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Sustainability now: Rethinking energy cost · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought leadership from PWC's National Office.
• 0:09
  SPEAKER_02: Hello, and welcome back to PWC's Accounting Podcast.
• 0:13
  SPEAKER_02: I'm Heather Horn, PWC's U.S.
• 0:16
  SPEAKER_02: Sustainability Technical Leader, and this is Sustainability Now.
• 0:20
  SPEAKER_02: Today we're revisiting the topic of energy with a focus on the levelized costs of electricity, or LCOE.
• 0:27
  SPEAKER_02: Well, it may sound technical.
• 0:28
  SPEAKER_02: LCOE has wide-reaching implications.
• 0:31
  SPEAKER_02: It's a key metric used to determine which power plants are built, how investments in energy are made, and even what shows up on your monthly electric bill.
• 0:40
  SPEAKER_02: Understanding this topic will be important as you look ahead to transition plans and your sustainability reporting.
• 0:46
  SPEAKER_02: I'm joined today by Carl Hausker, Senior Fellow at the World Resources Institute's Polski Center for the Global Energy Transition, to unpack what LCOE really means and why it matters to you.
• 0:58
  SPEAKER_02: And one quick note before we dive in.
• 1:00
  SPEAKER_02: If you'd like to watch the video version of this conversation, you'll find a link in the show notes.
• 1:05
  SPEAKER_02: And particularly for today's episode, you may want to check those out because it actually will come with some bonus slides that will help us understand what Carl really means.
• 1:14
  SPEAKER_02: So, Carl, welcome.
• 1:15
  SPEAKER_02: So nice to have you here.
• 1:16
  SPEAKER_01: Great to be here, Heather.
• 1:17
  SPEAKER_01: Thanks.
• 1:18
  SPEAKER_02: So, Carl, before we dive into the details, can you just share a bit with our listeners on your background and how you really came to this topic?
• 1:26
  SPEAKER_01: Sure.
• 1:26
  SPEAKER_01: Yes, I've been a senior fellow at the World Resources Institute about 12 years, and that uh comes as part of a 30-year career uh working on climate change and clean energy.
• 1:37
  SPEAKER_01: Uh, starting off on Capitol Hill uh back in the late 80s, early 90s, and then uh I went uh to EPA under President Clinton and served as a deputy in the policy office there.
• 1:48
  SPEAKER_01: And since then I've done consulting at firms uh and uh nonprofits and uh have, like I say, been 12 years at WRI working on these issues with a focus on the power sector.
• 1:59
  SPEAKER_02: Very interesting for many of our listeners, especially who are relatively new to sustainability reporting and focusing on some of these issues.
• 2:07
  SPEAKER_02: It's always, I think, nice to be reminded that there have been people focused on this for quite some time.
• 2:11
  SPEAKER_02: So I so appreciate that.
• 2:13
  SPEAKER_02: And then in addition, can you just share a little bit for our listeners on what the resource World Resources Institute Polski Center is and what you're focused on?
• 2:22
  SPEAKER_01: Yes, uh World Resources Institute as a whole is amazing green think tank and do tank.
• 2:29
  SPEAKER_01: We have over 2,000 employees uh across eight uh offices, uh, including the US, China, India, Indonesia, Brazil, Mexico, and with also staff in Europe and in Africa.
• 2:44
  SPEAKER_01: And uh we work on all aspects of sustainability climate change, energy, food, forests, oceans, water issues, other land issues.
• 2:55
  SPEAKER_01: Uh, and it is an organization that not only does cutting-edge research uh and publishes uh amazing uh reports on these issues, but also is a do tank.
• 3:05
  SPEAKER_01: We really try to get down uh on the ground, making change happen in the countries that we work in.
• 3:12
  SPEAKER_02: All right, so definitely a lot to think about.
• 3:15
  SPEAKER_02: And it's very appropriate we're having this conversation during New York Climate Week.
• 3:18
  SPEAKER_02: So I may ask you a few questions about that at the end.
• 3:21
  SPEAKER_02: And I can't resist asking you this question to start.
• 3:25
  SPEAKER_02: So as soon as someone hears that you're working on this topic, do they say, Oh, so you must spend all your time focused on renewable energy?
• 3:34
  SPEAKER_01: Uh no, in fact, there's a full suite of low and zero carbon electricity sources that uh I'm working on and my colleagues in and out of uh World Resources Institute.
• 3:45
  SPEAKER_01: Uh, with the main thrust being: in order to solve the climate change problem, we need to dramatically increase global electricity supplies on an order of two or three times uh what we're producing now by 2050.
• 3:58
  SPEAKER_01: We need to use that electricity to decarbonize other sectors like transportation with electric vehicles, buildings with heat pumps, and industry uh also with heat pumps and other applications.
