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Todd Snitchler, President and CEO, Electric Power Supply Association:
With 2024 underway, we’ve officially entered the part of the year where we anticipate extreme winter weather events, which bring increased demand on the grid. With two winter storms now behind us, reliability has been top of mind for competitive power providers nationwide. Nate Hanson, President of LS Power, joins us today to discuss why markets matter—and the ways LS Power works to bring maximum benefit to consumers in a transforming grid. You’re listening to Energy Solutions, a podcast from the Electric Power Supply Association, where we talk with experts about the changing electric system. I’m your host, Todd Snitchler.
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Todd Snitchler: Nate, first let me thank you for joining us for our January episode of the EPSA podcast. And thanks also for your leadership here at EPSA. As our Board Chair, as well as your leadership throughout the energy industry, it’d be really helpful, I think, for listeners to learn a little bit about LS Power and LS Power Generation in particular; kind of the role you play and what LS Power does.
Nathan Hanson: Sure. Thanks, Todd. And thanks for having me. It’s been great to be able to work with EPSA over the years. And just a little bit about LS Power. You know, we’re really an investor in the energy space. Historically, we have developed and invested in power generation projects of all technologies; batteries, gas, fire generation, wind and solar projects. But our focus is pretty simple. It’s to invest in energy supply, services and infrastructure, to ensure that we can provide reliable low carbon energy supply at an affordable cost. That’s really what drives us, and you know, with the ongoing transformation to change our energy supply to be, you know, have a lower carbon intensity, we’ve expanded our investments beyond power supply to energy services such as demand response, electric vehicle charging, micro grids, as well as trying to build and expand the transmission system, or enhance the transmission system, to be able to deliver the newer, lower carbon assets, which may be in different locations than where the old power plants used to be, to customers. You know, with the transformation to a lower carbon supply portfolio, and the investment opportunities not just in power supply, but in transmission distribution as well as energy services, our firm has really about tripled over the last couple of years, and we think that we’ll continue to grow. The transformation of the grid and really the expansion of energy use, and how consumers use energy, is really just beginning. You know, we really have a long way to go, and we expect our firm will continue to grow as those opportunities continue to, you know, expand across the United States.
Todd Snitchler: Yeah, that’s a great explanation that really kind of leads right into the next question I wanted to ask you. As we record this where the holidays are close at hand, and we’re trying to get a little bit ahead of the break that, you know many people will be taking and we won’t air this until January. We’re going to be sitting around the holiday table and sometimes this happens to me, Nate, I don’t know if it happens to you, but the question gets asked, you know, what’s a competitive power supplier or why do markets matter? And I like to try to say that, you know, as consumers, you want to pay the least cost possible and as a generator, I have every incentive to both run as inexpensively, but as reliably as possible because I don’t get paid if I’m not able to deliver the service or the commodity when it’s needed. Is that how you think about it or is that how you’d explain it? Or would you take a different tack to explain why competitive power generators are important?
Nathan Hanson: That’s exactly right, Todd. I think competitive power generators and competitive suppliers compete to do exactly that, to provide electricity to the grid, which ultimately ends up at the consumer level at the lowest cost. So higher cost assets may not be able to provide their product, and be less economic in that manner. What that drives is really efficiency improvements.
Todd Snitchler: OK.
Nathan Hanson: It makes us invest in our assets so that we can continue to provide that product in a reliable and low-cost manner. And it also expands to other parts of our business where there’s other services as well as not just producing the power, but transmitting the power, being able to do that at the lowest cost. Also, you know, at the end of the day results in the best possible lowest cost outcome for the consumer.
Todd Snitchler: Exactly. And as you noted a minute ago, there’s a lot of things happening on the system, none of which are free. So, the ability to mitigate those costs, I think, is going to continue to be critically important as we go forward.
2023 has been a busy year for you, Nate, not just as your first stint as EPSA’s Board Chair this year, but also in your role as the President of LS Power Generation. What stands out to you is, you know, some of the key issues that have come up this year, or that have an impact on EPSA members and the competitive power market more broadly?
