Data Centers and Energy with Phil Deutch | E2015

When you have your electricity bill, let's say it's a hundred bucks, only 25 bucks of that is from the generation source, the rest of the wires to get it to you. But electricity in Texas is a good example. Might cost you 3 cents a kilowatt hour at a cool winter day. In the summer, that can jump to almost a thousand dollars kilowatt hour to the utility. They don't pass it through. But I can't think of a commodity in the world that goes up 300x in a day. No 3000x in a day.

Just Gamestop, right?

Just Gamestop, right, Right. The thing I think I'm close to being able to say is I think in our children's lifetime, electricity be close to being free.

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Alex here and I have a treat for you Today we have the very first talk from Our Liquidity Summit 2024. Phil Deutsch, a partner over at NGP Energy Partners, kicked things off with a look at the domestic energy industry. Now, if you've been watching the news at all, you know that Microsoft is currently working to actually get a nuclear power plant turned back on just so it can help power its data centers with low carbon energy. So this is an enormous topic. If we're going to see OpenAI and anthropic and all the other model companies become what we hope they will, we're going to need a lot more power. Where is it going to come from? What are the challenges and opportunities there? Well, Phil knows, and now you are about to.

We're going to start off with a bang. Today, the two most important topics on everybody's mind are AI and energy. And they and they dovetail together quite nicely. I was able to meet Phil Deutsch through our group. He's on the board of Chamat Social Capital partners and one of the most intelligent considered individuals. Also incredibly generous, but he's so quiet about it, you wouldn't know that, but he frequently sends me emails explaining things I got right, things I got wrong. You know, little bits of coaching here on the margins, but it doesn't feel like that. It feels more like having a big brother. So he's with NGP Energy Capital. He's going to talk today about these incredible opportunities and energy created by explosive data center growth. A first principles approach. Please welcome my bestie, Bill Deutsch.

First of all, I want to thank Jason and the Liquidity team. I think the innovation, enthusiasm, originality is just wonderful and infectious and I just want to give a hand. Jackie, thank you for everything you guys have done.

It's a great thing.

Second, I do want as an organizing principle, the day is organized by intelligence. You'll start with me at the top, the most intelligence and you'll finish with the besties at the end of the day. So it'll be a slow road down. Jackie offered to coach me and I said what the do I need coaching for? I've been doing this for a long time. And she said, well Phil, I think you should introduce yourself and say who you are and what your talk's about. And I said geez, that sounds like a pretty good idea. So I'm going to listen to Jackie. As Jason said, my name is Phil Deutsch, I'm a partner at NGP. I've been investing in the energy transition for 30 years which goes to show you how bad I've been at it. Since we're still at it. During that period of time we've invested about a billion dollars across non carbon solutions and products, created multibillion dollar companies in REG and TPI and I think are considered a top quartile performer, if not the only fund that's been doing it for 30 years. So over the next 30 minutes my goal is to teach you more about energy than Sachs and Chamath have ever learned in their whole life. Okay, so you're going to be well prepared for tonight. This means that if I lie about anything or I say anything wrong, you can't sue. Let's start off with data centers. Okay. And this is for the people who are talking at the end of the day. This is a picture of a data center. This is what they look like. There are lots of things in them. But what's most important and interesting about a data center is it has very unique power demands. It needs a lot of power. It's got a lot of hot chips and racks and servers and things that Sunny knows about. And it has to be reliable. So it's not like power can go out for a minute or two. You cannot have that happen in data center. It needs to be feeding those chips all day long. Second, I don't think this is terribly surprising to you unless you live under a rock. Data center are growing in this world. We're going to spend something like $2 trillion over the next four years. And so data center growth, absolutely explosive. Now, when we think about energy, which we'll talk about later in data centers, think about geographic problems, right? There's not just one data center. It's something that's across the United States. So it could be growth that's ubiquitous geographically. When we take the data center growth that was already projected and we add artificial intelligence on top of it, the growth becomes even more dynamic. So here you see a slide that shows you power consumption of a Google search versus an inquiry under one of the models that Sunny will talk about later. And it's about a 10x increase for artificial intelligence. So we're asking more and more of our data centers, Data center scalers and producers are not sitting idly by. Everyone's trying to meet this increased power demand. They might do it at the chip level. So here you see Nvidia power consumption on the left or the racks themselves. So everything is beefing up to meet the increased demands of artificial intelligence. And so when you look at a absolute chart of data center growth, it's enormous 3x increase in the demands that data centers are going to put on our energy systems. Now, just to put that in perspective, basically during our lifetimes, electricity growth in the United States has been about 0% because we get more and more efficient, more urbanization. We haven't needed more electricity demand. But the increase just from data centers alone plus EVs and others is going to change that growth rate on the right hand part of the slide from 0 to 2.4%. Now that might not be a lot, sound like a lot when we have companies growing at 20 or 30%. But think of the base of this. We're talking about total U.S. electricity demand. Every single way we use electricity. We're going to now see unprecedented growth. So we're seeing technology drive unique demands on electricity generation in the U.S. so what we walk away from this section saying to ourselves is huge growth in data centers fueled by artificial intelligence and the dramatic size of it is enough to increase the overall demand for electricity in the United States. It's very, very big deal. So let's talk a little bit about energy and how we think about energy connecting to this. And this is where I really want you to kind of slow down and think about the different parts of what it takes to get an electron from being generated to being used. Because people will say things like, okay, well you're going to use great solar power in the house and therefore we'll demand less oil from opec. Those are apples and oranges. One's electricity, one's a transportation fuel. So whenever you think about energy, you really have to get down to first principles and think about each step of the way because it's a complicated equation here and that's what I really want to focus you on next 10 or 15 minutes. So this slide, which is very busy, really is probably the most important slide in energy because what you have on the left is sources of energy. Okay? And here when we mean energy, we're not talking about electricity, we're talking about energy. And so it comes from petroleum, nat gas, solar, and those are all the ways it can be produced. And then it could go through various intermediate forms and then there's an output where it's what sectors it's used by, transportation, industrial, et cetera. So whenever anyone starts talking about energy, you want to know, okay, what's the source and what's the use and in what form do I want my energy when I use it? Do I want it a liquid like a gasoline in my car or I do want it like an electron plugged into the wall. So never lose sight of the fact that this is really your organizing home base, your first principles founders.

