Climate Now

The IRA Progress Report

September 11, 2023 James Lawler Season 1 Episode 113
Climate Now
The IRA Progress Report
Show Notes Transcript Chapter Markers

When the U.S. Inflation Reduction Act was signed into law in August 2022, policy analysts predicted that the incentives it provided for renewable energy deployment, home electrification and EV adoption would put the U.S. on track to reach at least two thirds of its 2030 emissions reduction target. Twelve months later, we can now start to track how well the nation is progressing towards those predictions.

In terms of unlocking private capital and kickstarting new clean energy projects, the IRA is profoundly exceeding expectations, already creating tens of billions of dollars in new investments in what has been dubbed a U.S. “manufacturing renaissance.” But according to Oliver Kerr, North America lead for market analytics company Aurora Energy Research, a national energy transformation requires integration as well as manufacturing. Climate Now spoke with Oliver about the impact of the IRA on renewable energy growth, as well as the policy reforms and grid infrastructure updates that are still needed to ensure that public and private investments being made in clean energy manufacturing will translate to 100% fossil free U.S. electricity in the coming decade. 

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James Lawler: [00:00:00] Welcome to Climate Now, a podcast that explores and explains the ideas, technologies, and the solutions that we'll need to address the global climate emergency. I'm James Lawler. Time flies. The Inflation Reduction Act, which is President Biden's landmark 2022 climate bill, turned one year old a few weeks ago. The IRA, as it's also known, contains groundbreaking green energy provisions, including tax credits for electric vehicles, rooftop solar, and home batteries, incentives for green hydrogen and carbon capture and storage, and $27 billion for grants for clean energy and climate projects.

If you're a regular listener, you've likely heard us discuss how the IRA is already providing new opportunities in industries, including carbon offsets, hydrogen fuel production, sustainable agriculture and, in one case, additives for rubber car tires. If you're curious to hear those conversations, go to climatenow.com

The sustainable energy goals that the Biden administration hopes to reach with the [00:01:00] IRA are very ambitious. These goals include achieving a carbon-free power grid by 2035 and to achieve net-zero emissions overall by 2050. A year after the bill's passing, however, the question of whether the U.S. will reach these goals remains unanswered.

Our guest today has spent a lot of time in the last year, analyzing the IRA and its impacts to determine whether or not the U.S. is on track to meet the goals outlined by President Biden. Oliver Kerr works at Aurora Energy Research, which is an analytics firm that provides models, forecasts, research reports, consulting services to help asset managers, policymakers, entrepreneurs, other stakeholders navigate the twists and turns of the sustainable energy market.

Oliver is somewhat doubtful of the United States' ability to reach a net-zero power grid by 2035, but he is overall optimistic about the political and technological foundation the country is laying for a net-zero future.

Our conversation covered the strengths and the limitations of the IRA, whether or not the Biden [00:02:00] administration's goals are attainable, and what it will take to achieve them. But first, our news segment: This Week in Climate News.

Alright, and this week in climate news, I'm joined by the one and only Julio Friedmann. Julio, great to see you again.

Julio Friedmann: Such a treat. Glad to be here. 

James Lawler: So, Julio, you have been absent from cli- This Week in Climate News for a few weeks and you have been doing some very exciting traveling. I wonder if we could maybe start with the summit you attended and giving us a rundown of what transpired.

Julio Friedmann: My great pleasure. I had the good fortune of attending the first African Climate Summit in Nairobi, Kenya. It was a mountaintop experience. It was just amazing. They had planned for 10,000 people. They received 35,000 people, which gives you a sense of the depth of demand and excitement.

James Lawler: Wow. So who, who attended? Who was there? 

Julio Friedmann: There were delegations from all over the world, heads of state, many presidents and ministers from across the [00:03:00] continent of Africa, from Europe, from India, Japan, China, and the United States. It's a big deal. People understand how critical Africa's development is to successful energy transition.

There were sessions on everything from solar, to critical minerals to, uh, green industry, to transportation and logistics, to equity and justice. And there was good representation on all of these topics from companies, from civil society, and most importantly, from government leaders. Last, there were a lot of bankers there.

There were a whole bunch of people representing ways to finance the energy transition. And they saw what was going on in Africa as really important. 

James Lawler: So if you had to name one or two or three things that surprised you about your experience, what would they have been?

Julio Friedmann: Most surprising of all was actually the stance taken by African leaders and in [00:04:00] particular President Ruto, who was hosting the summit.

