In this episode, I speak with Pier LaFarge, CEO of Sparkfund, who challenges the traditional antagonism between utilities and distributed energy advocates. While investor-owned utilities have long been seen as obstacles to clean energy adoption, LaFarge argues that they're actually essential to scaling DERs in an era of explosive electricity demand.
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David Roberts
Greetings. This is Volts for December 18, 2024, "Should we put utilities in charge of distributed energy?" I'm your host, David Roberts. When people involved with distributed energy resources, or DERs, talk about utilities, it is usually with considerable frustration. As I have ranted on Volts many times, the regulatory structure under which investor-owned utilities operate biases them toward big spending on big projects and away from energy efficiency and DERs, both of which reduce the need for utility spending and thus reduce utility profits.
Clean energy advocates often wish utilities would just get out of the way. Pier LaFarge, the CEO and founder of a company called Sparkfund, wants to put them in the driver's seat.
Electricity demand is set to skyrocket, requiring up to a doubling of today's grid capacity, even as fossil fuel power plants are being phased out. Utilities are, LaFarge argues, the only institutions capable of accomplishing change of that scale in the time available.
The key is just to let them procure DERs like they procure any other energy resource. This deceptively simple-sounding argument runs somewhat counter to the energy world zeitgeist, but it has drawn the attention of lots of smart people. And the more I've thought about it, the more intrigued I am and the more questions I have.
So, I am excited to talk with him about it today. With no further ado, Pier LaFarge, welcome to Volts. Thank you so much for coming.
Pier LaFarge
David Roberts. It's great to be here.
David Roberts
You know the meme where the guy's mind is successively further blown? Let's start all the way at the galaxy brain level and work backwards from there. You've said before that, big picture wise, you see our current moment as kind of the end of phase one or chapter one of the clean energy transition and glimmers of entering into phase two. Phase one being characterized sort of by consumer choice, by ESG, by carbon credits, by sort of companies going above and beyond thanks to the prodding of green consumers, let's say. The second phase, you say, is going to be more about an infrastructure mindset.
So, just to begin with and to frame things, spell that out a little bit, talk a little bit about what you mean by that, big picture-wise.
Pier LaFarge
First of all, I just want to say, you know, chapter one had a lot of value in it, right? I'm sitting here because I was a Power Shift kid in 2007, you know, reading you in Grist, you know, and I mean it. This is an honor to be here because, you know, you were one of the people who diverted my career into climate change, which is annoying.
David Roberts
So, yeah, sorry about that. That was back in the Waxman-Markey days, right?
Pier LaFarge
That's right. And I, my first internship was at One Sky, working in the trenches on Waxman-Markey and reading Grist and, you know, look, it's like whether it's a "Thank you" or not for showing me, showing me a wall to bang my head against for years.
David Roberts
Head, meet wall.
Pier LaFarge
Head, meet wall. Thanks, love, David Roberts.
David Roberts
You're welcome.
Pier LaFarge
But, I think that point though is really the chapter one. As a climate movement, as a renewable energy industry, we should be incredibly proud of the progress we've made. We've deployed an enormous amount of this stuff. We've dropped the cost curves, we've pushed the institutions and societal kind of compacts. Right. I see utilities really as just things we invented to go put energy infrastructure out there to start the party of electrification and industrial growth. And look, chapter one was all conducted in a world when the grid wasn't growing, when energy efficiency was doing its job, and when we were getting economic growth but without energy growth.
And that was core to the mission again in chapter one of climate progress. But that's changed. Chapter two really started when people realized the grid's going to double. And it's going to double for a whole new set of reasons. I always think back to the chapter one motivations as soft signal political economy trends, long-term trends around decarbonization, sustainability, consumer adoption, all of which were sort of dependent on interest rates and policy and politics and subsidy. What we've got now is a grid that's going to double because of hard signal political economy trends, manufacturing coming back to the United States, data centers spurring generative AI, which is about GDP growth. It's about long-term geopolitical competition.
It matters whether we put data centers in Ohio and Kansas versus Saudi Arabia. So now, in chapter two, the institution that our society built 100 plus years ago to power an electric economy is actually going to be good at deploying clean energy and DERs, whereas for the last 20 years, it really struggled to do that inside its compact.
David Roberts
This has come up on every one of my recent pods. And I, you know, I just think it's always worth emphasizing again that an age of flat electricity demand is just fundamentally different. It's just, you know, every bit you're pushing renewables on the grid, you have to take something else off. Every bit you add, you're subtracting something else. And as you say, these are for sort of soft, long-term motives that often are easy to bump back in the priority stack in the scrum of day-to-day politics. But now, whether you care about climate or not, big companies towing big sacks of money are showing up saying, "We need lots more power overnight."
So, everybody now is, whether they care about this or not, aligned in this direction, even if only for purely venal reasons.
Pier LaFarge
Right, you said it. And look, let me respond to that and then go back one point. Right now, when those companies show up, right, because we did our job in chapter one, David. Because we got the cost of renewables down, because DERs have value to the grid, because we've proven that through VPP pilots and programs, because we've actually done the work to deploy this stuff and build all the products and software around it that make it really valuable. Now, when those companies show up towing their bags of money and saying, "We will, for good reason, pay more for electrons than anyone in history because they're inputs into a fourth industrial revolution called AI."
And we're building AI refineries, not data centers. Right? And electrons and chips are what we need to scale what could be some of the most valuable buildings on the planet." If you run that math cold, right: climate, no climate, IRA, no IRA. If you run that math cold, to be formal about it, the techno-economics of that turns out, because we did our job, we're going to put a ton of renewables on the grid, we're going to put a ton of DERs out there because they're faster to build, they're cheaper, and they're better than upgrading distribution systems, for example.
David Roberts
And you think that's true regardless of any subsidy, regardless of any climate motivation?
Pier LaFarge
I do.
David Roberts
Do you think just on a pure physical economic basis?
Pier LaFarge
I do. I mean, the only thing that makes solar batteries and gensets look dead stupid cheap is comparing them to upgrading a substation or fixing transformer overload or building a new transmission line into a major US city. It does not matter whether you have a tax credit. If you're talking about, you know, for every $10 billion of smart grid you don't need to build, you build a smart sponge out of two or three billion dollars of batteries.
David Roberts
So, let's talk about what you're proposing. The basic idea is that right now, DERs are operating basically on a kind of a private, almost like a black market. They're just sort of outside the rest of the electricity system, just going on their own logic. And so, utilities, who are supposed to manage electricity, basically just encounter them sporadically, more or less randomly, and then have to react and often don't even see them, aren't notified when they're installed. And so, utilities are intuiting their existence via effects on the demand curve, basically. So, this just doesn't seem like an ideal situation, especially since we're on the front end of what I think everybody agrees is going to be a much larger flood of DERs.
So, your basic proposal here is that the utility needs X amount of capacity. It should be able to go procure that capacity the same way it would from a big power plant, from a DER aggregation, basically, that utilities are going to procure DERs. The acronym, everybody's got to have an acronym, the acronym is DCP (Distributed Capacity Procurement).
Pier LaFarge
David, I would have wasted my time at Power Shift in 2007 if I didn't go on to contribute to the number of acronyms in the climate space.
David Roberts
You're nobody without an acronym or two of your own.
Pier LaFarge
So, what we really do here is create new climate-related acronyms.
David Roberts
Talk about how that would work. Just talk about that model and why it's attractive.
Pier LaFarge
Yeah, look, the Distributed Capacity Procurement idea is really simple. A utility is chartered to provide lowest cost, most reliable energy to support economic growth and prosperity of the state. And that charter has been around for a long time. When the grid wasn't growing, it actually turned out that, you know, a lot of the times renewables were part of that charter. Right. Utilities have procured tens of gigawatts of renewables all over the country. Right. Wind, solar, but at utility scale. DERs were rarely a good fit when the grid wasn't growing. But now that the grid needs to grow and DERs have come down in price —
so, solar, batteries, gensets, controls, connected assets, demand response, a whole range of distributed capacity, eventually vehicles participating — now that those things are in fact low enough cost and reliable enough, and the grid needs to double, simply put, it now fits the charter. And utilities can incorporate distributed energy resources into their core planning. They can tell us where the assets need to go, how many they need, and they can plan that in a way that really directly impacts and offsets the money they would otherwise spend on upgrading the distribution network.
David Roberts
Let's back up a little bit. Just say one or two more sentences about why demand growing makes DERs more amenable to the charter.
Pier LaFarge
A couple of reasons. The goal, as I see it, for chapter two, for the next 20 or 30 years of the energy transition, is to double the capacity of the grid in a way that lets us sell three to four times the number of electrons to folks like manufacturing data centers, electric car drivers, home heat pump owners, all that stuff. So, if we double the capacity of the grid to move and distribute electrons and sell three to four times the electrons over that doubled grid, electricity is going to get cheaper and more reliable if we do it the right way. So, that's good news.
That's the goal. Utilities exist to plan and capitalize on those moments of needed growth to support economic development and stuff we want, broadly speaking. And so, DERs in particular are important for two basic reasons. One, you can build lots of small things faster than you can build a few very big things. That's particularly true because of permitting, NIMBYism, and political constraints. You've covered this enormously well on this podcast, and it's all over this space in the sense of how hard it is to build big things fast. So, you can build lots of small things more quickly.
And if you're using central planning, if you're using the utility to determine how many they need and bringing that into the core of planning and where they need them, you also get this really interesting effect where you don't have to have this be something that's happening to utilities that they can't see coming. That is difficult from a system standpoint. Because look, you can say that utilities are just being grumpy and don't like DERs, but like, they're central planners, they're managing a landscape scale machine. And it is actually hard when things pop on and off and send electrons backwards.
It's not like a metaphor. It's not like they're not just being grumpy for no reason. It is actually hard to do that. Could utilities get better at it? Could they buy more products, services, software, and companies to help them get better at it? Yes, I think they could. And I also think in this moment in economic history, they're going to. And I think that what we're describing with the Distributed Capacity Procurement is frankly how that happens. It's how you bring Distributed Energy Resources into the proactive core of utility planning and finally take them to multi-gigawatt procurements that actually get out into the ecosystem and get done right.
David Roberts
You know, I think listeners will be familiar with the sort of long-running debates about the value of distributed energy, the value of rooftop solar. Right. This big fight. It's a big fight. Everywhere there's rooftop solar. You know, California has just been through a big fight about it. And I think one of the things that's come out of that debate is that there is the value of DERs. There's not a set answer to that question. It depends on where they are and when they run. Right. Like geography and time matter on the grid. So you can't just say rooftop solar has x value.
It depends on where you put it. So, the first obvious thing to recommend this model is that, by your logic, utilities know where DERs are most valuable, where they are most needed, and can direct, if they use this model, can procure them where they're needed, rather than just having them pop up randomly in time and space.
Pier LaFarge
With a few years of work, I mean, it's true that utilities are not suited to do feeder up planning universally. Right. There is work to be done. They need to buy new software tools. We can definitely come back to that. So, it's not an off-the-truck solution. But I would say the reason that this Distributed Capacity Procurement idea has gained so much traction so quickly, David, is that the moment of economic history we're in is faster moving than people could have possibly imagined. We saw EVs coming. It used to be just 18 months ago that electric vehicles were the biggest source of load growth.
