Texas’s new era of electricity demand is forcing policymakers to walk an unprecedented tightrope.

The state has to keep the lights on – and it has to make sure that Texans can afford to do so..

Massive load growth from data centers, population, and electrification is teeing up existential questions for the ERCOT grid. How do we build what we need without overbuilding? And how do we avoid burdening households with costs that businesses and large users should be paying?

Those questions framed our latest Energy Capital roundtable with Matt Boms and Dr. Joshua Rhodes.

Why bills are rising faster than people expect

Utilities across the country are planning massive infrastructure investments over the next several years, and Texas is leading the way. Between new generation, transmission, and distribution upgrades, the price tag for this growth is substantial.

Texas has covered recent load growth primarily with a mix of solar, wind and batteries. Some state leaders have prioritized new gas plants as well, though capital costs for these facilities has more than doubled in some cases, even as wait lists for turbines have grown.

At the same time, transmission and distribution companies are filing rate cases tied to resiliency, reliability, and growth. Those investments often show up in rates years before customers see any economic benefit from load growth.

What’s driving costs matters more than ever

As large new loads, especially data centers, request connection to the grid, the question of who pays becomes unavoidable.

The basic principle is simple: if infrastructure is built for a specific customer, that customer should bear the cost. If infrastructure provides broad system value, then costs should be shared. Problems arise when all customers pay for expensive upgrades to cover loads that may be temporary or never fully materialize – especially with transformers, substations, and core hardware now costing multiples more than they did just a few years ago.

Without guardrails, Texas risks building expensive infrastructure that everyone pays for, even if demand disappears for the energy that infrastructure is meant to support.

Underused tools

There are ways to blunt this load-growth pressure.

Distributed energy resources (i.e. community power or local power), demand response, and energy waste reduction can reduce peak demand and delay or avoid costly grid upgrades. In many cases, these solutions are faster and cheaper than traditional investments in poles and wires.

Analyses show that even modest levels of community power can save ratepayers meaningful amounts of money by deferring transmission and distribution spending while also delivering wholesale market value.

One way or another, decisions made in upcoming utility rate cases will lock in costs for decades.

Grid growth is real. Infrastructure costs are rising. Ignoring either won’t protect customers. The state must align costs with the parties driving them, wringing out value from lower-cost flexibility strategies before committing to the most expensive build-outs.

If Texas effectively walks the line between affordability and reliability, this period of load growth can strengthen the grid without punishing Texans who rely on it.

Timestamps

* 00:06 – Rising Costs, Rising Stakes

* 01:17 – Load Growth and System Pressure

* 03:16 – Gas Dependence and Fuel Risk

* 06:21 – New Generation Costs and Competition

* 07:05 – Oncor Rate Case, $830M Request

* 08:27 – Who Pays, ERCOT vs Other States

* 12:08 – Driveway vs Highway Cost Test

* 15:33 – Capital Bias and Regulatory Incentives

* 18:49 – Avoiding Rate Shock, Role of DERs

* 24:07 – Higher Prices, Solar Payback Effect

* 34:12 – Missing Price Signals in Distribution

* 37:05 – Final Takeaways and Wrap

Resources

Hosts Platforms

* Texas Energy & Power - LinkedIn, Twitter (X), and Bluesky

* Micalah Spenrath - LinkedIn

* Matt Boms - LinkedIn

* Texas Advanced Energy Business Alliance (TAEBA) - LinkedIn

* Joshua Rhodes - LinkedIn

* IdeaSmiths

* Webber Energy Group, UT Austin

Company & Industry News

* Electricity rate hikes slash commercial solar payback periods by 33%, says Wood Mackenzie (pv magazine USA)

* Rising retail rates are accelerating commercial solar payback periods (Wood Mackenzie)

* The Value of Integrating Distributed Energy Resources in Texas (Advanced Energy United)

* TAEBA news page, DER study links (Texas Advanced Energy Business Alliance)

* CenterPoint raises 10-year spending plan to $65.5B (Reuters)

Related Podcasts by TEAP

* More Power that’s Faster and Fairer, Roundtable Discussion (TEAP)

* Why Are Utility Bills Rising So Fast? (Powerlines) (TEAP)

* Distributed Energy Resources and all-of-the-above energy solutions (TEAP)

* Texas’ Load Growth Challenges, And Opportunities (TEAP)

* Texas Needs a Vision for Customer-Side Solutions (TEAP)

* Where the Grid Goes from Here, Reading and Podcast Picks (TEAP)

Transcript

Micalah Spenrath (00:05.55)

Hi everybody and welcome back to the Energy Capital podcast. I’m your host, Makayla, and I’m joined by Josh Rhodes and Matt Bonds. We are at an interesting place in the energy transition. Energy costs are rising. Utilities are planning to spend trillions of dollars across the country to keep up with rising energy demand. And at the heart of these macro trends is us, the consumers, the payers of electricity bills. So that raises a question. How do we build the grid that we need today?

Micalah Spenrath (00:34.868)

and tomorrow without overbuilding it or pricing people out. I’d like to dig into what’s driving energy costs, where utilities are planning to spend those billions and trillions of dollars, and how we can modernize the grid in a way that’s reliable, efficient, and still affordable. So setting the stage, demand for energy is rising, outpacing traditional energy system planning frameworks and timelines, and utilities are in the middle. Challenge with meeting that demand and keeping costs.

