The Exchanges

Q stuff. Um, I really like this next one. Slide 32. So, so much CapEx. That's my version of the slide title. Um, you're comparing the, the total amount of CapEx spending on, this is going to be predominantly data centers, so it just says tech CapEx in twenty-twenty-five to other historic booms in In capex spending in the economy, which is a good way to compare. What do you find?

A So I'm going to give credit, first of all, to Michael Semblest and his team at, uh, JP Morgan and asset and wealth management. They built this slide first, not me. I did in the past, I'd done some examples of interstate highway and broadband capex as a comp, but I'd not done this full suite that they've got here, which goes from all the public works in the 19 thirties, like the Hoover dam through the Manhattan project. We could call our wave of electrification in the U.S. in the late forties. Apollo project, the highways, broadband build out, and then the tech capex. And, you know, things like the Manhattan project, electricity, the Apollo project, these are like less than or barely above one half a percent of U.S. GDP at their peak. Even the Apollo project, even the interstate highway project is like six 10th of a percent. Building out broadband CapEx in the year 2000 at its peak was like 1.2% of US GDP, and tech CapEx right now is just under two percent. So basically higher than anything else. And, and to your point, this is the capital expenditure to build compute, essentially. This is CapEx for building just the actual computational Elements as well as the buildings that contain them and the power stuff that's within the fence of the company's capital expenditures. It is not power and transmission and water capex to go with it. So it's a pretty fast, it's a pretty fascinati…

AI assessment note: “tech CapEx right now is just under two percent. So basically higher than anything else.”

Q All right. So let's move on from the, the question of how much load growth to how are we going to meet this load growth? Uh, slide one Oh six. I'm going to rename this slide for you. The new name of this slide is build some fucking transmission. That's the name of the slide. Now, can you describe what the slide is?

A It's a sad slide whistle sound here. Uh, in 2013, the U S built 3200 miles of three 45 KV and up transmission. So Uh, high voltage, long distance transmission. 3000 miles, whatever, not a lot, but infinitely, not infinitely, but like, like, shall we say, statistically, significantly better than the 125 miles of high voltage, long distance transmission that the U.S. built last year, which is pathetic. Like, there's really no other way to say this. And if you look at the trend of demand growth, and you look at the trend of High concentrated sites of new demand that might be far from load center or correction are becoming their own new load center, and you look at the need to decarbonize that electricity insofar as possible, and you say that the answer is to build a 125 miles of 3:45 kV and up transmission, it's not a very good answer. Like, it's really not an answer at all.

AI assessment note: “in 2013, the U S built 3200 miles of three 45 KV”

Q just, something's got to give there. And in fact, one of the things that may drive something giving is slide 73, which is looking at Um, issuance of voluntary carbon credits. Now, again, not all CDR credits. Let's be clear. I understand the nuance there. But nonetheless, um, it is stark to show what is happening in the carbon market, the voluntary carbon market as well, which has gone where?

A Well, we had, uh, another massive run-up in issuance. More than three hundred million credits were issued, uh, in, in twenty-twenty-one. Uh, also more than 2.1 billion dollars worth of market transactions. In 20, 21. Uh, and those have both come down significantly. Um, issuance last year was, call it about a hundred and fifty million. Uh, retirements, we don't know, we actually don't know yet the sort of value of those retirements in the market. That data's not there yet. Retirements themselves are sort of ticking along, like they're still going, um, and which is, which is a good thing. That's a function of, you know, that that part of the market, the buying part of the market, not just the selling or the creating, is, is working cleanly. Uh, but it's just, um, You know, it's another signing like this, these, these sort of go hand in hand. It's kind of a surprise that in the same, the year that you have this spike and then the peak in CDR startups, you've also got the same energy going into people issuing new carbon credits and the value that's being transacted around them. And they're both just like way off, way off the boil compared to where they were, uh, just, just a couple of years ago. You know, again, to some extent, probably healthy. You know, like, if there was no fundamentals driving a market like this, then, you know, line can't go up forever. You need to settle in t…

AI assessment note: “More than three hundred million credits were issued... those have both come down significantly.”