Nathan Hanson: Yeah. I guess the first one offhand would be the role of firm dispatchable generation. You know, this is something I know EPSA has identified for several years, and continues to make the necessary advocacy points around the need for firm resources to be able to frankly balance energy supply when wind and solar are not producing energy. So as more renewable generation which has a variable output, there’s more volatility of energy supply on the grid, and we need resources to be able to fill those gaps. And this year in particular, there’s been, I think along many policy fronts both in Washington and across various states, the recognition that firm, natural gas resources are going to be critical for, to be able to decarbonize the grid and provide reliable, firm and affordable power as more renewables penetrate the market. It’s just what you need to balance the energy supply and balance of variability of renewable resources. I would say along with that really comes revenue adequacy for these firm resources, so we have firm resources that are necessary to operate a reliable grid, and those resources need to be paid to be able to remain in service for years to come. I mean, our view is that the existing resources that can turn on when you need them to turn on are the lowest cost way to balance the grid—
Todd Snitchler: Yep.
Nathan Hanson: — and ensuring that the policies that are put in place, whether they be environmental policies or other regulatory.
The state policies, for example, as well as the market rules at the various RTO levels, need to ensure that those resources are adequately compensated to make sure they can pay their costs and remain available and reliable as we continue to decarbonize the grid into the future.
And I would say, maybe the last item that sticks out this year is there’s been a great recognition I think across most of the country that as more solar penetrates the market, that’s a great resource in the summertime. What that really does is shift in typically or historically most of the high demand periods. Or where the system gets the tightest has been in the summer, but because of that solar penetration that is now shifting to winter periods. Yeah. And I think that is a much different problem to solve in terms of resource adequacy and I think that’s something that I think there’s been a great recognition of that this year, and it’ll be something that for the next couple of years I expect that EPSA and other market participants will be working on.
Todd Snitchler: It’s worth noting that, while especially relevant in restructured areas of the country, issues surrounding resource adequacy in other areas of the country are happening as well, like the Southwest Power Pool, and MISO.
Todd Snitchler: Yeah, I’d agree with that. I mean, resource adequacy has become vitally important. We’ve had a couple of examples where it wasn’t insured or wasn’t maintained, and we don’t want to go through that again. So, how do we do the best we can to prevent some of that? You raised a couple of issues that I want to kind of dig into a little bit, you know, the impact of policy decisions on the power system was identified by NERC as one of the main drivers for reliability concerns that they have. That was a recent addition in a report that they had, but you got the EPA’s proposed power plant rule around carbon emissions, the permitting reform issues or lack thereof, because Washington can’t figure out how to get to a permitting reform agreement that parties can agree to, the Inflation Reduction Act, and other things are all having an impact on the system. How’s LS power thinking about some of those? And how do you think that, you know, kind of, our space as EPSA, we should be thinking about some of those issues?
Nathan Hanson: That’s a good question because there’s a lot of competing principles in each of the items that you mentioned.
Todd Snitchler: Exactly right.
Nathan Hanson: When you have NERC coming out with guidance that we need firm dispatchable resources to maintain reliability, that’s really becoming an acute problem for most of the competitive markets. And then you have EPA coming out, which will, you know, restrict operations or cause significant capital expenditures. And potentially, you know, almost mandating technology improvements that aren’t really commercial at this point in time, those kind of butt heads with each other.
Our view, and we think EPSA’s positioning on this should be we really need, you know thoughtful, congruent principles of how we’re going to move forward. I mean, we are moving forward to decarbonize the grid as quickly as we can and areas that have moved too fast have had already have reliability issues. I would point to California. Texas is getting there already, and we start to see that in other markets up in the Northeast. I think it’s important for us, because there’s a lot of different initiatives from different, you know, agencies to try to keep in mind that we need to do this all in in concert, otherwise it’s going to be a failure both from a reliability perspective as well as an affordability perspective which at the end of the day hurts consumers. So, we try to take a balanced approach towards these very competing policies, and that’s kind of how we present ourselves, because we try to—it’s a lot of education both at the state and federal level in terms of what the impacts are on the power supply system as well as on the transmission system of these rules and the reforms that are being put forth. They sound great in principle, but in application they may fall short in certain areas and we need to make sure that policymakers are aware of those gaps as we can address them to really at the end of the day, make sure that we keep moving forward with decarbonizing the grid, but doing it in a very thoughtful and reliable manner.
