This transcript is from a CSIS podcast published on April 15, 2024. Listen to the podcast here.
Tom Baker: So, continuing to push where the U.S. has arguably a phenomenal lead is around innovation and is in our R&D capabilities and our ability to foster and build technology startups in these decarbonization spaces. So that's a place where we have opportunities here in the U.S. to develop a technology that can be deployed globally.
Lisa Hyland: Welcome to Energy 360 from the CSIS Energy Security and Climate Change Program. I’m your host, Lisa Hyland. This week I am pleased to welcome to the show Tom Baker, managing director and partner with BCG, to discuss the energy transition and opportunities in the low carbon energy and infrastructure sector.
He and my colleague Joseph Majkut look at the impact of the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA) on the energy transition, noting that they have been a key driver of recent conversation around clean energy technologies like hydrogen and carbon capture. They recognize the challenges in the renewable space, particularly in terms of interconnection and permitting, but see a lot of space for progress. I will turn it over to Joseph for the discussion.
Joseph Majkut: Our guest today is Tom Baker, managing director and partner at the Boston Consulting Group, where he also serves as the global leader for low carbon energy and energy infrastructure. Tom, I'm really grateful that you're here today.
Tom Baker: Same here. Good to see you.
Joseph Majkut: Nice to see you as well. You and I have known each other for a few years. We've worked together a little bit on various occasions, but I would love to start with you to introduce yourself to our audience. How did you find your way to being at BCG and what's your intellectual background?
Tom Baker: Yeah, sure thing. I'm a managing director and partner at the Boston Consulting Group right now, and I lead our work globally in the low carbon energy and infrastructure sector. That perfectly, I think describes me and quite frankly, my full professional career focused on decarbonization and that interface between climate and sustainability and energy. We know that at the end of the day, approximately 80% of all greenhouse gas emissions are a result of some energy production process, and my entire career has been focused on addressing that 80% and trying to think through how we reduce carbon emissions. I've been at BCG for about 13 years now. My entire BCG career has been focused at that interface of climate and sustainability energy, and I've had the pleasure to work with clients across the value chain in renewables, clean fuels, clean hydrogen carbon capture, and then also in the utility space, which I'm happy to spend some time talking about, but utilities and networks, both electric and gas are important enablers of decarbonization. Before BCG, I spent some time working in the solar industry, and then in a previous life I was a scientist, I have a PhD in chemical physics, did a postdoc, spent some time in academia and as a scientist, explored a lot of other separate clean technologies.
Joseph Majkut: One of the things that makes it easy for us to work together, I think, is we're both fallen academics. There's a lot of detail to talk about, but it seems to me like BCG and your peers play a really interesting role in energy transition, right? So if you're at a company somewhere or you're trying to build and develop a new facility, you have so many immediate needs that you need to deal with. How are we going to staff it? What's our site selection look like? What does the financing picture look like? You guys can bring a lot of knowledge about industry trends at a time when things are shifting a lot. How do you view the role of your industry in both taking the temperature of how the energy transition is going, finding failures, and helping the learning process across the whole industry as businesses are trying to stake out opportunity?
Tom Baker: Yeah, it's a great question, and first off, I think you think of a firm like BCG first as strategy advisors, and especially in this time of change, as you mentioned with the energy transition, we're absolutely spending a lot of time doing strategy work and helping our clients think through the role that they play in decarbonization. Everyone has their favorite number, but over the next 10 years, I've seen folks throw out between $16 to $30 trillion of new investments and value is going to flow to decarbonization technologies. And so if you're a client or a corporation in the energy value chain or even adjacent to the energy value chain, you see that as an opportunity, but often requiring a pretty massive shift to the way that you do business, needing new capabilities, needing new go-to-market strategies, needing drastically different ways and changes to how you're going to implement and go after that big pie that's being created as a result of the energy transition.
