Dr. Michael Webber is one of the best known energy experts in Texas. He’s the John J. McKetta Centennial Energy Chair at the University of Texas at Austin, an author of multiple books on energy, and the Chief Technology Officer of Energy Impact Partners, a cleantech venture fund.

Michael has a way of explaining and breaking down even the most complex energy concepts and topics into terms that are understandable and engaging to novices and experts alike.

We started the conversation with Michael’s views on common misconceptions about energy and what Michael sees as the future of the grid in Texas. We explored the role of fossil fuels and oil and gas companies in the energy transition; talked through the history of energy transitions (there have been several) and what we can learn from the past; and went over the steps to achieve decarbonization. Michael also went into some detail on energy efficiency, demand response, baseload power, hydrogen, heat pumps, electric vehicles, and much more.

I hope you enjoy this conversation as much as I did. If you like the episode, please don’t forget to recommend, like, and share on Substack, Apple Podcasts, Spotify, or wherever you listen.

I look forward to hearing your thoughts; don’t hesitate to share them with me and fellow listeners in the comments. Thank you for listening and for being a subscriber! Transcript, show notes, and timestamps are below.

Show Notes

Powering Humanity: Essays on Energy and Society by Michael Webber

Power Trip: The Story of Energy by Michael Webber

Power Trip: The Story of Energy documentary series

The Webber Energy Group at the University of Texas Austin

You Should Be Getting Paid to Prevent Heat Wave Power Outages, New York Times Op-Ed by Michael Webber

The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail by Clayton Christensen

The Obstacle is the Way by Ryan Holiday

How ExxonMobil Is Planning For A Future Of EVs: Interview with CEO Darren Woods

More about Michael:

https://twitter.com/MichaelEWebber

https://michaelwebber.com/

https://www.energy101.com/

Timestamps

3:39 Michael’s roles at UT and Energy Impact Partners

4:37 History of energy, PBS series, and books

6:12 Conventional wisdom regarding the energy system that is wrong and/or misunderstood.

8:11 Where the Texas grid will be in 10 years and what he hopes will happen

11:27 Carbon pricing

14:34 Why oil and gas companies should not be worried about the energy transition, what role they can play, and political dynamics in Texas

17:45 The Four Steps to Decarbonization

19:30 What role oil and gas companies will play in the energy transition future and political dynamics in Texas

26:40 History of energy transitions and sources in the US

31:51 Environmental, labor, and national security benefits and challenges of renewables, including precious metals

36:18 Unpacking baseload power

42:51 Energy efficiency and building codes, challenges for investing in energy efficiency and need for policy

51:41 Heat pumps and resistance heat: market signals, effectiveness, challenges, and benefits.

1:03:47 Residential Demand Response and the need for market innovation

1:08:16 Hydrogen explainer

1:13:40 Interconnecting ERCOT

Doug Lewin

Michael Webber, welcome to the Energy Capital Podcast.

Michael Webber

Thank you so much for having me. It's good to be in a conversation with you in this format after all our conversations in person over the years.

Doug Lewin

Yeah, I mean, one of the reasons I so wanted to do this podcast just to have conversations like this, I always enjoy talking to you, but I'm not, I'm not sure we've ever just had an hour to talk. So this is, this is great. I've been really looking forward to this. And just before we jump in, you know, just want to acknowledge the influence you've had on me and so many people around the state and around the country. I think it was your, was it Energy Policy and Technology short course back in like 2000?

Michael Webber

Yeah, energy. The energy technology policy, which you took like in 2008 or something? It was a while ago, so yeah.

Doug Lewin

I think that's right. That's right. And that was one of the first times that I really felt like I could really understand this stuff. Your ability to kind of translate really difficult concepts into plain language and help dumb people like me understand it is so appreciated. So thanks, and thanks for being on the podcast.

Michael Webber

Oh, my pleasure. And thanks for the kind words. It's exciting to be a collaborator with you after all these years.

Doug Lewin

Let's start just with, if you would, just kind of describing in your own words, who you are and what you do.

Michael Webber

So that’s great. So I'm a professor of mechanical engineering at the University of Texas at Austin. So I do research and teaching on energy and the environment, really at the convergence of commercialization, technology and policy. I'm really an engineer. But I say the words describe me are engineer, entrepreneurship and energy, the three E's, so to speak, and maybe add the fourth E of environment. I'm also Chief Technology Officer at Energy Impact Partners, which is a four billion dollar cleantech venture fund. And I was formerly Chief Science and Technology Officer at NG in Paris, France. So I was there for about three years, 2018 to 2021. So I was an executive in charge of research innovation for one of the world's largest multinational electric and gas utilities. So I've got a lot of corporate experience, some venture and entrepreneurship experience, and a lot of academic perspective.

Doug Lewin

Yeah, and also just this kind of quintessential, like public intellectual, right? Talk also about, just for a minute about the PBS series, because I want people to be able to find that if they want to learn more after this conversation.

Michael Webber

Yeah. So I'm a public intellectual, which means I mouth off in public. I write op-eds and give speeches and publish essays. I've written several books. And one of the books, Power Trip: The Story of Energy has been turned into a 12 part PBS series over two seasons. Season one came out in 2020 and season two just came out a few months ago. It has 12 hour long episodes on energy. You can get it on PBS and Amazon prime and Apple TV. And if you fly American Airlines, it's in their in-flight entertainment. Season One is, you can watch it while you're captive on the tarmac or something.

And then I've got a new book coming out on Valentine's Day called Powering Humanity: Essays on Energy and Society, which is a collection of like 65 of my 200 plus op-eds and essays I've written over the last 15 years. And that one's a fun one because I go back and actually assess when I was wrong or when I was right because I made a lot of predictions about the future in those essays. So that's my upcoming book.

Doug Lewin

Yes, and you were gracious enough to provide me an advanced copy and I love it. I've been looking through it over the last couple of weeks and it's great, highly recommended to everybody as well as Power Trip: Thirst for Power. Anything Michael's ever written or recorded is worthwhile.

All right, let's start with, usually Michael, I save a few questions for the end to kind of wrap up conversations, but I actually wanna invert the order today and start with these because you are an expert in such a wide range of different topics related to energy.

I'm really curious to hear what your answers are to these, and I think that'll help guide our discussion. So I wanna start with this question that I ask on most of the podcasts. What is something that's conventional wisdom among energy people that you think is wrong or commonly misunderstood?

Michael Webber

There's, I've got so many, there's like three things that come to mind that are conventional wisdom that I think might end up being wrong.

One is that, to decarbonize economy, we have to get rid of oil and gas, or oil and gas companies. And I can see a lot of ways we could decarbonize economy with molecules still in the mix, and with those companies still in the mix.

Another piece of conventional wisdom is that we will have to have base load power in the future. And I think the whole concept of base load actually is going to go away. And we're going to replace it with dispatchable. But that means dispatchable on and dispatchable off. So we could talk about demand response for things you could turn off, as well as power plants or batteries or things you could turn on. So the concept of base load, I think, is just going to feel very antiquated.

And then a third piece of conventional wisdom is that hydrogen or other clean options will always require subsidies to be cost competitive. I don't think that's true. I don't even think it's true today for wind and solar. And I don't think it's gonna be true for hydrogen in the near future. I think instead, what we'll do is instead of subsidizing one form of energy another, we'll quit letting emissions pollute for free. I think like you think of like a dumping waste in the atmosphere for free is a form of subsidy. I think if we eliminate that subsidy, then we'll move towards the right answer and won't need to subsidize the clean stuff. So there's this notion like, oh, we gotta have hydrogen tax credits, that kind of thing, make hydrogen competitive. Not really, we maybe just can't let people pollute for free anymore.

Doug Lewin

We're going to come back to all three of those as we go through. Those are great ones. As I suspected, your answer would be interesting there.

Another question I like to ask, and this isn't like asking for big predictions, but just kind of in general, what will the grid look like in 10 years and how will it be different for consumers?

Just for people that don't think about energy every day, but obviously depend on the grid, rely on the grid, and pay for it. What's it going to look like in 10 years? How will it be different for them?

Michael Webber

I've got a couple thoughts and I've got to be careful to be honest and I'm mixing partly what I wish for and what I actually think will happen. So what I think will happen is coal will continue its decline. Coal's already dropped like 60% in the last 15 years. I think it drops another 50% from where it was in the next 10 years. So coal about a decade from now will be about 10% of where it was in 2006.

