The Usain Bolt of Solar Power - Ep130: Paddy Padmanathan

Michael Liebreich So, Paddy, thank you so much for joining us here today on Cleaning Up.

Paddy Padmanathan My pleasure and privilege to be with you today, and thank you for having me. Something I've been planning to do for a while, glad to be here.

ML  We're glad to have you. Let's start where I always start. I'll ask you to describe what you do, who are you, in your own words, because I've done a little intro, but I probably haven't captured exactly the essence.

PP  I've just recently, two and a half months ago, stepped down after eighteen years as CEO of ACWA Power, a company that is very much in power generation and desalinated water production, and now in green hydrogen. I've now moved on - I remain a director on the company's board - but I've moved on to found a couple of other companies and champion them as they move into energy transition, to basically reduce the gap between ambition and action: Zhero BV, a company that is very much focused on producing green hydrogen at scale, and renewable energy at scale; and Xlinks, entirely focused on long-distance transmission, underwater, across land, linking grids, making grids more resilient, and creating an electron superhighway that hopefully will ring the world one day.

ML  And we had Simon Morrish, CEO and co-founder of Xlinks on Cleaning Up, that was Episode 92. So, if anybody's wondering, wants more details on Xlinks - we might talk about it a little bit as it fits in with your other activities - b but if you want a real deep-dive on XLinks, then Episode 92 is incredibly interesting, I think. So, I've described you, and in fact, I've even described you in episodes of Cleaning Up as the Usain Bolt of, particularly of solar. And the reason I describe you as that is because you've created world records and then just beat them again and again for the cost of solar power. So, I want to go through that kind of history if we could. And that was while you were running and building ACWA Power. So, how big is ACWA power? How much have you built? Just give us some metrics on that?

PP  In terms of global numbers, so ACWA power today, has something like $75 billion worth of assets, 42 gigawatts, and 7 million cubic meters of desal a day. And now, in construction on a global scale, green hydrogen production - which converts to ammonia - to produce 240,000 tonnes per year of green hydrogen, to produce 1.15 million tonnes of green ammonia. In renewable energy, the company something like 35% of its investments, of its volume, is in renewable energy. Not only power generation, and obviously, the green hydrogen, but also now starting to put renewable energy into the desalination process, starting to decarbonize that. So, fairly significant projects. A lot, many of the projects... In fact, ACWA power is involved in not only photovoltaic, that everybody knows, or the wind plants, but also concentrated solar power. In fact, today, it's the largest concentrated solar plant developer in the world, taking the heat of the sun and storing it and putting out electricity even at night.

ML  So, just taking that 40-odd gigawatts, about a third of it, a quarter of it is renewable? Because you sort of exploded onto the scene around 2014 / 2015, from my perspective, because... You were this kind of Saudi-based, Saudi-backed company nobody had heard of, and then you started to bid into these renewable solar processes. And in fact, your concentrated solar may have started a little bit before, 2010, and I hadn't really focused on that, because I had decided concentrated solar was not really going to be the winner, and we'll talk about that. But suddenly, in 2014 / 15, you bid this - what everybody considered an absurd low price. Tell us about... What was that project, that was the famous sort of below six cents?

PP  Yes. So, just suddenly, I mean, the world at that time, on an average number basis - it differs from place to place, right - was sitting at about sort of eight cents per kilowatt hour, nine cents in some places. DEWA - Dubai Electricity & Water Authority - put out pretty much the first renewable energy, PV plant tender at scale on an IPP-basis - independent power producer, competitive tender. Fourteen tenderers responded, there was an unusual sort of heavy subscription. And they tendered a project that said, look, we’re creating a park that's going to have thousands of megawatts in due course, but right now, we're putting out just a 100-megawatt tender. They were also testing to see how low the price can be, and the consensus was it would be somewhere around about the sort of eight or nine cents mark. Anyway, we tendered that project; we submitted a couple of alternatives, we submitted a hundred megawatt, the base bid, and a 200-megawatt alternative. Look, from the earliest days - people in the business now know it very well - right from the start in 2004, when the company was founded, we convinced ourselves that we should be in the business of just not simply market pricing what we do... Because whatever it is that we produce and sell, we are selling on long-term contracts. So, what is the business all these people are in? You spend a lot of money upfront - your money, other people's money - and then you get that money back in little bits as you sell the product over 20, 25, 30 years... to win the project. But that tariff needs to endure for such a long time, so we said, we don't ever want to market price. Don't worry about who's our competitor, or what does it replace... the contractor's mentality - win by as tiny a margin as possible with the second bidder. We said no, no, our philosophy should be: focus on minimizing cost. Don't compromise on the margins that everybody needs to live and to prosper, but focus on cost. Whatever that number is, we tender; amazing when you do that, if you really, really, really are diligent at that. So, using the same philosophy, we jumped into this PV tender, and priced it. I remember the day before we submitted a bid a week before that the numbers were starting to come out at a shockingly, we also didn't have a benchmark we were just saying cost-cost-cost-margin.

ML  And for context, you had not built a PV project at that point?

PP  We hadn't built a PV plant before... We had done CSP, which I would argue is much more complicated.

ML  So, the acronym - Concentrated Solar Power.

PP  So, we'd built those plants, and they were... I mean, the first project we did itself was a $600 million investment, second project was $500 million or so, big projects we had done. And we had stepped into a PV plant that did complete development, and we were operating a PV plant. So, we had some experience in Bulgaria - that was another interesting story, and a challenge. Anyway, we did that project only for experience. So, we had confidence about being able to operate a PV plant, had seen it being completed. Anyway, absolutely right, this was our first, our own tender. We priced it up, and were very surprised at the number that came out of the machine, of the computer. And we said, no, man. I mean, the world is talking about nine, eight, we know what the client is expecting, recalculate, recalculate. Utterly convinced, submitted the tender. We submitted, as I say, an alternative as well, 200 megawatts -  the price difference was marginal. And we said, let's put it out there and see what happens.

