Can Anyone Catch China's Clean Tech Lead? Ep258: Bryony Worthington & Michael Liebreich

Michael Liebreich

Coming back to electrification, the question you posed is what are countries doing about dependence on China? And the answer is worrying about it.

Bryony Worthington

But can they move fast and start their own supply chains that can compete with China? Or should we just be accepting global trade is a good idea? And it actually has proven to lift people, you know, lift global economic productivity by taking the prices at the lowest cost where people can actually benefit from that? Should be not, you know… it seems we're moving away from that as neoliberal kind of trade theory is almost dead. But in this case, you're never going to catch up with China in terms of the cost of their cell production.

ML

So you've established the bookends of a conversation. One is protectionism, and we have to have our own supply chain. And the other is neoliberal trade and dependencies are managed by… are not worried about, they're not priced in effectively. And I think the reality is and has to be somewhere in between.

BW

Hello, I'm Bryony Worthington. 

ML

And I'm Michael Leibreich. 

BW

And this is Cleaning Up. So, Michael, I'm just excited to get talking as very, very seldomly do Michael and I actually coincide in the same place on the planet at the same time. So welcome to San Francisco, Michael. As I say, we thought ‘move fast and make’ things is still the topic that we're going to come back to in this conversation. But there have been some events, haven't there, since the start of this year that relate to energy and the things we care about, Venezuela, now the Middle East. And you've been tracking that quite closely, Michael. So tell us a little bit about you know, what are the impacts of these last few months?

ML

So we were supposed to be doing ‘move fast and make things.’ But President Trump decided first that he needed to move fast and break a few things. So we've got this situation in the Gulf. And there are some things that we can say that we know are going to come out of it that are happening now and that are going to result. But t it is very important to say that, you know, here we are on, what is it, the 19th of April.

BW

20th. 

ML

20th of April. That's what jet lag does for you. And there's a lot that we don't know. And in fact, you know, if you think about the energy industry is always doing scenarios, and the range of scenarios that you would really need to encompass if you wanted to play out what might happen. And it goes everything from waking up tomorrow morning, and there's been true regime change in Iran and the Revolutionary Guard is no longer around, they're fleeing to wherever they're going to flee to, and it's all over. And the oil price is headed back to $60 or below or whatever. But there are other scenarios where, I think we can paint our own versions of everything from tactical nukes to attacks on American ships. And, you know, there's just such a large range of possible outcomes. 

And I think the one that probably looks most likely is some kind of festering, frozen or near frozen conflict, because I can't see either side backing down. And I can't see either of those fast resolutions happening. So what we're going to see in that situation would be oil prices remaining high, supply constraints, very substantial supply constraints on and it's not just oil and LNG, but it's also things like sulphur, which is used to make fertilisers. You need the sulphuric acid for phosphate fertilisers. It is urea, it is ammonia, and it's helium. And all sorts of, of course, also all of the food and everything that's supposed to be heading into the GCC region. So enormous disruption. And, you know, tragically, if you take out even if it's only 10% of global oil demand, what happens is the prices of everything have to go up until 10% of demand for oil is choked off.

And so that could well be the world that we're in and it's going to hit aviation fuel probably first and so on. Just one of the things that I did some analysis on that I think is worth sharing or speaking about is that just zooming in on oil and gas on the energy bits and setting aside the fact that there's all these other commodities being affected as well. There's a big difference between what might happen in the oil markets and the gas markets if this is a festering or frozen conflict or one where there's, you know, continuing uncertainty. And that is because whilst 20% of oil goes through the Strait of Hormuz, there's only 20% of LNG, but LNG is only something like 12 or 13% of gas. So the gas that is taken out of the markets, which is largely Qatari gas and some of the UAE gas, that actually only amounts to 3% of global gas, much less than the 20% of oil. And so I don't want to say this is a forecast, but it is at least some kind of a scenario.

And in a way, it's my central scenario, which is that oil prices remain high. And by the way, yes, we should do, you know, EVs and all those sorts of good things that people will do. But it's very difficult to replace 20% of global oil of 20 million barrels per day just by doing EVs will take you a very long time, many years, longer than a decade.

But 3% of natural gas demand is actually going to be much quicker to replace than that oil. And the reason for that is there are much easier alternatives, namely wind and solar and batteries, if you're talking about the peaking demand. And wind and solar have so much excess capacity, they already account for all of the electricity growth. I think Ember figures for 24 to 25 shows that wind and solar essentially absorbed all of the electricity growth, gas accounted for almost none of it barely grew at all last year. And so, you know, you could do a thought experiment that says, well, if you doubled the rate of installation of wind and solar, which you could do, the industry has the capacity, and you did that for nine months, it would actually replace the same amount enough gas demand that would replace that Qatari and UAE LNG going through the Strait of Hormuz. Now, I'm not saying in nine months, this will all be over on the gas markets.