And that's really phenomenal that coal will end up dropping about 90% in two and a half to three decades. A lot of that's because of the natural asset life of the coal plants. The coal plants are coming up at their end of life retirement window and we just won't replace them. There are a few newer coal plants that might hang in there, but most of the coal we use in America will be for like steel and cement, not for power. It'll be very limited coal and power. And I'm pretty confident that will happen.

A thing that I kind of wish will happen, but I don't know if it will happen, is that we pass through a lot of the market reforms we've done on the wholesale side to the retail side. So if you look at places like Texas, there's a lot of competition on the wholesale side. A lot of new power plants can come in like wind and solar or clean gas or whatever it is. But most of us on the retail side still pay bills the same way we did 10 or 20 years ago. Our bills look kind of the same. And I think we need to have a lot of evolution there where we can be paid to turn off our power certain times a day. We can be paid to sell power back to the grid if we have solar. We'll have much more net metering, we might even have peer-to-peer markets where we can sell power to our neighbor. There's a lot of things that could happen on the distribution end of the power sector that haven't happened yet. That would be great if they happened, but that's my wishful thinking. Like that's what I wish will happen in a decade. I don't know if that will really happen or not.

And then the thing that I do think will happen and I wish will happen is I think we'll have a lot more distributed generation, a lot more rooftop solar panels. However, as a warning to everybody, that distributed generation will also include natural gas generators, maybe fuel cells and things like that, it won’t be just rooftop solar. But I think we're going to have a lot more distributed generation, a lot more generation at the end of the line because of all the difficulties we're having building transmission and for other reasons. So that's kind of a mix of things I think will happen and things I kind of hope will happen. In that middle one, this evolution of having more sophisticated and efficient markets at the distribution end would really enable that third piece of distributed generation.

Doug Lewin

Yeah, that's right. I think it's interesting, you mentioned both solar and gas. And of course, I think storage will probably be part of that mix to battery storage would be part of that mix to whether any of these are on the wall. Yeah.

Michael Webber

Absolutely, and that battery's, exactly. And we actually, when we remodeled our house a decade ago, we built it a place in a crawl space for battery storage, like a power wall or something. And we will probably never use it because the battery in my electric vehicle is so much larger than whatever power wall I could have bought.

Doug Lewin

Yeah, yeah, a lot happening in that space. All right, good, we'll come back to all of those things as we begin to talk too.

And then the third question I like to ask when we have time, and I knew if we started talking about other things, we'd never have time. And I wanted to ask you these questions because you do teach a class on policies and technology. So what are the two or three, one, two or three, whatever you like, energy policies that you think could have the biggest impact to increase reliability, lower costs for consumers, and reduce pollution?

Michael Webber

That is a great question. So I kind of give a hint at this with the first question and part of my answer, which is I think we need to put a price on pollution. Like if I think of the policy we need that's missing today is we allow people to pollute for free. They can dump their greenhouse gas emissions in the atmosphere for free and use our atmosphere as a common dumping ground. That is inappropriate for so many reasons. It's inappropriate economically and ethically and morally and environmentally, you name it.

And that's the one policy I really wish we had. And if you ask like 99 out of 100 economists, they would say, put a price on carbon. That's the most important thing you do. And that carbon emission is a proxy for some of the other problems we have around domestic security of our energy sources, reliability of everything else, because that CO2 ends up driving climate change, which becomes a forcing function of strain on the grid. So if we put a price on pollution, it will lead us to cleaner, domestic mix of sources that will end up being more reliable.

And then the counterpoint to that is we should have a reliable services price, like a market for reliability services. And we have some of that, like in ERCOT, we'll have spinning reserves and non-spinning reserves and reg up and reg down these different types of markets that pay people for the reliability services they provide. And I would like to see a more enhanced, bigger market for that. Most of the market is just for buying and selling electrons or electricity in the power markets and a little bit of the market is to do so reliably. And I think the reliability part of the market should grow and will grow. And that will incentivize not only more capacity to more things we build, but more things like storage and demand response and dispatchable, firm, clean power and this kind of thing. And so I think having a price on pollution so you can't pollute for free anymore and a value or reward for reliability, those two things hand in hand will do a lot to solve our grid.

And we don't really put a price on pollution at all. There's sort of a price on some of the pollutants like NOx and SOx, but not CO2. And we have a little bit of a price or a little bit of value that we attribute for reliability, but I think we need to do more of those.

Doug Lewin

Yep. All right, so this is great. I think my instincts were good on this. Asking these questions sort of tees up, because as I was preparing for this, there's like so many things I wanna ask you, but kind of getting a sense of where you wanna head is helpful. So I actually wanna go back to the first thing you said about what is commonly wrong, taken as conventional wisdom, that, the decarbonization requires the end of oil and gas.

I want to talk more about that. So obviously you and I both live in Texas. This podcast is focused on Texas. Texas has, back to spindle top, taken a very large share of its wealth. It's not as much now as it was 80 years ago or whatever, but it's still a very large share of the wealth generated in the state. The tax revenue in the state is tied to oil and gas. So I think a lot of people that either... have derived well from that continue to, or tax revenue or whatever, get very worried when they hear energy transition. Why should they not be worried? Why do you think that it could continue? Is this even potentially an opportunity as well as a risk?

Michael Webber

It's absolutely an opportunity for oil and gas companies if they choose to be part of the future and not all oil and gas companies wish to be part of the future to be very clear about that. Some of them are at war with the future and I think the future is going to win, frankly. But there are a lot of companies that feel like they have a role to play. There are a lot of solutions in the decarbonized economy that require subsurface expertise. Might include geothermal energy or below ground storage of hydrogen or even extraction of hydrogen from natural reservoirs.

It might include CO2 sequestration. It might include pipelines that move different molecules around, including CO2. It might include offshore solutions like wind or solar. It might include a lot of the things that the whole gas industry already knows how to do better than anybody. And so there's like a certainly a skillset that oil and gas has a capability that we're going to need in a decarbonized future.

And that includes things as basic as project finance and project management. And how do you do complex engineering projects in hostile environments and make them work? That's something oil and gas knows how to do. So there's a skill set that's very valuable and the people they have on the team, the geologists, the engineers, you name it.

In addition, the product they sell, the molecules might also be important. Now the molecules might be different in the future and they might be sourced differently. The methane might not come from below ground fossil reserves or if it does, it might be converted into hydrogen or it might be methane that's manufactured from biological processes like decomposition of animal manure or something like that, or might be other molecules like ammonia, formic acid, or hydrogen methanol, you name it, but the world of moving molecules around and converting molecules is something that oil and gas knows very well. So these molecules might play a role. And then as you especially think about the molecule of CO2 and removing it from the atmosphere and putting it somewhere else, that's something oil and gas companies might know how to do.

So that I just feel like there's a bucket of incredible capability and expertise and assets like rights of way and pipelines and platforms and ships and welders. There's… welding equipment, there's a lot of assets as well as skill sets that can be really useful.

So that's kind of my view, but you don't have to take my word for it. You can listen to ExxonMobil CEO Darren Woods, who said on the record in the middle of 2022 in an interview that his view and therefore ExxonMobil's view, because this was on the record, is that 100% of light duty vehicles sold in the world in 2040 will be electric. So this is a man who sells gasoline for a living saying…the new cars that you buy by 2040 will be electric and will not need gasoline. And he said, that's okay. Those cars are gonna need a lot of lightweight materials like plastics and other base materials. Well, we make those materials, we'll be fine. And so if one of the world's biggest sellers of gasoline says the market for gasoline will disappear, but that's okay because we'll make the materials those cars need, for example. He didn't say this, but they'll also produce the natural gas that will make the electricity for those cars. They're fine.

And so that's one view. Another view tends to be like smaller independent oil and gas companies who don't care and are gonna ride to the fossil tail. Like they're just gonna ride the curve down and make a lot of money before they retire and that kind of thing. So they're not gonna switch to the future, but some of the big ones, the multinational companies for sure are switching to the future. So that's my view and that's their view, frankly.

But the way I put this in sort of a logical hierarchy of decarbonizing is it's kind of a four step process. Step one is efficiency. We should make things as efficient as possible. Light bulbs, cars, homes, you name it. We need to reduce the height of the hurdle we have to clear or reduce the height of the mountain we have to climb, whatever your analogy is. We have to use less. That is the best thing we need to do. By the way, that's a very hard thing to invest in as a venture capitalist. And so efficiency doesn't always get there with market forces alone. It's a great place for policy, especially around building codes and fuel economy standards and that kind of thing. But efficiency is where we start.

