the time. The economy was coming back to life after Uri. And so what had been happening over that year and a half, um, between COVID forcing the dormancy of the economy, uh, load had stayed steady state. There was no load growth over that year period.By 2021, everything was reopening again. All the industrial processes were reopening again. And what had happened between 2020 and 2021, and what had been building before that, was a crash course industrialization, electrification movement. And especially in Texas, because we are the, we are one of the manufacturing engines of the country.What we didn't realize is how much gas-driven industrial processes over that two-year period were being converted to electrified systems. So they were, instead of burning gas-fed boilers or internal gas-fed systems, they were switching that over to a plug-and-play system where they could account for the carbon emissions that they were producing, where they could account for the energy costs associated with that, where it wasn't necessarily directly tied to the volatile natural gas system. And what we saw was a dramatic increase in load growth at the same time as this winter storm was bearing down on Texas. And that was a snapshot in time, but it hit us at a point where the PUC and ERCOT were not tracking the criticality of the electrons being diverted to those loads. And as a result, key systems failed. And that became a cascade of failures that rippled its way through the entire system. That's when curtailments occurred. That's when, and this followed wind generation freezing in place because of the magnitude and the moisture associated with that winter event. So it became this pancaking cascade of failures that took the system down and took it down for several days. So that's what I would say.Doug LewinSo let's, um, let's pivot a little bit. Um, and, and although it's, it's related to the last question. So you, you were there for, for nearly three years, obviously when, when we're talking, you've, you've left the commission. What, what are you most proud of when you look back at your tenure there? And what do you wish you had more time to focus on what, you know? Yeah. I'll just put it that way.Will McAdams Yeah, well, I was most proud of we held our ground on weatherization. So we, and I would like to advertise this for the public, we have a winter event that appears to be headed our way this coming weekend. And preparations are underway. I'm fully confident that everybody's taking necessary steps to make sure that they're winterized and weatherized. I urge the public to do the same. However, at the time we were in this paradigm shift discussion about who bears the costs of these efforts. And at the time we dug our heels and said, no, statute has given us direction. These costs will be borne by the resources that support the system.This is a part of their cost of doing business, just like any business has a natural regulatory cost of doing business. And we will establish a standard that will be very stringent that they will be a held account to. I had a part in establishing that stringent standard. I had a part in holding the line on ensuring that windchill was accounted for. And I think we're gonna find out how important that is this coming weekend because it's going to be windy and it's going to be cold. And the temperatures will be extremely low as a result. And they will feel extremely low. And so metal is going to perform in a certain way under those conditions. And we need to make sure that holds up. So we impose the weatherization standards that are absolutely the most conservative, quote unquote conservative, but stringent in the country. NERC is looking at those standards as an example.I believe it'll play an important role in informing what their ultimate standards are for the nation. So Texas will have led the way. And then the second thing I'm most proud of is we stood up the aggregated distributed energy resource pilot program in a five month period, launched it to where it was live within nine months.And at the year anniversary, we had the first electrons being dispatched into the system as a result, allowing everyday consumers to become a resource, a virtual power plant system to support system reliability. And I think one day we will be able to account for them in resiliency plans for the system. So I think we started building a road to the future, and I was a part of that, and I'm extremely proud.Doug LewinAnd what do you think is sort of left undone? What do you wish there had been more time to focus on?Will McAdamsI was so focused on just the day-to-day triaging of ERCOT at the time of this transition and Southwest Power Pool working on that. I wish we could have addressed cost allocation in terms of distribution infrastructure costs. And I believe that is one of the most profound things that the Commission can take up over the next three to five years, or frankly the legislature. I believe this issue is ripe for the legislature to begin arguing that will determine who pays for distribution costs. Because I believe what's coming is the distribution system is going to be upgraded in a dramatic way over the next 40 years. And the resources that we can begin aggregating and bringing in and dispatching into the system, not from the transmission system, but from the distribution system, will help support our grid from now, for 100 years from now. And if under the current policy, if those costs are completely borne by the consumers at distribution, that's your mom and pop businesses, that's your small to mid-level commercial consumers, that's your low-income residential consumers, they're paying the cost of that. And it could be a crushing cost. So I think ultimately the commission needs to, and this is what I had launched but didn't have the time to finish, needs to have the discussion and ultimately decide that those costs need to be borne by the system as a whole because ultimately that will help spread the cost across a greater pool of consumers to include our large industrial consumers.Because ultimately all of them will benefit equally from the reliability and the increase in resources participating in the energy market, which will ultimately bring down wholesale energy costs and help support system reliability and resiliency while decreasing price volatility in the system, which eventually cost consumers.Doug Lewin So I understand generally what you're saying, but I'm not sure I follow specifically on the distribution infrastructure costs. You're saying it should be spread across. Is it not currently done that way? No, okay, tell me more.Will McAdamsNo, it's so if you're a consumer, say in Houston, the costs for the distribution system are borne by those consumers in the CenterPoint Energy service territory. And so that's just basically Houston people paying for Houston wooden poles that are outside of their homes. But in an environment of huge electric load growth, the distribution system can do a lot more and become a lot more sophisticated to where it can handle two-way traffic of power, not just along radial systems, instead of just receiving power from the transmission grid to their home. And in so doing, you can start hooking up cars, you can start electrifying all this stuff that we're installing in our homes or putting on our businesses. It allows that neighborhood to be a lot more sophisticated and a lot more resilient than it currently is. But it requires a lot of upgrading. And we don't know the magnitude of the upgrade to the distribution system or the magnitude of the costs associated with that. But once that happens…Doug LewinWe don't know the magnitude, but we know it's gonna be big, right, because like you were talking, yeah, this crash. Will McAdamsWe know it’s terrifying.Doug LewinYeah, yeah, yeah. The crash course you were talking about in industrialization and electrification prior to Uri is like a fraction of what we're about to see over the next 10, 20 years.Will McAdams It's the tip of the iceberg. And I'm telling you, the iceberg's big. And so if you can socialize that beyond the distribution system to the transmission system, then that means all of the industrials who currently do not pay distribution system costs would bear a portion of the burden, because again, they're consuming large amounts of electricity. And they would be able to socialize those costs over a greater pool of payers and support the system which they're benefiting from.Doug Lewin The industrial consumers pay transmission based on their four coincident peak, but they don't pay for distribution at all?Will McAdamsBecause they're not interconnected at the distribution level. They bypass that by building their own substations and interconnecting right there at transmission.Doug LewinBecause they're okay. Wow.So does this, so that's obviously a huge issue, the who pays. I also wonder if sort of a first step to that is it's something like distribution resource planning, which we don't really do in any kind of a transparent way right now, obviously the utilities do their own distribution resource planning, but having some kind of a market signal to solar and storage and energy efficiency, forget the technology, there'll be all kinds of different technologies like “Hey, there is a need over here.” We think we need to invest tens of millions of dollars in distribution infrastructure. Is there a solution that can be met for millions of dollars instead of tens of millions?” But there's no market like that, right? Now there's no market signal, is that correct?Will McAdamsThat's right. The VPP was the first market signal that was introduced really at that small of a scale at distribution. And there’s starting to be market signals on that part, Doug, because, and this is for the more sophisticated listeners, because congestion costs at the transmission system, on the transmission system, are growing leaps and bounds. So people are starting to feel on a nodal basis. Okay, so, the nodal system are a series of price points that are based around your closest substation in your neighborhood. And the reason they do that is because that helps the system signal where scarcity is occurring. And at the transmission system, think of it just like traffic congestion. There's too many people or too many electrons trying to get on the system at one place, congestion builds up.It backs up power beyond that point and starts backing down power resources, whereas scarcity is experienced on the other side because it's free highway and people are calling for more cars to be on the road, but they can't get through because of the bottleneck. So it creates a price formation problem on the system. Well that sends a signal that there needs to be more resources closer to the loads. And that's what these smaller resources can provide. They can start to spread out the cars coming onto the system. And as such, we don't have as many bottlenecks and the costs start to decline.Doug LewinYep. Will McAdamsDoes this make sense? Doug LewinIt does make sense. Does this inevitably lead to some kind of a distribution system operator model or DSO? This is talked about a lot at conferences and in white papers. And for those – we always want to make this podcast both accessible to a general audience and interesting to an in the weeds audience – but a distribution system operator would basically be somebody who's coordinating all of those small sources. If you start to think of all the batteries and the vehicles that are starting to come. A quarter a million electric vehicles on the roads of Texas already today, probably pretty quickly heading towards a half a million and then a million after that. And each of them have pretty good size batteries inside them. If nobody's coordinating all of that and they all plug in at six o'clock when people get home from work on a summer day as the sun is starting to set, we're gonna have major problems. The inverse is true, if they're all being coordinated and orchestrated in such a way that their power, at least we're not charging them and potentially even reversing flow to the home so that it's consuming less from the grid, we could alleviate a lot of the problems we have, but doesn't some entity need to coordinate all of that and who could that be?Will McAdamsWell, so we had talked about that. I had talked about that with ERCOT system planners. And they said, well, look, we believe ultimately something like that is needed. We don't want to do it. And I'm like, understandable. But we need to start talking about that. But in terms of the distribution system build out, Doug, this is a 40-year play. This is the future. And that's why the conversation has started now.It's going to be an evolving conversation because there's going to be some entities, namely the IOUTDUs, so like CenterPoint Energies and Oncors of the world; the electric cooperatives, so South Texas Electric Cooperative or Pedernales Electric Cooperative; the municipal systems, CPS, Austin Energy, who will need to consider ceding some of their current authority in terms of coordinating their distribution system to that operator, to that new system operator, distribution system operator, just like they have done or federal policy has required them to do toward ERCOT in terms of management of the bulk power system. So that's going to be an evolving conversation on how that could unfold.Doug LewinCould the utilities themselves, the Austin Energy, the CenterPoints, the Co-Ops, play that DSO role, or do you think it needs to be something independent? Or have you not thought about it enough to say it?Will McAdamsNow, I've thought about it…Doug LewinI figured. Will McAdamsBecause, look, one of the big things that I believe is underway, and this is frankly counter to broad-based federal policy, I think, right now, is I think we're on a long march around, for the last 100 years, the grid has been on a long march toward more broad-based integration as a system.Okay, as for ERCOT that's been as an islanded system within the national grids. For the other grids like SVP, PJM, CERC, it's been integration with each other, you know, to make them more, be able to lean on each other. I believe right now with the type of load growth that we're seeing.That everybody's gonna start to default back to a more islanded approach, just to sort of stabilize the system and manage their systems, and then begin another phase toward more integration. It starts and stops. But as a result, those regional entities, the CenterPoints of the world, or the Oncors of the world, will begin coordinating, possibly, with their neighboring cooperatives to better manage regionally the distribution system and what that could dispatch onto the bulk power system ultimately to move around the state. And I think that's not a bridge too far. I believe ultimately the market will signal that this is needed, but it's not ripe yet.Doug LewinThat's fascinating. So this is actually a good, I wanna make sure we take just a little step back and focus on the specifics of the VPP pilot and what the Aggregated Distributed Energy Resource Task Force, that is a mouthful, but there is this Task Force. They continue to meet in Texas and will continue going forward. It was just announced, I believe just last month, on December of 2023, that the Aggregated Distributed Energy Resources would be allowed to participate in this new ancillary service, the ERCOT contingency reserve service. So it's kind of growing in the ways that it can actually serve the state, serve the grid, um, serve Texans. And that pilot is very related to everything you're just talking about at a high level. But let's, let's bring it into the specifics. Can you just describe the pilot? What it's about? Whatbarriers it's trying to overcome, sort of what it is, what it's achieved so far, and where it's headed? I think we've already covered why it matters. I was gonna ask you why it matters. I think we've already covered that. You could say more about that, but what does it do? Where is it at now and where is it heading?Will McAdamsOkay, well high level, the reason I pushed so hard for this is because again my mission was to stabilize the system and And I had to do that in an environment where I was trying to stabilize the system with a moving target meaning the demand kept on going up at the same time I was trying to find resources to satisfy the demand supply, find the supply and there was no supply getting built everybody was petrified of the volatility and the unknowns about the market and the market design. And a lot of that was PUC introduced. And we tried to sort that out over time. The bottom line is, I knew that the public's confidence had been shaken in the grid. And the reaction that I would have or anybody would have is like, I'm going to start to take care of myself. I'm going to take care of number one first. And then I'll worry about number two, which is the system. And people were investing under those under that motivation. And they were buying generators, they were buying PVs, or they had solar panels on their roofs already. They were like, at that point, all right, I'm gonna pop for the battery and pair that up with the battery, and I'm gonna make it through the next winter storm or hurricane or whatever's gonna come along. And so I knew that number, the number of those types of resources was growing out there. And I wanted to figure out a way, all right, how does our market begin to co-optimize that pool of resources within the system. And so that was the ADER pilot. That was the driving force behind allowing Virtual Power Plants or communities with