Data Centers and Energy with Phil Deutch | E2015

0:00When you have your electricity bill, let's say it's$100. bucks. Only 25 bucks of that is from the generation source, the rest of the wires to get it to you. But electricity in Texas is a good example, might cost you three cents a kilowatt hour at a cool winter day. In the summer, that can jump to almost a thousand dollars a kilowatt hour to the utility. They don't pass it through, but I can't think of a commodity in the world that goes up 300x in a day, no, 3000x in a day. Just GameStop. Right, just GameStop. Right, right. The thing I think I'm close to being able to say is, I think in our children's lifetime, electricity would be close to being free.

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1:21Twist listeners can get an extra 20 % off any plan for your first six months at openphone.com slash twist. Hey, everybody, Alex here, and I have a treat for you today. We have the very first talk from our Liquidity Summit 2024. Phil Deutsch, a partner over at NGP Energy Partners, kicked things off with a look at the domestic energy industry. Now, if you've been watching the news at all, you know that Microsoft is currently working to actually get a nuclear power plant turned back on just so it can help power its data centers with low carbon energy. So this is an enormous topic. If we're going to see OpenAI and Anthropic and all the other model companies become what we hope they will, we're going to need a lot more power.

2:05Where is it going to come from? What are the challenges and opportunities there? Well, Phil knows, and now you are about to. We're going to start off with a bang today. The two most important topics on everybody's mind are AI and energy, and they dovetail together quite nicely. I was able to meet Bill Deutsch through our group. He's on the board of Chamath Social Capital Partners and one of the most intelligent, considered individuals. Also incredibly generous, but he's so quiet about it, you wouldn't know that. But he frequently sends me emails explaining things they got right, things they got wrong.

2:40you know little bits of coaching here on the margins but it doesn't feel like that it feels more like having a big brother so he's with ngp energy capital he's going to talk today about these incredible opportunities and energy created by explosive data center growth first principles approach please welcome my bestie phil deutsch

3:03first of all i want to thank jason and the liquidity team i think the innovation enthusiasm originality is just wonderful and infectious. And I just want to give a hand, Jackie, thank you for everything you guys have done. It's a great thing. Second, I do want, as an organizing principle, the day is organized by intelligence. You'll start with me at the top, the most intelligence, and you'll finish with the besties at the end of the day. So it'll be a slow road down. Jackie offered to coach me, and I said, said, what the do I need coaching for? I've been doing this for a long time. And she said, well, Phil, I think you should introduce yourself and say who you are and what your talk's about.

3:47And I said, geez, that sounds like a pretty good idea. So I'm going to listen to Jackie. As Jason said, my name is Phil Deutsch. I'm a partner at NGP. I've been investing in the energy transition for 30 years, which goes to show you how bad I've been at it since we're still at it. During that period of time, we've invested about a billion dollars across non-carbon solutions and products, created multi-billion dollar companies in a REG and TPI, and I think are considered a top, core top performer, if not the only fund that's been doing it for 30 years. So over the next 30 minutes, my goal is to teach you more about energy than Saks and Chamath have ever learned in their whole life, okay?

4:32So you're going to be well prepared for tonight. This means that if I lie about anything or I say anything wrong, you can't sue. Let's start off with data centers, okay? And this is for the people who are talking at the end of the day. This is a picture of a data center. This is what they look like. There are lots of things in them. But what's most important and interesting about a data center is it has very unique power demands. It needs a lot of power. It's got a lot of hot chips and racks and servers and things that Sunny knows about, and it has to be reliable. So it's not like power can go out for a minute or two.

5:08You cannot have that happen in data center. It needs to be feeding those chips all day long. Second, I don't think this is terribly surprising to you unless you live under a rock. Data centers are growing in this world. We're going to spend something like$2 trillion over the next four years. And so data center growth, absolutely explosive. it. Now, when we think about energy, as we'll talk about later, and data centers, think about geographic problems, right? There's not just one data center. It's something that's across the United States. So, there could be growth that's ubiquitous geographically.

5:41When we take the data center growth that was already projected and we add artificial intelligence on top of it, the growth becomes even more dynamic. So, here you see a slide that shows you power consumption of a Google search versus an inquiry under one of the models that Sonny will talk about later. And it's about a 10x increase for artificial intelligence. So we're asking more and more of our data centers. Data center scalers and producers are not sitting idly by. Everyone's trying to meet this increased power demand. They might do it at the chip level. So here you see the NVIDIA power consumption on the left or the racks themselves.

6:22So everything is beefing up to meet the increased demands of artificial intelligence. And so when you look at an absolute chart of data center growth, it's enormous. 3x increase in the demands that data centers are going to put on our energy systems. Now, just to put that in perspective, basically during our lifetimes, electricity growth in the United States has been about 0%. Because we get more and more efficient, more urbanization, we haven't needed more electricity demand. But the increase just from data centers alone, plus EVs and others, is going to change that growth rate on the right-hand part of the slide from 0 % to 2.4%.