The second thing is electrification. We need to electrify as much as is reasonably possible, especially light duty vehicles are a great example. Building heat for new buildings in mild climates is really obvious, we should use heat pumps, this kind of thing. And those light duty vehicles and the heat pumps actually help fulfill that first goal of efficiency because the light duty electric vehicles and the heat pumps in mild climates are more efficient than your alternatives.

Then the third priority is clean molecules for the parts of the economy that are hard to electrify. And I'm thinking industrial heat, maybe building heat in cold climates in old buildings, aviation, marine shipping chemicals. And then the fourth one is carbon management, which is to remove the carbon that we couldn't avoid through clean molecules and electrification. So, like the first few steps are kind of like do your best, and then the fourth step is, clean up the rest. So that's kind of saying “do your best, clean up the rest.” So the four steps, efficiency, electrification, clean molecules, carbon management.

Well, those last two, clean molecules and carbon management are in the molecules business, probably gonna be oil and gas companies or oil and gas adjacent companies. And those clean molecules could be biomolecules, biomethane, it could be fossil molecules, a carbon capture, that looks pretty expensive to me. Could be hydrogen from a variety of sources, ammonia, methanol, formic acid, you name it. There's a variety of ways to get clean molecules.

But in our analysis, if you wanna get to zero carbon or net zero as quickly, affordably, reliably and equitably as possible. It's cheaper, faster, more reliable and equitable to keep molecules in the mix and to exclude them. If you have to go 100% electrons, it delays the path, makes it more expensive and might make it more fragile or less robust because you have single point vulnerabilities and that kind of thing. So that's kind of my long sweet, I think molecules have a role and I think it's in our interest that molecules have a role and I think it's certainly in our interest for the companies that know molecules to be on board with decarbonizing and we can sort of map out a pathway, here are all the ways an oil or gas company might make money in a decarbonized future, because I'd much rather have those companies on board with the future than against it.

Doug Lewin

Yeah, I think two things are true here. One, electrifying everything possible, everything that makes sense from an engineering and physics and financial perspective. That's good. There generally is energy efficiency, as you pointed out, right? The electric car is what, you're the engineer, what 80, 90% efficient versus an internal combustion engine car that wastes so much heat, right? And is only 30 or 40% efficient. So that's great.

It's also, I think, important for people to understand that at this point, only 20% of all energy is electric. Even in International Energy Agencies’ net zero scenarios, at the very high end of the spectrum, you're talking 50 to 60% electrified energy. You still have a lot of molecules. Having those molecules be clean molecules, whether it's 40% or whether it's 70%, that's still a lot and they need to be clean, right?

Michael Webber

It's a lot that need to be clean and even beyond that, we want those companies who know how to do it to be a partner for all the other things we need them to do, drilling and offshore and everything. So it's the same companies often. And I see this role for molecules in the future. Now, another way I'd say it is, I think the total volume of molecules is gonna be much lower in the future because we're gonna replace a lot of molecules with electrons. But the use of those molecules will be more valuable.

And so when I talked to oil and gas, I was like, okay, would you rather sell more oil and gas or molecules, or would you rather sell fewer molecules, but more profitably because you're selling them for very valuable procedures or processes, making cement or whatever it is, or doing backup power if you have no other options. So you're only using it for really critical times or valuable times or valuable goods. I think like, backup power is a great use of molecules. But when you need backup power, the prices tend to be very high. So that's a very profitable time to have natural gas for a natural gas power plant.

But if you're using natural gas when it's really windy and sunny, well, that's a pretty dumb time to use natural gas because it doesn't really add value to society and you're not making money off the gas itself either. So we burn a lot of natural gas that we don't really need to burn when we could be using wind and solar. And so I'd rather save the gas for the high value critical times. And I think that's better for the gas sellers too. I think they'll make more money.

Doug Lewin

Yeah, I think it's really interesting on this question of oil and gas companies and what their role in the energy transition is. You know I named my company Stoic Energy. I'm very into Stoic philosophy and for instance, the books of Ryan Holiday, a fellow Austinite, or nearby in Bastrop. He wrote a book where the title is The Obstacle is the Way. And I think there's something really true there… a lot of people view this as oil and gas companies are in the way. And sometimes that's quite true.

But some of them are trying to figure out how to get through this transition. And I think the ones that just continue to be stubborn and intractable, eventually there's gonna be a decline there. This is like Clayton Christensen, Innovator's Dilemma stuff. They have to look around for the other things that are gonna start to grow. Clean molecules, hydrogen, carbon capture. Exxon bought a lithium mining operation, right? Not long ago. I mean, it's fascinating what is starting to happen and it's slow. It's too slow. There's probably a lot of people listening right now that are like, “What are you talking about?” and are frustrated by this. And I acknowledge it's too slow, but that's not the same as saying it's not happening at all.

Michael Webber

We actually, the good news is we're making progress. The bad news is we need to pick up the pace a lot, right? It's just way too slow. On the oil and gas companies, there is a big distinction between the multinationals and then the independents, the smaller mid-majors or domestic producers.

And even among the multinationals, there's a distinction between the European multinationals and the American multinationals. Although the American multinationals are catching up to the European multinationals. European multinationals, Equinor, Total, others are fully on board. They're investing money. They have ambitious plans to ramp up their electrons business, to decarbonize their molecules business, that kind of thing. Equinor is really doing it. Orsted we think of as an offshore wind company. Orsted used to be Danish oil and gas company, right? That's a European oil and gas company that is now fully on board with offshore wind and electrons. So I think we can look to the European multinationals for leadership on this.

The American multinationals, you mentioned ExxonMobil, but there's others like Chevron and others who are also doing it.

The smaller invaders tend to be the laggards on this. They don't have the resources for it, but sometimes the leadership is just not on board philosophically with this. Or they're in a position where like, I'm gonna retire in 20 years, that sounds tough. I'll just kind of ride the tail and make a lot of money in the next 20 years and not worry about it.

So there's a myth that, the oil and gas industry is not quite monolithic on this. There's a lot of disagreement within it. And it's fascinating to me as a Texan, I think you see the same thing. The multinationals in Texas, are not influential with Texas government, which is kind of a fascinating thing that the local independents have much more say with the Governor, Lieutenant Governor, other people than the ExxonMobiles. And that's not true for ExxonMobil, I would say in every other place where they're active, they're probably very influential. So we have some unique to Texas experience that might inform our opinion on this too.

Doug Lewin

It is a fascinating dynamic here, as so many things in Texas are.

I want to back up and just kind of widen the aperture here. In your book, Power Trip, you talk about, and I'm kind of a student of history, I love talking about history, I love taking sort of this broader view, and you do this so well, sort of the evolution of energy sources and how we have seen better and sort of better, however, you can define that different ways, more energy dense, I guess, would be the best way to define that in this context, but cleaner as well, sort of one after another supplant energy sources before them. Can you just kind of run through that and bring us up to where we're at right now with the energy transition?

Michael Webber

Yeah, and the history teaches us that transitions are common in energy, and there tend to be episodes where transitions happen faster. So I think we're 10 years into a 30 year transition right now. And we've had them before with the rural electrification from like 1930s and 1960s, with the second industrial revolution in the 1800s, the industrial revolution of the 1700s. So we have these episodes where innovation happens more quickly, innovation on the energy conversion devices, making new machines like a steam engine or gasoline car or electric computers, we have new devices that convert or consume energy and new forms of energy available. And when you have rapid convergence of changing forms of energy and changing uses of energy, that's an energy transition. So we're in one, this is to my eye, at least the fourth or more. So they're more common than we think and the prior ones instruct us on what to expect.

If I take just one example, in the United States when we cut down most of the virgin forests in America, we deforested and cut down these trees to get the wood as both a building stock and material for fence posts on the prairie and also to build our homes, but also for heat, for cooking, home heating, as well as industrial uses. We would like use the wood to make industrial heat, but also to do coking, to make different charcoal or different things. So we use wood as a fuel and a feedstock for materials and energy.

And we cut down so many trees. We did so much environmental damage that trees became very expensive. So if you go to Maine today, they're a beautiful forest by the way. Those are all second growth and regrowth forests. Those are not the original forest, we cut them down. And as we cut down the forest in New England, then the Eastern Seaboard, we moved further west through Pennsylvania. Eventually we cut down most of the trees in the upper Midwest, like Wisconsin and Minnesota. Well, it's getting harder and harder to cut down the trees and move them to the markets. The markets being Philadelphia, New York, and Boston. The trees are farther and farther away, and you have to go longer and longer distances to get the trees. That wood became very expensive.