Q this podcast. It's clearly become this like hot button political issue in the United States. And so the interesting question is, yes, it's clearly a political issue, but what is actually happening in terms of company ESG reporting and ESG fund flows and all these things that had, had Grown up as ESG, the concept had gained prominence. So let's start with ESG reporting from corporates. How has that changed?

A So I, I want to start by saying that, like, when I set out to do this, I was, did not anticipate having one slide out of every eight be about sustainability, ESG, uh, carbon markets, reporting, things like that. This is a case of sort of letting the data and letting the market lead you in a, in a kind of constructive way. It was really, like, it was really interesting that this is where I devoted a lot of my time and attention to pulling information, because it is so hot button. It's such a third rail, as you rightly say. But let's dig in a little bit. So, U.S. company ESG reports, this is some great research that the Harvard Law School Forum and Corporate Governance had put together. They did something that I find very useful and very kind of Empathetic on behalf of practitioners, which is, let's just look at reports in a very blunt way. How big are they? How much information is included in what ways? When do they get published? So this was a fun slide to put together. The average number of pages for a sustainability report in 21 was about 70 pages. It's gone up to 80 pages, 82 pages in 23. But those report lengths range from 11 To 262 pages. I footnoted that, but kind of worth noting. That's not great. What's also not great is that the resolution, the, the data quality, or the readability of this stuff has declined, and this is, frankly, a terrible outcome. So the number of r…

AI assessment note: “The average number of pages for a sustainability report in 21 was about 70 pages.”

Q sales, motor vehicle sales, have been declining over time, overall. Can you just talk through, like, what the dynamic is, as we understand it, that's driving that? I think intuitively, I would have said, on a global basis, like, sure, maybe we've hit peak car in the West, but you'd think that would be more than made up for by growth in China and India and Indonesia and wherever else.

A You're, you're, you're right. So the, the, the data show that on a trailing, 12 month basis, uh, we hit the sort of peak of cars, not vehicle sales necessarily, but car sales, you know, in the, about eighty-five million, and that was now, uh, almost six years ago when that happened. Uh, that's a function like so many of the things that we end up talking about here of China. China was during the interval I've got from 20 10 on rapidly on its way to becoming the world's biggest new car market. Uh, supplanting, I'll give you one guess, which market is the biggest new car market in the world. Um, but then, you know, running to a certain extent against perhaps some limits of urbanization everywhere. Running against global, a global economy as you get further on. But I think most importantly, running up against the limits of the sales of internal combustion engines. So, like, not only did sales peak at about eighty-five million and decline to below seventy million, uh, as of the third quarter last year on a trailing twelve-month basis.

AI assessment note: “Uh, that's a function like so many of the things that we end up talking about here of China.”

Q spend too much more time on agriculture, but you have another slide in here a little bit later, slide 25, which I think is, is a more global perspective that I think is one that is sort of unappreciated as well, which is that actually, um, despite a growing global population, um, Land use for agriculture globally has been declining for a while, right? Which, which implies increased productivity, basically.

A That's right. So we, we had a peak in the total percentage of global land area used for agriculture right around the turn of the millennium, a little bit more than 37%. And let's be clear, it hasn't come down massively. It's come down maybe one percent of total global land area. But Multiple billion extra people have been added to the global population in those two decades, and we're somehow reducing the total amount of land that's used for agriculture. It is, it is very interesting. There are some nuances again underneath that. A lot of it has to do with changes in grazing land, but it is in general, uh, a, a factor of much greater efficiency. There's another aspect within that too, which is A huge amount of aquaculture to shifting a whole lot of food production into the ocean where necessarily it does not take up any of the land area that we have available. But again, it's not sort of a, a narrative that I think people would expect because you have to unpack a little bit what that means, what that implies. It implies greater efficiency. It implies some changes in the way that we produce certain products. Uh, it implies Making sure to be aware of everything that's happening in the ocean, but yes, there's less land that's being used for agriculture, and that's more land for something else. That's more land for, you know, urbanization as it continues and expands. It's more room …

AI assessment note: “That's right. So we, we had a peak in the total percentage”

Q in general, we had supply chain issues, all this kind of stuff. So, so folks probably know battery costs rose just as Solar costs rose and things like that. One thing that I think people don't often appreciate is that the data that you put in here on the difference between how battery costs rose and how system costs, battery system costs rose. So can you just compare those two?