And then, maybe it was home heat pumps. And now, EVs are like a distant super third on the list. Manufacturing is number two, which in and of itself would be the biggest news in electrification in 20 or 30 years. Except, it's dwarfed by data centers and generative AI.
David Roberts
Yeah, this is what I keep trying to tell people. It's like, yes, the data centers are coming. Yes, more demand is coming, but that is just the front edge of a much, much bigger wedge of electrification coming along. All of transportation, all of the industry, basically, like the whole economy. So, like, data centers look big from our current vantage point, but in the final analysis here, the whole economy is. That's what we've been saying. You know what I mean? Like, it's just sinking in now.
Pier LaFarge
That's what we've been advocating for a decade. Also, data centers, people always do this funny thing where they're like, "Oh, the grid's going to double, but not if the data centers don't show up." It's like, no, if the data centers get like 80% more efficient, then the grid will only double because of all those other things. And the data centers, if the data centers just all showed up on their current queues, the grid would 5x or 10x. And by the way, that wouldn't even happen because we couldn't possibly build it fast enough.
So, like, you just end up in this conversation where, baseline, our job is to double the US electric grid in terms of capacity to move and distribute electrons and do that safely, reliably, and in a way that actually doesn't create fires or other issues. And then also to sell a huge amount more electrons that are intermittent, that are clean, that are, you know, every possible source of electrons. And by doing that, again, said this before, the math in the grid is really simple. It's the cost of the infrastructure divided by how many electrons you sell equals the cost of electrons.
And if we do this right, electrons will get cheaper. And if part of doing that cheaply means doubling the grid by putting batteries and generators and solar all over the grid, on every feeder that needs it, on every transformer that would otherwise overload, on every substation that would otherwise need to be upgraded, not only will we save money now, we're also going to make the grid fractally reliable and enormously more resilient to the very real — I think of climate change as a dragon sitting on our society with teeth, claws, and a tail. It's not a game.
And real people with real lives are vulnerable to it. And so, the way we grow our grid is always, and has always been, about shared prosperity, economic development, and fundamentally keeping people safe downstream of that electric power.
David Roberts
And I think it's worth emphasizing too, maybe I'm overdoing this point, but I do think it's important that even if you're one of these, like, "big is beautiful" people, even if ultimately you think that, like, utility-scale stuff is cheaper and better and is the ultimate answer, it is still simply the case that there is nothing big — and I'm not just talking about a nuclear plant, I'm talking about a transmission line, any kind of power plant — there's nothing big we know how to build as fast as we're looking at these electricity demand numbers go up. Like, even if we agree that big stuff is the key, it's just the case that we cannot build big stuff fast enough on the timeline that we're looking at in front of us.
Only small distributed stuff scales fast enough. There's just no way around that. I've never heard a counter to that.
Pier LaFarge
Amen. And it's fundamentally true. The historic role that DERs are going to play in the energy transition in this coming decade really comes down to not only that you can build it faster, right? It's a critical one to five-year solution. It's also that you can put it exactly where the grid needs it to avoid exactly the type of expenditures that drive rates up, which is distribution upgrades. Right. If renewables were the only thing that we needed, you could buy 1.7 cents wind in North Dakota and move it and the price of power would go down.
But guess what? 1.7 cent wind, 2 cent solar is not making the grid cheaper, it makes it more expensive because you have to upgrade feeders and substations to handle the intermittency to move that very cheap, very reliable, very clean power. And people unironically experience bill increases because you've had to upgrade the distribution network to handle both the growth in power and the intermittency.
David Roberts
Maybe people already know this, but this is also worth putting a pin in. It's just that the rise in electricity costs, which is happening everywhere now, is almost entirely transmission and distribution.
Pier LaFarge
That's right.
David Roberts
It is moving the power around. So, insofar as you can deploy DERs and prevent yourself from having to do some of that T&D upgrade, you also make the growth of the big stuff faster. Like anything you can do to reduce T&D costs is the lord's work. So, let's get into the details a little bit. So, what does it look like? I'm a utility, I go, say there's a node on my grid that is congested or whatever. And I feel like, you know what would help me? There is a bunch of solar and storage.
And so I, the utility, say I want whatever 50 megawatts of capacity in this defined geographic region. And then what? They just put out an RFP and they say, "Come to us with your DERs." And so private companies then say, "We can do that. We can pull together 50 megawatts of capacity in this area," and they bid. Is that the process?
Pier LaFarge
Yeah, pretty close. And look, I think this will look different in every state. So, you know, Sparkfund is sort of one model of it, isn't the only way this is going to go down, I don't think. But utilities are good at planning and capitalizing infrastructure, and they're not very good at building lots of small projects. So, I see in all cases this Distributed Capacity Procurement concept being delivered by a local competitive ecosystem of DER companies and vendors. Right? So, folks who go out and bid on it and say, "We can do a good job in your area and can comply with utility requirements of safety and all that stuff," but ultimately these are small local companies who are going to grow really quickly.
And by the way, David, it addresses one of the biggest barriers that our industry, my industry, right — I am, you know, this is what Sparkfund is, is building these things. Fundamentally, the biggest issue we've had for decades is it's hard to sell this stuff to people. The sales cycles are long, the conversion rates are long, the marketing is expensive. You end up with saturation in different territories. And so, it's hard to build a business around such unpredictable demand. And what this represents, what a Distributed Capacity Procurement represents to the DER industry, is turning utilities into the largest wholesale customer this industry has ever seen by a factor of 10 or 100 in most states.
David Roberts
Yeah, so you get big chunks, big buyers. But I'm still a little confused. So, like, if I'm a household in that area, who is coming to pitch me and what are they pitching me on? And when the solar panel shows up on my roof and the battery shows up in my backyard, who owns them?
Pier LaFarge
Yeah, great question. So again, this is just one way this could happen. This is our Distributed Capacity Procurement model. But a DCP has three basic parts. The utility plans and capitalizes. It says, "Here's where we need it, here's how many and of what type," and then on the other side — so that's layer one, right. On the other side, you've got the local competitive ecosystem of vendors who are bidding into tranches of needed construction.
David Roberts
These are rooftop solar installers?
Pier LaFarge
Yeah.
David Roberts
Also aggregators?
Pier LaFarge
Yeah, solar installers, battery companies, genset companies, demanders. Anyone who believes they can fit into these tranches and provide the capacity needed. But that middle layer, right, which I think has really been the thing that's missing, is what we call deployment services. Right. And Sparkfund's business is to be that middle layer. We want to be the thing that helps utilities interface well with their customers. So, we do customer engagement. We go out and knock on the door, and instead of trying to sell them a battery or a solar panel, we ask a customer to host a utility asset.
Something that makes their building more reliable, their neighbors more reliable. We give them a hosting payment to take the asset, so they get an ongoing annuity from the utility to host it. And then we do what we call value chain management. Right. So, go out and build that local competitive ecosystem. We form like a light general contracting layer to coordinate all the contract and dispatch of those vendors. Because one thing that would take utilities way too long to do is sign master service agreements and service agreements with 100 local small companies. So, we become like the shock absorber between the utility, the customer, and the DER.
David Roberts
So, they put out an RFP, they say, "We want 50 megawatts of firm capacity here in this neighborhood." You take that, go find the customers, sign the customers up. Find the vendors, sign them up, oversee the work so that this is installed and operating well.
Pier LaFarge
That's right.
David Roberts
You're all that stuff in the middle. So, again, who owns the battery? Who owns the DERs at the end of this? Like, it only makes sense for the utility to procure these DERs in a particular area if the utility then can subsequently have some control over it. Right? Because it only helps the utility if the utility controls it.
So, it's not just that the utility needs to have solar panels and batteries installed. It also needs some kind of control software to which it has access. So, again, I'm sort of like getting confused, like, where the ownership lines and the operating lines are drawn here. So, if I'm a homeowner, who owns my solar panels and batteries?
Pier LaFarge
Yeah, so the operating piece is the most important from the grid value. So, what the utility really needs fundamentally to make this model work is the ability to control contractually, right, control and dispatch these pieces of equipment in a way that benefits the grid and meets their grid's needs.
David Roberts
Right. Making them dispatchable is the whole point here.
Pier LaFarge
So, that has to be true. You can give the customer some, maybe like a residual charge for resilience, but frankly, if you're supersaturating a feeder, if you have a feeder with 900 buildings on it and 500 of them have batteries and solar, that feeder is going to become, like, super reliable. Right. That's what I call fractal reliability. But setting that aside for a second, ownership is a legal question. But what is critical is that the utility recognizes the value of DERs to the grid and capitalizes them in a way that they can earn on and recover inside their regulatory model, which aligns their incentive and also is directly comparable to the capital they would otherwise be deploying on feeder upgrades or substations.
And ultimately, it's that capitalization and planning and dispatch ability that anchors this model. Legally, the customer could own it. You could have the homeowner have title to it. I think in residential, a lot of times, utilities will be hesitant to own batteries or other things, particularly solar panels on a customer's roof in a residential context. I think in commercial, industrial, and municipal utilities will be much more comfortable owning and operating assets, and that has to do with different contracts and safety and indemnification issues. So, ownership, who legally has title to the asset, is actually pretty flexible in this model.
But the utility has to capitalize it, recover, and earn on that capital, be able to plan where and what type, and then dispatch and control the asset to maximize grid value.
David Roberts
In many ways, this is not novel at all. This is just exactly what utilities do.
Pier LaFarge
I say that, David, I say that in every conversation. All I've just explained is that utilities should be utilities. And now that we need to double the grid, that will and should include DERs and a bunch of renewables. That's it.
David Roberts
Right. So, they go, they procure, they operate, they get a set rate of return on their investment. All of that is very familiar from the large-scale stuff. So, my question here is, if they need to control it, what are the VPPs doing? Like, if I go to one of these areas and sign up 50 households into a VPP and then I'm running the VPP, I'm controlling those devices, how then does the utility also control those devices? Is the utility then contracting with me?
Pier LaFarge
So, this is where we get a little bit into two things. One, the sort of nesting doll of acronyms and then also like, look, the answer is it could be different in a bunch of different utilities. That's what's cool about our energy system, is that it could be different 50 different ways. But our view is that the Distributed Capacity Procurement is a type of VPP. We think this is part of the VPP sort of moment and that this is just a utility-led, utility-planned, utility-capitalized, and dispatched VPP that's then built out of an infrastructure value chain of a bunch of local vendors and suppliers and then we become the deployment middle ground, or someone like Sparkfund becomes the deployment services middle layer.
David Roberts
So, wait, let me just make sure I understand that. So, the utility then is basically controlling the VPP, is the operator of the VPP. So, what happens if I go to an area and there are already a bunch of households signed up with some other VPP?