Meanwhile, coal in Pennsylvania is closer to market. Coal is a higher performing fuel than wood. It gives you more energy density per pound and it burns more cleanly than wood. It gives off less smoke and generates less ash and gives you less CO2, frankly, per unit of energy as well. So coal comes along and it's closer to market. It's higher performing, it's cleaner and it's cheaper. So we start to use a lot of coal in the 1800s and that leads us to stop cutting down the trees and the forest grow back. It's an incredible environmental solution at the time.

Same kind of concept with whale oil as an illuminant, where we used whale oil, we'd kill these whales just to get the blubber, to get the whale oil as an illuminant, as a lighting fuel. And we killed so many whales, whale populations declined so rapidly, it became much more expensive to get the whales and therefore the whale oil, the expeditions would take like two years instead of two months. And so whale oil became more expensive.

Meanwhile, Pennsylvania comes to the rescue again, drill for oil in 1859 in Titusville, Pennsylvania, and we get the oil out of the ground. And if you refine or distill, think about it that barrel of oil, the middle slice the middle distill it is kerosene, which is a great illuminant, and it burns brighter and more cleanly and without the pungent smell of whale oil. And it's closer to market and it's cheaper. So with wood to coal and whale oil to kerosene we went to these fossil fuels because they were cheaper, cleaner better higher performing closer to market and that let whale populations recover and let the trees grow back.

And that was a great environmental solution. But now we're trying to clean up those messes. So one of the lessons here is there are solutions. We tend to move towards cleaner, cheaper, higher performing options. We tend to introduce new problems with those solutions. So coal and kerosene were solutions, but now are problems. And now we're trying to solve that with electricity or wind and solar, which is great. But if we do a lot of solar and a lot of wind at scale, they will introduce different problems, land impacts or mining or blight on the land or whatever your concerns might be. So you have to think about how to avoid those problems of doing them at scale and what we might do in the future to clean up whatever problems they introduce. And by the way, wind and solar are cheaper and cleaner. And I would say even higher performing in a variety of ways. They're not dispatchable the same way, but they're domestically located and they have all these security benefits, which is China and Vladimir Putin can't turn off the wind or the sun, right? So they give us some other performance benefits. So that's where we're headed. But because they all have their limits, we'll do more than wind and solar. We'll do… these clean molecules or geothermal, or we'll have other options because they all have their different upsides and downsides. So that's kind of the story of energy transition is they happen quite often. It gives us some lessons. We typically move to a better place.

Doug Lewin

Yeah, and there's a couple different places I want to go from there, but let's actually, there's something you just said there that was really interesting at the end, and I do want to ask you about this. So, yes, China can't turn off the wind or the sun, but something like 90 plus percent of solar panels are coming from China. There was a major change in US policy in the Inflation Reduction Act, which I've heard described as not so much a climate bill as an industrial policy bill.

Are you starting to see, I know you, again, through not only being a professor, but with Energy Impact Partners, you see things going on in the market. Are you seeing that have an impact on manufacturing here in America?

Michael Webber

Absolutely. So first of all, the wind world is different because most of the wind turbines are made by Vestas or GE or Siemens. So these are Danish, German or American companies. So the wind turbine manufacturing is not dominated by China the way solar panel manufacturing is. And one of the reasons why solar panel manufacturing is dominated by China is partly because of the mines for the silicon, the raw materials. The bigger concern I have is the, I don't know, lithium or cobalt, or different, name your material material. China probably dominates the market for the upgrading and refining of it, if not the original extraction.

So China has a stranglehold on particular materials that are very important. And those materials might go in that wind turbine made in Germany, but they will go into things like batteries and solar panels as well. So there is a national security risk for these new options, but it's a capitalized risk. Like it's a risk in the manufacturing, not in the operation. So China might be able to turn off the flow of solar panels, but won't turn off the sunshine.

And so, they could disrupt our ability to build solar, but they don't disrupt our ability to operate solar. That's a pretty important security benefit. So there's still some security risk. It just shifts in terms of scale of disruption and where in the supply chain or the lifecycle of a facility it might be impacted. And because of that concern, and this is not a new concern, I was at a briefing in 2007 or 8 with the Department of Energy where they were talking about this back then. They're like, we're really concerned about molybdenum and yttrium and erbium, like these different rare earth materials, as well as the silicon, the lithium, the cobalt, and graphite and things like that. So they've been concerned for a while. They've been raising the flag of concern. So there's been a while to look at it and bipartisan interest in solving this. And the latest policy push with the Inflation Reduction Act and others has these domestic sourcing requirements or supports for domestic manufacturing capacity. In effect, there's been tremendous uptick in domestic manufacturing capacity of electric vehicles and batteries and things like that. Probably won't go to solar panels that much, frankly, it'll be a little bit for solar, but. It's more likely on the other materials. And where my venture capitalists had, we're seeing some producing startups on domestic sourcing capabilities for new alternatives to graphite or new ways to manufacture anode, geocathodes for batteries, that kind of thing. We absolutely see startups that are ready to solve this problem. And not only is there like a federal policy support potentially for the startups, but there are a lot of buyers who are willing to pay more for a shorter, more secure supply chain. But it's just like they wanna have a supply chain that works.

Doug Lewin

Michael, is that specifically about cobalt or are there other issues? When you talk about anodes, cathodes and the, and the different ways of…

Michael Webber

Graphite. I think like so there might be ways to do the lithium ion or the graphite to produce you want. Cobalt's fascinating. Cobalt, there it's less about China more about the Congo for example. Where, in there it's more of a labor justice issue than environmental justice. You have to worry about both: you have to worry about dirty minds, extracting materials that pollute the environment. You have to worry about labor justice issues which might be 12 year old boys in these mines in Africa getting cobalt out of the ground. Or prisoners or slave labor in China making solar panels.

You also worry about the security risks of bad actors turning off the supply of the materials we want to make things. And China has already said they're gonna do that. So these are all real risks.

Cobalt's a little interesting, different to me in my perspective. When I was at NG in Paris, we were very sensitive to labor issues. And for NG, it was easier just to find an alternative to cobalt, like use a different material than it was to find an alternative cobalt source. So you could either find a different place to mine cobalt so you don't have the child labor issues or you just find an alternative to cobalt. And companies are looking at, okay, how do we avoid that material? Or how do we avoid that country or that mine or that company, that kind of thing?

So you can do a combination of the two, but there's some materials like graphite and lithium there. It's going to be hard to avoid those materials. And frankly, of all the things I just said, the one I'm actually worried about the most in terms of total volume is copper. I don't know how you avoid copper in an electrified future. And I'm less worried about the environmental labor risks there, but more just the… volume, like is there enough and can we get it at a price that's manageable without depending on countries who hate us.

Doug Lewin

I want to come back to something else you were talking about earlier. One of the things you thought that was wrong or commonly understood is the need for base load power. That's interesting, because I do think there is a very, very common perception out there, like maybe 90%, even to people still in the industry, that you gotta have base load power, you gotta have stuff that's always on. Why is that wrong?

Michael Webber

I think it is hard for people to let go of that term because we've built up the concept of it over a century plus. The way we built our grid in the United States and elsewhere is to be load following. So you and I, we're turning on our lights on and off, we're turning things on. So people like you and me, multiplied by hundreds of millions in America, we're turning on or off our loads. And then we ramp the power plants up and down to follow the loads. So we set up the power sector to be load following. The loads change, however the loads change based on the weather or temperature or time of day, whether we're at work or home or how big our refrigerator is or whatever, and the power plants must follow. So it's load following.

And then there's certain minimum load that happens throughout the year. We call that the base or the base load, and we have enough power plants that are on all the time to be base load to meet that minimum demand. And then we have peakers or mid-merit dispatch or other things we ramp up and down to meet the variability in the load above the base load.

We built up that concept over a hundred years and we had trouble letting go of it. We need baseload power plants. And we might need baseload power plants, but we're moving into this new world where we don't just have variable load, you and I changing our habits and patterns during the day with light bulbs, things like that, but variable supply, because we have more supplies that depend on meteorological or astronomical conditions, like the weather or position of the Earth relative to the sun with wind and solar or hydro and that kind of thing. So add to the mix variable supply and variable load. I think load following doesn't make as much sense. In fact, I think we probably need supply following loads. Rather than turning power plants on and off to match when the load is, we should turn the loads on and off to match when the supply is. And those loads could be some non-critical data centers, water treatment, certain types of steel mills. There's a lot of things, cool pumps, water heaters, a lot of things we can turn on and off to match when the power is available, rather than turn the power on and off to match when the load is desired. So I think we need to switch our mindset from load following to supply following. And then if you do that, base loads are a ridiculous concept.