Micalah Spenrath (01:03.778)

to consumers reasonable. So starting with the primary question, what is the primary driver of these increased energy costs in Texas or nationally?

Joshua Rhodes (01:17.038)

You know, there’s just this massive growth in electricity. There’s like a lot of things kind of coming together, kind of been kind of a perfect storm here, right? It’s like one across, you know, the US electricity growth has been flat. It’s been growing in Texas. Texas has been an exception to other places. I mean, really demand growth has been kind of flat, right? And managing a system that is just kind of going from day to day, not really changing is much different than managing a system that’s growing. The amount of inputs you need to that are just different.

Joshua Rhodes (01:46.734)

A lot of the utility spending and buying has been responding to storms or just replacing things kind of at the end of their life, but not really building for growth. And that’s just a different mindset. The big topic right now is like data centers and like all this other kind of stuff driving up demand. But I mean, even before this, 2022, 2023, before we taught the internet how to talk to us, we were already expecting.

Joshua Rhodes (02:11.532)

electricity used to go up, right? We were already looking at electrification of buildings and electrification of transportation and kind of reshoring of like, you know, manufacturing and all this other kind of stuff. I mean, we’re already looking at a lot of that, but then AI is here, you know, among us and demand is going up. There’s still hangovers from like, you know, COVID supply chain. Surprisingly, it’s really like at the same time that we’re looking to grow everything that we need to buy to facilitate that now costs like way more than it did five years ago. It’s kind of a perfect storm.

Joshua Rhodes (02:41.518)

Onomat, you got any extra thoughts?

Matt Boms (02:43.66)

I think Josh said it perfectly. The pie is getting bigger for everyone, right? Everything’s getting more expensive. We’ve got supply chain issues. And at the same time, I feel like we’re in the best possible place to meet all of this load growth. Michaela, you know I’m a glass heffal kind of guy. And I tend to think that where else would you rather be living and working when it comes to which market is best positioned to meet all of this load? And I think we’re seeing the answer play out in front of our eyes with all the action that’s happening in ERCOT, right? That’s true.

Matt Boms (03:11.362)

So yeah, I’m feeling more optimistic by the day. think it’s a huge challenge, but I think we’ll be able to meet it.

Joshua Rhodes (03:16.216)

some other interesting things in there. As I was thinking about what types of fuels and things like that that we’re going to use to meet this electricity sector growth. I think if you look at the interconnection queue, we’re going to build a lot of solar and storage, or what is like chock full there. we have gigawatts of natural gas in that queue as well. And long term, ERCOT’s gotten about 45 % of electricity from natural gas. I mean, there is pressure on natural gas prices, right? mean, they fluctuate.

Joshua Rhodes (03:45.55)

We’re going to export more from LNG and like how associated gas production is dependent on the price of oil and like all these other kinds of things. know, natural gas can be volatile in terms of its fuel price, which we saw in 2022 in Russia invaded Ukraine, natural gas prices tripled over two years. They tripled. And then two years, they came back down. It doesn’t mean that some other shock couldn’t do that as well. And 25 years ago, there was first generation tech bubble. thought we were going to be building a bunch of data centers for, you know, pets.com and

Joshua Rhodes (04:15.586)

what the original tech bubble that was out there and through efficiencies and switching to cloud and like a whole bunch of other things that demand growth really didn’t materialize. And there were utilities and builders of natural gas turbines and things like that, that kind of over invested, overbuilt and kind of got burned in that space. And I think there’s a bit more discipline right now in terms of, okay, we see the growth, maybe we’ll output of this factory by 20%, but we’re not going to increase it by 120 % or something like that, right? I think there’s some kind of

Joshua Rhodes (04:45.016)

things going there. And just, it made me also think of back in the seventies, even going further back, we actually used a lot of oil to generate electricity. And then we had the energy crises of the 1970s that kind of got us off of using oil for electricity because oil got super volatile. I don’t know. It just makes me think, could that be something that happens in gas too? I mean, probably not in the near term, but long-term it could be interesting to watch.

Micalah Spenrath (05:10.742)

Yeah, I think the word that stuck out to me there was discipline. So I think disciplined utility spending is music to my ears. So hopefully, hopefully we will implement some of the lessons learned from the 70s and prior. So for me, from what I’ve been seeing, a primary driver to increased energy costs nationally, but also Texas, is that

Micalah Spenrath (05:34.58)

utilities are leaning into natural gas in order to meet some of that demand. And as you noted, there’s fuel costs associated with that. There’s higher operating costs associated with that as compared to some of the other technologies at our disposal. So I think it’s really interesting to see that natural gas is still playing a very large role in utility strategies, even though the cost of natural gas is increasing. So that’s based on EIA data. So I think that’s part of it, right? And then I think another

Micalah Spenrath (06:04.12)

contributor to increased prices is barriers to low-cost energy deployment, whether that be market-driven or policy-driven. So if we don’t have as many low-cost electrons on the grid, you’re going to be spending more on things like natural gas. So that’s definitely going to drive up prices as well.