Pier LaFarge
Yeah, pretty much every utility that we've talked to who is seriously engaged with a DERMS process (Distributed Energy Resource Management Systems), really think of their DERMS, the utility DERMS, as an aggregator of aggregators or pulling up existing interoperable systems. So, I think there's a lot of space for those existing ones. But I also think that the reality is utilities' experience with aggregator-led VPPs and regulators' experience with aggregator-led VPPs has been pretty bad, and for a couple of reasons. One, having a customer in the neighborhood get pitched by two or three different companies to sign up for a program is annoying.
David Roberts
I've been wondering about this. I mean, this is like, I'm sorry to interrupt your thing here, but before I forget this, we forgot to sort of finish our first point, which is chapter two being about infrastructure. And so, the thrust of that, the thrust of clean energy becoming infrastructure in chapter two, is that it becomes like the rest of our infrastructure. That is, you as an individual consumer don't have to worry about it. It's just there, working in the background. And if we want to make energy like infrastructure, part of what that implies is it's just there in the background, working.
Just like your electricity is in the background working and you're not futzing and fiddling with individual, you know, different vendors for different rooms of your house or whatever. Like, it's just there, it works. So, if you're talking about making DERs into infrastructure, basically, which is what this is, that sort of implies that you're getting rid of the model where individual consumers go shop around for different VPP vendors. You know, are like, "You can control my water heater, you can control my EV," you know, maybe even sign up to two different VPPs. Like, I've been wondering how this market's going to shake out and it seems like it could very easily get a) overwhelming for the consumer and b) just ripe for a lot of scams because these VPP vendors are going to have a massive information asymmetry.
They're going to know what's going on, they're going to know what's going on on the grid. Consumers don't know anything. So, if you're going to put utilities in this position, it seems like that is de facto going to get rid of the private Wild West VPP market.
Pier LaFarge
No, I agree. I call it the wild dogs problem. You've got five companies out there that are hiring folks, often on week-to-week quotas. Eventually, you're going to end up with high-pressure sales tactics. You're going to end up with misinformation issues.
David Roberts
Happening in rooftop solar, right now, we should say, is a huge problem.
Pier LaFarge
Yeah, not like this is a hypothetical and it's true in VPPs. And by the way, David, look, one of the other problems from an energy, equity, and justice standpoint is the people who are most capable and interested from a time and attention standpoint in having that conversation are not always the right people from a vulnerability standpoint. Right. I think that one of the problems with the current VPP model is that it's going and engaging a subset of highly motivated, engaged, you know, customers. And it's actually taking grid value and putting it in the places that the grid needs it least.
We should build models that can engage vulnerable communities while giving them the dignity of just being people, right? Of going about their days, about going to restaurants and being in the community and going —
David Roberts
The other thing about infrastructure is it's universal.
Pier LaFarge
It lets people be people. My favorite thing about the US electric grid is that when I go into a restaurant to buy a sandwich, I don't need to worry whether or not the lights are on, whether the oven is working, or whether my sandwich will be twice as expensive because I walked into a restaurant with the wrong cost of energy. Infrastructure means it's in the background, and the entire economy is downstream of our infrastructure outcomes, just like roads. And I think that's what makes it a natural monopoly. It's what makes it a great candidate for a regulated monopoly.
And it means that providing electric power, right, for however many cents on the dollar our economy spends on electric power, maybe 3 or 4 cents, the other 97 cents on the economy happen because of that electric power. And we often forget in this industry to really tell ourselves the story of what energy is for. You know, it is about sandwiches. This is Amory's—
David Roberts
Cold beer, hot showers.
Pier LaFarge
Cold beer, hot showers. Exactly. You got it, right? I probably learned that from you in an article in like 2008, as I think about it now, but reminding ourselves what the energy economy is even for and why we invented it the way we did to fuel post-war industrialization and before that, rural electrification.
I mean, this was built as a societal scale franchise to be a foundation of shared prosperity so that people could not have to think about it and focus on being people. Picking their kids up from school, teaching students, taking care of patients, building a business. That's what the energy economy is for.
David Roberts
And so, part of it becoming infrastructure means basically that every building, as a matter of course, is going to have some devices in it that are networked and connected to the grid as a matter of course, not as some sort of elective consumer choice. It's just something that buildings do. But I want to be clear here. So, this model leaves a private DER industry, right? You still have people selling the solar panels and the devices and maybe home management, but in terms of aggregation, the utilities are going to do that. The utilities are going to be the aggregators, which will leave no room for private aggregators.
I just want to make sure I fully understand that.
Pier LaFarge
That's right. But what it leaves a lot of room for are the companies that know how to engineer, design, develop, build, and maintain distributed energy resources. It leaves a lot of room, in fact, it creates new room for those companies because it creates a wholesale buyer at gigawatt scale, which doesn't exist today. And it also creates a huge need on the part of utilities and that whole value chain for the software and services that make a distributed energy resource value chain efficient and scalable.
David Roberts
Right. Well, here's where I think the market people ride in, hear their galloping feet approaching —
Pier LaFarge
The Hayekian hooves.
David Roberts
Yes, the Hayekian brigade approaches and saying, "If you want to manage — right, VPPs are kind of a new thing. This whole area is kind of new. And if you have a new uncertain technology, this is where markets excel. You need market competition, which will find the best way to manage VPP, the best, the right way to aggregate, the right way to find consumers, et cetera, et cetera. If you give it to a utility, you remove market competition. And thus, they're just going to buy some suboptimal software and run the VPP suboptimally. And the only force pushing against that will not be market competition, it will be their regulators". We return to the problem of regulators having an information asymmetry and being captured and not being great at their jobs. Among other things, this model seems to assume staffing and competence both in utilities and in PUCs.
Pier LaFarge
Well, the way I think those concerns can be addressed, because they're real concerns, are: 1) much of the value of competition, in my view in the DER market, and I know this because my own businesses participate in it in this way, comes down to bidding the best design system with new components, good engineering, and making bets that you can deliver with a fair margin and lowering costs. A system that will provide value that it says it does over its lifetime and then go maintain it. That type of competition in terms of DER design, in terms of new uptake technology, that part of the competition is left entirely to the competitive ecosystem of DER suppliers.
That a utility is just simply receiving bids on a price per megawatt basis.
David Roberts
Well, in a sense, the utility is almost structuring the market.
Pier LaFarge
That's right.
David Roberts
The utility is almost kind of creating a little mini-market for DERs.
Pier LaFarge
And that works very well when they go out and bid for wind, solar, and power plants, gas plants, and transmission lines. That's exactly how the energy economy really works in a lot of places. And I am not proposing that utilities build in-house engineering, design, development. I'm not proposing a Ma Bell kind of dystopian scenario where they tell you which type of telephone you get this decade. The hardware outcomes are where that Hayekian fervor was born. And the hardware outcomes, the engineering innovation, the system markets like new companies coming on and selling innovative products into a thousand or 10,000 or 100,000 decision makers that bring them into the world and make them part of the infrastructure outcomes that people then benefit from or not.
That is intact here because there are hundreds of thousands of DER suppliers who will be making those choices. And if they can bid in at the lowest price to utility distributed capacity procurement, that's why it's a procurement. The utility is buying DERs on a needed megawatt basis in the places the grid needs it most. But that competition is alive and well in terms of how those DERs are built, performed, and connected.
David Roberts
Got it. And so, like, there's still customer choice here. Like, customers are still kind of in the driver's seat. They don't get any devices they don't want. They don't hook up to any VPP if they don't want to. So, what happens if I'm a utility, I use an RFP for 50 megawatts of whatever capacity. You win the auction, you win the RFP, and then you go out and customer acquisition proves difficult. Customers prove to not be swayed by your pitch, even though, you know, it's worth noting that this is somewhat of a better pitch.
Rather than, "Hey, would you like to become, in addition to a normal homeowner, an energy contractor dealing with your home's infrastructure? You know, would you like to set aside several hours a week to manage this shit?" This is just, "Can we come in and put some stuff in your home that you will not have to mess with or otherwise deal with?" It is a better pitch, but we don't, I don't think, know for certain that customers are going to take it up. What if, like, I win the RFP and I go out and I just can't rustle up the customers?
Like, what if customers in the end, like, are the turd in the punch bowl here?
Pier LaFarge
Well said. And let's unpack that a little bit. That's actually why I think you're blending the aggregator frame and the DCP frame a little bit. In a Distributed Capacity Procurement, the utility would plan how many they need in terms of megawatts of what type and where. And then a deployment services company like Sparkfund, but there are others, will go and talk to customers and sign them up to host the assets. And then once that customer has agreed to host the asset, then it's bid out as a tranche, and the supplier gets a list of places to go build DERs of a certain type, and then a whole set of compliance and safety requirements to make sure that's done right, that the asset is connected correctly, maintained correctly, and commissioned correctly.
So, the deployment services layer happens before the bid, which means that DER companies get the thing they most want, which is to build hundreds of megawatts of equipment at a predictable margin with predictable offtake timing so they can plan labor. They can be more efficient in warehousing, procurement, and supply in software. This goes back one point a little bit, but there are two different types of efficiencies. Where I really think that the market folks get it a little bit wrong is there's a type of efficiency the market delivers in competition and choice. Again, I believe we're preserving most of that value inside this competitive value chain that's locally built.
But also, you have a huge inefficiency when you have small, subscale companies with a warehouse with 1 1/2 FTE and no systems, and when you're buying not at bulk, but changing orders month to month and your distributor is adding cost because of how unpredictable your offtake is. And you have no working capital and you have no internal software and ERP systems that can track margin against actual deployment. Right. There are real inefficiencies that live in the distributed value chain today. And I say that as a DER CEO who has those inefficiencies. So, I'm talking about myself.
Right. It's not like some distant, "Oh, they're inefficient." Right. I'm inefficient because I don't have procurement off-takes that are predictable, scaled, and reliable. Right. So, I'm trying to build this market as much for my own business as for the market itself.
David Roberts
And so, if this model were implemented and given some time to run, you think that we would see consolidation and scaling in the DER industry, like the emergence of probably — rather than what we have today, which is like thousands of barely evolved mammals scurrying around on the floor of the forest — we're going to get some sort of big, probably a handful of big companies. Like, do you think that's an inevitable sort of outcome here?
Pier LaFarge
So, I don't actually. Although, I think this is actually a really fun moment where utilities can add sustained societal value using their franchise. Utilities are also politically sensitive and I think can build and should build value chains that remain competitive and diversified. So, they should actually have requirements mandated by their regulators to the maximum percentage of a given procurement that can be won by a single —
David Roberts
A little anti-monopoly built in.
Pier LaFarge
There is an antitrust function. And by the way, many utility commissioners, if you talk to them, see competitive value chains as part of their regulatory mandate.
David Roberts
Oh, interesting.
Pier LaFarge
And so, do I think there will be consolidation, scaling, and efficiencies inside the value chain of distributed energy resources? Absolutely. Will companies that cannot come up that efficiency curve go away or be bought? Definitely. That is the good news of bringing distributed energy resources to all of a sudden hundreds of gigawatts and hundreds and hundreds of billions of dollars of scale in these United States. Yes, for sure. But I don't believe that will result in some oligopolistic, you know, subsidiary sort of issue where you have anti-competitive behaviors precisely because this is a value chain of a regulated social purpose monopoly.
