July 14, 2025 • 54 mins
Jim Murchie explains recent developments in the energy sector, including growing, bipartisan demand for nuclear power and why the non-cyclical energy industry is “an island in a sea of chaos”.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Ryan (00:09):
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Isakainen, etfstrategist at First Trust.
Today, I'm joined by JimMurchie, ceo, co-founder and
co-portfolio manager at EnergyIncome Partners.
Jim and I are going to discussthe increased demand for
electricity capacity in light ofartificial intelligence,
(00:30):
reshoring, of manufacturing,cryptocurrencies, electric
vehicles and other areas ofelectrical demand, and what the
impact might be on the energysector, specifically that
non-cyclical part of the sector.
Thanks for joining us on thisepisode, that non-cyclical part
of the sector.
Thanks for joining us on thisepisode.
So, jim, before you got intothe investment side of the
(00:53):
energy sector, you did spendsome time at British.
Jim (00:54):
Petroleum.
Is that right, correct?
Yeah, I had an eight-yearcareer there, seven different
jobs, seven different jobs,seven different jobs.
Yeah, that was actually kind ofmy problem with.
Well, I actually went to gowork for the Standard Oil
Company of Ohio in 1982.
They were majority owned by BP.
Okay, so what happened was BPhad Alaska and Standard Oil had
just refining and marketing.
And so they said here's thedeal We'll give you Alaska, you
(01:17):
give us 55% of your company.
So it was the deal of thecentury for Standard Oil of Ohio
.
It is where John D Rockefellerwas based, in Cleveland.
So when they broke up the trust, they gave him this tiny little
piece in Ohio, I think, just tostick it to him.
And so I had seven differentassignments in refining and
marketing and petrochemicalsstaff and mine jobs.
Ryan (01:39):
So that probably gives you an edge in understanding the
industry now that you're havingfor years have been on the
investment side, yeah, and thethe other folks at EIP are
really sick and tired oflistening to my stories from the
old days.
Jim (01:55):
But that's exactly what Bernstein thought.
Bernstein hired their analystsfrom industry for that reason
yeah and uh, it's you know, andthey figured that they could
teach you how to do thefinancial analysis, but they
couldn't teach you what youwould learn actually working in
the industry.
Ryan (02:12):
So then you went to.
Did you go right from BP to?
Jim (02:15):
Sanford Bernstein.
I went right to SanfordBernstein and from there two
years at Julian Robertson'sTiger Management and then after
that ran a a long short hedgefund in the world of energy and
basic materials and commoditiesand things like equities,
commodities, derivatives.
Ryan (02:31):
Okay, so that you've got a really kind of unique
background with both the energysector and as an analyst and all
these other other roles, what'skind of the like.
As an analyst, what's the keytakeaway?
That applies to what you'redoing now.
Jim (02:50):
You know, the thing is, all three of the portfolio managers
at EIP had their industryexperience, kind of in the oil
and gas part of the business, Ihad so many different jobs and
the I had so many different jobsand the other two had so many
different jobs that we touched alot on the pipelines and the
(03:10):
power sector as well.
What we like to say is you know, we grew up in the cyclical
sort of bad investmentneighborhood of the energy
ecosystem and we're able to getout, and so the transition of
going from industry to managingmoney was the transition of
(03:32):
going to the part of thebusiness that really was not a
good shareholder investment, tothe part that is.
And while I sensed that when Iwas at BP, it was really when I
got to Bernstein analyzing thesecompanies, their lack of
earnings growth, the highvariability of their earnings,
their low returns on capitalthat it was like.
(03:53):
You know, this is not a placethis isn't Microsoft and Google
where you just own the companiesfor the next 20 years because
their earnings growth isn'tthere and it's highly variable,
which makes planning theirbusinesses very difficult.
It makes capital allocation andthe efficient allocation of
that capital, which would resultin a high return on capital
(04:16):
just wasn't there.
It was a complete lack ofcapital spending discipline.
And so one of the pieces I did,the research pieces I did you
could say it was sort of aseminal piece for me that other
people at Bernstein and thenaround the industry copied was I
noticed this correlationbetween capital spending as a
percentage of cash flow andreturns on capital.
(04:38):
In fact it was an 85%correlation.
And people said, oh okay, sothe more you spend, the more you
grow.
No, it was the oppositecorrelation.
And people said, oh okay, sothe more you spend, the more you
grow.
No, it was the opposite.
So Exxon had the highestreturns on capital and
reinvested the smallest portionof their cash flow.
And so when you would talk tothe companies, they didn't
really understand this either.
But it occurred to me that thecompanies are good at ranking
(05:07):
their projects.
You know everyone can run aspreadsheet and the farther down
that list they go, the lowertheir returns.
So you do your best projectsfirst and your worst projects
last.
So the more you spend, thelower your returns.
It's almost tautological, andother analysts in other
industries kind of took thatanalysis and found similar
correlations.
Now, you wouldn't find that intech, for example, but for
mature, cyclical businesses itdefinitely was the case.
(05:29):
And so, when you look at howenergy infrastructure operates,
not only are the earnings stable, but the dividend payout ratios
are higher.
And if you think about it, ifyou've been given a monopoly,
let's say, to run an entireelectric area, right, and demand
is only growing 1% or 2% a year, and you're earning a 10%
return on equity, if youreinvested all of that money,
(05:53):
you would grow your capital base10%.
Well, who would do that?
There's no competitor to stealmarket share from and demand's
only growing 0%, 1% or 2%.
So why would you do that?
And so there is an inherentcapital discipline that comes
from a monopoly business thatcan't steal market share and
knows that if it's simply plowedback in all of its cash flow,
(06:16):
or like the s p 500, which has apayout ratio today, I think, 27
or 28, so you know, reinvesting75 of your of your operating
cash flow means you're growingyour asset base much faster than
you're growing your business.
So it's two very importantelements you get when you get to
the world of non-cyclicalenergy infrastructure that isn't
(06:38):
present in the rest of theindustry.
Ryan (06:41):
So you said something interesting there, growing at 1%
or 2%.
But that actually leads us intoanother thing I wanted to
discuss with you, and that isthe apparent inflection higher
for the growth in electricitydemand.
Yeah, to what?
Jim (06:58):
three, three and a half percent, something like that,
that's the high end of the range, but we're already growing at
one and a half, coming off of 20years of zero growth.
And so, again, being aninvestor wanting to cover our
downside, we have thisdiscussion with investors that
says, look, let's understand howwe went from zero to the one
(07:19):
and a half that we've been atfor the last two or three years
and to understand that you gotto understand why you were zero
for 20 years.
And it was really two reasons.
The first is the offshoring ofmanufacturing, which everybody
knows about.
Manufacturing output in thiscountry didn't fall, it just
went sideways while the economygrew right Because we outsourced
it to China, southeast Asia andother places, and so
(07:41):
electricity demand there didn'tgrow.
In fact it shrank.
For the second reason, which iseverything that uses electricity
today, whether it's light bulbs, air conditioners, electric
pumps, washers, dryers,dishwashers they use 70 to 80%
less electricity than 30 yearsago.
Every refrigerator at HomeDepot, that energy star rating.
(08:03):
I think the improvements todayare minuscule and I'm not even
sure they're worth the dollars.
They save energy, but you maybe spending a hundred extra
dollars to save maybe $50 ofenergy over the life of the
machine.
I mean, I don't know that,those are the numbers, but we're
clearly getting to diminishingmarginal returns.
But, more importantly, we'veturned over in the last 30 years
(08:26):
the highly inefficient stuffthat predates the run-up in
energy prices in the 1970s and80s which triggered all of that,
and so you have now a reversalof those things right.
So now we're electrifying morethings.
It'd be electric vehicles, notso much in this country, but
it's happening.
It's just happening slower thanpeople had forecast and you
(08:46):
have this migration towards heatpumps, not in Wisconsin, but
sort of in the moderatetemperate areas in the
wintertime.
And then, obviously,manufacturing is reshoring.
I mean, construction spendingon factories has tripled in the
last three years, and you folkswork with Richard Bernstein and
he has been telling people aboutthis for a while.
(09:08):
He saw this coming a long timeago and it's a function of a lot
of things coming togethercheaper energy, a strategic need
to reshore, that kind of thing.
So that gets you to one and ahalf percent.
The AI data centers gets youanother one or two percentage
points, depending on whatforecasts you listen to.
Ryan (09:30):
So I would imagine that people watching that are
listening to the podcast now aresaying, okay, that's boring one
exactly two two and a halfthree percent.
Jim (09:40):
I know india grew 65 percent last quarterover-year
sales, and so it's only largewhen you compare it to being
flat for 20 years an industrythat's used to flat for 20 years
and what the actual five-yearplan is for the industry.
So all of the folks in theelectric power industry, mostly
utilities have to file withtheir states every year a
(10:04):
five-year plan.
They call it an integratedresource plan, but they also
have to file it with theDepartment of Energy.
So we in the industry knowexactly what plants have existed
in the country, when theyclosed the existing ones, when
they plan to close and when thenew ones that are planned are
(10:24):
coming on.
And so if you're going to growat one and a half percent, you
need 130 gigawatts of power overthe next five years.
If everything you're building iswhat the industry calls
dispatchable with an eye um, asopposed to dispatchable where
you chop somebody's head off um,so dispatchable is natural gas,
(10:45):
coal and and nuclear right, youcan turn it on, you can turn it
off.
That's opposed to intermittent,which is wind and solar.
Now if everything we'reproviding is coming from wind
and solar, we'd be more like 225gigawatts, not quite double.
So, as it turns out, we are infact adding 150 gigawatts at the
low end of the range.
So, as it turns out, we are infact adding 150 gigawatts at the
(11:06):
low end of the range, butthat's made up of 170 gigawatts
of wind and solar minus 20gigawatts of dispatchable.
Now we're growing natural gas,but we're shrinking coal, and so
we are not adding enough by along shot in the five-year plan.
Now, if electricity wasn'tgrowing, we probably would just
(11:31):
continue doing what we've beendoing for the last 12, 13 years,
which is closing coal-firedgeneration at a rate of about 5,
5.5% a year and replacing itwitha roughly 50-50 mix of
natural gas and wind and solar,and so the plan for the next
five years is perfectlyconsistent with what we've been
(11:51):
doing for the last 10 to 15.
But what's different from thelast 10 to 15 is demand is
growing.
Now.
Ryan (11:59):
So you're not just replacing with 0% growth some of
the coal with maybe wind andsolar that have lower
utilization rates, but maybe itall is okay.
Jim (12:10):
Yeah, that's right, yeah, and so and so now the folks
worried about the reliability ofthe system, and that would be
at the state, regional andfederal level.
They all have varying degreesof responsibility.
I think the primaryresponsibility is with state
regulated utilities, becausethey have what's known as an
(12:30):
obligation to serve, and thatmeans safe and reliable power.
We don't have regionalauthorities everywhere in the
country and the federalgovernment has some powers, but
no one can make anyone build apower plant.
All they can do is encourage itand ask you if there's one
currently in existence that'snot profitable.
(12:51):
They can say you got to runthis thing and we'll compensate
you for your costs.
But the folks who are looking atthis unfolding situation for
the next five years see thatdispatchable power will continue
to decline.
I mean, natural gas is growing,nuclear is not, but coal
continues to decline.
(13:11):
And you say, well, okay, whatdoes the industry think growth
is going to be?
We're currently at one and ahalf.
Well, the industry thinksgrowth is going to be about two
and a half percent a year.
And the way they look at thereliability equation is they
look at the peak demand for theyear in the US, which is July or
August and we're talking likethe peak day or two days or
something like that, and that'sbecause it's hot and people need
(13:32):
to turn their air conditioningto share out.
Now below the Mason-Dixon line.
They have a peak in thewintertime too because they have
so many heat pumps, but upnorth it's mostly natural gas
and in the northeast fuel oil,so electricity isn't peaking
them the way it is south of themason dixon line.