And so I'm just saying that order of magnitude, oil, it's years and a decade to really make a difference. Gas, much, much more, much faster. And the context is that we were probably going to go into an LNG glut. Before all of this was happening, there was so much new gas liquefaction capacity being built that we were headed for a glut. So, you know, give it a year or two, I think we are going to be in glut for LNG. But the other thing I want to just highlight is that's the kind of physical supply demand balances.

But there's also: what is the policy response in the countries that are importing this oil and gas. And I think there we're going to see an acceleration of efforts to get off fossil fuel. I cannot imagine that an India, a Pakistan, a Bangladesh, a South Korea, a Japan are going to continue to say, ‘well, you know, thank goodness, everything looks like it's going to be resolved.’ And we can just go back to being as dependent on oil and gas as we were. They're going to accelerate. They have, there are alternatives.

They might be slow in the case of EVs, faster in the case of renewable energy or renewable power. But I think they're going to redouble. And what's happening to Asia is going to be very similar to what happened to Europe when Russian gas was suddenly, you know, yoinked from the market. And there was an acceleration in the transition. And Asia is now going to do the same. I didn't mention China in that list because you've just been there. And you know better than me what they might be talking about as their response to this situation.

BW

Yes, that's right. I flew back from China on Friday. I was there for, actually there for a holiday, because in February, visas were removed for UK travellers. So China's opening up to British tourism. So the whole family went over to experience some of the wildest landscapes I've ever seen, the Avatar Mountains and all sorts of things. And what was extraordinary was how easy it was to travel through China. If you've got the right apps, you just need four or five apps, and you can go anywhere and pay for anything. It's incredible. So China's moving, opening up. 

And while there, I was also there for work for an energy conference. But it was surprising to me how little talk there was about the energy crisis. Clearly, the sort of official Chinese line is, they are going to stay neutral. In Chinese terms means obviously that, you know, they've been supportive of Iran. They've been dependent on Iran for a lot of their oil and gas, but often Middle East. But what they've done over successive five year plans is insulate themselves against exactly this kind of shock. 

The penetration of electric vehicles is extraordinary. Even in the most remote little villages that we visited, everyone's on an electric scooter. The boats are electrified, the cars are electrified, the taxis are, everything's electrified. And they have, they've reached more than 50% now penetration of sales of EVs in China. And it's not just cars, it's every vehicle class. So because they don't have an indigenous source of oil, they've basically said, our future is electrification. And they've rolled that out in the way that China does, you know, they do know how to move fast and make a lot of things over supply is actually the biggest problem at the moment.

So you've got this kind of domestic resilience, which is based on domestic coal, and then electrification. And a lot of people say, well, doesn't that, you know, negate, you know, the fact that you're basically making this from coal, but they've actually successfully also pulled down their coal burn, because they've been investing hugely in renewables. That's that figure from Ember about solar growth.

I mean, it's predominantly China that's put in this vast amount, gigawatts of solar, and India now following suit. So India and China have pushed up the solar and pulled down their coal burn for the first time, really, ever since COVID, really. I mean, COVID was the anomaly, but this is the first time China and India have actually seen a coal burn reduction last year. So it is coal dominant, but that coal is increasingly efficient, they're shutting the old stations, building new, more efficient ones, and trying to get their coal to be more flexible. So they're investing in storage capacity at the sites of these coal stations, to enable them to flex, to enable them to absorb more renewables. And as a result, that plus their build out of nuclear means that their carbon intensity of their power sector is now below that kind of 500 grammes per kilowatt threshold, where it makes sense to electrify.

If your grid is clean enough, electrification makes complete sense. So it's an environmental win, it's an energy security win, and now it's an export win. They're the largest manufacturers of batteries on the planet, CATL, the biggest battery manufacturer, showing record exports, particularly this quarter. And a quarter of their exports now are going into batteries for grid storage. So there's just this transformation happening that China has basically been responsible for. The challenge now, though, I think, is how does the rest of the world square this idea that we're going to continue to move into electrification, but it's going to be on the shoulder of Chinese manufacturing? And how do we feel about that? 

And I know, Michael, you've been also travelling, you've been in Brussels, been to Canada recently. There is a mood towards electrification, right? But how is that playing out? Are people going to be doing it themselves, trying to build their own supply chains? Tell us a bit about that. 

ML

Yeah, so I think since you and I last had a chat for Cleaning Up. I've been to Canada and had quite a few meetings, a series of meetings there. I've also been to Berlin, big infrastructure conference. I've been to Brussels, I've been to Paris. And obviously I hang out in London. So there's a sort of sample of cities and leadership, civic society and political leaders and so on. And I'll tell you, electrification is in the air. It is absolutely in the air.

I've also been talking to, as you know, I'm off to Singapore, and then to Australia with Cleaning Up. And so I've been prepping that and talking to people in both places. And particularly the Australians are pushing very hard to get electrification into the COP process for Antalya, because they're joint president in the preparation with Turkey.

And of course, you've got Saul Griffith, who has been on the show, who's the Electrify Everything guru, who's very active, still pushing that agenda. But actually, it is now a very, very broad based agenda. So in Europe, we are supposedly a few weeks away, no more than weeks away from an electrification strategy. In the UK, the most active discussion is around the price of electricity, which is even more than most, I think it's still the most expensive in the OECD, probably the OECD and the G20.