A Absolutely. So yes. So for the first time, at least since, uh, my, my dear friends at Bloomberg and EF have been tracking the data, the, uh, weighted average pack price for lithium ion batteries went up year on year last year. So Uh, 20, 21 actually came very, very close to going up. If you hadn't used full year data, it would have been close. But last year, the weighted average pack price was up about seven percent, uh, year in year. That means it's still down close to 90%, but not quite 90% anymore. But then the four-hour system cost for, you know, an energy storage system went up 25% last year. And I think that the important thing to note there is that, like, the battery is manufacturing. You know, that's the cost to manufacture, to put together, assemble, high volume for almost every application. Building a system is still pretty bespoke, and you're going to be exposed to every other kind of value chain along the way. The cost of trucking, the cost of fuel, the cost of employees, uptime, all of these things have gone up significantly over the time. So basically you're aggregating in other inflationary pressures to get the full system cost. But what's really interesting about this is that, uh, in the survey that BNEF ran on, on getting these costs and getting a sort of sense of the market is that almost no developer said that they're actually pulling back at these price leve…

AI assessment note: “pack price was up about seven percent... four-hour system cost... went up 25%”

Q Do you worry, as I do, about retail electricity prices? Gas, too, I guess, but I think more about electricity. Do you worry about how much retail electricity prices are going to rise in the next five to 10 years?

A I do, because we've, we've, we've made it very difficult. Uh, rather, we've taken away a lot of the instruments that were meant to help suppress those rates. By sort of distributing the cost across federal government expenditures and tax, you know, tax rebates and whatnot in favor of, uh, nothing that really helps support fast-moving new generation. But also we have labor shortages. We have still a fairly pro-inflationary environment for, for a lot of different things going in. We have the challenges of the cost of infrastructure itself. Transformers are not getting any cheaper anytime soon. So I am concerned about this, and I'm also concerned that the kind of mechanisms that we're familiar from early in our career that can respond to that, namely build a bunch of cheap distributed renewable generation right now, uh, are, are impaired to some extent by current legislation. Maybe, maybe the, maybe we will find just how flexible and fast and low cost some of these renewable generation elements can be, To get to market very, very quickly, but that does nothing for the cost of wires. It does nothing for the cost of transformers. Uh, it does nothing for the cost of labor necessarily. So I am concerned about, about that.

AI assessment note: “I do, because we've, we've, we've made it very difficult.”

Q a conversation talking about this many technology trends and not talk about AI. So we got to talk about AI. Let's start with just AI overall. I mean, we, we, we know it's hyped, but there's some fun data that you've got in here on slide one 80 on how much executives are mentioning AI and earnings statements, uh, and in company presentations. So like, how, how has that gone?

A Yeah. I mean, it's, it's, it's like tens of thousands of mentions per quarter now up from like a few thousand mentions, maybe, you know, five, six, seven years ago. Uh, it, it feels like it's, Something where every company needs to have a strategy, or at least has to be thinking about it. Now, you could be the, you, you could be, um, a bit dismissive of that and say that it's the same way that every company needed to have a metaverse strategy, you know, two years ago. But more importantly, I think you start to see a lot of discussions wherein there are questions of, A, how is this a sort of general purpose Business technology. Like, it's going to enter into the way that general business gets done, whether you're a power generator, or a retailer, or an agribusiness. And then there's, I think, the deeper, more profound set of questions, which is, how is this going to not just inform, but transform businesses over the long run? You know, how are you going to build new things that only exist because of AI, as opposed to, Just optimizing processes and things like that. But also, what I think is very relevant for, for you and me and for most of the people listening to this is that, like, this is going to have impacts in the built environment and in energy and in water and things like that, because it is a very electricity intensive process, AI, in a way that, in a way that actually I…

AI assessment note: “tens of thousands of mentions per quarter now up from like a few thousand mentions”

Q You mean the total aggregate Asia-based battery cell manufacturing is 94, or close to 94% of global production?