And so they compare that peakdemand to the amount of
(13:53):
electricity available fromdispatchable sources and you say
well, wouldn't they includewind and solar?
It's like, well, wind and solarhave an average utilization
rate of, you know, 22, 23, 24%combined, something like that.
You know wind is higher thansolar, but that's an average.
If for some reason it's hot,you know, and it's at night when
(14:13):
people want to run their airconditioners and it's not windy
and in fact when you look atwind speeds in the United States
they dip in the summertime thenyou can't depend on it, even
though some of it's going to bethere.
And so when you graph out peakdemand with a two and a half
percent growth rate and thecontinued decline of
dispatchable, those lines crossin about three years.
Ryan (14:37):
And that is not a good thing.
If you want to if you have anobligation to provide that power
right.
Jim (14:42):
You have an obligation to provide that power right, have
an obligation for that power,and so that's again.
So that's where the stateregulated utilities um come in,
because, with the obligation toserve, they're the ones who have
been primarily building naturalgas turbines to back up the
wind and solar who are being,who have almost entirely been
built by merchant powerproviders.
Ryan (15:03):
Right, yeah, break down the difference between those two
.
Jim (15:06):
So we started the industry off in a vertically integrated
cost plus system and the choicewas whether or not we let
companies do that or governmentsdo that.
So if you look at water andsewer God I'm going to get this
wrong, wrong.
But like 92% of sewer and 75 to80% of water in the United
(15:30):
States is provided bymunicipalities and regional
districts.
There is some investor ownedwater and sewer, but it is very
small.
In the world of electric powerit is.
Those numbers are the opposite.
85% is provided byinvestor-owned utilities and
those utilities are granted amonopoly in return for an
(15:52):
obligation to serve.
So as one utility executive saidto Walmart once, every time you
put in a wind farm or a solarfarm, it's another natural gas
power plant that I have to putin to back it up.
And he gets cost recovery onthat because he's operating
under a cost plus system,because he's been granted a
(16:12):
monopoly, which means that thereis no competition.
So he has to serve customersdon't have an alternative.
And um, he has to agree thatutility has to agree to limits
on what they're allowed to earn.
He said well, how do you managethat?
You say it's a cost plus system.
They have their operating costs, their interest on their debt
and then an allowed return onequity and that is their allowed
revenue.
Divide that by kilowatt hours.
(16:33):
That's what everybody pays.
So you can see why theutilities under the cost plus
model have been the onesbuilding natural gas to back up
the intermittency of wind andsolar.
And now essentially what'shappening is people are saying,
well, I guess that's okay, butyou got to either build more
because we have demand growth orstop shutting down these coal
(16:55):
plants one or the other, or both.
But we need more dispatchablepower because demand is growing.
Ryan (17:02):
So do you expect that will need to happen in the next few
years?
Maybe delay some of theshutdowns of coal and some
natural gas plants are going toshut down as well, right?
Jim (17:12):
Yeah, so a five-year plant has 35 gigawatts of natural gas
planned, but that's roughly anaddition of 50 and a closure of
15.
So those will probably bedelayed.
The five-year plant has 55gigawatts of coal, so think
about how big that is.
I mean we're building net 150,right, but without those coal
plants we would have beenbuilding 200.
(17:34):
And some of those coal plantplanned retirements have already
started to be postponed andthat's already happened at the
state level where utilities havesaid you know, you got to get
another five years out of thesethings because we see what's
happening.
(17:54):
We don't have enoughdispatchable power.
There are regional authorities,one in the Northeast that goes
by the initials PJM, whichstands for Pennsylvania, jersey,
maryland.
They issued an order to keep aone and a half gigawatt coal
plant, you know, like five milesoutside baltimore, to keep it
running.
And then we've had an executiveorder from the white house, um,
essentially saying look, we'regoing to make sure that these
(18:16):
coal plants don't close if weneed them, and that power
already exists under the federalPower Act of 1920.
So if people want to look it up, it's section 202C.
It's been in the Federal PowerAct for 105 years and what you
find with these executive ordersis there's really no new law
(18:36):
being issued.
It's really a statement ofpolicy and emphasis on the part
of the executive branch usingexisting laws and existing
agency rules.
So there are these backstopsthat are kicking in, and I think
that, regardless of what growthcomes from the AI data centers,
it has shined a light on thissituation where the cushion
(19:00):
between dispatchable availablepower and peak demand is
starting to erode and, if youbelieve the industry's modest
growth of 2.5% a year for thenext five years, that margin
disappears, and so it's like youcan only build this stuff so
(19:20):
fast, so let's make sure wedon't close the stuff we already
have.
Ryan (19:24):
You know, one of the things that I think has
surprised a lot of, maybe,strategists over the last couple
of years has been the fact thatearnings growth estimates have
really increased more thanhistorically, at least over the
last 20 years for utilities.
Why is that?
Jim (19:41):
happening.
So there's a big mix changethat's gone on in utilities.
So again, in the beginning theywere all vertically integrated,
cost plus, and after World WarII there was a lot of growth in
everything, demand foreverything, and that all slowed
down as the economy matured andbecame more service oriented.
As Alan Greenspan famously said, gdp gets lighter every year,
(20:02):
and lighter means less energy aswell.
And then we went through thisderegulation of electric power
generation where the federalgovernment made sure that there
were open, competitive markets.
That was difficult to dobecause the poles and the wires
are all still controlled by thestate regulated utilities.
(20:23):
And history tells us if peoplecan manipulate a market and
favor their own source of supply, if they control the
infrastructure, they're going todo it.
And so those rules took almost20 years to put in place.
So we started with allowingpeople to build their own power
plants, but the price they gotwas some economic calculation of
(20:47):
avoided cost because there wasno wholesale market.
And there was no wholesalemarket because they hadn't
established the rules of howyou're going to use the poles
and wires.
Electricity isn't like coal youcan't like dump it into a truck
or on a rail car and take it towherever you want, it needs a
wire, and so all of all of thattook a long time.
And so when you get to thebeginning of the 1990s, you have
(21:07):
this deregulation of theelectric power generation part
of the business.
Government don't have awholesale market in my state,
but what they can say is myvertically integrated utility in
Florida or my verticallyintegrated utility in Georgia, I
(21:30):
want you to keep that powergeneration in the cost plus
system.
Why?
Because we don't want happeningto the electric power system
what happened to the railroadsin the 1800s, which was just a
wild west boom bust business.
We know that cyclical commoditybusinesses come with.
You know, booms and busts,bankruptcies and all kinds of
(21:51):
things, lack of reliability,lack of safety and we don't want
that happening.
And so today you have half thepower generated by these, these
cost plus utilities, and halfgenerated by the merchants.
Now, a merchant power producerdoesn't have an obligation to
serve, and so, as I said before,most of the wind and solar were
(22:13):
generated by those guys.
So that's how we got to thesituation we have today.
Ryan (22:20):
Is there a difference in projected or realized earnings
growth over the last coupleyears or going forward a couple
years between the merchant powerand the regulated?
Jim (22:30):
Yeah, so the merchant power guys are highly cyclical and
the electric power market hasgotten tighter.
So their earnings are doingreally well now and the stocks
have done really well.
In fact some of these guys areup 200% in the last year and a
half or so.
Meanwhile, what's happened inthe sort of the vertically
integrated utilities is thecharacter of their earnings has
(22:51):
become less cyclical over timebecause they have divested that
merchant power along with theirenergy trading desks think Enron
along with their overseasinvestments think Enron and
they're getting back to theirsort of more simple model.
And so the first phase waswatching all these earnings
(23:11):
become cyclical because ofderegulation, because there were
so many utilities in statesthat said, nope, your electric
power is going to be a freemarket, cyclical business now,
and they added energy trainingand all that.
Then they start getting rid ofthat stuff and the earnings
become less cyclical, butthey're only growing 2% or 3% a
year.
So you have this perception outthere that, oh, utilities are
(23:38):
bond substitutes because theydon't really grow.
That was true on average.
But that 3% was a mix betweencompanies whose earnings were
still falling because of badexecution and ones that were
growing at high single digits.
So when you look at the utilityspace on average.
Now that mix change, combinedwith this need for new
electricity, has brought thatgrowth rate from three or 4% 10
(23:59):
years ago, five years ago, tocloser to seven or eight on
average.
And if seven or eight's theaverage, you know there's folks
that are still four and five butthere's folks that are nine and
10.
Ryan (24:11):
I also wanted to ask you about natural gas specifically
and some of the pipelines, andthere's been some news recently.
You and I were chatting aboutthis yesterday with the state of
New York and the Trumpadministration, I think, had
pushed pause on some of theiroffshore wind operations.
And then Kathy Hochul andDonald Trump got together and
(24:35):
made a deal.
Yeah, and I'm probablyoversimplifying, but it was
basically a trade of okay, youcan put a natural gas pipeline
in in exchange for going forwardwith the wind project.
Jim (24:45):
Yeah, I think that's pretty much the deal.
I mean, you know, at the end ofthe day, that was the federal
government saying look, all ofNew England is suffering for
lack of energy.
So New England is a netimporter of all kinds of energy
because they just don't have anyon their own.
You know the Marcellus Shale isclose in pennsylvania but it's
not in new england.
(25:05):
Um, so they don't have naturalgas production.
Um, you know, and you know,they only have two nuclear power
plants left, and so they are anet importer.
And, um, you know, you can't runthe whole system on renewables.
And the other thing is offshorewind is five times more
(25:28):
expensive than onshore wind justbecause of all the equipment it
takes to put it out there, andso, and the other thing is, the
current president just hatesoffshore wind.
I mean, just he not recently,like people that know him, like
this goes back decades, right,it's like I don't want to look
out on the beach and see thosethings.
Basically is kind of what iswhere he comes from, and I you'd
(25:50):
be hard-pressed to find peoplethat don't agree with them well,
there's a reason for nimbias.
There's a reason for nimbias.
Nobody wants to see yeah so soanyway, so what they, so what
the trump administration did,was they pulled the same trick
that the sierra club pulled onthe pipelines by saying you know
, I'm looking at your permitsand you haven't really filled
them out exactly right, so we'regoing to stop this project.
(26:12):
And um, and they York says,okay, what do you want?
It's like, well, let'sreinvigorate these two pipelines
that you shut down theConstitution pipeline, which
comes from the Marcellus Shaleinto New York and then connects
to some other pipelines thatwould feed the rest of New
England, and then a pipelinethat actually runs from New
Jersey across a little bit ofthe Atlantic Ocean to Long
(26:34):
Island and that's calledNortheast Supply Enhancement.
Now they call it Nessie, and sothat's kind of the deal.
Now the question is whether ornot those pipelines get built.
So Williams Company is thecompany that owns those two
projects and they're lookinginto kind of getting the
permitting going again.
But here's the thing you can'tbuild a pipeline.
(26:56):
Well, you can, but Williamsisn't going to do it and I don't
think any other pipelinecompanies are going to do it.
You don't build a pipeline onspec you do it on the back of a
20-year contract.
So the original Constitutionpipeline had contracts from the
producers Now producersgenerally, not the ones that
backstop natural gas pipelines.
80% of the capacity on naturalgas pipelines is reserved
(27:20):
generally by the users which arethe utilities, either electric
utility or natural gas utility.
So it's not clear whether ornot those producers want to sign
up again when it's indicated aninterest and it's not clear
whether the utilities in NewEngland want to sign up for
Constitution.
There is one utility that wouldsign up for the Northeast
(27:41):
supply enhancement and that oneis deemed the more likely of the
two to go through.
Ryan (27:50):
As you said, there is a need to increase dispatchable
energy, though.
So I would think that would be.
I know the politics to increasedispatchable energy though.
Jim (27:55):
Yes, so I would think that would be-.
I know the politics in NewEngland are rough, though.