BW

Might not be as expensive as California, but we can check that.

ML

I think that's the sort of competition that I'm not sure you want to win or lose, you don't want to be in that competition at all. But the conversation is how do you get that electricity price down, because the subtext is the only game in town is electrification. I mean, I sort of, you know, I say that ever so slightly tongue in cheek, because sadly, tragically, there is still an enormous amount of time being wasted on hydrogen pipeline discussions, you know, joining Holland with Belgium, or, you know, Italy just wants to spend six or 8 billion on hydrogen pipelines. And, you know, but those, it is what's really interesting is the people that I meet, which may be a self selected group, know that that is dead policy walking, that is simply not going to happen. And so it is about electrification.

BW

Can I just, for the audience sake, I mean, you've got this great phrase of the hydrogen souffle, because essentially, you know, there's been this assumption, and it's been, you know, promulgated by the gas industry largely that hydrogen is just a drop in solution, you know, we can just take, you know, clean up gas with hydrogen. And you've been at the forefront of pointing out that that's deeply inefficient and very expensive, not just that it's inefficient.

ML

It's really about the economics, you know, engineers would love and it's, you know, it's fabulous. I've also had my love affair with hydrogen. It lasted about three, four weeks. But, you know, engineers love it, you know, they like working on fun and interesting things, you know, hydrogen bicycles and goodness, but they are really, generally, very, very poor solutions. 

And hydrogen is expensive, green hydrogen expensive to produce to transport to store to distribute to use. And, you know, even now in this crisis situation, where you've got high oil prices and high gas prices, there are people running around saying, you see, if we had hydrogen, then you would you would have you would you'd be resilient. And it's like, yes, but the cost of that hydrogen, because you have to build all the infrastructure, all of the production, storing, moving, etc, etc. It would be like spending, you know, a million pounds or dollars a year to ensure a house that's worth a million pounds or dollars. So you've got the cost every single year, even the non-crisis years, because at some point, there might be a month or two months, or six months or even a year of very high costs for an alternative.

So hydrogen has zero role to play in resilience, I shouldn't overtrade. I mean, there may be some countries that want to do some green ammonia, because they've got very high gas costs, very low electricity costs, lots of farmers. And so you might want to have a few percent of green ammonia just to kind of partly just to be smart about it and have some kind of supply chain just in case, but it's not a resilient solution.

And you know, we're getting a lot, I didn't mention in my remarks on the crisis, but we are seeing a lot of kind of fake solutions where people say, ‘oh, you know, we must frack in the North Sea, or we must frack in the UK, and we must explore in the North Sea because of this, these crisis prices.’ And, you know, I'm actually all for it, you know, go for it, knock yourself out, do all of that. But the amount that you will get, you will extract, the timeframe on which you'll extract it, the impact it will have not on local domestic prices, because particularly in the case of the UK with the North Sea, we're connected to European prices.

And so the amounts that you could extract from this aging resource, or this unproven fracking resource, the amounts are just not enough to move the European gas price by more than a few percent for a few years. So it's a non-solution and it dominates discussions. It's very frustrating, to be quite honest. But coming back to electrification, the question you posed is what are countries doing about dependence on China? And the answer is worrying about it.

BW

But can they move fast and start their own supply chains that can compete with China? Or should we just be accepting global trade is a good idea, and it actually has proven to lift people, you know, lift global economic productivity by taking the prices at the lowest cost where people can actually benefit from that. Should we not, you know, it seems we're moving away from that as neoliberal kind of trade theory is almost dead. But in this case, you're never going to catch up with China in terms of the cost of their cell production.

ML

So you've established the bookends of a conversation. One is protectionism, and we have to have our own supply chain. And the other is neoliberal trade and dependencies are managed by… are not worried about, they're not priced in effectively. And I think the reality is and has to be somewhere in between.

And I think the reality is and has to be somewhere in between. There is no question, one of the consequences of the US becoming a, I don't even want to say a less reliable, but frankly, an unreliable ally. I mean, an ally that wants to take over Greenland, which is the sovereign territory of a NATO member. That's not just a less reliable ally, that's an unreliable ally. And, you know, you can wind all of that back. And over time, maybe one can paper over or heal some of those conflicts and so on.

But the fact is that the US, that we're not going to go back, you're not going to be able to get those feathers back in the cushion, or back in the pillow, as they say, you know, that's now, the damage is done to the US's reliable partner image. And inevitably, I think that means a lot of countries are going to end up closer to China. So all of the work that was done over the last decade of saying, you know, Huawei is doing this, and we mustn't be dependent on those communication technologies.

The concerns about whether those electric vehicles that are now, you know, being imported, particularly, by the way, into the UK, but also into Australia and other countries, Canada, under the deal with Mark Carney, you know, will the data from their cameras be being streamed back to China, we've got to deal with those issues, but the willingness to deal, you know, we will not be taking absolutist positions on that. And the Spanish PM has just been over.

BW

They've all been over.