A Uh, I believe, I believe so. So there's, there's just not a lot of stuff happening elsewhere yet. That there's a lot under construction. There, there, there will be some changes there. And remember, this market is very, very big. You can still have really, really big scale happening. Uh, you know, like the, you know, in the 50 to a hundred gigawatt hour probably capacity capabilities in other countries that get stood up. But yeah, look, it's, it's China in first and second, it's South Korea in third and fifth, it's Japan in fourth, and then it's China, Korea, China, China, China, from there on as you, as you go down the list. Uh, I believe it was also the, the first year of producing a terawatt hour worth of batteries. Which is notable. But yeah, this is not a news story. I guess what's notable is that it hasn't particularly changed that much. I, you know, I could go back and compare this to last year, but this is directionally pretty much exactly where it was in twenty-twenty-two.

AI assessment note: “I believe, I believe so. So there's, there's just not a lot of stuff happening elsewhere”

Q land, um, and a ton of our corn crop for the purpose of ethanol. And so like the fear with all this biomass to X stuff is that at some point you start to run out of the waste. And meanwhile, these markets have taken off. You start shifting toward dedicated crop and you end up in a situation just like this. Do you think that's like a warranted fear?

A I, I, I do, absolutely. I mean, this reminds me way back when of, well, of two things. One was the food versus fuel debate that was very prevalent in, uh, the run-up to very, very high oil and general commodity prices, including foodstuffs, in the 2007, 2008 era. So there was a big debate about, about use of land and then use essentially secondarily of calories derived from that land and for what purpose they were going, you know, you might offset inflation in. Transport fuels at the expense of creating more inflation for human food calories. That's one thing. The other is that you and I will also remember the time when cellulosic ethanol was supposed to be the thing that was going to dominate the liquid fuels market in the United States if we could only bridge our way there by doing a little bit of corn ethanol first. But look, I mean, the science on this, and I'm not A deep scientist when it comes to this is that it's way easier to synthesize something with simple sugars than with things that are hard to digest by their nature, like lignin and cellulose. And so it's proven to be very, very difficult to do. I think too, when it comes to making sustainable fuels, we're going to find that starting with easy to work with hydrocarbons to make more complex hydrocarbons is probably, you know, just energetically easier than going for things that are very, very hard to break down and …

AI assessment note: “I, I, I do, absolutely. I mean, this reminds me way back when”

Q I do love a big deck. 200 slides this year. 200 slides exactly. So wait, I have an important question for you. There's no way it just happened to be 200 slides. You had, you made it an even number. What was the one that got cut out?

A Oh, the one that got cut out is nothing I can tell you. I had about 365 slides as of the start of November. So the better way of thinking about it is that I essentially cut one slide for every slide that's in there. And in fact, I usually cut more than that. So I start off with like 300 plus and cut it down to about one 50 or one 60 and then build back up. So it's first an exercise in addition Then it's an exercise in subtraction to get to, uh, the kind of the magic number. As you remember, way back when I had a 141, which is like a sort of arbitrary prime number count, or maybe it's not even a prime number of, of slides. And then, uh, I, I always felt like there was stuff that I had left, so I made it bigger and then kept it there. I think it's quite possible that if you do more than that, you're, you're going to lose the edit capability that gives it some of the strength over the course of 12 months.

AI assessment note: “the one that got cut out is nothing I can tell you.”

Q emergent industries. Where are we going to make all of our electrolyzers? Where are we going to make all of our direct air capture machines? Whatever you want to call them. Like, all this stuff, right? So batteries, I think, are getting the, rightly getting the most attention, because it's sort of happening the fastest at largest volume. But it feels to me like it's sort of, it's pan-climate tech.