• 4:10
  SPEAKER_01: We need electricity potentially to make hydrogen.
• 4:13
  SPEAKER_01: So vastly increased electricity supplies are key to solving climate change.
• 4:18
  SPEAKER_01: At the same time, of course, we need to move entirely to low carbon and zero carbon sources of that electricity.
• 4:26
  SPEAKER_01: That's the big challenge that takes us a long way to solving climate change.
• 4:30
  SPEAKER_02: Yeah, because I think when most people think about, again, thinking about our audience, when most of them are thinking about increases on electricity, they're immediately thinking increased emissions.
• 4:41
  SPEAKER_02: But what you're saying is actually net net, if we're using the right sources of electricity, we can actually decrease emissions and by cleaning up other sectors as well as a fair sector.
• 4:53
  SPEAKER_01: That's the trick we have to pull off.
• 4:54
  SPEAKER_02: All right, that's quite a trick.
• 4:56
  SPEAKER_02: So, Carl, then a bit with that background, I sort of tease this in the opener.
• 5:01
  SPEAKER_02: We're here today to spend some of our time talking about this levelized cost of electricity.
• 5:06
  SPEAKER_02: But before we get into what exactly that is, maybe you can help us understand for our non-energy uh focused listeners why it matters to all, you know, to everyone in business.
• 5:18
  SPEAKER_01: Right.
• 5:18
  SPEAKER_01: There are a lot of pieces of the puzzle of decarbonizing the electricity sector.
• 5:23
  SPEAKER_01: LCOE is one piece of that puzzle, but it's an important one to understand because uh LCOE numbers are thrown around by a lot of people, and they're also misinterpreted and misused often.
• 5:36
  SPEAKER_01: That's why I devote some of my time to it.
• 5:39
  SPEAKER_02: Okay, thank you.
• 5:39
  SPEAKER_02: So then, with that, what exactly is this metric?
• 5:43
  SPEAKER_01: What is the levelized cost of electricity LCOE?
• 5:47
  SPEAKER_01: It's a simple metric that is probably best understood as an effort to estimate the average cost of power from a generating source.
• 5:56
  SPEAKER_01: And what it does is in the numerator of the formula, it is the all of the costs, the capital cost, operating costs, fuel costs, uh taken on a present value basis, discounted uh over the life of the power plant.
• 6:12
  SPEAKER_01: And then the denominator of that uh of this metric is the sum of all the megawatt hours produced by that generating plant.
• 6:21
  SPEAKER_01: Also discounted, physically discounting units, uh, which is which we can come back to.
• 6:28
  SPEAKER_01: But when you divide the cost by the quantity of electricity, you can envision it sort of as this average cost of power from a generating plant.
• 6:37
  SPEAKER_01: It seems very straightforward.
• 6:39
  SPEAKER_01: Uh, however, uh, what it uh overlooks is that not all megawatt hours are created equal among different power plants.
• 6:49
  SPEAKER_01: Some power plants are baseload and put out megawatt hours throughout the year in a steady stream, except for occasional outages.
• 6:57
  SPEAKER_01: Uh other power plants are deliberately operated in some kind of ramping capability where they ramp up to meat load, they ramp down.
• 7:06
  SPEAKER_01: And then uh what's happened over the last 10 or 15 years, as I'm sure all of our listeners know, is that solar and wind have become very cheap.
• 7:15
  SPEAKER_01: Uh however, uh solar power, of course, is only available for half the day, and then its output drops to zero at night.
• 7:23
  SPEAKER_01: And its output also varies depending on clouds and on the season of the year.
• 7:29
  SPEAKER_01: More production in summer, less production in winter.
• 7:32
  SPEAKER_01: Similarly, wind has a production pattern all of its own, a very sort of stochastic uh production pattern depending on weather and wind speeds.
• 7:42
  SPEAKER_01: So uh it is uh the sort of one of the flaws of using LCOE to say what is the cost of uh output from a power plant, is that uh different power plants bring very different value uh to the grid.
• 7:59
  SPEAKER_02: So maybe if I take a step back and try to understand that, if I'm thinking about, for example, the solar plant, then the cost of each megawatt of electricity that I'm producing is basically capital cost divided by this largely divided over the expected output from the plant over its life with self-discounting.
• 8:20
  SPEAKER_02: Is that fair?
• 8:20
  SPEAKER_00: Correct.
• 8:21
  SPEAKER_02: And then, but whereas if I'm talking about a coal plant, then I'm thinking the capital costs, there's more operations and maintenance costs, there's also the fuel cost.