I mean the governor ofConnecticut, in his State of the
State, addressed energy,because rising electricity bills
has become pretty much thenumber one political issue in
Connecticut and the rest of NewEngland and he's a Democrat in a
blue state and he used theexpression all of the above and
(28:15):
was just widely criticized fromthe left side of the aisle for
uttering those words, becausethe folks on the left side think
that that's a dog whistle forfossil fuels.
But he is frustrated with thecost of offshore wind at 17
cents a kilowatt hour and theyhave chosen not to participate
(28:37):
in any of the projects goingforward.
Well, they have one that'salready in the bag, but going
forward.
They were offered toparticipate in a wind project
that's mostly contracted withMassachusetts and a little bit
of Rhode Island and theyactually chose not to do that.
And I think the reason wasbecause that 17 cent per
(28:58):
kilowatt hour when the wholesaleprice of electricity in New
England is between five andseven cents, I think.
Ryan (29:04):
I think the governor just thought you know, that's just,
that's not a good look thepolitics of energy never ceases
to amaze me, and one of theinteresting things that's
happened just the last couple ofyears has been the renewable
energy commitments thatespecially technology companies
have made has butted up againsttheir need for electricity right
(29:27):
.
Jim (29:27):
Yeah, so about a third of all the utility scale wind and
solar that built in this countryin the last 10 or 15 years has
been built by the four big techcompanies and you for walmart in
there too, because walmart'sactually the largest buyer of
electricity in the united states.
Yeah, um, and and there, and Iand I, um, we attend the aspen
institute energy environmentalroundtable twice a year, sort of
(29:49):
invitation.
Only about 60 to 80 people andthe head energy buyers of big
tech are always there, they'responsors, so they're always
there, and they are areremarkably sophisticated energy
buyers and they have to besophisticated because they have
24-7 requirements and the windand the solar of course that
they're building isn't 24-7.
So they're out there in themarket backstopping the
(30:10):
intermittency with purchasecontracts on the grid.
So they call that firming andshaping the power of.
You know it's just sort of aeuphemism for backstopping, and
so they're very sophisticatedabout doing that.
But, as you say, now you know ifthe ability to go out into the
wholesale market and buy all theelectricity you want when there
(30:33):
was plenty of surplus capacityand electricity demand wasn't
growing, that situation haschanged and so now they're
expressing this willingness togo with natural gas, while at
the same time having discussionswith carbon capture and
sequestration of that naturalgas.
Or as Facebook did with theirdeal with Louisiana vertically
(30:56):
integrated utility that goes bythe name of Entergy.
They signed a deal about sixmonths ago for 2.2 gigawatts of
gas fire generation to feed a$10 billion data center in
Louisiana.
But their investment Meta'sinvestment will include
batteries and some wind andsolar I think primarily solar as
(31:17):
well.
So they still have these zerocarbon commitments to their
shareholders and their customers.
But they also have a commitmentto their shareholders to be
competitive in this space racefor AI, and speed to market is
critical.
Ryan (31:34):
Yeah, in their eyes.
Jim (31:35):
I mean, I'm not an expert.
Ryan (31:36):
I just saw, I think this morning, that Meta had signed a
deal with Constellation fornuclear up in Illinois.
Jim (31:45):
Yeah, that's right.
So let's talk about nuclear alittle bit.
We have 18%, we can call it 20.
20% of US electricity comesfrom nuclear.
That compares to 10% for theglobe.
And we finished one new nuclearpower plant a year ago.
But other than that webasically haven't built nuclear
for 20 years.
And so you have these plantsthat are getting old and it
(32:07):
costs money to kind of shut themdown and refurbish them.
Now the state of Illinois wasone of a handful of states that
said we don't want to lose thezero carbon.
So they put in they called themzero emissions credits to make
it sound like they're moreagnostic, saying well, we'll
give these credits to anyonewho's zero carbon and
dispatchable.
Well, there's not muchgeothermal there.
(32:29):
So pretty much it was a nuclearsubsidy so that those things
wouldn't shut down.
That was followed by the way atthe federal government under
the IRA, to provide a risingfloor rising with inflation
floor for the price a nuclearpower plant could get for
selling its electricity in thewholesale market, in an attempt
to make sure their costs werecovered.
So the Illinois program expiresin a few years, I think in the
(32:51):
end of 2027.
And so the meta deal is goingto extend the life of that
nuclear power plant.
The federal subsidies willsunset eventually too, but
that's not until 2032 orwhatever.
But what they're making thissound like is that, even though
this plant is currently running,the meta deal keeps it going,
(33:17):
that, all else equal, this plantwould have shut in a couple of
years.
I'm not sure that's true, butyou can see what Big Tech is
doing.
They are reaching for thisalways available zero carbon
source and trying to avoid theproblem that happened with the
first deal like this that wasannounced a little over a year
ago and that's between Amazonand another merchant power
(33:39):
producer called Talon and thatis being held up by the Federal
Energy Regulatory Commissionbecause they're saying wait a
minute, this is an existingresource.
It's 1.6 gigawatts total.
It's in Susquehanna.
It's a Susquehanna nuclearpower plant in Berg,
pennsylvania, and you know, infact the company built a shell
for a total.
It's in Susquehanna.
(33:59):
It's a Susquehanna nuclearpower plant in Bourke,
pennsylvania, and in fact thecompany built a shell for a data
center.
They didn't put chips in it oranything.
And Amazon comes along and sayswe'll buy that and we're a
couple of hundred yards away andwe'll use your power.
And the Federal EnergyRegulatory Commission said we're
going to hit the red stopbutton on this because it
concerns us that you're takingthis highly reliable asset for
yourself, which, all else equal,makes the rest of the grid less
(34:20):
stable.
We want to study this.
So that analysis, thattestimony, those studies are
still kind of filtering in, butyou can understand from a public
policy perspective.
If big tech starts hogging allthe nuclear to themselves, all
else equal, it makes the rest ofthe grid less reliable.
The real solution is to buildmore dispatchable power and if
(34:43):
people want to insist on zerocarbon, they can build the
natural gas with carbon captureor we can get going on nuclear.
Ryan (34:50):
I'm not sure how much you've uh studied the illinois
uh deal with constellation, butisn't that potentially going to
run into the same issue takingthat power off the good?
Jim (35:01):
but you could tell, you could tell in the, in the um, in
the language, in the pressrelease this morning.
Um, because it was first thingthis morning, they came out and
um basically saying hey, thisplant was dead until, not
until're not taking anything offthe grid.
Ryan (35:14):
It was dead anyway.
Jim (35:16):
Yeah, that's exactly right.
So the word additionality isthe word people throw around.
So Microsoft is doing a dealwith another merchant power
producer to restart the unit atThree Mile Island that didn't
melt down, or almost melt down,in 1979.
And it had closed I'm going toget this wrong say three to five
(35:36):
years ago, and they're payingthat company 12 cents a kilowatt
hour remember.
The wholesale price is six,twice the wholesale market to
compensate them for the costs.
And 12 cents is cheaper than abrand new nuclear power plant.
The one that was just finishedlast year in Georgia needs close
to 20 cents a kilowatt hour torecover its costs.
Ryan (35:58):
Okay, so nuclear.
There was also a series of Ithink four executive orders that
the president just issued.
Jim (36:05):
I want to back up a second and say that what seems to be
apparent without muchdisagreement is that nuclear,
being pro-nuclear, is abipartisan issue.
So you saw this under the bidenadministration, where they
passed the advanced act, and theadvanced act addressed a number
of the impediments for nuclear.
Like you know, you gotta, yougotta try these new technologies
(36:26):
, you gotta permit them faster.
You know, uh, if someone'sgonna do the old technology, you
gotta permit it faster, thatkind of thing.
And then, with thisadministration comes in and says
that's, that's, that's stilltoo wishy-washy.
I'm going to go into the NRCand I'm going to start firing
people.
I'm going to start replacingthem with people that are going
to be oriented towards gettingthis stuff built, because their
(36:47):
current criteria is zeroradiation.
Okay, well, you walk out on asunny day, you're getting
bombarded by radiation and theirstandard is actually less
radiation than that.
And so that language isactually in the executive order.
So it's four executive ordersthat are addressing what they
perceive to be the constraints.
So the first is the permittingthing, the second is the
(37:10):
financing right.
So think about that nuclearpower plant in Georgia that got
built.
They're in a verticallyintegrated cost plus utility.
So at a point the publicutility commission cut them off
and Southern Company had to eatthose.
But the rest the public iseating.
So if you want a merchant powerproducer, you know to try to
sell electricity into a six centmarket, obviously the price has
(37:33):
to come in a lot less than 15to 20 cents a kilowatt hour, or
they have to do a bilateral deal, the way Microsoft is doing.
And so the trick is to getthose costs down, and the only
way you do that is with adoption, and you got a chicken and egg
problem because no one wants tobe first with a massive cost
(37:54):
overrun.
So in these executive ordersthe president is actually
ordering the Department ofDefense to come up with a new
technology and the newtechnologies have been used for
decades.
Right, but actually put one inplace at a US lower 48
installation in the next two anda half years.
Like get it the next two and ahalf years.
(38:14):
Like get it built in two and ahalf years, just one, but get it
done, stop talking about it.
Put a man on the moon, returnhim safely to Earth inside the
decade, kind of a thing.
They also then have said wewant to have 10 nuclear power
plants under construction by2030.
Figure out how to do that.
So by putting the power of thepurse of the Defense Department
(38:36):
behind it and then actuallygoing into the Nuclear
Regulatory Commission and sayingthe incentives you're operating
under are gumming up the works.
They really are taking anaggressive step towards this.
And some people said, hey, let'snot forget about the safety.
I think everyone would agreewith that, but I think this is
(38:57):
the natural evolution of thesituation we're in, where a
significant part of the customerstill wants zero carbon, but
everybody wants always availableand nuclear power solves both.
We invented the technology andnow we're falling behind on the
implementation.
So it isn't the physics, it'sthe engineering and the
economics, and so the onlyreason and that's us, that's
(39:21):
just human beings and how weinteract with each other, how we
permit things, how we argueabout things and not get stuff
done.
And so the president'sexecutive orders and under this
administration and the AdvanceActANCE Act under the prior
administration, which hadbipartisan support, are an
attempt to sort of say wait aminute.
We are falling behind in atechnology that we invented.
(39:42):
Economics matters.
The only way we're going tobring the cost down is the
adoption curve, so we've got tostart building these things at
scale.
Ryan (39:50):
It's really ironic to me that you can't get bipartisan
agreement on anything Just about, especially in the energy
sector.
Jim (39:59):
It's so polarized.
It is.
Ryan (40:01):
If you would have told me five years ago that nuclear
power was going to be thebipartisan agreed on energy
source.
I would have thought you werecrazy.
Jim (40:10):
No, that's right.
The other bipartisan thing inenergy is and it's moot now
because everything's going onwith tariffs but but was
actually having a borderadjustment tax on carbon?
Because the environmentalistssay, hey look, the biggest
problem are countries like Indiaand China that keep building
coal plants right and left andthat is, you know, the largest
(40:30):
single source of carbonemissions and we should tax them
for it.
In fact, everyone agrees thatthe best way to deal with an
externality like pollution is totax it out of existence and
then let the free market come upwith the most efficient way of
getting rid of it.
And while everyone agrees onthat, no one seemed ever to be
able to pass a carbon taxlegislation, and in part that
(40:53):
was because we're just going totax ourselves and those guys.
We're just making our energymore expensive.
So that's why people, includingGeorge Shultz and James Baker,
who served under Ronald Reaganthey formed this thing called
the Global Climate Initiative,and I mean 15 years ago they
were saying, no, you need acarbon tax and a border
adjustment tax.
And they're not liberals.
They're just saying, no, youneed a carbon tax and a border
(41:15):
adjustment tax.
And they're not liberals.
They're just saying this is theway to address this problem.
Let the market figure it out,but tax it.
So there's bipartisan supportfor that.
Ryan (41:23):
But obviously given everything that's going on with
tariffs, that's you know.