David Roberts
That's interesting. Right now, I feel like in this space, what we have is kind of an unholy hybrid which is not working particularly well for anyone. One way to go is just, in a sense, back to the future, I guess backward. I don't say that in a derogatory way, but back to sort of the model of utilities, like back to utilities being utilities, which is what you're talking about. The other way I think to go is people talk about a pricing system basically where prices become extremely geographically and temporally fine-grained. Right. And so then serve the function of directing investment where it's most needed on the grid.
This is the other. You know, I have a lot of people in my inbox who are big fans of this sort of, you know, second-by-second pricing model which will send all of the same planning signals. You don't go for that, buy that. Why not?
Pier LaFarge
Well, it's not that I don't go for it. I mean, look, in the debate of energy history, one of the great moments was in the early 90s, like when we really began that process of deregulation or semi-deregulation. And you see it alive and well in the UK, for example, in Europe. I think that it's a viable model. It works in ERCOT, it works in many parts of the country. And I think markets provide some efficiencies and also some inefficiencies of price stability and predictable capital. And how much capital has to get paid to participate in building infrastructure?
David Roberts
Well, infrastructure legendarily does not perform well just in open markets. Right? I mean, infrastructure capital is kind of different than market capital in a lot of ways.
Pier LaFarge
You know, honestly, to me, that debate has fought itself to a historical standstill, David, where the inefficiencies of a higher IRR from private equity participants in a more uncertain, more price offtake oriented market has added cost. And at the same time, market efficiencies and competition have taken costs out. And if we were sitting here and ERCOT had like power that cost 2 cents a kilowatt hour, I would say, do not listen to me, do not do distributed capacity procurements, make everything an unregulated market. But we don't. We have a market where for whatever reason, the price of power is actually pretty similar.
And there are big market efficiencies in ERCOT and some really amazing superpowers in terms of resource adequacy and demand response. Like, there are some really amazing pieces that that tribe has invented and then there are some really big problems, and I think they actually cancel each other out. And if you zoom out to the UK for a second, the big difference between the United States and Europe is that in Europe, people pay an amount of money for power that is relevant to their consumer consciousness. It can be a big chunk of their mortgage. And if you were to ask me, "Would you like to take 30% of the cost of your mortgage and get it back so you can buy more stuff and you just do this one simple thing?" I would listen to you.
But in the United States, we have, by and large, succeeded in an infrastructure compact that not only is invisible, like it's out of sight, out of mind, it's so successful, you can stop thinking about it, you can take it for granted. We have an energy economy that's actually, for most people, relatively cheap and at an economy level, very, very cheap. And there are real issues with energy poverty in parts of the country. There are real people who suffer from paying too much in the United States, and that's a real serious problem to fix. But compared to Europe, we pay way less for power.
And building an efficient market is really conditioned — the preconditional question of "Is that efficient market going to work?" is, can you get people to pay any attention to it? So, price signals are not great when people don't want to and don't have to pay attention. And then, you actually get an even worse condition where if it's only the people who are truly enthusiastic that can participate, you end up with a lot of the value of a competitive market being taken by the richest, most educated, most engaged consumers.
David Roberts
Well, I mean, part of that vision would be that the devices are smart and automatically respond to the price signals. Right. I mean, part of the vision of ubiquitous price signals is that they're taken off the plate of the — then you get, I mean, you know, I just talked with Cory Doctor the other day. Then you have a whole new set of worries about lock-in to platforms and platform enshittification.
Pier LaFarge
Absolutely. Imagining a perfect, software-driven, interoperable, competitive, and unregulated market that also happens to work well for consumers and the climate, and doesn't have any sort of issues of high-pressure sales, fraud, or regressive aspects. You can imagine that. But the reality is, climate change is here now. The dragon is sitting on the continent, scraping and clawing and hurting people. And we have an infrastructure compact that actually works, that delivered the first 120 years of the electric utility model, and it has risen to the moment when we needed electricity in the first place, rural electrification, post-war industrial boom, air conditioning.
Now is the next time. This is the moment. 2024 is the next big chapter in US energy history because of manufacturing, because of data centers, generative AI, political competition with China. Getting this right is not just about optimizing some beautiful energy system so that energy nerds can be excited about acronyms. It is about providing support for the US economy. It is about growth, it is about geopolitical security. Putting data centers in Ohio and Kansas, not in Saudi Arabia, matters because they're going to train the drone swarms of the 2040s. This is not just about the price of energy or how efficiently competition delivers lower cost.
David Roberts
Yeah, yeah, yeah.
Pier LaFarge
Energy is for something.
David Roberts
One of the things you're talking about here, which is somewhat out of fashion, is kind of the merits of central planning. The idea here is the utility has, as you say, this sort of landscape-level machine. It has the view of the entire machine. It knows where it needs things. But it seems like when you describe that, what comes to mind for me is an old-fashioned vertically integrated utility like you get in the Southeast, like Southern Company or something like that. They are procuring, they're buying, they're owning, they're running, they are truly running the whole thing.
I have a little bit less clear of a vision of how this works in restructured markets. The utility that's going to procure DERs, you're talking about distribution utilities then in wholesale market areas, which seems like a bigger change for them than this would be for like a Southern, a vertically integrated — like Southern Company. I think my guess is you pitch them this model, they're like, "Yeah, that model makes total sense to us. That is literally how we do things." But pitching it to a distribution company in a deregulated market is a little bit of a bigger thing.
And I don't totally understand how it works in that market. So, say a little bit about that.
Pier LaFarge
Yeah, let me give you three hot takes in escalating order of interest.
David Roberts
Hotter and hotter. Whatever that pod is with the hot sauces.
Pier LaFarge
Yeah, I wish. I would like to do that someday. Hot take number one: a restructured market and a T&D utility. Most of the value of distributed energy resources we're talking about for the grid are batteries. And so, a distribution utility can absolutely procure batteries if they are primarily distribution resources. And it can include that into its distribution capital planning for resource adequacy and grid functioning.
David Roberts
Right. That would just be like the distribution utility viewing batteries as a piece of distribution infrastructure, which they are.
Pier LaFarge
And it's a one-for-one, right? I mean, you either — to do a distribution utility's job, if the planners inside the full, you know, the market, right, whether it's an RTO or a co-op or whatever it is, they say, "Look, we need to double the amount of electrons that go over this network." And they say, "Okay, I need to make this substation not melt. With money and copper. And these transformers are the ones at risk." Okay. Or, so if that's $5 billion, well, I could put a billion dollars of batteries in exactly these places and avoid that $5 billion upgrade.
So, like, that is the job of a distribution utility. So, I think that much of the value of a Distributed Capacity Procurement is contained and totally accessible inside distribution utilities. And by the way, about half of the utilities we're actively engaged with promoting this model and bringing it into their institutional work are distribution utilities.
David Roberts
In wholesale markets.
Pier LaFarge
In wholesale markets, yes. In restructured markets.
David Roberts
This is a slight side thing, but I just... I'm curious about this. Like, just between us, the value of distributed energy, most of that is batteries, right? I feel like rooftop solar used to be sort of like what we put on the tin, you know, sort of like the advertising, the big thing we use as a symbol.
Pier LaFarge
It's like the Wheaties commercial. Just rooftop solar is the Wheaties commercial of DERs. Batteries are like the spinach and broccoli.
David Roberts
In terms of what we want distributed energy to do to help the grid, most of that is what batteries do, right? So, if I'm a utility, and this, to me, is just about deploying distributed energy in such a way as to make the grid operate better, I'm just deploying batteries. Like, why am I messing with rooftop solar at all?
Pier LaFarge
Yeah, there. So, this is a side thing, and then I'll get back to my other two hot takes. But it's a really important point. Most of the value to the grid of distributed energy resources in the task of doubling the grid comes in the form of batteries or stored dispatchable electrons, which can include natural gas and diesel. Less from a climate perspective, but that's just, you know, technically that's the case.
David Roberts
Or hydrogen. Don't forget hydrogen.
Pier LaFarge
Or hydrogen. Right. Any stored value of electrons. And so, batteries are the lion's share of the grid value of DERs. However, rooftop solar and ground mount solar, and the bigger the better, particularly if you can get it over 500kW nameplate and even better over a megawatt from a cost per watt basis. But let's say you have a megawatt of rooftop solar and then 5 megawatts of batteries in trailers in an industrial yard. What that solar does is optimize the state of charge of the batteries, and it adds energy value to the capacity value of the batteries.
The batteries are doing most of the work to make sure that no transformer overloads, the substation doesn't need to be upsized, and the distribution system isn't melting. So, the batteries are really doing the lift. But when you run the numbers, it, in many cases, not in all cases, makes sense to put solar on and around batteries to actually make the batteries better from a total grid efficacy standpoint.
David Roberts
Oh, funny. So, you're just boosting the value of the batteries. They're like battery enhancements.
Pier LaFarge
Yeah. So, it's actually the thing you said first. It's just that solar can make batteries even more valuable and, in some cases, at a rate that allows you to spend money on the solar. But that really does depend, and the math doesn't pencil very well unless you're putting a bunch of solar around a bunch of batteries. So, I don't think that applies to residential.
David Roberts
Not to get stuck on this, but it seems to me like if you are doing a wholesale shift from a DER market driven by consumer preference, a DER market driven by consumer preference, I think is going to include a lot of rooftop solar because customers like the idea of it. Right? They like it. It's got good vibes.
Pier LaFarge
The vibes are good.
David Roberts
And that's what you need also for personal resilience and backup. But a utility-led DER market, it seems to me, is going to involve a lot less rooftop solar and a lot more batteries. Is that fair?
Pier LaFarge
It is. And again, going back to your opening premise, which I really like and I think actually reflects my views on this, is, you know, chapter one was about consumer-driven adoption of renewable energy and we got the cost down, we proved it could work, we built an industry around it and we should be damn proud. Chapter two is about thinking from an infrastructure-first mindset about utility-led deployment in the way that adds the most value to the grid and deploys distributed energy resources at deca gigawatt scale all over the United States to fundamentally support a faster, cheaper build out of the US electric grid downstream of manufacturing, data centers, geopolitical competition, and generative AI.
David Roberts
You might have heard the podcast I did with Lorenzo Kristov, who's very big on distributed energy. This is a point that he made to me. He makes it all the time, which really flipped my lid. Now, I make it all the time and pretend it's my own. It's just that from a societal perspective, from a grid perspective, it makes no sense to size a solar and battery system on a rooftop to the energy consumption of the building. That makes sense from the building owner's point of view, but from a societal point of view, from a grid point of view, we just want to maximize how much the building can hold.
Right. Like, we want to maximize the amount of distributed energy possible for that building, regardless of the building's individual consumption.
Pier LaFarge
And David, people who are open to that point, it really starts to create a kind of division or disconnect inside this movement. More and more, the way I hear aspects of, particularly the residential solar industry, advocating for its product is a narrow defense of a business model they've gotten used to and a consumer relationship and marketing competitive advantage that they believe helps their particular P&Ls, not open, honest arguments about what is the best solution for the climate, the grid, or society.