• 8:30
  SPEAKER_02: And so you're saying that maybe on the surface, oh, well, here's the solar megawatt, maybe is cheaper than my coal megawatt megawatt, also comes with less emissions, but they're serving much different purposes in powering our electric grid.
• 8:46
  SPEAKER_01: Exactly.
• 8:47
  SPEAKER_01: There, of course, their emissions are different, and we're trying to get emissions down, and uh solar's features on that front are great.
• 8:55
  SPEAKER_01: Uh, but you you put your your finger on the key thing, um, which is uh solar has mostly upfront capital costs.
• 9:03
  SPEAKER_01: We uh uh do a present value on that and some fairly small operating costs, no fuel costs, divide by the total uh output over 20, 25 year life of the solar plant, and you get a number.
• 9:17
  SPEAKER_01: And for a um for a utility scale solar plant, that is typically$30,$40,$50 a megawatt hour.
• 9:26
  SPEAKER_01: Um, but of course, it is only available some hours of the year.
• 9:31
  SPEAKER_01: The coal plant will tend to run um uh flat out uh most of the year.
• 9:37
  SPEAKER_01: Uh most coal plants have some ramping capability, which uh provides more value.
• 9:42
  SPEAKER_01: We also and then we uh take the present value of, as you said, the capital costs, operating maintenance, and and the fuel costs.
• 9:50
  SPEAKER_01: Uh coal plants will have a much higher LCOE, could be$100,$150 a megawatt hour.
• 9:57
  SPEAKER_02: And but and then I guess again, for the benefit of our listeners who aren't following the electricity markets, can you just give a sense of the cost of electricity today?
• 10:06
  SPEAKER_02: If maybe we're recording this in New York, so in this market in general, uh obviously it fluctuates widely, but just to give a sense of how these numbers fit in.
• 10:16
  SPEAKER_01: Yeah, what is the cost of electricity?
• 10:18
  SPEAKER_01: Even that question is is is a is hard to answer because we have like one can answer it is what is sort of the the wholesale production cost uh that uh the New York uh uh ISO might might report.
• 10:33
  SPEAKER_01: Uh you have the um you have retail rates, which are much higher because they incorporate the distribution system and and other costs.
• 10:41
  SPEAKER_01: But uh across across the country, we we might see range of retail prices ranging from maybe under 10 cents a kilowatt hour in some states up to 25-30 cents kilowatt hour in places like California, and a whole range uh in between.
• 10:57
  SPEAKER_01: Uh the key thing, of course, is to what what we as a society care about is not the cost of an individual power plant, however that's measured, but the system cost, how all those power plants play together to create reliable electricity, uh, meet our environmental goals, whatever they are in terms of emissions of sulfur dioxide and NOx or carbon dioxide, uh, and then try to minimize the cost to consumers of providing that electricity at the system level.
• 11:28
  SPEAKER_02: Right.
• 11:28
  SPEAKER_02: And so I that's where I think that's some of the policy questions come in as well.
• 11:33
  SPEAKER_02: And if I rewind to 20 years ago, I think that's right around the right time, when a lot of states were putting in place these renewable mandates, and otherwise, that's when we started to see the shift.
• 11:45
  SPEAKER_02: But now it's much more complicated.
• 11:47
  SPEAKER_02: We have a lot of new types of uses coming onto the grid.
• 11:51
  SPEAKER_02: And again, just focusing here in the US, not thinking about a global problem.
• 11:55
  SPEAKER_02: Uh, reliability is such a huge issue.
• 11:58
  SPEAKER_02: And then the interplay of these more intermittent resources with the baseload and otherwise.
• 12:04
  SPEAKER_02: And so, how how does the C LCOE fit in with all these other policy questions that a regulator is trying to answer?
• 12:13
  SPEAKER_01: Yes, regulators uh and utilities, and then independent power producers who are not uh part of a utility operating grid, they all have to look at cost.
• 12:24
  SPEAKER_01: Uh and the regulator, of course, has the job of uh trying to minimize uh the utility rates, the utility's total costs.
• 12:32
  SPEAKER_01: The utility comes to the regulators with a plan.
• 12:35
  SPEAKER_01: Here's what we're gonna do next year, here's a 10-year uh expansion plan for the future.
• 12:40
  SPEAKER_01: Uh, and the utility uh again is trying to minimize costs.
• 12:45
  SPEAKER_01: If they put forth a dumb plan, the regulator is gonna give it the thumbs down.
• 12:49
  SPEAKER_01: And then the IPPs, the independent power producers, are bidding into wholesale markets in places like the New York ISO or PJM uh or ISO New England, and they are also looking at their um uh their their costs and what kind of what what kind of bid can they make to to win uh uh a contract or establish a power purchase agreement uh with a large buyer.
