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Emmanuel Lagarrigue on Climate Investing Today · Columbia Energy Exchange

• 0:00
  Emmanuel Lagarrigue: You cannot consider renewables and put everything in the same bag. I mean, offshore wind and, and solar are just different sports. So if you're a very good basketball player, that doesn't mean that you're going to be very good at football. If you're lucky, you're good, at least. But those are two different disciplines.
• 0:01
  So this is what I bring to the table: going to the nitty gritty of the supply chain and trying to understand what, from an industrial standpoint, can make sense and can create value for our investors, versus ideas which are either too early or where the green premium will never disappear.
• 0:02
  Jason Bordoff: Investment in clean energy technologies is on course to hit a record $2.2 trillion this year, according to the International Energy Agency, more than twice the amount invested in fossil fuels.
• 0:03
  But this year has also brought lots of geopolitical, economic, and political uncertainty to clean technology investing. That includes waning enthusiasm for climate action in some governments, and intensifying trade wars which have created more risk for many investors.
• 0:04
  So how much are these policy shifts impacting climate investment strategies? How have investors in the United States reacted to the roll-back of some key incentives in the Inflation Reduction Act? What technologies are most promising? And where is the climate investing landscape headed in the next decade?
• 0:05
  This is Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I’m Jason Bordoff. Today on the show – Emmanuel Lagarrigue.
• 0:06
  Emmanuel is a partner at KKR, where is the global co-head of KKR’s climate transition strategy. Before joining KKR, he was a founding partner of BeyondNetZero, a General Atlantic fund focusing on decarbonization technologies. Emmanuel spent the first two decades of his career at Schneider Electric, where he held various leadership roles, including chief strategy, chief sustainability, and chief innovation officer. He is also an advisory board member here at the Center on Global Energy Policy.
• 0:07
  Emmanuel and I talked about what it’s like to lead work on climate transition at KKR in today's environment, and how consolidation is impacting the renewables market. He shared where he sees opportunities right now and also how the firm has adjusted to changes in federal energy and climate policy over the past year. We also discussed how power prices and AI factor into the clean energy investment outlook.
• 0:08
  I hope you enjoy our conversation.
• 0:09
  Jason Bordoff: Emmanuel Lagarrigue, welcome to Columbia Energy Exchange. Good to see you my friend. Great to have you here.
• 0:10
  Emmanuel Lagarrigue: Thank you Jason.
• 0:11
  Jason Bordoff: Especially exciting because the last time I saw you in person, I almost ran you over on my bike in Central Park and you were listening to the podcast when I almost ran you over. So now you're on the podcast.
• 0:12
  Emmanuel Lagarrigue: I was listening to the episode with Neil Chatterjee who is also a good friend.
• 0:13
  Jason Bordoff: And works with you at KKR now. One of our distinguished visiting fellows here. So let's start by just helping everyone understand what you do, what your role at KKR is, how you came to this work from a pretty extensive background in the industrial sector at Schneider Electric and how that informs an approach to investing in clean tech and other energy transition strategies.
• 0:14
  Emmanuel Lagarrigue (3:28): Well, I started my career at Schneider Electric where I spent the first 25 years of my professional life, 15 years as an operator running P&L everywhere on the planet in several places in Europe, in South America, in the US, in Asia. And in the last 10 years as a member of the executive committee in charge of strategy, innovation and sustainability. And basically the task was to figure out, we're talking about 2015 when diversified industrial companies like Schneider Electric were looking…
• 0:15
  Jason Bordoff (4:06): I think a lot of people may have heard of it, but maybe not everyone. So for what Schneider Electric does, people should understand.
• 0:16
  Emmanuel Lagarrigue (4:11): Yeah, that's a good point.
• 0:17
  Jason Bordoff: Super important company in the global.
• 0:18
  Emmanuel Lagarrigue: Yeah. So Schneider Electric is a Fortune 300 company, global Fortune 300, the largest maker of power equipment on the planet, the circuit breakers, the main suppliers of buildings, data centers, industries for medium voltage, low voltage equipment. If you live in the US, in Europe, it is likely that the circuit breakers in your house are from Schneider Electric. But also Schneider Electric is one of the leaders in industrial software. So the big control rooms and the software that controls 80% of the grid in the USm most of the oil and gas refineries or pipelines in North America, in Europe, in the Middle East are run by, are running on Schneider Electric software.
• 0:19
  (5:00): So as I was saying, so I became the chief strategy officer in late 2015. And at a time we were looking for a growth story, organic growth, but combined also with inorganic growth and how we would reinforce the position at that time, electrification was going to be a big trend. So if you're the largest maker of circuit breakers on the planet, you try to make the best of electrification, especially at that time there was a lot around data center infrastructure and the cloud that was growing enormously. And also we're starting to see lots of opportunities in software around grid management and how you would manage efficiently. The grid infrastructure is probably the most complex machine that we built. So just to give you an example, when you manage a grid software, you have to manage almost in real time something like 10 million points at the same time. So that's a very complex manufacturing process that you automate. You would talk about tens of thousands, the grid is much more complex. So at that time we're looking for a new story that's 2015, that's the year of COP 21. There's a lot of enthusiasm around sustainability. Also, the first idea that you can create value for investors and shareholders by decarbonizing.