ML

And talking to Xi and becoming closer to China. So inevitably, we will become closer to China. But what's interesting is we also see progress on some of the diversification. So in the US, US domestic battery manufacturing by 2027 will have gone from zero to enough to meet all of the US domestic demand for stationary batteries, not for that, because the car companies were going to build car EVs, but they then repurpose those factories. We see in the US, again, investments in critical minerals, but we see that in other countries, too.

BW

So, and then, but often with the help of China, right? Well, this is the unspoken kind of unfortunately, for whatever reason, the last two to three decades, we've sort of allowed China to simply dominate manufacturing across a whole host of categories. And so now in order to build back that you just even if you can get the lithium out of Nevada, or wherever lithium valley here in California, it will cost a lot more. And then you've got to process it into use into the cells. There is no middle that that midstream is missing the manufacturing gate, the tooling to even do that is missing. So you need to do JVs with China, or you need to do tech transfer from China to the US.

ML

I caused a very sharp intake of breath at a conference, which was full of Germans, who were worrying about this question. And I said, look, the UK car industry was on its knees, not even on its knees, it was finished. And what actually provided the lifeline was the big Nissan plant in Sunderland. And that was how the UK then became quite a considerable car exporter to Europe and around the world. And it saved the UK car industry. There's no known two ways about it.

And I said, well, so maybe if you want to do the same with the German car industry, then maybe it's a BYD factory in Wolfsburg, which is where the VWs are made. And there was a sharp intake of breath. But you know, it's not as simple as that. Volkswagen has a made in China for China strategy, and is actually, of all of the car companies, because the more luxury high end car companies said ‘no, no, no they'll just buy made in Germany, because it means so much.’ And of course, in the last two years, in China, they said, ‘sorry, not interested, our cars are better. The batteries, the styling, the energy efficiency, the software, even in the seven seaters.’

BW

Now, I've discovered they have massage chairs inside them. I mean, the degree to which they treat cars now as entertainment vehicles, they're basically laptops on wheels, and they're doing all sorts of speaking.

ML

I don't want my car… if I want a massage then I’ll go for a massage. But the point is that it's not as simple as declaring that we've got no chance, and we just have to accept the terms of trade from China. Yeah, it's going to be as I said, those are the bookends. Either the go it alone, which will be very expensive, or just capitulate and say, ‘we'll just import everything.’

And the answer is, we're going to go down some kind of a track. And we are going to need a lot of Chinese technology, because they're the ones who've spent the last 15 years developing it, patenting huge amounts, and also not just patents, but being able to produce the actual manufacturing know-how, which is as important as those patents. And, but then you also talked about, or your question originally harked back to what is India going to do?

And it's not just India, you could say, Well, what about Malaysia? What about Indonesia? What about the Philippines, there's lots of Thailand, Vietnam in Asia. And there, there are also bookends, which is, well, if you don't want Chinese batteries and Chinese EVs, then the Chinese companies can make factories in Bangladesh or in Malaysia, and then we'll buy that instead. But then, so that's one, that's one bookend. But there's another that says, well, actually, either we see through that, or those countries don't want to essentially just become assembly shops for Chinese technology. So it's a very, very dynamic tapestry that we're facing. Every country is facing the same questions.

BW

They are. But I mean, fundamentally, though, what's different about the electrotech export from China, is that you buy it once, and then you install it, and then it generates power. And so you buy your solar, you buy your batteries, and you buy your EV. And that's a capital investment, which then frees you up from the continual reliance on buying fossil fuels every day, right? 

So you know, a tanker arrives, and it's burned, it literally dissipates that energy, and you buy a container ship full of tech from China, it sticks around for 10 to 15 years, reduces your balance of trade in the meantime, gives you a boost, it reaches parts of the economy that fossil hasn't reached, you know, we're seeing, and I know you've looked at this, but in India, you've got both massive grid scale investments going in and big HVDC cabling, connecting it all. But then you've got the rural electrification agenda, which is fossil, fossil didn't quite reach in India, but solar plus batteries can. So it's kind of, you know, it's happening on all levels. And it's and it's got a different characteristic to the fossil based system, right?

ML

Absolutely. And I came at this recently from a slightly different angle, when I was in Egypt. And I was there, as the guest of one of our Leadership Circle members, Alcazar Energy, talking to their investors.

And the question was, why should one do wind power development in Egypt, you're in a region that is surrounded by all this fossil fuel, why not just do oil and gas, Egypt's economy is growing at about, it's getting 50% bigger every decade, so 4% growth per year, why do anything but oil and gas? And I just did a calculation that said, well, if you have a million dollars, and you are sort of Egypt PLC, what should you spend it on? 

And it's absolutely clear that you should spend it on the assets, not the fuel, don't spend it on oil and gas, you get far more bang for your buck for the economy if you spend it on wind, solar, and nuclear — because they're building a Russian nuclear power station — and of course, batteries. And the only thing that you can't do more cheaply, in a sense, by buying the asset, and more resiliently, because once it's there, it continues to produce. The only thing is long duration storage, long duration resilience. That's still the challenge. That one is still cheaper to do via LNG or oil. But other than that…

BW

Or by coal, right? That's the weird thing. In places like Asia, where coal is dominant, we're sort of seeing this world where it's clean plus coal, whereas in Europe, you get clean plus gas.