And so we spent a lot of time, especially early on a couple years ago, helping our clients think through what's the role that they play, what are the markets and technologies that they're best positioned to enter? But I think increasingly and where it's getting fun is now folks are in implementation mode. We're also quite actively involved helping folks on the hard side and thinking about, we have a whole practice called large capital program management, so helping folks think through many of these decarbonization technologies, whether it's hydrogen carbon capture or massive infrastructure projects that have their own unique challenges to of course, also thinking about the software side, how am I going to, for those that haven't done large capital projects in the past, there's a whole world of project financing and engineering, procurement and construction. Where am I going to get those capabilities, for example, financially, the way that we measure the outcomes of these projects is drastically, potentially, drastically different to the way that the company may have done things before. And so long story short, there's a set of, I think, hard enablers in ways that we're enabling clients to push new technologies, but also we're great at thinking about the softer side of what are the changes to the org and capabilities, et cetera to make it happen.
Joseph Majkut: Really interesting mean. So you mentioned companies being in implementation mode, and when we think about this issue from a policy standpoint, one of the big changes we've seen over the last few years, especially from a U.S. lens is the inflation reduction act obviously, and to some extent also the bipartisan infrastructure law, but those are demonstrating that governments want a piece of this transition. There's all sorts of incentives and programs that are designed to bring supply chains, make technology innovation here. And so in some ways the government is acting a little bit like a firm trying to capture some market opportunity. Given you're deep in the business community, I'd love to start and say, okay, a year and a half into IRA, what do you see really working? How do you take the temperature of those kinds of policies from your vantage point?
Tom Baker: Yeah, it's very clear that both the IRA and the IIJA have been fundamental game changers. I think if we took a step back and just considered the breadth and the depth and how they have drastically changed the conversation around, especially technologies like hydrogen but also carbon capture. And of course we always had some incentives for renewables, but the extension of those tax credits and some of the changes there, it's pretty fundamentally changed the view of the energy transition in the U.S., and it's a bit of what we just talked about earlier. There's no player or none of my clients in the energy space and adjacent industries that haven't fundamentally changed the way that they do business because of the IRA. To me, I think that's point number one and one to recognize. But there's no doubt devil's in the details and implementation is tough, is always hard. And so I think in the renewable space, that's been very clear and we're quite frankly in more of a supply constrained world in renewables than we are demand constrained right now.
Joseph Majkut: Explain that a real bit. I've been drifting the other way, looking at these huge capacity numbers for solar panels and now battery capacity looks like it's very large compared to what we're deploying. Help me unpack the difference of view there.
Tom Baker: Yeah, so let's start on the demand side. On the demand side, we see demand incredibly robust and driven from a couple factors. One is when you look at utilities, we have across the country what are called renewable portfolio standards that at the end of the day mandate the amount of renewable procurement that utilities are going to be required, and you add up those numbers and they start to become pretty big. On top of that, we see huge corporate interest in renewables, procurement from the data centers and the tech players to Home Depot, to Walmart, to quite frankly just about every corporate player is also looking for clean energy. They're looking for it because I think primarily in many instances it's actually a cheaper source of wholesale electricity and a hedge against future increases in electricity prices. But they also have their own decarbonization goals. They're seeking to reduce their scope to emissions and renewable energy is one if not the most effective way of doing that.
Joseph Majkut: I see. So this is when you say supply limited, you're thinking electrons. I was kind of maybe thinking molecules like all the stuff that's going to help deliver those electrons, but there's a breaking point in the middle, I guess, which is can we deploy equipment fast enough to meet demand and use all the apparent supply that we have in terms of solar and batteries and other things?
