Podcast Summary
Identifying Investing Opportunities in Real Estate and Energy: Principal Asset Management offers local insights and global expertise to find compelling real estate investments, while the DOE's loan program, led by Jigar Shah, now has $300B to lend out, accelerating clean energy finance and bringing infrastructure projects to scale.
Principal Asset Management, with its 360-degree perspective, delivers local insights and global expertise to identify compelling investing opportunities in real estate. Meanwhile, in the world of energy, the Department of Energy's loan program, led by Jigar Shah, is now a major player in the energy transition with over $300 billion to lend out, thanks to the Inflation Reduction Act. This significant increase in funding will help accelerate clean energy finance and bring infrastructure projects to scale. The loan programs office has historically played a crucial role in figuring out how to get debt into infrastructure projects, as debt is often hesitant to invest in early-stage, risky technologies. By providing debt financing, the government aims to bridge the gap and bring innovative technologies to market. The conversation with Jigar Shah on Odd Lots will delve into his plans for deploying this newfound funding and the impact it could have on the energy transition.
Federal government's role in funding clean energy technologies: The federal government's role extends beyond grants, with loans also necessary to make clean energy technologies bankable. The Inflation Reduction Act has increased funding, allowing for more applications and building trust, but the challenge is to allocate $350 billion by 2026.
The Office of Clean Energy Demonstration in the federal government plays a crucial role in funding the development and demonstration of clean energy technologies. However, grants alone are not enough to make these technologies bankable for commercial financing. Loans are also necessary, and the federal government serves as a catalyst by underwriting these loans, which then encourages private sector investment. With the recent influx of funding from the Inflation Reduction Act, the office is now able to process more applications and build trust with entrepreneurs and growth companies, leading to increased interest from potential applicants. The challenge is to spend the $350 billion allocated for energy efficiency and renewable energy projects by the end of 2026 through programs like Title 17 (1703) for project finance and 1706 for repurposing energy infrastructure.
Supporting industries through loan programs: DOE loan programs not only support individual companies but also foster industries by reducing risk and establishing credibility. They evaluate loan applications based on repayment potential and look for sectors with an existing ecosystem to maximize impact.
The recent loan authority increases for advanced technology vehicle manufacturing and tribal energy loan guarantee programs serve not only to support individual companies but also to foster entire industries by reducing risk and establishing credibility. The Department of Energy evaluates loan applications based on a reasonable prospect of repayment and operates similarly to a commercial bank. However, in their outreach and business development efforts, they look for sectors with an existing ecosystem to maximize the "crowding in" effect and avoid being left with outdated or uninnovative projects. When it comes to evaluating unproven tech, the DOE does not take technology risk at the loan programs office but instead assesses perceived risk based on the expertise and demonstration projects of the DOE's 10,000-strong platform of engineers and scientists. For instance, they provided a conditional commitment to Monolith Materials' 25-year-old methane pyrolysis technology, which has a proven underlying concept but still carries operational risk.
Identifying high-growth energy sectors for investment: Investing in energy projects with large market potential and advanced technologies can lead to profitable and impactful outcomes, but risks include technology success and plant uptime. Evaluate TAM vs SAM and be aware of capital crowding in smaller markets.
Investing in energy projects involves risks, but identifying sectors with high potential for growth and significant market size can lead to profitable and impactful outcomes. The speakers discussed a carbon capture project that could generate profits if operated at high capacity, but the risk lies in the technology's success and plant uptime. They also mentioned the importance of evaluating the Total Addressable Market (TAM) versus the Smaller Addressable Market (SAM) and the challenge of crowding in capital in smaller markets. The speakers shared their excitement for hydro and geothermal energy, but acknowledged the need for advanced technologies to expand their market size and potential impact on carbon emissions. They also reflected on the lessons learned from past failures, such as Solyndra, and the improvements made to mitigate risks in the loan programs since then.
Innovation and Perseverance in Energy Technology: Successful commercialization of energy technology demands a deep industry understanding, innovation, and perseverance, even when it's financially unviable. Visionaries like Harold Hamm and Elon Musk illustrate this principle.
Successful commercialization of energy technology requires a deep understanding of the industry and a relentless dedication to innovation, even when it doesn't make immediate financial sense. The Department of Energy's (DOE) experience with fracking and the stories of Harold Hamm and Elon Musk illustrate this principle. Fracking, which the DOE helped invent, didn't make economic sense when oil prices were low, but visionaries like Harold Hamm kept pushing forward, and when oil prices rose, they reaped the rewards. Similarly, Elon Musk's persistence with Tesla and Andy Marsh's efforts at Plug Power paid off in the long run. In the energy sector, it's crucial to evaluate the technology's readiness, but also consider the market conditions and the determination of the entrepreneurs behind it. The DOE's current approach to solar manufacturing loans reflects this understanding, with a focus on proven operators, solid offtake agreements, and a thorough evaluation of the risks involved.
Companies adopting renewable energy solutions face initial challenges but see significant payoffs: Despite initial hurdles, companies like Amazon and Walmart have reaped economic benefits from investing in renewable energy. Green hydrogen and other renewable sources are gaining traction, but market conditions and government policies impact their adoption.
Despite the initial challenges and long wait times for companies like Amazon and Walmart to adopt renewable energy solutions, the investment has paid off significantly. Plateau Energy Services, for instance, has become a major player in the green hydrogen market with a $14 billion order book, and companies are now being forced to adopt these technologies due to their economic viability. However, the energy sector is different from the tech sector as the cost of natural gas or oil sets a cap on potential profits. This means that breakthroughs in green hydrogen or other renewable energy sources may have to wait until the market conditions are favorable. The nuclear industry is also experiencing a shift in attitudes, with Diablo Canyon and German nuclear plants extending their operations, and nuclear being recognized as an essential part of a diverse grid mix to ensure reliability and resilience. Companies seeking loans for renewable energy projects are evaluated based on their qualification for loan programs and not necessarily on their contribution to grid mix or resiliency.