He gave many eloquent, clear eyed, practical talks. And at his keynote speech the first day, he said two things that stood out to me. One of them, he said, it is no longer helpful to list grievances. Instead, we must field solutions. He is trying very deliberately to change the story of Africa solely as a climate victim to one that can deliver the solutions of the present and the future.

And that was a theme that he hammered and others hammered all the way through the summit. It is a pivot towards investment and green development and opportunity. Rather than, you know, "hey, pay us reparations". So that was a big surprise. Second big surprise. He said he wants the number one export of Kenya in a few years to be carbon certificates, as opposed to coffee or tea.

James Lawler: Interesting. 

Julio Friedmann: That's a pretty radical business shift. 

James Lawler: That's fascinating. 

Julio Friedmann: And he [00:05:00] sees everything, from nature-based solutions to direct air capture to biochar, he sees that very much as a stake in his nation's future. Again, that's a pretty different sensibility than we hear at a lot of these conferences.

He sees CO2 removal and carbon management as a frontline opportunity for development.

James Lawler: Fascinating. 

Julio Friedmann: The, the third thing I do want to just mention this briefly, there were a lot of countries there cutting deals and two stood out in my mind. One of them is the United Arab Emirates pledged $4.5 billion of investment in sub-Saharan Africa. That's a lot of money, including $450 million for CO2 removal.

And Germany and a handful of other Nordic nations pledged debt relief in exchange for investment in things like solar and green hydrogen and wind. 

James Lawler: Mm-hmm, interesting. 

Julio Friedmann: So they're thinking about new financial mechanisms. They're thinking about a way to get more development and more opportunity there.

But those deals were sort of [00:06:00] signed by ministers, by CEOs, by presidents. Like, this was a frontline major effort to try to, again, deliver that pivot that President Ruto was talking about: how does Africa provide solutions to the world as opposed to just asking for redress. And there were representatives from China, from Japan, from the Middle East.

Everybody was trying to get in on this because they see the reality of the need and they see the size of the opportunity. 

James Lawler: Mm-hmm. That's really exciting. Very happy that, that we have, we have someone who actually was there to, to report back with such color. So we want to cover a couple of- a handful of other stories that we saw this week.

There's a story in Bloomberg about Texas kind of teetering on the edge of blackouts as demand squeezes the grid. The grid operator issued its first emergency declaration since 2021. And, you know, the grid was in a position of drawing on electricity reserves while urging conservation. This is in, in the face of unprecedented heat across the state.

What do you make of the trials and [00:07:00] tribulations of ERCOT in Texas, which is the grid in Texas, Julio? 

Julio Friedmann: I would say something like "isolated grid faces problems of isolated grid". Like, this is what happens when you're not connected to other parts of the system that can provide capacity or relief. 

James Lawler: Why are they not?

Julio Friedmann: So this is just structurally designed. They, they, they built their grid that way for all kinds of reasons, which had to do with, say, when they liberalize their markets. And for a long time, they got much lower prices and much greater performance and resilience. Like, there were good reasons for them to remain separate.

Also, as we have discussed many times on this show, building grid interconnections is not easy to do in this nation. 

James Lawler: Right. 

Julio Friedmann: And so, if you're going to connect Texas to another state, that could take 17 years. And in fact, there is real problems and issues with that. I will say though, that to your earlier point, this is the first emergency declaration since 2021.

That says a couple of things. One, that wasn't that long ago! That was two and a half years ago. And that was when they [00:08:00] had extreme cold instead of extreme heat. Second, it shows that they need to modernize their grid in a very real way. Nobody likes to foot the bill for infrastructure investments, but that's what they need.

They need modernization and upgrades, capacity buildings, additional electricity storage. They need all kinds of stuff. And they have not spent the money and done the hard work to do that. And as- they are suffering the consequences. And then the last is sort of where I started. They really do need to connect to other parts of the system.

That's just a bullet they have to bite. Because otherwise they're going to keep having these challenges. They're going to use more natural gas and have more emissions. They're going to suffer more rolling blackouts. Asking for conservation in a place like Texas is not particularly useful. 

James Lawler: And to that, to that point, the world likely has seen the hottest summer on record by about a degree, one degree Fahrenheit, 0.65 degrees Celsius in terms of averages, which is above the, you know, above the 1991 to 2020 average.[00:09:00] 

This summer probably has beat the previous warm summer record of 2019 by about 0.3 degrees Celsius or 0.5 degrees Fahrenheit. So, you know, and this is unfortunately only going in one direction. Julio, we saw a sort of a fun story about an investment that was- this is sort of taken from a press release or expanded from a press release.