• 13:15
  SPEAKER_01: But the key thing here is that LCOE is not used as a decision tool by any of the players in these real real roles with responsibility for building or operating overseeing uh a grid.
• 13:31
  SPEAKER_01: It's a metric that's tossed around a lot, but uh talk to any utility or any IPP, they don't make decisions based on the LCOE of a particularly generating plan.
• 13:43
  SPEAKER_02: Okay, I have a follow-up question, but just to keep our listeners for them to keep up, uh Carl referenced the New York ISO, PGM, and just for your benefit, those are really operating the transmission systems is probably the most simplistic way to describe that.
• 13:59
  SPEAKER_01: Right.
• 13:59
  SPEAKER_01: They uh the they are a regional transmission organization, are almost uh equally described as an independent system operator.
• 14:09
  SPEAKER_01: In those states, there is a uh there are fairly high levels of deregulation of the generation sector.
• 14:17
  SPEAKER_01: And so those organizations create markets for power at the wholesale level.
• 14:22
  SPEAKER_02: And make sure that the system is operating, which I think is.
• 14:32
  SPEAKER_02: So, Carl, let me go back to the question I was going to ask you because you said you made a very interesting point, which is that none of the people responsible for keeping the lights on and and maintaining the uh electric system are actually using LCOE.
• 14:47
  SPEAKER_02: So, how is LCOE being used and and how would you think it should be used?
• 14:52
  SPEAKER_01: Yeah, let me start with how it should be used.
• 14:54
  SPEAKER_01: Okay.
• 14:54
  SPEAKER_01: And I'll just uh amend my comment just briefly to say when I talk to, again, real-world decision makers at utilities, grid operators, IPPs, at best they might use LCOE as an initial screening tool in terms of what should we be thinking about in terms of generation options.
• 15:13
  SPEAKER_01: Uh, but that's that's as far as it goes.
• 15:15
  SPEAKER_01: And I would like to quote uh from a study by the National Renewable Energy Lab that really lays out how LCOE should be used.
• 15:26
  SPEAKER_01: Uh and they this is a 2021 uh paper that your your viewers can uh look in the show notes for the link.
• 15:33
  SPEAKER_01: They say LCOE is an incomplete metric.
• 15:36
  SPEAKER_01: LCOE is not designed to capture a technology's full economic value to the system, as I mentioned before, and LCOE is commonly used to communicate technology comparisons.
• 15:49
  SPEAKER_01: This use can be appropriate to track the cost and performance progress of a single technology over time, or to compare technologies that operate similarly and that primarily provide energy services, just pure megawatt hours.
• 16:04
  SPEAKER_01: This is really important because they say that's what that's how it's appropriate to use it.
• 16:09
  SPEAKER_01: So don't compare different technologies unless they operate very similarly in terms of the value they deliver to the grid.
• 16:18
  SPEAKER_01: Uh this was echoed by a report by the Energy Administration, uh, excuse me, Energy Information Administration 2023 report that said, quote, direct comparisons of LCOE across technologies are misleading as a method to assess economic competitiveness.
• 16:35
  SPEAKER_01: That's how all experts say LCWE should be used.
• 16:39
  SPEAKER_01: And this is like if we look in the literature, you we'll see that the LCOE of solar, tracked across different years, has come down amazingly over the last 10 or 15 years.
• 16:50
  SPEAKER_01: Uh it used to be over$100 a megawatt hour, now it's down into that$30,$40,$50 a megawatt hour range.
• 16:57
  SPEAKER_01: It's great news.
• 16:58
  SPEAKER_01: Similarly, you can track the cost of wind.
• 17:01
  SPEAKER_01: We had some pretty big cost reductions in the 2000s.
• 17:04
  SPEAKER_01: It's continued to inch down uh in the 2010s and into the 2025s.
• 17:09
  SPEAKER_01: Um now, you know,$40,$50,$60 a megawatt hour.
• 17:13
  SPEAKER_01: If it's offshore, it's higher.
• 17:15
  SPEAKER_01: But again, it's it's good to track a single technology over time to see what's happening to the average cost coming out.
• 17:22
  SPEAKER_01: But not comparing across technologies unless it's uh they're operating very similarly, delivering similar value to the grid.
• 17:31
  SPEAKER_01: So you asked, how is it how is it real, how is it used?
• 17:34
  SPEAKER_01: Yes, what's out there, and what what why why do I focus on this?
• 17:37
  SPEAKER_01: And the uh what happens so often is that uh a company or organization that produces the LC these LCUE estimates will just throw them up on one graphic or one table or one chart that shows all the LCOE of very different uh methods.
• 17:56
  SPEAKER_01: Uh I have an example uh in the slides of the latest report by Lazard, very high profile publisher of these estimates.
