The Big Problem With the Modern Electricity Grid

Tracy Alloway (0:02)

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Joe Weisenthal (0:17)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:23)

And I'm Tracy Alloway.

Joe Weisenthal (0:24)

Tracy, I feel like we have already done kind of one episode, or maybe multiple, depending on how you define them. But we're understanding the incredibly complex, opaque, crucial world of how electricity markets work in the US and what's good about them and what's bad about them. We just gotta do more.

Tracy Alloway (0:45)

Here's what I've learned from multiple hours of this topic now.

Joe Weisenthal (0:48)

Let's hear a summary.

Tracy Alloway (0:50)

It's complicated. No, it isn't, but that's it.

And also, actually, I'll add one more thing. It seems to be kind of the worst of multiple worlds. In a sense, there's a lot of regulation, but in another sense, there's a lot of deregulation. In one sense, you have these dominant players. And I have to say, a lot of this is informed by my experience in, I guess, New York and Connecticut, where you have Con Edison and then Eversource. And so you have these big players that you have to pay a lot of money to in terms of distribution. But then if you want, you can go out to an independent energy supplier and pay them for the actual electricity that is going through the pipes or the wires of Con Ed or an Eversource.

But it never ends up making a difference, as far as I can tell, because the distribution costs are still so high.

Joe Weisenthal (1:43)

Yeah, I mean, I think the part about it that like why it feels like a mess intuitively is this attempt to essentially create a market on top of something that we know is a natural monopoly, right? Because obviously you're not going to have like multiple companies, or ideally, I don't think it makes sense, maybe it does, to have multiple companies like running their own wires in distribution. I think we all sort of get why there is this natural monopoly aspect. But then, of course, you try to introduce market aspects. And so different producers, whether it's solar, whether it's nuclear, whether it's coal, whether it's natural gas, whether it's wind, et cetera, are kind of in a market. And it depends. So I think in Texas, it was probably different than Virginia versus Tennessee.

Tracy Alloway (2:24)

Oh, that's the other thing. There's state by state differences, obviously.

Joe Weisenthal (2:27)

Texas, there's a lot of competition where you can basically just do whatever you want. And whoever is the cheapest price at any given moment, that's who is supplying the power. So you try to like overlay on top of this natural monopoly, some sort of market ish thing where different people compete. And then, of course, you have the issue of because it's not a market, these utilities are, as you mentioned, heavily regulated, constrained on what they can invest, constrained on what they can price, constrained in the connection they can link between their own investment and say renewables versus then capturing that with higher prices.

And everyone complains that for whatever kind of energy they make, the system isn't working well.

Tracy Alloway (3:07)

Yeah, but I think you put it perfectly. It's like imposing market forces on a natural monopoly. And it just seems like there are some downsides to that model. I'm going to put it that way.

Downsides for consumers and then downsides in terms of maybe the transition to decarbonized energy.

Joe Weisenthal (3:25)

And this is the key thing we are putting. There's so much riding at stake of the power system, right? Because obviously we're attempting to take the old model that was in place for decades and then replace a lot of the generation sources with zero carbon versions, whether they're solar or wind or maybe nuclear, though there's not a ton of nuclear construction. But that is one attempt. Then there's also booming demand for the first time in decades. And this is something we have talked about in the context of AI data centers.

Tracy wrote that great post recently. Just talk about how every question an analyst calls now for these companies is basically about demand from AI.

Tracy Alloway (4:01)

Oh, it was crazy. I looked at the transcript for Dominion's most recent earnings call, and I think there were like five or six questions asked, and four or five of them were about data centers. And Dominion's doing a bunch of interesting things, but people only want to hear about data centers at the moment.

Joe Weisenthal (4:16)

Totally. So you have two really novel things. You have the decarbonization effort, and you have the increase in load growth. I think they call it for the first time in decades.