Jim (41:25):
I don't think that'll bubble to the surface anytime
soon, but the nuclear thing isbipartisan.
And the public?
By the way, the public is now61, 62% in favor of nuclear.
Yeah, and then you go back fiveor 10 years.
It was 61, 62% against Publicopinion has definitely shifted.
Ryan (41:42):
In fact, I remember it wasn't that long ago.
In upstate New York there's anuclear power plant in Oswego,
New York.
Jim (41:49):
Yeah, it's the one that they kept.
Ryan (41:57):
Yeah, they closed the one.
You 35 miles from manhattan andthey kept that one.
Yeah, and, but they were goingto shut that down, yeah, and,
and then well because it wasuneconomic.
Jim (42:01):
Yeah, of course, yeah, yeah , and so now?
So now it's economic and youknow, and as you know, in those
areas there's not a lot ofemployment and so you know,
shutting a plant like that has abig social impact as well.
Ryan (42:11):
Absolutely Okay shifting gears a bit, because we get
questions all the time about theprice of oil, the price of
natural gas and how that impactsthe non-cyclical part of the
industry, and that's really whatyou focus on yeah that's right.
So you know.
The price of oil and naturalgas is down when we're recording
(42:31):
this, maybe 10% or 15% thisyear.
What impact does that have onthe non-cyclical part of the
industry?
Jim (42:38):
Yeah, so non-cyclical per se, it has virtually no impact
In the longer term.
If you run a transportationinfrastructure, you want the
thing that you're shipping to becompetitive, want the thing
that you're shipping to becompetitive, so you don't want
high oil and gas prices, just inthe simple economic theory that
people would use alternativesand that means they'd be using
(43:00):
other infrastructure to deliverother sources of energy that
you're losing market share to.
But there is this sentimentthat when oil and gas prices go
down, that you need lessinfrastructure, that well, no
one's going to drill, so they'renot going to use your pipelines
.
Sentiment that when oil and gasprices go down, that you need
less infrastructure um, thatwell, no one's going to drill,
so they're not going to use yourpipelines.
Well, it's sort of like well,the pipelines have to be used
because people heat their homeswith natural gas and drives
(43:22):
their cars with gasoline, so thedemand in fact, doesn't go down
.
Um, and so you see asympathetic move in the stock
prices of pipeline companies.
Um, but the earnings are for ourcompanies anyway, are as stable
as they can be.
In fact, during the time whenoil prices corrected from bubble
territory in 2014 at $110 abarrel, overcorrected to $30 and
(43:45):
then settled back at their cost, which 10 years ago was, say,
$50 or $60 a barrel.
The earnings in our portfolioactually were flat to slightly
up over that time, where, whenthe S&P energy sector dominated
by names like Exxon and Chevronand the oil service companies
and the independent oil and gasproducers, the earnings for that
(44:06):
part of the S&P 500 was down83% in two years and the
earnings in our portfolio wereessentially flat.
Ryan (44:14):
So here's maybe an oversimplification, but if
earnings don't decline butprices do, that seems like an
opportunity.
Jim (44:23):
Yeah, absolutely.
I mean, the SEC doesn't let usdo it anymore.
They don't like this line.
But we show a line of theearnings of our portfolio over
time and then the price of theportfolio to tell the clients is
like, look, it's not likesomebody knows something.
They actually don't knowanything.
They don't know what we know,which is the earnings on our
portfolio are stable and they'restill growing.
(44:44):
In fact, the earnings on ourportfolio grew right through the
global financial crisis as well, but the stocks?
Obviously there was a liquiditycrisis and I had clients saying
, well, somebody must knowsomething.
And it's like, well, I don'tthink they know more than us.
We've been investing in thesecompanies for so long and, sure
enough, with the benefit ofhindsight, the earnings on our
(45:04):
portfolio went up low singledigits over that time, when the
earnings for the S&P 500 fellalmost 40%.
So people confuse.
People have this belief thatthe market is efficient in
absorbing information andtranslating into stock prices,
and it's just not true.
(45:24):
I mean, that example tells youthat it's not true.
Ryan (45:27):
Yeah, all right, I want to circle back to something that
we said we were talking aboutearly on in the conversation,
and that is the plans to addpower capacity in the US and you
know we made the point thatit's mostly renewables the
(45:56):
Pacific at China, and the amountof electrical capacity that
they have added over the last 15years, it's pretty staggering.
It's a staggering comparison,and you and I were talking
yesterday.
It was something like 430gigawatts of capacity just last
year and we have something like1.3 total in the US.
So do we need to be reallyramping up the capacity in order
to compete?
Jim (46:17):
You know this is I think from an economic growth
standpoint you know, we knowwe're already short right.
The market is alreadyresponding in various ways to
this shortfall.
There is a little bit of aprice signal coming through for
the merchant guys.
There's clearly a reliabilitysignal coming through for the
(46:40):
vertically integrated utilitiesand the carrot of demand from AI
, data centers and the carrot ofI'm going to bring jobs and
economic growth to your statehas the states and their partner
vertically integrated utilities.
Even though they're monopolies,they're competing against each
(47:03):
other because those monopoliesare at the state level.
So Missouri is competing withLouisiana, which is competing
with Texas, which is competingwith Oklahoma, and Arkansas and
Illinois.
So there is competition.
And you do see the capitalspending plans of the vertically
integrated utilities keepramping up.
Every quarter that goes bythere's another announcement
(47:23):
that their capital spending forpower generation is going up.
The question is whether or notfrom a geopolitical strategic,
if we're adding enough.
I don't know the answer to thatquestion, but if that answer is
yes, that is where thegovernment has to step in and
(47:46):
say I know there's no pricesignal for this, because there's
no market for geopoliticalstrategic supremacy, any more
than there was to put NeilArmstrong on the moon.
So the government has to stepin and say this is a strategic
imperative and I think, throughtrial and error, the Advance Act
under Biden, the executiveorders now under this
(48:08):
administration.
If that doesn't do it, expectmore executive orders and expect
legislation.
Remember, the executive canonly do so much.
Only Congress can pass the lawsand only Congress can allocate
the tax dollars.
And so if which it seems to mepeople are coming to the
conclusion that this is astrategic imperative for the
(48:29):
United States, because youcannot afford to not have enough
electricity to be at thecutting edge of AI, and all of
that means for any kind ofmilitary conflict that we have
to do this now.
And if the market doesn'trespond, then there will be even
more incentives.
And Trump's executive ordersare definitely a step in that
(48:52):
direction.
But again, it doesn't come withthe power of the purse.
Only Congress has that.
And again, being that this isbipartisan, you know, I see this
.
For years I have been saying ifyou want nuclear to come back,
you have to have an Apolloprogram approach, because if
it's strategic imperative, pricesignal isn't there for for the,
(49:14):
for independent people to do itright.
So nasa said if you build me arocket that takes neil armstrong
to the moon with you know,computer chips that are light
enough for me to get, becausevacuum tubes are heavy.
If you build it, I will buy itfrom you and that's the
situation here.
In fact, that executive ordersaid you're going to build an
advanced reactor at a defensebase or location and have it
(49:37):
operating in two and a halfyears.
You're going to do what you canto get private industry to have
10 under construction in fiveyears.
You're now starting to takesteps of actual commitments to
actual numbers.
As before, it's like we'regoing to encourage it's all
adjectives, no numbers.
We're starting to actualnumbers.
As before, it's like we'regoing to encourage it's all
adjectives, no numbers.
We're starting to see numbersnow and the real weight would be
(49:59):
if Congress passes legislationthat has numbers in it.
We have a strategic objectiveto have so much reliable power,
zero carbon, if they want it,nuclear, whatever because it's a
strategic imperative.
Ryan (50:14):
So do we then run the risk that there's overcapacity?
No question, and maybe that'sfurther down the road.
Is that a Always is.
Jim (50:23):
But I mean, this investment theme of electricity demand
driven by AI is not the firstinvestment theme to visit the
energy ecosystem in the last 15or 20 years.
Remember peak oil supply, right, and then we had shale, right.
So it's like, well, I guess wedidn't have the, I guess we
haven't reached the peak,because there's all this stuff
in shale, you know, which iswhere actually 95% of the
(50:43):
hydrocarbons still are.
They're still in the rock,where it was formed, where the
hydrocarbons were formed fromrotting plants and animals.
And then then you know, so thenwe have, you know, an oil price
boom because everything'srunning out of oil.
And then the shale comes.
We have an oil price bust andthen people say, well, you know
what?
It wasn't peak oil supply, wehad to worry.
We have peak oil demand nowbecause renewables are just
taking over and we have anenergy transition.
(51:05):
And then we have a clean energyboom and then we have a clean
energy bust.
And it's like you know, it'sone thing after another and in a
cyclical look.
Energy is a cyclical commoditybusiness.
The regulated pipelines andpower utilities are an island in
that sea of chaos, but as, onaverage, it's a cyclical
commodity business, strong pricesignal is going to be needed to
(51:35):
get people to build stuff, andthat price signal is exactly
right, not a little bit, toomuch, not a little.
You know, too little would bethe first time in commodity
price history that that happened.
So they don't build enough, thepricing will be there until
they build too much.
And then of course and thesethings take three or four years
to build, so once you start ityou can't stop it, and then you
go on the, then you go the otherand remember there's this risk
for these data centers wherethey come up with chips that use
(51:57):
a significantly less amount ofelectricity to do the same
number of calculations, and sothat's always a risk.
So that's why, for us, we staywith the cost.
Plus guys, that was a risk inthe whole shale build out.
Plus guys, that was a risk inthe whole shale build out.
There's tons of cyclicalbusinesses, obviously oil and
(52:19):
gas production, but theprocessing of that, before the
stuff can even be put into thepipeline, that processing
activity actually splits therevenue with the producer.
So people were calling thatinfrastructure.
I suppose you look at it, lookslike infrastructure, but the
revenue stream was exactly thesame as the company who was
pulling the oil and gas out ofthe ground.
You were just splitting it withthem.
So that was obviously highlycyclical got overbuilt and when
(52:40):
oil prices fell and natural gasprices fell, their share of that
revenue fell as well and we hada number of bankruptcies and
consolidation and everything.
And that was where people whothought that the word energy
infrastructure was asufficiently safe adjective they
found out that a significantpart of businesses that were
(53:00):
kind of loose in using that wordhad the exact same cyclical
exposure as Exxon.
Ryan (53:06):
Just because it's marketed as infrastructure doesn't mean
that it's not cyclical.
Jim (53:10):
And when you have this with investment, people say I want
real assets or hard assets orinfrastructure in my portfolio,
and it's like those are broadadjectives and I understand what
people are getting at.
They want something that seemslike a natural monopoly,
something that will have sort ofinflation protection and
something that is an essentialservice, like a road or a bridge
or an airport or a pipeline.
(53:30):
That is an essential service,like a road or a bridge or an
airport or a pipeline.
But it doesn't mean that therearen't a lot of pieces of that
business within the technicaladjective of infrastructure that
are highly cyclical and aregoing to hurt your performance.
And that's kind of whathappened during the shale boom.
People thought they were buyinginfrastructure.
Well, it might've beeninfrastructure, but it was
(53:52):
cyclical.
Ryan (53:52):
Well, jim, the time has flown by.
Once again, you're right,believe it or not.
We're coming up against thehard stop time here, yep, but
again, appreciate it.
There's a lot of peoplewondering how to navigate the
energy ecosystem, so thesepodcast chats are enormously
helpful.
Thank you for joining us onceagain.
Jim (54:14):
Yeah, thanks for having us again.
Yeah, we'll do this again soon.
Great, yeah, no thanks.
We'll continue to be sort ofchickens and avoid the risks and
do our best to stay out oftrouble, as we have for the last
22 years and, thanks to First,trust, has been our distribution
partner for nearly two decadesnow.
It's been a great partnership.
Ryan (54:35):
All right.