Tom Baker: Yes. You're spot on about that connection point because if I now start to go and start to think through the supply side, there are many challenges that we're facing on the supply side, some on the raw equipment, but I mean probably one of the most acute challenges is the interconnection of renewables. A massive solar or wind farm requires a place on the grid where you can literally interconnect, where you can connect the electrons coming from that plant into the grid. And as a result of historic growth in renewables and a combination of new supply and load being added, there are many parts of the country, especially areas where we already have a lot of renewables, where that grid interconnection is challenging and we see it acute in a lot of areas, but probably most famously in what's out here in the Northeast and what a region that's called PJM, that region has had a very, very long interconnection what's called an interconnection queue.
Joseph Majkut: It's basically a line.
Tom Baker: Basically, a line that's right. And there are for those looking to enter that queue today, you're likely going to wait for years until you get an actual opportunity to get to the front of the queue. So I think people are starting to understand how challenging this interconnection issue is, and it's starting to kind of create perverse strategies.
Joseph Majkut: As I understand it, companies are kind of putting themselves in the queue even with projects they're not sure about because they sort of have to hedge against just having to wait so long. How are you and how are executive leaders around our country thinking about what do we actually do about this? How is it changing decision-making in your view?
Tom Baker: Yeah, I think you're spot on in terms of some of the gaming of the queue and some of the speculation that's created. I mean, there's speculation not just on putting projects on the queue, but we're seeing speculation in terms of land, so developers that will speculate on land because I think it's an area that's easier to interconnect, et cetera. I think collectively both our industry and federal and ISO level regulators, I think everyone's interested in solving this problem. And so we are starting to see across the country reform and measures that are being taken to try to clean up the queues, try to address bad behavior, including speculation. And so like everything in power markets there are very regional specific and every region is different. So unfortunately this will not be done in a consistent and homogeneous way, but I think we're seeing reforms across the country that are trying to move in the right direction to address this.
Joseph Majkut: Yeah, it's very challenging. I mean here in Washington, a lot of what we hear is permitting reform is the path to fixing this. Do you have thoughts there or if you were thinking about a permitting reform wish list, what do we need to be able to build faster to help clear out these queues and accelerate deployment so we can meet all that perspective demand?
Tom Baker: Yeah. Well, I fully align with the importance of permitting. I mean, that was probably going to be after challenges with interconnection permitting. Inciting is the second biggest challenge that we see in renewable and also just broader development of clean technologies infrastructure.
Joseph Majkut: It's building stuff takes a long time in the U.S.
Tom Baker: That's another topic where I'm encouraged because I think that there is pretty strong recognition both from policy makers in a bipartisan way and from industry that we can make that process more efficient. And the challenges we see from a siting permitting perspective are often ones of speed. Often one of you have multiple agencies that are touching the same project, and of course that slows things down, but you see in many areas those agencies are not well coordinated and so they get to a suboptimal decision. And look, I think there's another on this permanent inciting topic, community engagement and how you work with local communities is a big part of this. This is, I think, a little bit more than the onus is on the industry itself to do a better job of working with local communities and making sure to drive and get them on board with projects that are going to happen. We see stronger developers invest much earlier on that to help address some of the more local issues you see from assigning and permitting perspective.
Joseph Majkut: Yeah, it's interesting to see that shift with that being such a huge priority for the Biden administration and implementation of IIJA or IRA. It's interesting to see firms trying to navigate that in new ways as well. I interrupted you. You were talking about more mature technologies and how IRA is accelerating those, but a big part of the case of the IRA is the U.S. also needs to have its own innovation portfolio in Washington. We think a lot about competition with China. What are you seeing with these places where the U.S. already has some technological lead or could develop it, whether that's hydrogen, geothermal technologies, what's your sense of the temperature on that more innovative side of things?
Tom Baker: Yeah, I think in short, the IRA is playing an important role to help develop and drive more domestic development of these technologies, and my understanding is that's a feature and not a bug you're seeing if you take a step back, the U.S. has become, I mean has always been to some extent, but is arguably now clearer global energy leader across both oil and gas, but also some of these other technologies. I think about a topic like hydrogen where the production tax credit, BCG has done some math. When you look at both our resource potential and the cost unsubsidized that the U.S. can do both green and blue hydrogen, there are other places in the world, for example, in the Middle East where they potentially could do hydrogen or an ammonia production, which is an important energy carrier that's a byproduct of hydrogen at a slightly lower cost than ours, than the United States.