• 18:05
  SPEAKER_01: And what what you see is here's the cost of solar, LCOE, here's the cost of wind, here's the cost of offshore wind, here's the cost of a gas peaking plant.
• 18:16
  SPEAKER_01: Gas peaking plants come in very high, well over$100 a megawatt hour.
• 18:22
  SPEAKER_01: Here's the cost of a coal plant, a nuclear plant, a geothermal plant.
• 18:27
  SPEAKER_01: And they throw them all up on one graph, and typically then the authors of the report will say renewables are the cheapest power source, or renewables are cost competitive with fossil fuels.
• 18:41
  SPEAKER_01: And those statements are true using the LCOE metric of dollars per megawatt hour, but that contradicts exactly what the NREL and EIA studies said don't compare across technologies.
• 18:54
  SPEAKER_01: So it creates a sort of a false, um false comparison of power plants that can that need to play together to deliver that reliable affordable power.
• 19:06
  SPEAKER_02: Yeah, it's very interesting.
• 19:08
  SPEAKER_02: So regular listeners will probably have heard me say before when I started as an auditor, I'm gonna date myself in the 90s, I had uh a large wind company with one of my clients, and they had to have a lot of incentives and still really was not the most profitable technology.
• 19:26
  SPEAKER_02: And then it's been so interesting as someone who's followed this to see these costs going down and the fact that all this investment in technology really has paid off when it comes to that, and from a broader policy perspective, then it it makes sense.
• 19:43
  SPEAKER_02: These are you know basically zero emissions, low emission sources.
• 19:47
  SPEAKER_02: But what you're saying is, okay, that's that's good, and yes, that that does make sense, but now in 2025, as we're thinking about what different sources to add and and where we should focus, you can't use that number to do that.
• 20:02
  SPEAKER_01: Right.
• 20:02
  SPEAKER_01: You you should not make a simplistic conclusion that we should only build this technology because it has the lowest LCOE.
• 20:11
  SPEAKER_01: And I want to emphasize that I don't want to come across as anti-renewable.
• 20:14
  SPEAKER_01: I was going to ask in any in any way.
• 20:17
  SPEAKER_01: Because the cost increases that we haven't, cost decreases that we haven't talked about mean that in future grids, 10, 20 years from now, we might be able to have solar and wind be the backbone of a zero carbon grid.
• 20:31
  SPEAKER_01: Maybe we can get to 50% solar and wind.
• 20:34
  SPEAKER_01: Uh in Australia, maybe they can get to 90% or more.
• 20:37
  SPEAKER_01: Some countries, maybe to 70%.
• 20:40
  SPEAKER_01: Uh, but the key thing is that solar and wind, which is variable or intermittent in its output, has to be complemented by things like storage, uh, demand side management, and clean firm generating sources, sources that we can control running it in a baseload mode or ramping mode.
• 21:00
  SPEAKER_01: And those clean firm sources, the necessary complement to solar and wind, will inherently have a higher LCOE.
• 21:09
  SPEAKER_01: So the zero carbon grids that we'd all like to get to are going to have a mixture of technologies, some with high, medium, and low LCOEs.
• 21:18
  SPEAKER_02: So let me ask a question then, um, just again to keep our audience with us.
• 21:22
  SPEAKER_02: So when we say clean, firm, that means it's low emissions, but it's also available when I need it.
• 21:29
  SPEAKER_02: So it's I'm not dependent on an outside source like um the sun or the wind.
• 21:35
  SPEAKER_01: Right.
• 21:35
  SPEAKER_01: Not weather dependent.
• 21:37
  SPEAKER_01: Um, no technology is available 100% of the time.
• 21:41
  SPEAKER_01: All the time.
• 21:42
  SPEAKER_01: Yes.
• 21:42
  SPEAKER_01: We all know about uh unforced outages uh or forced outages.
• 21:46
  SPEAKER_01: Uh, but of course, there's a dramatic difference between a solar plant that might have a 25% capacity factor because of weather, uh, a wind plant that has a 40 or 45% capacity factor.
• 22:00
  SPEAKER_01: Versus a nuclear plant or a gas plant that has carbon capture, low emissions, but is very controllable and dispatchable.
• 22:10
  SPEAKER_01: It's really there when you need it far more than the variable output of solar and wind.
• 22:18
  SPEAKER_02: So where does LCOE fit into this discussion then?
• 22:21
  SPEAKER_02: Or does it not?
• 22:22
  SPEAKER_01: Yeah.
• 22:22
  SPEAKER_01: Well, I'll give I I mentioned the the publishers of uh of LCOE estimates, and that includes uh Lazard, Wood Mackenzie, Bloomberg, but also international organizations uh like IEA International Energy Administration or the International Renewable Uh uh uh Administration.