aggregated resources to use technology that they had available to bid into the ERCOT energy markets, namely ancillary markets, which for you laymen out there, that's like our emergency service markets. So the backup power of the system. And sell that into the system at peak need. You know, when need determined that energy would be most valuable. And that's what the system does. It specifically targets not the big batteries or anything like that, but I'm talking about everything below one megawatt. And to put it in perspective, one megawatt is a Walmart, or it's a neighborhood of three to six hundred homes. Or it's a water treatment plant with a neighborhood around it. It's all kinds of stuff like that. It is as close as you can get to the ultimate end-use consumer and that's us. And so we did that we set up the system we created the market within a market and now they are selling in to the emergency services and people are making money and now other people are thinking about okay “Maybe this isn't a $70,000 out-of-pocket cost.” “Maybe I can build this or put it on my home and I can have it paid for in a certain amount of time under this market structure.” Now ECRS. You talk about ECRS. That is the most flexible emergency service that we have in the system. Okay, that was our newly created stealth fighter if you will of an emergency service. Um, that's the latest and greatest thing we have to deal with a system that is more variable in nature,. Meaning we have to manage a system that has more variable resources like wind and solar. But also higher load growth, and with the loads, meaning the consumers are doing more things that changes their patterns over time. So ECRS is designed to be there no matter what. And now that ECRS is open to the Virtual Power Plants they are perfect to meet that need because they can dispatch almost instantaneously. They are extremely flexible in an environment where flexibility is the watchword of the day and the thing that should be most valued. And ultimately, when we have a winter storm come through, these guys are going to be a valuable component in shoring up the system in the face of it.Doug LewinYeah, totally agree. So very related to that. And I'm interested in, you know, what you think the potential of demand response. So demand response can be storage, of course, but let's also talk about, storage is injecting power into the grid. What about actually removing the demand? So I think in my understanding, well, at this point in the pilot, there isn't any reductions, there's no like aggregation of thermostats or electric hot water heaters, is that correct or?Will McAdamsSo it is because we were first and foremost focused on because we hadn't done this before Doug in terms of injecting power into the system. So you had to learn because again, the whole point of the pilot and the reason we have it as a pilot is it's a sandbox for experimentation. But we wanted to see what the injection and dispatch looked like. But the pilot is an insert within a rarely used and not well-known program, which is the aggregated load response program inside of ERCOT. And so the ALR program can already pay loads to turn themselves off and all kinds of loads, like aggregations of small loads can start to reduce their demand at key times.When the pilot continues to move forward, we can start to co-optimize both the dispatch of the resources in the pilot, and also to incentivize and send the market signal that the aggregations of these smaller demand response pools can be valued and compensated. So I think that is in the future phase of the pilot to send a more targeted market signal for the bundled demand response to be paid.Doug LewinNo, that makes a lot of sense. So the learnings that happen within this VPP pilot can help to kind of extend that ALR, which to my understanding is mostly used for the bigger stuff now: Bitcoin mines and steel mills, stuff like that. But there's nothing, there's, I was gonna say there's nothing stopping the smaller ones from getting in. What is stopping it is, lack of market signal, lack of experience, and the VPP pilot is bringing those things forward so that the ALR can be sort of expanded to include more of these smaller resources.Will McAdamsWell, and I'll tell you what this pilot does, Doug, is it sends a value signal to create a business case for the retail electric providers to actually develop the technologies needed to telemetrically control both the dispatch of resources into the system and the demand response needed to turn consumption down into the system. And once that is certified by ERCOT, then they can back bundle the demand response together and actually provide a value stream to the end-use consumer. To date, we have not had that. With the pilot, we now have that signal.Doug LewinSo I wanna put a finer point on this just to make sure, cause this can get a little bit esoteric to those that maybe aren't involved in this, or even those that are involved in the market, but maybe don't work on these kinds of issues as much. What we're talking about here as customers getting paid, if they volunteer, if they want to, right? If they come forward and say, I want solar and storage, or I would like to participate in a program where my electric hot water heater, my pool pump, my refrigerator, my thermostat is reduced at certain times. I can actually get paid for that if I choose. So there's the affordability piece here, bringing down the cost of energy, bringing down the cost of new technologies. And there's the reliability piece, right? Which is if I'm somebody, I'm a Texan who says, I don't want any part of this. I don't want to deal with solar panels on my roof. I don't want anybody ever touching my thermostat. That's fine. If your neighbor or somebody down the street does. You're affordability gets better because the overall system cost is going down because we have more resources, more competition, and the reliability of the system is going up as well. I was struck by an exchange you had with Woody Rickerson, the COO of ERCOT. This is September 14th. It was just after we had been through 11 conservation calls over the summer, just eight days after there was an emergency alert and we were very close to having rolling outages.Will McAdams Yeah.Doug LewinYeah, and September 6th and you asked him, you said, is this the future? Meaning all these conservation calls and emergencies. And he said, yes. And I thought that was particularly striking because I think it's a possible future. Yes, we could have every summer where we have a bunch of conservation calls and emergencies, there is another future that's possible, which is a whole lot of people have devices, they're being orchestrated in a, in a coherent way. People are being paid and they're getting the bill credits, but they aren't hearing conservation alerts and emergency alerts. Am I being too overly optimistic or is that a possible future?Will McAdamsNo, but I gotta tell you, so one thing the Army taught me to do is be a natural pessimist, and so to plan for the worst possible contingencies. And do you want me to scare you a little bit? So in my last briefing with the Speaker of the House before I left the state government, I said, I'm getting out of energy, I wanna go to construction, I'm sick of it.It's too bare-knuckle of an industry. And he said, well, where's all this headed, Will? And I said, look, this is gonna get sorted out, this energy trajectory that we're on. But what's gonna sort it out is pure unmitigated volatility. And that's because we knew that the economy was taking off. We knew that load growth was there. We didn't know to what degree, and we still don't, because every system in the country is trying to figure that out. We knew that the resource mix was becoming more variable, but it was also bringing down costs, as you have pointed out, 90% of the time. It's just that 10% really gets you, because it comes at unpredictable moments. But ultimately, where I was going with the statement, and I said, ultimately, cost volatility will drive consumers and the market to answer this question and they will begin to actively engage in the market to provide solutions that will bring down these costs over the mid and long term. And we will have a more reliable and more resilient system as a result of it. But nobody's gonna get off their hind end and go and invest in that. On a hypothetical, frankly, they're gonna have to see it. And I think we're seeing that now.And ERCOT is not the only system. I work with other systems and they and will continue to do so and they are experiencing the same thing. We are just on the leading edge and I will say it's because our load growth is that much more than theirs is right now. But they see the beginnings of their load growth beginning to take off and it's taking off during the winter season for which no system in the country is designed for including the northern systems and that's changing the planning calculations on the part of the grid administrators.Doug LewinSo your contention is that there's going to be a lot of volatility going forward and it's the demand, tell me if I'm putting words in your mouth there, and the demand side resources that customers are bringing to the table themselves are gonna be a major solution.Will McAdams It’s the near-term answer.Doug Lewin Near term, is there a longer term or you're just not sure what the longer term is?Will McAdamsAnd that's where the palette comes in. It's that more aggregated dispatch of power. Because again the sun's gonna set unequally over time because again, it's setting over the arc Those electric vehicles will begin their charging patterns at different times because of the setting of the sun or when they're getting off work. Because of time zones any number of permutations will change the load profile on a regional basis. And therefore the closer to the loads that you have enough disparate resources, dispatching will satisfy their needs. It'll be a more co-optimized system. And I know I'm using a lot of big words that are common speak in our world, but bottom line is the grid will manage itself better because we'll have more options. And the market will provide those options.Doug Lewin Yeah, if there's a market, which we'll get to in a minute, what that market looks like and what that market structure is and if it's properly incentivized from these different resources. So we'll get there in a minute. But before we go there, you've talked often about the bigger challenge that is reflected in winter. You were just talking about it just a minute ago.Will McAdamsSure.Doug LewinI wanna talk a little bit about one of the things that is driving the winter problems. This is something I talk about a lot. It won't be a surprise to you I'm bringing it up, but it is the sort of inefficiency that we have built into our system, particularly from resistance heat, from really inefficient heat, which according to the Department of Energy, we have resistance heat, which for those who don't know, and I've talked about this a lot and written about it a lot, but it's basically the technology of a toaster oven or a hairdryer, but sized for an entire home. We're still building homes that have resistance heat strip heating. It's called a lot of different things, baseboard strip heating, resistance heating, but it is very inefficient. It's in three and a half million homes in Texas. I just heard a presentation just last week, Will, it was at a symposium at the University of Texas.Will McAdamsTerrific.Doug LewinSome researchers there were doing some looking back at Uri. Of course, we don't know how much demand was during Winter Storm Uri. ERCOT estimates it was 77 gigawatts. I had heard an estimate from Texas A&M that was published that said 82 gigawatts. This team of researchers at UT believes it was 87 gigawatts during Uri driven by extremely inefficient heat and poorly insulated homes.You talked about when you went to the Senate for a hearing in the summer of 2021, you talked about the need to look at energy efficiency programs and the like. We have done, there have been some increases in the energy efficiency programs to demand response. There's the VPP pilot. There's a lot of things to point to where progress has been made, but energy efficiency, as far as I can tell, and you may have a different view of things, we haven't made any progress on energy efficiency. The programs are still as they were three years ago. Why is that and what needs to be done there?Will McAdamsSo, all right, one of the conditions, and everybody needs to know about this, in PURA, the Public Utility Regulatory Act, the conditions upon which the PUC can set energy efficiency standards are pretty restrictive in terms of building an energy efficiency program that our regulated utilities manage. It's very stringent and prescriptive in the statute. This is one of the reasons, you know, when I first looked at this, you know, one of the virtues or features of being the first at the Commission, you kind of get to pick what you work on first, and that's why I focused on the VPP programs because, one, I saw the sense of urgency associated with it, and then, two, I had more flexibility to do things within the ERCOT market as a PUC commissioner, then I could as a PUC commissioner related to energy efficiency, and that's because the statute was so restrictive about what we could do and how we could do it. And so I would recommend that the legislature does need to look at the energy efficiency statutes, determine what actual powers the PUC has to create standards, what our targets for the standards are, where those costs to pay for those standards can be levied. But ultimately, absolutely, that is a midterm and long-term essential goal for the system because you have to smooth out the trajectory of demand growth and energy efficiency is that breaking mechanism because it's a difference between climbing a hill and climbing the altitude like an F35 fighter.You do not want that steep of a curve. You want to flatten out that curve to make our infrastructure planning processes more achievable and orderly, and to prevent cost shock within the wholesale market to the rest of the system. That's what you're trying to prevent, and that's what energy efficiency provides you. We just didn't get to it over the last three years because again, we were trying to one, stabilize the ship, and then two, guide it around several icebergs within this ice field and keep moving forward.Doug LewinYeah, you guys obviously had a ton on your plate. I will point out the legislature during the 2023 session, there was a bill that passed the Senate. It did not pass the House, but that would have required a 5X increase in energy efficiency. So huge credit to the Senate for getting that done. And hopefully next time the House will push it through too. But there was a bill that did pass the House and the Senate, Senate Bill 1699. It was related to DERs.Will McAdamsThat's right.Doug Lewin And it had a provision in there on energy efficiency and demand response. And I'm reading from it. “The commission by rule shall establish goals in the ERCOT power region to reduce the average total residential load.” So that is utilities code 39.919. So that's there that, and it does say shall. So hopefully, um, your successors and the current commission will, will take that up during this year, cause I think that's right. I think that's a good analogy, the difference between a climb of a you know, what did you say of an F35 or F15 or whatever it is versus a nice gradual, um, kind of a slope energy efficiency can provide that. Yeah. So, and we, look, we saw that during, go ahead…Will McAdamsYeah. It never ends. It's a- Well, so I have another recommendation on that front. One of the things that needs to be looked at is, look, the federal government just passed a, appropriated a lot of money in the Inflation Reduction Act. There is a lot of money out there for appliances that increase energy efficiency. That program is supposed to be administered by the State Energy Conservation Office. Okay, so they're supposed to find homes for this money to help people purchase appliances to bring down their energy costs and increases and manage their energy consumption. The PUC goal should be somewhat, somehow, tied to that effort, because you establish a goal, but you have to figure out how to meet the goal. Well, that is at least an existing mechanism with resources that allow you to try to meet that goal. So there needs to be a synchronized effort on the part of the state. It's not just the PUC, and that's what I'm saying, because we can be as much as of a toothless tiger as any other agency unless there's some type of way to operationalize to meet the goal.Doug LewinYeah, 1000% the funds that are coming to the state, it's $690 million over five years. There's two different programs, HOMES and HEEHRA, and those are designed for folks… so just so the public is aware, and I'll put some links in the show notes so people can find out about this. There are tax credits. This was an existing statute, but it was very limited. It was like a $500 limit tax credit for energy efficiency.That's up to, and again, I'll put it in the show notes. So I'm not an accountant. Go to your accountant for tax advice, but it's something like $3,000 a year, and it can be repeated year after year. So you can actually continue to get this. That is part of it. What the 690 million for is for the roughly 40 to 50% of the population that does not have a tax liability, because those are tax credits. So if you don't have a liability, you can't get the credit.This