The way Brad Jones used to say it, and I miss Brad dearly, and I'm really sad that he died not too long ago. Brad was just a great executive in the power sector. He was a public servant at ERCOT. He was a public servant in New York, ISO, and at New York Power Authority. Then he came back to ERCOT, just as a gentleman to be an interim CEO after Winter Storm Uri, and recently died. And the way Brad would say it, and I really liked it, he said, I need things I can turn on and off. He didn't use the word baseload.

And it's like, it was way, almost like the way he was addressing this, like we need to change our thinking and our language even, because I need dispatchable things. And a thing that I can turn off is dispatchable and a thing I can turn on is dispatchable. And Brad would say nuclear power plants are not dispatchable because I can't turn them down. Months are all on their own. At least that's true for American nuclear, by the way. French nuclear is very different. And so we would talk about nuclear as baseload because it's on all the time, it serves its need, but Brad would not call it dispatchable, and I agree, frankly. And so we need to get to this dispatchability, things we can turn on and off. And I think that's the future and the dispatchability terminology should replace the base load terminology. And by the way, designing nuclear power plants to turn on and off is entirely possible. We do it in other places around.

Doug Lewin

Yep. And I think it's dispatchability. I think it's also important to consider, right there next to it, like a twin, flexibility. Right?

Michael Webber

Flex, absolutely. Yeah, agility, absolutely. Yeah, that's right.

Doug Lewin

Yeah. Right. So and if you start to think about, I mean, you went through a list of the sort of demand that is flexible. It's, I'll just add a few to it because we were talking earlier about carbon management, you know, big carbon dioxide capture machines, right, can be flexible. You don't need to run them 100% of the time. If you run them 90%, that's more carbon than we were capturing before, right?

Michael Webber

Totally.

Doug Lewin

Flexible loads, green hydrogen you were talking about, or you just talked about hydrogen generally, the green hydrogen desalination. There's all these different things. And actually, I think it's important for us to start thinking of storage itself, not only as supply, but as a flexible load, right?

Michael Webber

Totally. Yeah.

Doug Lewin

Because a lot of people say, well, yeah, like data centers are this big growing demand, but they're not very flexible. A, that may be wrong, because there's certain kinds of data centers that will be flexible, but there's others that aren't. But if you put storage there, right, now you do have a flexible load and a supply. So I really think that in many ways, battery storage is sort of the ideal, dispatchable and flexible demand and supply, right? It works both ways.

Michael Webber

I agree. In fact, the way I think about it is electric vehicles will either save the grid or destroy the grid entirely, depending on what time of day you charge them, because they are this flexible load. And if we all charge at peak times, it can break the grid. But if we all charge it off peak times, it will save the grid because it will help us amortize our entire cost of grid across more kilowatt hours and therefore lower the cost for all of us and give the money we need to do the investments to modernize upgrade. So.

And that's because the battery inside is very flexible. You can charge it easily. You can turn it on and off. You can do it at different times. Batteries have a response time of like 100 milliseconds. So they're really fast. So batteries are an important part of that flexibility, dispatchability, both on and off. That's really great. Some things we can only turn on or things we can only turn off, right? So it's nice to have the two-way capability with the battery.

Doug Lewin

Yeah. And in many ways that then becomes a battery storage and its ability to be a flexible demand matched up with supply. It becomes another form of energy efficiency. And you talked about efficiency earlier when you said there's kind of these, these four steps, efficiency, electrification, clean molecules, and then carbon management. And efficiency is number one. I know you've done a lot of work on this. You've done a number of studies on energy efficiency. You, you've read a lot and talked a lot about energy efficiency.

Can you talk a little bit about its importance, specifically in a Texas context, right? We've just come through another winter cold blast. Obviously, Uri is only three years in the rear view and I don't think is getting much further from anybody's memory, even the further we get, it's still sort of with us in all these conversations. But talk a little bit about energy efficiency and how it also plays into this flexibility discussion we were just having.

Michael Webber

It's great. And from the United States perspective, the two biggest opportunities for efficiency are the building stock, our homes, especially, but homes and businesses. And then second is our vehicles, our cars. And those are the two biggest opportunities. There are many other things. Light bulb efficiency, for example, has been very dramatic for the United States. Our energy consumption has dropped as a nation, partly because of the switch to LED light bulbs, which are much more efficient. But the light bulbs are much smaller than gasoline combustion engines and cars or how much energy we consume in our homes. Light bulbs are part of the homes, but truly heating and cooling is a dominant part.

And so efficiency there, we'll do a variety of things. And efficiency of the home could be better installation, better windows, better design, not having your windows face south in an unshaded manner if you're in Texas, but maybe face south unshaded if you're in a Northern climate. So you can think about how you design your house, how you orient your house, the materials you use, the type of installation, the type of windows in a lot of passive things. And then you can think of the active devices, the heaters or coolers and what kind of device and how efficient they are. Are they modern vintage with high efficiency ratings? Are they pretty old and unreliable and more energy-consumptive? There's a lot we can do there.

And I mentioned earlier that I think that's a place for building codes. Our building codes are non-existent a week in the United States compared to, say, France, where I was for a long time. France and Germany have much stricter building codes. They tend to have national building codes. In the United States, it tends to be either a state by state or city by city. We don't have a national efficiency code really, other than maybe for the devices like light bulbs.

California has some strict building codes. They've avoided a lot of energy consumption over the last few decades. They call it the Rosenfeld effect because Rosenfeld really pushed for these efficiency rules. So the building stock in California is much more efficient. It's also a milder climate. And so they save energy, but their energy consumption wasn't as high to begin with. In Texas, our climate is less mild. We have drought and freeze and flood and heat wave, we tend to have it all. And we don't have strong building codes, maybe City of Austin does, but it's not universal across the state.

If you have a stricter building code around the devices and the passivity with which you design the home in a way that keeps it more efficient, you reduce how much energy you need dramatically. And therefore you can have a smaller air conditioner, for example, and if it's a smaller air conditioner, it costs less, you can afford to pay more for a more efficient one.

And then the safety benefits are remarkable. If the power goes out, your home will stay cool for longer. So you have this human health benefit and this quality of life benefit where you're less likely to die if you're a retiree and you're in a home that doesn't get as hot as quickly. And this happened in places like France in the 2003 heat wave, tens of thousands of people died, especially the elderly, because their homes were designed to stay hot in the winter and they could not shed heat in the summer. So even there with their efficiency, their envelope was so tight, it actually kept the heat in. They didn't design around cooling. So elderly people can die if it gets too hot.

That's a risk in Texas. Or if it gets too cold and the power goes out, like in Winter Storm Uri, your home will stay comfortably warm for longer. So efficiency has the benefits of saving the consumer money, making it easier to increase your efficiency again. They get these amplifying gains of a more efficient house, needs a smaller air conditioner, which becomes more efficient. So it can be smaller again. And then you get better safety. That's a huge opportunity for us in the United States. We just aren't tackling it.

And the analog is lightweight. You think of major airplane manufacturers. If they go to a lighter design by removing redundant components, then they can have a smaller fuel tank. And if you have a smaller fuel tank, the plane is lighter again, which means you have smaller engines. Well, if you have smaller engines, you don't need as much fuel. And you can just get this, like, accelerating gains as you improve that way. Efficiency has the same kind of amplification or acceleration.

The other one is gasoline cars. And going from gasoline cars to electric cars is a huge step in the right direction. And going even further, not just cars, but mass transit, walkable cities, bikeable cities, and the e-mobility or micro-mobility, e-scooters and e-bikes, that's really where you get efficiency gains. And that’s, you might call that more conservation because it's more about the design of the system rather than just the individual device. But between conservation, how and where we lay out our transportation networks and homes with urban planning, and then the efficiency of the devices, the installation, the drive train or whatever, we can save a lot of energy. That solves our problems, that avoids a lot of CO2 just in the reduced energy consumption. Then if you decarbonize the energy, you get additional gains, and then it saves money for consumers.