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Data centers, we're talking about electricity. So we can go from energy, which could have been oil, gas, to electrons. Okay? So you have to generate those electrons somehow. And here you see the various forms of electricity generation in the United States. What's really interesting from this slide is coal is dying, nuke stays about the same, and renewables have been the highest form of growth over the last five or six years in the US and globally. So the thing that gets added the most is renewables. And it does so at the cost of coal. Now, just like data centers are geographically distributed, so too is electricity generation. You have generation all across the United States. Some places are good at producing wind, for example, the Plains and Midwest. Some places do solar better, they can figure that out. But your generation is distributed. Each source of generation has a different cost to it. Right? That's intuitive. But you have to, as we think about, we have data centers are going to come up across us, it's going to need power across the US So it's going to be geographically. One issue will be where can I get solar in Maine? Probably not, but if I can, I get NAT gas in Colorado. Yes, but there'll be different costs. So you're going to think geographic plus cost. Then you might care about the future climate change. And if you do, you might want to lower CO2 emissions. So now you get overlay on your energy supply. Where is it located, how much does it cost and how much CO2 does it emit. Then different times a day produce at certain energy sources produce different amounts of energy. Solar not so good at night. Wind not so good when the wind doesn't blow. So your generation, you now got to think about when am I going to have it produce energy. And then there are also capacity factors as well. So you got to think about all these things. Now we've generated our electricity somehow burn coal, used solar, used wind. Now we've got to get it from the generation source to the use, okay? And so there are transmission and distribution lines across the United States. Hundreds of thousands of high voltage lines and then millions of low voltage lines. An incredibly complicated system. And what's most interesting about this is there is not one US electric grid. The grid is regulated by entities called RTOs and ISOs. Just follow the colors. But you cannot easily get electricity into and out of regions that are not yours. So for example, ercot Texas, it's its own world. Electrons do not flow in and out of Texas easily. So too California. You may have heard about path 4 or how you get electrons north and south in the state. That's been an issue. So we have a patchwork of grids, not one single grid. Now you could say, let's fix this. Let's build transmission lines, notoriously hard to do, very expensive, very hard to get through people's backyards, down my backyard and long. Even if you had the transmission distribution lines, you have to connect to it. So you have to get approval from your ISO rto. I built a solar farm. I want to hook up to the grid I'm in. That too takes time. And there's something called interconnection queues that make you wait to get onto your local grid. So in summary, what we see here is a very complicated system of energy generation plus transmission and distribution of those same electrons. And you have to think about all of that together when you think about how do I provide data for data centers. So the reason we're here today I think is to make money and think about ways to follow investment opportunities. And opportunities usually come from challenges. I'd like to spend a few minutes on the challenges and opportunities that we see by all this energy demand for data centers. First, the most obvious, we need more power. So things that are going to produce power and electrons are an obvious win for the US and the world in the next decade or two. Now the nature of this, this need is pretty staggering. But when you look and compare it to how we plan to meet future additions now, and you see here the overall net capacity additions, how much more energy we plan to do for wind or from solar, it's, it is attainable. So it's going out there and saying, can we add more solar? Can we add more wind. Absolutely. And we do it in better ways. So this is a problem that we can solve. And when you look at the impacts of these numbers on incremental natural gas demand, again, this is a very solvable problem. But it's going to take execution and better products and better services to do it. Second issue, challenge opportunity. I talked about the interconnection queues. People are waiting in line to get onto the grid. And this slide on the left, it is absolutely exploded. So this is the amount of. This is basically how long is it? I'm at the deli, Jason, this way. We're in a deli and you wear Katz's in New York. I got a number. My number is 3 million and 1. A long time till I get pastrami. No bueno. So we got to get on the grid as fast as we can. That is in some sense a regulatory problem which people like us in the room don't like because that puts time in the hands of bureaucrats, makes Girly insane. So we want to try and avoid that. And two ways you might think about avoiding that are one, distributed energy, right? If I produce power on site of the data center and I don't touch the grid, I don't have to get lined, get to queue up. But the amount of power I need at data center and the reliability I need make that a non trivial. But it's still a pretty smart idea. You may have seen that Amazon did a deal to buy power kind of directly from the next nuke that was next door to a data center. That's a way to try and cut in line and not have to stand in this queue. The second thing that's really interesting is a virtual power plant. And by that we mean you take a variety of supply and demand resources in an area and you connect them using software. So for example, at a peak energy demand, I may reduce my load in one place so that another place can use it, or I may use backup generators that are sitting on site at this hotel and use it to control for other purposes. So you kind of create a network and if you could do that, you might be able to avoid going to the grid. So these two ideas, you can go down those wormholes later of distributed energy resources and virtual power plants are a way to avoid the interconnect issue. Now this is an absolutely fantastic statistic done by Morgan Stanley. Right now people like Sunny are so hungry for electrons to run their data centers and their AI products, they will pay twice as much as prevailing electricity rates to get it faster. They want the electrons today. So imagine if you all are attacking a market where the incumbents are saying to you, I will pay you 2x over today's prices to get me this stuff. So that's a lot of fat to really go after with new business models. So speed really is incredible value to these data centers. Finally. This is not finally, but this is a little geeky. And I'm sorry for the kind of complexity. The slide transmission, as I said, is very bulky, hard to build. And because of that we have congestion and interconnection cues. And that leads to pricing differentials that are inefficient at their core. That is, if the grid was as fulsome as we wanted it at a peak moment, there wouldn't be pricing differentials caused by the transmission. You just can't get enough electrons through the pipe. Think about it that way. So when you look at these colors and these price differences, what they say to you is there's an inefficiency going on that can be exploited. If I could figure out how to debottleneck the grid or go around it. So this is another way of saying the extent you think of businesses and ideas that can get you out of the congestion of the grid, there's huge opportunities to make money here. One way to do it, that's a shortcut, is you can trade electrons. So for example, electricity, unlike stocks, is not traded in one place. It's traded all over the United States. So there are some people that say, okay, if I can figure out where the bottlenecks are, I might create a software program to buy electrons. In moments, I think it gets congested and it's the number one electrated commodity in the world, electricity. So it's just a long way of saying it is worth those of you who are thinking about places to invest to think about the grid. It has huge dollars involved.