• 0:20
  (6:23): The only point though, which I never changed my thinking around this, for me it was never about choosing between decarbonizing or creating something more sustainable and returns or value recreation. So the best way to make things sustainable is to make them profitable and to create a return for you, for your shareholders at that time. And now from our investors at KKR. So then after 10 years at Schneider Electric doing this and basically writing with the rest of the executive committee, the next chapter of Schneider Electric, tripling the share price and the market cap, doing a few interesting acquisitions that transform Schneider Electric into the first supplier of Google, Amazon, Nestle, Walmart. And when it comes to power equipment and their partner when it comes to sourcing renewable energy or looking for advice for the carbonization, I decided to change, to take a hard pivot in my career and go to private equity and do basically the same thing but from a different vantage point. So instead of deploying capital from the balance sheet of a Fortune 500 doing this, and
• 0:21
  Jason Bordoff (7:35): You're deploying capital now as co-head of KKR climate transition strategy.
• 0:22
  Emmanuel Lagarrigue: Yes.
• 0:23
  Jason Bordoff (7:35): I think if I'm right, that sits within infrastructure. And I'm curious how that background in a leading industrial sector company informs the way you think about investing in energy technology, clean energy technology. Now you sort of talked about an infrastructure mindset to how you approach this. What does that mean?
• 0:24
  Emmanuel Lagarrigue (8:00): So basically when KKR calls us – us is Charlie Gailliot and myself, so Charlie was a partner at Goldman Sachs Asset Management. He was basically the guy that was running all the big decarbonization and energy deals set for Goldman Sachs and KKR wants to build that business of big investments, creating a new business in energy transition and climate. And the idea is like, okay, we need to go ahead because you always have to go ahead for new strategies at KKR and two complimentary partners. So Charlie, who has been an investor in this type of deals all his life, and I was the industrialist and basically the thinking behind was that the two of us were complimentary. And I confirmed we are complimentary. Charlie and I, and we work extremely well together. But precisely what I bring to the table. Of course I have some investment reps through my M&A background at Schneider Electric, but I bring that angle on going deep into the understanding of supply chains, the best example. So today we have invested so far a lot in the transition. the electrification of transportation systems.
• 0:25
  (9:15) So there's a lot of opportunities when you can create a lot of economic value by electrifying vehicles, but not every vehicle, not with every business model. So if you electrify a fleet or bus or trucks that come back to a central point or warehouse or a depot at night, it's relatively easy to create an alpha to create value, an economic value for investors out of this type of business model. Whereas if you invest in other type of EV charging, that's going to be much more difficult. So what we say with Charlie is not everything is good. Not everything is bad in EV charging. There's some extremely good business models where you can create value on top of decarbonizing the transportation system and others which are possibly not mature enough or we never get to the zero green premium or to create economic value. And the same is true for heating systems, industrial heat renewables, you cannot consider renewables and put everything in the same bag. I mean offshore wind and solar are just different sports. So if you're a very good basketball player, that doesn't mean that you're going to be very good at football if you're lucky, you're good, at least probably. But those are two different disciplines. So this is what I bring to the table, going to the nitty gritty of the supply chain and trying to understand what from an industrial standpoint can make sense and can create value for our investors versus ideas which are either too early or where the green premium will never disappear.
• 0:26
  Jason Bordoff (10:58): And talk a little bit about what it looks like to lead that work on climate transition at KKR in today's environment where it seems like energy security, affordability, national security are front and center, and climate broadly speaking seems to have taken a backseat, right? You walked down the promenade at Davos and 3, 4, 5 years ago every corporate space was ESG and you don't see that anymore. Is that a significant change in the outlook for what you do or is that just sort of atmospherics and it doesn't change the fundamentals?
• 0:27
  Emmanuel Lagarrigue (11:30): It doesn't change the fundamentals because for us it was always about energy sovereignty, secure supply chain and decarbonization. It's not an either or, it's all together. The thing we always say is that it has to be better, cheaper, faster, and greener and you cannot force people to choose. Now everybody understands that there is zero tolerance in most supply chains for green premium. The public or businesses are not going to pay more for the green stuff. It was a bit delusional to think that would happen. And I think this is what has changed a lot of the climate movement, if you will, had this and we had to start somewhere so we should not have any regret, but was at this an underlying force of it was more about virtue signaling, talking down to some emerging countries with probably sometimes a north-south divide that was dating back to, I don't know, the 1980s. And I would not consider the UAE or Qatar as emerging countries today or even India.
• 0:28
  So whereas in many rich economies we have seen the creation or destruction of jobs and some people now are reading, you see sometimes the adverse effects of globalization. So I think we had all that movement with ideas that were coming a bit from the past. The vilification probably too fast, too early, a bit, too, of oil and gas. We're going to have oil and gas for a while, ripping off oil and gas too fast is going just to be inflationary because you just have to keep in mind the economic value and have a balanced approach. If not, it's worse for the climate movement. And I think this is a bit what happened. There was a bit that thinking that it was going to be easy and easy to do In just a few years that's going to take decades.
• 0:29
  (13:53): And now people are disappointed because, oh, it does not happen yet. And solar and wind are not a thing and EVs are not a thing. No, no. It's just like nobody said it was going to happen in five years. And so you had that underlying movement combined with a lot of enthusiasm around, I would say that was right after COVID where a lot of people, especially in private capital deployment, thought it was easy that yeah, we can build supply chain and we can do green steel and the hydrogen economy and electrifying vehicles and the learning curves are going to be the same as the ones we see in solar and chips and costs are going to decrease exponentially and value are going to explode. And then we do IPOs and then there will be like 10 more Elon Musks every year. Well no, there is one Elon Musk still and that's okay. So there is a bit that fallacy that it was going to be easy combined with a bit talking down to people and with virtue signaling and overregulating, sometimes that brought to a backlash.