money is supposed to help folks that don't have a tax liability. So that is coming to the state. The state will have a lot of discretion and leeway over how to focus those funds. And if the state energy conservation office and the comptroller and the PUC all get together and focus this on HVAC and insulation, it could have not only a great impact for the people that use those funds and lower their energy bills, but also for everybody in the state to increase reliability to decrease the probability of outages.Will McAdamsAnd Doug, let me pile on to that to an extent that heat pumps, you brought up heat pumps, all right? The term heat pump terrifies me as a regulator, and I'll tell you why. Because we talk about strip heating. I was talking with Jim Robb with NERC and TEPRI. And 90% of the heat pumps that you will find in Home Depot or Lowe's are not variable cycle heat pumps. They are not the efficient heat pumps that we need to get in people's hands. They are heat pumps that are essentially strip heaters. The exact heating system that we want to try to avoid on the system is what is being marketed out there as a heat pump. But that's the type of load that will cause a reliability crisis. That's the type of load that will keep us in rotating outages for days on end. And that's what every system around the country is seeing is load growth, demand growth during winter months. And it's because people are buying the wrong kind of equipment at these stores and installing them. And that's the kind of stuff that the SECO program could help assist with and get those appliances in the hands of lower income folks who need to be using that to normalize their consumption and reduce cost and help the system. But we have to have some type of coordinated strategy and you've been preaching on that for a while, but we need it.Doug LewinYeah, that really I think is the role where the energy efficiency programs that the PUC oversees through the utilities, the SECO programs that are coming from these federal funds, that's the role of the incentive. Because I get asked this a lot, why can't the market solve this? These are such great technologies. They save people so much money. Why can't the market take care of it? Because when you have something break at your home – which I've had happen in a Texas summer, not a pleasant experience – you take what they have. You take what they have, right? So the role of incentives is to bridge that gap. So a consumer that is in trouble and needs that solution quickly has actually the option. You make sure that the stores are carrying the higher efficiency stuff and you make sure that the difference in the cost is negligible or even zero.So it's very easy for the customer, instead of putting in the very inefficient equipment that is gonna make the grid reliability problems worse, you bridge that gap so that they're putting in the higher efficiency equipment that's going to increase our reliability. So yeah, hopefully there's a lot more to come on that. I think you're exactly right that the coordination between SECO and the Comptroller's Office and the PUC is going to be incredibly important in 2024. All right, so let's shift gears just a little bit because I definitely, you know, you mentioned, we started this conversation by you saying your, I believe it was your first job at the Legislature was with Troy Frazier. Is that right in the Senate? So you were kind of, you know, you started off some of your formative experiences with a guy who was a big advocate for competitive markets, for the energy only market. Let's talk about different, and you obviously over the last 14, 15 years, Will, I admire you so much. I think you are a person that has, I don't know if this comes from military background or just your nature or whatever. I've listened to you talk a lot when you're on the dais. You question your own assumptions. You're obviously, somebody that tries to talk to a lot of different people, get a lot of different perspectives. You have looked at a lot of different markets. You've obviously been active in SPP at your time on the commission, but I've heard you talk eloquently about MISO and PJM. Even I've heard you bring up Australia a bunch of different times. Can you talk about markets and their evolution and where they're heading? We have an energy only market still mostly, though it's...Will McAdamsMm-hmm.Doug Lewin…a little bit in doubt if that's even what we actually have right now. What in your mind, I'm just going to, I could ask a question here, but I'm just going to just share your thoughts on markets and what you think the evolution of them is, where are they headed?Will McAdams (56:16.33)Yeah, so I had a role in killing capacity in Texas in 2013. I helped organize a hearing of the State Senate that questioned capacity in Texas. And this was when we were really debating, the Commission was debating whether to just unilaterally move from an energy only market design to a capacity market.And in 2021, I was wondering, okay, did we really screw up? Did we not move quickly enough to capacity? Even though we have aspects of capacity in Texas, our ancillary services, our capacity, a form of it. The methodology that we produce for ancillary services determine forward capacity values in inside markets. And so in my experience as a Commissioner when I got to see the other systems around the country and I work with SPP, Southwest Power Pool, and to put in perspective, SPP, if you're looking for the most traditional power system in the world or in the country, that's Southwest Power Pool. That's made up of 16 vertically integrated utility monopolies that have all three tiers of the supply chain from the power production to the transmission and distribution delivery of the electrons to the servicing of the actual consumers, you know, so the retail end of it. Those are vertically integrated monopolie.s And so if there's any system that is regulated, fully regulated, in the world that can manage through this energy transition that's Southwest Power Pool and then on the other extreme you have ERCOT which is completely deregulated and everybody keeps wondering if we're gonna make this thing work. But over the last three years, two years, nine months, or eight months, so I looked at PJM, I looked at their capacity monitoring, and capacity is excellent for retaining generation. Okay, it is excellent for propping up previously installed plants. Now the question is, will it pay to install anything new? The replacement values, because eventually any piece of machinery, any piece of metal, is going to break off, shear off, rust, burst into flames, meltdown, it will go away. And the question is, is the capacity value enough to install something new? And in PJM, they did do it for a finite amount of time, and that was after the shale revolution. The Marcellus shale is a captive shale play in the heart of PJM. Much of the energy value is predicated, in electricity, is predicated upon the value of natural gas and when you have captive natural gas that is going to be rock bottom cheap, you're going to get new power generation built over top of that. Oh, and they might get a side payment of a capacity payment. And that's what happened for the last 10 years. They built some new power plants, but at the same time, they lost just as many power plants as they were building new. And at the same time, their load began to take off just like ERCOT’S did. So they're experiencing load growth and they are not building enough new to support the load growth. So it's the same problem that every other system in the country is facing. So is capacity the answer? My view is it's not the whole answer. It may be a component and that's why I had more of a nuanced view on the performance credit mechanism discussion at the commission. I wanna make it work, tried to make it work.SPP is talking about how to make it work as well right now. But it isn't an all-in. In my view, it wasn't an all-in capacity construct. It was another adder that would actually pay people to perform or pay them if they in fact did perform during times of high risk and system need. And it was, again, a market-driven approach to entice you to dispatch an electron, to take the risk and dispatch an electron into the system.The jury is still out on what the best market design is. And again, that's why I don't want to put my eggs all in the basket of big power resources that are being installed at transmission. I want to get down closer to the consumer because what I do know is that technology has vastly improved since the 1970s. The computational power of our country, of our world, has increased the ability to co-optimize the system in a truly co-optimized sense to be able to dispatch the appropriate resource at the appropriate time on a millisecond basis is right at our fingertips. And that means that we can have more smaller resources working together rather than a big fleet of huge power plants across the state that basically incentivize the overbuilding of the system, inefficiently committing capital on long-term projects. I believe that's not the way we need to go. I think I might get outvoted today, but I think I'll be proven right in the future.Doug LewinYou said you wanted to make the Performance Credit Mechanism work. It's obviously, it had some, famously, some guard rails put on it by the legislature, namely a $1 billion net cost cap. I don't know, in your view, can it work? Or, I mean, it's not going to happen in the next couple of years. It would have to be after RTC, right? Real-time co-optimization, which is for those that aren't following this, a big system-wide upgrade to ERCOT that will solve, by itself, solve a lot of the problems. There's no one thing that's gonna solve everything, but real-time co-optimization will solve a lot of the problems that are existing in the system now. But I think it's gotta wait that long. I don't know, is PCM, could it actually work?Will McAdamsI think it could work in concert with the rest of the statutory framework that they put in. And I told the governor as such, I said that even with the cost cap, the cost cap constrains the PCM. However, it’s working in concert with the ancillary services, and I asked ERCOT point blank, if we had PCM tomorrow, would you still need that amount, or the suite, of ancillary services that we're developing? And would you need a fairly robust procurement of ancillary services such as we have today? And they said yes. And the reason they need that is because they need enough behind the house capability, behind the house resources, sitting on the sideline ready to go, when wind may drop off or to cope through the solar ramp or to account for the single largest contingency, which we always have, to be flexible about to meet that challenge.Doug LewinWhich is nuclear, which is nuclear. Yeah, which is nuclear by the way, right? And it's not that there's anything wrong with nuclear, it just happens, there's a lot right with nuclear, it just happens to be the largest one on the system. Will McAdamsYeah. It's a lot of eggs in one basket. That's right. And so they need a big old suite of ancillary services to cope with that so when people were talking about PCM can do all of this… Yeah, they it's gonna be doing all of this plus you're gonna be carrying the ancillary services So a 1 billion dollar cap essentially makes PCM live with the ancillaries which it was gonna have to anyway.And so you need to co-optimize the system. Real-time co-optimization does that. It hopefully will produce a more realistic picture of how much ancillaries we need to carry on a day-to-day basis to cope for contingencies and variability of the resource mix. And then a PCM adder is gonna be on top of that, along with on top of an ORDC adder that gives you that value signal that you need to be there.You need to lay on that gas in advance. You need to deal with energy transfer or any other pipeline operator to have that gas contract. And you need to perform during that high risk hour because we don't necessarily know when that's gonna be. So we're gonna do this on a settlement basis and you make sure that you're performed and you're gonna get paid. And you're gonna do very well that year.Doug LewinYeah, we could do a whole hour on PCM, but I'll restrain myself. Will McAdamsI know.Doug LewinSo I do just wanna ask you, I don't wanna spend a lot of time on this, but I think it's important to ask you this question. And in 2021, yeah, when you were first appointed, you had an idea for dispatchable energy credits. I liked that idea at the time. And I actually think that PCM seems to be sort of morphing into something that sounded like dispatchable energy credits. Like the idea that, but for that to work, doesn't it have to be technology neutral? Doesn't it have to be if you are, no, it does not. Okay, go on.Will McAdamsOh. No, no, I didn't say no. I said, oh, so that's true. It can be either. A deck is proportioned, again, not to be the all-in capacity payment. So it can be targeted. But if you want it to not produce a competitive advantage, for any particular resource because that's what it does, it pumps money toward a subset of the market which will skew, and I conceded this when I laid it out, this may have the effect of skewing bids into the dispatch engine of the system. But I rationalize that and I'll admit, look, I've worked in politics long enough, I can rationalize anything if I try hard enough, that we already have production tax credits that are skewing the bids of wind generation and now solar generation, and frankly now batteries to some degree. But my point is we already have some skewing of the market because of subsidies. And so I figured, well, you might as well just subsidize the only one thing that doesn't have a direct subsidy from ERCOT. And I understand that there's arguments that gas is subsidized and so I won't get into that. But if you wanted to, PCM is a deck, ultimately, with a one billion dollar cap for all resources that perform.So that's essentially what it does. And I said that at the time, and I thought that was the irony of where Chairman Lake kind of went, because the more it went toward establishing a clear resource adequacy equilibrium point, the more it went toward allowing demand response to be able to recover PCMs.I'm like, man, this is starting to sound more like a deck every day. And, and I'm okay with that.Doug LewinYeah, yeah. It's gonna be really interesting to watch as that concept of PCM continues to evolve and be discussed. I think the trick here is, and I think you kind of alluded to this when you talk about ancillary services, we say energy only. It was probably a misnomer from the beginning. Of course, there is some amount of capacity that is procured. You can't have a system that doesn't have some of that. And the question, I talked about this a lot, the folks after Uri, it's like it's not binary. A hundred or zero, on/off, black/white, it's a, it's a dial. It's kind of a, you know, a dial that you're going to turn up or turn down. And I think the trick is to not turn the dial so far towards capacity that you lose that competitive market signal that you do let stuff that needs to retire because it's not reliable and it's old and let it go, but also have enough of a signal that brings in resources that are available at the times of highest need.Will McAdams Absolutely.Doug LewinSo that's the trick. It may be easy to describe that problem. It's really hard to solve it. And that's, I think, what everybody in the market is kind of dealing with right now.Will McAdamsYeah, I mean, it requires a certain amount of faith in markets. And Sam Newell really got after me in the early days of our market design discussions, because he accused me of not having faith in markets. And I think it was around the debt conversation. And I'm like, oh, Sam, let's not get religious about this. You know, but I do believe in markets. And I believe they're the only way to solve this and to help us transition.But I have it at a high level.Doug LewinWell, here, yeah, yeah. I mean, here's the thing about this, because I'm certainly not religious about this. I believe that there are times, there are many things for which I think markets are not well-suited. That's my view of the world. I think for electricity, it happens to be really, really well-suited. I think markets work quite well here, but as with any market, you have to have the signal for the things that you need. And that's the question right now, is the signal getting.Will McAdamsWell, especially with the degree of sophisticated technology that we have in the energy space. Since 1974, the world has been focused on one thing, and that has been solving for a sustainable supply of energy to meet our needs. And we have the capabilities. We have to allow a market to dictate where those capabilities are deployed and employed. And that's why deregulation happened in the late 90s. And it didn't just happen in Texas, it happened everywhere. And now everybody wants to try to talk about, okay, well how would we put the toothpaste inside of the bottle? I don't know how you'd do it. I don't know.Doug LewinI mean, I guess you could, but it would be enormously expensive and it wouldn't get to the outcomes I think anybody's looking for. I think one of the key things that markets have going forward is if you do the flip side and you say, okay, what else are we gonna do? We're gonna completely regulate, it's gonna be command and control. Humans with all their problems are gonna decide this is what should happen. There's too much dynamism out there right now, right? There's