So it's just like win-win-win while improving resilience. So this is the obvious thing to do, but I will tell you as a venture capitalist, it's hard to find investable startups in this space. It's a very awkward business case, and that doesn't mean it's impossible. There's certainly business cases for the industrial sector where they have really big energy bills and they have dedicated experts on staff just to look for cost savings in energy. It is already cost effective and market based for like school districts, but for an individual homeowner efficiency can be hard to get to. So I think that that's where you have an opportunity for policy.

Doug Lewin

Yeah, there's so much there. It is difficult because it's such a diffuse market, right? By definition, you're talking about, what are we, 11 million residential units in Texas or something like that? It's just…

Michael Webber

Yes, and the payoff is delayed. So the big mismatch right now is, because we don't put a price on pollution, the cleaner things, which are often the more efficient things, cost more upfront. You pay more CapEx, more capital expenses. But they cost less to operate. So your OpEx or operational expenses go down. And so we're doing a more expensive thing upfront to have something less expensive along the way.

And an EV today often is more expensive than gasoline engine, but cheaper to operate. Triple pane windows are more expensive to install, but cheaper to operate. More efficient air pressure is more expensive to install, but cheaper to operate. And if you are an individual, you're gonna be pretty price sensitive to that upfront price. If you're at the University of Texas, or if you're the federal government who owns a bunch of buildings, or if you're ExxonMobil with a refinery, you can do that trade-off of CapEx versus OpEx, because you're pretty sure you're gonna be at that site for decades. But if you're a homeowner, you might leave in three years, and your payback might be in four years.

And so it's harder for us at the individual level to make that trade off. Also, we're pretty bad at math in general, but even if we can do the trade off, that doesn't mean we can get the loan for the extra $10,000 on the house price. So there's some pretty fundamental…

Doug Lewin

And even if we could get the loan, it's like, do we really want a loan for that?

Michael Webber

Yeah, exactly.

Or would we rather upgrade the kitchen or a bathroom? And everybody deals with this…

Michael Webber

Exactly.

Doug Lewin

So you are a mechanical engineer. I wanna ask you about heat pumps and resistance heat. So you were just talking about efficiency, right? And I think a lot of times when people don't understand about efficiency, still a lot of people's perception of efficiency is you're asking me to suffer, but it's actually the opposite. You're getting the same output or sometimes better output, but just using less units of energy. So LEDs are just a great example of this. You're using 1/10th or even 1/20th the amount of energy, but the light's actually better. It's dimmable, it's programmable, you could control it. It's all of these added features and it's using less.

Michael Webber

And it lasts longer. Now it lasts 20 years instead of eight months too, right? So you design how's it with light bulbs, with the expectation you're never gonna change the bulb. It changes the way you might design things.

Doug Lewin

So let's talk about that in a heating and cooling context. I mean, you were talking about how hard it is to invest in these companies, and you just have this mismatch in the economics here, right? So most homes are built with an air source heat pump that will heat it down, because we're 60% electric in Texas. So most homes are built with that heat pump that is only going to heat the home down to about 32 degrees and then have resistance heat as a backup. My understanding from talking to folks in the industry is that you can install resistance heat for a couple of hundred bucks.

But on the power grid side, to build generation to serve that $200 resistance heat can be 10 or $20,000, right? But the homeowner, the builder, whoever's paying the bill for that resistance heat isn't thinking about that, understandably so, right? But we’re all going to pay for that power generation to serve that resistance heat.

There are now resistance heaters that are cold weather rated, that will go down to zero or even below that. And I think to a lot of people, it's like, well, how does that even work? How can it still be efficient? And of course it gets less efficient the colder it gets, but can you give just a brief tutorial on, again, you're a mechanical engineer, so heat pumps and why they're so magical and how the sort of newer generation is changing things?

Michael Webber

I think it's great. So the heat pump technology, and also will vary on where you are. So its value in Texas might be different than Vermont or France. Not gonna walk through all that. So the cold weather heat pumps get better and better every year. But if you're a homeowner, you're at some point confronted with a choice, do I wanna get the heat pump that can keep the house warm when it's 32 degrees outside, like you said, or the one that works even when it's 15 degrees outside? And the difference in price might be a thousand or $2,000. Okay, do I pay a thousand or $2,000 more for the cold weather heat pump, or do I just get the sort of cold weather heat pump and add a couple hundred bucks of resistance heating?

And for the homeowner, the resistance heating feels a lot cheaper, right? Looking at math, that's saving me 800 bucks or whatever it's saving me. But then your electric bills will be more than $800 higher over the next 20 years. But that's really hard math to do. It's hard to imagine, you don't know how long it'll be in your house as well, but how much higher will the rates be for electricity because I and all my neighbors are adding resistance heaters, therefore, we need to build more power plants. The cost of those power plants are spread across my bill and others, and I'm gonna pay for it one way or another. And so that heat pump for the cold weather rating, even though it's more expensive, is probably cheaper across the system, though it might not be cheaper to you in a very direct, obvious way. So that's part of the challenge.

And I would say, without a doubt, in mild climates, heat pumps for new construction are the way to go. They will save you energy, they're cleaner, they don't have the fumes, they're more reliable, all that kind of thing.

If you are in a cold climate like Vermont, you can argue a little bit more about whether it makes sense. And if you are doing a cold weather heat pump, they exist now, you can extol them, they work just fine. We know people have them, they work fine. It costs more and that heat pump is probably instead of fuel oil, which is particularly expensive and dirty, so you might not mind paying more for the heat pump because you're off this expensive fuel.

However, your other option might be natural gas furnace. The natural gas will be cheaper and cleaner than fuel oil as well, but not as expensive as a heat pump. So in many ways, like it gets more complicated in cold weather environments, especially if it's a retrofit. So if it's a new house you're building in Vermont or Maine, you can build the panel the right way and all that kind of stuff through the heat pump. But if it's a retrofit, or you don't have a big panel, and you could just swap out gas or propane for fuel oil and you're changing the tank for 400 bucks and you're getting cheaper fuel versus having to upgrade the panel… For cold weather retrofits, going to a cleaner fuel will be cheaper and cleaner, but not as clean as a heat pump, but it'll be cheaper than a heat pump.

So you have to distinguish between is it retrofit building stock or is it new building stock? And is it cold climate or mild climate? And certainly for new buildings and mild climates, it should always be heat pumps. Probably for new buildings and cold climates, it should be heat pumps. For retrofits and cold climates, that's kind of complicated. So we just got to talk. Oh, the other thing is like, we start moving a lot of power on those cold climates through the wires and you can move more energy by pipe than by wire. So it might be cheaper just to decarbonize the fuels and use synthesized methane from hydrogen or something like that. And that's the case in France, probably. So France is a cold climate situation that they have trouble upgrading their panels in those old buildings, but they already have the pipes for gas. So probably cheaper for them to do biomethane.

However, in France, you get a different benefit. If you install a heat pump, you get air conditioning. And most of those homes don't have air conditioning. So in France, there's a movement for heat pumps, not so much because it improves the quality of heating, but it's hot in the summer, they kind of want the air conditioning you get for free. You also get the benefits of avoiding Russian gas, that kind of thing. So the motivation between a Texas new building versus old building, Vermont new building, old building versus France will be kind of different based on what you already have.

Doug Lewin

So, let's talk about Texas a little bit more since we're focused on Energy Capital on Texas. I think there's, a lot of the heat, no pun intended, in these discussions is around electrifying everything and converting from gas to electric, and that's its own conversation, but let's set that aside for one second.

We are more than 60% electric heat in Texas. So as somebody's HVAC is breaking and they're considering a replacement, a heat pump that has that cold weather rating, which like you said, will cost a little bit more. And you've said this before too, but I wanna just drill into it a little bit more. This is the place where policy comes in because it is a clear market failure in the sense that to the individual homeowner, if you just let the free market, and I'm generally a free market guy, I do believe in the Texas competitive electric market, I believe markets are very powerful to drive change and to improve lives and all that stuff. But there are places where it just doesn't work because the incentives don't line up. Me as a homeowner, like you were just saying, it's just cheaper for me just to have that heat pump down to 32 and let resistance heat do the rest. Well, if I do that, I'm now using four times as much in my home as I am on a hundred degree day and just leaving it to ERCOT and power generators to figure out how to supply that 15kW. How did that turn out for us during Winter Storm Uri? And, and even if you do figure it out, it's expensive and now I'm leaving it to everybody else to pay that. That doesn't mean I'm a bad person for making that decision. I'm making a logical financial decision. It’s cheaper for me to pay the 200 bucks. So that's where government comes in and, and the utility programs can come in. The Inflation Reduction Act can come in and close that gap down to zero to make that decision easy for people. Is that, does that all make sense or did I miss something in there?