• 22:46
  SPEAKER_01: Um and what what what bothers me is that uh uh these organizations and then the media will make fairly simplistic statements based on throwing all the numbers on one graph or one table.
• 22:59
  SPEAKER_01: You know, a quote from the IEA uh executive director said onshore wind and solar photovoltaics are cheaper today than new fossil fuel plants almost everywhere.
• 23:11
  SPEAKER_01: They're even cheaper than the existing fossil fuel plants, just their operating costs in most countries.
• 23:18
  SPEAKER_01: Um, when media reports on the annual Lazard estimates, they will say solar and wind retain the lowest LCOEs.
• 23:29
  SPEAKER_01: Or another media outlet said fossil fuels cost more than unsubsidized wind and solar.
• 23:36
  SPEAKER_01: That's what Lazard says.
• 23:38
  SPEAKER_01: And what this this creates in my mind a uh a false narrative that says let's that implies let's just build the cheapest stuff on an LCOE basis and gets away from this idea of what is the mix or the team of power plants we need going forward.
• 23:57
  SPEAKER_01: Now, in some cases, to meet an increment of demand, uh building solar and storage or wind and storage might be the best option.
• 24:07
  SPEAKER_01: And in fact, over the next couple of years, as demand is now growing again at 2% a year or more, uh often the short-term, the the near-term build-out, the lowest uh cost option might be typically solar with storage, wind and storage.
• 24:23
  SPEAKER_01: Uh of course, gas combined cycle plants are also in big demand now as demand source, short lead time, uh, low LCOE.
• 24:31
  SPEAKER_01: But again, LCOE is not the determinant of what utilities need to do.
• 24:36
  SPEAKER_01: Um, and the other thing that worries me about simplistic interpretations that let's just build what's cheap is it may undercut the need to build first of a kind, second of a kind plants to demonstrate and commercialize advanced nuclear plants, gas with CCS plants, geothermal plants, all that are will come in initially at a relatively high LCOE, but then will come down over time as as they demonstrate their their ability.
• 25:06
  SPEAKER_02: Similar to what we talked about with the solar and wind, in fact.
• 25:09
  SPEAKER_02: And I think you said gas with LCC, right?
• 25:13
  SPEAKER_02: Oh, sorry with CCS, carbon capture and storage.
• 25:16
  SPEAKER_02: I was thinking low carbon, but yes, carbon capture and storage.
• 25:19
  SPEAKER_02: So let me ask a question then.
• 25:20
  SPEAKER_02: If I take a step, well, I have a few, but if I take a step back, many of our listeners are not, you know, in a decision-making capacity here, but they're focused for their own company on their transition plans, on achieving net zero, and you know, the overall objectives of lowering emissions.
• 25:38
  SPEAKER_02: So, what role then do companies have to play in this discussion, particularly where what we see is for most companies, their number one way to reduce emissions related to their um, you know, scope two or electricity emissions is to go buy renewable energy credits.
• 25:54
  SPEAKER_02: So, how does that fit together then?
• 25:56
  SPEAKER_01: Yeah, you're raising some really interesting questions that relate, of course, to scope two emissions.
• 26:03
  SPEAKER_01: And we're in the middle of a revision of the GHG protocol, uh, which WRI plays uh a huge role in and managing that revision.
• 26:13
  SPEAKER_01: And it's uh again some very technical concepts in terms of what is a what are how should we define scope two emissions?
• 26:23
  SPEAKER_01: And up till now, companies have been able to claim uh a lower scope two footprint by buying renewable energy or is literally simply the renewable energy certificates, the recs.
• 26:36
  SPEAKER_01: Uh and uh in in my in my view, this has been a very important way to stimulate the wind and solar industry over the last 10 or 15 years.
• 26:47
  SPEAKER_01: But uh also it's widely acknowledged that just to purchasing a wreck or entering a PPA for uh for renewable power somewhere maybe even distant from your factory, may or may not save a lot of carbon, really reduce emissions.
• 27:04
  SPEAKER_01: And this is why uh some large buyers of electricity uh have been advocating and moving toward what's called 24-7 carbon-free electricity purchasing, uh, where they really track when their renewable power is purchased and how it is affecting the grid and uh backing out gas or coal.
• 27:27
  SPEAKER_01: It's a more sophisticated and costly approach to tracking your scope two emissions, and this is something that's being debated literally as we speak in terms of how the GSG protocol should evolve over time.
• 27:39
  SPEAKER_02: Yes, interesting.
• 27:40
  SPEAKER_02: I actually recorded an episode earlier this week with two of my partners who are working in the GHG area, and we were debating scope two, and particularly our personal views on market-based, uh, the use of that market-based method.