too much happening. Technology is moving…Will McAdamsRight.Doug Lewin…faster than humans can keep up with. So that's why you want markets to be able to kind of skate to where that puck is going, if you will, right? I don't think, yeah.Will McAdams But an even scarier thought is like, okay, let's allow AI to do this. Let's turn it over to artificial intelligence. One of my points in coming on here is, so Winter Storm Elliott blew through the country last Christmas, not this last Christmas, Christmas before last. And Tennessee Valley Authority went into load shed for the first time in 60 years. And they did so becauseof a number of things, but chief among them was they missed their load forecast. And so did PJM, and so did ERCOT, and so did SPP, and so did every other system in the country that was affected by that storm. And they missed their load forecast from anywhere from by a magnitude of 10% to 30 to 35%. Okay? There were huge misses all over the country. That's the kind of data that will be inputted into artificial intelligence if they were monolith of the electric grid of the future. Okay, so AI is only as good as the data being inputted into it and we're really bad at load forecasting. And so I recommend allowing the markets to gauge where we're at right now because like I said you're picking your way through an ice field and that iceberg is really big that's just below the surface so you better be careful.Doug LewinAnd whatever kind of capacity market you have, you have to be able to do that. That load forecasting piece is huge. And yeah, right. And, and the ability for folks to get that right seems to your point to not be very great. That that was, that is, this is another thing I talk about a lot. That was a recommendation out of the FERC and NERC report was that the balancing authorities like, you know, for example, ERCOT need to get better at forecasting demand that miss in ERCOT was 23%.Will McAdamsIt's critical.Doug LewinSo you've mentioned that range of 10 to 30. It was on the higher end of that range in ERCOT. And it'll be interesting to see what happens in the coming weeks we're recording on January the 9th, but in the next week or two as this cold front moves through. I think that those demand forecast misses are happening because of resistance heat. They still don't understand. Yeah, yeah. One other question, a little bit of a pivot here, but I wanted to ask you about this too. I was going back in preparation for this interview and looking back on, obviously, as I've quoted you a few times, looking back on that first year as you were sort of getting adjusted to the commission and in this sort of post-Uuri reality, you said in November, 2021, you were referring to the conference of parties, the climate conference that...that was meeting at that time, that there were gonna be trillions of dollars of global capital deployed. And you said, Texas will be a great destination for that capital. At the time, you said, we might see, this is really amazing, November, 2021, you said, we might see 20 to 30 gigawatts of solar eventually. Two years later, we've already crossed about 22 gigawatts, according to the number from ERCOT just a couple days ago. So will you talk a little bit about…Will McAdamsThat's right.Doug Lewin…Texas and what the opportunity in whatever this thing that's happening right now, some call it an energy transition, some call it an energy expansion. There's lots of different words that can go on, but something is happening. There is a lot, a lot, a lot of global capital right now going into, speaking of markets and market dynamism, a lot going into, quote unquote, clean energy. In your opinion, is Texas still set up?Is it better or worse than a couple years ago? What's the trend line? Is Texas a destination for that kind of economic growth?Will McAdamsTexas, just like my ADER pilot program, is the best sandbox on the planet to test whether this energy transition is gonna work for the betterment of our people or not. And that's a great question right now. That's a historic question. But as a result, we will have capital deployed on both the load side and the resource side.And so at the same time, we saw 20 gigawatts of solar deployed in the system, or certainly another 11, and then we'll have 20 by the end of, or probably going in the next summer. So that total of 30. We've doubled our battery capacity. We will double it again very soon. And batteries are right at home in what's going on right now. It has been an invaluable resource and will be a critical resource managing through the seasons that we're soon to see with the amount of load growth patterns that we have today. And so every energy company in the world is either looking at Texas or has invested capital in Texas to some degree. And it's all in how we co-optimize the system. I'm not talking about real-time co-optimization. I'm talking about how the market co-optimizes the system. And we're proving out a lot of lessons that everybody else is learning from. This PCM concept is being analyzed in SPP. It's being looked at by other systems, but it's again more in the deck fashion than the forward long-term LSCRO or forward capacity market fashion And so we're cracking the code on some innovative stuff. We've done it on weatherization. We're gonna do it on other approaches. Now, ERCOT staff may be uncomfortable with that from time to time. PUC staff may be uncomfortable with that from time to time. Because again, it's a matter of faith. You're letting other people sort of control what happens to you. And that's an uncomfortable situation.But that's the only way we're gonna make it through this. And the market will solve for it.Doug Lewin It is uncomfortable. But I think that the alternative again, will get much more uncomfortable for Texans. Because otherwise it's an illusion of control, right? Will McAdamsThat's right.Doug LewinI'm all for focusing on what you can control in life. I named my company Stoic Energy. I love the Stoics and focus on what you could control. But you have to be clear-eyed about what you can actually control. And as a government agency, it's really hard to steer billions of dollars in global capital. They're, you know.Will McAdamsEfficiently? Absolutely not. I mean, and then you create a crony capitalist apparatus that will produce undesirable outcomes. Matter of fact, you will bumble into the outcome that you most wanted to avoid, and it'll happen to you sooner than it otherwise would have. And that's what we've got to avoid with our policymaking.Doug Lewin Yeah, it’s gotta be like shaping, guiding, steering, not commanding and controlling, right? Will McAdamsThat's right.Doug LewinYeah. All right. Well, I want to just end with these couple questions I sent you in advance to think about. None of those other questions I sent you in advance, but a couple of these I did because I wanted to get your thoughts on these. Let's start with this one. What are the two to three energy policies you think would have the biggest impact to increase reliability, lower costs, and/or reduce pollution?Will McAdamsThis will be fast. I covered a couple of these in our exchanges, but one allow broad-based and large-scale bidding of Virtual Power Plants into the current suite of ancillary services, especially ECRF since it is so well suited for that specific service and allow them to carry a larger percentage of what, as I said, is being kept behind the house. Okay, those electrons that we know are there, they can be dispatched. But eventually, what I hope to see and what that policy would allow is an overbuilding and scaling of the amount of EPPs that are out there that eventually will start to engage with our energy markets. And if they engage with our energy markets, then the ancillaries will not nearly be as necessary.And that will accomplish greater reliability and, as a secondary approach, it'll accomplish greater resiliency. And it'll ultimately bring down wholesale costs and I would point out that it would behave very similarly for the system just like wind did. Okay when we went from two gigawatts of wind at the beginning of the last decade to five gigawatts of wind and like I said for ninety percent of the hours of the year that keeps prices rock bottom. If you have enough Virtual Power Plants out there that are engaging with the system, it would reduce costs for the rest of the system. It would make our manufacturers and industrials that much more competitive on a global scale, causing business to continue to grow in Texas. So I think that's, we're at first base of a long run around the field, and that's something that could be done immediately.Second, again, I think we should consider socializing distribution costs throughout the system. Again, normalizing the standard between transmission cost allocation and distribution cost allocation because the technology has evolved to a point to where it provides the same benefits, the resources, the capabilities at distribution, especially after transportation electrification does continue to materialize on the system.The capabilities of distribution will support the entire system, not just the Houston area and not just the city of Austin. In that way, the entire system can lean on itself and not compartmentalize the cost along the consumer classes of our least fortunate. And so I think that should be taken up in the next three years.And ultimately, the industrials, who will pay more of the costs associated with that normalization of allocation ,will experience the benefit and continue to grow for the reasons I said in regards to Virtual Power Plants. It's a fairness issue.Doug Lewin Yep, yep, that's a huge one. Those are both huge ones. What, so I think you've talked about this a lot, so you don't need to go deep on this one, because I think most of the conversation is kind of focused on this, but what will the grid look like in 10 years, and how is it different for consumers? A lot of VPPs, a lot of participation, a lot of chance to earn, all that. Is there anything else you wanna say about that particular question?Will McAdams Yeah, now there's a lot more chance for them to engage, and I think they will have every reason to engage, because in the near term, costs will go up. They will go up just like they did when deregulation happened, costs went up, because you had to pay for stranded costs, you had to normalize the way the market was behaving within itself. But ultimately, I think what the systems start to look like over the next 10 and 20 years, is again, I think the grid planners start behaving more on an islanded basis. Islands connected by large-scale infrastructure like CREZ, large-scale transmission highways carrying power from more remote regions where renewables are plentiful to the load centers, to the Port of Houston industrial heavy areas like that. But ultimately, those regions closest to the loads would be self-supported through a more disparate and aggregated system of smaller resources like small modular reactors, or VPPs, or DGRs, distributed generation resources, or SODG, standalone distributed generation resources. And so it's a more co-optimized system, but it's more islanded for grid planning purposes. And that's the way everybody sort of will start building themselves back out.And ultimately we get to a point where we can start Interconnecting those zones just like we did, you know in the last century, but it's going to take a while to getDoug LewinYeah, it's a really compelling vision for the future of the grid. I think if it's right with you, we'll leave it there. Will McAdams, thank you very much for being on the Energy Capital Podcast. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.texasenergyandpower.com/subscribe

For the inaugural episode of the Energy Capital Podcast, I spoke to Will McAdams, the former Commissioner of the Public Utility Commission of Texas (PUC) who left the Commission just a few weeks ago.We spoke about his appointment to the PUC in the immediate aftermath of Winter Storm Uri and the challenges he faced during that tumultuous period. He told me what he was proudest of from his time on the Commission, including his efforts to wintererize power plants and “hold the line” to ensure a stringent standard was adopted, a stance that likely paid big dividends over the last few days during Winter Storm Heather. We had a great conversation about distributed energy resources (DERs) and how they are likely a major part of the future of the grid. Commissioner McAdams led the effort to create a Virtual Power Plant pilot, allowing small customers to get paid for injecting storage to the grid and, eventually, for reducing their use.He talked about the difficulties in the first few months on the job, after all three commissioners had resigned following Uri. He also reflected on his own possible responsibility for Uri, something I’ve rarely heard in the last three years.We went in-depth into the evolution of energy markets and how they might need to change to provide higher reliability at lower cost. That discussion included his views on the energy-only market, the large volume of ancillary services in recent years, and the controversial Performance Credit Mechanism (PCM). We also talked, of course, about energy efficiency, renewable energy, battery storage, demand response, and much, much more. (We discussed IRA incentives, if you’re interested in learning about which incentives you can access to upgrade your home, see this calculator. If you don’t qualify for tax credits, see this article for information on when additional incentives may become available, hopefully later this year.)Time stamps and a transcript are below. Thank you for being a subscriber. Please consider becoming a paid subscriber. I’ll have a subscriber-only chat during the upcoming PUC meeting this Thursday and you’ll have full access to the archives as well as subscriber-only events. And some podcast episodes will be for paid subscribers only.If you like the episode, and I think you will, please don’t forget to recommend, like, and share the Texas Energy and Power Newsletter.I look forward to your feedback on the episode.Time stamps:2:30: McAdams’ background and path to being a Commissioner6:00: The first days and months at the Commission after Winter Storm Uri10:38: Diagnosing why Uri happened14:50: What McAdams is most proud of from his time at the Commission: strong winterization standards for power plants18:00: What he wishes he had more time to work on: cost allocation for distribution infrastructure costs23:10: The need for distribution resource planning and the potential for a Distribution System Operator (DSO) model; discussion of the PUC’s award-winning virtual power plant (VPP) pilot30:25 Deeper dive into the VPP pilot and the Aggregated Distributed Energy Resource (ADER) Task Force, and the potential for Texans to earn revenue for their DERs36:00: Potential of demand reductions to contribute to VPPs40:25: Are conservation calls inevitable?45:15: The challenge of winter reliability and how energy efficiency can help51:15: The potential of energy efficiency funds from the Inflation Reduction Act, and the need for better education and incentives for HVAC equipment58:15 McAdams’ views on the evolution of energy markets1:02:01: Are capacity markets the answer, and McAdams’ view on the Performance Credit Mechanism (PCM)1:05:30: Do we need all the ancillary services we have? Will we need them if PCM is implemented?1:08:00 Comparison of PCM with McAdams’ idea for Dispatchable Energy Credits (DECs)1:14:30: The criticality of load forecasting, and how bad load forecasts were for Winter Storm Elliott1:17:15: Is Texas a good destination for clean energy investors?1:21:54: What are the 2-3 energy policies McAdams thinks will have the biggest impact on increasing reliability1:25:20: What will the grid of the future look like for consumers?TranscriptDoug LewinWill McAdams, welcome to Energy Capital.Will McAdamsHey, thanks, Doug. Glad to be here.Doug LewinSo excited to talk to you, obviously a whole lot to talk about, but let's just start with your background. What was your path to being a Public Utility Commissioner?Will McAdamsYeah, no, so I landed in Austin around 2009. I was fresh out of the U.S. Army, and I went to work as a sort of jack-of-all-trades legislative aid staffer, policy analyst to a state senator, and that senator happened to be Troy Frazier. And Troy Frazier was a pallet manufacturer from West Texas who was a long-serving legislator. And as a part of being a manufacturer, his number one cost of doing business was electricity. And so he always had a passion for energy, electricity, industrial policy, and was actually one of the co-authors of SB7. And so his policy focus was always in that area. Over two years of working for Frasier, he began to shift me into that policy area as his aid analyst designated to focus on energy, especially the Public Utility Commission. He eventually regained the chairmanship of the Committee of Jurisdiction over the Public Utility Commission and ERCOT, oversight of ERCOT. I was his legislative director and kind of his point staff person on grid related issues.And I held that spot for both Frazier and several other members of the legislature for the next, oh, eight years. And so I worked for Frazier. I worked for Charles Schwartner, who authored Senate Bill 3 during the 2021 session. I also was the director for Senate Business and Commerce, the Senate Committee on Business and Commerce under Kelly Hancock, who authored Senate Bill 2 in 2021.So I had a strange nexus in terms of the issues. I also worked for Speaker Dennis