Khosla Ventures, which is a VC firm, is one of several partners to back an effort to make what they're calling "orchards" of this lung-like material to absorb CO2 from the air. And this is one, one of, of many technologies that is seeking to capture CO2 from the air for storage. This is a small company, you know, raised a few million dollars.

But we have noticed that there've been an increasing number of direct air capture companies that are trying to solve these issues around, you know, the, the high energy requirements of recycling the sorbents that, that exist. And, and- so seeking to sort of solve some of the problems [00:10:00] of the direct air capture systems that are, that are most prevalent currently. And I was curious, given your expertise on this, what you thought of this and maybe other, newer technologies in the space.

Julio Friedmann: Yes, so direct air capture is an inherently challenging thing. We have two broad-based systems that work pretty well, liquid solvents and solid sorbents. These are the kinds of things that scrub CO2 from submarines and spacecraft today. Those have gotten the largest commercial traction and investment, but there's limits to what they can do, there's challenges to what they face, so there's lots of companies trying to say, "let's try something pretty different".

And this is one of those companies. They are inspired with biomimicry. They said, let's try to do what lungs do. Lungs are really efficient at separating gasses. Maybe we can do something like that. So they've structured their little balls to do what the lungs do. And they're trying to do it with lower energy, uh, about half the energy of the conventional systems.

Looks interesting. This stuff is hard. I don't really know how it'll work. I don't really know how it'll scale. But the fact that we have now four or five alternative [00:11:00] pathways to the main pathways says to me, someone's going to figure it out. We will actually get direct air capture substantially cheaper and pretty soon.

And that's good because we keep failing on other fronts. That means we're going to need more and more direct air capture. 

James Lawler: Mm-hmm, should we talk about this report, this New York Times article? It just came out. 

Julio Friedmann: So, the New York Times has reported on the first UNFCCC report on the global stocktake. This is basically "how are we doing, folks"?

And the UN Framework, uh, on Climate Change is put out this report. It's two years of work, many authors from around the world. In some ways, this is not a surprise. It basically says we're doing better than we were, but we're not doing enough. I think most people tracking climate understand that we were headed towards really bad climate outcomes, higher than three degrees Celsius pre-industrial.

And we are no longer on that track, we're more on, like, two and a half degrees. Two and a half degrees is way higher than two degrees or one and a half [00:12:00] degrees, which are the formal aspects of Article Six under the Framework Convention and the Paris Accord. So, it says we are not doing as well as we had hoped. We are doing better than we feared.

And a lot of the things that are said there, a lot of the recommendations, are again the kinds of things that we are already familiar with. We need to spend more money. We need to deploy at greater speed. We need to manage adaptation as well as mitigation. But if you're doing climate arithmetic, it shouldn't surprise you that everybody's fallen behind because they are.

It is also the case that it just takes a long time to deploy these things. It's been seven years since the Paris Accord. That's- seems like a long time, but that's not a long time to build transmission infrastructure or ports or, you know, hydrogen plants or carbon capture facilities or sustainable aviation fuel plants.

These things take a decade. So there's a lot that's coming, but it's not represented in this report because it's not built and it's not working. 

James Lawler: Right.

Julio Friedmann: So, the next stocktake is probably going to say something similar. Ah, we did better than we were the last time [00:13:00] we did this five years ago, but we're still not on track.

And that is, to me, says two things. One, it is just the nature of these things. It's all hard, it all takes time, and it all takes money, and that means we are always behind. Second, we do make progress. And if, in fact, you know, we end up next year saying we're not on a two and a half degree trajectory, we're on a 2. 2 degree trajectory, that would still be behind, but way better than we were. 

And I think that that's what we're going to see five years from now, because we're seeing this global activity really ramp up.

James Lawler: And I think it's worth noting that even as we talked about, you know, this past summer were fractions of a, of a degree above averages, which don't sound like a lot. But just look around, look outside and, you know, feel the temperature. Like this, this matters a lot when you're talking about local impacts, which collectively average out to something that's just, you know, sounds like it's not too much over the average, but that translates into the massive, massive [00:14:00] costs.

So, any fractions of a degree, you know, that we bring that down is going to mean a much, a much better future than we otherwise would have had. So it's important not to, not to read these fractions of a degree and, and think all is lost. We can, we just have to continue to double down. 

