The Exchanges

Q like, you know, prior to any of these bills, right, Tesla was in Nevada already with the Reno Gigafactory. In solar, first solar has been in Tempe, Arizona forever. Um, you know, is it just that it's like once there's one, it attracts a cluster? Because now you have a trained workforce that you can hire from, and, you know, people have moved there and all that kind of stuff?

A Yeah, I think there's real path dependency and talent in, uh, relationships with state and local governments that are going to provide incentives and where permitting is a kind of known quantity, uh, and, uh, and just familiarity of working, just word of mouth of, Oh, we set up a factory there. It worked relatively well. Um, we were able to navigate these issues. Here's how we did it. As opposed to going to a completely new state where you have no experience, your community within the field has no experience is, is a pretty, uh, is a pretty high bar. And so when we look at over the past year, manufacturing investment is a share of GDP across the country. So the top four states, uh, Are the traditional auto hubs. So it's Tennessee, Kentucky, Michigan, South Carolina. But then ranked fourth and fifth is Arizona and Nevada. And that's mostly EVs, but it's also, um, it's also solar, uh, as well, particularly in Arizona. Uh, and a lot of announced activity in those regions, too, including on the critical mineral side. So Redwood Materials Facility, uh, the Giant lithium mine in Nevada. And so that kind of critical mineral supply base in the U.S. Southwest, I think will be another attractive aspect of the Southwest as a clean energy manufacturing hub.

AI assessment note: “Yeah, I think there's real path dependency and talent in, uh, relationships”

Q announcements as gospel, the amount that will be online in 2029 and 20 30 is like, Ridiculously stark. And that just implies to me that twenty-thirty is a nice round number. It's not like an exact thing, right? And so you see these announcements, you're like, okay, great. Like, you know, I'm, I'm happy we're thinking about building a bunch of manufacturing capacity in twenty-thirty, but what's really happening here?

A And to, and to be clear, in our database, to even be counted as an announcement, we have a pretty high bar. You have to have picked a specific location. You have to have announced a timeline. That's not a, like, twenty-thirty. It's like, we're going to break ground. And then you have to have a specific construction timeline. And for large projects, you have to be in, um, front-end engineering and design for it to be an official announcement for us, right? Um, you don't have to have taken FID, but you have to be in feed before we're going to count it as an announcement. Um, but even with that high bar, I still thought that the actual amount of investment activity would be relatively modest in manufacturing.

AI assessment note: “in our database, to even be counted as an announcement, we have a pretty high bar”

Q that are, they're better off domestic anyway. What you probably could not have predicted is, like, the You know, there's the pull incentive in the market in the form of the 7500 dollar EV tax credit. And then there's the push in the form of all the subsidies for, for manufacturing. And that part feels like you couldn't have predicted that, right? Like a year in advance of the IRA.

A But I think, so I think there was some, for EVs, I think it's safe to assume that in, if demand was growing, right, so take whatever your demand forecast with or without the 7500 dollar tax credit. If demand is growing, you're gonna get a certain amount of localization and production. No matter what, both as a general political matter, auto companies know that the auto sector is of strategic national importance to the different major markets in which they operate. And so when they have the ability cost-wise to do it, there's generally a preference for localization because it helps in the politics. Uh, and, uh, and then there's also just logistic advantages in some parts of the value chain of being close, uh, to, uh, to the customer. Uh, So I think you would have had some of that anyway. The, uh, The, I think the anticipation both of 45 X and of things like the loan program office, even though the final contours of that, as it ended up in the IRA, weren't completely known, they were broadly known a year or so before. Now you're taking a bet on, is that going to come through, right? Will the Biden administration successfully be able to get what was originally in Build Back Better and then over the course of a year got whittled capital down into the IRA? Are they going to get that through or not? Uh, and again, I think if it hadn't, you would have seen a lot of those plans fall aw…

AI assessment note: “anticipation both of 45 X and of things like the loan program office”

Q the hubs clustered, it's the Midwest, the Southeast, and the Southwest, all of which contain fairly important swing states. How do you think about that? Or do you, I mean, you, you have a lot more historical context on this kind of thing than I do. Like, How much does manufacturing investment in a given, uh, policymakers region typically affect their desire to change legislation that might sacrifice that investment?

A So traditionally, it was very important and very predictive of elected officials, uh, political choices, uh, hometown industries, uh, Were able to shape elected officials' preferences when they went to DC in a fairly predictable way. The nationalization of politics and the partisanization of politics in the US pushes against that, right? So there are places where the political rewards to an elected official of taking a very partisan approach that plays well in national media is, Can be greater than the downside of doing something that hurts a local industry. So it's certainly not as predictive as it was in the past, but of the things at a local level that elected officials still listen to, investment in manufacturing is, is still pretty high on the list. And you can see in South Carolina, in Kentucky, in Tennessee, uh, places with, uh, Unified Republican control of the governor's office and the legislature's pretty strong incentives packages being provided to attract EV manufacturing companies to those states. West Virginia as well. And, uh, so there, there, there, there clearly is still strong political support within those states for, uh, for incentives of manufacturing of any kind, even if it's clean energy manufacturing. There, elected officials from those states that have national ambitions will, if there's, if there's rewards to them politically at a national level, for t…

AI assessment note: “traditionally, it was very important and very predictive of elected officials, uh, political choices”

Q Why would that be different from vehicles? Wouldn't you assume the same The same factors that affect the overall market for HVAC probably affect the overall market for vehicle purchases.