Joshua Rhodes (06:21.23)

Even like the costs for the gas power plants are up, right? When we do grid modeling, we used to do like a thousand bucks a kilowatt, right? That was like our thing for like a natural gas combined cycle. then somewhere now between, you know, 2,500 and 4,500, depending on which study you’re looking at. And does that include new pipeline infrastructure and all this other kind of stuff? Which is interesting because we did a study last year or two years ago that looked at how cheap does nuclear have to get versus when it becomes competitive in like a unbundled or deregulated kind of market.

Joshua Rhodes (06:51.84)

If we’re at 4,500 bucks per kilowatt for like combined cycle, that’s about where it started to look really competitive, which is just interesting to note. We’ll see, like, you know, do people think those are long-term prices or whatever? It is an interesting point.

Micalah Spenrath (07:05.122)

Yeah,

Micalah Spenrath (07:05.482)

okay. Continuing on, so looking a little bit deeper into utility spending. So as I mentioned, utilities are planning to spend trillions of dollars across the nation through 2030. And much of this investment is to expand capacity, modernize the grid and infrastructure, and then also respond to demand growth. So bringing it closer to home, looking at Encore in Texas, Encore recommended their revenues be increased by approximately, I think it was like eight

Micalah Spenrath (07:33.998)

$130 million or something like that, looking at about a 13 % increase over their current annualized revenues, which is a lot. That proposal can translate into meaningful bill increases for customers if regulators ultimately approve them. We haven’t found out the results of that just yet, but what they’re looking at primarily is resiliency and reliability projects and really infrastructure build out, which is not a surprise given the cost of service regulatory model we have in Texas.

Micalah Spenrath (08:04.226)

So when we talk about utilities needing to invest all of these billions of dollars, millions and billions of dollars, what types of projects are truly necessary for reliability and what might be deferred or approached differently? Simply put, are utilities investing in the right places in order to meet demand but also meet responsible costs for consumers?

Matt Boms (08:27.162)

I’ll take a stab at that Josh. My feeling on that Michaela is most people just want to know who’s left holding the bag. Who’s going to end up paying for all of this? Like if we were in a house state affairs hearing and chairman Todd Hunter were asking us questions, the first thing he would ask us is who’s ultimately paying for this? And that’s again, like bringing it back to Texas. That’s where we’re lucky that our utilities are just transmission and distribution and they’re not generators. So going back to the gas projects that are being built.

Matt Boms (08:56.556)

That’s happening all across the country with vertically integrated utilities who ultimately they’ll build the plant, they’ll own the plant, they’ll put them to the right base and they’ll get the guaranteed return on the gas plant, right? Regardless of what happens next, we know what the steps are, it’s predetermined, right? Versus in ERCOT, the company that builds the plant puts themselves at risk because they’re bidding into the market, right? So we’ve got a great market-based system where...

Matt Boms (09:21.824)

In my view, we can have that conversation on transmission and distribution infrastructure and what we need to meet all the load. at least when it comes to what I’m seeing, what I’m hearing from folks in other states is a whole lot of construction that may or may not be worth it for ratepayers. So that’s at least one thing that I’m grateful for working in Texas, in Urquhart specifically.

Joshua Rhodes (09:41.888)

Yeah, I think the national numbers are just some of the reading we’re doing before. It’s something like almost 71 billion in rate increases between now and 2028, like across the country. Like it’s not a little bit of money, right? I’m curious what the number would have been five years ago before all of this. this triple that or double that or is it similar magnitude? I don’t know. We’re just paying more attention to it lately. Some of these companies are starting to come out with like plans for this, which I think a lot of the big tech companies, now that they’re moving into hard infrastructure.

Joshua Rhodes (10:11.64)

They just didn’t really know how to deal with that. Like when you’re doing software and you’re dealing with a different kind of use case than you are for like grid infrastructure, sunk costs, fixed costs, things that other people are kind of paying for and kind of the whole Silicon Valley ethos of move fast and break things, you know, doesn’t work super great in the utility space, right? Whether that’s electricity or water or other types of things. And so, mean, there’s been some interesting stuff like, I think Microsoft recently came out with community first plan for like data centers that they’re going to

Joshua Rhodes (10:40.866)

shoulder a whole lot more of the cost and not ask for some of these tax abatement programs that maybe exist in certain regions, which is really interesting. I’ve been saying things like if these companies have buckets of money, let them spend it. And so maybe they sounds like starting to do some of that, but it’s been interesting, probably like, you know, working through that regulatory structure, right? It’s like, this is probably the first time that companies have come in, been willing to do that, or at least got to the point where they’ve been willing to do that, right? Just because of how fast they want to move and all this kind of stuff. So, I mean, I think it’s a really interesting.

Joshua Rhodes (11:10.638)

model that may start working, particularly in some of the regulated parts of the state. Now I talking about we are unbundled and we have deregulation in most of the state, but there’s some parts of the state that don’t. I think there’s a story just yesterday or that I read just yesterday talking about that Metta is going to pay for a brand new gas plant in the El Paso electric region, which is a regulated area. I swear it up and down that they’re going to pay for the whole cost because it’s all going to go to support a data center. I think it’s a 366 megawatt gas plant.