Todd Snitchler: Yeah, I think you’ve encapsulated what I sometimes refer to as the aspirational policies having to interface with operational realities and sometimes that gap is manageable and sometimes that gap isn’t manageable. And I think you’ve rightly noted that we’ve seen some examples of that the last year or so that I think are drawing a much sharper focus on that.
So, we talked a little bit about 2023. As we look into 2024, there’s all kinds of issues that are on the table. Gas-electric coordination is I think an evergreen issue that will continue to have attention. EPSA’s recently announced Energy Expansion Principles and then market design reforms that are needed. What are you thinking about with 2024 right ahead of us as we think about things that we need to be paying attention to, but also delivering solutions on?
Nathan Hanson: You know, I think it’s some of the things we’ve spoken about already. What—how do we ensure that dispatchable firm resources are going to exist in the future? I think that we’re at a point where it’s been recognized they are going to be needed and actually more of them may be needed in the future. And how do we get folks to invest in the various market areas to do that? You know, we have various RTOs across the country that are making regulatory changes to ensure that there’s more revenue driven towards those types of resources in Texas, they’ve implemented rule changes to ensure that, you know, reliable assets can get paid for their performance. In PJM, they are, you know, initiating market rules and proposed market rules to enhance those payments to the firm resources. And in California, we have, you know, they have a different type of system out there, but they’re ensuring that those firm dispatchable resources are there to balance the system when they’re needed. I think we will continue—we’re just starting those market reform changes. And I think we’ve made a great advancement in terms of the recognition of the need for these types of resources over the last year or two, but I think probably over the next year or two, you know, we need to make sure that those market mechanisms are implemented so that we can set ourselves up to continue to move forward with decarbonizing the grid into the future.
Todd Snitchler: I couldn’t agree with you more. So that being said, what, if anything, surprised you this past year, or what may surprise you next year? That’s a loaded question. I mean, Lord only knows what could happen in ‘24, but did anything surprise you? Were there things that, you know, gave you pause?
Nathan Hanson: You know, always something seems to come up. This year, I think the new issue was demand growth has returned across the country. In Texas, it was, well, while it was a very hot summer, their peak demand in the summer grew 10% over last year, which last year grew 10% over the previous year.
Todd Snitchler: Yeah, that’s unheard of.
Nathan Hanson: So, 10% compounding and that’s really just due to economic activity within the state. We see data center growth in the eastern markets, especially PJM. We have had flat demand or declining demand for probably the last 10 years. Now we’re projecting demand growth in certain areas over 10% over the next five years or so. And that’s just one area of PJM. So, across the pool, we’re starting to see very aggressive demand growth targets. And that’s not even looking at electrification of vehicles or electrification of heating systems in residential and commercial buildings. If you couple that on top of really kind of the data center growth in the eastern markets, that demand growth can, you know, compound a 3 to 4% level for years on end. So, demand growth creates, you know, we’ve talked about some of the issues we’ve already dealt with in terms of trying to balance the grid at current demand and the firm—the need for the firm, reliable resources to do that. As you add more demand, we will need more of the firming types of resources to be able to manage the grid volatility. So, that’s the new one this year. We haven’t seen demand growth in significant means in years, and that, you know, it’s just another variability in terms of how can we continue to move forward with decarbonizing the grid and doing it in a very reliable manner.
Todd Snitchler: And of course, that’s something we’re very supportive of. You know, that’s good for our business as well. So yeah, I think that’s a great one.
So at the risk of asking the unknowable, we’ve got an election coming up in 2024 and without asking you to get into any of their personalities, I would ask you, what do you think that candidates should prioritize and what should voters know when it comes to energy, when they think about how to cast their ballot?