Julio Friedmann: Right. People get into their heads that, like, we need to hit some target by 2030 or else we're doomed.

That's not strictly true. What that means if we don't hit a certain target by 2030 is it'll be harder, it'll be more suffering and there'll be more, you know, expense to fix it. But history doesn't end in 2030. History doesn't end in 2050. And so we need to configure a system that will work for everybody and over the long haul.

And that just takes real time commitment, expertise, and money. Like, there's no shortcut for that stuff. 

James Lawler: Right. That makes a lot of sense. Well, thank you, Julio. I think that wraps it up for the, for our week of stories. Really appreciate you taking the time, as always. Thank you.[00:15:00] 

And now for our interview with Oliver Kerr of Aurora Energy Research. Oliver leads Aurora's North American practice based out of the company's U.S. headquarters in Austin, Texas. Since joining Aurora in 2016, Oliver's worked on a wide range of buy and sell-side transactions for renewables, storage, and conventional power generation, both in the USA and in Europe.

So now, he's responsible for running the Aurora North American business, which covers all U.S.. regional transmission organizations, RTOs, as well as regulated markets and Canada. Oliver has a decade of experience working on the energy transition, including roles in the UK government and World Bank. He holds a master's in energy economics, policy, and modeling from UCL, an MA from Harvard, and a BA from Oxford with first class honors.

He is a recipient of the Kennedy Scholarship as well, so Oliver is a smart guy. 

Oliver Kerr: I'm blushing. That was a very lovely intro. 

James Lawler: Oliver, it's, it's an honor to have you. So let's jump straight to- what do you do at Aurora? 

Oliver Kerr: Um, the [00:16:00] core of the business is really built around models and data. So we spend, and I spend a lot of time thinking about the long-term future of power markets and modeling different scenarios for how things might pan out.

So that can help utilities, policymakers, investors, lenders, large energy consumers all understand market dynamics and ultimately make better decisions. I think our mission statement is to provide data driven intelligence to support the global energy transformation. Basically, there are going to be trillions of dollars spent over the next few decades on decarbonizing the economy.

There are probably good ways and less good ways to do that. And at heart, I think the central premise of Aurora as a business is that the maths and robust independent analysis can, can help support better decision making and allocate that capital more efficiently. 

James Lawler: And also math singular, [00:17:00] as we use it here in the U.S,. it's also useful.

Oliver Kerr: Exactly. Clearly I have not, not adapted quite yet, sorry. 

James Lawler: So, I'd like to ask you about the Inflation Reduction Act, which just turned one year old last week. What is your view of the IRA's impact so far on the energy transition? 

Oliver Kerr: I mean, honestly, I think it's, it's really hard to overstate the importance of the IRA.

We can get into the detail, but for me, one of the most significant aspects of the bill is that I think it signals something of a shift in US policy away from globalization and towards a more nationally-focused industrial policy. So I think, since the 80s, really the dominant paradigm has been the free markets, low barriers to international trade are basically the most effective and efficient way to allocate goods and services. 

It's a [00:18:00] paradigm in which the economy is, in some ways, depoliticized, so markets are seen largely as autonomous and self correcting. The role of the government in the paradigm is, is simply to, you know, remove barriers to efficient market functioning.

You know, maybe stepping in from time to time when you see a market failure. You know, carbon pricing is probably a good example of that. You know, setting a carbon price, you price in the externality, and then you basically let markets do their thing and solve the problem. I think there have been three big shocks to the system over the last few years that have really shaken some of that faith in, in globalization and free market.

So first we had COVID and, you know, fairly unprecedented restrictions on international travel. Second, you have the energy crisis in Europe with Russia's invasion of Ukraine and, you know, that impacted power and commodity markets right across the world and, I think generally, led to more of a push for reliance on one's own resources.

Finally, we have the more general push to support [00:19:00] domestic industry and reduce outsourcing to countries that perhaps have lower costs of labor, lower labor standards, which I think until now has really been a key pillar of globalization. So, you know, we could talk about all of these at length. But to me, the IRA is a pretty good example of this broader shift towards a more nationally-focused industrial policy where government's really willing to step up and intervene in the market, playing a much more active role using fiscal policy to drive, you know, investment, growth, and, productivity. 

James Lawler: Hmm, interesting. Of all the different provisions in the IRA that are aimed at spurring the energy transition, accelerating that transition, what do you see as the most impactful from where you sit?