ML  And the number was? I'm on the edge of my chair even though I know the answer!

PP  It was 5.85 cents per kilowatt hour, which was a shockingly low number. Now, it's very interesting to recognize that number, not just because it was so different from the eights and nines people were expecting. In fact, in that round of tender, we were 5.85, there was a 7.9, or something, all the way to 14. There was a whole bunch of 13s and 14s - I think they were pricing a different tender. But anyway, the important thing about that number was, if you did the calculation, in that part of the world, which at that time hadn't really taken on adopted solar yet, at scale - Saudi Arabia, Oman, Dubai, Abu Dhabi, not really - because you're able to produce, extract oil out of the ground at a very low cost, or take gas out of the ground at very low cost. So, if you read those numbers, five, six cents, is kind of the number at which they were able to supply energy into the system, putting true costs - not subsidies - true costs, okay? They all knew that. So, the minute hours came at 5.85, they said, man, even in this part of the world life has changed, has to change. When the sun is shining, we're not going to be able to compete, even with our low-cost energy... Knowing full well, just as quickly as eight and nine has come to 5.85, it's probably going to jump even lower, right? So, that was that was a big thing. Yeah, we were excited that we got there. By the way, contrary to all the popular belief at the time, everybody said, impossible, this cannot be done, these guys are marketing, whatever, whatever, whatever. And in fact, I think you moderated an exciting panel...

ML  That's right. I want our listeners to kind of imagine how seismic this was. Because you can talk about it, as you have, and not only is it 25% below anybody else, but it's also matching the costs of fossil power. And it's matching it not just in the GCC, but also even in the US. Six cents was this iconic figure for... If you do coal, if you do gas, you get to six cents, for a new power plant. And suddenly... And I was thrilled, because in 2013, I had written a piece about Twilight in the Desert for oil-based power. I said, if you're pulling oil out of Saudi Arabia, don't burn it for power, sell it on the global market, and use solar. And it kind of, nothing happened, that paper disappeared without trace, I did it with Standard Bank, I believe, at the time, I worked with them on that. And so suddenly, you came along, and you did it. And the panel that you're referring to there was - you're not going to name him, but I'm going to - Kerry Adler, who's the founder and chief executive of Skypower - I don't know whether they were one of the bidders or not...

PP  They were. They tried to bid, and they decided not to bid at the last minute.

ML  So, he sort of grabbed me before and after the panel and said, this Padmanathan guy, it's subsidized, trust me, you can never get to that number without somebody else's money, somewhere, I don't know where it's hidden, but there's a subsidy, trust me, trust me, trust me. And I said, I don't know, he seems like an honest guy, he seems like he knows his stuff.

PP  Well, okay, fast forward, the plant is operating very well, is consistently delivering energy. We're making the money that we expected to make, we're paying back the loans, everything. And then of course, very quickly, we were proven right, because within one year, there was another tender from DEAW. Guess what? The numbers were 2.99.

ML  From yourselves, or from now everybody?

PP  Now other people. In fact, that particular tender was won by Masdar at 2.99. We submitted something slightly higher than that, if I remember right on that tender. But then the following one, we beat Masdar.

ML  So, the Usain Bolt, by 2018, you were back, you got your nose back ahead, right?

PP  Straightaway. 2017, we were back, beating everybody else, and we carried on beating to the point where in 2019, just before the onset of the pandemic, we delivered, again, a world-famous tariff. Unfortunately, it's going to remain the top tariff for some time to come.

ML  In nominal terms, the record?

PP  What do you mean nominal? It's delivered, it's 1.04 cents. $10.40 per megawatt hour.

ML  This number, just let me clarify one thing if I could, because there was some discussion about...With solar power, the equipment costs were coming down so quickly, that you could sort of under-bid and then two, three years later, when you actually built it, the numbers... Are these... when you say 2019, is that when you delivered when you delivered the bid, or when you delivered the actual plant?

PP  That was when we delivered the bid. But I mean, we were working on the basis... We, as a company, we never played that game, we tendered... These contracts, by the way, in that part of the world, are very, very well structured. There is a requirement that from the time they declare you as preferred bidder, within so many months, you've got to sign the PPA, Power Purchase Agreement, and then you've got to achieve [inaudible] and you've got to actually deliver power. They plan their grid management on the basis of power coming, certainty of power coming at a given time. Generally, privately developed projects in that part of the world had always performed fairly well. So, we needed to be very careful not playing that game of pushing it back. So, this was 2019. Okay, now, the timeframe on that particular project did get stretched out, because of course, all of a sudden, then we got COVID, and everything, the world came to stop for a while, but then it's come back, you know, fully back on developing, and so on and so forth. Then we've gone on to deliver subsequent projects. Now, the problem with that... why I'm expecting the $1.04 to remain a competitive tariff for some time to come - the lowest that has been achieved - is because inflation, post pandemic, post this crazy war, tragic war, all the rest of it... You've now got rampant inflation, shortage of components. And then of course, interest rates have gone up, base rates have gone up. So, if I were to... I mean, my guess would be - I've done some calculation around it - that project, exactly the same site, same conditions, if we were to tender today, the matching number, I would expect it to be somewhere in the 1.7 sort of range. So, 70% impact of inflation and interest rates.

ML  Okay, so that was my question about nominal, whether it was just the inflation, but you're saying that actually it is more difficult. I mean, it's a more difficult environment, not just in terms of the price of the panels. And then... do you expect that to unwind?

PP  No question whatsoever. As we speak, more and more capacity is getting built. Phenomenal capacity, component manufacturing capacity expansion. Absolutely expect by 2025, 2026, for the efficiencies continue to... Technology continues to keep improving, efficiency continues to improve. So, the impact of efficiency improving, more capacity, introducing competitive tension driving all that cost down. Even if interest rates remain, which is what people would expect... We're not expecting interest rates forever to keep going up. So, on the assumption that they flatten out, we would imagine that by... contracts that are tended in 2025, 2026, should start to move down. I have no doubt whatsoever, we will... There will be a time when it will be below one. No question. No question.