Well, thanks again, and thanksto all of you for joining us on
this episode of the First TrustRY podcast.
We'll see you next time.
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Isakainen, etfstrategist at First Trust.
Today, I'm joined by JimMurchie, ceo, co-founder and
co-portfolio manager at EnergyIncome Partners.
Jim and I are going to discussthe increased demand for
electricity capacity in light ofartificial intelligence,
(00:30):
reshoring, of manufacturing,cryptocurrencies, electric
vehicles and other areas ofelectrical demand, and what the
impact might be on the energysector, specifically that
non-cyclical part of the sector.
Thanks for joining us on thisepisode, that non-cyclical part
of the sector.
Thanks for joining us on thisepisode.
So, jim, before you got intothe investment side of the
(00:53):
energy sector, you did spendsome time at British.
Jim (00:54):
Petroleum.
Is that right, correct?
Yeah, I had an eight-yearcareer there, seven different
jobs, seven different jobs,seven different jobs.
Yeah, that was actually kind ofmy problem with.
Well, I actually went to gowork for the Standard Oil
Company of Ohio in 1982.
They were majority owned by BP.
Okay, so what happened was BPhad Alaska and Standard Oil had
just refining and marketing.
And so they said here's thedeal We'll give you Alaska, you
(01:17):
give us 55% of your company.
So it was the deal of thecentury for Standard Oil of Ohio
.
It is where John D Rockefellerwas based, in Cleveland.
So when they broke up the trust, they gave him this tiny little
piece in Ohio, I think, just tostick it to him.
And so I had seven differentassignments in refining and
marketing and petrochemicalsstaff and mine jobs.
Ryan (01:39):
So that probably gives you an edge in understanding the
industry now that you're havingfor years have been on the
investment side, yeah, and thethe other folks at EIP are
really sick and tired oflistening to my stories from the
old days.
Jim (01:55):
But that's exactly what Bernstein thought.
Bernstein hired their analystsfrom industry for that reason
yeah and uh, it's you know, andthey figured that they could
teach you how to do thefinancial analysis, but they
couldn't teach you what youwould learn actually working in
the industry.
Ryan (02:12):
So then you went to.
Did you go right from BP to?
Jim (02:15):
Sanford Bernstein.
I went right to SanfordBernstein and from there two
years at Julian Robertson'sTiger Management and then after
that ran a a long short hedgefund in the world of energy and
basic materials and commoditiesand things like equities,
commodities, derivatives.
Ryan (02:31):
Okay, so that you've got a really kind of unique
background with both the energysector and as an analyst and all
these other other roles, what'skind of the like.
As an analyst, what's the keytakeaway?
That applies to what you'redoing now.
Jim (02:50):
You know, the thing is, all three of the portfolio managers
at EIP had their industryexperience, kind of in the oil
and gas part of the business, Ihad so many different jobs and
the I had so many different jobsand the other two had so many
different jobs that we touched alot on the pipelines and the
(03:10):
power sector as well.
What we like to say is you know, we grew up in the cyclical
sort of bad investmentneighborhood of the energy
ecosystem and we're able to getout, and so the transition of
going from industry to managingmoney was the transition of
(03:32):
going to the part of thebusiness that really was not a
good shareholder investment, tothe part that is.
And while I sensed that when Iwas at BP, it was really when I
got to Bernstein analyzing thesecompanies, their lack of
earnings growth, the highvariability of their earnings,
their low returns on capitalthat it was like.
(03:53):
You know, this is not a placethis isn't Microsoft and Google
where you just own the companiesfor the next 20 years because
their earnings growth isn'tthere and it's highly variable,
which makes planning theirbusinesses very difficult.
It makes capital allocation andthe efficient allocation of
that capital, which would resultin a high return on capital
(04:16):
just wasn't there.
It was a complete lack ofcapital spending discipline.
And so one of the pieces I did,the research pieces I did you
could say it was sort of aseminal piece for me that other
people at Bernstein and thenaround the industry copied was I
noticed this correlationbetween capital spending as a
percentage of cash flow andreturns on capital.
(04:38):
In fact it was an 85%correlation.
And people said, oh okay, sothe more you spend, the more you
grow.
No, it was the oppositecorrelation.
And people said, oh okay, sothe more you spend, the more you
grow.
No, it was the opposite.
So Exxon had the highestreturns on capital and
reinvested the smallest portionof their cash flow.
And so when you would talk tothe companies, they didn't
really understand this either.
But it occurred to me that thecompanies are good at ranking
(05:07):
their projects.
You know everyone can run aspreadsheet and the farther down
that list they go, the lowertheir returns.
So you do your best projectsfirst and your worst projects
last.
So the more you spend, thelower your returns.
It's almost tautological, andother analysts in other
industries kind of took thatanalysis and found similar
correlations.
Now, you wouldn't find that intech, for example, but for
mature, cyclical businesses itdefinitely was the case.
(05:29):
And so, when you look at howenergy infrastructure operates,
not only are the earnings stable, but the dividend payout ratios
are higher.
And if you think about it, ifyou've been given a monopoly,
let's say, to run an entireelectric area, right, and demand
is only growing 1% or 2% a year, and you're earning a 10%
return on equity, if youreinvested all of that money,
(05:53):
you would grow your capital base10%.
Well, who would do that?
There's no competitor to stealmarket share from and demand's
only growing 0%, 1% or 2%.
So why would you do that?
And so there is an inherentcapital discipline that comes
from a monopoly business thatcan't steal market share and
knows that if it's simply plowedback in all of its cash flow,
(06:16):
or like the s p 500, which has apayout ratio today, I think, 27
or 28, so you know, reinvesting75 of your of your operating
cash flow means you're growingyour asset base much faster than
you're growing your business.
So it's two very importantelements you get when you get to
the world of non-cyclicalenergy infrastructure that isn't
(06:38):
present in the rest of theindustry.
Ryan (06:41):
So you said something interesting there, growing at 1%
or 2%.
But that actually leads us intoanother thing I wanted to
discuss with you, and that isthe apparent inflection higher
for the growth in electricitydemand.
Yeah, to what?
Jim (06:58):
three, three and a half percent, something like that,
that's the high end of the range, but we're already growing at
one and a half, coming off of 20years of zero growth.
And so, again, being aninvestor wanting to cover our
downside, we have thisdiscussion with investors that
says, look, let's understand howwe went from zero to the one
(07:19):
and a half that we've been atfor the last two or three years
and to understand that you gotto understand why you were zero
for 20 years.
And it was really two reasons.
The first is the offshoring ofmanufacturing, which everybody
knows about.
Manufacturing output in thiscountry didn't fall, it just
went sideways while the economygrew right Because we outsourced
it to China, southeast Asia andother places, and so
(07:41):
electricity demand there didn'tgrow.
In fact it shrank.
For the second reason, which iseverything that uses electricity
today, whether it's light bulbs, air conditioners, electric
pumps, washers, dryers,dishwashers they use 70 to 80%
less electricity than 30 yearsago.
Every refrigerator at HomeDepot, that energy star rating.
(08:03):
I think the improvements todayare minuscule and I'm not even
sure they're worth the dollars.
They save energy, but you maybe spending a hundred extra
dollars to save maybe $50 ofenergy over the life of the
machine.
I mean, I don't know that,those are the numbers, but we're
clearly getting to diminishingmarginal returns.
But, more importantly, we'veturned over in the last 30 years
(08:26):
the highly inefficient stuffthat predates the run-up in
energy prices in the 1970s and80s which triggered all of that,
and so you have now a reversalof those things right.
So now we're electrifying morethings.
It'd be electric vehicles, notso much in this country, but
it's happening.
It's just happening slower thanpeople had forecast and you
(08:46):
have this migration towards heatpumps, not in Wisconsin, but
sort of in the moderatetemperate areas in the
wintertime.
And then, obviously,manufacturing is reshoring.
I mean, construction spendingon factories has tripled in the
last three years, and you folkswork with Richard Bernstein and
he has been telling people aboutthis for a while.
(09:08):
He saw this coming a long timeago and it's a function of a lot
of things coming togethercheaper energy, a strategic need
to reshore, that kind of thing.
So that gets you to one and ahalf percent.
The AI data centers gets youanother one or two percentage
points, depending on whatforecasts you listen to.
Ryan (09:30):
So I would imagine that people watching that are
listening to the podcast now aresaying, okay, that's boring one
exactly two two and a halfthree percent.
Jim (09:40):
I know india grew 65 percent last quarterover-year
sales, and so it's only largewhen you compare it to being
flat for 20 years an industrythat's used to flat for 20 years
and what the actual five-yearplan is for the industry.
So all of the folks in theelectric power industry, mostly
utilities have to file withtheir states every year a
(10:04):
five-year plan.
They call it an integratedresource plan, but they also
have to file it with theDepartment of Energy.
So we in the industry knowexactly what plants have existed
in the country, when theyclosed the existing ones, when
they plan to close and when thenew ones that are planned are
(10:24):
coming on.
And so if you're going to growat one and a half percent, you
need 130 gigawatts of power overthe next five years.
If everything you're building iswhat the industry calls
dispatchable with an eye um, asopposed to dispatchable where
you chop somebody's head off um,so dispatchable is natural gas,
(10:45):
coal and and nuclear right, youcan turn it on, you can turn it
off.
That's opposed to intermittent,which is wind and solar.
Now if everything we'reproviding is coming from wind
and solar, we'd be more like 225gigawatts, not quite double.
So, as it turns out, we are infact adding 150 gigawatts at the
low end of the range.
So, as it turns out, we are infact adding 150 gigawatts at the
(11:06):
low end of the range, butthat's made up of 170 gigawatts
of wind and solar minus 20gigawatts of dispatchable.
Now we're growing natural gas,but we're shrinking coal, and so
we are not adding enough by along shot in the five-year plan.
Now, if electricity wasn'tgrowing, we probably would just
(11:31):
continue doing what we've beendoing for the last 12, 13 years,
which is closing coal-firedgeneration at a rate of about 5,
5.5% a year and replacing itwitha roughly 50-50 mix of
natural gas and wind and solar,and so the plan for the next
five years is perfectlyconsistent with what we've been
(11:51):
doing for the last 10 to 15.
But what's different from thelast 10 to 15 is demand is
growing.
Now.
Ryan (11:59):
So you're not just replacing with 0% growth some of
the coal with maybe wind andsolar that have lower
utilization rates, but maybe itall is okay.
Jim (12:10):
Yeah, that's right, yeah, and so and so now the folks
worried about the reliability ofthe system, and that would be
at the state, regional andfederal level.
They all have varying degreesof responsibility.
I think the primaryresponsibility is with state
regulated utilities, becausethey have what's known as an
(12:30):
obligation to serve, and thatmeans safe and reliable power.
We don't have regionalauthorities everywhere in the
country and the federalgovernment has some powers, but
no one can make anyone build apower plant.
All they can do is encourage itand ask you if there's one
currently in existence that'snot profitable.
(12:51):
They can say you got to runthis thing and we'll compensate
you for your costs.
But the folks who are looking atthis unfolding situation for
the next five years see thatdispatchable power will continue
to decline.
I mean, natural gas is growing,nuclear is not, but coal
continues to decline.
(13:11):
And you say, well, okay, whatdoes the industry think growth
is going to be?
We're currently at one and ahalf.
Well, the industry thinksgrowth is going to be about two
and a half percent a year.
And the way they look at thereliability equation is they
look at the peak demand for theyear in the US, which is July or
August and we're talking likethe peak day or two days or
something like that, and that'sbecause it's hot and people need
(13:32):
to turn their air conditioningto share out.
Now below the Mason-Dixon line.
They have a peak in thewintertime too because they have
so many heat pumps, but upnorth it's mostly natural gas
and in the northeast fuel oil,so electricity isn't peaking
them the way it is south of themason dixon line.
And so they compare that peakdemand to the amount of
(13:53):
electricity available fromdispatchable sources and you say
well, wouldn't they includewind and solar?