Bonham for a period where I was his advisor on regulated industries, for business in regulated industries. And then energy had burned me out in 2019 and I decided to step away and became president of a statewide trade association, Associated Builders and Contractors of Texas, and happily focused on employment and construction related policy for a year and a half. And then Winter Storm Uri happened in 2021, and I got a call. And that was after the recording of Arthur DeAndrea broke. Um, and the, the final resignation was announced at the PUC and, um, and the rest is history. I onboarded shortly thereafter.Doug LewinSo you were appointed on April 1st. There's a lot of jokes that could be told there. But I'm sure at many points you felt like that, what am I doing here? What have I taken on? What have I walked into, right? I mean, it was an extraordinary set of circumstances where I'm not sure it has, I'm pretty sure it doesn't have any precedent that all three commissioners were gone. There were no commissioners for a period of some weeks. You're appointed on April 1st. Can you talk a little bit about what those days and weeks and even the first couple of months were like? You know, clearly the dust had not settled from Winter Storm Uri. People were still processing it. There's all sorts of what's gonna happen next. What, it must have been some form of chaos. What was that like?Will McAdamsYeah, it was not an orderly transition of authority and responsibility, I'll say that. But we made the best of it. As you recall, the legislature was in session. I was over at the Capitol lot doing my job as president of ABC, and I remember sitting down in a legislative office watching the marathon hearings just on the telecast, watching the Q&A between the senators, the House members and the Commissioners at the time… it was painful to watch. And I was, it was tough to watch. And people would ask me what's wrong. And I'm like, look, I feel partially responsible for this. I mean, I had a hand in crafting policy over the last eight years, decade. And this collapse of the system was… it was personal to me and it was personal in trying to stabilize the system, recover, rebuild. So that's what I wanted to do. And when I got that call, I was like, yes, absolutely. Let's do this. Let's help. And so my history in the State Senate was very important in terms of that first nomination. Any of the Commissioners who were going to be on board at that time had to undergo Senate confirmation. And if the public was questioning the competence of the Commission, the State Senate certainly was. And you could even multiply the intensity of that skepticism on the part of the Senate. And so, you know, I had spent 10 years in the State Senate by the time I had left. And I knew all the senior senators. I knew all the senior staff.The Lieutenant Governor and I had met before. I'm sure he kind of put the face with the name when we had our first meeting, which was an hour and a half meeting, before my name was even put forward on an appointment list. And that was a tense meeting. I will tell you, I've never been in a more high magnitude interview than with that meeting. Because he wanted to know somebody was gonna come in here and do their duty.And so I passed muster. He said, I believe you'll do your best and I'm going to support you. Uh, everybody was relieved to hear that the governor's office was relieved to hear that and, uh, and then they put my name out, uh, within 24 hours. And, um, and then I began to lead the way. Uh, again, I wasn't going to be the chair. Um, Peter Lake followed two weeks later.But I was going to onboard first assess the situation and then get confirmed ultimately which the Senate did in short order and start to rebuild at PUC. I remember walking over to the PUC two days before the vote and actually… no I didn't walk over it was it was the day after the vote when I was confirmed and I said look, I'm going to onboard and I met with Arthur and the place was dark. All the cubicles were empty because they were still on COVID staffing. Only the senior staff was present. It looked like an empty ship. Just cold, dark, and quiet. And met with Arthur and you could imagine a man under tremendous strain and he was. But he also looked like a weight was being lifted.It was a tough time for them. But we just assessed the situation, got with Peter, and then we started putting things back together again.Doug LewinSo you said it was personal and you felt some responsibility. It's interesting, and I want your perspective on this too, how much of Uri do you think was, and I understand that sentiment because that's your character as a human being and your army background and probably the way you were raised and all that, and that's admirable and I appreciate that sentiment. That's the way I think we want public servants to think that, you know, um, I have some responsibility here and all that having been said, I still don't view Uri as a quote unquote market failure. It may be, I want, I want to know your view on this though. Forget mine for a minute. What, you know, you had other failures as well, right? Of gas supply of, um, you know, forecasting of load going as high as it was. So energy efficiency comes into this.And then, and then the market maybe is a piece of that. What is your sort of diagnosis of Uri and where the sort of, what were the major problems and how does the market structure fit into that puzzle?Will McAdams Yeah, no, it was a confluence of events. It was not a market failure. I can say that emphatically, clearly now. What happened in 2020, and I started alluding to this from my statements from the dais shortly after we had the new commission composed. I said, look, this was a confluence of events. It certainly appears that way. The last two years and eight months have only affirmed that in my mind.And you got to remember what was happening at the time. The economy was coming back to life after Uri. And so what had been happening over that year and a half, um, between COVID forcing the dormancy of the economy, uh, load had stayed steady state. There was no load growth over that year period.By 2021, everything was reopening again. All the industrial processes were reopening again. And what had happened between 2020 and 2021, and what had been building before that, was a crash course industrialization, electrification movement. And especially in Texas, because we are the, we are one of the manufacturing engines of the country.What we didn't realize is how much gas-driven industrial processes over that two-year period were being converted to electrified systems. So they were, instead of burning gas-fed boilers or internal gas-fed systems, they were switching that over to a plug-and-play system where they could account for the carbon emissions that they were producing, where they could account for the energy costs associated with that, where it wasn't necessarily directly tied to the volatile natural gas system. And what we saw was a dramatic increase in load growth at the same time as this winter storm was bearing down on Texas. And that was a snapshot in time, but it hit us at a point where the PUC and ERCOT were not tracking the criticality of the electrons being diverted to those loads. And as a result, key systems failed. And that became a cascade of failures that rippled its way through the entire system. That's when curtailments occurred. That's when, and this followed wind generation freezing in place because of the magnitude and the moisture associated with that winter event. So it became this pancaking cascade of failures that took the system down and took it down for several days. So that's what I would say.Doug LewinSo let's, um, let's pivot a little bit. Um, and, and although it's, it's related to the last question. So you, you were there for, for nearly three years, obviously when, when we're talking, you've, you've left the commission. What, what are you most proud of when you look back at your tenure there? And what do you wish you had more time to focus on what, you know? Yeah. I'll just put it that way.Will McAdams Yeah, well, I was most proud of we held our ground on weatherization. So we, and I would like to advertise this for the public, we have a winter event that appears to be headed our way this coming weekend. And preparations are underway. I'm fully confident that everybody's taking necessary steps to make sure that they're winterized and weatherized. I urge the public to do the same. However, at the time we were in this paradigm shift discussion about who bears the costs of these efforts. And at the time we dug our heels and said, no, statute has given us direction. These costs will be borne by the resources that support the system.This is a part of their cost of doing business, just like any business has a natural regulatory cost of doing business. And we will establish a standard that will be very stringent that they will be a held account to. I had a part in establishing that stringent standard. I had a part in holding the line on ensuring that windchill was accounted for. And I think we're gonna find out how important that is this coming weekend because it's going to be windy and it's going to be cold. And the temperatures will be extremely low as a result. And they will feel extremely low. And so metal is going to perform in a certain way under those conditions. And we need to make sure that holds up. So we impose the weatherization standards that are absolutely the most conservative, quote unquote conservative, but stringent in the country. NERC is looking at those standards as an example.I believe it'll play an important role in informing what their ultimate standards are for the nation. So Texas will have led the way. And then the second thing I'm most proud of is we stood up the aggregated distributed energy resource pilot program in a five month period, launched it to where it was live within nine months.And at the year anniversary, we had the first electrons being dispatched into the system as a result, allowing everyday consumers to become a resource, a virtual power plant system to support system reliability. And I think one day we will be able to account for them in resiliency plans for the system. So I think we started building a road to the future, and I was a part of that, and I'm extremely proud.Doug LewinAnd what do you think is sort of left undone? What do you wish there had been more time to focus on?Will McAdamsI was so focused on just the day-to-day triaging of ERCOT at the time of this transition and Southwest Power Pool working on that. I wish we could have addressed cost allocation in terms of distribution infrastructure costs. And I believe that is one of the most profound things that the Commission can take up over the next three to five years, or frankly the legislature. I believe this issue is ripe for the legislature to begin arguing that will determine who pays for distribution costs. Because I believe what's coming is the distribution system is going to be upgraded in a dramatic way over the next 40 years. And the resources that we can begin aggregating and bringing in and dispatching into the system, not from the transmission system, but from the distribution system, will help support our grid from now, for 100 years from now. And if under the current policy, if those costs are completely borne by the consumers at distribution, that's your mom and pop businesses, that's your small to mid-level commercial consumers, that's your low-income residential consumers, they're paying the cost of that. And it could be a crushing cost. So I think ultimately the commission needs to, and this is what I had launched but didn't have the time to finish, needs to have the discussion and ultimately decide that those costs need to be borne by the system as a whole because ultimately that will help spread the cost across a greater pool of consumers to include our large industrial consumers.Because ultimately all of them will benefit equally from the reliability and the increase in resources participating in the energy market, which will ultimately bring down wholesale energy costs and help support system reliability and resiliency while decreasing price volatility in the system, which eventually cost consumers.Doug Lewin So I understand generally what you're saying, but I'm not sure I follow specifically on the distribution infrastructure costs. You're saying it should be spread across. Is it not currently done that way? No, okay, tell me more.Will McAdamsNo, it's so if you're a consumer, say in Houston, the costs for the distribution system are borne by those consumers in the CenterPoint Energy service territory. And so that's just basically Houston people paying for Houston wooden poles that are outside of their homes. But in an environment of huge electric load growth, the distribution system can do a lot more and become a lot more sophisticated to where it can handle two-way traffic of power, not just along radial systems, instead of just receiving power from the transmission grid to their home. And in so doing, you can start hooking up cars, you can start electrifying all this stuff that we're installing in our homes or putting on our businesses. It allows that neighborhood to be a lot more sophisticated and a lot more resilient than it currently is. But it requires a lot of upgrading. And we don't know the magnitude of the upgrade to the distribution system or the magnitude of the costs associated with that. But once that happens…Doug LewinWe don't know the magnitude, but we know it's gonna be big, right, because like you were talking, yeah, this crash. Will McAdamsWe know it’s terrifying.Doug LewinYeah, yeah, yeah. The crash course you were talking about in industrialization and electrification prior to Uri is like a fraction of what we're about to see over the next 10, 20 years.Will McAdams It's the tip of the iceberg. And I'm telling you, the iceberg's big. And so if you can socialize that beyond the distribution system to the transmission system, then that means all of the industrials who currently do not pay distribution system costs would bear a portion of the burden, because again, they're consuming large amounts of electricity. And they would be able to socialize those costs over a greater pool of payers and support the system which they're benefiting from.Doug Lewin The industrial consumers pay transmission based on their four coincident peak, but they don't pay for distribution at all?Will McAdamsBecause they're not interconnected at the distribution level. They bypass that by building their own substations and interconnecting right there at transmission.Doug LewinBecause they're okay. Wow.So does this, so that's obviously a huge issue, the who pays. I also wonder if sort of a first step to that is it's something like distribution resource planning, which we don't really do in any kind of a transparent way right now, obviously the utilities do their own distribution resource planning, but having some kind of a market signal to solar and storage and energy efficiency, forget the technology, there'll be all kinds of different technologies like “Hey, there is a need over here.” We think we need to invest tens of millions of dollars in distribution infrastructure. Is there a solution that can be met for millions of dollars instead of tens of millions?” But there's no market like that, right? Now there's no market signal, is that correct?Will McAdamsThat's right. The VPP was the first market signal that was introduced really at that small of a scale at distribution. And there’s starting to be market signals on that part, Doug, because, and this is for the more sophisticated listeners, because congestion costs at the transmission system, on the transmission system, are growing leaps and bounds. So people are starting to feel on a nodal basis. Okay, so, the nodal system are a series of price points that are based around your closest substation in your neighborhood. And the reason they do that is because that helps the system signal where scarcity is occurring. And at the transmission system, think of it just like traffic congestion. There's too many people or too many electrons trying to get on the system at one place, congestion builds up.It backs up power beyond that point and starts backing down power resources, whereas scarcity is experienced on the other side because it's free highway and people are calling for more cars to be on the road, but they can't get through because of the bottleneck. So it creates a price formation problem on the system. Well that sends a signal that there needs to be more resources closer to the loads. And that's what these smaller resources can provide. They can start to spread out the cars coming onto the system. And as such, we don't have as many bottlenecks and the costs start to decline.Doug LewinYep. Will McAdamsDoes this make sense? Doug LewinIt does make sense. Does this inevitably lead to some kind of a distribution system operator model or DSO? This is talked about a lot at conferences and in white papers. And for those – we always want to make this podcast both accessible to a general audience and interesting to an in the weeds audience – but a distribution system operator would basically be somebody who's coordinating all of those small sources. If you start to think of all the batteries and the vehicles that are starting to come. A quarter a million electric vehicles on the roads of Texas already today, probably pretty quickly heading towards a half a million and then a million after that. And each of them have pretty good size batteries