Joshua Rhodes (11:40.044)

and about there. So that’s an interesting thing because there’s a lot of competitive in Texas, but there’s still the non-optin entities, the non-ERCOT parts of the state, whether that’s in the far west, the panhandle, or the eastern or the far eastern part of the state. And then we’ve got these transmission and generate co-ops and other types of things like that. So there’s a big portion of the state that some of that thinking might be able to work its way into. mean, the majority of the power is in the deregulated competitive area, but there’s a good chunk of it that’s not.

Micalah Spenrath (12:08.354)

Yeah,

Micalah Spenrath (12:08.744)

I think what you said was Microsoft and their proposal to pay for the infrastructure that they are incurring. It just reminds me of conversations that we had at the Public Utility Commission of Texas, right? So driveway costs versus highway costs. Yeah. So I think many people understand the concept of if this is your driveway and it’s dedicated to you for your use, you should pay for it. Yeah. If it’s going to be something that all of us are using, then feel free to socialize those costs.

Micalah Spenrath (12:37.944)

but you don’t wanna have rate payers paying for something that they’re not gonna be benefiting from. So if that natural gas plant in El Paso is dedicated to this data center, then I think it makes common sense that Microsoft should pay for it. Although many people might interpret that as an act of goodwill, I interpret that as just aligning with cost causation principles. So it’ll be interesting to see if the community side of things evolves beyond that.

Micalah Spenrath (13:07.342)

or if it doesn’t. So I suppose we’ll see.

Joshua Rhodes (13:10.838)

Yeah, it’s an interesting, I think it’s Meta, the one on Microsoft and El Paso one, but it will be interesting to see like if some of those principles can also work their way into the competitive part of the state, right? I think there are some mechanisms. I may have talked about this in our last round table and I know I’ve talked to a bunch of folks around it, but like there’s this principle of how infrastructure is paid for in the Alberta system operators. Alberta is like the Texas of Canada, right? It really is. It is kind of uncanny in a lot of different ways, but they do this for generators and we can do this for load.

Joshua Rhodes (13:40.014)

New generators have to pay for like the cost upgrades that go into the system to be able to deliver that power. But then they’re paid back over time. So the generators pay for the driveway and the highway, but then they’re paid back for the highway over time if they exist over a long period of time and provide the market benefit that existing in that system does. And so, right, think some of the concerns, if some of this AI, you know, stuff turns out to be bubble-ish or

Joshua Rhodes (14:06.542)

partial bubble or whatever that like we build out all this infrastructure and then there’s no one there, you know, using that infrastructure or consuming that power that would pay for that infrastructure. And then right payers get left, you know, everyone else gets left holding the bag for that, right? If Matt was, was talking about, I mean, I think we could do something similar. It’s like right now in ERCOT, we just make you pay for the driveway, but we could make you pay for the driveway and highway and then pay you back for the highway over time. Put that up to load if you exist for 10, 15 years, whatever it takes.

Joshua Rhodes (14:36.236)

to pay that infrastructure cost back. And then if you are a bubble, if you’re gone in two years, then you defer the other 13 years worth of payment or something like that. And we’re not left holding the bag, right? So I think there are some mechanisms. I think they’re clear in like the regulated space, even in the deregulated space. I think we could do some learnings from other regions.

Matt Boms (14:54.518)

Yeah, it would be a good, interesting solution because under that scenario, Josh, you would take away some of the risk from the investors. ERCOT is completely dependent on those investors. And like you said, if it is a bubble, then you lose them, right? Right. Versus a middle ground. You don’t want to go to vertically integrated because then, the rate payer is paying for that drive. That drive is going to get turned into a highway or will pretend that it’s a highway, even though it’s really just a driveway.

Joshua Rhodes (15:21.73)

Five lane driveway, yeah.

Matt Boms (15:23.042)

Yeah, so you’d want some middle ground where the investment doesn’t dry up, but at the same time, you give it the value it deserves instead of prepaying and assuming that there’s some value there.

Joshua Rhodes (15:32.471)

for

Joshua Rhodes (15:32.646)

sure.

Micalah Spenrath (15:33.282)

This might be a hot potato of a question. if it is just. Many utilities are referencing historic load growth as justification for their historic spending, primarily pointing the finger at large loads and data centers. My question is, is this truly a new constraint that utilities are facing or does it largely and perhaps conveniently fit within the traditional utility model that prioritizes capital investment?

Micalah Spenrath (16:02.616)

So basically like, are utilities just doing what they’ve always done in that they’re spending on capital because that’s what they get a rate of return on and they’re just using data centers as a convenient justification for that? Or is this genuinely something that is catapulting them into a whole new order of magnitude of spending? I hope that’s not too controversial.

Matt Boms (16:25.706)

No, I don’t think so. I think that the answer is always somewhere in the middle because they’ve already been spending about $9 billion a year on poles and wires in Texas, right? And that’s roughly $5 billion on distribution, $4 billion on transmission. So you add that up, that’s $80 billion over the past 10 years. And that was all without the load growth that we’re seeing now. So the nature of utilities is to build because that’s what we’ve asked them to do in ERCOT. The shareholders want more capital expenditure, so you can’t blame them for

Matt Boms (16:55.224)

doing their job well. And I’ll let Josh answer the more difficult question, which is like how much of that is reasonable?