Michael Webber

No, no, I think you got exactly right because there's this mismatch in economics speak and I'm not an economist so I might get this wrong. It's really called like mixed agency or you have an agency problem The people who are making a decision about what to pay are not the only people who are affected by that decision. This happens a lot with landlords where landlord has to pay for the new water heater, but it's the tenant that has to pay the electric bill for the water heater. And so the landlord doesn't want to pay for a $3,000 water heater that's better, when you can pay for a thousand dollar one. They don't care because it’s someone else. So there's a mismatch.

When you're doing your resistance heating tape, you're not really fully aware of all the costs you're imposing on the system. Because it's not directly exposing. It might show up to you indirectly later on, blend it into your bill in a way that's hard to decipher. So maybe your bill's $10 more a month for many months in the future because of that. But that's hard to anticipate or know or even decipher once you get there. And so that's part of the system cost problem.

The other thing I'll say is with a heat pump, if you get down to 30 degrees Fahrenheit, whatever, your electricity's 10 cents per kilowatt hour, say at home. That's not that big a deal. But if you're turning on that resistance heating tape below freezing, usually that's a time when it's really cold and electric prices are really high. So you're paying 10 cents a kilowatt hour at that time because you're on a residential rate. But the actual cost in the system is more like several dollars per kilowatt hour, which means someone's paying that, which might be you indirectly at some point or industrial customers or someone.

And so we're not exposed to how steeply the price is increasing. The more you're using resistance heating, the more likely the prices are to be higher than normal. So there's a great non-linearity that happens or exponential rate increase. And you're not exposed to that. So that's a real problem. If you're, you don't see any benefit for doing the better thing, other people are bearing the cost of you having made that choice. That's a great place for policy to rectify this market failure, either putting the full price on the system onto you with that decision or whatever it is or doing low cost loans or incentives to just install a better system because there's some system benefit to it.

This, I mean, the market fails in many ways on this. Part of it is because we have mixed timelines. The power plant has a 50 year timeline or maybe 25 year timeline if it's solar wind. Your HVAC system has a 10 to 20 year timeline. You're making a decision in the next 10 minutes because it just broke and the technician's there and you gotta decide. So there's operational decisions in a crisis in minutes. Heating, cooling over days or seasons, asset life's mixed from one decade to five. It's hard to make that all bridge together in one market.

Doug Lewin

Yeah, and I think that almost ironically, those that are just sort of like ultra-fanatical and religious about markets end up doing damage to them because if you just have that small help to the consumer to make that right choice, then the market has a better chance of actually functioning and working. It's just too much to put on the market to create that really expensive power in those times of scarcity for the 4 million homes that have resistance heat. It's just, it's too much to put on the market. You can, you can, it's like a release valve, right? It's like, just let some of that pressure out so the market can work.

Michael Webber

It is so hard, and ERCOT doesn't know who's got what, right? So they can't see beyond our meter and know what we have, and they also don't know how we're gonna behave. They can do some models, this kind of thing. And if you look in the past, they really under-predicted what the demand was gonna be when it was cold, because probably they don't see how many of us have these resistance heaters.

And so people yelled at ERCOT, hey, you need to improve your modeling to account for all the resistance heating that kicks in when it gets really cold. So then ERCOT did update a modeling that showed the demand was gonna be much higher than it really was.

And so it's easy to be wrong where you're too low, or easy to be wrong where you're too high. And I'm very sympathetic to ERCOT, because I don't know how you model this thing where you don't have the data or can't see it. But that's part of the lack of transparency. They don't know what we have. But also there's human behaviors involved behind the meter. And it might be, they were correct with the high estimate of 85 gigawatts of load. And we all saw that and thought, holy crap, I'll do my part. Who knew, maybe we responded behaviorally, we don't know, right? So it might be everyone's bad at projections or might be we are responding to correct projections and therefore the projection gets adjusted. We don't really know, but it’s the, resistance heaters just make it harder because it's such a big load that kicks in all of a sudden and it’s invisible to ERCOT until it's already happened.

Doug Lewin

You know, so there's two more things I want to talk about before we end. And one is you talked earlier about one of the things that'll be different, you know, a decade from now as they'll be, you know, you hope and predict, there'll be more sort of retail competition. You talked about more distributed generation and solar. I think one way this could go is we could start to see sort of markets for dispatchable, dispatchability and flexibility. Flexibility markets would be one thing you call them on the distribution side. And if you actually have markets for that, you can start to see, you just said, ERCOT doesn't know what's going on beyond the meter. If there are markets where people could be paid to reduce, right? Then you start to see how much are you using, how much are you reducing, and the retailers can start to see, they already have some awareness of this, obviously already, but I don't think it's very granular, who's got that really inefficient heat that maybe I can target some incentive to help. And by the way, that's gonna make them more comfortable. It's gonna lower their bill. And they can always say no, that's how markets work. It's voluntary. You wanna pay a higher bill and be less comfortable? Have at it, freedom, right? Great. But if you wanna participate in this market, here's the potential to get paid for that flexibility. And you wrote a great op-ed in the New York Times about how Texas has these very advanced systems for paying large users, steel mills, Bitcoin miners, big box stores, but really hardly any on the residential side. How do you see that kind of playing out? Is it, I mean, it's kind of opaque, it's hard to tell, but is it just retailers offering more products and services, some of these upstarts in Texas like Tesla and Octopus, David Energy and Ohm Connect, the list goes on.

Or do we need some kind of more organized market where buyers and sellers can find each other on the distribution side? Or is it something else entirely I haven't thought of yet?

Michael Webber

I don't know and I'm surprised it hasn't happened yet in many ways. We do have retail competition in many parts of Texas where you can choose who your retailer is. So we have that level of competition. And there was some market innovation within that where people for a while used to do free nights and weekends or lower rates or different things or lower overall rate. You're exposed to the market volatility and that really caused some people to lose a lot of money and go bankrupt. So there was some market innovation, but not a lot. And it was mostly just competing by brand loyalty and fidelity. Do you like my company’s logo or do you like me or not.

So there's some competition, but not a lot of competition. And that competition is mostly on who is sending you the bill for the electrons you got, maybe some differentiation of whether it's green choice or clean energy or that kind of thing. But I feel like there's more, and I just can't explain why there isn't more aggressive competition there. I think the next piece, and this makes a lot of people, now when I say that, especially distribution utilities, is to open up the distribution wires and poles the way we've opened up the transmission wires and poles.

So when deregulation happened before that, it was integrated. A power company would own the power plant, the transmission lines, the distribution lines, and then they would own sort of the retail customer. But they broke that up. So now there's competition at the front of the wire. It's regulated for the wire, moving it from the power plant to the customer. Then you can choose who your retailer is. But we haven't done that kind of opening up of the distribution service areas. Think of the different parts of Texas where there's owners of the wires where I can participate. And over these wires, I could sell my electrons to my neighbor. I'm going to be out of town for a month. I got solar panels, boy, I'd sure love to sell that power either to my neighbor or local utility or whatever it is.

So those kinds of peer-to-peer markets or those distribution level markets don't happen. And it might take regulation to do that where those wires become common carriers. Think of like what happened with AT&T where AT&T had to open up its wires for telecom in the eighties and all of a sudden you had Sprint and T-Mobile, a bunch of other companies popped up, so we have more choices and that drove down the cost of long distance. Same kind of thing happened, but I think there might have to be some opening up of who owns the distribution, not just the transmission. How do you make that accessible to everybody? And how do you let even individuals participate? Then you get some more innovations that will happen then. And because there are a lot of people like, well, yeah, I'll put a battery in my basement if I can sell it to my neighbor in the summers when I'm in Colorado or something like that. You might get more active participation that way.

Doug Lewin

Yeah, there's obviously more resistance than openness to that from what I've heard…

Michael Webber

Yeah.

Doug Lewin

…in the transmission distribution utility world, but I think there's starting to be a little opening there partially because the utilities are understanding how big this challenge is,

Michael Webber

Yes.

Doug Lewin

… and they also live in these communities and see the reliability problems and see the cost going up. And I think there's becoming more of an openness. I think the other thing, Michael, the reason why there might be some openness to that is because there is such demand growth happening from electrification of transportation, new things like hydrogen or industrial heat being electrified. Their growth opportunities are so much that I think some of that, maybe somebody else is doing some of the smaller stuff, doesn't scare them as much as it once did. That's my hope anyway.