Oliver Kerr: I really think it's the tax credits for clean tech deployment, and I, I mean that across the board. So, the impact of those in the modeling that we do is pretty big. So, for renewables projects in the United States right now, [00:20:00] projects can avail themselves of a whole range of tax credits. Some of those we've seen before.

So for wind and for solar, you can get an- either an investment tax credit or a production tax credit. The production tax credit for solar is somewhat new, and especially in sunnier parts of the country, we'll see lots of projects taking that up. There is a new- tax credits for batteries, for standalone storage, which were not available before, which are really spurring a boom in battery deployment.

James Lawler: And these are all utility- you're talking about, sort of, tax credits that large utilities and developers are availing themselves of, is that right? More so than consumers. 

Oliver Kerr: That's correct. Yeah, so on the consumer side, there are tax credits for things like EVs, but I'm, I'm more focused on the, the sort of upstream supply side, you know, if EVs are to be effective, we need to decarbonize the power sector and, and that's what a lot of these credits do.

James Lawler: Mm-hmm. Would you be able to summarize a couple of these credits for us just to understand the magnitude and what exactly they are for [00:21:00] utilities and other developers? 

Oliver Kerr: Yeah, of course, so this can get pretty complicated pretty quickly, so I'll, I'll try to break it down as simply as I can. So, the important thing to remember here is there, there are basically two types of credits on offer.

There are what you might call supply push credits that focus on domestic manufacturing. And then there are what you might call demand pull credits that support project developers that actually buy and install domestic products. You can't just source all your materials elsewhere, assemble them in the U.S. and then qualify for this extra tax credit. The goal really is to support domestic industry. 

This is something that we spend a lot of time parsing through the policy and understanding what it means. We're less focused on that as opposed to what impact this will have on the power market. So for instance, as a result of some of these tax credits between now and 2035, we see around a twofold increase in [00:22:00] onshore wind, about a fivefold increase in solar, and a tenfold increase in battery.

So it's a pretty huge impact, you know, across the market. 

James Lawler: Wow. So, what do your models say about renewable energy growth and adoption over the coming, say, five years, 10 years, 20 years?

Oliver Kerr: I think, you know, one thing that I've, I've learned since the IRA was passed is that, when it comes to just about anything in the, in the bill, the devil really is in the detail.

I think a trap that I think a lot of studies on the IRA that I've seen fall into, especially those that look at U.S..-wide impacts, is failing to take into account some of these very local real-world constraints, which can lead to some fairly optimistic projections for the speed of renewables rollout across the country.

So when it comes to specific markets, I think one of the challenges, for instance, [00:23:00] is interconnection queues. So as I'm sure many of your listeners will know, I think this is one of the big challenges we're facing across U.S. power markets right now. It's basically, you know, all system operators are facing to some degree is just how do you get through the sheer number of projects applying to, to connect to the grid. 

So according to some of the modeling we've done in markets like CAISO and PJM, CAISO is in California, PJM covers a bunch of eastern states; in both of these markets, I think, you know, there's just a very long queue of projects that are waiting to connect to the grid.

In markets like that, we find that it's very hard for the IRA to lead to this immediate short-term bump in, in renewables deployment, at least over the rest of the 2020s. 

James Lawler: Wow, that long. 

Oliver Kerr: Yeah, no, exactly. These, these queues are really, really long. 

James Lawler: I mean, isn't there some non-zero probability that policy is reformed within the 2020s and this problem goes away, [00:24:00] or no?

Oliver Kerr: I mean, people are trying, I think it has to happen. I think it probably boils down to the fact that a lot of developers, you know, it's just very cheap for them to be able to put a project in the internet connection queue. It's, it's more of an option than an obligation. So that can lead to projects essentially reserving spots in the queue and then, you know, using the time to figure out, you know, whether the project's actually viable or not.

And of course, you know, the more that happens, it's actually a, it's a vicious cycle because when everyone needs to reserve their place in the queue and things just get longer and longer and system operators become overwhelmed and it's, it's actually quite hard to address. So I think you're absolutely right.

Policy is, is underway. FERC has some regulations that are trying to address this and MISO is- just a couple of weeks ago, released a policy proposal to address this. But, but it's difficult, right? To get the balance right. So MISO is probably a good example. So, so MISO is a bunch of the Midwestern states that, that power market, you [00:25:00] know, some of their proposals included things that sound very sensible, like capping the number of projects that can enter the queue in any given year, you know, increasing costs to do that, increasing penalties for withdrawing from the queue. 