David Roberts
Yeah, and maybe they know on some level that a utility-led DER push would be mostly batteries. I mean, maybe that's hovering in the background here. I mean, maybe it is the case that we're deploying more rooftop solar than is rational on a kind of globally assessed level. I know people hate hearing that and I'm going to get a lot of angry emails for even saying it, but —
Pier LaFarge
I don't think it's the batteries. I think that a lot of solar companies are really well-suited from a human capital and resource systems and engineering and like business processes, infrastructure procurement, they're really well-suited to deploy a ton of batteries. Right. And you know, look at Sunrun. They're making a ton of progress. They're closer and closer to becoming and talking about themselves as a battery-led grid services company.
David Roberts
No, that's Mary Powell, the CEO said that to me flat out "We are a battery-led company."
Pier LaFarge
Now, big shout out to Mary Powell and a bunch of other folks there, Chris Roucher. Right. Who are really driving that shift and I think they're right. I don't think that the aversion is about batteries versus solar. I think that actually the more complex sticking point as you think about the difference between an industrial incentive versus a climate incentive or imperative is actually about consumer financing. What rooftop solar has made billions in is long-dated high IRR —
David Roberts
Yeah.
Pier LaFarge
financialized contracts with escalators. And the industry that really spends the money on advocacy in the policy space in solar, I think, is primarily backed by the financing piece of that industry. It is not the people who build solar, who design it, engineer it, who put it in a warehouse and go out and actually build it. The companies who know how to do that and make money doing it are not only going to be fine, they're going to be much, much bigger companies with more wealth created and a huge solution contribution to the climate problem and to the US grid and to prosperity, economic development, etc.
David Roberts
But to touch on the financing, this would be from the consumer's point of view. If the utility comes to me and does all this for me, part of the advantage for me as a consumer is that I'm not signing or even particularly thinking about some novel new financing something. This is just going to show up on my bill, right? It's just going to be integrated into my electric bill in such a way that I don't have to think about it?
Pier LaFarge
Yes, that's right, and as a credit. I mean, what I love about this idea is, instead of taking debt to get energy ownership, what you get is a 20-year risk-free annuity paid by the utility because you're participating in the grid. Right. By the way, Sparkfund's corporate mission is to make buildings a valuable extension of the US electric grid. That is actually our formal mission. And fundamentally, the reason we believe that's a good idea is because it actually lets building owners participate in the flow of value of being a valuable extension of the grid.
David Roberts
Yes, and this is like, "Can we put a device on your building that will basically sit there and print money for you?" You don't have to maintain it, you don't have to operate it, you don't have to finance it, it's just going to sit there and make money for you.
Pier LaFarge
You don't need a 700 FICO score. There's no green lining, there's no first cost issue, there's no down payment issue. And by the way, when one person, particularly an economically vulnerable person, takes out debt and owns a system for 20 years, that's just one system. If that thing breaks or has out-of-warranty issues or the companies go bankrupt that sold it to them, that person can lose a lot of money. So, infrastructure models that own hundreds of thousands or millions of systems provide value on average, but they can share that value with no risk to the consumers who just want to pick their kids up from school and do whatever it is that they do for a living.
That's the difference between infrastructure thinking and consumer adoption thinking that relies on credit-based, financialized models.
David Roberts
So, I interrupted your hot takes. So, I have, as I told you, a kajillion questions and they just keep popping up. So, the first hot take is distribution companies, distribution utilities in wholesale market areas are going to be willing to deploy a lot of batteries purely for the health of their distribution networks.
Pier LaFarge
Yes, and can incorporate that normally inside distribution capital planning processes, inside their existing regulatory authority. In some restructured markets, there's more question and political heat around "Are batteries distribution assets?" In some markets, that's easier; in some, it's a little harder. I believe in most cases it's plausible. Second hot take: By 2050, every power market in the United States will be an IOU again.
David Roberts
Really?
Pier LaFarge
Because — now, I want a caveat. I don't.
David Roberts
So, you — hang on. So, that means no more munis, no more publicly owned utilities, no more. What are you saying?
Pier LaFarge
I'll clarify my hot take. And that was my spiciest one. I jumped right to the end. If by 2050 every power market in the United States is an IOU, what I mean by that is no municipals and co-ops can exist in their really, really valuable local context. Right. Having citizens be part of a power system, having members be part of a cooperative economic model, I think, is really good economic code that does and has existed where the grid either gets thinner in rural areas or very, very community-specific in municipalities. So, I think that's good code.
It's been part of this energy system since the beginning and I think that's actually a separate part of the energy analysis. What I'm talking about are markets that were run as IOUs and then were restructured starting in the 90s to break apart transmission, distribution and generation.
David Roberts
Oh, you think we're going to go back?
Pier LaFarge
I think we're going to go back.
David Roberts
We're going to re-restructure?
Pier LaFarge
I think we're going to re-restructure.
David Roberts
Interesting. That has not happened anywhere yet though, right? We have not seen that yet a single time.
Pier LaFarge
No, it hasn't. Which is why it's my spiciest take.
David Roberts
But we also haven't seen a single new move to a wholesale market in a while either. We're sort of frozen right now.
Pier LaFarge
Right. And look, going back to your point about Southern Company, any IOU that remembers what a utility is for, which is providing the lowest cost, most reliable, safe power to provide economic development and shared prosperity, that is a foundational infrastructure model. That is a regulated monopoly franchise that uses Wall Street's money for like 3.5% or 4% dividends to build a landscape-scale machine that helps the whole economy exist. And that model, that regulatory compact, is regulated for social purpose and can price the full marginal value. This is the key point. An IOU can price the full marginal value and marginal cost of transmission, distribution, and generation as if it was one system.
And you know what? When the grid isn't growing and you want to optimize it and convince it to uptake new technology, breaking those apart creates more space for optimization. But when you need to double the grid for critical infrastructure development upstream of economic development, geopolitical competition, when it's time to build manufacturing facilities and data centers and compete geopolitically, all of a sudden you want that infrastructure scheme to have transmission, distribution, and generation as part of its same planning system.
David Roberts
Interesting. This is almost spicier than your central take care. I mean, or maybe they're connected. You know, maybe these two takes go together. Like if you're right that a utility-led DER model is the way to go because of utilities' advantages in central planning and financing, the logic of that suggests de-restructuring, right? The logic of that suggests going back to vertical —
Pier LaFarge
There you go, you got it. I think de-restructuring is definitely the worst way to say that. And that's what I'm going to say for the rest of — I'm going to credit you.
David Roberts
Hang on, I'll come up with an acronym for de-restructuring. That's what we do.
Pier LaFarge
De-restructuring, I would like to formally submit my vote for that.
David Roberts
So, going back to Southern Companies everywhere, this is of course Southern Companies are thought of as kind of the bête noires of clean energy right now, currently. So, one of the frequent themes here on Volts is the regulatory structure under which these utilities operate. They get a guaranteed rate of return on their spending. What you're suggesting is just fold DERs into that on that same model. But one of the critiques of that model is that it incentivizes utilities to overspend, basically to not seek the lowest cost, but in fact to seek the maximum amount of money they can get past their regulators.
Why wouldn't that same dynamic apply here?
Pier LaFarge
Well, when you look at the map of IOUs versus restructured states, you don't see a map that makes the IOUs look like they have more expensive power. And I would say you see the opposite map, which is that by having the ability to plan and price transmission, distribution, generation, and have regulators that know what a utility is for, which is making power cheaper, reliable, and safe so that you can have an economy. The last 20 years of running that experiment, comparing IOUs to restructured markets, shows quite the opposite effect, which is that IOUs on average have cheaper power and more industrial growth and more economic growth in their states, and restructured states have higher cost power and less economic growth on average. I'm pretty sure that's true.
It would be good for someone in your many, many bright people listening to fact-check me on that.
David Roberts
But it's not so much structured versus restructured, it's the ownership model. Like, if the point of the utility is to make profit for investors and the way it makes profit is by spending money, it will want to spend as much money as possible, even if it's in an old-fashioned monopoly market.
Pier LaFarge
Yeah. Something that's always confused me about this debate, David, is that it's not like in a restructured market where you have private equity-backed IPPs (Independent Power Producers), who are building power plants. Like, they don't want to spend more money and make more money, and their cost of capital is way higher than the utilities because it's not guaranteed. And they take all sorts of contractual risks that mean they have to charge much higher IRRs that start at 9% and end in the high teens to the return of the investor. And the utility takes hundreds of billions of dollars of Wall Street's money and offers a 3 to 4% dividend.
That's the net money that it costs to build the grid. A 9% regulated return or a 10% or 12% regulated return is what you bake into rates to recover the cost of an electron. And then you take all the operating costs of the utility out and that's the profit that goes to shareholders; it's the net amount. So, people often talk about the gross regulated return as if that's the like there was a guy who wrote an article recently, they called it a "gluttonous return." Right? A 9% gluttonous return. Well, that's a 9% gross return that is then tariffed by all the operating costs of running a landscape-scale grid that's regulated.
And then its investors, the people who actually keep the profit in that utility's case, get like a 3.2% dividend.
David Roberts
But then, you also have an incentive to minimize operational costs. Right. Which is another critique of utilities is that they don't do the upkeep, they don't trim the trees, they are incentivized to minimize spending on which they don't get that return. That's part of the critique.
Pier LaFarge
Right. I mean, again, another confusion. Would a private system be incentivized to maximize its OpEx that comes out of the same gross margin? So, what if the gross margin is 18%, coming down to a net acceptable return of 9 or 12? Everyone optimizes operating costs. Everyone. I mean, I think we've forgotten what we're talking about. Like, we framed utilities as if they're these big evil private corporations and private equity-backed for-profit solar companies, DERs, VPP aggregators, and IPPs are like some noble climate purpose group of knights that are, you know, the Hayekian hooves galloping towards the beautiful future.
I mean, give me a break, right? You know, regulated public purpose monopolies who are chartered in the public benefit is the most successful balance of private capital and public purpose in history. It's the only operating example of socialized infrastructure in the heart of the largest economy in the world. And we've used that model again and again at critical junctures in energy and economic history, which are often the same thing, to animate that growth. Right. And to animate prosperity.
David Roberts
This is so funny because I know, I mean, I know from having listened to some of your talks and stuff now that you personally are a big markets guy, love markets, probably in the Hayekian brigades yourself, but it's kind of funny, electricity makes socialists out of all of us.
Pier LaFarge
It does. And the political coincidence. I am, broadly speaking, a grumpy conservative, not socially, but economically conservative, who grew up partly in Appalachia, partly in the South. I don't have an intuitive connection to the concepts of central planning or, you know, institutional economics. Those were dirty words for me too, right? I too then went off and became a coastal elite educated — I'm a Middlebury graduate, for God's sake. I was at PowerShift. I told you that, right? No one at Power Shift in 2007 was like cheering central planning. And the reality is that although this was not in any way my intuitive bias, I just think I had the luck of starting this company way too young.