Michael Webber

Right, me too. So we'll see, yeah, we'll see how it goes. But I think there'll be some changes there. And we talked about distributed generation. If you have distribution level markets, it'll be easier for people to invest in distributed generation at their home. And you can kind of get to there with net metering, but net metering is a partial solution, but that's not quite a competitive market in the distribution level.

Doug Lewin

I got to ask you just one more thing, and this is kind of just a 90 degree turn, but I tried to loop it together there with the electrification piece. I don't know. It wasn't very elegant, but maybe I connected it, is hydrogen. You said earlier that one thing you think is wrong is that hydrogen will forever require subsidies. So you think hydrogen's coming down the cost curve pretty fast. I know you've done a lot of work on hydrogen and you're doing some work now right on some of these natural seams that exist for hydrogen. You think this kind of big thing.

Talk a little bit about where you think hydrogen's going. Maybe just talk a little bit about the difference between what is commonly called green and blue hydrogen, and there's other kinds too. But what do you think is most promising? Why do you think it's not gonna need the subsidy? And how much are these natural seams gonna play a part?

Michael Webber

If you talk to the companies that make hydrogen, they're happy to have the subsidies, frankly, right? Who doesn't like to be paid extra for the thing they're already gonna do? And the reason why I think hydrogen will eventually not need subsidies is just like all the other industries that might've received subsidies for a while. Once they develop maturity and a more robust supply chain, costs come down with learning. And hydrogen can be done at a variety of scales, small scale or large scale. We'll just do a lot of it, and as you do, more costs will come down.

The ways you can make it include electrolysis using electricity to split water to get the hydrogen out. Some people call that green hydrogen, especially if it uses like wind or solar. You can use nuclear electricity or geothermal, whatever clean electron you want to split the water. You can use steam methane reforming with carbon capture. We start with methane, convert it into hydrogen in a synonymous carbon wave, you have carbon capture. And if your methane system is not leaky, you can also do pyrolysis. We start with methane and then you use plasma or catalyst or some sort to strip out the carbon. You get the hydrogen, but there's no CO2, you just get carbon black. And that carbon black can be used for graphite or solar memos, that kind of thing.

And pyrolysis looks really efficient and clean and lets you leverage existing infrastructure like natural gas pipelines, that kind of thing. So that's really interesting. There's photolysis and photobiological techniques and photoelectric techniques. My father looked at photodiodes to get hydrogen with xenon lamps out of water in the 1980s, as a chemistry professor, there's just a lot of pathways.

And the one you mentioned is natural hydrogen or geological hydrogen. There are places where the Earth makes it. You can make hydrogen by reacting water with iron rich or magnesium rich rocks under the right conditions. And we have those kinds of conditions many places around the world. And then you just have to extract the hydrogen from the Earth or capture it from these seams. And then it doesn't take all this natural gas or electricity to get it. And so it ends up being cleaner and cheaper and less water intensive and doesn't impact the land. It just looks like there's a lot of it, and that's gonna drive down the cost a lot.

So there's some surprises on the horizons, and the headlines are really focused on electrolysis, but we just wanna remind people there's a lot of ways to make hydrogen. The markets haven't chosen the winner, and the winner might look a whole lot better in the future than it does today. It reminds me a little bit of where we were with computers in the 1990s, where every year computers got cheaper and better.

So it actually became a problem. Like I used to buy computers for my research at grad school. I could buy a $1,500 computer, or if I waited six months, I could get a $1,500 computer that was like 50% faster. And this happened like every six months.

I feel like we're entering one of those curves for batteries. We've been on that curve for batteries for maybe a few years, but we're about to enter that curve for hydrogen where every six months or year, it'll be a little bit better and prices might come down. And eventually that means the subsidies really aren't necessary. Maybe they're good to get the industry started. And I would say, as long as you let other people pollute for free, you got to do the subsidy, bring it into balance. I think that won't be necessary at some point.

Doug Lewin

What do you think hydrogen is mostly gonna be used for and what do you think it's not gonna be used for?

Michael Webber

I think hydrogen will be used primarily as a building block for high value chemicals like fertilizer. And I think we might want more fertilizer and if we use more fertilizer, we might need less other forms of energy to reap our crops and protect our foods and refrigerate and that kind of thing. So I think we'll have more agrochemicals and hopefully not the kind that are cancer causing and that kind of thing, but the kind that help us lead to food abundance.

I think we'll use hydrogen as a building block for things that are hard to electrify like aviation fuels, for like long haul aviation, short haul aviation maybe we can electrify. Probably for marine fuels, and that might be ammonia or methanol or something like that we might build from hydrogen. You can also get there from alcohols by the way, if you ferment bio matter, you might be able to get to the jet fuels or marine fuels. And then industrial heat, there's certain applications where you need high temperature heat, where we burn gas today, burning hydrogen instead would be better. Some of the industrial processes can be electrified, but a lot of them just want heat. So that might be hard to get there with a heat pump, for example.

And then maybe for long haul, heavy duty trucking, I mean, there's a battle right now between electricity and hydrogen, or not necessarily hydrogen, but hydrogen as a building block for diesel. Long haul trucking might be another place where hydrogen is valuable.

So, there are a few places outside of the power sector, but then the power sector, hydrogen itself might be a good backup fuel because you can store it more easily than a battery for long duration. And I think that's a pretty good use of hydrogen. I wouldn't want to use hydrogen for around the clock operation of the power sector, but there are episodes where it's neither windy nor sunny where it'd be nice to have a power plant that you could turn on. So I think that will be either backup or peaking times for reliability purposes in the grid. So that's it. I mean, I think, I don't think it'll be light to any vehicles and I don't think it'd be home heating. I think a lot of things hydrogen won't do.

Doug Lewin

Yeah, and with that backup piece, you can actually make the hydrogen with the wind and solar when it's abundant and then use it when the wind and solar is not.

Michael Webber

Yeah, yeah. Especially for island communities where it's so expensive to bring in diesel that they have abundant sunshine or wind, they would use electricity to make a storable form of electricity, say, with hydrogen, that they can then use to make power later on.

Doug Lewin

I know I said that was going to be the last thing, but when you said island communities, I have to ask you about interconnecting ERCOT. You've talked about this a lot. We need to interconnect. This will be the last question, I promise. I need to let you go. But yeah, we got to talk about that. Do we need to interconnect, Michael?

Michael Webber

I mean, yes, if we interconnect, it will make us money, it will save us money, it will reduce pollution, and it will improve reliability. Like it's the most obvious kind of thing we need to do. And this is where Texas jingoism and nativism and patriotism gets in our way, where we don't wanna do it because we don't wanna deal with the feds or something like that. But we deal with the feds for natural gas exports, liquefied natural gas exports, crude oil exports, refined oil exports, wood pellet exports, you name it. We deal with the feds for a lot of exports of energy because it makes us so much money.

So we're willing to deal with the tedium of federal regulators if it makes us money. But for some reason, we decided, well, we're not going to do it for electrons. We don't want to make billions of dollars a year. We don't want to save billions of dollars a year for consumers. We don't make landowners royalties. And we don't want to improve the reliability grid because we'd rather just build gas plants here. But if all we did was build gas plants here, which is the preferred policy solution in Texas, that will be much more expensive and dirtier. And we sort of cut off our ability to export a lot of clean wind and solar to other states who would like it but can't build it. Like California is running out of room to build stuff. They would love to import solar wind from Texas. So I just think it's silly that we haven't done it. I know there are groups trying to do it with DC ties, different, like Grid United and other people are trying to do projects to do these interconnections. It's a great idea. I'm really amazed we're taking this long to make this much money.

Doug Lewin

Michael, thank you so much for doing this. Anything you wanted to say that you didn't get a chance to, and also where can people find you on social media or the web, your books.

Michael Webber

Yeah, regrettably, I'm very active on Twitter and LinkedIn and just my research group at UT is WebberEnergyGroup.com and I'm also at Energy Impact Partners and there are a lot of ways to find me. My email is pretty easy to find, so send me a note.

Really appreciate the conversation with you. You've become really one of the important thought leaders in this space. And despite it all, we end up often at the right answers in Texas, even if it doesn't look like we're going to get there. But we're kind of making our way towards the right answer, which is good news.

Doug Lewin

We take strange paths, but we sometimes end up in the right place. Michael, thank you so much. Appreciate it.

Michael Webber

Thank you.

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Interview with Energy Expert Dr. Michael Webber

Energy Capital Podcast (private feed for maxwang1990@126.com)