Energy in a more dangerous world. Resilience, affordability and self-sufficiency are the priorities now. What does that mean for our energy future? | From Climate Week NYC

26:32Your operations, your goals, your pressures, your plans for what's next. Because while Engie knows energy, no one knows your business like you. And when that expertise comes together, energy becomes more than something that powers your business. It becomes part of what helps move it forward. Engie helps turn energy plans into outcomes with solutions built around real business needs. Learn more at engiresources.com. That's E-N-G-I-E-N-G-Resources.com. Yeah, 100%. I absolutely agree with that. And Amy, you often say that listeners like it when we disagree with each other. So I'm going to disagree with you now.

27:11And I think I agree with Sarah on this, which is, you know, what we're seeing right now is the United States is very much not immune to the impacts of these shocks, despite being the world's largest oil producer, the world's largest exporter of LNG, and so on. We're still in the position where the country is in a state of crisis because of elevated diesel prices. We had a state of emergency declared yesterday in Louisiana. This is one of the heartlands of the United States oil industry, the state with the second most refining capacity in the country. and they are really hurting because of diesel prices because the United States is integrated into a global economy and a global energy system and when shocks hit anywhere they hit this country too and so I think actually thinking about how you manage that vulnerability and as you say how you think about resilience in the light of you know not just this shock we've we're seeing right now this year, but others that might occur in the future.

28:13Actually, it is absolutely urgent for the US as much as anywhere. One of the things then I think that leads me to is to think specifically about electrification. I know, Sarah, that's something you're talking about in your paper as one of the themes. How much of the answer is that then? Is electrification one of the things that by shifting economies away from reliance on imported oil, certainly maybe from reliance on imported gas, is a kind of a general purpose tool for improving resilience? Is that going to be a very important part of the future, do you think? I do. But it shifts your reliance from fuels over to electricity.

28:59So now if you don't build resilience in your electrification system, in your utility, in your grid, now you've created a new exposure. And that's why we're starting to also see home appliances and HVAC systems, they're starting to include storage in them because of that volatility. And you're also starting to see more storage options that if diesel prices are high, if there's scarcity, people are moving towards battery packs for their generators. And it's not about going low carbon or no carbon. It's about actually having resilience because now you've experienced enough of this with the diesel variability that you need to move towards it.

29:38I'd posit though that electricity debate today is not just about resilience. I think that's, I agree with what Sarah said, but the electricity debate today is about demand growth, right? Which none of us were expecting several years ago, right? In the developed economy. And that's driven, of course, by AI data centers. It's driven by re-industrialization in some cases. And it's, in some part, driven by the shift in electrification towards transportation sector and more broadly, right? So when you're in that scenario, you have to think about, you know, the question is not, is, is electricity making us safer?

30:23I think the question is, at what point is there going to be enough electrification where you actually are backing out other energy sources, right? When you're actually backing out liquid fuels in particular, but electrification today, like, you know, like, you know, do, you know, one click deeper, not all electricity is created equal, right? And so if you're talking about this country, electrification today and meeting that demands about natural gas, right? So you're still in the hydrocarbon discussion and you're still in the global hydrocarbon discussion. Now the U.S. has certain insulation because of our domestic production, right?

30:59So an argument for self-sufficiency compared to LNG prices, but that is also shifting over time and will become more and more integrated into global pricing. Yeah. And I think one of the big surprises of all of this was seeing how well China is weathering through the shock. And that was due to both their reserves of oil, but also their transportation industry by moving towards the EVs. They were able to actually shut down because of the worry over the refined products. They actually shut down driving of combustion engines on certain days and in certain weeks now. And so they've been able to weather that lack of diesel, of gasoline through this time because they could actually shift it because they have now economy that is running on a lot of EVs for not just transportation of individuals, but they also actually have electric trucks.

31:47So I will say one thing, then I'll let Anna go. You know, that's true what you're saying, Sarah, no question. And people have commented about that and shown the statistics. But if you actually look at the combination of the giant drop in refinery runs in China, and then you combine that with the drop in consumer spending in China, right? You can kind of think about, I mean, I kind of think about what it was like in the 1970s in the United States, because one of the things we economists all studied was that the things, the first thing people stopped buying in oil price shock is durable goods. So the car industry sales go way down.