• 0:30
  Jason Bordoff (15:08): It sounds like your criticism of, I hate painting with a broad brush, but the climate movement broadly speaking is a combination of over optimism about what the economics would actually look like - that it would be easier and cheaper than it actually is. And there are some places where the green premium may be very low, it's just cheaper to do things in a zero carbon way than not, but not as many as people hoped. And the idea that we would hit tipping points and S-curves and it would just be cheaper to get off fossil fuels, there was excessive optimism about that. And to your point, the willingness for shareholders and consumers to pay a green premium that oil and gas companies should become energy companies, they should get out of that business and go to something else where at their time and today their returns may not have been good and at some point shareholders would penalize A CEO that moved too fast in that direction. Am I hearing you right?
• 0:31
  Emmanuel Lagarrigue (15:58): Yeah, that's exactly right. And I think we should not criticize because we didn't know better. So I mean as societies, as market participants, we learn through those movements and sometimes it's, yeah, you have bubbles and sometimes there's excessive enthusiasm and not everything was bad. Look, the cheapest source of electricity today is solar. Electric vehicles are extremely efficient. If you have a fleet of buses or trucks, school buses in the US or double decker buses in the streets of London, that's going to be much cheaper if you run them on electrons than if you run them on diesel. So there's been a lot of positive results.
• 0:32
  What I mean is that there was a point probably 2020, 2022, where everything went, everything goes. And that's I think the peak of that was when people were talking about the hydrogen economy. Hydrogen is definitely going to be extremely useful to decarbonize a number of industrial processes, everything petrochemical where you're using hydrogen today, gray hydrogen, you can use green hydrogen provided you can produce green hydrogen at competitive cost. But a number of business models like consisting in doing long duration storage or power or hydrogen mobility. Yeah, it was borderline [unclear]. So this is why at KKR we always, with Charlie, we always took the point of like, let's make sure that there's an economic value in this. So for us, nothing has changed. We haven't changed our strategy.
• 0:33
  Jason Bordoff (17:49): So where do you see that now with a little more realism about what the economics look like? And let's leave policy support aside for the moment. Where do you see the opportunities just on economic grounds? You mentioned solar and EVs a moment ago.
• 0:34
  Emmanuel Lagarrigue (18:04): Yeah, so solar is the cheapest source of power today actually in the US if you want.
• 0:35
  Jason Bordoff: And you see that on a total system cost accounting for intermittency and
• 0:36
  Emmanuel Lagarrigue (18:16): Yeah, accounting for intermittency with batteries. And it is true, you have to take the total system cost because one of the issues that solar and wind have is the intermittency. What you need is base load or to at least make sure that you have things on the system that can give you load firming and otherwise you…
• 0:37
  Jason Bordoff: And you need to account on the system level.
• 0:38
  Emmanuel Lagarrigue (18:39): At system level you come for this, right? So this is a bit what you've seen. You can see in the UK today or what we saw in late April in Spain with a blackout that happened. But solar is still the cheapest option today and even compared to gas, even in a country like here in the US where is the largest producer of gas by far, the build cost of a gas turbine in today has increased a lot. So solar is becoming extremely solar coupled with batteries is becoming competitive now wind is not. So this is why you have to separate the
• 0:39
  Jason Bordoff (19:10): Onshore? Offshore? Both?
• 0:40
  Emmanuel Lagarrigue: Well, my point on offshore wind is a great option if you're in the North Sea, if you're in Germany, you don't have any natural resources. You have a sea next door where you have a lot of very high wind regime and a new market can accept a hundred euros, megawatt tower, electricity price in the US, 60% of the power system runs on gas, the rest is solar and nuclear basically, and a bit of wind. And the base price is going to be 25, 35, $40 a megawatt hours. So don't try to bring offshore wind to the US. You're just bringing a very expensive solution to the market that's not ready to price this. And especially because power markets are very local.
• 0:41
  So we see opportunities in solar, offshore wind and wind is what depends on where you are on the planet. Electrification of transportation systems. So basically what if you electrify a bus or a mid-size truck, what you have is all the energy goes to the wheel, nothing goes in thermal losses or in [unclear].
• 0:42
  (20:20)” So if you are able to organize properly, your equity, your debt and your business model, that productivity that electrification brings will become an alpha. And this is what we do with a few of our investments where today we have almost 3000 electric buses running around the streets of London and Birmingham and we are saving money to those bus operators. It's cheaper to operate those electric buses than to run this on diesel buses. Heating that depends also on the location and the price of gas in many countries. But electrifying heat, industrial heat or residential heat is also a big opportunity. We see a big opportunity around supply chains of critical minerals, rare earth lithium batteries. I think this time it's obvious that it's going to be very difficult to produce solar panels competitively outside of China. But batteries, it's still possible.
• 0:43
  (21:25): So the supply chain for batteries will probably not be as concentrated into China as it is today in the future. That's our bet. So there should be opportunities to create this type of supply chains outside of China. Other opportunities we are seeing are around decentralized generation, long duration storage especially. And then that's when you start stepping into how efficient the grid in a given country is, how much solution to the AI race and the AI needs can duration, long duration storage, all the technologies bring? So all these type of things are coming are coming. So then geothermal, nuclear, we'll see, it's probably a bit early to declare victory on this geothermal. There's a lot of really interesting things happening, especially in the US. We'll see.