ML  That's below one cent?

PP  One cent per kilowatt hour. No question.

ML  So, when you went from the famous 5.84, sub six cents for solar, and then by around 2018, you were at about... that was the kind of the era of three cents solar I would call it. At that point, that's when I started to say, we're headed to one cent solar, that's $10 per megawatt hour, and not by 2050, but by 2030; that's when I started to say that. And then, even brought that forward. So, in the early 2020s, around 2020 - actually, just before COVID - I actually said, I think we'll get there by 2025. And I think what you're now saying is no, it'll take longer because of inflation, the war, interest rates, but we will get there by 2030, you have no doubt?

PP  I have zero doubt we will be below, simply because of the advances in technology, advances in methods of manufacturing. And by the way, the most interesting one - AI. AI is starting to now really get embedded, and there are some very significant upsides to be had. I'll give you, without getting into too much of detail - not quite sure where this conversation is going - but one example of an AI-induced sort of advancement. So, now, we automatically clean the panels, okay? So, you don't want to have thousands of people running around polishing mirrors, we've got machines that run up and down cleaning the mirrors, cleaning the panels. Okay, so they've been cleaning - up, down, up, down. They consume energy. Well, if you start introducing some machine learning and artificial intelligence into those cleaning machines, what they are able to do in real time is to keep checking how much dust has been deposited at that spot where they are; how much of extra energy is going to be delivered, if they were to clean it, versus the energy they're gonna consume to clean it; they do, and they skip. So, those of you who are going to have the fortunate opportunity to go and visit a solar plant, when you see these machines that are running up and down, please don't tell them that, oh, no, your machine is broken. Because what you're very likely to see is the machine moving, cleaning, and then skipping a section and carrying on and then cleaning. That's because it's using artificial intelligence and machine learning to continue to keep improving. Now, that little saving of extra energy that we're wasting, could be 0.5%. Now, that's a significant upside - very simple thing. So, using digital technology, this vast computing, power for peanuts, we're able to forecast weather, we're able to... And particularly now if we've got batteries in the solar field as well, we're able to manage dispatch much more tightly; within five minutes, we can move stuff around by starting to predict weather, cloud movement. Because if you're standing in a solar field, when a cloud goes by, you can see the drop immediately, okay? Of the cloud drifting over your solar field. So, all of that can be managed so much more efficiently. So, all of that improvement is yet to come. Zero doubt that will be below ten.

ML And that maps into manufacturing, and it maps into shipping and installation, and it maps into even the end of life and identifying panels that break. One of my main takeaways from this last little intervention, there is, I need to get an AI expert on to Cleaning Up, to talk about some of these things. Because I sort of naively think that I'm across that stuff, but I'm really not, it's moving so, so fast. But the really interesting question, in the background of this is, does the experience curve, does the learning curve, ever stop? And I get asked this; oh, well, you know, okay, everything's become cheaper, but surely, at some point you've reached as cheap solar, or as cheap wind or as cheap batteries as you can get? And my answer is, no, you never do, because people remain smart, they continue to invest, they have scientific breakthroughs, they invest in logistics, they invest in... right across from manufacturing all the way through to installation and even after care. So, I say it never stops, but you know better than me.

PP  No, no, I agree with you. Absolutely, we are the ones who have demonstrated that, continuously built on experience, putting in a technology, bravely going forward, stepping up. So, I agree with you. Never say never, and never say ever, but... Clearly, it's not going to become zero. The big question is... It's very easy for me to be very convinced that it's going to be below one cent per kilowatt hour. The big question then is, how low can it get? Look, you know, before... In 2009, when we delivered that 1.04 cents per kilowatt hour, because we're very much in it, we can see the levers that would help... that has a chance to keep coming down, down, down. And I at that time, I was saying, look, I can see a pathway to 0.8, 0.75. And I think it's going to become very, very hard thereafter. Okay, now we are back up. As I said to you - 1.7. Okay, that one has jumped up to 1.7. So, we're going to bring it all the way down to one. But I expect... no reason why we wouldn't get back to that 0.75 kind of level.

ML  Okay, so definitely back to one by 2030, and then beyond that... So, this is seven and a half, or even maybe $5 per megawatt hour by 2040, 50. But let's talk about something else, though, which is geographic differences, right? Because you've been doing this in the GCC, where... And frankly, if I was to push back and say, these are not real, real numbers, because you've got the same person, very often you've got some state or state-like entity buying the power, providing the land, providing even the capital in many cases, providing the permitting. I mean, it's a really unique situation. And you know...

PP  Michael, sorry to interrupt you. So, we became very famous in Ethiopia. There you go: Ethiopia. Ethiopia tendered their first at-scale, renewable energy plant - PV - 2018/1, that kind of time. We delivered at the lowest end there, again, but the whole continent of Africa became very excited about it. 2.4 cents per kilowatt hour in Ethiopia. No subsidized nothing. No concessionary financing embedded in it. Normal, private sector-led tender. Okay, now, that project hasn't gone forward. Main reason: Ethiopia then went into this tragic war, internal sort of ethnic conflict, and the project sort of drifted, drifted, drifted. We were very busy putting it together and putting the financing together when all that fiasco started. But all I wanted to say there is that, you know, we showed that it is perfectly possible.

ML  Well, yes and no, because had you built that project, and then the terrible conflict started a year later, you would have lost your investment. So, doesn't that suggest that you haven't put the right risk premium on it?

PP  No, I will refute that argument simply because I don't think necessarily... So, in Bulgaria, by the way, exciting place. A different sort of... I was about to say Mafiosi. Different risks, different people, different... Business leaders there were fighting with each other, and they were trying to wipe out, they were trying to wipe out a solar plant. Okay, so they did fire missiles - not at our plant, but at a different plant. Well, you try destroying a solar field - bloody hard work. For a very simple reason: it is vast. It's spread over a vast territory. Yes, you can take out 25 arrays. Usually what they do...