• 27:56
  SPEAKER_02: And I think we see it has its place, but it's because it's not representative of what's physically occurring, I think all three of us at least have some concerns.
• 28:06
  SPEAKER_02: And so it will be interesting to see what the GHG protocol comes out with in their proposal, which I think is coming soon.
• 28:13
  SPEAKER_01: Yeah, yeah, it will be out for public comment pretty soon.
• 28:16
  SPEAKER_02: Yeah.
• 28:16
  SPEAKER_01: And going back to your question about, you know, should individual companies outside of the power sector what should they care about LCU should be position?
• 28:25
  SPEAKER_01: It's a more, I think, an indirect role in that uh as as customers of of utilities, they should be they want uh reliable power, of course.
• 28:38
  SPEAKER_01: Uh most companies want to see us decarbonize in the power sector, uh, and they want it done at lowest cost.
• 28:45
  SPEAKER_01: So at as they uh uh participate in in public utility uh proceedings and affect how market design in PGM or the integrated resource plan of a utility, uh I would uh I would advocate that they um advocate again for looking at system costs and that mixture of plants needed and not be sort of taken in by the LCOE myth that you know the PUC should just approve lowest LCOE and end of discussion.
• 29:20
  SPEAKER_01: That is a path actually ultimately to higher system costs and less reliable systems.
• 29:25
  SPEAKER_02: Yeah, so it's an interesting point.
• 29:27
  SPEAKER_02: Again, we deal with a lot of companies that are either now trying to buy this type of 24-7 low-carbon power, or that are solely focused on RECs and otherwise.
• 29:39
  SPEAKER_02: And what you're seeing is actually there's also a policy role here, where a lot of times I think those plans that are presented to the Public Utilities Commission, those hearings and otherwise, and companies are more focused on these other mechanisms, but you're saying actually they have a voice to play there.
• 29:55
  SPEAKER_01: They should have yeah, should have a voice to play.
• 29:58
  SPEAKER_01: And that actually uh leads me to another observation, which is uh uh is is there a is there something better than LCOE to use?
• 30:08
  SPEAKER_01: Uh and uh I've looked at some of the other metrics that are sort of a variation on LCOE, and they all get more complex and don't but don't really solve the problem.
• 30:20
  SPEAKER_01: In other words, in other words, you can never look at an individual power plant, do a cost metric, tweak it a little bit, oh let's maybe try to pull in some reliability features or pull in the value.
• 30:33
  SPEAKER_01: You and you'll in the literature you will see variations on LCOE, but none of them can be really be a replacement for a more complex computer model that looks at what's often called a capacity expansion model that utilities will run, consulting firms will run, utilities, excuse me, PUCs sometimes have in-house models or need to oversee the use of these models that, again, look at all options and how they fit together and try to minimize system cost, sometimes called minimizing present value of revenue requirements in the kind of regulated utility context.
• 31:13
  SPEAKER_01: So there's there isn't, you know, I kind of wish there was a shortcut to make LCWE better, but I haven't found one.
• 31:21
  SPEAKER_01: And so we need to all be more sophisticated looking at uh capacity expansion models and and system costs and not be misled by LCOE.
• 31:34
  SPEAKER_01: Yeah.
• 31:34
  SPEAKER_02: All right, so definitely some education probably needed for for all of us on that.
• 31:39
  SPEAKER_02: So let me ask you one final question.
• 31:41
  SPEAKER_02: At the very beginning of the conversation, I jotted this down because you mentioned that you are involved in looking, when I asked you about renewables, you said no, you know, this wider uh focus on low carbon, no carbon sources of power.
• 31:55
  SPEAKER_02: And I do think just uh a few headlines on that may be interesting for our listeners to hear where you think some of that may be going.
• 32:03
  SPEAKER_01: Yeah, yeah.
• 32:05
  SPEAKER_01: When I look across the uh the different studies of how we get to that literature net zero as the entire economy, global studies, national studies, and sometimes even state level studies, there's actually sort of a remarkable convergence uh uh among them that I noted a little bit at the outset that we need to produce a whole lot more electricity because we can drive EVs and reduce emissions of the transport sector, we can buy heat pumps, reduce our building use, et cetera, et cetera.
• 32:37
  SPEAKER_01: Uh but then when it comes to how do we still have a reliable power system, most of the number most of the studies show that at a global level, if we if we can really build a lot of wind and solar and overcome some of the local siding issues, we could get to maybe 70, 75% solar and wind globally, uh, but we need to complement it with other things.
• 33:00
  SPEAKER_01: And uh fortunately we we have a number of things to to choose from.
• 33:04
  SPEAKER_01: Hydro is zero carbon.
• 33:07
  SPEAKER_01: It can it's a firm source, and sometimes it can be ramped up and down, depending on you know reservoir levels, but hydro can't scale up much more than where we are now.
