Invest Like the Best with Patrick O'Shaughnessy
· John Arnold
[00:00:00] S1: Promising, but very, very difficult. The innovation hasn't been proven. We can build the AP1000. The AP1000 is the latest of the traditional nuclear power plant. We know it's a very, very costly electron. It was the last nuclear plant to be built in the United States – finished, I think, in 2024. Vogtle Units 3 and 4, AP1000s, have a very advanced safety design for a nuclear power plant. The Vogtle plants were enormously expensive. If anything, they've gotten harder to build since then because they require a very significant amount of labor in generally rural parts of this country. At its peak, Vogtle had 9,000 laborers on site, many of which were highly skilled craftsmen, and trying to do that today in the United States is very difficult. We've proven we can build that, we know it's of a high cost. And so there's a lot of effort to do advanced nuclear. And that's either the SMR, small modular reactor that's fission, or through fusion. I think the question is, we don't know what the economics of either of those are. Number one, we don't know whether we can build a commercial fusion unit. I think there's a lot of optimism in the industry. Remains to be seen whether we can get there or not. The greater question is, what are the all-in economics of that? That's a big unknown, because at the end of the day, you're competing in a commodity market. We've seen that we're willing to pay a little bit more for a cleaner electron, but we're not willing to pay a lot more for a cleaner electron. So it has to be cost-competitive. Optimally, the cheapest electron is one that minimizes emissions. And so I think that's the promise of nuclear. These aren't coming anytime soon. There are some pilot plants that are being drawn up today. They may or may not have started construction on some of these. I think most of these announcements are for the PR. By the end of this decade, I think we’ll have taken some small steps there. But we're probably looking 10, 15 years to really have advanced nuclear be at any scale in the United States, and that's best case.
· Patrick O'Shaughnessy, John Arnold
[00:00:00] S0: What do you think about the basket of startups that have been launched, and raised – in some cases – a lot of money? About the prospects of good returns for those dollars that are going into these companies and projects, either today or the historical dollars that have gone in over the last five years? [00:00:00] S1: It surprised me. In some ways, I thought that some of these technologies were almost uninvestable from the VC side because it’s such a long duration to get to a free cash flow business. I'm surprised at how much money. I think it's fantastic. I think this has to be a public-private partnership where the government is putting in real capital into these, because I don't think they make sense as a stand-alone investment without public support. The time frame to commercial deployment, the amount of money that has to be raised for it, the fact that you don't really know early on whether you're making progress or not. There's a bunch of benchmarks to be overcome, but until you actually build one, you don't really know what your economics are going to be, what your efficiency of the unit's going to be. I worry that there's going to be a falling out in the industry. There’s probably too many SMR companies. It would be better if the industry can coalesce around three or four different technologies and focus the resources there.
· Patrick O'Shaughnessy, John Arnold
[00:00:00] S0: It's a scary circumstance to imagine as an investor, when funding dries up and free cash flow is still over the horizon, not even within the visible horizon. I'm curious if there are other areas that you think that's less true, like solar and batteries seems like a really interesting way of solving some of the problems in the energy markets. The cost curves for both look really cool and interesting. I'm curious what you've learned about those two, and just generally what you think about that style of energy generation and storage. [00:00:00] S1: Solar has two trends. One is technology and manufacturing costs keep going down. Technology is improving, manufacturing costs are going down, so the end product of a solar panel keeps getting cheaper. [00:00:00] S0: Mostly in China.
· John Arnold
[00:00:00] S1: The cost to develop a solar panel keeps falling. Now, a solar panel doesn't get you what you want. You want electrons at the location that load is at. There are a lot of steps to go from a solar panel to electrons in the right location. Some of those are inflationary. The panel itself is deflationary, but it requires land. It requires labor. It requires access to transmission. It requires access to capital and the cost of capital, which was falling for a long time and has now been increasing over the past five years. People love to talk about the cost of a solar panel. And usually, whenever you see these graphs, it's what's the cost of the panel? And it's just from top left to bottom right. Meanwhile the cost of a PPA, a power purchase agreement for solar, is well off the lows. The lows happened around 2020. The cost of delivered electrons from solar is probably 50% plus more expensive than they were at the cheapest point in 2020. It's because the panel itself becomes a smaller and smaller percentage of the total cost of the system. Any advantage from continued technological improvements or manufacturing improvements are just getting at a smaller and smaller percentage of the total cost. And meanwhile, the inflationary aspects of the system become a bigger and bigger percentage of total cost. That being said, there’s a lot of ideas about how to bring load closer to where the solar is being generated. Can you use some type of automation, factory automation or robotics, to build the plant better, the solar field better, in a cheaper way that requires less labor? There are advancements being done. It's good to see that a lot of the data centers now are – developers or the end users are signing new PPAs with solar developers. So we've seen a tremendous amount of solar come onto the system. I think it's also true that generally, in a stable demand environment, each megawatt of solar that comes on is worth a little bit less. The most valuable solar that came on was the first megawatt. You get to a point where the supply of solar has exhausted the demand during the sunny parts of the day in a certain region. And so as you bring on more solar, either you have to also bring on batteries or you have to bring on transmission to move it to a different place. So that has a cost. Battery costs have been declining as well.
· John Arnold, Patrick O'Shaughnessy
I wonder if some of the same dynamics that’s happened with solar will start happening with batteries soon. As the technology is getting better, the manufacturing gets optimized, you start running out of the advancements that have significant cost ramifications for the battery system. It becomes more and more about what the input costs are. We've seen lithium prices, for instance, just in the past few months, be up more than 50%. That's going to translate into higher battery costs, all things being equal. [00:00:00] S0: It's fascinating that it all comes back to the same problem of labor. Can we build these things? Can we build them quickly? Permits. A lot of our attention as a country maybe should just be there. We can take for granted these falling cost curves, which are great. It’s great, but not sufficient to have the end system that we want. If I was forcing you to invest in something related to the proliferation of data centers today, I'm curious how you would attack that problem. So much excitement around these things. Lots of companies that are predicated on the rise of data centers and the build-out of data centers. What would it take for you to get excited about investing in something that was tied to that trend?
· John Arnold
[00:00:00] S1: There’s a number of companies that are trying to make the build-out of the data center less labor-intensive through robotics. That's an interesting source. It could be a very crowded space, though. It remains to be seen how good of an investment that robotics companies will be. From an energy standpoint, I think advanced geothermal is one of the most interesting components of the system today. It is a baseload energy source that is friendly to the environment. It is coming down the cost curve, it's still very early in this industry. So it still us unclear what costs are going to look like in a few years. But there is the skilled labor force that exists in this country already. It comes largely from the oil and gas sector. The technology has now been proven out. There's a lot of work to do to scale this. Early on in shale gas or shale oil revolutions, it just starts out small because these companies have had to prove out the geology, have to prove out the techniques, have to prove out the management team. You have to get to the project finance market in order to get a very low cost of capital to make these things really work. It takes time to get from startup of the industry and getting all these steps proven, to getting to where banks are willing to loan you money because they know it's going to work and they know where they will get repaid. But I can see in five years that the geothermal industry could be the most exciting in the United States.