A No, I, I, I think so. And, you know, we, we have the advantage here in the United States of being a large market, right? We were a large market for basically anything. Um, and we're adjacent to two other reasonably large markets, Canada and Mexico. And I, I think that if you, if you're confident in the sort of path of climate technologies, then you as an executive could see the path to doing things here. Because of the strength of your own market and becoming an exporter elsewhere. The question is, like, how, sort of, how small of an economy can you do this effectively? Like, could you do this at the scale of Germany? I think so. Could you do this at the scale of Vietnam? Open question. Could you do it at the scale of an Indonesia? Also an open question. Um, but I think a lot of countries are sort of doing this right now. They're trying to decide, are we capturing something for ourselves for, um, I wouldn't, let's, let's not call it autarky economically, but for reduced interdependence in other countries, or are we ourselves trying to become a new export hub, a new friend for globalization?

AI assessment note: “you as an executive could see the path to doing things here”

Q Venture circles. And, and you're a student of Cleantech One Dot O, as I am, and the history of this sector. Do you have any, like, lessons you've taken away from how to scale energy efficiency businesses or technology? Because it feels like this is a moment when efficiency should be the thing, but you just don't see that much of it in terms of, like, true new innovation happening.

A No, I mean, like, like, like, if, if I think back to one of the one point O examples, you could show people material savings on their bill by implementing Behavioral responses by doing something to help them with more efficient devices. And it just didn't seem, it somehow didn't seem to impress people, uh, in the same way that offsetting all of their demand through a, you know, a home PPA might have. Whether or not the economics of it fundamentally were like a good, a good idea for somebody or not. People always wanted, they wanted something more. And I, and I think that there's a psychology of I'm doing less or I'm getting less is probably a challenge. Uh, you know, I would welcome another set of approaches, but is behavior going to be enough to do that? I don't know. Is it, you know, is, is yet another kind of behavioral approach to saving money when you work? Is it going to be about shifting load around in the house? I mean, back in the day, it was, you know, better run your washing machine at night because that's when the rates are lowest. Now, is it going to be something else? Is it something you could automate away? Um, Or, you know, one, one aspect is, is this something that we've already kind of internalized by just getting a Nest thermostat already, and people just don't think about it? You know, like, what are the, what are the equivalent things like that, though, whe…

AI assessment note: “there's a psychology of I'm doing less or I'm getting less is probably a challenge”

Q Right. Alright, so I guess to wrap up here, I know, you know, Bloomberg has come up with a bunch of scenarios for future sort of progression of the, of the market. For you personally, if you're sort of taking a guess as to the next five to 10 years, how do you think this plays out?

A I think that, I think that I'll start with, I understand, like, thinking about it from an investor perspective. You're the investor, not me, but insofar as I can abstract this, it's like, why are people interested in this, you know, if, in terms of backing companies that go after this? Well, it's because These markets have a high degree of uncertainty today and a high degree of significance in the future. But more to the point, and this is something I haven't seen talked about yet a lot, is that there are dynamics in play. There are definitely probably power law economics involved in these kind of particularly software-driven platforms, but also are there software kind of margins for many of these layers, which is also why people are interested in doing them, you know, protocols and, and things like that. And then, are there winner-take-all network effects? That, I think, is extremely important. Is there a case in which we have dozens of different ways to do accounting? And you and I talked about this the last time we spoke, too. Like, there's a couple of ways to do globally recognized financial accounting. You know, like, we will not be in a successful place if we have, if we have, on a good way, 500 different ways to do a high-quality offset, And 50 different ways to measure and account for it. That will not be a success. Success would be, like, thousands of ways to do an off…

AI assessment note: “Success would be, like, thousands of ways to do an offset, and two to five”

Q How many data centers do you think there were in the year 1900?

A Very, very few. Uh, I will go with, I'm gonna go with no, none, rather. Uh, and you just had a, yeah, you had a very limited use. And again, of course, you have to put in the fact that, uh, 10% of today's electricity consumption is slightly more as a, an absolute figure than 25% of the year 19 hundred's electricity consumption. But nonetheless, it's, it's impressive. And I, I like to highlight things like this because it shows you A, where successes have been made, and B, where these sort of new frontiers of, of work to be done have moved, and that's definitely into cooling and into low temperature heat. Like, these are areas that now need to be addressed, um, with, with electricity, and the electricity within them need to be addressed as well.

AI assessment note: “I'm gonna go with no, none, rather.”