When the transcript becomes available, we will include it here. -Thank you!

David Blackmon [00:00:00] Hey, welcome to the interview question with David Blackmon. I am your host, David Blackmon. And my very special guest today is Juan Arteaga, senior analyst at Embarrassed Intelligence Research. Always for some reason, I want to mispronounce that you’re in Calgary office, correct?

Juan Arteaga [00:00:16] Yeah, I’m in Calgary.

David Blackmon [00:00:17] How’s the weather up there today?

Juan Arteaga [00:00:18] It’s actually pretty nice. We actually got some summer this year. Unlike many other years.

David Blackmon [00:00:24] I know, I know, I was with a company who had a big office in Calgary for the last ten years. I was there and I got to visit several times. Such a beautiful part of the world is just really incredible. I’m jealous. Anyway, it’s hot as hell down here in Mansfield, Texas. Yeah. So before we get into Q&A, we’re here to talk about, a really interesting report, embarrassed, released a few weeks ago, in which they calculate, they did a study on, on, future demand for, for generation capacity on the various grids around the country in the US. And I guess it. And you looked at Canada two probably, didn’t you?

Juan Arteaga [00:01:01] We kept this one is does it to the US.

David Blackmon [00:01:03] Pacific, to the other.

Juan Arteaga [00:01:04] 48. Right now.

David Blackmon [00:01:06]  And, and so I mean and we’ll talk we’ll go through it in detail. But essentially the report finds that, you know, all these fried stories that we’ve been been seeing from, the various regional grid managers, including Ercot in Texas, are kind of overstating and in fact, pretty significantly overstating what future, load demands are going to be from AI and data centers. And, before we’re going into that one, though, talk about your background, how you came to be in at various and, your, your specific, work assignments within the company.

Juan Arteaga [00:01:40] Yeah, totally. Well, first, thank you for having me, David. This is this is great being able to chat.

David Blackmon [00:01:46] I always enjoyed talking to folks with with embarrass. Yeah.

Juan Arteaga [00:01:48] Great. Thank you. So a little bit of background on my. And I’m an industrial engineer. And then I moved to Calgary, in 2015. Originally from Mexico. That’s why I, the accent, to do a stay here, mainly focused on on the optimal integration of storage assets into power markets. When I finished that, I was eager, and I just wanted to the world, you know, as we all do when we design school, and I was looking for a place where I could have a real impact on the power industry. Right. And that’s how I came across in various, I fear that being able to to help capital allocators to make, better informed decisions was a good way, if not one of the best ways of of having an influence on how the power markets or how the power industry blows, in the future. Right. So I’ve been with the company for close to three years now, in the, in the intelligence team, pretty much doing that, helping capital allocators, make better informed decisions. We use in the research, side of things we use in various platforms and, and databases to pretty much, provide actionable insights for allocators. Right. More specifically, I mean, the power markets team, that’s what I did my PhD on. And I’ve been in that role like looking at power markets, designs, dynamics and all that for for close to ten years now. So, I mean, the power markets team, the focus for the last year, maybe close to two years now, has been to develop this future view of how their power markets are going to evolve into the future, right. Like, we have so many things changing constantly. One of. Them. One of them being the load, which is the focus of this, of this report and this talk. But we’re also looking at the generation mix, and we’re also looking at different policies, trying to shape how this how this looks and, like different market designs, market structures. We’re looking into all of that, trying to come up with a view of how this power market evolution will take place and like, how, how how it all play out at the end.

David Blackmon [00:03:59] Yeah. And it’s such an important aspect of, this energy transition, that we’re calling it anyway, it’s, it’s really been more of an energy innovation and expansion to this point. But eventually, presumably will we’ll turn into a real transition. And, and power load is such a, a critical issue that has to be addressed. I mean, we’ve already been experiencing quite a lot of instability on the Texas grid in the northeast grid is has seen a lot of displacements as well. And so when I saw this report, I thought, man, it was so timely because it came out just a few weeks after Ercot, CEO Pablo Vega said and offered some testimony, before a legislative committee, one of the interim committee studying all this, in which he he said that their their new estimate for for low demand through 2030 on the Texas grid, which is currently at like 85GW is going to grow in. Just six years to 150. Largely attributable to these these, to AI technology and all the data centers that are being built all over the state and really all over the country. When you guys came up with a different view on that, right, in your analysis?