But once you add in the production tax credit from the IRA, we draw that same chart and we see that the U.S. being likely the global leader from a cost perspective on hydrogen and ammonia. And so when you start to then look, you look globally and we are seeing markets like and Korea and others in Asia that are looking to, they don't have their own energy resources and have always imported fuels. They're thinking about their own energy transition and looking at clean hydrogen or ammonia as an energy source. Same thing in Europe, both Europe having strong decarbonization goals and challenges with some of their supply of energy from Russia and other areas. We see interest in those markets to import clean molecules and a lot of us firms are playing a role. We see a world where in the next couple of years you're going to start to see the U.S. export these clean molecules to some of these markets.
Joseph Majkut: Yeah, I look at the European energy plan, talk about a supply limited market. I mean they have enormous ambitions for hydrogen, both their own and imported that sort of boggled the mind. I'm just like, oh man, could we build all that in six years? It seems slightly more aspirational, but I take the point that there seems to be some pretty enormous market potential there. It's interesting that the conversation in Washington does still kind of focus on domestic consumption. One of the challenges of building the clean hydrogen market is you've got a PTC and a lot of firms that would say would like, Hey, we would love to make hydrogen and benefit from this tax credit and help set up this new clean industry, which we know is necessary for deep decarbonization. The buy side does seem challenging. What are you seeing in the business community of like who's ready to buy it, who's ready to pay necessary premiums? Do we have the right methodologies in place for emissions accounting? What are industry folks thinking in that context?
Tom Baker: I think we need more folks saying that on the buy side, it is challenging, and I think hydrogen's a great kind of test case here because the production tax credit for green hydrogen is $3 per kilogram. It's a pretty generous subsidy on the face of it.
Joseph Majkut: Yeah, some of my early math showed that you would basically be producing it for free with that tax credit. I don't think that ends up being the case because of cost inflation and actual projects are more than early estimates, but it's a big tax credit.
Tom Baker: It's a big tax credit, right? I mean today what we call gray hydrogen, so hydrogen produced from fossil fuel sources is anywhere between 75 cents a dollar per kilogram. So that $3 is pretty material. But you alluded to exactly where I was going to go. I think we were all early on excited, and as reality has hit in terms of the challenges of developing these projects, the inflation related costs that we've seen, the fact that hydrogen is difficult, it's one thing to look at the costs associated with the actual production. It's another when you need to add on costs associated with transportation of hydrogen because in many instances where you need the hydrogen and where you're going to produce, it may not be the same place in some instances, you need to store hydrogen. If you're producing hydrogen from a renewable resource, that renewable resource is intermittent, and if you don't have a way to firm that up, that means you're producing hydrogen in certain parts of the day, and so you need to store it when you're producing a lot of it, et cetera.
And so what we're seeing is a hydrogen market that's a bit more a challenge. Costs are higher than we had hoped and anticipated, and I think we are. Anyone who is in the hydrogen value chain will tell you the biggest challenge they have right now is securing offtake is getting, especially in the private sector, getting a company to be willing to buy the offtake of the hydrogen. And there's several challenges. One is given these additional costs, we see very few instances where clean hydrogen is at parody with the fossil fuel alternative, but also beyond just the pure economics. If you're not that dissimilar in the renewable energy space, if I'm going to sink a billion dollars plus to develop a big hydrogen facility for you, I'm going to expect that you're going to take that hydrogen for the lifecycle, for the next 15 to 20 years. I need to amateurize all that capital I spent.
Joseph Majkut: And we don't really have a market that you can go to otherwise, at least at this time. Right?