So, you know, all very sensible things to address this issue of speculative projects. In reality, though, I think one thing that it risks is that you essentially penalize smaller developers that, that perhaps don't have access to cheap credit for whom those penalties can be quite high and you ultimately just slow down the pace of renewables and battery deployment in general. So, and, and in MISO that's potentially a really big challenge given the amount of coal that we anticipate coming offline over the next few years. 

James Lawler: So, understanding that the speed of renewable energy deployment is a question that must be answered locally because of local constraints, what do your models say about the speed of renewable energy deployment, given those constraints?

Oliver Kerr: I mean, still, still huge. If you put it down to an annual level, I think we [00:26:00] see between now and 2035, around 10 gigawatts of batteries per year-

James Lawler: Per year?

Oliver Kerr: -per year, 20 gigawatts of solar per year, 10 gigawatts of on-shore wind per year.

James Lawler: And these numbers that you're quoting, these annual numbers, are they numbers that will- we will reach in 2035 or they're numbers that are averages? 

Oliver Kerr: No, this is an average over that whole period. 

James Lawler: Okay. An average over that whole period, so considerably more than that once we reach 2035, we'll be seeing, what? 20 gigawatts per year coming online in batteries? Or something, maybe even higher?

Oliver Kerr: Yeah, exactly. So by 2035, we think that the IRA helps boost renewables capacity to around 900 gigawatts across US markets. And it's about $420 billion of capital expenditure. It's just a- a huge amount of investment. 

James Lawler: Mm hmm. And so, just to put this into context, like a single large nuclear power plant, light [00:27:00] water reactor, is about one to two gigawatts of power?

Oliver Kerr: Correct. Exactly. 

James Lawler: So, essentially the IRA gets us to a point where by 2030 to 35, we would be seeing the equivalent of roughly 10 nuclear power plants per year of battery storage coming online. 

Oliver Kerr: Exactly, yeah. Five to 10 nuclear power plants worth of battery storage. That's right. 

James Lawler: That's incredible, okay. Wow. And so, what percentage of our primary energy mix is renewable by 2030 in your models? 

Oliver Kerr: That's a great question. I don't actually have the answer to hand, but maybe I can answer it in a slightly different way, which is that, even with all of this deployment, we still don't think that it's enough to reach net zero by 2035.

James Lawler: By 2035.

Oliver Kerr: Correct. There's still a lot of thermal on the system. It's just really hard. I, I think the, the [00:28:00] IRA is good with the sort of carrots or the incentives. There is less in terms of sticks. The EPA is now addressing some of that with its rules around regulating carbon emissions from, from power plants but, you know, getting to net zero’s- is really hard, and we don't see that happening. 

James Lawler: Okay, so I'd love to drill into that a little bit more. I mean, starting with the rules that you just mentioned at the EPA, those, I believe, are not yet passed, are they? 

Oliver Kerr: No, that's correct. 

James Lawler: And so, essentially, the rules that we're talking about are proposed rules that the EPA has put forward that would require power plants to equip themselves with carbon capture and storage, thereby reducing around 90 percent of their CO2 emissions, I believe?

Oliver Kerr: It depends. There are, they don't need to necessarily put carbon capture and storage or other technologies they can use, or they could just run less, but they are fairly stringent regulations. That's right. 

James Lawler: So it seems like [00:29:00] all of these different rules, you know, the power- the EPA power plant rule, incentives to store carbon underground, 45Q, et cetera, they're all sort of in place of, or sort of for lack of a carbon tax, it seems. Like, if we only had a carbon tax, like an actual cost to polluting, a cost to the emissions that was assessed directly, none of these other instruments would be necessary and we'd have a much more efficient, sort of, mechanism to act as that stick that you're talking about.

It could be one policy, very simple, and get the job done. Why can't we do this? Why is this so hard? Everyone seems to want it. Like even Exxon, I think, wants this. At least they say they do

Oliver Kerr: I mean, I would challenge somewhat the notion that a carbon tax would, would fix all of the problems. If you look at Europe right now, the carbon price is incredibly high and gas prices have been high for the last year, but we're still burning a lot of gas.

James Lawler: So in Europe, is [00:30:00] there a sort of global blanket carbon tax? 

Oliver Kerr: Uh, that's right. There's a carbon price in the EU ETS. Yeah. 

James Lawler: And who pays that price? 

Oliver Kerr: Everyone. Generators of power that produce carbon will pay that price. The European carbon price right now is around $100 per ton, which is high. But I think the idea that a carbon price alone is, is enough to get to net zero, I think is, is, is misplaced.