• 0:44
  (22:20): But again, for us having line of sight to the economic value we create is important. And this is why we incubate this strategy on the infrastructure platform of KKR because all those businesses are going to eventually become infrastructure businesses. I think it's a bit delusional to think that you're going to do your climate tech series A, series B, and then you have all your VCs and your growth equity and then you do an IPO. Today, if you're in the business of long duration storage electrification of bus systems or geothermal or small nuclear reactors, difficult to think you're going to do an IPO and be successful in the intent. It's much more reasonable to think that in the long term you're going to become part of a large infrastructure fund. So you're going to decrease the cost of capital over time. You can make the same money and create the same value for your investors, but going public isn't not the only route you can stay private for longer or even forever bringing those infra characteristics. So this is why for us it's important that all the businesses we invest in can have or gain or receive infra characteristics because we basically, our mission is to pick up those growth businesses and transform them into infrastructure businesses.
• 0:45
  Jason Bordoff (23:52): So you described a really helpful overview and you described many areas where the economics make sense and the green premium is very low, maybe even it's negative. But I presume for a climate transition fund to succeed in the long run and certainly to do so at scale for a fund , a firm like KKR or for society to deal with the threat of climate change, it's not just going to be based on the economics. We need policy to account for the social cost of emitting CO2 and to make different choices look more economic. So how policy dependent is your strategy? And obviously we've seen a dramatic change in the us is that a huge wrench that's been thrown into what you and Charlie are doing?
• 0:46
  Emmanuel Lagarrigue (24:33) No, it is different for sure.
• 0:47
  Jason Bordoff: What have been the biggest impacts of the changes we've seen?
• 0:48
  Emmanuel Lagarrigue: The biggest impact I think if you look at and if you talk to the people who are today running the DOE, the DOD and the number of institutions which I'm involved in this and the conversations you have with those folks today and the ones you had with the previous administration, you almost get very predictable Democratic versus Republican type of thing. So what you hear from those people on EVs for instance, they say, no, we like EVs. They are much better product, more efficient. We just don't want to subsidize them. We just don't think every, we
• 0:49
  Jason Bordoff (25:22) We shouldn’t put our thumb on the scale for them.
• 0:50
  Emmanuel Lagarrigue: Exactly. So that's what you hear. And so we went from a system where, well the Democratic administration was like, no, nice, we want to incentivize this and it's important to incentivize this with $7,500 to I would say most a classic Republican approach to small government.
• 0:51
  Jason Bordoff (25:47): But that has to change where you potentially see opportunities for investment in economic returns to invest an EV network in electrification technologies.
• 0:52
  Emmanuel Lagarrigue (25:59): Not for us because I think one of the things that has happened since probably 2020 when if you remember during COVID, everybody learned what the supply chain was. So that you cannot create the dependence on one country and so on and so forth. And then post COVID what happened, and that was a bit the genesis of the IRA and the Green New Deal in Europe, most policy makers understood that well there was jobs involved in this that if you were going to create a battery plant here or nuclear facility there that you were going to create 1,000, 2,000 jobs. So for us it was obvious since that since then the energy transition was going to be part of policy and could be volatile because Western governments have become to some extent volatile on this. So with Charlie, for us, one of the golden rules is to never take a regulatory risk and making sure that we are never one stroke of a pen away from an adverse outcome. So we never take this type of risk.
• 0:53
  Jason Bordoff (27:12): So what parts of, there was a lot of angst and tearing of hair out at the IRA being meaningful parts, not all of it, of the IRA being rolled back in the big beautiful bill. What parts of the IRA mattered the most and what kind of got a lot of attention but didn't matter as much for putting capital to work in this space?
• 0:54
  Emmanuel Lagarrigue (27:32): I think the IRA was very comprehensive, to put it in one way, probably too much in some cases. I think what we see, for instance, happening in renewables today is interesting. And again with that,
• 0:55
  Jason Bordoff (27:49): When you say too comprehensive, like when economists talk about infra marginal, you were subsidizing some stuff that probably would've happened or been economic anyway. That's what you're talking about?
• 0:56
  Emmanuel Lagarrigue (27:58):Yeah, or subsidized things that would never happen.
• 0:57
  Jason Bordoff: Oh, I see.
• 0:58
  Emmanuel Lagarrigue: And back to my example of the hydrogen economy, again, green hydrogen can help decarbonize a number of hardware sectors, but basically the sectors which are today using hydrogen, replacing hydrogen, which is coming because green hydrogen would come from electrolysis, which is, so that's basically electricity replacing. So using hydrogen in places where you can go straight with an electric process, why would you? and then there was a bit of this also, but we're all learning. So that's the point. If you look at what's happening in renewables today and in the US with the demand for power that is growing probably for the next 10 years at 3.5%, 4%, there is no gas turbines available for the next seven years. Nuclear and geothermal are big promises, but they're far away.
• 0:59
  (29:00):You're going to get solar and batteries because this is cheap, this is available. So now what's happening with the policy changes, you have a sort of rationalization of the market because people, which could be good at the end actually because everybody was trying to invest in renewables in the US and some were doing it with, I would say a very sensible approach and trying to look for the economic value. The others are sometimes missing a few details. So what you see today in renewables is a consolidation of the market where you will have losers and winners. And we want to think that we are on the side of the winners and actually some of our investments are showing that today. So the rules have changed. There is a lot of noise of course, but again, I'm back to that point when you see that it's kind of almost your classical expected approach that you would expect from a Republican government. So the rules have changed. That's it.