It's like, well, wind and solarhave an average utilization
rate of, you know, 22, 23, 24%combined, something like that.
You know wind is higher thansolar, but that's an average.
If for some reason it's hot,you know, and it's at night when
(14:13):
people want to run their airconditioners and it's not windy
and in fact when you look atwind speeds in the United States
they dip in the summertime thenyou can't depend on it, even
though some of it's going to bethere.
And so when you graph out peakdemand with a two and a half
percent growth rate and thecontinued decline of
dispatchable, those lines crossin about three years.
Ryan (14:37):
And that is not a good thing.
If you want to if you have anobligation to provide that power
right.
Jim (14:42):
You have an obligation to provide that power right, have
an obligation for that power,and so that's again.
So that's where the stateregulated utilities um come in,
because, with the obligation toserve, they're the ones who have
been primarily building naturalgas turbines to back up the
wind and solar who are being,who have almost entirely been
built by merchant powerproviders.
Ryan (15:03):
Right, yeah, break down the difference between those two
.
Jim (15:06):
So we started the industry off in a vertically integrated
cost plus system and the choicewas whether or not we let
companies do that or governmentsdo that.
So if you look at water andsewer God I'm going to get this
wrong, wrong.
But like 92% of sewer and 75 to80% of water in the United
(15:30):
States is provided bymunicipalities and regional
districts.
There is some investor ownedwater and sewer, but it is very
small.
In the world of electric powerit is.
Those numbers are the opposite.
85% is provided byinvestor-owned utilities and
those utilities are granted amonopoly in return for an
(15:52):
obligation to serve.
So as one utility executive saidto Walmart once, every time you
put in a wind farm or a solarfarm, it's another natural gas
power plant that I have to putin to back it up.
And he gets cost recovery onthat because he's operating
under a cost plus system,because he's been granted a
(16:12):
monopoly, which means that thereis no competition.
So he has to serve customersdon't have an alternative.
And um, he has to agree thatutility has to agree to limits
on what they're allowed to earn.
He said well, how do you managethat?
You say it's a cost plus system.
They have their operating costs, their interest on their debt
and then an allowed return onequity and that is their allowed
revenue.
Divide that by kilowatt hours.
(16:33):
That's what everybody pays.
So you can see why theutilities under the cost plus
model have been the onesbuilding natural gas to back up
the intermittency of wind andsolar.
And now essentially what'shappening is people are saying,
well, I guess that's okay, butyou got to either build more
because we have demand growth orstop shutting down these coal
(16:55):
plants one or the other, or both.
But we need more dispatchablepower because demand is growing.
Ryan (17:02):
So do you expect that will need to happen in the next few
years?
Maybe delay some of theshutdowns of coal and some
natural gas plants are going toshut down as well, right?
Jim (17:12):
Yeah, so a five-year plant has 35 gigawatts of natural gas
planned, but that's roughly anaddition of 50 and a closure of
15.
So those will probably bedelayed.
The five-year plant has 55gigawatts of coal, so think
about how big that is.
I mean we're building net 150,right, but without those coal
plants we would have beenbuilding 200.
(17:34):
And some of those coal plantplanned retirements have already
started to be postponed andthat's already happened at the
state level where utilities havesaid you know, you got to get
another five years out of thesethings because we see what's
happening.
(17:54):
We don't have enoughdispatchable power.
There are regional authorities,one in the Northeast that goes
by the initials PJM, whichstands for Pennsylvania, jersey,
maryland.
They issued an order to keep aone and a half gigawatt coal
plant, you know, like five milesoutside baltimore, to keep it
running.
And then we've had an executiveorder from the white house, um,
essentially saying look, we'regoing to make sure that these
(18:16):
coal plants don't close if weneed them, and that power
already exists under the federalPower Act of 1920.
So if people want to look it up, it's section 202C.
It's been in the Federal PowerAct for 105 years and what you
find with these executive ordersis there's really no new law
(18:36):
being issued.
It's really a statement ofpolicy and emphasis on the part
of the executive branch usingexisting laws and existing
agency rules.
So there are these backstopsthat are kicking in, and I think
that, regardless of what growthcomes from the AI data centers,
it has shined a light on thissituation where the cushion
(19:00):
between dispatchable availablepower and peak demand is
starting to erode and, if youbelieve the industry's modest
growth of 2.5% a year for thenext five years, that margin
disappears, and so it's like youcan only build this stuff so
(19:20):
fast, so let's make sure wedon't close the stuff we already
have.
Ryan (19:24):
You know, one of the things that I think has
surprised a lot of, maybe,strategists over the last couple
of years has been the fact thatearnings growth estimates have
really increased more thanhistorically, at least over the
last 20 years for utilities.
Why is that?
Jim (19:41):
happening.
So there's a big mix changethat's gone on in utilities.
So again, in the beginning theywere all vertically integrated,
cost plus, and after World WarII there was a lot of growth in
everything, demand foreverything, and that all slowed
down as the economy matured andbecame more service oriented.
As Alan Greenspan famously said, gdp gets lighter every year,
(20:02):
and lighter means less energy aswell.
And then we went through thisderegulation of electric power
generation where the federalgovernment made sure that there
were open, competitive markets.
That was difficult to dobecause the poles and the wires
are all still controlled by thestate regulated utilities.
(20:23):
And history tells us if peoplecan manipulate a market and
favor their own source of supply, if they control the
infrastructure, they're going todo it.
And so those rules took almost20 years to put in place.
So we started with allowingpeople to build their own power
plants, but the price they gotwas some economic calculation of
(20:47):
avoided cost because there wasno wholesale market.
And there was no wholesalemarket because they hadn't
established the rules of howyou're going to use the poles
and wires.
Electricity isn't like coal youcan't like dump it into a truck
or on a rail car and take it towherever you want, it needs a
wire, and so all of all of thattook a long time.
And so when you get to thebeginning of the 1990s, you have
(21:07):
this deregulation of theelectric power generation part
of the business.
Government don't have awholesale market in my state,
but what they can say is myvertically integrated utility in
Florida or my verticallyintegrated utility in Georgia, I
(21:30):
want you to keep that powergeneration in the cost plus
system.
Why?
Because we don't want happeningto the electric power system
what happened to the railroadsin the 1800s, which was just a
wild west boom bust business.
We know that cyclical commoditybusinesses come with.
You know, booms and busts,bankruptcies and all kinds of
(21:51):
things, lack of reliability,lack of safety and we don't want
that happening.
And so today you have half thepower generated by these, these
cost plus utilities, and halfgenerated by the merchants.
Now, a merchant power producerdoesn't have an obligation to
serve, and so, as I said before,most of the wind and solar were
(22:13):
generated by those guys.
So that's how we got to thesituation we have today.
Ryan (22:20):
Is there a difference in projected or realized earnings
growth over the last coupleyears or going forward a couple
years between the merchant powerand the regulated?
Jim (22:30):
Yeah, so the merchant power guys are highly cyclical and
the electric power market hasgotten tighter.
So their earnings are doingreally well now and the stocks
have done really well.
In fact some of these guys areup 200% in the last year and a
half or so.
Meanwhile, what's happened inthe sort of the vertically
integrated utilities is thecharacter of their earnings has
(22:51):
become less cyclical over timebecause they have divested that
merchant power along with theirenergy trading desks think Enron
along with their overseasinvestments think Enron and
they're getting back to theirsort of more simple model.
And so the first phase waswatching all these earnings
(23:11):
become cyclical because ofderegulation, because there were
so many utilities in statesthat said, nope, your electric
power is going to be a freemarket, cyclical business now,
and they added energy trainingand all that.
Then they start getting rid ofthat stuff and the earnings
become less cyclical, butthey're only growing 2% or 3% a
year.
So you have this perception outthere that, oh, utilities are
(23:38):
bond substitutes because theydon't really grow.
That was true on average.
But that 3% was a mix betweencompanies whose earnings were
still falling because of badexecution and ones that were
growing at high single digits.
So when you look at the utilityspace on average.
Now that mix change, combinedwith this need for new
electricity, has brought thatgrowth rate from three or 4% 10
(23:59):
years ago, five years ago, tocloser to seven or eight on
average.
And if seven or eight's theaverage, you know there's folks
that are still four and five butthere's folks that are nine and
10.
Ryan (24:11):
I also wanted to ask you about natural gas specifically
and some of the pipelines, andthere's been some news recently.
You and I were chatting aboutthis yesterday with the state of
New York and the Trumpadministration, I think, had
pushed pause on some of theiroffshore wind operations.
And then Kathy Hochul andDonald Trump got together and
(24:35):
made a deal.
Yeah, and I'm probablyoversimplifying, but it was
basically a trade of okay, youcan put a natural gas pipeline
in in exchange for going forwardwith the wind project.
Jim (24:45):
Yeah, I think that's pretty much the deal.
I mean, you know, at the end ofthe day, that was the federal
government saying look, all ofNew England is suffering for
lack of energy.
So New England is a netimporter of all kinds of energy
because they just don't have anyon their own.
You know the Marcellus Shale isclose in pennsylvania but it's
not in new england.
(25:05):
Um, so they don't have naturalgas production.
Um, you know, and you know,they only have two nuclear power
plants left, and so they are anet importer.
And, um, you know, you can't runthe whole system on renewables.
And the other thing is offshorewind is five times more
(25:28):
expensive than onshore wind justbecause of all the equipment it
takes to put it out there, andso, and the other thing is, the
current president just hatesoffshore wind.
I mean, just he not recently,like people that know him, like
this goes back decades, right,it's like I don't want to look
out on the beach and see thosethings.
Basically is kind of what iswhere he comes from, and I you'd
(25:50):
be hard-pressed to find peoplethat don't agree with them well,
there's a reason for nimbias.
There's a reason for nimbias.
Nobody wants to see yeah so soanyway, so what they, so what
the trump administration did,was they pulled the same trick
that the sierra club pulled onthe pipelines by saying you know
, I'm looking at your permitsand you haven't really filled
them out exactly right, so we'regoing to stop this project.
(26:12):
And um, and they York says,okay, what do you want?
It's like, well, let'sreinvigorate these two pipelines
that you shut down theConstitution pipeline, which
comes from the Marcellus Shaleinto New York and then connects
to some other pipelines thatwould feed the rest of New
England, and then a pipelinethat actually runs from New
Jersey across a little bit ofthe Atlantic Ocean to Long
(26:34):
Island and that's calledNortheast Supply Enhancement.
Now they call it Nessie, and sothat's kind of the deal.
Now the question is whether ornot those pipelines get built.
So Williams Company is thecompany that owns those two
projects and they're lookinginto kind of getting the
permitting going again.
But here's the thing you can'tbuild a pipeline.
(26:56):
Well, you can, but Williamsisn't going to do it and I don't
think any other pipelinecompanies are going to do it.
You don't build a pipeline onspec you do it on the back of a
20-year contract.
So the original Constitutionpipeline had contracts from the
producers Now producersgenerally, not the ones that
backstop natural gas pipelines.
80% of the capacity on naturalgas pipelines is reserved
(27:20):
generally by the users which arethe utilities, either electric
utility or natural gas utility.
So it's not clear whether ornot those producers want to sign
up again when it's indicated aninterest and it's not clear
whether the utilities in NewEngland want to sign up for
Constitution.
There is one utility that wouldsign up for the Northeast
(27:41):
supply enhancement and that oneis deemed the more likely of the
two to go through.
Ryan (27:50):
As you said, there is a need to increase dispatchable
energy, though.
So I would think that would be.
I know the politics to increasedispatchable energy though.
Jim (27:55):
Yes, so I would think that would be-.
I know the politics in NewEngland are rough, though.
I mean the governor ofConnecticut, in his State of the
State, addressed energy,because rising electricity bills
has become pretty much thenumber one political issue in
Connecticut and the rest of NewEngland and he's a Democrat in a
blue state and he used theexpression all of the above and
(28:15):
was just widely criticized fromthe left side of the aisle for
uttering those words, becausethe folks on the left side think
that that's a dog whistle forfossil fuels.