Nathan Hanson: Yeah. And I think it’s good not to get into the political discussion around when it comes to energy. Energy is really a necessity of our economy and a growing necessity becoming more important in everything that we do in this country. And when we have disruptions in electricity delivery, it causes significant economic dislocations in the various market areas that it occurs in. So, we really need to just state principles, as I said previously, you know, everyone’s on board with moving towards decarbonizing the grid. But we need to do it in a very, you know, coherent manner. We cannot get ahead of ourselves. We can’t get over our skis as we’ve, you know, seen in other areas where as soon as they do, they start to get into, you know, have reliability issues. It’s kind of like electric vehicles. If there’s a little pause in the electric vehicle production and I think some of that is really being driven by—folks are not buying them because there’s not a reliable recharging infrastructure network across the country yet. So, while we could produce all the electric vehicles we want, you know, a lot of them are sitting on lots longer until people can get comfortable that they can use them in a very reliable and an easy manner. Same thing with the power supply system. You know, I think we need to make sure as we integrate renewables, we’re providing the services and the balancing resources as needed so we can continue to move forward in a reliable and affordable manner.
Todd Snitchler: You pointed out and really in, I think, almost every question because I think it really is that central to what we do. But reliability is clearly at the top of the list of concerns for the power system. And you’re not just a legacy owner. LS Power is also a developer that puts steel in the ground. Do you have concerns about what will be needed to ensure a reliable system? Or maybe asked a different way: what is needed to ensure that you and other EPSA members and others can continue to provide reliable power at competitive prices? And you can take this any way you’d like—at the policy level, or a regulatory level, or an RTO level. I mean, there’s answers on all kinds of levels here, but kind of share with us your thinking on some of these issues.
Nathan Hanson: Look, I think one of the benefits when we started, you know, when we restructured the energy markets in certain parts of the country, you know, 20 years ago at this point, was really bringing efficiencies to the market, and consumers have benefited significantly from that.
So, efficient dispatch of competitive assets lead to lower costs for consumers. And what we’ve experienced over this twenty-year period is a revision of many of the market rules that were put in place to ensure that these assets can continue to exist and provide those cost benefits to consumers. And some of those rules have been, and really it comes back to revenue adequacy, they’ve eroded over time and we’re at a point where assets are not, you know, receiving revenues that support investment in new assets across the country.
And so, we need to get back to a point where the market rules provide for revenue adequacy to invest in these new types of assets that can balance the grid and that will be critical to ensuring reliability, and continued decarbonization of the grid in the future.
We’ve seen certain markets, you know, propose rules to try to start restoring back to—restoring that revenue adequacy signal. And we think if those reforms can come through and stay consistent for a period of time, investment will come back into these markets, and we can build the types of resources that will be necessary to ensure reliability into the future.
Todd Snitchler: Yeah, there has to be a pathway for smart investment because if you can’t see a pathway forward, then you look to spend your dollars in other places. And I think every market needs to be mindful of that. And part of that as you’ve mentioned before is energy prices and they’ve been top of mind for consumers, of course with inflation and all the other pressures on the typical American family and business market volatility continues to exist in some places.
Some have argued that competitive power markets drive up cost to consumers, and I think we’ve established that we don’t share that opinion. You know, we’ve talked a little bit about competition, putting pricing—downward pricing pressure. Do you think that is able to continue for the long term given some of the electrification issues that you just talked about and the need for investment? Or do we need to recalibrate a bit, perhaps about there is a cost to delivering reliable power. How do you think about reconciling those two issues? Because the system isn’t free, and we’re going to be adding a lot of resources and a lot of ways to deliver it. And I think we want to make sure that we’re upfront with consumers about what that potential cost could be.
Nathan Hanson: And maybe it will just start off with, you know, inflation has been a problem for, you know, in the economy more recently here over the last years or two. Over time, you know the cost of money has been very cheap, but if you go back 15 years or so, you know the inflation adjusted cost of electricity has reduced by about 15%. And when you break that even further apart, part of that goes to the transmission and distribution folks and the rest of it is really for the electricity generation and supply, and if you just isolate the generation and supply component of that it looks like, you know, inflation adjusted the costs of that and really in the competitive markets have declined by about 40% over the last 15 years or so, yeah, which is fantastic. So, when we talk about the benefits of competition to consumers, that really drives home the point.