ML  That's fascinating, because one of the last episodes was with Professor Bent Flyvbjerg, who wrote How Big Things Get Done, and it's all about modularity, it's all about modularity.

PP  That's a huge advantage of solar and wind, and to a certain extent, CSP - concentrated solar power. But anyway, so coming back to the point. No, the reason why I would say that in Ethiopia, had the project gone ahead and got built, before the sort of internal strife... That project would continue to supply power to the region. And, you know, generally, by the way, this is an argument that I have. Forget about all the other things: electricity and water. We need to think of them very differently from a risk perspective. They are so basic for people's needs, particularly in these very different, faraway places, where people have not had access to electricity or adequate access; all of a sudden, you start providing it at a sensible rate, it's... I don't want to call it, it's like a drug that they start taking, they're never gonna go off - it is! They would start to use it, they would start to benefit from it, beneficiate it; they're not going to attack it. I really think the risk profile is very different - they're not going to default on it. Provided it is at that really competitive, lowest possible price. At 2.54, I have no doubt whatsoever, it would have been absorbed into the system, people would have been looking after it, that's the last place they would have gone to destroy. So, I am not convinced that the risk is wrong.

ML  We're actually at the heart of one of the biggest conversations about climate, right? Because the developing world is where emissions are going to grow. The developed world has already over the hump. We could go faster, we must go faster, but it's really about the developing world. And China is kind of sui generis, it's sort of different because it's so big, and it's got so much capability and capital and so on. But you know, we're talking about the Indonesia, the Malaysia, the Thailand, the Vietnam...

PP  Nigeria, the whole of Africa, my goodness.

ML  Then the whole of Africa, absolutely. And the big problem with all these kind of low-cost solar, low-cost renewables, it's all marvellous, if it's really that cost for them. And I think I'm going to challenge you on that because you're putting dollar denominated panels into Ethiopia, where the electricity - for all that they're going to love it, and I agree with that -  that electricity is going to be sold in the local currency. And so, there's a foreign exchange risk, which you can't just sort of say, oh, well, you know, electricity it's so marvellous to see people have electricity for the first time, we'll ignore that; there is a foreign currency risk. There is the risk of social conflict, conflict risk, right? I mean, you look at what's happening with Zaporizhzhya nuclear power station; you would say oh, the locals, they really need this nuclear power, they're not going to do anything about it, and it is, you know, compromised. So, there are real risks in these countries.

PP  Look, okay, so there are real risks, but I think let's not overplay. I think the reason why we are in the mess that we are; all these so called real risks are getting overplayed and overvalued. Look, it's very simple. Particularly with God giving us the energy for nothing, we are now in a position where a bit of kit, we can convert that to real, usable energy, provided we value that risk correctly, and price that money correctly. You can end up with very competitive energy, which can transform economies, improve lives, and get them focused on fighting about other things. So, just think about this for two seconds. On average, for those people who are lucky enough in these impoverished parts of the world to get energy, using diesel put-put generators - utterly inefficient, all that nonsense - they were getting energy at 40 cents, 45 cents per kilowatt hour if they were lucky. With 40 cents, 45 cents per kilowatt hour, what can you do? If you're lucky enough to afford it, just for the basics of your life. You're not going to be able to utilize it to add value and do things. No particular reason - in that country, in a country like Nigeria, where it is 45 cents for the majority - you can't put solar panels and a bit of battery in order to bring that down. I am absolutely convinced you can do it at ten cents, eight cents, five cents - five cents, probably. Haven't done the numbers, but I'll be shocked if we can't do it for five cents. At five cents, they can do so much with that electricity. So, in terms of yes, you have a problem with the local currency conversion, currency conversion, ability of dollars, interest rates, depreciating currency and all the rest of it. But I think we are clever enough to start finding solutions for that. There are many solutions that are starting to be developed, but not fast enough. I think banks like the World Bank, who have been focused on poverty alleviation, need to get off that, and need to start thinking about how to reduce the cost and provide these mechanisms for projects that provide energy, that provide water, that will then sort out their poverty problem. So, I think we need to get off thinking that we're all sort of some - not picking Goldman Sachs for the sake of it, but - really, really, really pricing the risk high all the rest of it. No, we need to price the risk correctly, appropriately. Why is it that when you invest...? So, think about this, put it the other way around: when I go and invest in a power plant, renewable energy power plant in one of these countries, why is it that the risk premium that I charge for that power plant is the same as if I were to put a chemical plant or a fertilizer plant or... a milk factory or something like that? It shouldn't be! Because that's all different, those are all choices that we can make. But as electricity is so fundamental, and so multipliable in terms of value creation... So, I think we need to think about the risk associated with power and water very differently, and price it right. If we price it right, we can bring these numbers down. And the faster we bring them down, the better the economies will be. At least carbon emissions will get start to get managed better.

ML  The space that you're talking about is, in a sense, it's the space between these very low-cost, super low-cost projects, and the poverty premium... When you talk about in Nigeria, it's costing 45, 50 cents per kilowatt hour, because they're using a generator. So, there's a huge amount of space between one cent, which you can do in the GCC, or 1.7, now, and the 45 cents. But the 2.0, whatever it was, 2.5 in Ethiopia. I mean, you didn't... I can't believe that you had Forex hedging, I can't believe that you had insurance...

PP  Everything, Michael. Everything.

ML  I bet you're happy that that project didn't go ahead, given what happened afterwards...

PP  I'm not, but anyway...

ML  Let's move on a bit from that because... It's a great discussion. And by the way, we had Damilola Ogunbiyi, we've had twice on Cleaning Up; we've had Kandeh Yumkella, we've had Rachel Kyte. So, you're talking to somebody who absolutely gets the idea of the foundational role of electricity - not just energy, but electricity - in bringing countries out of poverty, so that they can get on a kind of positive spiral. So, I don't I don't disagree with that

PP  Correctly-priced. Correctly-priced electricity, not any electricity

ML  But we are miles from getting the scale of finance. That's the other thing you haven't....