ML

Correct. That is, I think, I'm going to call that trend. Absolutely. Any country in Asia that said, well, we're going to go for lots and lots of renewables, nuclear, if we can get it done, and then we're going to just go to the LNG markets for backup… The situation in the Gulf today means that is a risky strategy. You cannot put your eggs all in that basket. 

And if you've got coal, then why wouldn't you let it fulfil the same role? The problem is, of course, that coal generators are much less flexible, you know, 25% minimum load factor and slower to ramp and so on. So I envisage that there'll be a lot of innovation around the use of coal for flexibility, because then you can go fully clean. 

So my pragmatic climate reset, when I wrote it, was all about, well, why wouldn't you do 96% renewables, nuclear, if you've got it, and then keep the lights on with that bit of LNG or bit of gas. I think in Asia, we're going to see a similar trend, but with coal as that insurance policy.

BW

I think you're right. And one of the things that it was exciting to see in China is the degree to which they're now investing in those thermal assets to make them flexible, pulls down the coal burn. 

ML

You're seeing that?

BW

Yes, we're already seeing it. And I mean, there's a very good example of a huge, like a gigawatt scale, molten salt storage capacity that's gone into an existing coal station, precisely because it's in that solar and wind belt. And it's being squeezed off by the solar and wind when it's available. So what are they doing? They're just taking that and storing into the molten salts and using that to then power their turbines. So it's that level of innovation.

And it's quite humbling when you know, you can almost go to China and think you think you've got a good idea that they haven't thought of. And you get there and they're like, oh, yeah, we built that last year. It was already operational. But yeah, that is going to be the future.

ML

Cleaning Up is proud to be supported by its Leadership Circle. The members are Actis, Alcazar Energy, Arup, Copenhagen Infrastructure Partners, Cygnum Capital, Davidson Kempner, Ecopragma Capital, EDP, Eurelectric, the Gilardini Foundation, KKR, Mitsubishi Heavy Industries, National Grid, Octopus Energy, Quadrature Climate Foundation, Schneider Electric, SDCL and Wärtsilä.

 For more information on the Leadership Circle, please visit cleaningup.live. To keep up with all that's going on in the Cleaning Up universe, make sure you subscribe to our newsletter. Written and edited by my longtime New Energy Finance and Bloomberg NEF colleague Angus McCrone, it comes out every second Monday. Angus provides the latest on the episodes we're recording, the events we're hosting, stories we're watching and what Bryony Worthington and I are up to. To sign up for the Cleaning Up newsletter, visit cleaningup.live. 

ML

I want to throw a statistic in there because I'm not sure that the whole of the audience would know this. We're recording this in front of a live audience here in San Francisco, including many friends, many people that I've known for nearly 20 years. When I started doing New Energy Finance, China's electricity was 80% coal. It is now just over 50%. It is just over 50%. 

Of all the tropes that I want to see die, this idea of China's doing nothing, China, it's all made with coal. As you said, once you get to 500 grams per kilowatt hour, then all sorts of things like heat pumps, absolutely clearly electric vehicles, you'd be lower emissions plugging in an EV to the Chinese grid than driving a petrol or diesel vehicle. I think the margin is growing. It's only growing as the resources become cleaner. We're just in this different world. The political discourse and the commentariat in the UK and in the US, I suspect, has simply not kept up with that.

BW

No, you're right. Well, I mean, because we're in the country of ‘drill, baby drill’, aren't we? Just to bring this back to California, we've got this really interesting, a bit like the North Sea debate, you've got Trump administration telling California, you've got to get back to oil and gas drilling, offshore oil and gas is back, baby, you've got to do this, and trying to force the state into this. Actually, when you look at the timescales, it would be about 10 to 15 years before you got the first drop of oil or the first thermo gas coming out of those offshore oil and gas facilities. 

You just think, why are you trying to take us backwards? California's demonstrated probably better than any country that you've got an amazing renewable resource. If you are able to just use trade, bring in these cheap elements that then make your grid clean and resilient, and then the batteries have come into California to address the duck curve, the famous duck curve where we had all this oversupply of solar and nothing in the evenings. We're moving now, big percentages of that solar, around to catch the demand. That's happened relatively fast. It's just going to be far quicker to keep going down that path than to go back to this mad world of drill, baby, drill.

ML

I came here in 2006 or 2007, so 20 years ago, and I said that where you're headed is that electricity will become essentially free at midday, because your solar resources are so good, and that's what's going to happen. It was at a lunch at the time, it was New Energy Finance, not even Bloomberg New Energy Finance, before I'd sold the business to Bloomberg. People, they looked very embarrassed for me, and they said, Michael, you've got to understand, please, we have this thing here called air conditioning, and the highest cost of electricity is during the day. I said, ‘yes, okay, fine, but that's not what the future looks like.’ Here we are 20 years, that  was before the duck curve was invented. 