I started this company at 24, and I didn't know anything about this system. So, I could just ask sort of some first principles, ignorant questions about it, and not get too wrapped up in the energy markets and kind of technocratic piece of this. And I was just asking these primarily from a climate perspective because I really genuinely give a shit that we maintain a stable climate that gives us the ability to have an economy that keeps people healthy, rich, and safe. Like, that's the point of climate change to me is to, like, have a stable environment, to run an economy to keep people healthy, rich, and safe.
"And that's why I'm in this movement, that's why I'm sitting here. But at the same time, I asked myself, 'Well, utilities have been keeping the lights on just about 100% of the time for like 3% of the economy's money. And we get the whole rest of the economy downstream with that power.'"
David Roberts
What a payback, right? What a payback for that investment.
Pier LaFarge
And then someone says, "Well, we should spend all this time building acronyms and policy innovation and tweaking this and tweaking that. It's going to do two things. It's going to make the energy economy in your state much more efficient because of markets. Oh, also it's going to make the power twice as expensive and all the industrial jobs leave, but whatever. And it'll make it cleaner." And look, I care about the cleaner, but I just think that the thing we forgot was that utilities are surprisingly good at their job. And in fact, they're so good at their job that we've taken it as a precondition.
We've taken it for granted. And we're at a moment in US history, I think, in a lot of ways, where we've really got to check some of our underlying assumptions about this stuff and dig deep into what it's going to take to build an economy that actually works for people and creates value and sustains it in the United States.
David Roberts
Yeah, it's funny, we are sort of like, with all the acronyms and the market tweaks and everything, kind of attempting to create a system that mimics what a smart central planner would do, because we've given up on our smart central planners, basically. Right. Like a lot of this is just like utilities have been in a hostile relationship with our movement for so long that we've, I think, a lot of us have just sort of given up on the idea that they could do their jobs. And this is, as you say, their jobs.
Pier LaFarge
The historic antagonism between the solar industry and utilities is about habit and forgetting. And it is now time for curiosity, for empathy, and for remembering what these systems are for and how they create value.
David Roberts
On that note, one of my big questions here is, would PUCs, like, say, a utility got religion on this, bought it, wanted to go do it? Does it need special permission from its PUCs? In other words, is this a change in operation that requires some regulatory change, or is this something that, in your view, a utility could just go do?
Pier LaFarge
It's a very good question. And I think it's something they can put into their normal infrastructure planning process, but that then requires review and approval by a commission for confirming that it is in fact in the public interest, lowest cost, most reliable. So, I think that you can drop a Distributed Capacity Procurement right into an IRP or a distribution capital plant. You could pick up this tool tomorrow or whenever your next IRP cycle is and go to your regulator and say, "We are a utility based on the demands of society and needed load growth to support our charter in this state.
We are going to add, you know, hundreds of megawatts of batteries, distributed solar gensets, etc., microgrids into that plan. And we are going to submit it to the regulator and ask them to approve us talking to our customers about hosting utility-owned, utility-dispatched assets for the benefit of growing the grid faster, cheaper, and more reliably."
David Roberts
And then, PUCs could just look at that and say, "Okay." You don't need enabling legislation or anything like that?
Pier LaFarge
You do not. The best thing about this idea is that it's not innovative at all. You called it out, clearly. And I say that in every, I mean every, time I'm in a room with regulators.
David Roberts
I mean, you're talking about unwinding a lot of what we've called innovation in this space for several decades.
Pier LaFarge
And I don't think much of it has worked. I mean, that's the sad reality. I don't think much of it's worked. I think the track record is bad. And we've created new ideas, we brought on some new technologies, we've created fragile room for innovation. And don't get me wrong, you know, in chapter one, I am proud, I've just said this at the beginning and I'll say it again. I am proud of the work that our industry has done on behalf of the climate, on behalf of clean energy innovation, from VPPs to the technology of distributed resources themselves.
We proved its value. We put it out there, we built businesses, and we brought the cost down. And now history is here, industrial history is back. We are going to double the grid and we should use the same institutions. We should see this as a graduation, not a fight. Right? We have proven that this stuff has value at grid scale. Every VPP conference, every conference you go to says, "Well, DERs have all this incredible value to the grid." Good. Put it into the planning and make it part of the grid.
David Roberts
Right? Well, when I think about interacting with regulators, I mean, from a certain perspective, you could say one of the benefits of this market being extra outside utilities, being just privately run, is that you could do a lot of stuff that, at least in the early days, was not particularly economic, that you wouldn't spend public money on. Right. Like there's a lot of private decisions that were not strictly rational, especially from a sort of grid level point of view. So, if then you're going to do this via utilities, then you're putting a different lens on.
Then, you are spending ratepayer money and you are obligated to do it in a way that is least cost. You are obligated not to make decisions that are frivolous or aesthetic, et cetera, et cetera. Which I'm winding my way around to a point here, which is if I'm going to a regulator and I'm going to install DERs, it seems to me like the lowest cost DER to get the benefits of DERs is a big battery sitting next to your substation, right on your distribution network like that. If you have a big battery sitting next to your substation, you are getting almost all the benefits that you get from distributed energy.
You get the transmission, you get the avoided transmission, distribution, et cetera, et cetera. Whereas, breaking that battery up into a bunch of small batteries in buildings... Or, you could install a 50-megawatt solar field next to your big battery next to your substation, you know, on the distribution side — so it'd still be distributed, but chunky, big distributed — that seems to me the lowest cost. Whereas, breaking those up and putting them and spreading them out over a thousand different buildings seems to be introducing a bunch of extra cost for no extra benefit to the grid. So, if I'm a utility and I have to convince a regulator that I'm doing the lowest cost work, it still doesn't seem like that rooftop solar panels and building-scale batteries are the lowest cost way to do DERs.
Does that make sense?
Pier LaFarge
It does. Although, I think there are a couple of extra steps that actually push the outcome back towards building scale. And those are particularly in vertically integrated — I'll tie in a couple of our previous discussions. If you are fully integrated, vertically integrated, and chartered in your regulatory process to think about transmission, distribution, and generation, you end up with what I would call more like "highest value, most reliable," not just lowest cost. And that means you can see more of the picture. For example, if you have the ability to build solar and batteries and start that by offsetting a CT, a peaker plant, that's one piece of the value.
Next, there's congestion on the grid, which means you can move electrons more efficiently and get them to the right places at the right times. And then there's the avoided distribution cost, and then there's the avoided transmission impact, say, building new lines into a city.
David Roberts
But don't you get all that with a solar field and a big battery next to a substation? You get all that?
Pier LaFarge
No, I'll come back to that. So, I think that you get a lot of it. But there are a couple of really important constraints and considerations. One, many substations just don't have the space to put that many batteries, let alone the solar field.
David Roberts
So, it is land, it's available land. I mean, that's one thing, right?
Pier LaFarge
When you run the math of that solution, don't get me wrong, I think utilities can and will do a lot of what I call medium-format distributed.
David Roberts
Yeah, nobody's got a great term for that middle tier of DERs.
Pier LaFarge
I'm an old photography nerd, so I just call it medium format. Medium format DERs. And so, fundamentally, I think that utilities will do a bunch of that. But when you actually look at the maps of their substations and where the constraints are the highest, they often tend to be in the highest density, most space-constrained areas. And there are companies, by the way, you know, like NineDot Energy in New York, that are doing exactly this with highly congested substations. And their biggest focus is on buying land in the right places in New York City.
But it's a whole company's worth of innovation to find that space.
David Roberts
Right, right, right. This is another point that Lorenzo makes a lot, which is just that buildings are the available land.
Pier LaFarge
Buildings are the land.
David Roberts
It's helpful to look at them as available land and available grid connections. Right. Which is another precious, scarce resource.
Pier LaFarge
Particularly, without having to modify the connections. And what's funny is that this is — so there are two more points I think will really drive this home. One, when you put 50 megawatts of solar and batteries right at a substation, you get some of the value, which is the smart sponge value of being able to absorb intermittency. But when you want to inject it back, it's too much energy in one place and you have to upgrade the substation just to make it go the other way.
David Roberts
Oh, interesting.
Pier LaFarge
So, you end up with the same problem just later, like an hour later or in the morning. And so too much concentration of any one point source injection of electrons into that system has basically — not exactly, and this is like, you know, caveat, there are probably a bunch of really smart power quality and power engineers and system engineers here being like, "This guy has no idea what he's talking about." I would just like to caveat: I don't know what I'm talking about, but I've talked to a bunch of you. So, this is downstream of that.
But, fundamentally, that solution does add value, but it also creates problems past a certain point. So one, you don't have the space. Two, round trip efficiencies and backfilling, like injecting power back into the grid, start to chip away and actually add infrastructure upgrade back in. Third, and this is maybe the most important, a really big part of the dollar spend that's coming on upgrading the distribution center system — yeah, substations are the big flashy spend for sure. But you know what else is everywhere? It's transformers.
David Roberts
Right. And they're notoriously supply chain effed.
Pier LaFarge
They're so supply chain constrained, they are so expensive. And if we double the grid, the number of utilities at once, that would have to replace and upgrade. Just huge, thousands and thousands. And then the dispatch and the trucks and the permitting, and that's turning traffic off a street. I mean, you're just talking about billions of dollars and huge amounts of time and permitting, you know, and then we haven't even talked about, then there's feeders and then, you know, there's so many other pieces of the grid. Right. But my point is not that putting batteries in buildings is like the move compared to putting them somewhere else.
When I say, "Make buildings part of the US electric grid," I'm saying, "Put batteries absolutely freaking everywhere, up and down the chain to whatever extent there is available space." And when you run out of land and utility and utilities, scale right away as you knock on doors and ask people, "Hello, ma'am, today is a Tuesday. Would you agree to host a battery?"
David Roberts
Yeah, so just to return briefly to the customer experience, you knock on my door. Your pitch is, "We want to install X, Y, and Z. The sum total of your interaction with X, Y, and Z is going to be that you're going to save a little money." That's literally like, "We'll come in, take a couple of days, install it, get out, and then your life will go on otherwise unmolested."
Pier LaFarge
That's right. You won't even save money. We'll just pay you. Like, you show up and you pull on people's, I think, really core instincts. You say two things. One, "By being part of the solution, we're inviting you to do something that's good for you and your family, good for your neighbors, good for your community, good for the grid. So, do great things together. Be part of the solution."
David Roberts
Yeah.
Pier LaFarge
And mostly, I think when you give people that opportunity, they like it. And two, "Hey, for that value that you, of your own free will, are creating for yourself, your community, and the grid will pay you for it."
David Roberts
But in most cases, that payment will show up as a reduction of my electricity bill.
Pier LaFarge
Oh sure.
David Roberts
I mean, it'll be on the bill in most cases.
Pier LaFarge
On bill, yes. I mean, I just think of it as like, if you pay 100 bucks a month for energy, you're still going to pay 100 bucks for energy, but we might pay you 30, 40, or 50 bucks to have a thing in your house.
David Roberts
Right.
Pier LaFarge
And also, by the way, you said this earlier, you know, it makes no sense to size batteries to the needs of the house unless you're selling it to someone. And if you make a really big battery in like — so let's say a small business that's got a big cement yard and a pretty good power hookup that's not being used because it used to be a bigger store or a more industrial area. Think of how many places in the United States that exists. Yeah, go drag a megawatt battery and you can give that small business owner enough money to buy their building from their landowner in 10 years.