And I think that is one of the things that the IRA recognizes is that you do need support for, you know, a much broader and more holistic industrial policy. 

James Lawler: Mm, interesting. So why do you think that the carbon price at a hundred dollars a ton, which is quite high, as you say, is not sufficient to stimulate a lot of CCS on power plants in Europe?

Oliver Kerr: Yeah, it's a good question. I think the tech- for CCS specifically, I think the technology is, is challenging. Look, I think, you know, there, there is a debate around how much we'll need new [00:31:00] technologies to reach net zero. I think, I think we know pretty much how to get that first 80 percent of emissions reductions, and I think you can do that with, you know, known technologies. You know, some markets around the world are already doing it. It's that last 20 percent that's really difficult. You know, there's one view of the world that, you know, we, we don't yet have all of the technologies we need and we do need new innovations in things like CCS or hydrogen or, or next-gen nuclear.

You know, all of which would make a 2035 timeline, you know, incredibly difficult. You know, the other view is that you don't need new technologies and, and you can do it with what we have already. You basically massively overbuild wind and, and solar, you build a lot of batteries to store that energy when it's cheap, um, and then dispatch when, uh, when the wind and sun are not blowing or the sun is shining.

The challenge is we don't yet have a good form, uh, of long-duration storage. The number of batteries you would need to do that is, is, you know, astronomically expensive. So yeah, it's, it's a [00:32:00] tough challenge. 

James Lawler: So which view do you subscribe to? 

Oliver Kerr: I think a bit of both. I think to, to get, it's, it's very difficult for me to see how we get to net zero without some technological innovation and just with, with what we have already. I think some of the key areas there that, that I would love to see a very cheaper, long-duration storage, I think that would help enormously. 

You know, nuclear would, would help and it's a known technology, but it's, it's very challenging politically and, and, you know, cost-wise, and we’re just not any good at building nuclear over the last 20, 30 years in the West. It's the first 80% I'm confident that we can, that we can do it. It's that last 10, 20 percent that starts to get much more difficult. 

James Lawler: So I'm curious about your models, and models in general, that predicts the energy mix in 2035, given that it would seem that so much hinges on sort of these binary decisions, like, do we have a carbon price or not?

Like, can we solve this interconnection [00:33:00] queue issue or not? So how can we really say anything about the future from a prediction standpoint when so much depends on sort of these binary choices?

Oliver Kerr: I think one of the nice things about power markets is that they do operate according to, you know, very predictable rules and basic math. You know, in other words if you know those inputs, we have a pretty good idea of what the outputs will be. The challenge is we don't have a crystal ball.

So when we do our modeling, we know that we'll be wrong. So we try to quantify exactly how we could be wrong through a range of scenarios and sensitivities. So, you know, what happens if the gas price is, you know, 20, 50, 100 percent higher than we expected? You know, what if battery costs come down much quicker or much slower?

So I don't think I would say that models can predict the future, but what they can do is help simulate different outcomes, and quantify and clarify some of the tradeoffs in different pathways. Uh, you know, the, the old adage is all models are wrong, but [00:34:00] some are useful. We model all of the time in our heads.

We make predictions and the difference between, uh, someone making a heuristic prediction about what they think will happen in future and the modeling we do is just the, the degree to which some of those assumptions are quantified and, and specified, and thinking through exactly how they will play out.

So- and I think there is a good discipline in being clear about what you're assuming and, and just seeing, you know, modeling that out. You might be assuming something completely wrong, but at least you could try to think through the impact. So a good example there is what would happen if we had long-duration, low-cost storage.

And then that starts to make the world in which you build lots of renewables, you know, much, much more attractive. Without that, it's, it's harder to see how that world, that really works. I think storage is a very versatile technology and like, you know, batteries are fast-responding

They [00:35:00] can ramp up and down with sub-second response times that makes them extremely valuable for managing grid stability, especially as more renewables come online and you know, it's, it's important that markets reward that. So I think two of the common features we tend to see in, in markets that have developed a lot of batteries around the world are a combination of one: good fundamentals, and by which I mean high levels of renewables deployment, especially solar, uh, and two: well-functioning ancillary service markets that reward battery flexibility.

Uh, and if you look at the U.S., the markets that are deploying the most batteries have both of those characteristics. 

James Lawler: What do you mean by, by well-functioning ancillary services?