PP  Yeah, I agree.

ML  You know, you could say the World Bank should do this, the World Bank should do that, but you know, they're going to do it in the level of tens of billions, maybe; we need trillions to flow in these directions.

PP  Michael, don't underestimate the power of that 1 billion that the World Bank throws. For every billion that the World Bank throws at the appropriate pricing, you can challenge the private sector for the rest at the right pricing. I say to people... You know, people run around, [saying] oh, in Africa, why is this not happening? Yeah, there is a lack of capacity, inertia, there is no incentive for the politicians, or the civil servants do anything... Yeah, there's a whole bunch of issues. But I say no, no, guys, private sector: we need to step up. We need to price the risk correctly, and we can deliver. We can deliver massively, fantastic opportunities there. And all the ingredients are there. Hydropower is there, the sun is there, the wind is there, the land is there, the needs are there...

ML  I want to come back to that sort of seismic shift that you caused, because the fact that it was a private player, right? The fact that anybody...

PP  And Saudi Arabia, by the way.

ML  That anybody could do that. And the fact that, when you went to that conference that I was chairing talking about whether you could or couldn't deliver it, you did not talk about blended finance, you didn't talk about the IFC and the World Bank and the Asia Development Bank and the African... you just said, this is what we're going to do. And that was seismic, because the power of that example, is much more powerful than the power of the World Bank, I would argue.

PP  No, you're absolutely right. Look, I think the revolution has to be led by private sector, okay? I think we can... People like the World Bank, all the IFIs have a role to play... I would argue that they have the role to play to accelerate, and to multiply. But really, this revolution has to be led by private sector. No question whatsoever.

ML  So, can you... Talk to me about NEOM. So, NEOM is this project in Saudi Arabia, 100-mile-long city, etc., etc., flying cars; you name it, they've got it. It's kind of like Avatar in the desert or whatever. But what has been your involvement, and your role?

PP  I was about to say, I think there's plenty on NEOM on YouTube and TV and whatever, and I'm not involved with that side of it. What I was involved in, what I am involved in is, we picked that site as a location to deliver a green energy project, green hydrogen production plant at scale - the first one that has gone into construction in the world. Just to give its scale, that plant will produce more green hydrogen than is produced in the world today by all the little plants, but that's our point of reference.

ML  Which is essentially more than nothing...

PP  But it is a plant that is at a different scale. So, the ingredients there were, back in 2018, 19, as we were kind of heading towards this one cent per kilowatt hour price for solar, we kind of were running late one evening, in the office, in ACWA Power, we were running some numbers about this electrolysis process. And we said, man, even if electrolyzers were priced at $900, or whatever it was, $1,000 a kilowatt at that time - as a CapEx. If we are able to produce between PV and wind - PV during the day, wind later on in the evenings, and a bit of battery - we can take that expensive kit and extend the use over 14, 15 hours, and we can probably deliver electricity at... I think we said, let's take an average of two, two and a half cents per kilowatt hour.

ML  That's higher than the $10 per megawatt hour. Higher than the one cent, because you're blending wind and solar, and the bit of battery, but you're running 14 or 15 hours a day.

PP  So, we said look, on an average, let's price it at two and a half, let's run the numbers and see what happens. Now, we had heard that the world market price at that time for green hydrogen in these little plants was something like $8, $9, $10 per kilogram. When we did the numbers, we were very surprised at how it was a different order of magnitude; we were down to threes and fours. We said, no, it can't be right, carried on doing it. Air Products, a company who are very much in industrial gases, and very much in hydrogen - grey hydrogen production, world leader in grey hydrogen production - we had a partnership with them on something else, and we started to engage with them to understand maybe we are messing up this.

ML  Maybe we missed something.

PP  Maybe, you know, we put the electrolyzer in, and maybe there's a lot of other things that need to go around it, whatever, maybe we missed. When we sat down and entered into a discussion with Air Products - and they come at it from industrial gases, but not from the power generation side, right? So, when we then said, look, we can give you power, green power, at sort of two, two and a half; nah, impossible. Yes, here, see what we are doing. Then they do, they say, hey, man, this is interesting, let's go, then it was very much a case of you know, picking a site. And in Saudi Arabia, there are many sites, but the attraction of NEOM was, NEOM had this massive ambitious project, a project that was under development, which is all going to be renewable energy based. They were talking about hydrogen cars, hydrogen trains, this, that and the other. We said, hey, let's go talk to them, see if we can piggyback on their piece of land. And they have an investment vehicle. So, long story short, we put together a project with NEOM Investment Company coming in as a 1/3 partner, Air Products 1/3, ACWA Power 1/3, so no arguments, equal shares; and at a site at NEOM, using the NEOM port, that we can use to export the hydrogen in the form of ammonia.

ML  And the total project value?

PP  $8.4 billion. That is the power plants. So, these 2.1 gigawatts of electrolyzers are being fed by 4.3 gigawatts of solar and wind and battery. And then it's converted using the Haber-Bosch process to ammonia, liquid ammonia. So, all of that, and the pipeline to the port itself - it's all at the port facility - that whole package is $8.4 billion total investment cost. Fully-funded, it's now in construction, it's now in construction for nearly one and a half years - on track.

ML  And now I'm going to kind of push you with the... I don't know how to put it, but the bear case. Which is, that is 250,000 tonnes per year of hydrogen, and it's $3, something like that? You don't need to say exactly, I'm sure you can't... you don't want to divulge exactly. The global demand right now for hydrogen, excluding syngas, and so on, is 94 million tons of grey. So, you're basically producing for $8 billion, you're producing about a quarter of a percent. This is a huge, gargantuan project, and it's a quarter of a percent of replacement of existing hydrogen.

PP  Michael, before you complete that mathematics, which I'm sure you're just about to complete, let me also tell you: in my view, that 8.4 billion on that first project - I take a bet with you - will come down to four point something within five or six projects of that scale. As fast as that.

ML  By 2030?

PP  For sure. Or before.