Right. We're talking about participating in the wealth of the energy transition in a way that has nothing to do with credit, nothing to do with maintenance, nothing to do with understanding or how much time you have to sign up for something. This is exactly the way that gas companies built wealth and power by putting gas wells in farmers' land. It's the same way that the clean energy industry has built wealth and power all over the United States by putting solar panels and wind turbines in fields. This is bringing that model of space leasing for needed energy equipment as part of the energy transition into the city and into towns.
David Roberts
Investor-owned utilities are going to want to get a healthy rate of return. Is there not some question about whether these things are profitable enough to generate that rate of return for them? In other words, are utilities going to want to do this? Is the rate of return that they'll be able to get on this stuff enough to pull them in?
Pier LaFarge
They don't think like that. Right? Because it's a guaranteed, it's a regulated rate of return. So, they could like rate base a potato and earn 9% on it as long as their regulator deems that said potato is fully in public purpose and is the lowest cost, most reliable for shared prosperity. You've got yourself an earning.
Well, let's talk about planning, because we were going to get back to planning. So, if I'm a utility with a multi-state territory, right now I'm planning and I'm planning, I'm doing my IRP, I'm planning how to meet demand, basically. My planning involves comparatively big chunks, big chunks, a big transmission line, a big power plant, a computationally manageable number of entities that I'm trying to make work together. We're talking now about going from dozens of big chunks to thousands, hundreds of thousands, millions of highly distributed devices all operating in concert. That just seems to me in terms of planning, combinatorially unworkable.
David Roberts
It seems like, and this is where Lorenzo's logic goes, it seems like what you'd want if you were going to do this model is a local utility, a DSO, what people call a DSO (Distribution System Operator) that then manages all this complexity at the distribution level and then just sort of presents to the transmission level as a single entity, basically as like a giant VPP I guess you'd call it, or whatever. A) Do you think it's possible now for today's utilities to do planning involving this level of complexity? In other words, are they ready to plan for all this stuff?
And do you have any thoughts about DSOs, about reforms trying to move control, utility control, closer to the local level?
Pier LaFarge
I do. I'll say a couple of things just as context. One, I constitutionally and politically believe that in many cases, moving control down to local levels is a critical piece of the next 50 years of American life. Right? Like that's in general something that I'm really passionate about and I think is important. The complexity in this case, though, is that central planning works best at system scale, not fragmented scale. And I actually don't think that planning for this many devices is that hard. Utilities need to know which feeders have stress and congestion. They need to know how much they're planning to upgrade substations and when.
They need to know which transformers are at risk of overload. But they actually mostly know those things. And then you need to spend a couple million dollars on software and services to help with companies that come in and do distribution system impact modeling. And there's software, right, that just can give you a bunch of these answers. Companies like Kevala, Recurve, ThinkLabs AI, and a bunch of other emerging ones — Innowatts. And so you can do the planning, you can do the modeling, and you can estimate the impact of DERs, just like you can a power plant.
You just say, "Hey, if you had 800 megawatts on your system here, here, and here. Here's how that would change your capital planning and your upgrade timing, and which feeders would no longer need to overload or be at risk of overload." So, planning, I think, is pretty straightforward. Operating and dispatching — the hardest part of what I'm proposing is actually the fact that the DERs go both directions. Right. They can both absorb power and inject power.
David Roberts
Yes, much more complex.
Pier LaFarge
Yeah, bidirectionality is the sort of scaling factor complexity that you're describing in the operations and dispatch and coordination side. But I don't think it is on the planning side. So, I agree with your point, but not where it sort of hits. Right, the planning is doable and the decision making on deployment is doable. And it also, at scale, has a pretty good, you know, again the regulatory compact says do this also because remember it's lowest cost, most reliable. So, also by putting batteries on buildings, you're making the grid more reliable and that's actually part of the charter and that doesn't need to be cheaper.
Like, regulators are allowed to say, "Spend more money to keep more people safe, happy, and prosperous because it's a society, right. It's the economy, stupid." So, that reliability term is actually something that people undervalue. And again, this is going back a couple of points too, but that's where I think the market people miss out on why central planning and infrastructure thinking matters. Because regulators care about the emergent value of keeping people healthy, safe, and prosperous.
David Roberts
Which does not appear in markets. Basically, it's not a signal in markets.
Pier LaFarge
No. And so, asking to create real-time, minute-to-minute, feeder by feeder pricing that everyone could participate in. In a private equity-fueled, Wall Street-traded cacophony of software, sending AI signals to trade energy would externalize the crackers out of human flourishing and reliability and safety. So, I've never understood why people are so stoked and so many climate-oriented people who I also understand are broadly interested in human flourishing, which is why they should be in my view in the climate movement. It's like, you know, why that has never tracked is like putting a Wall Street trading desk inside the real-time decisions around how the energy system —
David Roberts
Yeah, and the thing is, there's no one who's willing to follow that market logic all the way. Right? Like even in a super market-y system like Texas. Right? The theory of the market is that when power becomes scarce, prices rise and sometimes, per force, the logic of that is that sometimes they're going to rise super, super high. And like, consumers are going to friggin' hate that. But that's how it's supposed to work. But no one will actually let that process play out. But in practice, everybody comes in with extra market mechanisms when reliability or price looks to be under threat.
So, like everybody, in their heart of hearts, wants some central planning here.
Pier LaFarge
Yeah, because energy is for people, energy is for society. That's what we're doing here, right? It is not an optimization desk exercise. It is a really, unironically, critical task to keep the lights on and keep power flowing. And by the way, many of the people, including me, who are debating this and have the opportunity to engage in these systems are not that vulnerable to these outcomes. And I've got backup power and if my power went off, I'd be fine. And if my power cost went up, I'd be fine. But there are people in the society who really, really, really, really, really care whether or not power goes off and their oxygen machine stops working or they have to, you know, find a new way to get to a place they need to go to work.
Right. There are real consequences for real people.
David Roberts
It's a little bit like the health care argument, right? Like, the market logic in health care is people who can't pay die. And it's the same thing. Like, we say we want markets in health care, but we're not willing to let that happen. So, we end up with these unholy hybrid systems. Right, the worst of both worlds. And it's kind of what we have in electricity is like the worst of both worlds right now. So, there's no grid logic for there being multiple VPPs in a single distribution area. Like, the logic of aggregation is such that it just makes sense for everything in a distribution area to be a single entity, right?
To act as a single VPP. So, this vision would be utilities basically operating their territories as single, giant VPPs.
Pier LaFarge
Utilities should just be utilities, and utilities operate power plants all the time. It is not easy. Even though the math is a little more fragmented, they use sophisticated software, economic models, and market interactions like submarkets and bidding conditions. If you go to a trading desk, both in an unregulated market or even in an IOU, you are seeing really sophisticated, really robust, technologically driven, and economically anchored management of a system either for private profit or for public purpose. I believe that an IOU or a distribution utility who deploys hundreds of megawatts or gigawatts of DERs can and will connect them to a DERMS and manage them.
And look, maybe there'll be sub-DERMS, there could be local aggregators. I have no problem if the DSO exists or if they, you know, smaller VPP aggregator bids capacity and I think there's a really great role for that on some of these kind of, you know, some of the DERs that sit at the edge of grid value and private value. Right, there's some, you know, connected assets, thermostats. So companies like Renew Home, you know, advocates like Clean Energy Works like they're all these folks doing great work — Uplight — like great work on how do you connect assets.
We've got another great company in V2G. Right. How do you find assets that people want? Thermostats, cars. Right. And how do you create energy efficiency savings value to the consumer and then have that person get part of the value from participating in the grid? That just means that you can bid a bunch of water heaters or thermostats or cars part of their time. You can bid them in as a really cheap dollar per megawatt-hour supply contract. I think that's the future of that category. And by the way, I think that fits elegantly under the umbrella term of the distributed capacity procurement.
And you know, fundamentally, distributed capacity is buying the things the grid needs where it needs them most to be safe and durable. Right. No overloads, no risk of melting, like putting the batteries everywhere they're needed. Great. That gives you the confidence that your system is safe. And then after that, the role of distributed capacity is just the cheapest megawatt hour supply you can possibly buy, even if it's probabilistically accredited.
David Roberts
And the logic here, like if we're serious that this is so much cheaper than building utility-scale power plants because of T&D costs, right — so you have to add the T&D cost to the central power plants and if you add those two together they're going to be more expensive than this — it sort of makes sense that this is going to be insofar as VPPs are competing in kind of wholesale, they're going to be the first dispatched I guess is what I'm trying to get around to. The logic of this is this is always going to be on the top of the dispatch order, is it not?
It's almost always going to be the cheapest thing to do first.
Pier LaFarge
I think that's right. And by the way, a lot of IOUs, including Southern Company, have come out with public, regulatorily anchored graphs that say that the spear tip of their future grid is dispatchable DERs.
David Roberts
Interesting.
Pier LaFarge
So, a lot of IOUs actually have been saying this for a while.
David Roberts
Southern?
Pier LaFarge
Absolutely. Southern Company absolutely looks at their grid as starting with those least-cost dispatchable assets.
David Roberts
You know, when I threw this out on Bluesky, a lot of people were just like, "No utility is going to want to mess with this. Why would they want to do this?" So, what are some examples? Like, this is mostly in the future, but some have dipped their toes in. So, talk a little bit about utilities that are starting to actually do something like this.
Pier LaFarge
David, my challenge to energy Twitter or whatever the Bluesky thing is now, you've been ignoring IOUs for way too long. And that's a mix of habit and forgetting. It's an antagonism that we've just got to take a breath and approach with more curiosity because we're in the same fight. And utilities are the societal institution we've invented to deliver most of the electrons in society 100% of the time.
David Roberts
Yeah, and it's kind of funny that we're ready to abandon them, even though in every state we literally have PUCs whose job it is to tell them what to do. Like, we could not have a more direct mechanism of control over these things. And yet, we're sort of throwing our hands up and like, "Oh, they're useless." So, it's a little crazy.
Pier LaFarge
We're on Twitter, yelling at them rather than in regulatory commission hearings and bringing resources and staff. If you're an energy advocate and a climate advocate out there, go work for a PUC, go be a staff member. Go do public service. Go do the math. Go show up and listen to people from community justice organizations that represent workers and communities who talk about how the grid matters to them in the real world. Go do that work. Be part of how our society does this work day in, day out. It is tireless, it is detailed, it is thankless.
And there is a sweetness inside the American utility industry that most people do not expect. I mean it.
David Roberts
I've never heard them described as sweet before. That's a new one.
Pier LaFarge
But they are chartered. I mean, just to talk about this directly, when you give a monopoly, a charter in society, right? And the utility charter is lowest cost, most reliable to support economic development in a territory safely. That's it. And if you give that monopoly normative power to change its charter, you have created a very dangerous thing indeed. You will get Eastern Europe block countries, you will get Venezuela. Right. Monopolies that can renovate their own charters become violent. The US electric utility has never been able, in most states, and least of all in states that still have poorer economies, a bigger percentage of their economy is industrial or manufacturing.