7:06Now, that might not be a lot, it'll sound like a lot when we have companies growing at 20 % or 30%, but think of the base of this. We're talking about total U.S. electricity demand. Every single way we use electricity, we're going to now see unprecedented growth. So we're seeing technology drive unique demands on electricity generation in the U.S. so what we walk away from this section saying to ourselves is huge growth in data centers fueled by artificial intelligence and the dramatic size of it is enough to increase the overall demand for electricity in the united states it's very very big deal so let's talk a little bit about energy and how we think about energy connecting to this and this is where i really want you to kind of slow down and think about the different parts of what it takes to get an electron from being generated to being used.

8:05Because people will say things like, okay, were you going to create solar power in the house and therefore will demand less oil from OPEC? Those are apples and oranges. One's electricity, one's a transportation fuel. So whenever you think about energy, you really have to get down to first principles and think about each step of the way It's a complicated equation here. And that's what I really want to focus you on next 10 or 15 minutes. So this slide, which is very busy, really is probably the most important slide in energy. Because what you have on the left is sources of energy. Okay? And here when we mean energy, we're not talking about electricity.

8:46We're talking about energy. And so it comes from petroleum, nat gas, solar. And those are all the ways it can be produced. and then it could go through various intermediate forms. And then there's an output where it's, what sectors it's used by, transportation, industrial, et cetera. So whenever anyone starts talking about energy, you want to know, okay, what's the source and what's the use? And in what form do I want my energy when I use it? Do I want it in a liquid, like a gasoline in my car? Or do I want it like an electron plugged into the wall? So never lose sight of the fact that this is really your organizing home base of your first principles.

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10:28Plus, you get built in analytics, SEO, e commerce tools. So when you invest in a Squarespace website, you get all of those developers, designers and brilliant people at Squarespace behind your business. Go to squarespace.com slash twist to get 10 % off your first website or domain purchase. And when you're ready to launch, again, go to squarespace.com slash twist and get that 10 % off your first website or domain purchase, squarespace.com slash twist. Now, when we talk about data centers, we're talking about electricity. So we can go from energy, which could have been oil, gas, to electrons. Okay.

11:04So you have to generate those electrons somehow. And here you see the various forms of electricity generation in the United States. What's really interesting from this slide is coal is dying, nuke stays about the same, and renewables have been the highest form of growth for the last five or six years in the U.S. and globally. So the thing that gets added the most is renewables, and it does so at the cost of coal. Now, just like data centers are geographically distributed, so too is electricity generation. You have generation all across the United States. Some places are good at producing wind.

11:44For example, the plains and Midwest. Some places do solar better. You can figure that out. But your generation is distributed. Each source of generation has a different cost to it, right? That's intuitive. But you have to, you know, as we think about, we have data centers are going to come up across the U.S. It's going to need power across the U.S. So it's going to be geographically one issue will be where can I get solar in Maine? Probably not. But if I can I get Nat gas in Colorado? Yes. But there'll be different costs. So you're going to think geographic plus cost. Then you might care about the future, climate change.

12:25And if you do, you might want to lower of CO2 emissions. So now you're going to overlay on your energy supply, where is it located, how much does it cost, and how much CO2 does it emit. Then different times a day, certain energy sources produce different amounts of energy. Solar, not so good at night. Wind, not so good when the wind doesn't blow. So your generation, you're now going to think about when am I going to have it produce energy. And then there are also capacity factors as well. So you got to think about all these things. Now, we've generated our electricity somehow, burn coal, use solar, use wind.

13:06Now we've got to get it from the generation source to the use. Okay. And so there are transmission and distribution lines across the United States, hundreds of thousands of high voltage lines and then millions of low voltage lines. An incredibly complicated system. And what's most interesting about this is there is not one U.S. electric grid. The grid is regulated by entities called RTOs and ISOs. Just follow the colors. But you cannot easily get electricity into and out of regions that are not yours. So for example, ERCOT, Texas. It's its own world. Electrons do not flow in and out of Texas easily.

13:48So too, California, you may have heard about half four or how you get electrons north and south in the state. That's been an issue. So we have a patchwork of grids, not one single grid. Now, you could say, let's fix it. So let's build transmission lines. Notoriously hard to do, very expensive, very, very hard to get through people's backyards, not in my backyard, and long. Even if you had the transmission distribution lines, you have to connect to it. So you have to get approval from your ISO RTO. I built a solar farm. I want to hook up to the grid I'm in. That too takes time. And there's something called interconnection cues that make you wait to get onto your local grid.