ML  Which is fine. So, you're producing 1/400th of existing hydrogen demand at... Let's call it 4 billion. That's still... If you multiply 4 billion for a similar project, and then you multiply it by 400, you get 1.6 trillion, right? Just... And by the way, what you've ended up with is... the only way to transport it is as ammonia. Or by hydrogen pipeline, right? So, you can go only to the region, or as ammonia, which of course, then if you convert it back - if you need the hydrogen - you've got this very lossy process at the other end. So, I mean, it's nice, but it's not going to really move the needle on climate in any meaningful way, is it?

PP  Michael, a couple of things. I think you better start praying that hydrogen does deliver, and does work. Because there is about 20% - plus or minus - emissions, we have no clue how we're going to decarbonize.

ML  I would disagree with that strongly. I would disagree with that. I think we do.

PP  Well, yeah, but some crazy... There are some things that you just cannot... I am a proponent of electrifying everything as fast as possible.

ML  Okay, give me an example that you can't decarbonize except with hydrogen.

PP  Cement. What are you gonna do with cement?

ML  So, with cement, you can use renewable heat in the clinker process, and then you can capture the co2 and put it underground. And you'll do that way cheaper than you'll do it through hydrogen.

PP  No, it depends. Depends on where the cement plant is; if the cement plants is next door to the hydrogen plant, never. You're never going to do it any cheaper...

ML  Why would you go to hydrogen? If you can... The hydrogen is coming from renewables, right? So why wouldn't you just take that electricity and heat your clinker? Why on earth would you go through the lossy process of making hydrogen instantly to then use it in a cement process, that would be madness?

PP  If your argument is, everything that is going to emit the carbon, we can take the carbon and sequestrated... If that is the argument, I would argue that there are many, many processes that are much more competitive. We've got...

ML  The cement, there's two forms... The co2 is coming from two places, as you know. There's processed co2, which nothing will solve - you'll have to put that underground. The other is the heat, where I would argue that using the electricity directly is going to beat hydrogen.

PP  Very high temperature heat.

ML  Not a problem, not a problem. Radiative heating, thermal buffer, and you're done.

PP  Immediately, I think ammonia, we should be using hydrogen - ammonia - to decarbonize fertilizer. 70 million tonnes per year that needs to be decarbonized pretty damn quick, and this is the best pathway. And chemicals.

ML  Well, except that that volume... Then we come back to the 1.6 trillion. Because the volume.... you've done this gargantuan project in NEOM, and you've got one quarter... you're got a quarter of a percent solving that problem.

PP  I don't know the answer to this one, but I'm sure you do. How much did we spend on vaccines for COVID?

ML  I'm not sure that's relevant, if I'm completely honest. And by the way, it's going to be much less than $1.6 trillion.

PP  No, nonsense! They just printed money. They printed many more trillions during that period.

ML  So, your answer is it doesn't matter how much it costs?

PP  I think if the planet is going to burn, and if we are having the consequences... Look, I am not sure we have actually calculated - I mean, there's a lot of stuff there - really calculated the consequences of sea levels rising to some crazy number... I think the catastrophe that's ahead of us is so massive, that it doesn't really matter.

ML  But hang on a second, because that... If you said okay, let's just do your plan, okay? So, the Padmanathan plan for clean hydrogen, we're going to replace the 94 million tonnes by doing more projects like that, at that sort of cost.

PP  No, half half half half half.

ML  I mean, half it and have it again, it doesn't matter. Because that is only, at the end of the day, that hydrogen is only itself 2.3% of global emissions - the 94 million tonnes. So, you've got another factor of 50 even to get to existing energy demand today. Then you can double the energy demand, because of course, the developing world wants energy. So, you've got then... you take that project in NEOM, you've got to multiply it by 400 to do hydrogen, you've got to multiply it by 50 to get today's energy, you've got to multiply it by two to get to tomorrow's energy. And you know, it's easy to say, well, we've got no alternative - but we do. Which is to electrify a lot more; not to go through those sorts of those byzantine conversions to get to hydrogen. And also, of course, energy efficiency, demand-side; doing much more on the demand side.

PP  Absolutely agree with you. So, for me, it's not just one solution, I think there's a whole basket of issues that we need to address. The biggest focus must go on energy efficiency - obviously, that's the first thing. Next electrify as much as you can, no question. The world is... I mean, they're thinking that by 2050, we will be somewhere between 50% and 60% and 70%. I would argue it could be even more than that...

ML  Compared to 25% today.

PP  Between 20% and 25%, or something like that.

ML  It's going fast because of heat pumps and electric transportation, so it is on the march, but it's very far behind...

PP  And also, industry. Industry is also electrifying more and more and more stuff. So, no question. So, that's what we must focus on. No question, no question. But at the same time, I would argue that we need to continue to apply all the technologies that we can dream of, think of, invent, as quickly as possible to deal with all the other stuff.

ML  You mentioned Air Products, your partner. What are they doing with the ammonia when it gets to Asia?

PP  In this particular case, they're off taking, okay? So, the project was built, it's been funded, on the basis of Air Products saying, look, you know, we are hydrogen kings, and we will take the hydrogen and we'll manage the sale of that hydrogen. The publicly-stated position of Air Products was that they would be sending it to the Far East, but that was before the war. So, I think there's a lot of recalculation going on right now. So, some of it may well end up in Europe. The intention at the moment is - again, publicly-stated by Air Products - is to crack it back to hydrogen, and then put it into fuel cells, and supply it into the transportation market - buses, trucks. As I say, at that time, initially in the Far East.

ML  This is one of my favourite processes, where you start with renewable electricity, you do all these things to it, and then at the end, you go into hydrogen, you put it in a fuel cell - it's 20% efficient end to end, it's 20%. And you've got... It's not just that it's inefficient - I get accused of saying, oh, I'm obsessed with efficiency, I'm not - I'm obsessed with cost. The efficiency means the electricity in that bus is going to be five times - just on efficiency - the cost in NEOM. And then you've got all of the capital costs, and all of the maintenance costs, and all of the safety management costs, etc., etc. I mean, this is just the sort of stuff that absolutely, in my view, should not be happening.

