With Laurent's segal End from London and Gerard Reed from Berlin.

This is redefining energy today.

On redefining energy, we're going to really look closely at what's going on in the US power markets, in particular the mismatch between what we're seeing in terms of wholesale pricing and what we perceive as this big increase in demand that's we're seeing in particularly driven by II and how that would cheap funds can flow to make sure that that electricity capacity, generation capacity, rid capacity, et cetera can be built with.

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Back to the show.

Yes, yeah, because there's no way at the current price of turbinds, interest rate and perceived demand that you can build anything right now with the current market pie, so something's going to give.

Yeah, you're totally right.

Ne's So anyway, we decided up this is a really interesting topic from our perspective, and we said, let's bring on an expert in this area.

Yeah, and yes, perf is.

Brian Long is executive director in JIP Morgan Communities Group focused on the all sale power and renoble energy transactions.

So he's been doing US power training for the past fifty years and is really on the top of the subject.

So let's bring him on the show.

Brian, Welcome to the show.

It's great to be here and thanks for having me, Brian.

As we're going to talk about infrastructure investment in the US around energy and of course that as center a large loads, how would you characterize the price signals that are currently given by the energy markets.

It's a good question because there's a lot of different opinions and perspectives on sort of what our pathway forward looks like.

From here, you've got enormous amounts of large loads data center activity that's being driven by AI and machine learning demands that are on the horizon that have caused a lot of increased forward demand expectations, and yet at the same time there's a lot of difficulty in terms of determining what's actually real, how much of that is going to be financed and materialized, and accordingly, how should the grid planners, how should the energy market trading participants plan and prepare for that eventuality that's out there on the horizon.

Maybe what will deal is we'll start with sort of observations that we've seen in the shorter term power markets and some of the announcements that we've seen over the course of the last several months, and then we can talk about how that going to look out into the next five to ten years.

That's really excellent, But first I want to go back to basics because we have a lot of listeners and probably not all of them are traded.

So if we go really back to basics, can you explain a bit what's the liquidity in US power and gas market and how do liquidity ty impact the cost of coverage or.

Edging in the power markets.

We have several regions that each have independent system operators or even are operated at regional transmission level, and among those regions there's major trading hubs that are in the different locations that are aggregates of different nodes which are just transmission points or generation points on the grid.

Those trading hubs are are essentially what there's financial and physical delivered instruments that are actively traded in the marketplace on a short term basis.

There's a lot of trading activity around how the supply and demand balances on the systems, so there's a lot of efforts that go into trying to determine what the marginal price for generation is going to be on an hourly basis.

That's determined by your fuel costs or determined by your transmission access and availability to be able to deliver to the larger system.

And those contracts are basically traded as a financial swap that's settled cash for differences against what's the clearing price, or they're traded on a physical basis, a physical forward basis where there's actual scheduled delivery.

In the power market portals.

From a trading perspective, there's a lot of liquidity in the short term of the curve because there's different sort of tactical trading strategies around the demand forecast, what the renewable production rates look like in terms of wind and solar production in the different regions.

There's a lot of other insights into sort of which your marginal unit's going to be based on the fuel that's going to be consumed and part of that daily offer curve that's submitted into the market.

As a result, you see an enormous amount of trading activity in the real time in daily markets, and I would say out through sort of the forward three months in terms of active generation, portfolio, active load portfolio, active general liquidity providers that are all taking positions there.

Once you start looking into the longer tenors, we have a forward curve that trades one to ten years out.

The liquidity there is challenged based on sometimes what's happening in the short term markets, but on a bilateral basis, people that come directly to trading desks like JP Morgan's Power Trading desk here in New York or Houston, there's an ability to provide quotes on the products that our clients are interested in purchasing or selling for those long term horizons.

The long term market is sort of challenged based on this credit and collateral requirements that are required of participants, and so oftentimes that sort of reduces just the sheer number of trading counterparties that are active.

Where in the short term markets there's reduced requirements because of the speed at which different settlements happen, and so there's a varying activity between those two.

But Brian, when I think of the power markets, for me, the really are all about optimizing demand and supply, and they work pretty well under normal circumstances.

But I would say we're not in normal circumstances now because suddenly, if you get a data center that comes online, it's a massive disruption system because the amount of power that's there number one and number two.

I'd also say on the supply side, you also have disruptions there because you've got a whole plant of renewables that might come on, it might not come on, and then you've got a hole pot of nuclear power stations that are implanning.

So in that type of environment, the power market is not how you would finance this or am I seeing this wrong?

There's a couple of different pathways that you could pursue.

Right for more shorter term observations from like June of this year, so June of twenty twenty five, there was a major heat event on the East coast.