• 33:16
  SPEAKER_01: We've already built in most of the good sources globally and certainly in the US.
• 33:22
  SPEAKER_01: Biomass is sometimes uh touted as a clean, firm source.
• 33:27
  SPEAKER_01: And yes, if you uh if you sort of do your GHG accounting, you're pulling carbon out of the air.
• 33:34
  SPEAKER_01: When you grow a plant, when you burn it, you're just returning the carbon to the air.
• 33:39
  SPEAKER_01: Yes, but a massive scale-up of biomass would also compete with food production and biodiversity.
• 33:46
  SPEAKER_01: Uh, so yes, biomass can play a niche role, but it can't really scale up in the way we need.
• 33:54
  SPEAKER_01: But we have really promising developments in geothermal recently, particularly out west uh in the US.
• 34:00
  SPEAKER_01: And over time, we think we'll probably be able to drill deeper and deeper and create these artificial, essentially man-made um uh uh uh heat areas to pump water down, boil it, spin a turbine.
• 34:15
  SPEAKER_01: Uh so that's probably going to be scalable, very encouraging.
• 34:18
  SPEAKER_01: Nuclear, uh, as I'm sure our listeners know, is really experiencing a huge surge in interest and investment, ranging from everything from uh bringing old nuclear reactors out of retirement, which can be done quickly, but there's only a certain limited number of those, to um uh AP1000 reactors, which are being built in different places in the world, China, India, Middle East at reasonable cost.
• 34:45
  SPEAKER_01: But Europe and the US sort of have lost the muscle memory on how to build a large reactor at reasonable cost.
• 34:52
  SPEAKER_01: Okay, can we recover that?
• 34:53
  SPEAKER_01: I hope so.
• 34:55
  SPEAKER_01: And then we have this whole range of one megawatt to 10 megawatt to 300 megawatt and everything in between small major reactor companies moving those uh technologies ahead, getting some interest again from large buyers, uh entering power purchase agreements or making equity investments to develop that.
• 35:16
  SPEAKER_01: So, nuclear is a scalable, clean firm resource.
• 35:21
  SPEAKER_01: Uh there are risks, of course.
• 35:23
  SPEAKER_01: You have to manage the waste uh safely, you have to manage the proliferation risks, uh, you have to manage the day-to-day operation risks.
• 35:30
  SPEAKER_01: And of course, some people view those as unacceptable risks, and of course, that's a whole nother podcast.
• 35:36
  SPEAKER_02: Yeah, that's another policy question.
• 35:38
  SPEAKER_02: Yeah.
• 35:38
  SPEAKER_01: And then finally, uh fossil fuel, either gas or coal, with carbon capture and storage to bring the emissions down, reduce them by 90 or 95 percent.
• 35:49
  SPEAKER_01: It's being piloted in many places in the world, and it can probably play a role too.
• 35:54
  SPEAKER_01: And again, it's scalable, unlike hydro and and biomass.
• 35:59
  SPEAKER_02: Yeah, it's interesting if we go back to the discussion on the large decrease in the cost of solar and wind and the role they're playing now.
• 36:06
  SPEAKER_02: It's almost like we need to move on and now focus on all these other technologies and see what can happen 20 years from now in terms of the cost and otherwise for those.
• 36:15
  SPEAKER_02: So very optimistic note, I think, to end on.
• 36:18
  SPEAKER_01: Yeah, let me just put one more metaphor, which is walking, walking and chewing gum at the same time.
• 36:23
  SPEAKER_01: Again, in the next couple of years, probably the smartest thing we can do to meet AI demand and other growth is to build a lot of solar and wind with storage.
• 36:35
  SPEAKER_01: But at the same time, we need to move forward with the first of a kind, second of a kind, and beyond demonstrations of the clean, firm technologies, see how they perform, see how they scale, and be ready to deploy them in the 2030s.
• 36:49
  SPEAKER_01: Because we will need, again, to find those optimal generation mixes of clean, firm, and intermittent as we go forward.
• 36:57
  SPEAKER_02: All right.
• 36:58
  SPEAKER_02: Well, uh very interesting.
• 37:00
  SPEAKER_02: I really appreciate you taking the time, Carl.
• 37:02
  SPEAKER_02: Thanks so much for joining me today.
• 37:03
  SPEAKER_01: You're very welcome.
• 37:04
  SPEAKER_01: Thanks for the opportunity.
• 37:05
  SPEAKER_02: Thank you.
• 37:05
  SPEAKER_02: All right, and thank you to our listeners at SlashViewers for joining us today as well.
• 37:10
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• 37:21
  SPEAKER_02: Thanks again for joining us today.
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