A Uh, not as much. So vehicle purchasers are not as interest rate sensitive as home, uh, as home renovations and new construction are. So when the Fed raises interest rates, it's residential construction activity that gets hit the hardest because of the sensitivity for the thirty-year mortgage. And, uh, and home renovations are pretty close after that. Vehicle sales do because of financing, uh, Uh, vehicle sales do take a hit when interest rates rise, uh, but not as much as, uh, as residential construction. We see the same thing, residential solar and distributed generation is also growing, like EVs. And I think that's also because those still, heat pumps are actually, have a much larger share of the market currently. They're a much more mature technology Than EVs and, uh, and rooftop solar and storage. And so, those technologies are still at an earlier part of their S-curve that's able to transcend the macro environment. Heat pumps are actually a much more mature technology.

AI assessment note: “vehicle purchasers are not as interest rate sensitive as home, uh, as home renovations”

Q there were a bunch of, there were also trade issues and, Other headwinds in the, in the solar market. So, um, it'll be interesting to see how that settles over the next few years. I'm interested in the EV side, though. Um, do we have, do we have anything we can say at this point about how these bills, and the IRA in particular, is affecting EV adoption, EV purchases?

A It's a little early, so we'll do an analysis at the end of the year where we look at full year Because the, the way the credits were structured, they changed the credit structure immediately in the IRA, and so for the end of, Twenty-twenty-two. The EV tax credit structure was different than before, um, but then it changed again in a pretty significant way in January of twenty-twenty-three, and we can see, looking through the make and model, mapping that to who was eligible before and who is eligible now, we can see really significant shifts in consumer behavior there, but it's hard to, in aggregate yet, uh, give a Definitive answer on how much did the 7500 dollar tax credit extension accelerate sales in, uh, in twenty-twenty-three. So we hope to be able to get at that a little bit once we have full year data, uh, at the end of the year, but it's a little bit, it's a little bit tough to quantify it right now.

AI assessment note: “we can see really significant shifts in consumer behavior there, but it's hard to, in aggregate”

Q Okay, so let's wrap up the second category of trajectory-changing technology. Technologies from, from this legislation or the suite of legislation. So you mentioned, I think, as a group, like hydrogen, carbon management, and SAF, sustainable aviation fuel. So where, what are we seeing in the data on those markets?

A Yeah, so the, what we would call, uh, group them together, let's call them like emerging climate technologies that we're starting to see real, um, meaningful investment in. And for all three of those, there was, so the, for carbon management, there was an incentive that existed prior to the IRA called 45 And that's got extended through the Inflation Reduction Act, so the value is higher and the, uh, and it lasts longer. But we were starting to see some carbon management investment before at the cheapest sources of capture, so that's mostly ethanol refineries, uh, in the Midwest. Since, over the past two years, with the combination of the IRA and the IIJA, the amount of announcement, announced investment activity in both carbon management as well as in clean hydrogen, both Blue hydrogen and green hydrogen, uh, even some turquoise hydrogen, uh, and sustainable aviation fuels has really taken off. So across those three technologies over the past two years, there's been eighty billion dollars of announced investment activity. Uh, that's a full third of the investment, announced investment across deployment, wholesale deployment. So if you, like, pull together solar, batteries, wind, uh, Uh, and these emerging climate technologies as a category, the ECTs have been about a third of the announced investment activity.

AI assessment note: “across those three technologies over the past two years, there's been eighty billion dollars”

Q that scale? Uh, how, what happens when all of a sudden there's a lot of SAF on the market as opposed to a tiny bit of SAF, which is where we are today? So I guess the question for you is, where are we in the, in the, on the path to going from a tiny, tiny bit of sustainable aviation fuel to a meaningful amount of sustainable aviation fuel?

A Yeah, this one is, so one interesting thing that we saw going through project announcements were a number of facilities that had been geared up for renewable diesel for either the California LCFS or for the RFS, and then the IRA is changing their focus. The incentives for SAF in the IRA, combined with the airline demand that you mentioned and the willingness to pay a green premium, Is prompting a lot of these projects to shift product mix and focus a little bit and start optimizing towards as much as they can with the technology towards sustainable aviation fuel, uh, and, uh, uh, and away from diesel. Uh, and then there's some big new Greenfield facilities that weren't, uh, that are, that were announced as primarily SAF plays, uh, and were not previously targeting, uh, other low carbon fuels markets. This is a place where, to me, the delta between, there's, these are a lot of really big, multi-billion dollar, multi-year projects, and the delta between the announcement and what it'll take to actually bring these projects online seems pretty large. I haven't done the full crosswalk of if they all came online, what would the, how would the output Compare to projected, um, aviation demand. Uh, my guess is, for this first round, we'd still be short. It would still be a tight market. Uh, but, uh, but we haven't run those numbers to ground yet.

AI assessment note: “my guess is, for this first round, we'd still be short”