There was peak load event in the PGAM market in which the load sort of exceeded highs from the previous decade, maybe even more than previous decade, and a lot of the data center load growth that has been accumulated in the market was front and center in terms of having an impact on power price formation and volatility that was seen on that day.

At the same time, about the swings in supply that are available you see in the shoulder months now, reserved margin constraints on a short term basis based on unit outages, reduced wind production, transmission line outages, those are all becoming a lot more complex for the grid operators to be able to balance and for the market to basically solve for the optimal equation.

In terms of the utilization of forward price signals for financing, You're right, it is challenging right now.

You're basically seeing an evolution in the marketplace where pjm's capacity market has cleared at all time highs, and yet the price signal isn't quite high enough to incent generation to come in.

You're seeing forward curves that barely support the development of cts on the grid, and you're seeing the evolution of programs like in Texas the Texas Energy Fund, where there's subsidized loan money available to be able to close the gap and get that generation online that they need for their load growth on the horizon.

And so there is several alternative market solutions that are out there and being pursued by different entities in order to finance and build their infrastructure.

At the same point, you know, you look at the scale and magnitude of the load that's coming and it's not all going to be solved through government or regulated or capacity based price signals.

There's going to have to be some kind of change and evolution in the price structure of the power forward curves in order to be able to support and substantiate the just the sheer amount of generation that's needed.

Is it not just simple It just has to be PPAs that these guys have to if they want power, they just have to go into long term PPAs well.

There's there's a lot of different sort of financing strategies that are happening at the moment.

You have quite a bit of committed capital that's willing to finance based on or secure financing that's based on forward merchant price expectations, and so you do have that risk capital that's being deployed, you also have a larger pool capital that does want some kind of a long term contract.

We saw that that was sort of a requirement for building the battery fleet in California was the California PUC created a midterm reliability program where load entities contracted for a certain amount of their peak load share in terms of ten year contracts.

So it's it's one of those things where there's a couple of different flavors to how this generation and how the infrastructure is being built and the price signals that are being sent, and it's becoming clear that the volumes that are needed are going to be extremely substantial.

Right even though people are now kind of working through this reconciliation process of like the number of data center loads that have applications that have been submitted in the interconnection queue, there's a realization that one hundred percent of that's not going to be likely because double applications or just sort of like a consolidation of where to focus.

But even if twenty percent or thirty percent of that load were to materialized, it would be just a substantial amount of power demand for the system to accommodate.

Brian, I hear you that I'm going to ask you a stupid question.

Well, I hope it's not stupid.

Let's assume I want to build a new CCGT.

So I've checked the numbers given by the next ten hours.

So it's going to cost me two point five million permega.

What okay?

And I take my gas at five dollars and meet you, assuming it stays where it is now.

If I run a simple model, you know, with a lot of fact about fifty percent and ten percent on capital, my break even point is ninety dollars omega, what hour now in Texas is what thirty ish?

And PGM is you know, between fifty and sixty.

So how can I justify building a new CCGT with two day prices?

With those prices, It's difficult.

That's why you have the subsidized loan money from the State of Texas that's come out.

That's why you're seeing PGAM capacity market rules and constructs potentially changing to be able to accommodate that.

And so you're right that the power markets don't substantiate that the issue is there's a disconnect.

There's going to be a certain point that those prices have to factor in the value that's needed, the revenue that's needed in order to security financing for that asset, or there's going to have to be some other kind of alternative, regulated, subsidized type solution that happens.

As a student of markets and as a promoter of competitive power markets, so I hope that it's a solution that we're able to come to in the trading activities that we see across the marketplace.

And I do think that as there's more certainty that is garnered around the forward load growth from the data centers, that there will be sort of a shift in terms of the value that the forward curve is reflecting.

Essentially, at this point, I don't think it's completely unfair to say that forward curves have discounted the data center growth rate that's possible to materialize.

You're starting to again, you're just starting to see that now reflected in this summer's load numbers in some key power zones across US markets.

But you're seeing major announcements made on the weekly basis for significant size facilities that are going to be pulling power from the grid in the next year two year timeframe.

You know, you saw or twelve hundred Magawot deal that Vistra completed with a hyperscaler for their Commandy Peak nuclear unit.

So it's this trend of seeing large scale loads linkages with core utility central generating stations that are driving those deals forward.

It's happening, it's coming out on the horizon.

There's magnitude at which these deals are happening and the size is involved in them that the industry has just never seen before.

Brian, can I add something else to the whole plot, which is that if you're gonna win an AI race, it's about speed.

So having to wait ten years or even five years to bring a power plant online, that's not what Google want.

They have to have it now.

So what that.