• 1:00
  Jason Bordoff (30:12): Do you agree when you look at the models in aggregate rhodium group, others have run these models with the changes in the IRA and they project how much solar, we'll see how many EVs we'll see, 20, 30, 40% lower. Do you think the changes are that significant or I'm not talking about just for KKR, just like at a system level, how important was that policy support to begin with?
• 1:01
  Emmanuel Lagarrigue (30:38): I think in EVs, and of course it's easier saying that down, but where you really have economic value, where you can really impact the system is in electrifying commercial vehicles, trucks and buses and vans. But of course it's much easier to tell a story around passenger cars and with the success of Tesla and all this, but this is not really where the money is and where the economic value for the society at large is the economic value is in electrifying a fleet of school buses. So let's start by this and we have started by something else. So when I see all those studies and those forecasts changing, I'm not sure they were focusing on the right thing in the first place.
• 1:02
  Jason Bordoff (31:19): Yeah, I do always wonder with some of those projections and the argument in support of policy like that is this is the cheapest form of energy and then as soon as the policy support is pulled back, it's sort of catastrophic for the outlook for these. So I sometimes wonder if can those both be true at the same time?
• 1:03
  Emmanuel Lagarrigue (31:38): What is important, back to your initial question on policy, policy is super important for an investor like us because we want to understand what are the rules of the game. And as an investor, it's extremely difficult to operate in a world that is changing around you, that is changing fast where the rules of engagement are changing. And it's true that in the first part of the year we didn't know. And so we're extremely cautious
• 1:04
  Jason Bordoff: In the US you mean?
• 1:05
  Emmanuel Lagarrigue (32:12): In the US and also in Europe for different reasons, trying to be careful because we didn't know where the policy would go. Now we have a bit more clarity on this, so now we know a bit better if the table is going to be round or square, just tell us if it's going to be round or square. And we play around the table. And it is true that in the first part of the year it was a bit difficult to apprehend where the policy would go. Now we have more clarity. So it's easier to invest and to see where things are coming. Same in Europe by the way.
• 1:06
  Jason Bordoff (32:48): Yeah, I was going to ask you to talk a little bit about how the outlook is different in different places. You talked about how technology offshore wind may make sense in one place but not another. And obviously the policy outlook is different also the economic landscape. Europe has a significant economic challenge ahead of it, Canada a little bit too. And maybe that's why we've seen some of the policy changes with energy. Mark Carney has undertaken recently. So when you look at the US, when you look at Europe, emerging markets too, maybe like India, where are the similarities? Where are the differences and where do you see opportunities for KKR?
• 1:07
  Emmanuel Lagarrigue (33:15): So Europe…the first thing, especially in everything dealing with power markets. Power markets are extremely local. When people say here that oh, energy is extremely expensive in Europe, it has hampered the competitiveness of Europe. They're losing jobs, their industry is leaving. Yeah, that's Germany, that's not Europe. That's a big one because probably that's half of the GDP of Europe, but that's Germany, that's not Europe to some extent. The other country, the other large country where energy prices are high is the UK. But even in the UK it's a different story. Power prices in Norway, Sweden and Spain are lower than in Texas and the grid is greener. It's also wind in Spain and it's all hydro in Norway, in Sweden. So what I mean with this is that Europe has different realities. And today, frankly speaking, if you want to build a data center because you're hungry for a lot of power, well you may want to go to Norway or Spain, you're going to get better power and it's going to be greener at the lower price than in other places. So the first thing with Europe is that different realities.
• 1:08
  (34:34) Now the big challenge in Europe is, well, there's no real integration about power markets and energy markets. And should we integrate the fact that energy prices in Germany as probably four times the price of energy prices. I'm talking about wholesale electricity prices, right? So because retail, you have a lot of distortions, but if you look at wholesale electricity prices basically between Norway and Germany, a factor of four. So how do you balance this? Do you send all the German industry and you localize it into Norway, Sweden and Spain? Or do you build interconnectors and transmission lines? And these are transmission lines that goes from Norway to Germany going through the UK. And actually that was almost two years ago now Norway imported German inflation and that created a lot of havoc in the states. So what Europe needs to solve now, I think, is to figure out how much integration they want because they have extreme disparities in energy prices.
• 1:09
  (35:45) It's also true. And now I think people in Brussels recognize that there is a bit of overregulation and telling people how and when and with which technology they would have to decarbonize their industry and what would be the price of carbon at the end. That has created a lot of bureaucracy and a lot of not created an environment to growth all the time. But when you talk to government officials in Europe and in Brussels today, they understand it. They understand it very well. They're preparing for the next set of regulations. And here again, everybody's learning. So I think it's too easy to say that the past was wrong and the future will be much better. We are all learning in that process. But it's a different reality. And this is why, and I can say this because I grew up in Europe, but there was a bit of European arrogance in renewables.
• 1:10
  Like, oh, those Americans, they don't have offshore wind. Let's go build offshore wind. No, you're bringing $110, a megawatt tower to a place where electricity is sold for $40 because it's all gas and don't think that they're going to pay that $70 green premium per megawatt tower because it's wind versus gas. So that was a bit delusional, and this is where sometimes many people got carried out because they failed to look at the economic value of what was the underlying economic value, what that was behind. This is why for me, that has always been a guiding principle when I was at Schneider Electric and now at KKR, because every country, every place is different. So I see a lot of opportunities in Europe, in electrification of heating, in decarbonization of industry, in understanding that integration and if there's differences in power, prices can create opportunities or risks.
