Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Patrick O'Shaughnessy
[00:00:00] S0: We've talked a lot about energy infrastructure specifically. Are there other parts of U.S. infrastructure, non-energy, that interest you most?
· John Arnold
[00:00:00] S1: The housing discussions that are happening across the nation are really fascinating. A lot of the YIMBYism, or Yes In My Backyard – as a combatant to NIMBYism – originated in California, largely because California had some of the highest housing costs and the fastest growing housing costs, and some of the most stringent restrictions on trying to build new housing. And it had gotten so bad that there started to be this pushback against all of that. What we've seen is similar to permitting reform, this has become a very bipartisan issue, of "Make it easier to build housing." We see it from not only California, but you see it in Montana, you see it in places like Austin and in the Northeast. And so, it has kind of superseded politics. I think politicians are now realizing that this affordability issue is front and center for voters. And that’s driving this renewed focus on cost of electricity, renewed focus on cost of groceries, and on housing. People are asking their mayors, governors, the federal government, "What about housing? What are you doing to reduce the cost of housing and make it easier for people to buy that first house?" If you don't have a response as a politician, you're just not going to win a race these days. President Trump came out and made this comment about, "I want housing prices for those who have a house to go up." He also talks about making it more affordable to buy a house. You can't do both unless there is just a massive government subsidy. I think that's one of the risks of this affordability push. It's been decades in the making from all these regulations, all these restrictions on building things in this country. There aren't easy solutions to overcome this, besides just big subsidies. The real solutions take time, and the problem is that that window is longer than the political cycle. If you're a politician and you're facing re-election every two or four years, you have to have an answer today about, "What you are doing that you can actually see during my term?" One of the easiest things to do there is, if you have access to the budget, which federal politicians do, you just start subsidizing things. Which makes the problem worse in the long-term, but the electorate likes it in the short-term.
· Patrick O'Shaughnessy
[00:00:00] S0: I'd love to apply your system thinking to some other areas that you've studied carefully and been really involved in with the foundation. Before we do that, maybe describe your goal for the foundation overall. One of the things I've heard you say that's so interesting is that foundations should get less powerful over time. Individual foundations, that is. As someone that's running a big one, that's an interesting thought, I'm curious why you think that. So maybe before getting to some of the things that you focus on, just frame, why have a foundation if you want to get weaker over time?