14:36So in summary, what we see here is a very complicated system of energy generation plus transmission and distribution of those stable electrons. And you have to think about all of that together when you think about how do I provide data for data centers. So the reason we're here today, I think, is to make money and think about ways to follow investment opportunities. And opportunities usually come from challenges. I'd like to spend a few minutes on the challenges and opportunities that we see by all this energy demand for data sectors. First, the most obvious, we need more power. So things that are going to produce power and electrons are an obvious win for the U.S.

15:24and the world in the next decade or two. Now, the nature of this need is pretty staggering, but when you look and compare it to how we plan to meet future emissions now, and you see here the overall net capacity additions, how much more energy we plan to do for wind or for solar, it is attainable. So it's going out there and saying, can we add more solar? Can we add more wind? Absolutely. And we do it in better ways. So this is a problem that we can solve. And when you look at the impacts of these numbers on incremental natural gas demand, again, this is a very solvable problem, but it's going to take execution and better products and better services to do it.

16:07Second, issue challenge opportunity. I talked to you about the interconnection cues. People are waiting in line to get onto the grid. And this slide on the left, it has absolutely exploded. So this is the amount of, this is basically how long is it? I'm at the deli. Jason all day is, wait, we're in a deli and you wear cats's. In New York, I got a number. My number is 3 million and one. A long time till I get pastrami. No bueno. So we got to get on the grid as fast as we can. That is, in some sense, a regulatory problem, which people like us in the room don't like because that puts time in the hands of bureaucrats, makes girly insane.

16:44So we want to try and avoid that. And two ways you might think about avoiding that are, one, distributed energy. If I produce power on site of the data center and I don't touch the grid, I don't have to get in line to get to queue up. But the amount of power I need at data center and the reliability I need make that a non-trivial. But it's still a pretty smart idea. You may have seen that Amazon did a deal to buy power kind of directly from the next, a nuke that was next door to a data center. That's a way to try and cut in line and not have to stand in this queue. The second thing that's really interesting is a virtual power plant.

17:24And by that, We mean you take a variety of supply and demand resources in an area and you connect them using software. So, for example, at a peak energy demand, I may reduce my load in one place so that another place could use it. Or I may use backup generators that are sitting on site at this hotel and use it to control for other purposes. So you kind of create a network. And if you can do that, you might be able to avoid going to the grid. So these two ideas, you can go down those wormholes later, of distributed energy resources and virtual power plants are a way to avoid the interconnect issue.

18:01Now, this is an absolutely fantastic statistic done by Morgan Stanley. Right now, people like Sunny are so hungry for electrons to run their data centers and their AI products, they will pay twice as much as prevailing electricity rates to get it faster. They want the electrons today. So imagine if you all are attacking a market where the incumbents are saying to you, I will pay you 2x over today's prices to get me this stuff. So that's a lot of fat to really go after with new business models. So speed really is incredible value to these data centers. Finally, not finally, but this is a little geeky, and I'm sorry for the kind of complexity of this slide.

18:47Transmission, as I said, is very bulky, hard to build. And because of that, we have congestion and interconnection queues. And that leads to pricing differentials that are inefficient at their core. That is, if the grid was as fulsome as we wanted it at a peak moment, there wouldn't be pricing differentials caused by the transmission. You just can't get enough electrons through the pipe. Think about it that way. So when you look at these colors and these price differences, what they say to you is there's an inefficiency going on that can be exploited if I could figure out how to de-bottleneck the grid or go around it.

19:24So this is another way of saying the extent you think of businesses and ideas that can get you out of the congestion of the grid, there's huge opportunities to make money here. One way to do it that's a shortcut is you can trade electrons. So for example, electricity, unlike stocks, is not traded in one place, it's traded all over the United States. So there are some people that say, okay, if I can figure out where the bottlenecks are, I might create a software program to buy electrons and moments I think it gets congested. And it's the number one electric commodity in the world, electricity. So it's just a long way of saying it is worth those of you who are thinking about places to invest to think about the grid.

20:05It has huge dollars involved. it. Founders, do you want to sell to bigger customers? I know you do. You got to get that ACV trending up. And you want to push your churn down, right? Sounds good. But to sell to those big buyers, you need to clear all of these compliance checks. You know that. That means you got to have things like SOC 2 sorted out. What's SOC 2? It's a standard and ensures that companies keep their customer data safe. And if you aren't SOC 2 compliant, you can kiss those big deals goodbye. You're not going to land the lighthouse customers. You're not going to be able to operate at the highest end of the market, but Vanta makes it really easy for you to get and renew your SOC 2 compliance.

20:46On average, Vanta customers are compliant in just two to four weeks. It can take months without Vanta, and they automate compliance for GDPR, HIPAA, and more. So you can sell to bigger customers in whatever markup your startup is going after. Vanta is going to save you hundreds of hours of work and up to 85 % on compliance costs. Stop slowing your sales team down and use Vanta. Get$1 ,000 off at vanta.com slash twist. That's vanta.com slash twist for$1 ,000 off your SOC 2. Finally, on the compute itself, we've presented there are a host of issues around energy, siting, sourcing. How do you maintain assets?