Tom Baker: Exactly. Exactly. And so I'm not going to develop a project for you until you tell me, yeah, I'm going to buy at this price for the next 15 to 20 years. Obviously on the off takes, on the corporate side, that's a big commitment. That's a type of commitment most corporations have probably never made.
Joseph Majkut: It definitely seems like a betting your CEO's tenure on that kind of project stakes decision, right?
Tom Baker: That's right. That's right. So simply put, we've got this supply demand imbalance and this need to figure out and continue to incentivize offtake so we can start to get projects done.
Joseph Majkut: Yeah. I know you've thought a lot about hydrogen and in the analyst community and on climate and energy Twitter, there are constant debates about how much hydrogen do we actually need for deep, deep carbonization. Is this sort of a necessary evil because it's deeply inefficient to crack water and then store hydrogen then use it again? But I'd love your thoughts. Are there areas where you think hydrogen's going to be of particular service and deep decarbonization, whether that's long-term energy storage, trucking, what's exciting in your view in that space?
Tom Baker: At a high level, I think there are certainly places where you have a set of technologies that hydrogen competes with and it remains to be seen how hydrogen stacks up against other technologies. And you mentioned energy storage examples, and I think that's a great one where hydrogen can play a role in energy storage, but we have other technologies like long duration energy storage, we have natural gas, but then you put carbon capture on the back end of it, so you collect all the carbon from using natural gas and a variety of others potential solutions there. And I can look, transportation's another great example where clearly for lighter and medium duty, we're going down the electrification route. There's still a bit more of an open debate on more heavy trucking. The role that can batteries are heavy, especially for heavy trucking. You need really high energy intensity.
Joseph Majkut: Do you want to talk about interconnection queue problems, right? Like every service center in the United States having rapid chargers for semi-truck batteries seems like it's going to be something of a technical challenge.
Tom Baker: For sure, for sure. And so I think that's another example where the verdict's still out, and I'm not a policymaker, but if I was one, I do think this, let's push multiple technologies and see what happens from a portfolio strategy makes a lot of sense. But I do think there are places, especially more in the industrial goods space where hydrogen is arguably one of really the only viable pathways to decarbonize and it's for those applications and you have industrial applications that hydrogen is an input to the process. So you literally, it is the physical input, but there are places where high heat is required. You have other processes like cement and steel, et cetera, where hydrogen is probably the only viable pathway to decarbonize. And why I think continuing in my personal view, continuing to push and look for ways to deploy hydrogen is going to be necessary for those industries.
Joseph Majkut: Yeah. We're CSIS, right? We're a globally oriented think tank. One of the things we've been thinking quite a bit about actually starting about a year ago is now that we have the IIJA and the IRA, let's sort of assume that's a policy backdrop for the next decade, and it's pretty clear to me some of that's going to work, some of it won't pan out. That's the portfolio strategy like you mentioned. But one of the key arguments that the Biden administration has been making, and I think a lot of policymakers like is the U.S. is bringing its innovative power to this challenge and then we're going to create knowledge and technology that can spread around the world, help the rest of the world decarbonize. We're 10% of global emissions approximately. No way we get to global net zero with the U.S. doing anything. The unilaterally on climate you've looked at for a basket of innovative technologies, the market opportunities abroad for U.S. innovations and firms. The paper was published about a year ago just when we started thinking about it too. Actually, you and your colleagues wrote, and you found some big numbers, a hundred trillion dollars over the next 50 years or through 2050. Excuse me. Do companies see that? Are they excited? What do we need to have happen that the U.S. in our business interest can seize that opportunity?