inside them. If nobody's coordinating all of that and they all plug in at six o'clock when people get home from work on a summer day as the sun is starting to set, we're gonna have major problems. The inverse is true, if they're all being coordinated and orchestrated in such a way that their power, at least we're not charging them and potentially even reversing flow to the home so that it's consuming less from the grid, we could alleviate a lot of the problems we have, but doesn't some entity need to coordinate all of that and who could that be?Will McAdamsWell, so we had talked about that. I had talked about that with ERCOT system planners. And they said, well, look, we believe ultimately something like that is needed. We don't want to do it. And I'm like, understandable. But we need to start talking about that. But in terms of the distribution system build out, Doug, this is a 40-year play. This is the future. And that's why the conversation has started now.It's going to be an evolving conversation because there's going to be some entities, namely the IOUTDUs, so like CenterPoint Energies and Oncors of the world; the electric cooperatives, so South Texas Electric Cooperative or Pedernales Electric Cooperative; the municipal systems, CPS, Austin Energy, who will need to consider ceding some of their current authority in terms of coordinating their distribution system to that operator, to that new system operator, distribution system operator, just like they have done or federal policy has required them to do toward ERCOT in terms of management of the bulk power system. So that's going to be an evolving conversation on how that could unfold.Doug LewinCould the utilities themselves, the Austin Energy, the CenterPoints, the Co-Ops, play that DSO role, or do you think it needs to be something independent? Or have you not thought about it enough to say it?Will McAdamsNow, I've thought about it…Doug LewinI figured. Will McAdamsBecause, look, one of the big things that I believe is underway, and this is frankly counter to broad-based federal policy, I think, right now, is I think we're on a long march around, for the last 100 years, the grid has been on a long march toward more broad-based integration as a system.Okay, as for ERCOT that's been as an islanded system within the national grids. For the other grids like SVP, PJM, CERC, it's been integration with each other, you know, to make them more, be able to lean on each other. I believe right now with the type of load growth that we're seeing.That everybody's gonna start to default back to a more islanded approach, just to sort of stabilize the system and manage their systems, and then begin another phase toward more integration. It starts and stops. But as a result, those regional entities, the CenterPoints of the world, or the Oncors of the world, will begin coordinating, possibly, with their neighboring cooperatives to better manage regionally the distribution system and what that could dispatch onto the bulk power system ultimately to move around the state. And I think that's not a bridge too far. I believe ultimately the market will signal that this is needed, but it's not ripe yet.Doug LewinThat's fascinating. So this is actually a good, I wanna make sure we take just a little step back and focus on the specifics of the VPP pilot and what the Aggregated Distributed Energy Resource Task Force, that is a mouthful, but there is this Task Force. They continue to meet in Texas and will continue going forward. It was just announced, I believe just last month, on December of 2023, that the Aggregated Distributed Energy Resources would be allowed to participate in this new ancillary service, the ERCOT contingency reserve service. So it's kind of growing in the ways that it can actually serve the state, serve the grid, um, serve Texans. And that pilot is very related to everything you're just talking about at a high level. But let's, let's bring it into the specifics. Can you just describe the pilot? What it's about? Whatbarriers it's trying to overcome, sort of what it is, what it's achieved so far, and where it's headed? I think we've already covered why it matters. I was gonna ask you why it matters. I think we've already covered that. You could say more about that, but what does it do? Where is it at now and where is it heading?Will McAdamsOkay, well high level, the reason I pushed so hard for this is because again my mission was to stabilize the system and And I had to do that in an environment where I was trying to stabilize the system with a moving target meaning the demand kept on going up at the same time I was trying to find resources to satisfy the demand supply, find the supply and there was no supply getting built everybody was petrified of the volatility and the unknowns about the market and the market design. And a lot of that was PUC introduced. And we tried to sort that out over time. The bottom line is, I knew that the public's confidence had been shaken in the grid. And the reaction that I would have or anybody would have is like, I'm going to start to take care of myself. I'm going to take care of number one first. And then I'll worry about number two, which is the system. And people were investing under those under that motivation. And they were buying generators, they were buying PVs, or they had solar panels on their roofs already. They were like, at that point, all right, I'm gonna pop for the battery and pair that up with the battery, and I'm gonna make it through the next winter storm or hurricane or whatever's gonna come along. And so I knew that number, the number of those types of resources was growing out there. And I wanted to figure out a way, all right, how does our market begin to co-optimize that pool of resources within the system. And so that was the ADER pilot. That was the driving force behind allowing Virtual Power Plants or communities with aggregated resources to use technology that they had available to bid into the ERCOT energy markets, namely ancillary markets, which for you laymen out there, that's like our emergency service markets. So the backup power of the system. And sell that into the system at peak need. You know, when need determined that energy would be most valuable. And that's what the system does. It specifically targets not the big batteries or anything like that, but I'm talking about everything below one megawatt. And to put it in perspective, one megawatt is a Walmart, or it's a neighborhood of three to six hundred homes. Or it's a water treatment plant with a neighborhood around it. It's all kinds of stuff like that. It is as close as you can get to the ultimate end-use consumer and that's us. And so we did that we set up the system we created the market within a market and now they are selling in to the emergency services and people are making money and now other people are thinking about okay “Maybe this isn't a $70,000 out-of-pocket cost.” “Maybe I can build this or put it on my home and I can have it paid for in a certain amount of time under this market structure.” Now ECRS. You talk about ECRS. That is the most flexible emergency service that we have in the system. Okay, that was our newly created stealth fighter if you will of an emergency service. Um, that's the latest and greatest thing we have to deal with a system that is more variable in nature,. Meaning we have to manage a system that has more variable resources like wind and solar. But also higher load growth, and with the loads, meaning the consumers are doing more things that changes their patterns over time. So ECRS is designed to be there no matter what. And now that ECRS is open to the Virtual Power Plants they are perfect to meet that need because they can dispatch almost instantaneously. They are extremely flexible in an environment where flexibility is the watchword of the day and the thing that should be most valued. And ultimately, when we have a winter storm come through, these guys are going to be a valuable component in shoring up the system in the face of it.Doug LewinYeah, totally agree. So very related to that. And I'm interested in, you know, what you think the potential of demand response. So demand response can be storage, of course, but let's also talk about, storage is injecting power into the grid. What about actually removing the demand? So I think in my understanding, well, at this point in the pilot, there isn't any reductions, there's no like aggregation of thermostats or electric hot water heaters, is that correct or?Will McAdamsSo it is because we were first and foremost focused on because we hadn't done this before Doug in terms of injecting power into the system. So you had to learn because again, the whole point of the pilot and the reason we have it as a pilot is it's a sandbox for experimentation. But we wanted to see what the injection and dispatch looked like. But the pilot is an insert within a rarely used and not well-known program, which is the aggregated load response program inside of ERCOT. And so the ALR program can already pay loads to turn themselves off and all kinds of loads, like aggregations of small loads can start to reduce their demand at key times.When the pilot continues to move forward, we can start to co-optimize both the dispatch of the resources in the pilot, and also to incentivize and send the market signal that the aggregations of these smaller demand response pools can be valued and compensated. So I think that is in the future phase of the pilot to send a more targeted market signal for the bundled demand response to be paid.Doug LewinNo, that makes a lot of sense. So the learnings that happen within this VPP pilot can help to kind of extend that ALR, which to my understanding is mostly used for the bigger stuff now: Bitcoin mines and steel mills, stuff like that. But there's nothing, there's, I was gonna say there's nothing stopping the smaller ones from getting in. What is stopping it is, lack of market signal, lack of experience, and the VPP pilot is bringing those things forward so that the ALR can be sort of expanded to include more of these smaller resources.Will McAdamsWell, and I'll tell you what this pilot does, Doug, is it sends a value signal to create a business case for the retail electric providers to actually develop the technologies needed to telemetrically control both the dispatch of resources into the system and the demand response needed to turn consumption down into the system. And once that is certified by ERCOT, then they can back bundle the demand response together and actually provide a value stream to the end-use consumer. To date, we have not had that. With the pilot, we now have that signal.Doug LewinSo I wanna put a finer point on this just to make sure, cause this can get a little bit esoteric to those that maybe aren't involved in this, or even those that are involved in the market, but maybe don't work on these kinds of issues as much. What we're talking about here as customers getting paid, if they volunteer, if they want to, right? If they come forward and say, I want solar and storage, or I would like to participate in a program where my electric hot water heater, my pool pump, my refrigerator, my thermostat is reduced at certain times. I can actually get paid for that if I choose. So there's the affordability piece here, bringing down the cost of energy, bringing down the cost of new technologies. And there's the reliability piece, right? Which is if I'm somebody, I'm a Texan who says, I don't want any part of this. I don't want to deal with solar panels on my roof. I don't want anybody ever touching my thermostat. That's fine. If your neighbor or somebody down the street does. You're affordability gets better because the overall system cost is going down because we have more resources, more competition, and the reliability of the system is going up as well. I was struck by an exchange you had with Woody Rickerson, the COO of ERCOT. This is September 14th. It was just after we had been through 11 conservation calls over the summer, just eight days after there was an emergency alert and we were very close to having rolling outages.Will McAdams Yeah.Doug LewinYeah, and September 6th and you asked him, you said, is this the future? Meaning all these conservation calls and emergencies. And he said, yes. And I thought that was particularly striking because I think it's a possible future. Yes, we could have every summer where we have a bunch of conservation calls and emergencies, there is another future that's possible, which is a whole lot of people have devices, they're being orchestrated in a, in a coherent way. People are being paid and they're getting the bill credits, but they aren't hearing conservation alerts and emergency alerts. Am I being too overly optimistic or is that a possible future?Will McAdamsNo, but I gotta tell you, so one thing the Army taught me to do is be a natural pessimist, and so to plan for the worst possible contingencies. And do you want me to scare you a little bit? So in my last briefing with the Speaker of the House before I left the state government, I said, I'm getting out of energy, I wanna go to construction, I'm sick of it.It's too bare-knuckle of an industry. And he said, well, where's all this headed, Will? And I said, look, this is gonna get sorted out, this energy trajectory that we're on. But what's gonna sort it out is pure unmitigated volatility. And that's because we knew that the economy was taking off. We knew that load growth was there. We didn't know to what degree, and we still don't, because every system in the country is trying to figure that out. We knew that the resource mix was becoming more variable, but it was also bringing down costs, as you have pointed out, 90% of the time. It's just that 10% really gets you, because it comes at unpredictable moments. But ultimately, where I was going with the statement, and I said, ultimately, cost volatility will drive consumers and the market to answer this question and they will begin to actively engage in the market to provide solutions that will bring down these costs over the mid and long term. And we will have a more reliable and more resilient system as a result of it. But nobody's gonna get off their hind end and go and invest in that. On a hypothetical, frankly, they're gonna have to see it. And I think we're seeing that now.And ERCOT is not the only system. I work with other systems and they and will continue to do so and they are experiencing the same thing. We are just on the leading edge and I will say it's because our load growth is that much more than theirs is right now. But they see the beginnings of their load growth beginning to take off and it's taking off during the winter season for which no system in the country is designed for including the northern systems and that's changing the planning calculations on the part of the grid administrators.Doug LewinSo your contention is that there's going to be a lot of volatility going forward and it's the demand, tell me if I'm putting words in your mouth there, and the demand side resources that customers are bringing to the table themselves are gonna be a major solution.Will McAdams It’s the near-term answer.Doug Lewin Near term, is there a longer term or you're just not sure what the longer term is?Will McAdamsAnd that's where the palette comes in. It's that more aggregated dispatch of power. Because again the sun's gonna set unequally over time because again, it's setting over the arc Those electric vehicles will begin their charging patterns at different times because of the setting of the sun or when they're getting off work. Because of time zones any number of permutations will change the load profile on a regional basis. And therefore the closer to the loads that you have enough disparate resources, dispatching will satisfy their needs. It'll be a more co-optimized system. And I know I'm using a lot of big words that are common speak in our world, but bottom line is the grid will manage itself better because we'll have more options. And the market will provide those options.Doug Lewin Yeah, if there's a market, which we'll get to in a minute, what that market looks like and what that market structure is and if it's properly incentivized from these different resources. So we'll get there in a minute. But before we go there, you've talked often about the bigger challenge that is reflected in winter. You were just talking about it just a minute ago.Will McAdamsSure.Doug LewinI wanna talk a little bit about one of the things that is driving the winter problems. This is something I talk about a lot. It won't be a surprise to you I'm bringing it up, but it is the sort of inefficiency that we have built into our system, particularly from resistance heat, from really inefficient heat, which according to the Department of Energy, we have resistance heat, which for those who don't know, and I've talked about this a lot and written about it a lot, but it's basically the technology of a toaster oven or a hairdryer, but sized for an entire home. We're still building homes that have resistance heat strip heating. It's called a lot of different things, baseboard strip heating, resistance heating, but it is very inefficient. It's in three and a half million homes in Texas. I just heard a presentation just last week, Will, it was at a symposium at the University of Texas.Will McAdamsTerrific.Doug LewinSome researchers there were doing some looking back at Uri. Of course, we don't know how much demand was during Winter Storm Uri. ERCOT estimates it was 77 gigawatts. I had heard an estimate from Texas A&M