Juan Arteaga [00:05:15] Yeah, definitely. Yeah. So, so our forecast is different from from any other, any other forecasts, in the market. Yeah. We’re trying to be really transparent and clearly identifying what are those future road drivers. Right. So we’ve seen flat load demand for the last decade or so. And now we start to see an, like a changing point, right. So we’re trying to we try to we try to do is try to see what it is that is making this change what it is that is changing the trend from the past ten years. So we identified 6 to 8, different load drivers for the different zones. And we’ve been putting out models and reports with all the assumptions on how each one of these drivers is going to affect that, the low demand in the in the future. Right. Like these drivers. Right. I like EV adoption. Behind the meter solar. It’s it’s also a big one that affects load in in a great way data centers of course. And and we just bucketed a bunch of a bunch of things into like large industrial loads. Right. Like this. Like, I don’t know, like green hydrogen, generation or, carbon capture and storage, stuff like that. So, so we identify each one of these drivers, we created models and where we are different from anywhere anyone else in the industry is that we’re being super transparent about it. We’re putting out the reports with all the assumptions and all the models that we’re running for each one of these drivers, and we’re publishing it out to so we can get some feedback from different personas in the industry. Right. So we’re talking to bankers, we’re talking to developers, IPPs, some utilities. So we’re talking to different personas and getting feedback from them. So then we can adjust our assumptions on our and tweak our models to kind of be able to have this consensus view, consented view of, of how each one of these drivers will affect the the future power demand. Yeah, right. Yeah. So a specific to, to to encode, the regional transmission planning forecast, like their final update puts their peak load at one 52GW by 24.

David Blackmon [00:07:25] Right?

Juan Arteaga [00:07:26] Right, right. So we believe that highly overstates growth in in large industrial loads. So this would make a good speed load comparable to PJM, right. So so it’s not that much higher okay. Yeah.

David Blackmon [00:07:42] Yeah. That doesn’t seem likely. Doesn’t

Juan Arteaga [00:07:43]  it doesn’t seem likely at all. Know our view after looking at all these, load drivers and taking feedback from the industry and all this, our view is that there could peak load will grow to 93GW by 2030. Right. So it’s, there’s there’s quite a big difference from that. 152 and yeah, this is this is based on their, differentiated forecast that we’re putting up. Right,

David Blackmon [00:08:07]  right. And so, so there’s, I mean, so 93, I mean, that’s just hardly any growth at all from current, right? I mean, current is 85.

Juan Arteaga [00:08:18] Yeah.

David Blackmon [00:08:18] So in six years it’s only going to grow eight gigawatts.

Juan Arteaga [00:08:22] Yeah.

David Blackmon [00:08:22] Despite all the growth in the economy and population.

Juan Arteaga [00:08:25] Yeah. So we see we’re taking into account efficiency. we’re taking we are very very bullish on behind the meter solar within Ercot as we see.

David Blackmon [00:08:38] That we explain it. So a lot of our audience isn’t going to understand exactly what you mean by behind the meter solar. So just just explain that.

Juan Arteaga [00:08:47] Yeah. So so we put out another report on that where we forecast how many households at the state level are gonna adopt rooftop solar.

David Blackmon [00:08:56] Right? Right. Okay.

Juan Arteaga [00:08:57] So own my own generation, right? If I own my house and I, I’m sick of, being without power for a long period of time. And then I see an opportunity to save some money by installing my solar panels on my roof. I’m, like, just self supply my own power. I would do that. Right. So we did that study. We we based it on the economics. Like we calculated the potential savings purchase per household through the years, considering the cost of the retail cost of power, the cost of, the solar, the solar system plus batteries, pretty much those two, and then some policy like, like we we integrated some tax credits and some policy and then some time of use tariffs and like some, some of the complications when mainly is just how much money can I save by installing solar panels in my rooftop.

David Blackmon [00:09:48] Yeah. And, and I know, everyone in Texas is has been pretty shocked here over the last few years that the, exponential increases in our. You. Tilt the bills at home. Like I said, my my, fuel use rate on that, that part of, of my bill has doubled since 2000. I mean, 2020 have just four years, my rate is doubled. And I know the same thing has been happening with most people in the state. So as as those bills go higher, the economics of rooftop solar gets better and better. Then

Juan Arteaga [00:10:20] exactly make more sense, right? So that’s just load being taken off the grid, right? It’s low that the grid will no longer see. Yeah. So that’s a

David Blackmon [00:10:30] did you. Also let me ask you one other thing. You know we’re seeing and I’m sorry I’m jumping around here, but that’s how my brain works. We’re also seeing, quite a lot of announcements recently from some of these data center developers that they’re going to build their own captive power generation supply. Right. So they won’t be on the grid. And I assume your model probably takes, some factor for that into account as well.