Tom Baker: Yeah, it's a great question. In short, I do think U.S. companies see it and are actively pursuing those opportunities. One of the biggest outcomes we tried to push in the report though is let's make sure we're smart about where we deploy public money and take a competitive lens to the way that we incentivize and build value chains here in the U.S. And again, I often don't see that competitive lens used in policymaking or the way that we just try to make decisions around where do we want to invest capital. It's one thing to do a market study to say, oh, there's $30 billions in smart grids here, $50 billion in renewables here, et cetera. But I think it's the next lens that's important to take, which is, but where can the U.S. really compete? Where do we have the structural advantages to build what we always like to say is a sustainable competitive advantage? And when you look at some of the upstream less value added parts of some of these value chains that are slightly more commodity driven, you very well could argue that the U.S. is not well positioned to compete globally in some of those less value add vetted pieces of the value chain. And by the way, are those areas where we even want to compete in the first place?
Joseph Majkut: Can you give me an example of that? So are you thinking like poly silicon manufacturing or lithium refining? Are you thinking that upstream?
Tom Baker: Exactly. Yeah. I think about some of raw material extraction and some manufacturing of raw equipment. This is a minimally a complicated space.
Joseph Majkut: Because here in Washington we feel the security issues too, right? Exactly. So the economic argument would distribute that stuff to cheapest producer, but I think after 2020, a lot of U.S. policy policymakers are thinking we may be over-indexed on that. And so finding the balance between making those strategic sort of security based investments and the sort of where do we've developed a real competitive edge seems to be like that's going to be a tough challenge over the next few years.
Tom Baker: Couldn't agree more, and I will leave that to the policymakers to figure out.
Joseph Majkut: No, you have good input. We need you guys to help Washington understand where we can find competitive edge and how we really can foster it too. I mean I think they really do. When we talk to policymakers across the board, across the aisle, they want to see that whatever their opinions on climate policy are, low carbon innovation is seen as good because of what it can do for U.S. economic interests. But it's not a magic wand, and I think your report does a nice job talking about the aspects of competitiveness that we need to see. What are the primary metrics that you think we need to think about? You can think about cost of service, cost of energy delivery. Are there other places where we should be thinking about developing competitive edge?
Tom Baker: Well, there's clearly a technology component here, and so continuing to push where the U.S. has arguably a phenomenal lead is around innovation and is in our R&D capabilities and our ability to foster and build technology startups in these decarbonization spaces. So that's a place where we absolutely want to keep our lead and continue to and where we have opportunities here in the U.S. to develop a technology that can be deployed globally. I also think in the advanced manufacturing space, so looking at manufacturing, but one that is more sophisticated, less commodity driven is another place where I get excited both by the U.S. ability to deploy it and build a competitive edge, but also because it creates good jobs. I mean, I think any policymaker should look at these advanced manufacturing jobs and see it as incentives and public dollars well spent. Those are two areas where we want to continue to focus from a policy perspective.
Joseph Majkut: So from a policy perspective, I mean one key I think to reducing costs and discovering technical edge is a little bit letting the market cook, right? We've got the IRA, we've got the IJA, let's let firms make investments, let's see what works, what are important indicators of learning where we want to three years from now, five years from now, we might want to start shifting efforts. I think that's one very, it'd be very interesting to hear your thoughts on that question and then how do we get ahead of the game when we think about reducing non terrier barriers for U.S. technology abroad? I can very clearly see the case or tell a story to myself, well, if we'd reduce the cost of solar panels, solar panels are going to be the cheapest form of marginal generation and that just develops around the world. Honestly, I have trouble thinking about how do we, the U.S. can afford $85 a ton tax credits for carbon capture and storage, but it's hard to think of that as a relatively immediate solution for a lot of places in the developing world, emerging markets, how are you thinking about getting ahead of the game and creating market opportunity through public policy abroad, reducing trade barriers, other non tariff barriers, because that's a matter of policy, I think aligning regulatory standards.