21:25When do you turn certain things on, certain things off. And when you think about that, artificial intelligence will be something that matters. But the compute demand is outpacing the efficiency of the chips. So again, anything that makes chips more efficient will cut down on the overall power demand. So again, efficiency in chips and racks and servers and cooling, all that stuff is a tremendous investment opportunity. When we look at the biggest hyperscalers, the people who are demanding the biggest data centers, Amazon, Meta, Microsoft, Google, they've made very public and very bold pronouncements about where they want to be from a CO2 emissions point of view.

22:08They want to get to net zero by certain dates and time. So they really put themselves a little bit of a box because the core of their business is demanding more and more electrons. Most of that electricity, about 60%, wants to come from nat gas because that's kind of how we do it in the US now. and it's fast and cheap, but that gives you CO2. So how will these hyperscalers be able to meet their promises of being net zero? One way that everyone loves is direct air capture, just suck CO2 out of the air. I'm not sure anyone's been able to show they can do it at a reasonable cost. And that leads to things like carbon credits and other workarounds.

22:53But there's going to be a big problem for these companies because they've made public announcements in their regulatory filings and their SEC enforced to live up to these promises. So you're going to see a big rush over the next decade for these guys to figure out how am I going to reduce my CO2 emissions to meet my promises. This gets to probably, I think, one of the weirdest things about energy that I just don't understand. I am really, really, really old. And when I graduated from high school in 1982, I worked on how to solve nuclear waste in the United States. Since then, what we've done in solving nuclear waste disposal is zero.

23:40There's been no advancement in nukes in the U.S. for decades. So the idea that we're going to solve the data center problem, which is measured in months, years, by building more nukes is insanity to me. Because the rates of planning, the amount of time it takes to build a nuclear power plant are enormous. These numbers in China, five to seven years, they may actually be understated. It may take 10 years to build a nuke plant in China. But just because you see one coming online now, it wasn't started yesterday. it. So people say, okay, you're pessimistic about the way old plants were, but what about new small modular reactors, SMRs, or let's go to fusion, not fission.

24:25I mean, those are all great ideas, and I think there's some really great companies, but the timelines are just a mismatch between adding power over the next 900 days versus 10 years. So I guess if you could solve this problem, of how long it takes to build nukes. I'm for nukes. I wish we had more of them. But just durationally, it's a mismatch to the data center problem. All of this leads a whole bunch of problems and a whole bunch of potential solutions. And artificial intelligence itself will be, as I mentioned earlier, one of the ways we work ourselves at it. There will be eventually smart people that take the AI resource and apply it to the energy problem.

25:06It's already being done, as I mentioned, with maintenance and how do you put generation online, but it'll be a really exciting part solving some of the challenges we have today. So in summary, I want, I hope you all are really enthused by this area. We have a huge growth and boom in data centers. It's not going to be stopped, connected to a very complicated energy system. And when you put those two together, you're going to just have a host of problems challenges and with that come solutions and if you're the guys who are on the cutting edge of the solutions you should make a lot of money so i hope that's a little bit of an intro and i guarantee you you're all set for the podcast tonight on energy okay so it seems like consumers in the united states have gotten a bit of a a free ride on all of this, except when it comes to recent outages.

26:08Texas, California, I think the public's consciousness is starting to get triggered, not because they want to save the planet and put solar on. Some people do. Not because they can save money. Some people do. That didn't seem to drive a lot of consumer, and consumers seem to be not the majority, but obviously significant here, but redundancy and batteries. And one of the great things that seems to have happened is with smartphones and EVs, battery technology has just absolutely been extraordinary. So how do batteries play into all of this? And maybe you could speak to that opportunity. I had a company on This Week in Startups two weeks ago that's just not putting solar in houses in texas they're putting batteries in your house to load them up during the low cost times and then deploying it during the peak times peak shape it's good yeah they're they're they're load managing within the home right and they told me it's an 8x difference in cost between peak and trow in terms of costs in texas let me say there are a lot there's lots of it's a great question lots of things going on there it'd be great if i could say it's a question wouldn't it be great but it was actually good.

27:19Well, no, I was thinking it was such a comprehensive talk. The one thing on the company is Texas has a weird regulatory thing. So you have to be a little careful of that company. I do know it's a great company, just whether it scales beyond Texas. So that's the first thing. What your friend Elon Musk has done for energy cannot be overstated. Think about a home that has a power wall in it, a Tesla and solar on the roof. That home now, has a mobile battery that is of significant size. And that allows for things like, okay, I'm not going to use as much electricity at the highest peak rate. I can store it.