Means when I look at some of these nuclear plants and ccgts that are coming online that won't be online until twenty thirty and beyondwards, you say good luck to them.

There could be a huge risk and you know a lot of those projects blown up or am I seeing it in an incorrect way?

You're seeing that reflected in the industry consolidation that's been happening in US power this year.

The trend started with Vista acquiring Energy Harbor.

It's now manifested into nrg's acquiring the LS Power portfolio.

You're seeing Constellation acquire Calpine.

You're seeing a handful of private equity back portfolios that are all being gobbled up by the large IPPs.

And there's very decisive, large strategic deals that are happening that are being driven with enormous amounts of confidence by these energy company executive teams and their investors in terms of ensuring that there's anchor positions of generations existing current operating generation supply available for these large structural load transactions.

And you have not mentioned the current conversation between GIP and AS.

That's right.

That announcement was also out recently last month.

Again, you're seeing large infrastructure funds that have acquired portfolios of energy companies and energy infrastructure assets across the markets that are continuing to further consolidate and create enormous conglomerates of power infrastructure assets.

Yeah, but Brian, thinking about you know, mentioning this ale MNE activity.

But from what I read, it looks like the value of operational assets is much lower than the price of a new one.

So how do you analyze that.

That's sort of the tactical maneuvers that are being made by the executive teams that these energy companies is to be able to get operating assets at these I call it discounted rates relative to building something new themselves.

But the cost of building is going to have to become competitive with number one, what exists in terms of available economics and current markets, and also in terms of what's going to be needed as again as the load demand becomes a little bit more certain over the course of the next two and a half to three years.

The cost for turbines, the EPC schedules, the TERRORFF considerations, the sort of long lead times to get interconnection, those issues have been being worked on by the industry now.

For I would say that the last three to four years coming out of COVID, a lot of the highlights around the development constraints were highlighted and then starting to be worked on in earnest and now as you're entering this end of twenty twenty five period, there's a bigger importance in terms of knowing exactly when the large central stations are going to be built in the timelines that they're now on.

So I would say there's now more certainty in terms of when you can actually build a new resource and how you're going to get it connected to grid.

Sure that's going to be in twenty twenty seven or twenty twenty eight, which might be behind the rate at which the large loads come online, but having that certainty at least provides you and your investor base and ability to move forward with more certainty.

In the meantime, there's a gap.

The gap is the load that's going to manifest is going to create volatility and reserve margin constraints across the systems.

The owners of the generation and the positions of that are going to be the ones that are in the seat to be able to sort of capitalize, that trade around, that optimize, and there will be an eventual swing in which development activity is able to maintain pace with the load requirements and maybe keep up with the load growth that actually starts to happen.

Okay, Brian, from what I hear is that in fact, something's got to give.

Are you going to ask ge to reduce the price of the turbine by fifty percent.

Yeah, you might try.

I'm not sure it's going to work.

So it has to be around transmission, probably those technology which are not really in favor of the White House currently.

So maybe we're.

Going to see some solon wind and batteries making more in roads that they thought and Dah's flexibilitymand flexiblity.

Look, I don't know, but something got to give, So what is it going to be.

There's actually a good book out there that was recently written by the CEO of Woodmac and one of their senior analysts, Simon Flowers.

The book's called Connected, and basically it talks about these complexities across all the different layers of the markets, and it talks about how trying to understand the interconnected nature of different products and how that kind of dovetails into forecasts and planning is going to be a sort of critical path item for businesses that are in the industry going forward from I see here in New York.

It's it reflects the importance of having markets, it reflects the importance of having price signals, it reflects the importance of having competition.

There will absolutely be winners and losers that happen in this next cyclical phase of the power industry, and there is sort of rational response to the economic price signals that the markets can give.

The markets are in that sort of way and balancing mode in terms of finding which levels need to be achieved in order to get the right sort of response from the supply and from the development and from the turbine manufacturing and from the different components of the supply chain to respond.

So, Brian, all very interesting.

Now, I'd love you to do one thing, and let's take out your crystal ball.

You're sitting here in two thousand and thirty.

Just give us an overview of how the power system in the US looks like.

I'd love to know how you see the pricing is higher and lower than today.

I'd also love to give your view in terms of how much capacity gets built.

And then just give us an idea in terms of mix.

What is it nuclear?

Is it gas?

Is it renewable?

Just give us an overview of how you see it.

Please.

It's a question that a lot of the other major trading and institutional investing and infrastructure investing and private equity and other capital private capital allocation entities have been asking themselves.

People are orienting for power to be a significant opportunity set that plays out of the next five years.

You're seeing the head of Goldman's Commodities group is a power trader that the head of their power desk that was promoted up.

You're seeing some of the largest hedge funds in the world that have been building power trading desks.