32:32And of course, that's happened in China. So the interesting question is, in, and I'd like to hear your opinion on this, because we are having this, we thought we were having sort of a decoupling between GDP and oil use. But on the other hand, maybe the China story is partly lower GDP, lowering oil use, especially at the consumer level. And some of the pressure on even plastics is that you don't need as much polyester if people aren't buying new clothes. So the question is, you know, how much of it is actually economic contraction and how much of it was their strategy? Yeah. I mean, the U.S. is completely, GDP is completely being propped up by AI growth.

33:21It is what's actually keeping us up given everything else. So I think there's a mix in certain economies, but I will say we talk about data centers often in terms of demand growth, but think about what industrial robotics is bringing in 500 ,000 units annually, humanoid robotics, autonomous vehicles. I don't think we fully conceptualize some of my point on when I talk about Daniel Kahneman of like, we have linear brains, but exponential technological growth, just wait what we're actually might be facing. And so it is electrification with the addition of just the amount of demand. And I think overall, so we're going to see whoever's going to be able to leverage that and control it, we'll see growth and economic growth, which is why there's so much nervousness of when we think about resilience or self-sufficiency of what does it take to build up these systems and what are we dependent on?

34:12So right tomorrow, President Trump and President Xi are going to talk about the Busan Agreement. Rare Earths, the pause, an export ban was lifted based on the Busan Agreement and there were some trade retaliatory measures from the US that were pulled back. That ends on November 10th. Rare earths, you need them for defense. You need them for industry. You need them for clean tech. You need them for EVs, right? You get permanent magnets out of them. They are critical. And China has significant control, and it has even more control in the processing stage, which is very hard to gain. And so strategically, you could tell already what is happening in the world in terms of thinking, what do we need to make this equipment?

34:59And even I mentioned this at an event recently, Amy, that we were at together yesterday. If we think of a small data center, it takes six times the amount of electrical equipment than a large load to prop up. A hyperscaler, 18 times the electrical equipment. So we are about to need a demand for goods that are dependent on a set of commodities that everyone is going to want to have way more leverage over than they do today. So, I mean, those numbers are mind-blowing. We need sulfur and sulfuric acid to produce, which we now have in shorter supply because of the war in the Middle East. The implication, though, is let's bring it all home.

35:39Right. And listen, I let me invest in that every day of the week. Right. When you have a strong offtake and you have access to the U.S. domestic market. However, if you look at the history just on the energy side of how do you get energy security in these situations, it's not by putting up the drawbridge. It's not by cutting trade. It's by having enough diversification of sources to be able to neuter the energy weapon. And the same logic applies throughout the supply chain. And so it's precision interventions to ensure that your adversary does not have the means and the incentive to use it against you.

36:28And we're not there today, to Anna's point. We have seen that. China has explicitly put out there that it will use its dominance in this sector to retaliate against what it used to be U.S. aggressive moves in the chip sector in particular. I would disagree. I, you know, Busan agreement, you want a disagreement. I would disagree that the Busan agreement has in practice been put into effect. Right. You know, the, the export licenses from China are still one offs, all this kind of stuff, you know, stockpiles. Yes, 100%.

37:37for a long time but didn't do that much, right? Now, granted, they had China step up to show the danger, but you've got to give them credit for trying. However, one of the big issues, just take one of these policies, tariffs. China, we know that China dumps a number of these products. As an investor, can you actually invest behind durable tariffs to protect you? Let's be a little bit more precise. The question is, does China dump when competition starts to actually start to rise? Right. And if that's the problem, how do you protect investors? Both and strategically. And the reason right now we're seeing we're still seeing issues on rare earths is there's a difference between a ban and this need for a license.

38:22So occasionally, right, they shift from ban to license and then you need government approval to move product. Really hard for industry to plan around in China and in the United States. So we still have that issue happening. But across the board, I mean, just think about we can shift, but there's only so many things we can shift and we have to prioritize. So if you look at average monthly import value out of China in 2019 to today, it's down 40 percent. We have shifted a significant amount, but there are these strategic areas. And the only you could say, why does China not fully pull this leverage?