I want to pick you up on a word that you use, which is you've got all these cheap resources, you use the word ‘cheap’. I don't want to say ‘honest’, because it makes it sound like I'm saying you're not being honest, but in Europe, in the UK, in California, there has to be a robust, believable, clear plan. By the way, South Australia as well, I'm off to Australia, I know I'm going to have the same conversations. 

How do you get the electricity price down? I have ideas about it to do with volume and flexibility and possibly some of the financing mechanisms, but is that conversation happening in California? Because telling people we must do this cheap thing, when they look at their bill and go, what cheap thing? It feels like a problem.

BW

Yeah, no, it is a problem. But obviously, the costs that are being borne by Californians now are not just to do, well, they're actually mostly to do with risk, fire risk, and the fact that you've got this very exposed grid that is now being undergrounded at quite extraordinary eye watering costs.

So it's a function of California's own geography and exposure to risk that's driving the prices up. And of course, we've also, we import a lot of energy into California, this beautiful mountain range that we all love to hike, actually cuts us off from a lot of America. So a lot of California's resources are basically being imported.

So it is hard, the domestic kind of bills that you can, if you can get onto an agile tariff, and we should, here's where we can give a little plug to Octopus Energy, that, you know, there is an era in which we're going to see a far more interaction between the consumer and the utility. I think, strangely, California has been a bit behind the curve, specifically in comparison to the UK, on understanding that agility of demand and the responsiveness of demand can be facilitated with apps, right, in your pocket, in your phone, you can respond. And I think Octopus is now, you know, teaching Californians on how to do this digital transformation.

ML

We need to point out that Octopus, obviously a member of our Leadership Circle.

BW

And sponsor of this lovely event.

ML

Exactly, also supporting this event. And yes, I think there's a lot to be done. As I say, if we add a lot of, you know, so my formula for keeping the electricity or getting the electricity prices down is, if the costs relate to the grid, any grid, then you need to, you need to grow demand. Use the grid more, basically. Use the grid more. When we used more, when we made more phone calls, we got cheaper phone calls, because you use the grid, you use it, you get more utilisation out of it.

And also, if we can use that, those apps and that flexibility, then we should not push up the peak demand, grid costs scale with the peak demand. And if you can not push up the peak, then you can also spread that cost over, you can, you can not increase the cost so much. So I think there are ways to do it. 

Now, we have got to this point in our conversation about half an hour in, and haven't used the words ‘AI’ or ‘data centre.’ And it strikes me that one of the things that's going on here is that California is racing ahead, creating these AI technologies, and importing, though, the compute from places like Texas and Virginia, where it can actually be built. I mean, there's, is it different from importing, you know, being unable to make, I don't know, steel or electric vehicles and just being just importing them instead? Is that California's grand plan? Let the other people do the difficult bit, which is the data centres, and we'll just get the value add and, and all of the clever bit, which is the AI?

BW

Yeah, well, yes, here we are in the epicentre of the AI revolution that we're going through. And yes, the physical constraint on AI is going to be energy, right? Because in California, we've got these amazing companies headquartered here who are piling into agentic AI and all this sort of, you know, near very close to market or even here today market uses of AI. And that is moving so fast. And the projections are that this is going to demand a huge amount of compute. And yet, yes, California is not famous for being able to build out its new generating capacity.

So yes, it is going to be built in Texas, and it is going to be built in Virginia. And yeah, that kind of the value created by the companies will be located here, but the actual physical assets are all going to be elsewhere. And what's been really interesting is watching the sort of hyperscalers that, you know, the companies that grew up in California, really suddenly get interested in energy, and looking for what are the fastest things we can add, what the cheapest things we can add, but also, interestingly, continuing to try to do it cleanly, because, you know, there is a world in which you just fire up a few open cycle gas turbines, or even diesel turbines and whack in a good big data centre, and off you go.

But you know, the more sustainable of the hyperscalers, and I think Google, I don't know if Mark's here, but companies like Google are trying to source what they call clean, firm power, alongside this massive uptick in demand. And that's leading to some quite interesting things. You were the first person to mention nuclear, so now I'm allowed to mention it. As everyone knows, I'm a big nuclear fan. And here in California, you've got a startup nuclear, which sounds like a kind of oxymoron, but Kairos Power, it's broken ground on its first test reactor in Tennessee. Google pulled forward that investment by saying, you can produce power, the following characteristics, we'll buy it. So they've signed a forward plan for I think it's up to half a gigawatt of new clean nuclear the into the US system, which would be the first time they've really gone for nuclear for decades. And I think this growth in demand is sort of rising, it's raising a lot of boats.

ML

It is, but I'm going to call you out on your use of tenses. There are half a gigawatt and they're different.

BW

Will be, will be, yeah.