Joshua Rhodes (17:01.87)

Yeah, I mean the engineering answer it depends right but like I think there’s two camps on this right is one was like well the load growth will come and they’ll take care of all of that and a lot of people point to like that LBNL study that looked at like historically how you know electricity costs have maybe not risen as fast in places that have had low growth versus those that haven’t. There’s always a danger of saying this time is different but there are some flags that kind of this time is a little bit different in terms of the low growth is just much faster than we’ve done in the past. I mean I think it does come back to like

Joshua Rhodes (17:31.434)

Everything that we need to buy from the poles, the wires, the transformers, the conductors, everything, the power plants, everything that we need to buy cost way more than it did five years ago. mean, if you got mad about inflation on the cost of eggs, you should look at pad mount transformers in terms of how much more expensive they are. CPI on eggs is like 10 % and people were like in the streets, right? The inflation on like transformers is 200%.

Joshua Rhodes (17:56.44)

You know, those green boxes that are like out in your neighborhood or the cans that are mounted on poles and then all the way up into like the big pieces of equipment that, know, step voltage and things like up and down on the transmission system and, and other parts. mean, all that costs more money. And so it’s like, if all that didn’t cost double, triple, like what it did a few years ago, then I could be more convinced that, okay, this low growth is going to like help with that. Those costs will be spread out over a whole lot more megawatt hours and kilowatt hours.

Joshua Rhodes (18:23.798)

everything’s just more expensive. And so, I mean, I’m afraid because we’re asking the system to like grow much faster than it has and everything that we need to build is more expensive, there’s going to be more money quicker moving into that rate base and there could be a rate shock, right? I mean, that’s what I’m worried about is it’s the mechanisms are probably long-term we’ll even out, but like the short-term, know, people got to pay mortgage this month, not the average over the next 10 or 15 years.

Micalah Spenrath (18:48.62)

Yeah, and I think the idea of rate shock is something that is certainly the big bad wolf that everybody’s looking at. So in terms of what practical solutions are to moderate cost and to avoid rate shock, right? I’m thinking about a few options, distributed energy resources. Matt, looking at you, we’ll come back to that, right? So rooftop solar storage, demand response, energy efficiency generally, and flexibility.

Micalah Spenrath (19:17.772)

So virtual power plants and things like that, those can really temper peak demand and defer costly investments if we actually incorporate those into our strategy. So the question is, are utilities doing that sufficiently or aggressively? So Matt, know that Teba has a report on that very question, like how can distributed energy resources defer some of this to indie investment? So can you share any high level findings with the listeners?

Matt Boms (19:47.278)

Yeah, thanks for teaming up there, McKinna. That was awesome. Well, I think the total savings that we came up with was $1,850 per rate payer over 10 years. And that number was calculated on the one hand, the TND deferral, right? So like how much of the distribution upgrades are not being made immediately because you’ve got more DERs on the system, whether they’re distributed batteries or any one of the technologies you just mentioned.

Matt Boms (20:13.038)

And then the other half of it is wholesale market value. like, think the assumption we had in there was pretty small, but it was like 2.5 gigawatts of DERs over the next 10 years. And just that alone yielded over $1,800 per rate there. So there’s a lot of value on the table, right? And I think we’ll see moving forward how utilities incorporate that into their strategy. think your question is dead on because you asked if they’re doing enough, I would say no, because they’re leaving distributed.

Matt Boms (20:42.786)

technologies on the table and they’re not taking advantage of them. But again, poles and wires only ERCOT. So if you’re a TDU in ERCOT, you’re just building out grid infrastructure. You’re not allowed to deal with storage unless you’re a CPS or an Austin Energy or one of the vertically integrated ones. So that would be the reason why.

Micalah Spenrath (21:02.058)

Yeah. So where my mind goes with this is it’s going to be very difficult to reorient utilities to prioritize some of these cost effective technologies, which can be cost moderators is something that we’ve discussed. Without a regulation reform, I think cost of service regulatory models had their purpose and I think they’ve served people well in the grid of yesterday. But I think that performance based regulation is

Micalah Spenrath (21:32.066)

Hard pressed, I’m hard pressed to understand how we’re going to get to a more flexible, dynamic energy system, distributed energy system, without taking a hard look at how utilities are financially incentivized to get there. And in Texas, I just don’t think that many of them are, unless of course you’re an integrated utility or don’t know what you’re something like that. But that leaves a lot of other folks on the table that don’t have those incentives. So.

Micalah Spenrath (22:00.952)

That’s a question. And is there the political appetite to tackle that, right? Because we’ve had cost of service regulation in Texas for so long. So that’s certainly a question I have.