I do think we are getting to a point where we need to build new resources. It’s not as cheap as it used to be to build new resources, and there’s going to be a cost to ensure we have reliable energy supply. But I do think ensuring that we do it in a competitive manner where the lowest cost or most creative and efficient supply resource, and it may be a different type of resource in the future than we think about today, has the opportunity to compete for that that supply option I think is the most efficient way and cost-effective way for the power grid operators to acquire the types of services and supply that they need to operate the grid reliably.
Todd Snitchler: What do you think is needed? Is it just revenue to drive that competitive investment in new and innovative technologies or is it, you know, more commercially viable technologies, do certain things have to get over the valley of death as it’s described in order to make sure that it’s ready for deployment or you—you’re kind of on the leading edge of this because of how you structured LS Power, and how you folks think about it. How are you thinking about some of those issues?
Nathan Hanson: It’s a little of both. You know, I do think when we talk about revenue adequacy, we really need regulatory and market certainty. What we’ve experienced over the last five years is, it’s almost every year we’re trying to change markets for a different reason or not. And typically, it’s been to reduce the value that generators receive.
And, so, I think ensuring that we have the right mechanism and market structures in place but leave them in place, let the market evolve. If the market needs a certain type of service, the market should be able to pay for that type of service, so prices should go up. If it has too many of those types of resources, then the price should go down and investors can make their own decisions in terms of do they want to invest in this market? Or maybe a different market has a different, you know signal economic signal in terms of where we should invest in certain types of resources or energy services. So, and you are right, some of the newer technologies, you know, even co-firing with hydrogen. You know, while that may be a great way to reduce carbon emissions from power supply, you need a whole infrastructure of how are you going to get the hydrogen to all the power plants that are in the country? And there isn’t a great or reasonable reasonably economic solution to that at this point. Very similar to the electric vehicle charging infrastructure network across the country, you would need a very similar hydrogen delivery construct and I think that will be very expensive to do. And it may not be the most efficient use of the investment dollars, the limited capital that’s available to, you know, continue to decarbonize the grid. So, there are new resources, your resource types that are being evaluated, but a lot of those are at the venture level, and not really for commercial application at this point, but we would expect they continue to evolve and be investable in the next 5 to 10 years.
Todd Snitchler: So, you’ve done a great job of teeing up my next question. [Laughs] It’s almost like, you know, you’ve been working on this, but EPSA members have been at the forefront of bringing reliable generation resources to market along with newer and cleaner technologies when they’re commercially viable, as you were just talking about. And LS Power has been a great example of that. As you’ve got investments in critical gas resources, but also building significant battery resources in places like California, and you already noted, other clean investments.
How’s LS Power looking at the future? And by that, I’m asking more about what’s on the horizon for your future investments in your generation portfolio. All our members are different. We’re all competitors. I think most people who have listened to this podcast know that, but how are you as LS Power balancing the call for lower carbon emitting power resources with the nation’s critical need for reliable generation today? I mean, it feels like there’s a package of resources, but I’m not sure if that’s how you’re looking at it. So, if you can, can you kind of walk us through how LS Power is thinking about that solution set?
Nathan Hanson: Sure. And look, I think in many ways we are doing what others are doing. We are investing in new renewables, solar and wind. We are investing in new battery development as the kind of no, no carbon solution to be able to balance the grid. But you know, we also are investing in transmission to be able to move all the new renewables which are not located typically where people are and where the load is to be able to move that power more efficiently to the load centers. So those are kind of—we have separate companies basically lined up to develop those types of resources. But separate and apart from that, some of the newer technologies around long duration storage or as I mentioned previously, how do we create a hydrogen solution so you can continue to use, you know, firm gas resources, convert them to hydrogen? We are investing in those types of pipeline projects. They’re in early stage development you know, and I think there’s other longer term storage solutions that we continue to, you know, invest in, follow, very similar to I think others. But that’s, some of these are a bit off in the distance in terms of investment, invest ability and commercial viability. But I think the people that are—we learn by looking at those new technologies and thinking through how they can be implemented in the various markets that we operate in, and we can make an investment decision based on that.