Shifting from custom nuclear plant designs to a standardized approach: To make nuclear energy cost-effective and efficient, the industry needs to adopt a standardized approach to building nuclear plants, like building airplanes with a completed design before construction.
While spreadsheet models can help identify optimal projects for infrastructure development, the reality involves numerous challenges that require blood, sweat, and tears from developers in local communities. Nuclear energy, in particular, faces difficulties with plants often running behind schedule and over budget. The industry needs to shift from building nuclear plants like airports with custom designs for every site to building them like airplanes with a 100% completed design before construction. This approach can lead to more efficient and cost-effective nuclear energy projects. Despite the challenges, recognizing the problem and implementing solutions is crucial for making nuclear energy a part of the low carbon mix and providing large-scale, low carbon energy.
Shift towards Small Modular Reactors in Nuclear Energy: Nuclear industry moving towards cost-effective SMRs, NuScale's design approved, political support for nuclear replacements, $100B DOE funding for energy transition, race for preferred utility technology, potential for significant economic and environmental impact.
The nuclear energy industry is experiencing a shift towards small modular reactors (SMRs) due to their cost-effectiveness and political considerations. Companies like Hitachi, NuScale, and Holtec International are leading the charge in this new approach, with several utility companies considering their technologies for future power plants. The Nuclear Regulatory Commission's recent approval of NuScale's design is a significant step forward. From a political standpoint, communities that rely on coal plants for significant portions of their budgets and employment are more likely to support nuclear plants as a replacement. The Department of Energy is allocating $100 billion to accelerate the energy transition, and while some of this money will be deployed through existing programs, a new program, 1706, focuses on repurposing existing energy infrastructure, offering opportunities for conversions to renewable energy or nuclear power. The race is on to see which technology will emerge as the preferred choice for utilities, but the potential for significant economic and environmental impact is clear.
Increased loan applications for energy repurposing require more financial institutions' involvement: The Inflation Reduction Act has led to a surge in loan applications for energy repurposing, but more financial institutions are needed to help entrepreneurs secure financing through the loan programs office.
The passing of the Inflation Reduction Act has led to an increase in loan applications for repurposing old energy assets, but there's a need for more financial institutions to get involved. The loan programs office, which was largely dormant since 2011, requires the help of investment banks, commercial banks, and financial advisory firms to connect entrepreneurs with the necessary financing. The vision is to electrify various industries and appliances, but concerns about the grid's ability to keep up have been raised. Natural gas was once seen as a bridge fuel, but with issues arising in the industry, the focus is shifting towards more efficient solutions. The key is to ensure a diverse energy infrastructure and not rely solely on the grid. The passing of the Inflation Reduction Act has sparked interest among financial institutions, and the need now is to build relationships and collaborate to make the most of this opportunity.
Shifting focus to energy efficiency and investing in substitutes: Emphasize energy efficiency, invest in alternatives like heat pumps and renewables, plan for transition, acknowledge need for continued production, and address grid capacity.
We need to shift our focus from just producing more energy to using energy more efficiently and investing in substitutes. This was discussed in relation to the historical context of peak gas predictions and subsequent natural gas price increases. The speaker emphasized the importance of heat pumps as a more efficient alternative to natural gas systems and encouraged the rapid transition to renewable energy sources like solar, wind, nuclear, and geothermal. He also mentioned the need to keep operating some coal plants for grid capacity and the importance of planning for this transition. The speaker acknowledged the risk of crowding out private investment with large government financing but assured that it's not a concern yet. Overall, the message was to move towards energy efficiency and investment in substitutes while also acknowledging the need for continued production and the importance of planning for the transition.
Government's Role in Renewable Energy Transition: The government plays a crucial role in accelerating renewable energy transition, but success depends on effective loan programs and addressing complex challenges like permitting and regulations.
The role of the government in accelerating the transition to renewable energy and addressing energy infrastructure challenges is a complex issue with significant potential. Jigger Shaw's work at the Energy Department aims to bring together various projects and operationalize government support in a cost-effective and timely manner. However, the success of this approach hinges on the government's ability to make good loans and effectively scale up these initiatives. Additionally, challenges such as permitting processes and local regulations add complexity to the situation. Despite these hurdles, the potential impact of this work is significant, with a potential shift from $39 billion to $350 billion in investments. The conversation highlights the importance of addressing these challenges and finding solutions to make the transition to renewable energy smoother and more efficient.
Importance of relationships in energy sector between DOE and Wall Street: Building relationships between DOE and Wall Street can lead to funding opportunities for energy projects, but over-reliance on government funding may crowd out private investment.
Learning from this discussion on the Odd Lots podcast is the importance of relationships and networking in the energy sector, particularly between the Department of Energy and Wall Street banks. Jigger Shaw, a former executive at SunEdison, highlighted the potential benefits of these connections, including the ability for banks to refer promising projects to the DOE for funding consideration. However, there is a risk of "crowding out" if banks become too reliant on this process, potentially reducing their own investment in energy projects. The government's role as a financier for energy projects was also discussed, with the potential for the DOE to take equity stakes in companies and recycle profits to fund more projects. Overall, the success of energy projects depends on a variety of factors, including timing, financing, and relationships. It's essential to strike a balance between government funding and private investment to ensure the long-term sustainability and growth of the energy sector.