PP  Michael, I am super proud of what we, Air Products and NEOM have been able to achieve in bringing that first plant, at scale, into contraction, and we will be delivering hydrogen and liquid ammonia - I'm super proud of it. And I'm very thankful that Air Products stood up and said, we'll off-take it. Otherwise, this project would not have happened. I absolutely agree with you, and I continue to argue, and prioritize, and even in other ventures that I'm involved in, prioritizing - the use of that hydrogen, in my view, first and foremost, should be going towards fertilizer, first and foremost, to decarbonize. I am not convinced that we should be rushing into transportation so much; I think electricity is proving itself to be a much more efficient solution for transportation. And in fact, I think, for all the transportation, eventually, I can see electricity playing the prominent role, right? So, for me, as I say, we are involved in delivering the hydrogen, the liquid ammonia, at the port of NEOM, super proud of that project. Not going to sit here and argue with you. But I do agree with your argument. And I absolutely, by the way, agree with your hydrogen ladder. No question whatsoever.

ML  What about heating? Let's just touch on heating.

PP  Again, I think hydrogen... No. Forget it. You're crazy. You're crazy to be using hydrogen for heating - other than for really ultra-high temperature. Really some specific processes,

ML  You mean things like 20,000 degrees centigrade for arc welding, that sort of thing? Arc welding, we do with electricity, we don't with gas. There's a fantastic episode - rather than go down this rabbit hole - I wrote a piece for Bloomberg New Energy Finance, my old house, on industrial heat, I called it the next Half-Trillion Dollar Market, is actually electrification of heat: low temperature, middle temperature, high temperature, domestic, etc., etc., commercial, industrial, all the way up and down. So, anyway, so you can...

PP  I'm very much an electricity fan, by the way, I'm electrons. That's why I'm in Xlinks, long-distance transmission...

ML  So, I wanted to sort of touch on X links, but we probably don't have time to go in any detail at all. There is a great episode on it with Simon Morrish. But that one... the notable thing that you said about NEOM is it's wind and solar and a bit of battery to smooth... And that's basically the same thing. I should say, not just you, but we - I am an investor in Xlinks, correct? That's the same thing as we're doing there.

PP  Absolutely. In fact, in Saudi Arabia, there is a project that is just now going into commissioning; the first hotels will be taking guests within the next couple of months. So, on the coast of the Red Sea, there is a regenerative tourism project in an area the size of Belgium. There's a whole bunch of hotels that are going in - zero carbon, zero waste, zero plastics, high-value, low-volume tourism. So there, 24 hours, seven days a week, 365 days a year, renewable energy - PV and batteries only in that particular instance. ACWA Power is the contractor delivering those services, and that's going online. So, it is now possible, by blending - certainly, if you have got wind, and in the case of this particular first project that we are doing in Xlinks in Morocco, where you've got fantastic, reliable... Because of the way the deserts and the oceans work, steady winds at night, right through the night. So, the wind raises sort of late afternoon, right the way through, blows till the sun picks up the following morning, fantastic complementarity. And then you use batteries just to manage the frequency and bit of storage in buffer. We're able to supply reliable energy, 24 hours a day, 23 hours a day in this particular case, through an underwater cable to the United Kingdom. But the exciting thing about Xlinks by the way is not just that project - I think that's super exciting. I think exactly like what NEOM is doing, once that project gets into construction, it'll open the floodgates. There is no way that we are going to efficiently complete the energy transition by having these little islands of grids and local supplies. Exactly like the communication revolution - the world is ringed by comms cables, fibre optic cables around the world - we'll end up with electron superhighways that will make the grids more resilient; completely change the load-curve everywhere; use redundant capacity while people are sleeping, people are working in a different time zone; locations, fantastic solar place here, fantastic wind place there, dark, no wind up there - link everything; and reduce the demand for storage, by the way - the grids themselves can store quite a lot.

ML  I love this picture, not just because I'm an investor in Xlinks for the one single project but... Xlinks, I know there's also conversation about Xlinks Morocco, potentially into Germany. What about Xlinks between Europe and the US?

PP  For me, I mean, when we started the on the Morocco project, I said to the team, I said guys, we've got to look at... absolute logic, right? Time difference, fantastic time difference to take advantage. Both are merchant markets, very, very efficient, functioning, merchant markets. So, we should... And the distance is 4200 kilometres, surprisingly. By the way, that was the first communications cable. So yeah, I would imagine that's the one of the things that we should be looking at.

ML  So, what's the distance? So, Morocco - England? 3,800 kilometres. And the losses would be?

PP  13%. So, when you're generating electricity on a blended basis, at about three and a half cents, four cents per kilowatt, 13% is no big ticket.

ML  So, 13% losses, just for those who think it's terribly lossy. Compared to, if we were to convert it into hydrogen in Morocco...

PP  Yeah, first of all... Electricity, I mean, look, we need a hell of a lot more electricity than hydrogen. Okay, that's the first point. And second point is that by converting and converting... Oh, no, no - you don't want to convert it and convert it back into electricity. That's crazy, right? You'll end up with about a 20% something percent efficient - theoretically 70%, 80% losses, as opposed to 13%.

ML  So, you would not recommend, for instance, your ammonia pathway, which you're doing with NEOM to Korea with Air Products? You would not... the idea of doing that instead of Xlinks is not something...?

PP  No, I don't think... They are not "instead of". I think Morocco can produce a hell of a lot of ammonia to produce fertilizer.

ML  Separately. But to bring in electricity into the UK - not ammonia? What about using this thing called eNG? Essentially, methane, made from captured co2 and electrolyzed green hydrogen? Would you use eNG instead of instead of Xlinks?

PP  No, because as I said to you, we need both. I mean, we need a hell of a lot more electricity than LNG, which is what eNG would replace, effectively. Look for me the eNG, again, in Zhero I'm...