Todd Snitchler: It’s interesting the way you describe it, it sounds like the portfolio approach and a horizontal fashion, but a vertical approach on the time horizon that some things are ready now and some things may not be ready yet, but you’re kind of looking at it from both perspectives in order to make sure you’re making smart investment decisions.
So, you’ve been working in this industry for a long time. What keeps you excited about it? And you know what are some of the issues that, you know, are things that we touch that you think you know, “this is why I like doing what I do.”
Nathan Hanson: Yeah, there’s, you know, there’s a lot going on. If you’re not excited about being in the energy industry today [Laughs] because the whole energy supply system is transforming with low carbon supply, changes in the transmission system. We basically had to build a new transmission system on top of the existing one to be able to get the low carbon resources to where we need it to go, and so it’s very exciting. There’s a lot going on in the energy services sector. So, all the balancing activity, how do you maintain the system reliability that not only comes from dispatching, call it a firm gas plant, but also comes from demand response. So, go and work with a company where they can curtail their load or turn off some of their electricity supply can work just as well. And you can do that on a very distributed basis. So, there’s many different ways to balance the grid, and I think those types of, call them services, or those types of services will become more valuable to the grid operators in the future as we integrate more renewables, which we all think is the right way to go.
Todd Snitchler: Yeah. So, we’re getting near the end of our time today. So, I want to ask you about, you know, what regions do you envision—regions of the country that is—do you envision EPSA being active in in 2024? As everybody probably knows, PJM has been the outsized focus of attention of late. But do you see other parts of the country where time may be spent or where LS is looking for opportunities and, you know, we ought to be keeping an eye on some of those issues as well?
Nathan Hanson: Look, I think the issues that we focus on in, or episodes focused on in PJM is really affecting all the market areas across the country. Even the non-restructured market areas like in MISO. Everyone is struggling with what’s the best recipe to make sure that we can integrate renewables, continue to provide reliable power and continue to decarbonize our energy supply. We have market rule changes in California, Texas, MISO, SPP, PJM and New England that are all tied to trying to figure out what the right recipe is, and so I think we will be spending more time, since everyone’s struggling with it, I think more education at the federal level of what the problems are and how we potentially can help, you know, form the right federal policies to support, you know, reliable operations in the future will be critical, and that’s at FERC and NERC as well as with—on the legislative side in Washington. I think those are important areas that we continue, we will continue to need to press our message to make sure everyone at least has the right information, and they understand the ramifications of certain types of policies on our industry as well as on consumers’ pocketbooks.
Todd Snitchler: Yeah, I think that’s very well said, Nate. I want to thank you for taking time to visit with us today. Any closing comments that you’d like to make or anything that you think you know, it’s important for the public to understand this part of what we do? Anything that you would want to close with?
Nathan Hanson: Yeah. Look, I think as I said in the beginning, at LS Power and I think generally in most of the EPSA members are very principled in terms of how they try to approach their business. I think we’re all trying to figure out—while we may compete against each other, we’re all trying to figure out what the best way to move forward is being able to decarbonize the power supply in the United States, but do it in a in a stepwise manner where we can continue to maintain reliability and affordability for consumers. That’s the most important thing. I think we at LS Power try to work on that every day and figure out ways to do that and then determine how we can invest in that. But I want to thank you Todd, and really appreciate our membership in EPSA and the other members in EPSA and how we conduct our business in a very principled manner and in a way that we think we’re trying to better, you know, the energy supply in the United States really for the benefit of consumers. So, appreciate your efforts as well as your whole team’s efforts. And thank you for taking the time to talk with me.
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Todd Snitchler: Our members are at the forefront of competitive power production—working to strengthen the reliability, sustainability, and cost-effectiveness of America’s power grid, and, as you’ve just heard, driving energy expansion in a thoughtful, efficient manner that keeps the lights on and the heat running while helping to decarbonize the grid. As always, subscribe to this podcast for more in-depth interviews with the leading voices in energy today.
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Energy Solutions is brought to you by the Electric Power Supply Association. EPSA represents America’s competitive power suppliers, which bring about 150,000 megawatts of power generation resources to customers throughout the United States. Discover the power of competition at www.epsa.org.