• 1:11
  (37:48): So there's a lot of things that can happen in Europe. But yeah, Europe has to get attacked together and decide what they want to do in terms of integration of power markets, integration of financial markets and banking union, defense is another big topic. Immigration is another big topic in Europe that has, all these things are now coming to the table and it's not easy when you have to align 27 countries around the table, but there's a lot of interesting opportunities also in Europe. Elsewhere, we invest a lot, we spend a lot of time in Australia. The Australian government has a very ambitious decarbonization plan, extremely ambitious, that's creating opportunities. The good thing in Australia is that deploying solar panels is extremely cheap and very easy. I mean the installation, I mean on rooftops, on houses. So you can have really cheap solar and batteries, but at the same time you have to understand how fast that system can transition out of coal and if it's reasonable to transition that fast.
• 1:12
  (39:00) So without creating inflation and without creating an affordability crisis. Also in Australia, when it comes to energy India, well it's incredible India. So there's a lot of growth opportunities in, I think India is very methodically going to towards a very efficient, economically viable system that is going to be decarbonized, electrifying the systems, having a lot of energy being provided by renewables. But they don't do this just to decarbonize. They do this out of an energy independence driver, which again, that's always been the case. It's just like France. France is all nuclear. How did they get there? It's not decarbonization, it was because France lost access to oil and gas resources at the end, the beginning of the sixties.
• 1:13
  (40:00) And this saw that having nuclear power would be a way to get in some form of energy dependence. And good news, it's a carbon free energy source. So what I mean with this is that every geography, every country is different and you always have, especially when you deal with electricity, you always have to start with the reality of the energy mix and the cost of electricity in that country before doing anything and figuring out if there's economic value. And this is why you cannot judge policies across the board. So what works in China, what works here? What works in Europe are going to be different. And sometimes, and I finish with this on Europe, sometimes Europeans, they feel they are trapped between two monsters and China and the US. And then so you hear some Europeans trying to, oh, maybe we should replicate the Chinese innovation model or maybe we should replicate the US innovation model, not just be yourselves just certain you will never be as good as the Chinese or never be as good as the Americans on some topics. Just be yourselves. And I think some countries in Europe, and again we could talk about the Nordics they can be themselves, have their own European values and only their own system and have very successful economies. Sometimes there are accidents, but it works.
• 1:14
  Jason Bordoff (41:30): I mean obviously Norway is fortunate with very cheap hydropower with a lot of oil and gas resources. But those differences you pointed out, Spain, Germany have different, even among states in the United States, very different experience. I'm curious what lessons you draw from that because there are technical models that show 90 plus percent renewable grid as the cheapest grid. And then people point to real world experience where things can look quite different and in some cases pushing more renewables may have raised costs and others may have lowered costs. And I'm curious what lessons you take from what you see having happened differently in different places. And what that tells us about the design of policy or about the cost effectiveness of some of the clean energy technologies you are talking about. Is it in fact the case that moving to a 90% renewable grid lowers the cost of electricity?
• 1:15
  Emmanuel Lagarrigue (42:25): My answer is it depends. And this is why also policymakers should start from the existing situation from Spain is operating 75% of the hours with renewable power of during the year. So they just forgot to put, it's so big and so high that it needs grid-forming. And grid forming systems could be inertia from gas turbine bin or nuclear. But you can do this with batteries, but you can do grid form and then oops, they had an accident last April, which now they're going to correct,
• 1:16
  Jason Bordoff:
• 1:17
  Which seems like a lot of human error was involved.
• 1:18
  Emmanuel Lagarrigue: It was a lot of human error and then probably system design and things like this. But in Spain, 75% of the hours you operate agreed on renewables. And a lot of the time this is free energy because there's too much of it. So Spain is a perfect country. If you want to electrify something in Europe, that reality, you bring it to another country in Europe and that falls apart, you cannot apply to Germany. The same policy as that has worked in Spain, you cannot apply to
• 1:19
  Jason Bordoff (43:40): Because of the resource capacity?
• 1:20
  Emmanuel Lagarrigue: Because of the resource capacity, because of the grid construction, because it took Spain like 20 years to get there or look at here. I think the best example in the US is, so it's a bit of an island, Texas, Texas in the US and it's a completely open market, very so ERCOT is you're ready for volatility and you have a lot of renewables, you have a lot of gas. So it's not a given that a hundred percent renewables is going to be a cheaper system, but it's not a given that a hundred percent gas or coal is going to be cheaper. It really depends basically of your starting point and where the transition is.
• 1:21
  Jason Bordoff (44:30): And we talked a few, well you talked a few times, we haven't talked yet about you just laid out what economics look like in terms of the technologies you've deployed and you're trying to, in your investment strategy, be independent of policy risk. It's hard to be independent of geopolitical risk and the extent to which many of the clean energy technologies you're talking about have supply chains dominated by China. Obviously in the US, Europe, many are looking at that with increasing concern about national and economic security and taking steps to respond to subsidize domestic production, to put tariffs on imports. What does that mean for the outlook for a climate transition strategy and how do you insulate yourself in that?