Oliver Kerr: So, so ancillary services are one of the ways grid operators manage grid stability, then keep, keep frequency at the right level so that the lights don't go out. Batteries are ideally placed to play in some of [00:36:00] these markets, but not all markets around the U.S. have, have well-developed ancillary service markets that, that reward, you know, batteries for their very quick response times.

You know, beyond those two factors, you know, you've got a lot of renewables deployment, you, you have well-functioning ancillary markets, and, and we're seeing a lot of battery investment. 

James Lawler: Interesting. So one of the big questions about the future grid is the degree to which we'll rely on distributed generation and storage versus utility, sort of, scale centralized generation and storage.

What is the mix today and- between these two things and what do you think it's likely to be in the future?

Oliver Kerr: I think we're still in a very centrally-oriented energy system. So if we compare somewhere like the U.S.. to Australia: in the U.S.., around 2. 5 percent of homes have solar panels compared to 25 percent in Australia.

[00:37:00] So I think there's still a long way to go. I suppose on the demand side as well, people are starting to adopt EVs, but again, still, still a long way to go. I think by definition, the system will have to be more decentralized, particularly as people start to start to use things like EVs, the system become- households become much more electrified.

It's hard to imagine a system operating effectively without some degree of demand response and local energy production. At the same time, there's a reason why the system has developed the way it has. There are economies of scale to building big stuff. It can make financing easier, rather than at the household level. So I think they'll- it's hard to see a fully decentralized system, at least based on current, current technology and incentives.

James Lawler: I know you've said that it's hard to see 100 percent clean electricity by 2035, but I'm curious, what would it take in your view to get there? 

Oliver Kerr: Frankly, by [00:38:00] 2035, I mean, it is possible. Is it plausible? I don't think so, at least not based on our modeling of the IRA as it currently stands. You know, thinking more broadly about 2050, I think it's, you know, it's more than doable, but by 2035, just given the lead times on some of the technologies, I think it's very hard to see any scenario in which you'd, you'd reach net zero by 2035. No new renewables can go into the queue until 2026. It's- these things just take time to clear and, and it's, it's, it's not going to happen. 

James Lawler: What strategies or innovations do you foresee that could make grid connections more reliable for users and more accessible for energy developers?

Oliver Kerr: Yeah, I think there's possibly two strands to this: policy and technology. So, you know, on the policy side, the Federal Energy Regulatory Commission is already starting the [00:39:00] process of trying to make it easier for people to connect to the grid. Individual ISOs, so independent system operators, have reforms underway.

All of them are likely in different ways to try to weed out some of those more speculative projects and prioritize those that are closer to commercial readiness. The big question mark really is, is how you do that without going too far and making, making life really difficult, especially for a lot of smaller developers. So that's the policy side. 

I think on the technology side, it's a question of building more grid, which is, which is hard to do, building more long-distance transmission lines, better connecting markets, and better connecting resources to, to demand centers, cheaper storage. Storage can be, in many ways, a replacement for grid.

If you have a particularly congested location, one answer is to build more power lines. The other answer is to build a battery. And you soak up power when it's not needed and dispatch when it [00:40:00] is. You know, there's more potential on the demand side to, to manage load, you know, in, in ERCOT in Texas, you know, the grid has basically been saved this summer by people voluntarily turning down load.

I think all of these things will, will help us maximize, you know, the use of the system as it currently is and help to integrate new resources. All I would say is that it's just a really exciting time to be working on the energy transition where we're heading into new territory. We're already starting to see some of the challenges and pushing to really high levels of renewables penetration.

And I think it will sup- you know, be really interesting to see how this all plays out, how market structures hold up, how governments respond and what new technological developments are to come further down the road. 

James Lawler: All right. Well, Oliver, thank you so much for joining us today. It's been great to have you.

Oliver Kerr: Thanks very much for having me on the show.

James Lawler: And that's it for this episode of the podcast. To learn more about the IRA and its impacts [00:41:00] on the energy industry, check out our other podcast conversations at climatenow.com. And if you'd like to get in touch with us, please email us at contact@climatenow.com. We hope you'll join us for our next conversation. Thank you.

Climate Now is made possible in part by our science partners like the Livermore Lab Foundation. The Livermore Lab Foundation supports climate research and carbon cleanup initiatives at the Lawrence Livermore National Lab, which is a Department of Energy applied science and research facility. More information on the Foundation's climate work can be found at livermorelabfoundation.org.


Introduction
This Week in Climate News
Oliver Kerr Interview
Kerr's Predictions and Models
Strategies to Reach Targets
Power Markets and the Grid