But he is frustrated with thecost of offshore wind at 17
cents a kilowatt hour and theyhave chosen not to participate
(28:37):
in any of the projects goingforward.
Well, they have one that'salready in the bag, but going
forward.
They were offered toparticipate in a wind project
that's mostly contracted withMassachusetts and a little bit
of Rhode Island and theyactually chose not to do that.
And I think the reason wasbecause that 17 cent per
(28:58):
kilowatt hour when the wholesaleprice of electricity in New
England is between five andseven cents, I think.
Ryan (29:04):
I think the governor just thought you know, that's just,
that's not a good look thepolitics of energy never ceases
to amaze me, and one of theinteresting things that's
happened just the last couple ofyears has been the renewable
energy commitments thatespecially technology companies
have made has butted up againsttheir need for electricity right
(29:27):
.
Jim (29:27):
Yeah, so about a third of all the utility scale wind and
solar that built in this countryin the last 10 or 15 years has
been built by the four big techcompanies and you for walmart in
there too, because walmart'sactually the largest buyer of
electricity in the united states.
Yeah, um, and and there, and Iand I, um, we attend the aspen
institute energy environmentalroundtable twice a year, sort of
(29:49):
invitation.
Only about 60 to 80 people andthe head energy buyers of big
tech are always there, they'responsors, so they're always
there, and they are areremarkably sophisticated energy
buyers and they have to besophisticated because they have
24-7 requirements and the windand the solar of course that
they're building isn't 24-7.
So they're out there in themarket backstopping the
(30:10):
intermittency with purchasecontracts on the grid.
So they call that firming andshaping the power of.
You know it's just sort of aeuphemism for backstopping, and
so they're very sophisticatedabout doing that.
But, as you say, now you know ifthe ability to go out into the
wholesale market and buy all theelectricity you want when there
(30:33):
was plenty of surplus capacityand electricity demand wasn't
growing, that situation haschanged and so now they're
expressing this willingness togo with natural gas, while at
the same time having discussionswith carbon capture and
sequestration of that naturalgas.
Or as Facebook did with theirdeal with Louisiana vertically
(30:56):
integrated utility that goes bythe name of Entergy.
They signed a deal about sixmonths ago for 2.2 gigawatts of
gas fire generation to feed a$10 billion data center in
Louisiana.
But their investment Meta'sinvestment will include
batteries and some wind andsolar I think primarily solar as
(31:17):
well.
So they still have these zerocarbon commitments to their
shareholders and their customers.
But they also have a commitmentto their shareholders to be
competitive in this space racefor AI, and speed to market is
critical.
Ryan (31:34):
Yeah, in their eyes.
Jim (31:35):
I mean, I'm not an expert.
Ryan (31:36):
I just saw, I think this morning, that Meta had signed a
deal with Constellation fornuclear up in Illinois.
Jim (31:45):
Yeah, that's right.
So let's talk about nuclear alittle bit.
We have 18%, we can call it 20.
20% of US electricity comesfrom nuclear.
That compares to 10% for theglobe.
And we finished one new nuclearpower plant a year ago.
But other than that webasically haven't built nuclear
for 20 years.
And so you have these plantsthat are getting old and it
(32:07):
costs money to kind of shut themdown and refurbish them.
Now the state of Illinois wasone of a handful of states that
said we don't want to lose thezero carbon.
So they put in they called themzero emissions credits to make
it sound like they're moreagnostic, saying well, we'll
give these credits to anyonewho's zero carbon and
dispatchable.
Well, there's not muchgeothermal there.
(32:29):
So pretty much it was a nuclearsubsidy so that those things
wouldn't shut down.
That was followed by the way atthe federal government under
the IRA, to provide a risingfloor rising with inflation
floor for the price a nuclearpower plant could get for
selling its electricity in thewholesale market, in an attempt
to make sure their costs werecovered.
So the Illinois program expiresin a few years, I think in the
(32:51):
end of 2027.
And so the meta deal is goingto extend the life of that
nuclear power plant.
The federal subsidies willsunset eventually too, but
that's not until 2032 orwhatever.
But what they're making thissound like is that, even though
this plant is currently running,the meta deal keeps it going,
(33:17):
that, all else equal, this plantwould have shut in a couple of
years.
I'm not sure that's true, butyou can see what Big Tech is
doing.
They are reaching for thisalways available zero carbon
source and trying to avoid theproblem that happened with the
first deal like this that wasannounced a little over a year
ago and that's between Amazonand another merchant power
(33:39):
producer called Talon and thatis being held up by the Federal
Energy Regulatory Commissionbecause they're saying wait a
minute, this is an existingresource.
It's 1.6 gigawatts total.
It's in Susquehanna.
It's a Susquehanna nuclearpower plant in Berg,
pennsylvania, and you know, infact the company built a shell
for a total.
It's in Susquehanna.
(33:59):
It's a Susquehanna nuclearpower plant in Bourke,
pennsylvania, and in fact thecompany built a shell for a data
center.
They didn't put chips in it oranything.
And Amazon comes along and sayswe'll buy that and we're a
couple of hundred yards away andwe'll use your power.
And the Federal EnergyRegulatory Commission said we're
going to hit the red stopbutton on this because it
concerns us that you're takingthis highly reliable asset for
yourself, which, all else equal,makes the rest of the grid less
(34:20):
stable.
We want to study this.
So that analysis, thattestimony, those studies are
still kind of filtering in, butyou can understand from a public
policy perspective.
If big tech starts hogging allthe nuclear to themselves, all
else equal, it makes the rest ofthe grid less reliable.
The real solution is to buildmore dispatchable power and if
(34:43):
people want to insist on zerocarbon, they can build the
natural gas with carbon captureor we can get going on nuclear.
Ryan (34:50):
I'm not sure how much you've uh studied the illinois
uh deal with constellation, butisn't that potentially going to
run into the same issue takingthat power off the good?
Jim (35:01):
but you could tell, you could tell in the, in the um, in
the language, in the pressrelease this morning.
Um, because it was first thingthis morning, they came out and
um basically saying hey, thisplant was dead until, not
until're not taking anything offthe grid.
Ryan (35:14):
It was dead anyway.
Jim (35:16):
Yeah, that's exactly right.
So the word additionality isthe word people throw around.
So Microsoft is doing a dealwith another merchant power
producer to restart the unit atThree Mile Island that didn't
melt down, or almost melt down,in 1979.
And it had closed I'm going toget this wrong say three to five
(35:36):
years ago, and they're payingthat company 12 cents a kilowatt
hour remember.
The wholesale price is six,twice the wholesale market to
compensate them for the costs.
And 12 cents is cheaper than abrand new nuclear power plant.
The one that was just finishedlast year in Georgia needs close
to 20 cents a kilowatt hour torecover its costs.
Ryan (35:58):
Okay, so nuclear.
There was also a series of Ithink four executive orders that
the president just issued.
Jim (36:05):
I want to back up a second and say that what seems to be
apparent without muchdisagreement is that nuclear,
being pro-nuclear, is abipartisan issue.
So you saw this under the bidenadministration, where they
passed the advanced act, and theadvanced act addressed a number
of the impediments for nuclear.
Like you know, you gotta, yougotta try these new technologies
(36:26):
, you gotta permit them faster.
You know, uh, if someone'sgonna do the old technology, you
gotta permit it faster, thatkind of thing.
And then, with thisadministration comes in and says
that's, that's, that's stilltoo wishy-washy.
I'm going to go into the NRCand I'm going to start firing
people.
I'm going to start replacingthem with people that are going
to be oriented towards gettingthis stuff built, because their
(36:47):
current criteria is zeroradiation.
Okay, well, you walk out on asunny day, you're getting
bombarded by radiation and theirstandard is actually less
radiation than that.
And so that language isactually in the executive order.
So it's four executive ordersthat are addressing what they
perceive to be the constraints.
So the first is the permittingthing, the second is the
(37:10):
financing right.
So think about that nuclearpower plant in Georgia that got
built.
They're in a verticallyintegrated cost plus utility.
So at a point the publicutility commission cut them off
and Southern Company had to eatthose.
But the rest the public iseating.
So if you want a merchant powerproducer, you know to try to
sell electricity into a six centmarket, obviously the price has
(37:33):
to come in a lot less than 15to 20 cents a kilowatt hour, or
they have to do a bilateral deal, the way Microsoft is doing.
And so the trick is to getthose costs down, and the only
way you do that is with adoption, and you got a chicken and egg
problem because no one wants tobe first with a massive cost
(37:54):
overrun.
So in these executive ordersthe president is actually
ordering the Department ofDefense to come up with a new
technology and the newtechnologies have been used for
decades.
Right, but actually put one inplace at a US lower 48
installation in the next two anda half years.
Like get it the next two and ahalf years.
(38:14):
Like get it built in two and ahalf years, just one, but get it
done, stop talking about it.
Put a man on the moon, returnhim safely to Earth inside the
decade, kind of a thing.
They also then have said wewant to have 10 nuclear power
plants under construction by2030.
Figure out how to do that.
So by putting the power of thepurse of the Defense Department
(38:36):
behind it and then actuallygoing into the Nuclear
Regulatory Commission and sayingthe incentives you're operating
under are gumming up the works.
They really are taking anaggressive step towards this.
And some people said, hey, let'snot forget about the safety.
I think everyone would agreewith that, but I think this is
(38:57):
the natural evolution of thesituation we're in, where a
significant part of the customerstill wants zero carbon, but
everybody wants always availableand nuclear power solves both.
We invented the technology andnow we're falling behind on the
implementation.
So it isn't the physics, it'sthe engineering and the
economics, and so the onlyreason and that's us, that's
(39:21):
just human beings and how weinteract with each other, how we
permit things, how we argueabout things and not get stuff
done.
And so the president'sexecutive orders and under this
administration and the AdvanceActANCE Act under the prior
administration, which hadbipartisan support, are an
attempt to sort of say wait aminute.
We are falling behind in atechnology that we invented.
(39:42):
Economics matters.
The only way we're going tobring the cost down is the
adoption curve, so we've got tostart building these things at
scale.
Ryan (39:50):
It's really ironic to me that you can't get bipartisan
agreement on anything Just about, especially in the energy
sector.
Jim (39:59):
It's so polarized.
It is.
Ryan (40:01):
If you would have told me five years ago that nuclear
power was going to be thebipartisan agreed on energy
source.
I would have thought you werecrazy.
Jim (40:10):
No, that's right.
The other bipartisan thing inenergy is and it's moot now
because everything's going onwith tariffs but but was
actually having a borderadjustment tax on carbon?
Because the environmentalistssay, hey look, the biggest
problem are countries like Indiaand China that keep building
coal plants right and left andthat is, you know, the largest
(40:30):
single source of carbonemissions and we should tax them
for it.
In fact, everyone agrees thatthe best way to deal with an
externality like pollution is totax it out of existence and
then let the free market come upwith the most efficient way of
getting rid of it.
And while everyone agrees onthat, no one seemed ever to be
able to pass a carbon taxlegislation, and in part that
(40:53):
was because we're just going totax ourselves and those guys.
We're just making our energymore expensive.
So that's why people, includingGeorge Shultz and James Baker,
who served under Ronald Reaganthey formed this thing called
the Global Climate Initiative,and I mean 15 years ago they
were saying, no, you need acarbon tax and a border
adjustment tax.
And they're not liberals.
They're just saying, no, youneed a carbon tax and a border
(41:15):
adjustment tax.
And they're not liberals.
They're just saying this is theway to address this problem.
Let the market figure it out,but tax it.
So there's bipartisan supportfor that.
Ryan (41:23):
But obviously given everything that's going on with
tariffs, that's you know.
Jim (41:25):
I don't think that'll bubble to the surface anytime
soon, but the nuclear thing isbipartisan.