ML  Let's just step back, because you know where I'm going with this, but I'm not sure that the audience does. Because the thing that you are working on now, so Zhero, is about, as you said, lots of cheap renewables and cheap hydrogen. But we had one of our most recent guests Marco Alverà, who is your partner on Zhero, and he is spending his time on this thing called TES. It is Episode 126, and we'll put links into the show notes. And what he's doing is, in my view, I'm gonna put it right out there - it's one of the things that I consider to be absolutely bonkers, from a thermodynamic perspective, and also from a subsidy perspective; it is only feasible because of the IRA money - the Inflation Reduction Act in the US. I mean, I calculated after the episode that... The pathway he's talking about which is capturing co2 from a fossil power station - completely crazy - and then using green hydrogen, combining them, bringing it into Wilhelmshaven in Germany, and then not caring what happens to the co2; so, this fossil co2 going into... scope three emissions up the wazoo, and so on. But that would provide him, if he can get away with it, with $60 of IRA subsidies per million Btu. And the price of a Btu in the US is $2, and in Europe is right now 10 because of the crisis, but normally five. So, he's talking about $60 of subsidies from American taxpayers, for Germany to import what is effectively LNG... I mean, this is... Are you sure you're happy with doing this business with him?

PP  Michael, first point I want to make on this subject: it's an energy transition, it's not an energy switch; it doesn't sort of magically decarbonize the following week. So, to me, eNG, is an essential contributory pathway to the final energy transition. So, what are we talking about? We are trying to find solutions where something that is emitting 100% of carbon... Yes, today, lots of discussion around taking it in an embedding it into the ground - we still don't know how long it's going to stay there, but that's another story, let's not go down that rabbit hole or that discussion. We're talking about somehow coming up with solutions that - instead of 100% - that whole package ends up reducing, taking away 80%, 85%, through the cycle of using the carbon as a carrier of hydrogen.

ML  But Paddy, sorry, to butt in, but that's not what Marco was talking about, right? Because he's taking fossil co2 - which is coming out of a power station - doing all sorts of incredibly lossy processes, and then emitting it again. Now it goes through two power stations at that point, or through two processes. But you cannot claim more than a 50% reduction - you cannot - because it is still fossil co2 ending up in the atmosphere.

PP  First of all, private sector is very efficient at most things it does. It's very efficient, also, at taking advantage of whatever the opportunities are there at a given time. Okay, so that's the first point. Look... other people need to manage their unintended consequences. Right now, there are opportunities available. So, Zhero is looking at projects, very specifically - or TES actually, sorry, in which Zhero is involved - has got projects where they are looking at taking carbon coming out of an industry, and using that carbon, and giving eNG back to that industry, in order to recapture it and send it back, use the carbon.

ML  And in the episode with Marco, that was the one sort of use case that I thought, you know, was at least vaguely feasible, where you remake your eNG because the process loves, it burns well... But that was sort of almost like on-site use. The other problem with this business of Wilhelmshaven, is that what he's going to be doing is selling his eNG, and what's going to happen to it? It's going to be used to generate electricity, for domestic and commercial low-temperature heat, and in industry. Of course, the electricity... Just do a cable. Just do X-links - you've said that's much better. So, if it's electricity, it's a stupid idea; if it's low-temperature heating, it's a stupid idea compared to a heat pump; and if it's in industry, most of it is a stupid idea, because most industry can simply electrify,

PP  We need time for transition, we need solutions in the intermediate period. Industries can do a lot of things while continuing to be industries, by the way. They can't just suddenly take a holiday, sabbatical for two years, while they retrofit everything.

ML  But why do something... Sorry, but you're right, we don't have time. But that what Marco was talking about his eNG plants, he says $2/3 billion each, right in the US? And of that, contributing, or financing that - you can do the numbers, I've done them - it's $580 million of US taxpayers' money, per year, thereafter. And you can say we're in a hurry, we must do... It's almost like, you know, we must do something, here's a thing, but it's stupid - ah, but it's a thing, so we must do it. I don't think we have to do it - I think we have to do clever things.

PP  As I said to you, Michael, you know, at the end of the day, the private sector will continue to take advantage of all the opportunities that are available to it. And in this particular case, we'll focus on... And also for me, getting these things done quickly, fast, is hugely valuable, because that will help us to drive costs down, build up experience, keep... One of the biggest things we should get to is: keep driving the electrolyzer costs down, all the balance of systems, get these plants built cheaper. If we are able to do half a dozen projects very quickly, I'm convinced we'll halve the price. Another dozen, we'll halve the price. So, I think we need to get on with that pathway, whatever pieces we can grab.

ML  But when you have natural gas, that is worth in the US $2 per million Btu, and you're talking $60 of subsidy to make it work. You can halve as much as you want, and you will not make that...There is a very useful lesson, a very useful conversation.... We've talked about the sort of cost of capital in the developing world, and there's some really big conversations we're touching on. The one I think we're touching on here is the difference between physics and thermodynamics, and engineering and kind of... And stuff where you really can't push down the costs. And juxtaposed with that, the stuff that you have brilliantly lead the world on, which is the learning curve, and it's the stuff that Professor Flyvbjerg talked about - the modularity, when you repeat and repeat how cheap you can get things. And I guess I worry that we're in a time in the world where, because wind got cheap, and solar got cheap, and batteries got cheap, that we sort of think that magically, ships full of liquid hydrogen will get cheap - they must! But actually, it's the physics of hydrogen that makes that a non-starter.

PP  Absolutely. Look, there are things that I think... I agree with you I don't think we have time to waste in pursuing some pipe dreams. But there are opportunities that will get us somewhere fast, and I'm always a proponent of... I'm also never going to underestimate human ingenuity and capacity and entrepreneurship - I've seen it at work.

ML  I agree with you. I'm not a religious person, but I have a religious belief in the learning curve. But not in breaking the second laws of thermodynamics. Paddy, it's a huge pleasure talking to you. Thank you so much.

PP  It's been great fun. Thank you.