• 1:22
  Emmanuel Lagarrigue (45:15): Yeah, because at the end, everything boils down to sovereignty, resiliency, and affordability on top of decarbonization. But it's not either or. You want everything. So obviously when you start talking about batteries, the supply chain for the metals that go in the batteries, you talk about rare earth and mineral and critical minerals. And yeah, there are a number of dependencies that you don't want to live with for too long, but that creates opportunities. I think now by and large creates
• 1:23
  Jason Bordoff (45:46): It creates opportunities for investment?
• 1:24
  Emmanuel Lagarrigue: For creating supply chains, creating a midstream supply chain for rare earth. So from just refining, recycling, blending rare earth and critical minerals.
• 1:25
  Jason Bordoff (46:00): But is that a setback for the outlook for these things globally? Because inflationary replicating supply chains, building redundancy, I mean there's a reason it's cheaper to make things in certain places. Does that become a headwind for clean energy?
• 1:26
  Emmanuel Lagarrigue: This is where you have to be careful with how inflationary policies can be. So you need a bit of protection and prime the pump, right? So if you look at the deal that was published of the deal around the P Materials a few months ago, here in the US, what the US government is bringing is a downside protection on price. Basically.
• 1:27
  Jason Bordoff: This is where they took an equity investment, created a price floor for rare earths.
• 1:28
  Emmanuel Lagarrigue (46:35): Exactly. So what that does is that when MP Materials will have to compete against Chinese sourced materials, well the Chinese will inevitably try to undercut in prices and the government is going to sustain the price. So is it inflationary? Yeah, maybe. So you just have to be careful with the duration of this and balance properly the interest between building a local supply chain and injecting too much inflation. And I think one of the lessons we should draw from the past years is that not everything goes, so again, the bringing offshore wind at $110 a megawatt tower when you already have gas at 40, that was too much, had it been $50 with a more reasonable green premium and knowing that building gas was going to be also inflationary, maybe it would've been a more reasonable case. So at the end, it's all relative. But yeah, that policymaking is very important. And I think that one of the big lessons is that you want resiliency, affordability, sovereignty and decarbonization and affordability is a key part of this. You cannot create inflation in the system because at some point you will have a backlash that system that won't be sustainable over time from an economic value creation standpoint.
• 1:29
  Jason Bordoff (48:03): As you may remember, Meghan O'Sullivan, your fellow board member at the Center on Global Energy Policy along with you, she and I wrote in Foreign Affairs recently sort about these competing forces, a renewed focus on energy security, national security, economic security. There's a direction in which countries, Europe is a good example, that are heavily dependent on imports, not just gas from Russia, but oil China, the same thing. It's why did China go big on renewables and coal and electrifying the vehicle fleet energy security as much as anything else. So that can take you in a direction of more electrification wanting to produce that electricity from domestic sources. Many of those are zero carbon, solar, wind, geothermal, nuclear. If you're in Indonesia, a lot of coal for example.
• 1:30
  But on the flip side, the other force on the flip side is that to the extent we come to see supply chain dependence on China, similar to the way one thinks about molecule or electron import dependence, Russian gas or oil from certain countries, and you try to dramatically reduce that dependence, really, really reduce your dependence on China and build those supply chains elsewhere or at home. That's a huge headwind. I think. I'm curious if you agree to the transition, it's just the scale, the efficiency, the innovation, the position China has is more dominant than people quite realize, and it takes a long time and is really expensive to try to do that without China or with much, much less of a role. So I sort of saw these as the two competing forces, and I'm curious if you see it that way and which one wins out.
• 1:31
  Emmanuel Lagarrigue (49:37): And what I would add is, and we saw that coming, they said it with all the words, I think that was 2014, if I'm not wrong, when Xi Jinping launched Made in China 2025 and said that they wanted to create an auto industry and the only way to take on the Germans because was to do this with electric cars. And at that time in the west, nobody in the car industry were taking them seriously. Now they also, that's, we could see that coming now the situation is what it is, but we should not say it's a surprise. We saw that coming in solar, our panels in batteries, cars in electrolyzers, in wind turbines. It's true that all those components, they have a strong dominance from China. I think there's two dimensions. One, there's a dimension of price. Can we live in a world where 95% or solar panels are coming from China and as long as the supply of the solar panels is not curtailed, probably yes. Because when you build the solar farm, the cost of the solar panels are going to be 12, 15%. Most of the rest are local costs. So probably not a big deal as long as nobody puts their foot on the supply chain and squeezes it.
• 1:32
  Jason Bordoff (51:10): And there are some cyber and digitally connected components, but maybe you can address those in other ways.
• 1:33
  Emmanuel Lagarrigue: Exactly. So the solar panel is normally not connected. That's a very good point. You have to make sure that don't you import them. So there's that price dimension. Now if you translate this to a battery, a battery for the grid or a battery for a car in the car, it's like 40% of the cost of the car on a grid storage system, the battery is going to be 70% of the cost. So this is where you cannot accept that risk because basically it's going to be the risk of manufacturing prices, lithium prices, and other metals that are going into the battery. So this is where, what I mean is that the cost component is different depending on which technology. And then of course the other thing is, is there a cyber risk and is there a risk of seeing China in that case squeezing completely out the West and using this, as you were saying in your paper with Meghan as a weapon.