Joshua Rhodes (22:12.674)

I think your spot on, Michaela and Matt was mentioning it earlier. I mean, just follow the incentives, right? It’s like, if you change the incentives, the companies will change their behavior, right? It’s just cartoon, like a trail of money, right? It’s just make it go a different direction or whatever and they’ll go a different direction, right? It’s just pretty much that simple in concept, probably not so much in terms of changing like, you know, the regulations and things like that. I think you sent this out. There was something about, okay, if like costs are going to go up, it actually starts to make distributed energy resources look

Joshua Rhodes (22:41.506)

better, right? Because I mean, a lot of times you’re making comparisons like, do I get solar? Do I get storage? What does that cost relative to like my electricity bill or whatever arrangement I have for energy? And like, as the electricity, you know, as one side of that equation goes up, then like, you know, systems that were more marginal or maybe didn’t pencil out, you know, start to pencil out, right? I mean, I think we’re seeing this in ERCOT, like wholesale prices as those have gone up, particularly in like the western part of the state. I mean, those have gone up. I was just looking at the western load zone.

Joshua Rhodes (23:11.384)

prices yesterday and they’ve gone up last year quite a bit further than like the years before in other parts. And so as those costs go up, whether that’s distributed energy resources or more utility scale, know, wind and solar projects, they start to pencil out even with the loss of the tax credits. There’s kind of like, we’ll see which one wins there, right? There’s like dueling things. One, the loss of the tax credits makes it more expensive, but if the cost of the grid is going to go up and electricity prices are going to go up, then maybe they start to pencil out again, right? It’s a weird

Joshua Rhodes (23:40.034)

What’s the new equilibrium going to be? When have we ever had an equilibrium? But when will we get there? But even getting back down to the distributed side, for distributed energy resources, I I don’t love that this is the mechanism, but it’s the silver solar lining of this, right? As more of those DERs become like more competitive in this region where prices are going up. Again, don’t love that that’s the reason why, but it might be the case, right? Yeah.

Micalah Spenrath (24:07.402)

Yeah, I think for me, it’s a very interesting and perhaps unintended consequence of some of the federal policy changes that we’ve seen related to clean energy. So rising energy prices might actually make it more financially viable or feasible for people to make these investments. So to quote what the resource I had shared, it was a Wood Mackenzie report, and it found that increasing retail rate escalation

Micalah Spenrath (24:34.648)

can reduce payback periods by about a third for commercial systems. So my interpretation of that is that could spur more renewable energy deployment even as we contend with the materially different federal tax credit landscape. So I think that that’s really interesting because it’s a bit counterintuitive. You wouldn’t expect that to be the result, but it absolutely makes sense. If energy is more expensive, it makes it more feasible for me to just

Micalah Spenrath (25:02.624)

invest in my own energy and produce it at home rather than buying it for my utility. So I think it’ll be interesting while those changes may have been intended to decrease renewable energy deployment, it might actually have the opposite effect now that markets have kind of taken hold and we’re seeing these different trends.

Joshua Rhodes (25:20.362)

Yeah, like I’ve not looked at this at all, but it’d be really interesting if, okay, with loss of the federal tax credits means less utility scale gets built. the price of electricity wholesale goes up. So that means that retail goes up. that means people build more distributed energy resources because the cost of has gone up. If we just completed the circle on that and that’s actually where it came to, like, and I have no data for that whatsoever, just a hot take on it. But I don’t know, that would be really interesting to see, but maybe we’re starting to see that. Yeah.

Micalah Spenrath (25:48.12)

If you

Micalah Spenrath (25:48.352)

do any research on it, please report back.

Joshua Rhodes (25:50.894)

Okay,

Joshua Rhodes (25:51.814)

I will do.

Micalah Spenrath (25:52.974)

Ha

Matt Boms (25:53.998)

The problem is also like to unlock the real value of those distributed resources. There’s so many layers of the value stack that are currently not accessible, that are not available in ERCAD to customers, right? Like I mentioned the TND deferral, that’s not on the table. The way that price is settled is only instead of notally, right? If we want to get real nerdy and talk about if there’s a customer in a really overloaded substation in Houston on a really hot day in August.

Matt Boms (26:20.46)

Why aren’t they getting rewarded? Like we have all the technology in place to make that happen, but it’s ultimately a policy choice. And that’s what I love about what you said, Michaela, because we’re not asking anyone to reinvent the wheel. if, when you say performance based regulation, what we’re saying is essentially, shouldn’t we reward utilities based on how reliable they are and how much money they save for their rate payers, right? And like there are other states across the country that do that. Like Arizona, Georgia, Illinois.

Matt Boms (26:49.73)

We can look to other places and like Josh mentioned, Alberta, there’s plenty of successful case studies where folks are doing that in a better way because ultimately the way that we set up our system here in ERCOT is cost recovery for all capital expenditure. It’s not based on how many consecutive days you keep the lights on for your customers and how much money you save them.

Micalah Spenrath (27:10.422)

And I think you hit the nail on the head with it mostly being a policy choice, right? We can choose to better compensate residential customers for grid services. We just have to commit to it. And I think we’ve started a lot of progress there, but to your point, there are additional pathways or components of the value stack that we could really be utilizing to deliver even more benefits to consumers. It’ll be interesting to see how that evolves over time and if there is the momentum to get there.

Micalah Spenrath (27:40.184)

But to your point, yes, I think that we do want to reward utilities for performance, not necessarily just for capital investment.