Juan Arteaga [00:10:53] Yeah, exactly. And that’s that’s another big difference that we baked into it. Well, I would say there’s a big difference in our data center forecast. This is just specific to data centers. Right. So the first one is that we are considering chip efficiencies, which is a big one right. We see huge increases in chip, efficiency in regards to power consumption year over year. We see this exponentially. So on an annualized basis up to 2030, we’re considering a 24% chip efficiency year over year, right. So so that’s a big one. Lowering these these lower, demand, numbers. Right. The second one is, demand substitution. We see data centers trying to, like targeting locations where there’s existing power infrastructure. Right? So right now, the it is hard to find a place to connect to the grid that has enough capacity for these huge loads, right? Yeah. So they’re targeting large industrial load places or points of interconnection where they can set up their shop and replace that load. Right. So a lot of these load wouldn’t be new load. It would be just replacing existing load from like old manufacturing facilities or like, I don’t know, like large commercial buildings that are. Yeah, yeah. Not anymore or something like that. They’re trying to find those locations where the infrastructure is already there.

David Blackmon [00:12:21] So this is, just raises all sorts of intriguing questions. You know, where I mean, at the same time, virtually the same time, Mister Vegas was, testifying to the legislature. We had this, announcement from the PUC here in Texas that, the response to the the Texas Energy Fund, this $5 billion fund to provide low interest loan guarantees, for development of new natural gas capacity was just overwhelming. You had something like 250, applications, for subsidy under under that plan, which would require it to, quadruple in size, in which I don’t think the legislature is going to do. But I mean, if if the growth rate in, in demand is really going to be this modest, on the grid itself. What does it mean for Ercot energy, future energy mix? I mean, right now, over the last 3 or 4 years, virtually the only thing we’ve added to solar, little wind, little natural gas, but it’s been probably 90% of added capacity has been sober in Texas. What is what is in versus outlook for for what the future energy mix needs are going to be in the state?

Juan Arteaga [00:13:30] Yeah. So we also we’re also put models and stuff like that. As I mentioned at the beginning, we were trying to think of everything. And yeah this makes right like think think of every detail. But then when you put it all together, you get the big picture, right. So this is a big model of models, right. We’re building small models to big this big model. Yeah we did. We are we are looking to into the interconnection. Q what’s in the Q will give us a sense of what’s likely to be built. Yeah. So we developed this machine learning algorithm to analyze the queue because we know, like everyone knows, the queue is is bloated. It’s just, congested.

David Blackmon [00:14:10] It’s crazy.

Juan Arteaga [00:14:10] In 70%, 70 to 80% of those projects will never become operational. Right. So it’s really hard to tell which projects we are actually serious and then which projects are just just there. There’s speculative projects. Someone’s trying to sell them or something. And if that doesn’t happen, they’re just going to sit there forever, right? So we developed this machine learning algorithm to be able to identify which projects have higher probabilities of actually becoming operational. And we’re looking at a bunch of things like from size and, and like type of, of like fuel like solar wind or gas or batteries. But we’re also looking at like the point of interconnection capacity, like at that substation. What’s the remaining capacity to, to connect, more projects, historical rate of success. For, for these different, substations or areas. We’re looking at the county. We realize that some counties are more prone to have more renewables than others. Yeah, we’re looking at the, the developers, like some developers, are more serious, picking their locations are their, queue positions than others that are just having a shotgun, approach. So anyways, we created this, machine learning algorithm, and then we gave a probability of success to each project, which gives us a sense of what’s actually going to be built in the short term. Right. And then for the long term, we developed, an optimal generation mix and optimal expansion planning model, which based on our load forecasts, it finds the most economical way of supplying that load given the generation profiles and costs. And we baked in also like, 86 PTC like all these tax credits like in capacity Mark is not for Texas but for everyone else. We baked in capacity market payments. We baked in a bunch of other things. But at the end of the day, we’re just finding that optimal, most economical way to supply the load into the future, right? So based on these two models, we’re seeing still a lot of sun coming to Texas, a lot of solar capacity growing, by five times, by 2030. And then a lot of batteries as well. Yeah. Those two being the, the highest growing, technologies. We do expect the ten megawatts of, of gas that are being, incentivized, but by the ATF to, to become operational in the, in the short term. But yeah, we see a lot of, a lot of sun, a lot of batteries and some, some wind as well.

David Blackmon [00:16:42] Yeah, yeah. So, you know, the, the ten, BCF I’m sorry, the, the ten gigawatts of gas, you know, the the anticipated need there, just so the audience knows, is that, Ercot needs that additional dispatchable capacity for events like Winter storm Uri. You know, where we just didn’t have enough of this, enough dispatchable capacity to come online and keep the lights on, and, I guess the view there then is that, we don’t expect solar and batteries to be able to fill that need rather than and displace that natural gas,

Juan Arteaga [00:17:17] I don’t think so. No. Like, yeah. Solar for sure. Not. The the batteries will have a say like the batteries will compete to not the.

David Blackmon [00:17:26] But they’re but their, their, cycle time is so short right now they wouldn’t really fill that multi-day need. We have four days without power in theory. And, so, you know.