And the public?
By the way, the public is now61, 62% in favor of nuclear.
Yeah, and then you go back fiveor 10 years.
It was 61, 62% against Publicopinion has definitely shifted.
Ryan (41:42):
In fact, I remember it wasn't that long ago.
In upstate New York there's anuclear power plant in Oswego,
New York.
Jim (41:49):
Yeah, it's the one that they kept.
Ryan (41:57):
Yeah, they closed the one.
You 35 miles from manhattan andthey kept that one.
Yeah, and, but they were goingto shut that down, yeah, and,
and then well because it wasuneconomic.
Jim (42:01):
Yeah, of course, yeah, yeah , and so now?
So now it's economic and youknow, and as you know, in those
areas there's not a lot ofemployment and so you know,
shutting a plant like that has abig social impact as well.
Ryan (42:11):
Absolutely Okay shifting gears a bit, because we get
questions all the time about theprice of oil, the price of
natural gas and how that impactsthe non-cyclical part of the
industry, and that's really whatyou focus on yeah that's right.
So you know.
The price of oil and naturalgas is down when we're recording
(42:31):
this, maybe 10% or 15% thisyear.
What impact does that have onthe non-cyclical part of the
industry?
Jim (42:38):
Yeah, so non-cyclical per se, it has virtually no impact
In the longer term.
If you run a transportationinfrastructure, you want the
thing that you're shipping to becompetitive, want the thing
that you're shipping to becompetitive, so you don't want
high oil and gas prices, just inthe simple economic theory that
people would use alternativesand that means they'd be using
(43:00):
other infrastructure to deliverother sources of energy that
you're losing market share to.
But there is this sentimentthat when oil and gas prices go
down, that you need lessinfrastructure, that well, no
one's going to drill, so they'renot going to use your pipelines
.
Sentiment that when oil and gasprices go down, that you need
less infrastructure um, thatwell, no one's going to drill,
so they're not going to use yourpipelines.
Well, it's sort of like well,the pipelines have to be used
because people heat their homeswith natural gas and drives
(43:22):
their cars with gasoline, so thedemand in fact, doesn't go down
.
Um, and so you see asympathetic move in the stock
prices of pipeline companies.
Um, but the earnings are for ourcompanies anyway, are as stable
as they can be.
In fact, during the time whenoil prices corrected from bubble
territory in 2014 at $110 abarrel, overcorrected to $30 and
(43:45):
then settled back at their cost, which 10 years ago was, say,
$50 or $60 a barrel.
The earnings in our portfolioactually were flat to slightly
up over that time, where, whenthe S&P energy sector dominated
by names like Exxon and Chevronand the oil service companies
and the independent oil and gasproducers, the earnings for that
(44:06):
part of the S&P 500 was down83% in two years and the
earnings in our portfolio wereessentially flat.
Ryan (44:14):
So here's maybe an oversimplification, but if
earnings don't decline butprices do, that seems like an
opportunity.
Jim (44:23):
Yeah, absolutely.
I mean, the SEC doesn't let usdo it anymore.
They don't like this line.
But we show a line of theearnings of our portfolio over
time and then the price of theportfolio to tell the clients is
like, look, it's not likesomebody knows something.
They actually don't knowanything.
They don't know what we know,which is the earnings on our
portfolio are stable and they'restill growing.
(44:44):
In fact, the earnings on ourportfolio grew right through the
global financial crisis as well, but the stocks?
Obviously there was a liquiditycrisis and I had clients saying
, well, somebody must knowsomething.
And it's like, well, I don'tthink they know more than us.
We've been investing in thesecompanies for so long and, sure
enough, with the benefit ofhindsight, the earnings on our
(45:04):
portfolio went up low singledigits over that time, when the
earnings for the S&P 500 fellalmost 40%.
So people confuse.
People have this belief thatthe market is efficient in
absorbing information andtranslating into stock prices,
and it's just not true.
(45:24):
I mean, that example tells youthat it's not true.
Ryan (45:27):
Yeah, all right, I want to circle back to something that
we said we were talking aboutearly on in the conversation,
and that is the plans to addpower capacity in the US and you
know we made the point thatit's mostly renewables the
(45:56):
Pacific at China, and the amountof electrical capacity that
they have added over the last 15years, it's pretty staggering.
It's a staggering comparison,and you and I were talking
yesterday.
It was something like 430gigawatts of capacity just last
year and we have something like1.3 total in the US.
So do we need to be reallyramping up the capacity in order
to compete?
Jim (46:17):
You know this is I think from an economic growth
standpoint you know, we knowwe're already short right.
The market is alreadyresponding in various ways to
this shortfall.
There is a little bit of aprice signal coming through for
the merchant guys.
There's clearly a reliabilitysignal coming through for the
(46:40):
vertically integrated utilitiesand the carrot of demand from AI
, data centers and the carrot ofI'm going to bring jobs and
economic growth to your statehas the states and their partner
vertically integrated utilities.
Even though they're monopolies,they're competing against each
(47:03):
other because those monopoliesare at the state level.
So Missouri is competing withLouisiana, which is competing
with Texas, which is competingwith Oklahoma, and Arkansas and
Illinois.
So there is competition.
And you do see the capitalspending plans of the vertically
integrated utilities keepramping up.
Every quarter that goes bythere's another announcement
(47:23):
that their capital spending forpower generation is going up.
The question is whether or notfrom a geopolitical strategic,
if we're adding enough.
I don't know the answer to thatquestion, but if that answer is
yes, that is where thegovernment has to step in and
(47:46):
say I know there's no pricesignal for this, because there's
no market for geopoliticalstrategic supremacy, any more
than there was to put NeilArmstrong on the moon.
So the government has to stepin and say this is a strategic
imperative and I think, throughtrial and error, the Advance Act
under Biden, the executiveorders now under this
(48:08):
administration.
If that doesn't do it, expectmore executive orders and expect
legislation.
Remember, the executive canonly do so much.
Only Congress can pass the lawsand only Congress can allocate
the tax dollars.
And so if which it seems to mepeople are coming to the
conclusion that this is astrategic imperative for the
(48:29):
United States, because youcannot afford to not have enough
electricity to be at thecutting edge of AI, and all of
that means for any kind ofmilitary conflict that we have
to do this now.
And if the market doesn'trespond, then there will be even
more incentives.
And Trump's executive ordersare definitely a step in that
(48:52):
direction.
But again, it doesn't come withthe power of the purse.
Only Congress has that.
And again, being that this isbipartisan, you know, I see this
.
For years I have been saying ifyou want nuclear to come back,
you have to have an Apolloprogram approach, because if
it's strategic imperative, pricesignal isn't there for for the,
(49:14):
for independent people to do itright.
So nasa said if you build me arocket that takes neil armstrong
to the moon with you know,computer chips that are light
enough for me to get, becausevacuum tubes are heavy.
If you build it, I will buy itfrom you and that's the
situation here.
In fact, that executive ordersaid you're going to build an
advanced reactor at a defensebase or location and have it
(49:37):
operating in two and a halfyears.
You're going to do what you canto get private industry to have
10 under construction in fiveyears.
You're now starting to takesteps of actual commitments to
actual numbers.
As before, it's like we'regoing to encourage it's all
adjectives, no numbers.
We're starting to actualnumbers.
As before, it's like we'regoing to encourage it's all
adjectives, no numbers.
We're starting to see numbersnow and the real weight would be
(49:59):
if Congress passes legislationthat has numbers in it.
We have a strategic objectiveto have so much reliable power,
zero carbon, if they want it,nuclear, whatever because it's a
strategic imperative.
Ryan (50:14):
So do we then run the risk that there's overcapacity?
No question, and maybe that'sfurther down the road.
Is that a Always is.
Jim (50:23):
But I mean, this investment theme of electricity demand
driven by AI is not the firstinvestment theme to visit the
energy ecosystem in the last 15or 20 years.
Remember peak oil supply, right, and then we had shale, right.
So it's like, well, I guess wedidn't have the, I guess we
haven't reached the peak,because there's all this stuff
in shale, you know, which iswhere actually 95% of the
(50:43):
hydrocarbons still are.
They're still in the rock,where it was formed, where the
hydrocarbons were formed fromrotting plants and animals.
And then then you know, so thenwe have, you know, an oil price
boom because everything'srunning out of oil.
And then the shale comes.
We have an oil price bust andthen people say, well, you know
what?
It wasn't peak oil supply, wehad to worry.
We have peak oil demand nowbecause renewables are just
taking over and we have anenergy transition.
(51:05):
And then we have a clean energyboom and then we have a clean
energy bust.
And it's like you know, it'sone thing after another and in a
cyclical look.
Energy is a cyclical commoditybusiness.
The regulated pipelines andpower utilities are an island in
that sea of chaos, but as, onaverage, it's a cyclical
commodity business, strong pricesignal is going to be needed to
(51:35):
get people to build stuff, andthat price signal is exactly
right, not a little bit, toomuch, not a little.
You know, too little would bethe first time in commodity
price history that that happened.
So they don't build enough, thepricing will be there until
they build too much.
And then of course and thesethings take three or four years
to build, so once you start ityou can't stop it, and then you
go on the, then you go the otherand remember there's this risk
for these data centers wherethey come up with chips that use
(51:57):
a significantly less amount ofelectricity to do the same
number of calculations, and sothat's always a risk.
So that's why, for us, we staywith the cost.
Plus guys, that was a risk inthe whole shale build out.
Plus guys, that was a risk inthe whole shale build out.
There's tons of cyclicalbusinesses, obviously oil and
(52:19):
gas production, but theprocessing of that, before the
stuff can even be put into thepipeline, that processing
activity actually splits therevenue with the producer.
So people were calling thatinfrastructure.
I suppose you look at it, lookslike infrastructure, but the
revenue stream was exactly thesame as the company who was
pulling the oil and gas out ofthe ground.
You were just splitting it withthem.
So that was obviously highlycyclical got overbuilt and when
(52:40):
oil prices fell and natural gasprices fell, their share of that
revenue fell as well and we hada number of bankruptcies and
consolidation and everything.
And that was where people whothought that the word energy
infrastructure was asufficiently safe adjective they
found out that a significantpart of businesses that were
(53:00):
kind of loose in using that wordhad the exact same cyclical
exposure as Exxon.
Ryan (53:06):
Just because it's marketed as infrastructure doesn't mean
that it's not cyclical.
Jim (53:10):
And when you have this with investment, people say I want
real assets or hard assets orinfrastructure in my portfolio,
and it's like those are broadadjectives and I understand what
people are getting at.
They want something that seemslike a natural monopoly,
something that will have sort ofinflation protection and
something that is an essentialservice, like a road or a bridge
or an airport or a pipeline.
(53:30):
That is an essential service,like a road or a bridge or an
airport or a pipeline.
But it doesn't mean that therearen't a lot of pieces of that
business within the technicaladjective of infrastructure that
are highly cyclical and aregoing to hurt your performance.
And that's kind of whathappened during the shale boom.
People thought they were buyinginfrastructure.
Well, it might've beeninfrastructure, but it was
(53:52):
cyclical.
Ryan (53:52):
Well, jim, the time has flown by.
Once again, you're right,believe it or not.
We're coming up against thehard stop time here, yep, but
again, appreciate it.
There's a lot of peoplewondering how to navigate the
energy ecosystem, so thesepodcast chats are enormously
helpful.
Thank you for joining us onceagain.
Jim (54:14):
Yeah, thanks for having us again.
Yeah, we'll do this again soon.
Great, yeah, no thanks.
We'll continue to be sort ofchickens and avoid the risks and
do our best to stay out oftrouble, as we have for the last
22 years and, thanks to First,trust, has been our distribution
partner for nearly two decadesnow.
It's been a great partnership.
Ryan (54:35):
All right.
Well, thanks again, and thanksto all of you for joining us on
this episode of the First TrustRY podcast.
We'll see you next time.
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