Matt Boms (27:49.806)

And also to take it one step further, Michaela, I don’t know if you agree with this, but it sometimes takes emergency or a disaster to shake people because I remember Hurricane Barrel when folks started questioning Centerpoint and folks in Houston were really outraged at what happened. I hope it doesn’t take that. Like I hope that we’ll be more sensible and plan for this and really be able to meet the moment. Like actually reward utilities for performance instead of just writing blank checks.

Micalah Spenrath (28:15.518)

Yeah, so I think my interpretation of a lot of the utility spending that I’ve seen, and I haven’t read every proposed rate case or strategic plan that a utility puts out, but a lot of them are reactive, right? So it’s we experienced a hurricane, we experienced a wildfire, so now we’re going to be investing in these strategies versus an adaptation perspective. So if we know and

Micalah Spenrath (28:42.4)

If we look at the data, we are going to be experiencing more challenges in the future, but perhaps not less, right? So it would be interesting to see how utilities plan to innovate and adapt over a long time horizon versus having plans that are a bit reactive in nature. And that can really change the perspective, I think. It can also change how a consumer is actually going to be serviced. So I want to be able to rely on my utility.

Micalah Spenrath (29:12.242)

And being aware of them looking into the future versus the past, I think would really increase confidence that they’re actually going to be doing that. I’ll pay for that. Like as a consumer, I will pay for adaptation because I think that’s going to benefit us in the long run. For me, it’s a bit harder to pencil out if you’re only going to be reacting to things that we’ve experienced thus far, because we know that the future is going to look a little different.

Joshua Rhodes (29:40.046)

Yeah, I will say it is. Maybe I’ll provide a little bit of pushback. Predicting the future is hard. Yogi Berra taught us this. Or making predictions is hard, especially about the future, I think is a quote that’s probably misapplied to him. But anyways, building out stuff for like an adaptation against an uncertain future, like utilities kind of get caught with their pants down if they like make the wrong investments. They can get dragged before committees and other kinds of stuff. And like, why did you spend this money on this thing?

Micalah Spenrath (29:41.084)

That might be a hot take.

Joshua Rhodes (30:07.042)

you haven’t used or it’s not going to be useful or like other types of things. If we’re going to do that route, like we have to be willing to let them make some mistakes because no one can predict the future. But that’s hard is like how much, how much of making a mistakes is, you know, just imprudent or whatever the terms are in terms of how that works. And so like, I understand why they’re like always being kind of more reactive than proactive. And maybe it’s just whenever they want to be proactive, there’s not enough buy-in from the

Joshua Rhodes (30:34.584)

communities and folks and everyone and everyone just getting to an understanding of like, hey, we’re building this for the future. There’s a potential that we don’t do this exactly right. It’s one thing to like look back and say, okay, you this storm took out like all transformers that were below a certain sea level in Houston or whatever, like, okay, all those need to be either all stilts or whatever, right? Versus we think that the next hurricane is going to get them at 20 feet higher or whatever the metric would be. I think, you know, utilities are pretty sensitive on like

Joshua Rhodes (31:02.83)

spending money that they may get called out on so far in the future. I think we need more consensus on that and consensus is hard, right? That’s really hard to get. On the other hand, you can look at the Texas has experienced like 27 plus billion dollar CPI adjusted storms over the past 20 years, right? And if you look at the chart, it’s just going up and up and up. And so like basically maybe the base level of every resilience needs to get better on spending on that kind of stuff. I can kind of have a little sympathy there for like being against a rock and hard place.

Micalah Spenrath (31:33.27)

Absolutely. So the two words that come to my mind are prudently incurred.

Joshua Rhodes (31:38.646)

Okay, I’m the engineer.

Micalah Spenrath (31:41.08)

So yeah, so that’s one of the standards when it comes to costs and utility spending. So prudently incurred, I think what is it, and reasonable. And I’m sure someone listening who’s a lawyer is probably gonna add something to this.

Joshua Rhodes (31:55.54)

I was trying to just put them together, yeah.

Micalah Spenrath (31:57.694)

No, no, no. So that’s one of the standards that I think they have to meet, right? These costs have to be prudently incurred. So I think to your point, we do want to make sure that they have this space in order to innovate and experiment and even make a mistake every now and then because they are adjusting to an uncertain future. at the same time, that has to be based on some sort of prudent strategy that they have. And if they’re not looking into the future and seeing that

Micalah Spenrath (32:25.192)

our extreme weather costs are going up, then it’s hard to understand how the billions that they plan to spend are going to be prudent. So I actually think that does give them some cover, right? So like we are looking, we’re staring down the barrel of an uncertain future and this is what we think we need to do. And hopefully we will have the policy spaces to encourage experimentation. Josh, I have a quick question for you. To your point,

Micalah Spenrath (32:53.322)

What do you think is missing that would basically encourage a utility to be more innovative and take, I don’t want to say risks, but essentially take the leap that they feel they need to take in order to meet the challenges of the future based on currently available models and data. Cause it sounds like you might think that the current incentive structure that they have might not allow them to feel that way. And I could be misinterpreting.

Joshua Rhodes (33:21.582)

Well, I mean, I utilities can do things like pilot projects that are like, you know, it’s kind of in the name, right? Okay, there’s a pilot. We’re going to try something out. Who knows maybe in the face of like how fast things are like set to grow and how much more we’re sort of set to spend on like electricity and how much more electricity is going to be going. Maybe we just need bigger pilots. The ability to take some bigger steps kind of in that direction. And maybe that’s the vehicle that it can be shielded through. actually don’t know if there’s okay. Pilots can’t be more than 2 % of.