ML

What I see is real bottlenecks on building these data centres. And there was actually a series of, I don't know what they call X's or tweets by Jigar Shah, who's been on the show a couple of times, obviously, formerly the head of the Loan Program Office under President Biden. And just yesterday, he tweeted a whole series of things saying, look, we got to get effectively, I'm going to paraphrase for him, we’ve got to get serious. Texas has got a 400 gigawatt connection, pipeline, connection queue. Line. I don't know if it's called a queue. I'm not sure if people understand it.

BW

We're British, we'll call it queuing. Yeah.

ML

The Q-U-E-U-E. We know how to spell it. But connection requests are massively different from what's actually going to get built. And Jigar went through the fact that actually, at the moment, there's only a couple of gigawatts per year that is coming out of the end of the production line for data centres here in the U.S. And even if that scales, you will get to something like 35 gigawatts by 2030. And I go back to the piece that I wrote in 2024 called The Power and the Glory, and my estimate was 30 gigawatts. And so these are minuscule figures compared to the aspirations, compared to, Texas connection requests alone, 400 gigawatts.

I don't know how much it is across all of the U.S. Then you add Europe. I mean, who knows what's going to happen in the Gulf? They've just had three data centres hit by the Iranians in Bahrain. And I think the UAE, not sure if it was the UAE, I think it was the UAE or maybe Qatar. So even more demand is probably coming back to the U.S. And it's going to be very, very hard to build. And the solutions, nuclear, I'm sorry, 2035, with a tailwind, it might actually move the needle on tens of gigawatts, which is what's required. So it feels to me like, and there's always conversation about, you know, computing space and the numbers for that. They're out there, a couple of orders of magnitude on cost and nobody wants to admit it. 

It just feels like a sort of reckoning is now beginning. There has to be an understanding that we're going to be in the tens of gigawatts, not in the hundreds of gigawatts of data centres, and therefore that a whole load of hopes and dreams, both of the data centre crowd, but also of the Californian hyperscaler visionary crowd, that there's going to be a lot of dashed hopes, are there not?

BW

I don't know. I mean, it's really hard to tell because the pace of things is so fast. I mean, it was only, you know, the advent of kind of agentic AI… I did not expect that to happen this quarter, you know, that we'd suddenly all have these little agents that you can run.

ML

Your OpenClaw.

BW

My OpenClaw experiments, which I'm doing very safely, don't worry. But, you know, that for me, I'm not a coder. And for that to open up that kind of ability to just move fast and make things as an individual, that is quite attractive. And it sort of led to this uptake in everyone buying, you know, Mac minis that suddenly you can't get a Mac mini in California now because everyone's running their own little agents. And I just don't think I had that on my bingo card for 2026. And so what's going to come in the next few quarters, it just feels like it's very fast.

And it all does rely on a huge build out of compute. And I guess, we have our differences on the nuclear question. I'm seeing this as a 2030 to 2040 to 2050 play. Because I think it, you know, it will… A bit like you said to me, you know, you're a Thatcherite Tory who believes in keeping things low cost, unless there's a real advantage in terms of a domestic political story about needing to have your own jobs, your own supply chains and your own, you know, there's a point at which the economist in you gives way to the political you. And I think that's where we meet, because I'm always thinking nuclear may not make sense economically, but it makes sense politically and strategically.

ML

I'm going to have to come in there because we had a conversation that you accused me of being a Thatcherite Tory.

BW

Did you say you weren't a Thatcherite?

ML

So the background to the conversation is we were talking about to what extent we should protect industries to try to get domestic supply chains. And I said, you know, if I were a pure Thatcherite Conservative, then I would say, ‘no, you should not do that because it harms consumers.’ But equally just saying, well, you know, let's just become completely dependent on somebody else is also not right. And the answer is somewhere in between. So I clarify that only because otherwise the comments will fill up.

BW

I know, exactly.

ML

I'll get hate mail on those bots. 

BW

Just for the record, you're not a Thatcherite. 

ML

No, but I am a fairly, you know, if it wasn't for planetary constraints, I would be a fairly, and perhaps and also sovereignty and resilience, I would be a fairly dry, you know, centre right dry economically. So I don't resile from that position. But I think what you're saying, though, if I can unpick it, is that it's clear that the AI is real, you're doing things you couldn't believe you were doing. Over Christmas, I created an entire, essentially Pinterest for quotations. It's called quotesof.me if anybody's interested.

BW

Where you find the time, I'm not entirely clear.

ML

The answer is it didn't take very long. It doesn't take very much time. It literally didn't take, it took a couple of hours a day for about six weeks, and I created this thing, which I use as a database for quotes I like, but anybody can use. And it was astonishing. I don't know a line of code. I didn't use a line of code, and I was able to produce it. So the thing is real. But you also then highlight constraints. And I agree. 2040, you know, 2035, 2040, 2045, we are completely aligned. The question is how quickly. 

I'm an engineer. I know how hard some of these constraints are to relax. And so I'm sceptical about the upper end forecasts of quick provision of compute. But I want to just shift to a different aspect of the AI in energy. We all talk so much about data centres. And you've got an OpenClaw, and I've got my app, I've got quotesof. But are you seeing transformation of the use of energy, or the supply of energy, aside from data centres?