38:59Well, because if they do, it actually forces so much diversification that they lose long-term leverage. And that happened with Japan. When they did this with Japan in 2010, because a fishing trawler got into an altercation with the Japanese Coastal Guard, all of a sudden Japan started diversifying, stockpiling. And the concern is if you have the entire world banding together that is concerned about this taking action, that takes strategic advantage away. So everyone is thinking about this strategically while trying to build in leverage and resilience at the same time. I'll also add as a scientist, when you start having shortages or you start having limits, that also is what typically drives mass innovation.

39:41And we're starting to see that like in the battery space, where lithium ion batteries and need for certain types of rare earths is leading to the rise in the speed towards sodium ion. It's leading to the speed towards iron-based, which iron is available everywhere. It's also leading to the commercialization and testing of things that were developed originally for satellites or for drones or other tech of other metal-based batteries that are much lighter, have much more energy per unit of weight. And so all of that fear and concern is driving R &D funding by both the private sector as well as by governments.

40:21And I'm seeing this not just in the U.S., but I'm also seeing it across Europe of people saying, if we want to have that manufacturing of that thing here, we're going to start innovating and then we're going to try and commercialize that up. And so that also, at least the innovation that then you no longer have that reliance on that specific technology you thought was going to be the technology of the future, then no longer is. Yeah, so I think those are really important points. I do want to bring it back, though, to a word that Neil raised earlier, which is affordability. I was talking to someone the other day who I thought made a really interesting point.

40:52And I can't, I'm afraid, remember who that was. So apologies if you're listening right now. But they said there's a clear analogy here between climate policy and energy security policy. And saying that just as climate policy asked us often to adopt more expensive technologies in order to address the climate threat and reduce emissions. So national security policies often are saying to us, we need to, as you say, and I have more industrial policy, more domestic production, whatever it might be. We need to do things that are going to cost us more because that's the way to build resilience and reduce the threats to our economies.

41:30This is then an ask that people have at a time when everyone is screaming about energy affordability, when it's a huge political issue, not just in the United States, but in Europe as well, other countries around the world, a time when fuel prices, as we've been saying, are a massive issue, but also electricity prices are very contentious. And there's been this huge wave in the United States of opposition to new data center construction. And part of that, I think, is based in generalized concerns about AI, but part of it is very definitely based in concerns about the impact on electricity bills of having all this new demand on the grid.

42:13So I guess my question is, how do you balance then this need for increased resilience against all this political pressure for approving affordability, which causes a very significant issue in the 2024 election, will I'm sure be important in the midterms and for future presidential elections as well. I mean, Sarah, I know this is something you've written about, you've thought about this tension between different imperatives for energy policy. How do you think that gets resolved? Well, first of all, I'm very glad I'm not a politician right now because it's a very sticky problem. And also part of what's also going to drive this on the energy side is that the infrastructure itself is decades old and needs to be replaced.

42:56It's not even a question of the volatility of the inputs. It's actually the fundamental things are crumbling and we're built for a climate that no longer exists and that's driving up costs in certain places. And so we have not been investing in our infrastructure for decades and that also needs to be built out. The entire grid needs to be modernized and the hardware needs to be replaced. So you have that and then you also have the energy addition of the growth of demand. And it will be trying to find the policies that reduce that growth in costs and have those costs potentially weighed for certain groups based on where that demand growth is driving.

43:35And a point that I am trying to carefully make in U.S. rooms is that in the U.S., most of that energy growth is due to data centers. But outside of the U.S., most, or it's not most, it's half most of that growth in demand in energy demand outside the u.s is actually from electrification yeah it's from the transformation of those economies that is driving that there air conditioning being one big thing right but just but but let me make a point depends on the geography right but let me make a point that no one can make anymore because i'm not a politician like like as sarah is saying so i can make this point people don't remember we all know that the International Energy Agency and countries coordinated a release of emergency stocks, and that's how we got through the first couple of months of the blockage of Strait of Hormuz.

44:26What people don't remember is that the IEA has these principles that no politician will mention to you, which is that as part of the plan when things get even worse, if that were to happen, we are supposed to all, as countries that are member countries, institute ways to reduce use of oil, right? And we have a lot of different ways we can do that. I mean, you saw in the early days of the crisis, in certain countries, they went back to sort of COVID-related things like telling people to work a couple days at home remotely, and things like that to reduce commuting fuel use. But one of the ways to square that knot is efficiency.