Right? So, the Southeast, the Midwest, the Mountain West, those economies did not feel that they had the money to spend or the room to spare in their growth journeys to mess with that charter. Our richest states, California, New York, Massachusetts, Connecticut, did feel that they had excess money so that they could add climate change and clean energy into that charter. And in a lot of ways, I'm glad they did because they brought the cost down. That was a big part of the success of chapter one. They made a market in a grid that wasn't growing. But it cost people money, it shifted costs, and it made some people more vulnerable to energy poverty, but it also helped us in the fight against climate change.
So, history is long, it's complicated, and there are trade-offs. So, I think that we'll look back at that history in terms of climate change very positively. But, I think what will surprise a lot of your listeners is that for the next 20 years, it's going to be IOUs in red states that drive clean energy and DERs to grid scale.
David Roberts
It would just be hilarious for my career if, like Southern Company, emerged as the hero. As the hero after all this.
Pier LaFarge
I would bet on Xcel, Southern, and Duke as three of the ones that will surprise you. And Southern Company, in its last IRP, filed and received permission for a 250-megawatt DER program.
David Roberts
Interesting.
Pier LaFarge
They have largely this logic of avoiding peaker plants and providing grid capacity. They have been publicly ordered by their commission to bring a solar and storage program forward in this next. Finally, Xcel Minnesota on August 9th filed a distributed capacity procurement comment talking about 400 megawatts to 1,000 megawatts of battery and solar in Minnesota, exactly for this purpose. You can go look at the filing, it's on the Minnesota PUC docket. That distributed capacity procurement concept was included in a draft settlement submitted to that PUC on October 3rd with a tariff filing due in October of 2025.
So, you know, Jigar Shah, Ryan Long, the president of Minnesota Xcel, and I did a panel at RE+ on that. Look at what folks like Lon Huber are doing in Duke territory in terms of new tariffs that can provide clean energy offtake to hyperscalers to support data center growth, their paired power program, their time to save. There are tariffs and regulatory innovations inside the heart of traditional, charter-constrained, public purpose monopoly utilities that I think are starting a drumbeat that is going to define the next 50 years, or at least the next 20 or 30, because things change pretty darn fast of how we meet this moment of manufacturing growth and data centers.
David Roberts
Let's give a little shout out to Green Mountain, too. I feel like they were early.
Pier LaFarge
Yeah, I mean, absolutely, I should have mentioned them.
David Roberts
Green Mountain is in Vermont, and they're putting batteries in homes and then managing those batteries. They're doing basically what you're talking about, right?
Pier LaFarge
Absolutely. And Green Mountain Power is often one of my examples. By the way, they had a "bring your own device" program that had been running for years and was small and slow to deploy, but still there. They took the cap off their utility-owned, "Hey, would you host this?" program, and in like a year, it's now 10 times the size of the other program.
David Roberts
And that's purely behavioral? That's just purely like —
Pier LaFarge
Yeah, same program. They are just knocking on the same door saying, "Do you want to host an asset? Well, here it is." And by the way, the way they paid for that was by taking billions of transmission out of their plan, not having to build transmission over mountains and forests because it's hard and expensive. And you want to go talk to the Green Mountain State Forest about permitting transmission? Like, you know, see you in the 2050s.
David Roberts
But the reason these traditionally maligned utilities like Duke and Southern Company are going to do this, just to sum this up, is not that climate activists finally got to them. It is simply that a bunch of data centers want to site in their territory. They just don't have enough power to power the data centers. And the fastest way to get more power is to draw on DERs. Is that fair?
Pier LaFarge
It is fair. And I would add manufacturing. All sorts of advanced manufacturing from chips and battery manufacturers and automakers. You know, CHIPS Act, IRA, IRJA, and then just general onshore —
David Roberts
Much more to come, too.
Pier LaFarge
Much more to come. Trade wars, tariffs. Right. I mean, this is about manufacturing, data centers to a lesser extent, EVs, but it is also about geopolitical competition, national security. Again, I've said this a couple of times, but where those data centers are matters enormously to how we will fight wars in the 2040s and 2050s.
David Roberts
Yes, so it's just worth emphasizing here, if you took pollution and climate change considerations out entirely, almost all this logic would still operate 100%, it would still be basically the same situation. You would still need lots of DERs quickly.
Pier LaFarge
That's right. Climate change nor its relevant subsidies fundamentally alter this calculus. Now, cheaper is cheaper. A subsidy is a subsidy. So it would happen to some degree more. Everyone's going to do different math on their substations. And by the way, something we haven't even talked about is you can take a distributed capacity procurement and you can sell it to a hyperscaler as an offtake agreement. I mean, Constellation Energy just sold Three Mile Island's ghost to Microsoft.
David Roberts
I get a real kick out of that. I don't know why this is so redolent with symbolism.
Pier LaFarge
Spooky, scary. And that deal — so that's historic, right? I think that's historically interesting.
David Roberts
So, what then? The utility rounds up a DCP and basically sells it to a power customer.
Pier LaFarge
Three Mile Island is 800 megawatts of nameplate, right? And nuclear has a very high accreditation factor. So, let's just call it, for argument's sake, 800 megawatts. What's the biggest problem with the innovation that selling Three Mile Island's ghost to Microsoft represents? It's that there are very few additional Three Mile Islands, right? Maybe Palisade. So, like, it's a pretty short list.
David Roberts
And Amazon's like, "Oh, we'll just build some nuclear plants." And the rest of the energy world's like, "Okay, you get back in touch in like 10 years."
Pier LaFarge
Yeah, and we'll see if that works, right? In some ways, I hope it does. But right now, if you ask yourself, where could you find 800 megawatts to sell forward to a hyperscaler?
David Roberts
Yeah.
Pier LaFarge
The answer is like 800 buildings. So, if all you needed to do to create another Three Mile Island is build accredited capacity of 1 megawatt in 800 buildings. And yes, I'm aware that that means building 1.6 or 1.78, you know, pick your rating. You know, I get that. It's not just a one for one. DERs aren't clean energy baseload. We're going to need a lot of clean baseload energy and dirty baseload energy to solve this problem for our nation, right? It's going to be truly the all-and-above.
David Roberts
Well, that's what I mean. It's part of what all the batteries are about, right? Batteries effectively make everything on the grid dispatchable. That's the whole magic.
Pier LaFarge
Easier, safer, and on time when you need it. You can handle issues before it overloads. You can dispatch it if it's windy overnight and the power hits Denver. You know, instead of building a smart grid, you build a smart sponge.
David Roberts
But what about, I guess I want to, I want to try to give listeners some sense of the scale available here. You know what I mean? Like, I'm thinking about Southern Company. I'm thinking about, like, Atlanta, you know, put solar and storage on, I don't know, half of the buildings in Atlanta. That's a lot of power at that point. Like, you're talking about multiple big power plants worth of power. Like how, what? Like, do we have any sense of the upper end of the scale available if we really did max out DERs everywhere we could?
Pier LaFarge
Yeah, well, you can do that thought experiment a couple of ways, and I think we can come back to Atlanta, too, because I think that Atlanta, Denver, Minneapolis, St. Paul are some of the most interesting places to think about this idea. But let's just talk about the kind of scale. You know, you can look at irradiance maps, you can look at hosting capacity maps, right. But I do the thought experiment a little differently. Think about it. I'll try to keep these numbers right. 50 utilities that each deploy 500 megawatts a year of DCP. If you did that for 10 years, you would end up with 250 gigawatts of power, which is 20% of the US electric grid.
David Roberts
Yeah. Pretty soon, you're talking about real, real money.
Pier LaFarge
In 10 years. And so, that's just. And by the way, that's just 50 utilities now, that's not a very high scale. So maybe it's 100, 200 a year. You know, I don't know. You can slide those maths. But fundamentally, I think there's a pretty real pathway for this Distributed Capacity Procurement idea to end up representing 10, 15, 20% of even a grid that's double.
David Roberts
Interesting.
Pier LaFarge
In a relevant timescale, over the very same decade in which many of the solutions of centralized power transmission and distribution investments that we have, don't even start kicking in until year 5, 7, and 10.
So, we should be starting now, getting the utility regulatory compact engaged to approve distributed capacity procurements, put them in plan, and start deployment periods so that we can measure DER history not in pilot success or how many pilots are being created, but in how many gigawatts of annual deployment capacity a region has. And we can measure the cost per watt going down from scaled procurement and industrial efficiency. We can measure customer value going up.
David Roberts
Will the cost of capital decline, as this stuff proves out? Or is it just the case that utilities just get cheap capital because of who they are?
Pier LaFarge
Utilities get cheap capital because of who they are. Wall Street gives American electric utilities capital at 3.5%, and they get some appreciation in the shares. But fundamentally, if you asked a private equity investor for $100 billion to go build a landscape-scale machine for a 3.5% return, the answer would be, "Who let this person in the building?" It would be like, "Call security." And what the US electric monopoly utility did right, again, regulated monopoly, was it created the most successful balance of private capital and public purpose in history to fuel American industrial growth.
David Roberts
Yeah, I think about all the conversations I've had that end up in the place where we're going. You know, what we need is like funding entities that are larger and more reliable and have more patient capital and can stay and will guarantee, be in the game for multiple decades. And you know, like we have those in some sense.
Pier LaFarge
A lot of systems, a lot of systems of innovation, end up reassembling current conditions. And in some moments, that's a tragedy. And in some moments, it's really hopeful because it means you have the tools in current form to fight this fight to keep Americans safe, healthy, and prosperous, to drive economic growth, to bring jobs, to keep the lights on, and to fight climate change all at the same time. No new regulation, no new laws, nothing. Like this is, this is how utilities were built. They were built to meet these moments of energy and economic history coming together. And it's what it's been doing for 100 years and it's what it's going to do in this moment.
David Roberts
Well, I guess we'll leave it there. This might be the longest episode of Volts in history, but in some sense, I think the reason this is catching on so much is that it's got a little bit of a "smack your head" about it, a little bit of obviousness, like "why didn't we think of this before?" But like, we have the utilities, we have the regulatory mechanisms to force them to do whatever we want. We have the experience in procurement, we have the cheap DER technology, we have at least the germs of DER supply chains in a lot of these places.
And really, they just need to start doing it. It's a very tangible, near-term, happy story, which we don't get a lot of these days.
Pier LaFarge
Well said.
David Roberts
Well, thank you, Pier, so much. And I can't wait to talk again in a few years and see, you know, what happened.
Pier LaFarge
Yeah, well, David Roberts, thank you for the decades of service and leadership that you provided. Thank you for teaching me a lot of things and for bringing me into this wonderful climate movement and showing me a wall to bang my head against for 15 years.
David Roberts
Thank you for listening to Volts. It takes a village to make this podcast work. Shout out, especially, to my super producer, Kyle McDonald, who makes me and my guests sound smart every week. And it is all supported entirely by listeners like you. So, if you value conversations like this, please consider joining our community of paid subscribers at volts.wtf. Or, leaving a nice review, or telling a friend about Volts. Or all three. Thanks so much, and I'll see you next time.
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