Are we really seeing people doing things in the energy system? Because it ought to, if it's this good, it ought to be driving energy efficiency. It ought to be driving new pricing algorithms for utilities. It ought to be driving new catalysts or new anode and cathode and new this and that. And, you know, you see a little bit of it, but I don't think we've seen the radical improvements to speeding up planning or to designing substations. It feels like we're in this kind of, almost like the phoney war, that we know that that stuff's coming. We've got the difficult bit, which is the data centres and the demand, but we've not really seen that many benefits.

BW

I think that's right. And I remember we did that episode with the head of sustainability, NVIDIA. And, you know, obviously that was a wonderful advert for why CPU, their chips are going to transform the world.

ML

Wonderful advert for NVIDIA. 

BW

Yeah, exactly. But, you know, it's an incredible success story. But my kind of slight pushback was, but aren't these chips just going to be used for cat videos, you know, more than they are for solving cancer? And I think, you know, if you look around at the moment, it is probably the way is towards entertainment, distraction, you know, the attention economy, more than it is solving, creating world peace. But that said, there are, you know, there are companies out there who are now trying to perfect weather forecasting using AI, which is going to mean that our energy system, which is going to be more weather dependent, will become more efficient.

And, you know, I think Google, DeepMind are now trying to crack that, you know, let's get really, really good at weather forecasting, which in a world of climate change isn't easy. And that's where an artificial intelligence, you know, augmented intelligence is going to really help us. And it will have then, you know, implications in how we manage the physical world. I'd love to see more of that than the cat videos. But, you know, I suspect we're in this, you know, world where there's a lot of huge potential. And, you know, I like to think that we're, you know, I'm quite an optimist at heart. And I do think this is going to lead to a world in which we've got more intelligence at our, you know, assisting us in some of the most critical problems and how we power the world, how we make sure that the climate stays reasonably stable. These are the sort of questions that, you know, we're gonna have to work on.

ML

So we had the internet, which was largely in the early days powered by pornography and dating. We have the solar industry, which was powered in the early days by marijuana farming.

BW

Was that right?

ML

Well, yes, but particularly here in California, because you could be caught — if you were growing pot — you could be caught if you used lights powered by the utility because the demand was so high. But if you put solar on your roof, you couldn't be caught. So that was one of the big drivers back in the day. Not that I would know. And so now we see cat videos and the things that are going to drive the uptake of this technology, which is in the end going to give enormous societal benefits.

BW

And I think it will. But we should also just say, though, the societal impact of the job losses, I mean, that's going to be like the moment, you know, coders are perhaps on the front line. And you saw that kind of weird moment where anthropic coders were saying to their bosses, when we build this, you must not sack us and trying to ensure their own future. But that's very myopic. What is anthropic and everyone else going to have on the wider society? You know, there's a lot of talk about, well, we're going to just put in some kind of universal income thing.

I don't see that happening in the US anytime soon. And then, you know, or even more glibly, well, let's just tax the robots. You know, yes, but like people like to work.

And there is a societal effect that perhaps we're not really paying enough attention to right now.

ML

So I think we could do another half hour on things like universal basic income. We could do, because you talked about the constrained resource being the power for the data centres. There is another constrained resource, which is people who have jobs able to pay for this stuff. And if you get rid of all of the junior lawyers and the junior doctors and the coders and the bookkeepers, and then who actually is going to have the money to pay for it? So we could do, and we probably should at some point do another half hour, particularly as this plays out. And we, instead of just talking about it and speculating, we get more data.

But I think that is where we're going to need to draw this conversation to a close. This is, you know, our episode, which is going to go out on cleaning up. And so I'm going to hand over to you because you're better at doing the closing spiel. And then for the live audience, we're going to stay and do the Chatham House closed book Q&A. So Bryony, over to you.

BW

So that was Michael and I on Cleaning Up. And I would just like to extend our thanks to our team that made this possible. Kendall Smith, who is our head of operations, Jamie Oliver, who is our video editor. And Oscar Boyd, who's our producer. And to the rest of the Cleaning Up team. And most importantly, the Leadership Circle members who make all of this possible. So please join us at the same time next week for another episode of Cleaning Up.

ML

And of course, to our live audience here at the Exploratorium in San Francisco during Climate Week when we've been recording this episode. Thanks to you. 

BW

Great. That's a wrap.

ML

Cleaning Up is proud to be supported by its Leadership Circle. The members are Actis, Alcazar Energy, Arup, Copenhagen Infrastructure Partners, Cygnum Capital, Davidson Kempner, EcoPragma Capital, EDP, Eurelectric, the Gilardini Foundation, KKR, Mitsubishi Heavy Industries, National Grid, Octopus Energy, Quadrature Climate Foundation, Schneider Electric, SDCL and Wärtsilä. For more information on the Leadership Circle, please visit cleaningup.live. If you're enjoying this episode, please hit like, leave a comment and also recommend it to friends, family, colleagues and absolutely everyone. To browse our archive of around 250 past episodes and to subscribe to our free newsletter, visit cleaningup.live.