45:12And that can go to the way we do things. That can go to not rationing, but having people change their thermostat problem and think about, there has been in the United States even a place where people are against that mentally. There's been actually a 10 % increase in the use of public transportation since the war began. But I would add to that, you know, interestingly, because Neil and I were at another forum about these new flexible innovations that are coming into the tech sector for data centers. And people made the point about our needing in the United States, but it's probably true everywhere else too, to take the existing assets we have in electricity and use them more effectively.

46:06Because we build for that hottest summer day when you have the maximum demand for air conditioning on top of the fact that you have industrial demand and data center demand and so forth. And the point is, can we use technologies or practice so that on the days when we're only using 40 % of the grid, could we think about how to smooth that out so that we're using the best possible practices for the infrastructure we have? And I think that when we come back to this conversation, not us on the panel, but in general in the political domain, we're going to have to come to talk about how do we use the assets we have more effectively?

46:53How do people themselves. Kind of to my point on the United States, the people disagreed with what I was kind of saying is that we in the United States don't see ourselves as a country, quote unquote, at war, the way maybe, you know, our grandparents thought about World War II or some other subsequent wars. But are we thinking carefully enough about how we use resources? Students and younger generation people who care about climate change have thought about that? When we think about rare earths and some of these metals, are we thinking about the fact that if we're going to all go into EVs, we have to have a system for recycling all of those batteries?

47:33And is that actually our supply chain? Right? So I think that the debate and the conversation has not gone Enough down the rabbit hole of efficiency, circularity, hesitate to use the word conservation, but that's really what we really should be talking about. Amy, the basic problem that you're getting at, I think of as like wealth is a gateway drug. Wealth is a gateway drug to adventurism. Well, a wealthy United States can afford to undertake military adventurism because most Americans don't feel it. Our armed forces and their families feel it. The average American does not. What you're seeing now with diesel prices is a reset because now, because the strait has been more or less shut in, it's not fully shut in anymore.

48:32Because of that, it is hitting the American public in a way that you have not seen in a conflict really in a sustained way since, you know, I would say at least the Vietnam War, which had its own sort of social issues, which we don't need to get into here. But I would say in the war since then, the American people haven't felt it other than our military personnel, other than for very short periods of time. Climate policy, to Ed's point, is also enabled, has too often been enabled by wealth. If you're wealthy and you feel like things are going well, then OK, sure, as a politician, yeah, my constituents won't really care if their prices go up a little bit.

49:13But when inflation is high, when geopolitics is roiling economies, then it all comes back to affordability. To your point, the cheapest energy and the most secure energy is the energy we never use. Right. Right. Which is it's bizarre that like decades later, we still have to say that. But like we do. It's not a popular thing to say. Exactly. But you cannot. This is, by the way, when I said earlier that like one of the reasons I'm bullish on the Middle East, the deep sovereign wealth pools to invest. They can afford to make the investments necessary to get out of this situation. There is no solution politically available today in most of the world.

49:58Right. Because fiscal situations are tight, politics are divided. And so you can't get that kind of systematic spending to dig yourself out of that hole. So you have to revert to other policies. And I often get asked, what do people think about climate and what do people think about international relations? And I've said for 10 years, I've said the same answer. People need to afford to care, particularly outside of their community. When climate comes to your door, that's a cost. All of a sudden you care. But otherwise, people function in the day to day. We think about, right, so I completely agree.

50:32In particular in the U.S., we have a very low tolerance for a loss of energy. And so our grid is built around that. Everything we do is built around that. But one of the things when we think about prices today and that tension between security of supply and affordability is a lot of our price increases are driven by trade policy at the moment and a supply-demand imbalance, a very heavy supply -demand imbalance. So we're able to keep prices really high. And you say, well, isn't this an investment opportunity and manufacturers can come in and build up? Yeah, they're building up a little bit. But the thing is, when you don't have certainty on regulation and you don't have certainty on policy, there's going to be a limit on how much you build up on supply because these sectors have already seen bubbles where they build up and all of a sudden you see a bit of a crash.

51:17So you can keep prices high and moderate how much you're supplying, right? And that benefits you on the other side. The incentive needs to be there. By the way, though, it's not just policy certainty. It's also just if you take AI demand and data center power demand, let's face it, you know, it's like, you know, put your finger up in the wind and let's see what the demand is going to be for very good reasons. Sarah is a scientist. I'm sure she can tell you much better than I can. We don't know today the efficiency that's possible in compute. We don't like what takes, you know, what takes this room, this auditorium size of compute capacity today?