that was published that said 82 gigawatts. This team of researchers at UT believes it was 87 gigawatts during Uri driven by extremely inefficient heat and poorly insulated homes.You talked about when you went to the Senate for a hearing in the summer of 2021, you talked about the need to look at energy efficiency programs and the like. We have done, there have been some increases in the energy efficiency programs to demand response. There's the VPP pilot. There's a lot of things to point to where progress has been made, but energy efficiency, as far as I can tell, and you may have a different view of things, we haven't made any progress on energy efficiency. The programs are still as they were three years ago. Why is that and what needs to be done there?Will McAdamsSo, all right, one of the conditions, and everybody needs to know about this, in PURA, the Public Utility Regulatory Act, the conditions upon which the PUC can set energy efficiency standards are pretty restrictive in terms of building an energy efficiency program that our regulated utilities manage. It's very stringent and prescriptive in the statute. This is one of the reasons, you know, when I first looked at this, you know, one of the virtues or features of being the first at the Commission, you kind of get to pick what you work on first, and that's why I focused on the VPP programs because, one, I saw the sense of urgency associated with it, and then, two, I had more flexibility to do things within the ERCOT market as a PUC commissioner, then I could as a PUC commissioner related to energy efficiency, and that's because the statute was so restrictive about what we could do and how we could do it. And so I would recommend that the legislature does need to look at the energy efficiency statutes, determine what actual powers the PUC has to create standards, what our targets for the standards are, where those costs to pay for those standards can be levied. But ultimately, absolutely, that is a midterm and long-term essential goal for the system because you have to smooth out the trajectory of demand growth and energy efficiency is that breaking mechanism because it's a difference between climbing a hill and climbing the altitude like an F35 fighter.You do not want that steep of a curve. You want to flatten out that curve to make our infrastructure planning processes more achievable and orderly, and to prevent cost shock within the wholesale market to the rest of the system. That's what you're trying to prevent, and that's what energy efficiency provides you. We just didn't get to it over the last three years because again, we were trying to one, stabilize the ship, and then two, guide it around several icebergs within this ice field and keep moving forward.Doug LewinYeah, you guys obviously had a ton on your plate. I will point out the legislature during the 2023 session, there was a bill that passed the Senate. It did not pass the House, but that would have required a 5X increase in energy efficiency. So huge credit to the Senate for getting that done. And hopefully next time the House will push it through too. But there was a bill that did pass the House and the Senate, Senate Bill 1699. It was related to DERs.Will McAdamsThat's right.Doug Lewin And it had a provision in there on energy efficiency and demand response. And I'm reading from it. “The commission by rule shall establish goals in the ERCOT power region to reduce the average total residential load.” So that is utilities code 39.919. So that's there that, and it does say shall. So hopefully, um, your successors and the current commission will, will take that up during this year, cause I think that's right. I think that's a good analogy, the difference between a climb of a you know, what did you say of an F35 or F15 or whatever it is versus a nice gradual, um, kind of a slope energy efficiency can provide that. Yeah. So, and we, look, we saw that during, go ahead…Will McAdamsYeah. It never ends. It's a- Well, so I have another recommendation on that front. One of the things that needs to be looked at is, look, the federal government just passed a, appropriated a lot of money in the Inflation Reduction Act. There is a lot of money out there for appliances that increase energy efficiency. That program is supposed to be administered by the State Energy Conservation Office. Okay, so they're supposed to find homes for this money to help people purchase appliances to bring down their energy costs and increases and manage their energy consumption. The PUC goal should be somewhat, somehow, tied to that effort, because you establish a goal, but you have to figure out how to meet the goal. Well, that is at least an existing mechanism with resources that allow you to try to meet that goal. So there needs to be a synchronized effort on the part of the state. It's not just the PUC, and that's what I'm saying, because we can be as much as of a toothless tiger as any other agency unless there's some type of way to operationalize to meet the goal.Doug LewinYeah, 1000% the funds that are coming to the state, it's $690 million over five years. There's two different programs, HOMES and HEEHRA, and those are designed for folks… so just so the public is aware, and I'll put some links in the show notes so people can find out about this. There are tax credits. This was an existing statute, but it was very limited. It was like a $500 limit tax credit for energy efficiency.That's up to, and again, I'll put it in the show notes. So I'm not an accountant. Go to your accountant for tax advice, but it's something like $3,000 a year, and it can be repeated year after year. So you can actually continue to get this. That is part of it. What the 690 million for is for the roughly 40 to 50% of the population that does not have a tax liability, because those are tax credits. So if you don't have a liability, you can't get the credit.This money is supposed to help folks that don't have a tax liability. So that is coming to the state. The state will have a lot of discretion and leeway over how to focus those funds. And if the state energy conservation office and the comptroller and the PUC all get together and focus this on HVAC and insulation, it could have not only a great impact for the people that use those funds and lower their energy bills, but also for everybody in the state to increase reliability to decrease the probability of outages.Will McAdamsAnd Doug, let me pile on to that to an extent that heat pumps, you brought up heat pumps, all right? The term heat pump terrifies me as a regulator, and I'll tell you why. Because we talk about strip heating. I was talking with Jim Robb with NERC and TEPRI. And 90% of the heat pumps that you will find in Home Depot or Lowe's are not variable cycle heat pumps. They are not the efficient heat pumps that we need to get in people's hands. They are heat pumps that are essentially strip heaters. The exact heating system that we want to try to avoid on the system is what is being marketed out there as a heat pump. But that's the type of load that will cause a reliability crisis. That's the type of load that will keep us in rotating outages for days on end. And that's what every system around the country is seeing is load growth, demand growth during winter months. And it's because people are buying the wrong kind of equipment at these stores and installing them. And that's the kind of stuff that the SECO program could help assist with and get those appliances in the hands of lower income folks who need to be using that to normalize their consumption and reduce cost and help the system. But we have to have some type of coordinated strategy and you've been preaching on that for a while, but we need it.Doug LewinYeah, that really I think is the role where the energy efficiency programs that the PUC oversees through the utilities, the SECO programs that are coming from these federal funds, that's the role of the incentive. Because I get asked this a lot, why can't the market solve this? These are such great technologies. They save people so much money. Why can't the market take care of it? Because when you have something break at your home – which I've had happen in a Texas summer, not a pleasant experience – you take what they have. You take what they have, right? So the role of incentives is to bridge that gap. So a consumer that is in trouble and needs that solution quickly has actually the option. You make sure that the stores are carrying the higher efficiency stuff and you make sure that the difference in the cost is negligible or even zero.So it's very easy for the customer, instead of putting in the very inefficient equipment that is gonna make the grid reliability problems worse, you bridge that gap so that they're putting in the higher efficiency equipment that's going to increase our reliability. So yeah, hopefully there's a lot more to come on that. I think you're exactly right that the coordination between SECO and the Comptroller's Office and the PUC is going to be incredibly important in 2024. All right, so let's shift gears just a little bit because I definitely, you know, you mentioned, we started this conversation by you saying your, I believe it was your first job at the Legislature was with Troy Frazier. Is that right in the Senate? So you were kind of, you know, you started off some of your formative experiences with a guy who was a big advocate for competitive markets, for the energy only market. Let's talk about different, and you obviously over the last 14, 15 years, Will, I admire you so much. I think you are a person that has, I don't know if this comes from military background or just your nature or whatever. I've listened to you talk a lot when you're on the dais. You question your own assumptions. You're obviously, somebody that tries to talk to a lot of different people, get a lot of different perspectives. You have looked at a lot of different markets. You've obviously been active in SPP at your time on the commission, but I've heard you talk eloquently about MISO and PJM. Even I've heard you bring up Australia a bunch of different times. Can you talk about markets and their evolution and where they're heading? We have an energy only market still mostly, though it's...Will McAdamsMm-hmm.Doug Lewin…a little bit in doubt if that's even what we actually have right now. What in your mind, I'm just going to, I could ask a question here, but I'm just going to just share your thoughts on markets and what you think the evolution of them is, where are they headed?Will McAdams (56:16.33)Yeah, so I had a role in killing capacity in Texas in 2013. I helped organize a hearing of the State Senate that questioned capacity in Texas. And this was when we were really debating, the Commission was debating whether to just unilaterally move from an energy only market design to a capacity market.And in 2021, I was wondering, okay, did we really screw up? Did we not move quickly enough to capacity? Even though we have aspects of capacity in Texas, our ancillary services, our capacity, a form of it. The methodology that we produce for ancillary services determine forward capacity values in inside markets. And so in my experience as a Commissioner when I got to see the other systems around the country and I work with SPP, Southwest Power Pool, and to put in perspective, SPP, if you're looking for the most traditional power system in the world or in the country, that's Southwest Power Pool. That's made up of 16 vertically integrated utility monopolies that have all three tiers of the supply chain from the power production to the transmission and distribution delivery of the electrons to the servicing of the actual consumers, you know, so the retail end of it. Those are vertically integrated monopolie.s And so if there's any system that is regulated, fully regulated, in the world that can manage through this energy transition that's Southwest Power Pool and then on the other extreme you have ERCOT which is completely deregulated and everybody keeps wondering if we're gonna make this thing work. But over the last three years, two years, nine months, or eight months, so I looked at PJM, I looked at their capacity monitoring, and capacity is excellent for retaining generation. Okay, it is excellent for propping up previously installed plants. Now the question is, will it pay to install anything new? The replacement values, because eventually any piece of machinery, any piece of metal, is going to break off, shear off, rust, burst into flames, meltdown, it will go away. And the question is, is the capacity value enough to install something new? And in PJM, they did do it for a finite amount of time, and that was after the shale revolution. The Marcellus shale is a captive shale play in the heart of PJM. Much of the energy value is predicated, in electricity, is predicated upon the value of natural gas and when you have captive natural gas that is going to be rock bottom cheap, you're going to get new power generation built over top of that. Oh, and they might get a side payment of a capacity payment. And that's what happened for the last 10 years. They built some new power plants, but at the same time, they lost just as many power plants as they were building new. And at the same time, their load began to take off just like ERCOT’S did. So they're experiencing load growth and they are not building enough new to support the load growth. So it's the same problem that every other system in the country is facing. So is capacity the answer? My view is it's not the whole answer. It may be a component and that's why I had more of a nuanced view on the performance credit mechanism discussion at the commission. I wanna make it work, tried to make it work.SPP is talking about how to make it work as well right now. But it isn't an all-in. In my view, it wasn't an all-in capacity construct. It was another adder that would actually pay people to perform or pay them if they in fact did perform during times of high risk and system need. And it was, again, a market-driven approach to entice you to dispatch an electron, to take the risk and dispatch an electron into the system.The jury is still out on what the best market design is. And again, that's why I don't want to put my eggs all in the basket of big power resources that are being installed at transmission. I want to get down closer to the consumer because what I do know is that technology has vastly improved since the 1970s. The computational power of our country, of our world, has increased the ability to co-optimize the system in a truly co-optimized sense to be able to dispatch the appropriate resource at the appropriate time on a millisecond basis is right at our fingertips. And that means that we can have more smaller resources working together rather than a big fleet of huge power plants across the state that basically incentivize the overbuilding of the system, inefficiently committing capital on long-term projects. I believe that's not the way we need to go. I think I might get outvoted today, but I think I'll be proven right in the future.Doug LewinYou said you wanted to make the Performance Credit Mechanism work. It's obviously, it had some, famously, some guard rails put on it by the legislature, namely a $1 billion net cost cap. I don't know, in your view, can it work? Or, I mean, it's not going to happen in the next couple of years. It would have to be after RTC, right? Real-time co-optimization, which is for those that aren't following this, a big system-wide upgrade to ERCOT that will solve, by itself, solve a lot of the problems. There's no one thing that's gonna solve everything, but real-time co-optimization will solve a lot of the problems that are existing in the system now. But I think it's gotta wait that long. I don't know, is PCM, could it actually work?Will McAdamsI think it could work in concert with the rest of the statutory framework that they put in. And I told the governor as such, I said that even with the cost cap, the cost cap constrains the PCM. However, it’s working in concert with the ancillary services, and I asked ERCOT point blank, if we had PCM tomorrow, would you still need that amount, or the suite, of ancillary services that we're developing? And would you need a fairly robust procurement of ancillary services such as we have today? And they said yes. And the reason they need that is because they need enough behind the house capability, behind the house resources, sitting on the sideline ready to go, when wind may drop off or to cope through the solar ramp or to account for the single largest contingency, which we always have, to be flexible about to meet that challenge.Doug LewinWhich is nuclear, which is nuclear. Yeah, which is nuclear by the way, right? And it's not that there's anything wrong with nuclear, it just happens, there's a lot right with nuclear, it just happens to be the largest one on the system. Will McAdamsYeah. It's a lot of eggs in one basket. That's right. And so they need a big old suite of ancillary services to cope with that so when people were talking about PCM can do all of this… Yeah, they it's gonna be doing all of this plus you're gonna be carrying the ancillary services So a 1 billion dollar cap essentially makes PCM live with the ancillaries which it was gonna have to anyway.And so you need to co-optimize the system. Real-time co-optimization does that. It hopefully will produce a more realistic picture of how much ancillaries we need to carry on a day-to-day basis to cope for contingencies and variability of the resource mix. And then a PCM adder is gonna be on top of