Juan Arteaga [00:17:36] Exactly like the, the main, the main issue with batteries is that they’re energy limited, right? You know, so you only get two hours, four hours of, of each one of them. If, if you really wanted that to be like reliable, you would have to dispatch them as, whole. Right. So you have to coordinate your batteries so that the dispatch, it’s prorated and not all at once. Right, right. The market signal doesn’t favor that, right? Everyone wants to dispatch to be dispatch at the highest price hour. Right. If you only have two hours, you the battery operator, you want to be dispatch during the two highest hours, right? That’s where you put your money. And if the system operator comes and tells you, oh, no. Do we have enough batteries there in during those two hours, you have to wait three hours. That price is going to be like 30% of that of the highest hour, right? So you’re not going to go for it. So so that’s that’s the issue with batteries and and reliability in a market, in an open market context. Right. So that’s why I see gas still be needed because gas is dispatch whenever. And you can keep it running for as long as you have gas in your pipeline. Right,

David Blackmon [00:18:44]  right. Yeah. So I, I got to tell you, I mean, I and I’m not trying to draw you into any kind of a political discussion, but I mean, this this kind of information seems to be absolutely vital, something that Ercot and the PUC and the legislature all would benefit from, hearing about. And I wonder if embarrass anyone and embarrass has been invited to, hold a meeting with anyone at those entities in Texas or even in other other with other ISOs in other regions of the country. I mean, or is anyone in that context, been, reaching out to you guys?

Juan Arteaga [00:19:23] To me personally, no one has like, I don’t know if if somewhere someone else in the in the company. We are a big company, right? Yeah. Yeah. And we do have offices down in Houston and Austin. Right. So maybe someone’s talking to to work on the PUC. I personally haven’t haven’t had the chance.

David Blackmon [00:19:43] Yeah, yeah. No, it’s I just I mean, I think it’s important. I, I have some contacts, in the Texas government and. Yeah. Would would offer to to help, arrange things.

Juan Arteaga [00:19:54] Yeah. Totally.

David Blackmon [00:19:55] I might run it up the flagpole there, and because

Juan Arteaga [00:19:58] I want to say that I. I’m pretty sure they know those numbers.

David Blackmon [00:20:02] They got to.

Juan Arteaga [00:20:03] I like they’re not like they are in the industry. They know what they’re saying. I what I believe is that they’re just trying to either push for some policy updates that needs a higher, like way higher.

David Blackmon [00:20:15] Right.

Juan Arteaga [00:20:16] Or like just try to get some additional budget, maybe for transportation.

David Blackmon [00:20:20] they would never do that.

Juan Arteaga [00:20:22] Like there’s like in my mind there’s there’s something behind these numbers that that that’s why they’re keeping them just to try to push of. Right. That that hasn’t been disclosed. But, but I’m pretty sure they’re aware of, of like the unrealistic numbers that they’re pointing at.

David Blackmon [00:20:36] Well I’m just and not to accuse anyone of bad faith, but, that would be a pretty, pretty classic tactic in the political realm. Not just in Texas, but anywhere else. Yeah. Yeah, exactly. There was I got to tell you, I this is this conversation is why I always like to talk to folks that are embarrassed because. And I’ve known Allen Gilmer since he started the company way back in the 90s and, since the beginning of that company, which was drilling info to begin with. It’s always been on the cutting edge of of looking forward and looking out into the future and pushing, pushing the envelope in that realm, whether that’s taking backwards looks at things. And, so it’s always a pleasure to talk to you guys here. It’s the staff at embarrass is just made up of incredibly smart people. I really appreciate your time, for this. This is going to be a great episode of my podcast, and I. And, we’re running up against 30 minutes, so, we like to, to keep it at the, at that limit whenever possible. But this has been great.

Juan Arteaga [00:21:41] Yeah, great.

David Blackmon [00:21:42] And, yeah, I appreciate you guys. And, keep up the good work.

Juan Arteaga [00:21:47] Thank you. Thanks. Thanks a lot for this opportunity. Yeah.

David Blackmon [00:21:50] Absolutely. Absolutely.

Juan Arteaga [00:21:51] Yeah. Keep keep an eye out. We’re we’re going to we putting out a lot of reports. Yeah. Print out the pricing forecast the flows forecast like looking at congestion. We’re putting out a lot of work now that it’s all coming together. Like all those models that I talked about are coming together.

David Blackmon [00:22:07] Right Right.

Juan Arteaga [00:22:08] We’re putting out a lot of a lot of really good work.

David Blackmon [00:22:11] Well thank you. Thank you so much. Thanks everyone for watching. And thanks to Stu Turley and Sandstone Group for producing our podcast. That’s all for now.

Juan Arteaga [00:22:19] Thank you.

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