52:02Maybe it takes, you know, this microphone in three years. We don't know that. Obviously, that's an exaggeration. And so we do know that the trend is up and to the right in a big way for demand. But we don't know how much. So if you're trying to invest behind that, very, very difficult to actually make those projects bankable unless you're investing behind, to Amy's earlier point and how we think about this, unless you're investing behind very strong credits. The hyperscalers, Google, AWS, Meta, Microsoft that can stand behind these commitments that they're making. But that's only part of the market.

52:46Right. And that alone will not get you the investment you need to upgrade the grid, as you were rightly talking about. And I will just say also, when we try and we're building our outlook, right, we're looking at compute efficiency, what would happen with quantum, what might happen in body data. We're also looking at policy. Right now we're tracking 359 moratoriums, 77 percent active across the local state and county level. So you will see delays hit just from that. So there's a certain amount of uncertainty that gets built in, which means the level of complexity to even get to where do I want to invest and how much do I want to go in is quite wide.

53:22Yeah, that is a fantastic point. We are unfortunately just about out of time. We promised Sarah and Neil that we'd let you go. Just before we wrap it up, though, we're speaking at a university, quite a few students in the audience, as you were saying earlier, Neil. I'm interested in what you would want to leave them with in terms of a message, the message for people just at the beginning of their careers. It seems to me like we've sketched out a fairly alarming vision of the world over the past hour. We've talked a lot about mounting threats, an increasingly complex world, a world that perhaps is not getting to grips with climate change, a world where people are facing a lot of economic pressures.

54:05what can people do perhaps uh and people working in energy or elsewhere to make a difference and address some of these problems i don't know what do you think sarah um as a former person that trains students and postdocs i will say yes it's becoming more volatile and more complex but for the really smart curious systems thinker it's going to be an incredible time of learning and change and need to build actual things. And so it's going to be an exciting time for your careers. It will not be monotonic or it will not be monotone. It will be variable. And so learning what you can as much as you can about these different types of systems is how you're going to make your mark and how you're going to find the opportunities in this world.

54:52Go local. Community engagement. There are so few people that know how to engage communities that understand how land leases work, how regulation works, how permitting works, how you build infrastructure, and how do you bring it to the everyday person? How do you talk to the everyday person about it? So few people have those skill sets, and it is so valued and so needed. Yeah, that's a great point, actually. That's a really important missing piece, I think. Neil, what do you think? Listen to the Energy Gang podcast. Excellent advice. I would also add to that, embrace disruption. Everything you heard today could change.

55:29And it's not just about volatility. I think it's a lot about AI. And the tools available today are unlike anything in human history. And they're like, you know, the Stone Age still. And so embrace disruption. You're not going to know, but like you got to pivot. You got to live by your wits and you got to focus on execution. And I would say first principles approach in the following way. there's never been a time when the incumbent industry, the incumbent fuel, the incumbent technology has been more at risk. And there's an opportunity there for people to think about what is the service that that fuel, that infrastructure, whatever, provides?

56:17And what kind of company could I start? What kind of research, scientific, technological, whatever, could I do that would take us to a totally, totally, totally different solution in a way that would be more sustainable and provide much more security? and I see that here at NYU and up at Columbia and in universities I visit in other parts of the country and other parts of the world where younger people are not looking to have a 40-year science career in some kind of national lab or institution. They are literally learning what they need to learn, think about how to turn that into a commercial product and then figuring out how to get that to market.

57:05And for me, that's very exciting. And I was going to say, join me on that journey. Absolutely. Yeah, fantastic. A great message to everyone. We do, unfortunately, have to leave it there, though. But it's been fantastic talking to you all. Thank you very much. Amy Myers-Jaffe, Neil Brown, Anna Schmitzberg, Sarah Kaepnick. Thank you for joining us. Thanks to our production team, Molly Mowen, Harry Weston-Cottrell, and Will Coley. And above all, as ever, many thanks to all of you for listening. We'll be back very soon with all the latest news and views on the future of energy. Until then, goodbye.

57:38You