You're seeing tech companies that are starting to build power trading desks.

You're seeing sort of revitalization of interest in getting exposure and managing risks across the power marketplace, which all indicates the sort of seriousness and the challenge that's on the horizon over the next five to ten years for the industry.

Well in twenty thirty, I don't think you're going to have a lot new nuclear generation online by then.

I do think that you will have sort of more solidified trajectory of SMRs and nuclear development into the middle of the next decade.

I think that the renewable development and deployment will continue at paces that we've observed on average over the last two to three years.

Those projects are continuing to be financed and move forward with and the developers and the companies that are engaged in those activities are very staunch at continuing their businesses and interest in the power regions.

You're heading towards some kind of reserve margin crisis in certain areas of the power markets.

We know that there's unit retirements on the horizon.

There's the aging infrastructure of our steam and coal and other sort of baseload generation units are reaching ages that are seventy eighty years old in some instances, and the mechanical life of those is compromised.

You add load growth on top of that, you add more variation in your life because of just more volatile weather patterns, and it turns into a mix of complication and challenges.

And the margin for error is very low, and that you have very serious institutional organizations that see that you know you're going to need to have perfect dispatch, perfect planning, perfect operations in order to meet the requirements of the power grid in the future, and that the margin for error is very tight.

There's a possibility that things will go as unforeseen as they always do.

Mistakes will happen, things will be delayed, there will be some kind of issues.

And people that have exposure to the power prices, that have exposure to power costs are acknowledging the importance of hedging that of covering that and tracking that exposure and being more dynamic and active in the ways that they manage it.

Brian, I think you have a great career into view.

It's all about market edging flexibility.

Thank you so much for coming on the show.

Thank you are and I'll say you know, I am in a client interfacing raw.

I enjoy talking about the US power Market's always available for connections that people are in New York City and happy to me and talk about what we're seeing across a power price and forward curves.

Thanks Brian, it was great, awesome, thank you job.

It's great to have a real expert going deep into the numbers and the reality on the training floor is not what you hear in conferences.

I agree with you, Anie.

So what do you take away from all this or what do I take away?

Is that the price needs to go up now ehether the price is going to go up on the markets or they're going to be side deals almost behind the metal, and behind the metal deals are going to be much more expensive to justify the investment.

And to give an example, last months, the utility called Vistra announce a deal called Commanche and they're going to add eight tonal ten system migaette of natural gas to increased capacity in Texas.

And according to Jigarsha, he said the deed is done above one hundred dollars and Maget what.

Hour one reflection I had on which we should maybe talk about, which is I understand that the wholesale power rises are not going up.

But what's very interesting is the share prices of all the independent power producers are going to the roof.

What that's also saying is the investors are really expecting power prices to go going forward, and because the valuations the IPPs are going up, that also means that there's a willingness there to finance that generation and to take that risk.

So that's that's a little bit of the paradox that we see there, and you could argue Jesus, that's a real risk.

That's certainly what we're seeing.

Oh yeah, the mn A consoledution is absolutely staggering.

The numbers we are talking saying.

Even last month there was the acquisition of the data centers of Macquarie by a consortium with open AI, and you know, the usual suspects forty billion.

Numbers are staggering, and I guess we'll do a special episode on what I started perceiving being a gigantic bubble because they're not going to add the equivalent of two hundred and fifty nuclear plants the next five years.

If you look at the connection request right now, the connection request are even five times bigger.

So I mean there's a lot of speculation going on.

But as Brian said, I mean some things get to give.

There's too much hope, projection, announcement, pr and then you have the readity underground and that you need to balance your book.

So it was a great tour of this conversation.

There's one other thing that I wanted to just bring in there, which is we talked about the IPPs and evaluations contry room, but it's everybody across the whole value chain, whether they're an EPC.

EPC valuations are probably the highest they've ever been.

You look at the nuclear businesses that have been IPO or La Range.

I mean, you know you've got businesses with zero revenues and twenty billion market caps.

So there is a perception and the capital markets are telling you that the prices are going on that's the way I conclude it anyway.

Joh, I understand everybody's enthusiasm, but some guys are going over the skis because, as you said, you have Oaklow and Fermi, which are power point company and lobbying company, and you know, collectively there was forty billion with as you said, the whole news.

Yeah, that's a disaster waiting to happen.

The growth is going to be there, but it's not going to look exactly what's being portrayed right now.

That I agree, Well, Job, it was great to have guys like Brian from GP Morgan who are in the thick of the action and discuss their option and questions and even doubts.

The future is uncertain, but it's in front of us.

Yeah, And I want to say thanks to Brian, and thanks to you Laurn, and I'm looking forward to shatting last week.

Cheers.

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