Tom Baker: Yeah, it's a great question. I think one of the things, and we talked about this in the report, that we have these global markets. We want to serve these global markets both because they create value for the us but also because they help these other markets decarbonize. At the end of the day, we saw in our work the importance of maintaining a domestic market for whatever is the technology you're currently looking to deploy or you want to deploy going forward. And so to me, that's one of the lessons from the report is quite frankly, if you look at a market like China or other markets that have been successful globally, exporting several of these technologies is not a surprise that often there's strong correlation with having first their strong domestic demand for that technology. And so maybe this is a bit of a backwards answer to your question, but I think looking and maintaining and making sure there's a robust domestic market and some of these forward looking technologies best creates an opportunity to then export in a cost effective and in a competitive way that hopefully reduces the need. The other way to try to avoid some of the tariffs internationally is have a strong competitive product that you're selling where the value for that international market to cost effectively import, it becomes so blatantly clear that there's demand to not levy high tariffs that would then make that product uncompetitive in that international market.
Joseph Majkut: How much do you see in this competitive edge question? Also, the carbon intensity. I mean, if you're making electrolyzers, I'm not sure how much carbon intensity of electrolyzers matters, but if you're making hydrogen and we're shipping hydrogen products or hydrogen derivatives abroad, carbon intensity is going to matter a lot, and one of the things that we're starting to understand is the relative carbon efficiency of the U.S. economy. Is that part of the competitive edge in your view or is the policy community telling ourselves stories?
Tom Baker: That's absolutely a potential edge, and Europe is probably one of the most recent best examples of where a lot of, whether it's clean hydrogen ammonia export is probably the best example. A lot of developers in this space are looking at Europe and making sure and want to understand what their ultimate carbon requirements are going to be for clean fuels so that any development that happens in the U.S. meets their criteria. The same thing is happening in Asia where those markets are setting some requirement that is energy output per kilogram of CO2 that is going to drive what counts and what is going to drive what's imported. I think honestly, one of the biggest challenges is trying to align across accounting, right? How do we measure, how are we actually going to measure, but I think a lot of folks are frustrated, and this may be an unsolvable problem, but if I'm in the U.S. looking to export a clean fuel and developing a project to meet a certain requirement in one international market, but then it's a different criteria in another international market, in a perfect world, these would all be aligned or aligned enough that it created a more free open market for the export of free molecules.
Joseph Majkut: A great book was published a couple years ago, tells Fixing the Climate. It's by Charles Bel and David Victor, David's associate of our program here at CSIS, and they make the case that basically trade rules and regulatory standards for low carbon goods is actually where our climate diplomacy should be. Yes, the UNFCC got the Paris Climate Agreement and for the time being that sort of sets a framework that's good enough, but success really hinges on these more technocratic, but very important negotiations around trade rules and regulatory standards. What is clean hydrogen? You get a very different answer to that question in Europe, Japan, the United States, the Middle East, south America, and we actually do to have rough agreement on it. That question, if we're going to see these things scale up super fascinating.
Tom Baker: For sure, and I mean we need that across the entire economy, but the energy space is most impacted by this because as we've talked about, they're huge projects, the billion dollar plus projects and people have to make these huge investment decisions and there's flexibility. We can go one way or another, but I'm not going to put a billion dollars into this until I feel confident that the clean molecule I'm going to produce is going to, and by the way, if you're an offtaker in one of these markets, you're also in the same, you're stuck in the same conundrum. I don't want to sign up for 15 to 20 years of offtake of this clean molecule if I find out a year in, oh, this doesn't actually meet the requirements as set by those governments.
Joseph Majkut: I want to take a sharp shift because I can't let you go without talking about what is in April of 2024, the busiest issue in our space, which is AI and energy. You guys are at the forefront of thought in how businesses are thinking about AI as a climate solution, and the challenge is if the economic optimists are right or if the AI optimists are right, that this is like a new industry that will be a significant energy consumer, what are your thoughts on where that conversation stands today and where might it be in a year?