• 1:34
  (52:15): And I think today that's a risk. The other risk is also that today something like 40% of the nuclear fuel that goes into US power plants is coming from Russia. So Russia could do the same and stop the nuclear plants. So now, and this is why I really appreciate that, what policy makers do is extremely difficult because you cannot go to one extreme and say, well, you know what? We're stop importing solar panels or rails from China. That's not realistic, but we should build alternative supply chain and not depend only on China for this or that. Yes, that's reasonable and that takes time. And this is the challenge for policy makers to do this without creating, injecting too much inflation or creating or business models that have no economic value or sending investors into stories where there's going to be value distribution at the end. So that's where policy making is becoming extremely hard in energy. And this is why I think here at CPEG there's a huge opportunity to help policy makers in that endeavor.
• 1:35
  Jason Bordoff (53:35): Yeah, that point you made about rich uranium. And it's part of the reason I think that when the Trump administration announced that deal with Brookfield and investing house for nuclear and enriched uranium supply chain was part of it, I think that was good. I'm glad you did that.
• 1:36
  Emmanuel Lagarrigue: Exactly.
• 1:37
  Jason Bordoff: Talk a little bit, we're just about out of time, but when you look at that outlook now, trying to not be policy dependent, make sure things are economic, what technologies you see the most opportunity in, what are you excited about and maybe what was overhyped and we should not be talking about so much.
• 1:38
  Emmanuel Lagarrigue (54:05): So when it comes to base load power, especially to power data centers, restarting nuclear plants or extending the life of nuclear plants is probably a shortcut. We'll see if we're able to create new nuclear generation capacity, either with SMRs or traditional reactors, TBD. At least here in the West. I think we'll get probably geothermal as a large base load before that. Because a lot of innovation that has been happening around the fracking industry and around other drilling technologies where you could get basically replicate a bit what Iceland has done, but on a larger scale, and especially here in the US, you see a lot of innovation happening and geothermal that would be cheap, sustainable decarbonize and basal power. So not yet there, but you start seeing interesting things happening. There's also the big thing around the AI race, right? So I'm not sure.
• 1:39
  (55:20): So today we tend to take a shortcut. So it's obvious that with AI, the need for compute capacity is going to increase exponentially. We don't know exactly for which application and which LLM or other application is going to win. It's probably too early to tell, but it's obvious that the need for compute power is going to increase exponentially. Now there would be a mistake to draw a direct correlation between that exponential increase in compute capacity and exponential increase in energy because that would mean that the system in between is perfectly efficient and it's not yet, there's at least three steps of efficiency in middle. So there is, as new LMS are being released, there are more and more energy efficient and we see that now every month with a new LLM being released. And that is a bit, so you will have software productivities and efficiency, energy efficiency brought by software then the hardware.
• 1:40
  (56:20) Now there's a big debate around GPUs versus dus versus trains that buy Amazon and we don't know yet, but each time you have a new generation of hardware, either a new generation of GPUs or ASIC like Google's CPUs are, you have more efficient system. So that's another factor of efficiency. And then the third thing, especially in the US and to some extent also in Europe, we're assuming that the electric, the way we are managing and building the grid is efficient and maybe it's not because that system has been built and designed for flat demand, zero interest rate world where hardware and the rules have changed. Now the demand is going to increase, so we'll see an exponential increase in compute power. We won't. We'll see an increase in energy demand, but there's not going to be exponential. There's going to be efficiencies in the system, virtual power plan, decentralized generation, long duration storage, a demand response. This is probably what we're going to see on the agenda to get to the AI race without necessarily having triple, quadruple the energy generation in the country.
• 1:41
  Jason Bordoff: Have you looked carefully at fusion?
• 1:42
  Emmanuel Lagarrigue (57:49): Fusion? Yes. It has been for the last 70 years, the energy of the future. So the day it stops to be the energy of the future, that's really encouraging. There's a lot of capital going into this in early stage capital. So they're definitely not the type of investment we would consider these days, but we are monitoring what's happening because
• 1:43
  Jason Bordoff: It's exciting what's happening. I mean, I'm not saying I would,
• 1:44
  Emmanuel Lagarrigue: Yes, maybe this time is real and if it is, then that could be a big solution because fusion, if it's proven, if it works, fusion is much easier to build, much easier to permit because it's safer.
• 1:45
  Jason Bordoff (58:35): Yeah. I'm not saying we should bet on it, but it's in terms of what would be a game changer. Exactly.
• 1:46
  Emmanuel Lagarrigue: That could be a game changer. So provided it stops being the energy solution of the future.
• 1:47
  Jason Bordoff (58:44): Emmanuel, you've been super generous with your time, not just in this hour but for many, many years, helping as a part of our advisory board here, making me smarter. And I've learned so much from you over the years, so really grateful to you for all of that and for talking with us for the last hour and walking through all of this. I learned a lot. Thank you.
• 1:48
  Emmanuel Lagarrigue::
• 1:49
  Thank you, Jason. Thanks for having me.
• 1:50
  Jason Bordoff: Thank you again, Emmanuel Lagarrigue, and thank you for listening to this week’s episode of Columbia Energy Exchange. The show is brought to you by the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs.
• 1:51
  The show is hosted by me, Jason Bordoff, and Bill Loveless.Mary Catherine O’Connor, Caroline Pitman, and Kyu Lee produced the show. Gregory Vilfranc engineered the show.
• 1:53
  For more information about the podcast, or the Center on Global Energy Policy, visit us online at energypolicy.columbia.edu or follow us on social media @columbiaUEnergy. And please, if you feel inclined, give us a rating on Apple, Spotify, or wherever you get your podcasts -- it really helps us out. Thanks again for listening, we’ll see you next week.