that, along with on top of an ORDC adder that gives you that value signal that you need to be there.You need to lay on that gas in advance. You need to deal with energy transfer or any other pipeline operator to have that gas contract. And you need to perform during that high risk hour because we don't necessarily know when that's gonna be. So we're gonna do this on a settlement basis and you make sure that you're performed and you're gonna get paid. And you're gonna do very well that year.Doug LewinYeah, we could do a whole hour on PCM, but I'll restrain myself. Will McAdamsI know.Doug LewinSo I do just wanna ask you, I don't wanna spend a lot of time on this, but I think it's important to ask you this question. And in 2021, yeah, when you were first appointed, you had an idea for dispatchable energy credits. I liked that idea at the time. And I actually think that PCM seems to be sort of morphing into something that sounded like dispatchable energy credits. Like the idea that, but for that to work, doesn't it have to be technology neutral? Doesn't it have to be if you are, no, it does not. Okay, go on.Will McAdamsOh. No, no, I didn't say no. I said, oh, so that's true. It can be either. A deck is proportioned, again, not to be the all-in capacity payment. So it can be targeted. But if you want it to not produce a competitive advantage, for any particular resource because that's what it does, it pumps money toward a subset of the market which will skew, and I conceded this when I laid it out, this may have the effect of skewing bids into the dispatch engine of the system. But I rationalize that and I'll admit, look, I've worked in politics long enough, I can rationalize anything if I try hard enough, that we already have production tax credits that are skewing the bids of wind generation and now solar generation, and frankly now batteries to some degree. But my point is we already have some skewing of the market because of subsidies. And so I figured, well, you might as well just subsidize the only one thing that doesn't have a direct subsidy from ERCOT. And I understand that there's arguments that gas is subsidized and so I won't get into that. But if you wanted to, PCM is a deck, ultimately, with a one billion dollar cap for all resources that perform.So that's essentially what it does. And I said that at the time, and I thought that was the irony of where Chairman Lake kind of went, because the more it went toward establishing a clear resource adequacy equilibrium point, the more it went toward allowing demand response to be able to recover PCMs.I'm like, man, this is starting to sound more like a deck every day. And, and I'm okay with that.Doug LewinYeah, yeah. It's gonna be really interesting to watch as that concept of PCM continues to evolve and be discussed. I think the trick here is, and I think you kind of alluded to this when you talk about ancillary services, we say energy only. It was probably a misnomer from the beginning. Of course, there is some amount of capacity that is procured. You can't have a system that doesn't have some of that. And the question, I talked about this a lot, the folks after Uri, it's like it's not binary. A hundred or zero, on/off, black/white, it's a, it's a dial. It's kind of a, you know, a dial that you're going to turn up or turn down. And I think the trick is to not turn the dial so far towards capacity that you lose that competitive market signal that you do let stuff that needs to retire because it's not reliable and it's old and let it go, but also have enough of a signal that brings in resources that are available at the times of highest need.Will McAdams Absolutely.Doug LewinSo that's the trick. It may be easy to describe that problem. It's really hard to solve it. And that's, I think, what everybody in the market is kind of dealing with right now.Will McAdamsYeah, I mean, it requires a certain amount of faith in markets. And Sam Newell really got after me in the early days of our market design discussions, because he accused me of not having faith in markets. And I think it was around the debt conversation. And I'm like, oh, Sam, let's not get religious about this. You know, but I do believe in markets. And I believe they're the only way to solve this and to help us transition.But I have it at a high level.Doug LewinWell, here, yeah, yeah. I mean, here's the thing about this, because I'm certainly not religious about this. I believe that there are times, there are many things for which I think markets are not well-suited. That's my view of the world. I think for electricity, it happens to be really, really well-suited. I think markets work quite well here, but as with any market, you have to have the signal for the things that you need. And that's the question right now, is the signal getting.Will McAdamsWell, especially with the degree of sophisticated technology that we have in the energy space. Since 1974, the world has been focused on one thing, and that has been solving for a sustainable supply of energy to meet our needs. And we have the capabilities. We have to allow a market to dictate where those capabilities are deployed and employed. And that's why deregulation happened in the late 90s. And it didn't just happen in Texas, it happened everywhere. And now everybody wants to try to talk about, okay, well how would we put the toothpaste inside of the bottle? I don't know how you'd do it. I don't know.Doug LewinI mean, I guess you could, but it would be enormously expensive and it wouldn't get to the outcomes I think anybody's looking for. I think one of the key things that markets have going forward is if you do the flip side and you say, okay, what else are we gonna do? We're gonna completely regulate, it's gonna be command and control. Humans with all their problems are gonna decide this is what should happen. There's too much dynamism out there right now, right? There's too much happening. Technology is moving…Will McAdamsRight.Doug Lewin…faster than humans can keep up with. So that's why you want markets to be able to kind of skate to where that puck is going, if you will, right? I don't think, yeah.Will McAdams But an even scarier thought is like, okay, let's allow AI to do this. Let's turn it over to artificial intelligence. One of my points in coming on here is, so Winter Storm Elliott blew through the country last Christmas, not this last Christmas, Christmas before last. And Tennessee Valley Authority went into load shed for the first time in 60 years. And they did so becauseof a number of things, but chief among them was they missed their load forecast. And so did PJM, and so did ERCOT, and so did SPP, and so did every other system in the country that was affected by that storm. And they missed their load forecast from anywhere from by a magnitude of 10% to 30 to 35%. Okay? There were huge misses all over the country. That's the kind of data that will be inputted into artificial intelligence if they were monolith of the electric grid of the future. Okay, so AI is only as good as the data being inputted into it and we're really bad at load forecasting. And so I recommend allowing the markets to gauge where we're at right now because like I said you're picking your way through an ice field and that iceberg is really big that's just below the surface so you better be careful.Doug LewinAnd whatever kind of capacity market you have, you have to be able to do that. That load forecasting piece is huge. And yeah, right. And, and the ability for folks to get that right seems to your point to not be very great. That that was, that is, this is another thing I talk about a lot. That was a recommendation out of the FERC and NERC report was that the balancing authorities like, you know, for example, ERCOT need to get better at forecasting demand that miss in ERCOT was 23%.Will McAdamsIt's critical.Doug LewinSo you've mentioned that range of 10 to 30. It was on the higher end of that range in ERCOT. And it'll be interesting to see what happens in the coming weeks we're recording on January the 9th, but in the next week or two as this cold front moves through. I think that those demand forecast misses are happening because of resistance heat. They still don't understand. Yeah, yeah. One other question, a little bit of a pivot here, but I wanted to ask you about this too. I was going back in preparation for this interview and looking back on, obviously, as I've quoted you a few times, looking back on that first year as you were sort of getting adjusted to the commission and in this sort of post-Uuri reality, you said in November, 2021, you were referring to the conference of parties, the climate conference that...that was meeting at that time, that there were gonna be trillions of dollars of global capital deployed. And you said, Texas will be a great destination for that capital. At the time, you said, we might see, this is really amazing, November, 2021, you said, we might see 20 to 30 gigawatts of solar eventually. Two years later, we've already crossed about 22 gigawatts, according to the number from ERCOT just a couple days ago. So will you talk a little bit about…Will McAdamsThat's right.Doug Lewin…Texas and what the opportunity in whatever this thing that's happening right now, some call it an energy transition, some call it an energy expansion. There's lots of different words that can go on, but something is happening. There is a lot, a lot, a lot of global capital right now going into, speaking of markets and market dynamism, a lot going into, quote unquote, clean energy. In your opinion, is Texas still set up?Is it better or worse than a couple years ago? What's the trend line? Is Texas a destination for that kind of economic growth?Will McAdamsTexas, just like my ADER pilot program, is the best sandbox on the planet to test whether this energy transition is gonna work for the betterment of our people or not. And that's a great question right now. That's a historic question. But as a result, we will have capital deployed on both the load side and the resource side.And so at the same time, we saw 20 gigawatts of solar deployed in the system, or certainly another 11, and then we'll have 20 by the end of, or probably going in the next summer. So that total of 30. We've doubled our battery capacity. We will double it again very soon. And batteries are right at home in what's going on right now. It has been an invaluable resource and will be a critical resource managing through the seasons that we're soon to see with the amount of load growth patterns that we have today. And so every energy company in the world is either looking at Texas or has invested capital in Texas to some degree. And it's all in how we co-optimize the system. I'm not talking about real-time co-optimization. I'm talking about how the market co-optimizes the system. And we're proving out a lot of lessons that everybody else is learning from. This PCM concept is being analyzed in SPP. It's being looked at by other systems, but it's again more in the deck fashion than the forward long-term LSCRO or forward capacity market fashion And so we're cracking the code on some innovative stuff. We've done it on weatherization. We're gonna do it on other approaches. Now, ERCOT staff may be uncomfortable with that from time to time. PUC staff may be uncomfortable with that from time to time. Because again, it's a matter of faith. You're letting other people sort of control what happens to you. And that's an uncomfortable situation.But that's the only way we're gonna make it through this. And the market will solve for it.Doug Lewin It is uncomfortable. But I think that the alternative again, will get much more uncomfortable for Texans. Because otherwise it's an illusion of control, right? Will McAdamsThat's right.Doug LewinI'm all for focusing on what you can control in life. I named my company Stoic Energy. I love the Stoics and focus on what you could control. But you have to be clear-eyed about what you can actually control. And as a government agency, it's really hard to steer billions of dollars in global capital. They're, you know.Will McAdamsEfficiently? Absolutely not. I mean, and then you create a crony capitalist apparatus that will produce undesirable outcomes. Matter of fact, you will bumble into the outcome that you most wanted to avoid, and it'll happen to you sooner than it otherwise would have. And that's what we've got to avoid with our policymaking.Doug Lewin Yeah, it’s gotta be like shaping, guiding, steering, not commanding and controlling, right? Will McAdamsThat's right.Doug LewinYeah. All right. Well, I want to just end with these couple questions I sent you in advance to think about. None of those other questions I sent you in advance, but a couple of these I did because I wanted to get your thoughts on these. Let's start with this one. What are the two to three energy policies you think would have the biggest impact to increase reliability, lower costs, and/or reduce pollution?Will McAdamsThis will be fast. I covered a couple of these in our exchanges, but one allow broad-based and large-scale bidding of Virtual Power Plants into the current suite of ancillary services, especially ECRF since it is so well suited for that specific service and allow them to carry a larger percentage of what, as I said, is being kept behind the house. Okay, those electrons that we know are there, they can be dispatched. But eventually, what I hope to see and what that policy would allow is an overbuilding and scaling of the amount of EPPs that are out there that eventually will start to engage with our energy markets. And if they engage with our energy markets, then the ancillaries will not nearly be as necessary.And that will accomplish greater reliability and, as a secondary approach, it'll accomplish greater resiliency. And it'll ultimately bring down wholesale costs and I would point out that it would behave very similarly for the system just like wind did. Okay when we went from two gigawatts of wind at the beginning of the last decade to five gigawatts of wind and like I said for ninety percent of the hours of the year that keeps prices rock bottom. If you have enough Virtual Power Plants out there that are engaging with the system, it would reduce costs for the rest of the system. It would make our manufacturers and industrials that much more competitive on a global scale, causing business to continue to grow in Texas. So I think that's, we're at first base of a long run around the field, and that's something that could be done immediately.Second, again, I think we should consider socializing distribution costs throughout the system. Again, normalizing the standard between transmission cost allocation and distribution cost allocation because the technology has evolved to a point to where it provides the same benefits, the resources, the capabilities at distribution, especially after transportation electrification does continue to materialize on the system.The capabilities of distribution will support the entire system, not just the Houston area and not just the city of Austin. In that way, the entire system can lean on itself and not compartmentalize the cost along the consumer classes of our least fortunate. And so I think that should be taken up in the next three years.And ultimately, the industrials, who will pay more of the costs associated with that normalization of allocation ,will experience the benefit and continue to grow for the reasons I said in regards to Virtual Power Plants. It's a fairness issue.Doug Lewin Yep, yep, that's a huge one. Those are both huge ones. What, so I think you've talked about this a lot, so you don't need to go deep on this one, because I think most of the conversation is kind of focused on this, but what will the grid look like in 10 years, and how is it different for consumers? A lot of VPPs, a lot of participation, a lot of chance to earn, all that. Is there anything else you wanna say about that particular question?Will McAdams Yeah, now there's a lot more chance for them to engage, and I think they will have every reason to engage, because in the near term, costs will go up. They will go up just like they did when deregulation happened, costs went up, because you had to pay for stranded costs, you had to normalize the way the market was behaving within itself. But ultimately, I think what the systems start to look like over the next 10 and 20 years, is again, I think the grid planners start behaving more on an islanded basis. Islands connected by large-scale infrastructure like CREZ, large-scale transmission highways carrying power from more remote regions where renewables are plentiful to the load centers, to the Port of Houston industrial heavy areas like that. But ultimately, those regions closest to the loads would be self-supported through a more disparate and aggregated system of smaller resources like small modular reactors, or VPPs, or DGRs, distributed generation resources, or SODG, standalone distributed generation resources. And so it's a more co-optimized system, but it's more islanded for grid planning purposes. And that's the way everybody sort of will start building themselves back out.And ultimately we get to a point where we can start Interconnecting those zones just like we did, you know in the last century, but it's going to take a while to getDoug LewinYeah, it's a really compelling vision for the future of the grid. I think if it's right with you, we'll leave it there. Will McAdams, thank you very much for being on the Energy Capital Podcast. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.texasenergyandpower.com/subscribe