Tom Baker: Yeah. Well, you're right Joseph. It's definitely a hot topic right now and for good reasons because it's not, you look the last 12 to 18 months, anyone who is building data centers trying to build EV charging, especially high speed, high voltage EV charging for medium duty fleets that have huge power demands, everyone is struggling because of the interconnection problems we mentioned because of the similar permitting insiding issues. We're going to continue to see issues as we electrify our economy to have a grid and be able to interconnect and serve the power demands. It's really often when we talk about in the power space, we think about two issues. Do you have the generation, are you able to produce the electrons when you need it to serve the power needs of these data centers and other electric loads, and are you able to deliver those electrons where you need them?
And the demand we're going to likely see from data centers and these other electric, large electric loads creates problems on both fronts, but arguably the bigger issue is on the grid side and the fact that we're going to need to build massive amounts of transmission and distribution to get electrons to the right place, and we're also going to see players who will take matters into their own hands a bit. We're seeing players like the Google’s and Microsoft’s and Nuclears of the world who are pushing for solutions that can meet their own power demands, what we call behind the meter, and you're seeing them pushing technologies like small module nuclear reactors and other technologies that while still higher cost and we hope can move down the cost curve, are solutions that could provide in a localized focused area provide a lot of electricity to meet this demand.
Joseph Majkut: Numbers that I see flying around are just kind of shocking. You see data centers coming in, there are projects coming in at a gigawatt of demand or there's now, I can't remember the name of it, Stargate, some massive multi gigawatt data center that's being conceived. These are like Vogel scale projects?
Tom Baker: Yes, I mean that's one several nuclear large scale reactors that's required to serve that load.
Joseph Majkut: I love your thoughts on whether AI, which presents a new challenge or it just helps us realize the challenge we had ahead of us if much of the decarbonization story was going to be where electrifying large parts of the economy, heat pumps, EVs, electrifying a lot of heavy industry where hydrogen is a competitor, but making a lot of hydrogen is an electricity intensive process, whether you're using fossil fuel feedstocks or making green hydrogen. Now that we've got AI sort of coming onto the scene and data centers looking to really rapidly expand, are we in a fundamentally different place? Is it a qualitatively different problem now or were we going to have to add so much generation and distribution capacity anyway that it's just showing us on a faster timescale the challenge we had ahead of us?
Tom Baker: Yeah, I think it's more the latter. At the end of the day, it's going to represent several percentage points of total electricity demand, and so for one single application to represent a couple percentage points is pretty material given how evasive electricity is.
Joseph Majkut: That said, couple percentage points is manageable when we were talking about expanding the electricity sector by 50 or a hundred percent over the next couple of decades anyway.
Tom Baker: Exactly, exactly. We're seeing the role that electricity is going to play in transportation. We see the role that it's going to play while hydrogen will be required for some industrial processes to decarbonize, there are other industrial processes where electricity will play a role. This topic in general has gotten a lot of buzz, but I think what it's nicely done is shed light on an issue we were facing anyway and will hopefully help spur continued development on both. How do we continue to evolve and create clean and firm electricity generation, and how do we continue to incentivize and make the investments we need in the grid to deliver that clean electricity?
Joseph Majkut: I completely agree. I mean, what I hope to see is both the economic, this is again a sort of a competitiveness edge that the U.S. has in AI. The potential economic benefits really might spur the changes that we needed for what might be low margin, but are very important deployments of clean firm energy, right? The energy transition, investments in strategic goods like chips manufacturing, returning aluminum manufacturing, but again, finding the right balance between strategic priorities, security, and developing competitive edge where we can. Tom, thank you so much for joining us this morning. This was really fun to chat with you.
Tom Baker: Yeah, agreed. Thank you. Thank you for having me. I hope we get to see you again soon and all the best in your endeavors.
Lisa Hyland: Thanks to Tom for joining us this week and sharing what he and his BCG colleagues have been following.
You can find more episodes of Energy 360 at our website, CSIS.org or wherever you listen to podcasts. Follow us on X and LinkedIn for updates from our team and as always, thanks for listening.
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