Joshua Rhodes (33:49.45)

operating or whatever. have no idea like if there are even like current constraints on that, but maybe in the face of, you know, higher levels of growth, being able to have some like higher value pilots and things like that to try out some of these new technologies, whether that’s bigger virtual power plants or advanced conductoring or whatever it is to let them try some of these things.

Matt Boms (34:11.928)

think, Michaela, this is also the problem with central planning because what Doug used to talk about this on the podcast, right? I won’t get into Hayek and I won’t be as intellectual as Doug, but I do think these are the dangers of a centrally planned system because you don’t have the price signals. the ones that we have in the wholesale market are pretty damn good. And that’s why folks love doing business in Texas. And conversely, we don’t have those price signals for the TDUs, right?

Matt Boms (34:41.1)

And like, we’re both relatively familiar with resiliency plans that were proposed by the utilities and approved by the commission and roughly a billion dollars a year for Encore and Centerpoint each. none of us are arguing on this podcast that they shouldn’t do hardening and they shouldn’t do vegetation management. Like we all agree on that stuff. It makes sense to be preventative.

Matt Boms (35:03.17)

But at the same time, like there were no DERs in those resiliency plans, right? There wasn’t a demand response program or energy efficiency or you name it. None of that is part of the resiliency strategy of the TDUs in Texas. And that’s a big problem because we all know that moving forward, that’s exactly what we need in Texas is more demand side solutions because most of the time we’re fine, but there’s always the chance of a winter storm and there’s always a chance of a really hot day in August. Then we’re kind of reaching the limits of what our grid can handle.

Joshua Rhodes (35:33.134)

So this is an interesting thing. I’ll agree like on half of that, that we don’t have the price signals. I think maybe not on the distribution side, because we don’t have prices down at the distribution edge or whatever. But on the transmission side, we do have congestion, right? Because of the way we do invest and connect and like we have our location of marginal pricing, LMPs, we do congestion revenue rights and all other kinds of complex things. I think we do have pretty good economic signals of like where new transmission is beneficial. But right now the way that we handle that,

Joshua Rhodes (36:02.434)

the economic test for transmission is so hard to overcome, the test doesn’t make sense. It essentially is like to pass the economic test and someone in chat or whatever is gonna tell me how I’m not exactly right on this, but essentially like you have to be able to make up all of the costs in one year or something. Whereas like transmission infrastructure upgrades and stuff, or that infrastructure is decade long infrastructure, right? It lasts for decades. And so like if we can take the congestion

Joshua Rhodes (36:32.602)

LMP signals, like I think it sends a very clear signal of where economic upgrades in transmission would be useful if we had a more sane economic test for that. So I think for the transmission side, we could, we have the data to be able to do this, but we’re just not doing it. But on the distribution side, yeah, it’s like if you want to do the same thing, you would need prices down there. And that does get pretty complex pretty fast. Maybe there’s always a divorce there somewhere, but like, I think at least on the transmission side, I think we do have the ability to do this now. just

Joshua Rhodes (37:01.696)

not doing it as good as I think we could.

Micalah Spenrath (37:04.59)

All right, so thank you so much for this amazing conversation. We are just about at time. So we’ve touched on a lot of different things, utility innovation, utility regulation, the pressures facing the energy system, whether that be cost or just speed of growth. So just quickly, what are your final takeaways from this conversation?

Joshua Rhodes (37:24.942)

I mean, think it just comes down to the pace at which this is happening is just so different than in the past, right? So I think we need to relook at how we’ve handled growth in the past and some of the mechanisms probably need to change to be able to handle how fast it’s coming to us now.

Matt Boms (37:38.958)

completely agree, Josh. And I think this is the moment where we need more innovation. I think we need to change the way we think about planning for the future. And if that means that our utilities have to become a little more innovative to meet the moment, then that probably makes sense as far as rewarding performance instead of just writing those checks for capital expenditure.

Micalah Spenrath (38:00.034)

Well, thank you so much for this amazing conversation, guys. And thanks so much to our listeners. Signing off, I’m Mikayla.

Matt Boms (38:06.731)

A man?

Joshua Rhodes (38:07.798)

I’m Josh.

Micalah Spenrath (38:08.93)

and we’ll see you next time.

Matt Boms (38:12.376)

Thanks for listening to the Energy Capital Podcast. If today’s conversation helped you make sense of the energy world, share the episode with a friend and hit follow on your podcast app. You can find us on Apple podcasts, Spotify, and all the usual platforms. For deeper analysis each week, subscribe to the Texas Energy Empowered newsletter at texasenergyempowered.com. That’s where you’ll find every episode, every article, and all of our latest updates. We’re also on LinkedIn,

Matt Boms (38:41.618)

X and YouTube, where we post clips, insights and ongoing commentary. Big thanks to Nate Peavey, our producer. I’m Matt Bombs and I’ll see you next time. Stay curious, stay engaged and let’s keep building a stronger, smarter energy future.

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