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Finally, on the compute itself, we've presented there are a host of issues around energy siting, sourcing, how do you maintain assets, when do you turn certain things on, certain things off? And when you think about that, artificial intelligence will be something that matters. But the compute demand is outpacing the efficiency of the chips. So again, anything that makes chips more efficient will cut down on the overall power demand. So again, efficiency in chips, in racks and servers and cooling, all that stuff is a tremendous investment opportunity. When we look at the biggest hyperscalers, the people who are demanding the biggest data centers, Amazon, Meta, Microsoft, Google, they've made very public and very bold pronouncements about where they want to be from a CO2 emissions point of view. They want to get to net zero by certain dates and time, so they really put themselves a little bit of a box because the core of their business is demanding more and more electrons. Most of that electricity, about 60% wants to come from nat gas because that's kind of how we do it in the US now. And it's fast and cheap, but that gives you CO2. So how will these hyperscalers be able to meet their promises of being net zero? One way that everyone loves is direct air capture to suck CO2 out of the air. I'm not sure anyone's been able to show they can do it at a reasonable cost and that leads to things like carbon credits and other workarounds. But there's going to be a big problem for these companies because they've made public announcements in their regulatory filings and their SEC enforced to live up to these promises. So you're going to see a big rush over the next decade for these guys to figure out how am I going to reduce my CO2 emissions to meet my promises. This gets to probably, I think one of the weirdest things about energy that I just don't understand. I am really, really, really old and when I graduated from high school in 1982, I worked on how to solve nuclear waste to the United States. Since then, what we've done in solving nuclear waste disposal is zero. There's been no advancement in nukes in the US for decades. So the idea that we're going to solve the data center problem, which is measured in months, years, by building more nukes, is insanity to me because the rates of planning, the amount of time it takes to build a nuclear power plant are enormous. These numbers in China, five to seven years, they may actually be understated. It may take 10 years to build a nuke plant in China because just because you see one coming online now, it wasn't started yesterday. So people say, okay, you're pessimistic about the way old plants were, but what about new small modular reactors? Smarts. Or let's go to fusion, not fission. I mean, those are all great ideas, and I think there's some really great companies, but the timelines are just a mismatch between adding power over the next 900 days versus 10 years. So I guess if you could solve this problem of how long it takes to build nukes, I'm for nukes. I wish we had more of them. But just durationally, it's a mismatch to the data center problem. All of this leads a whole bunch of problems and a whole bunch of potential solutions. And artificial intelligence itself will be, as I mentioned earlier, one of the ways we work ourselves at it. There will be eventually smart people that take the AI resource and apply it to the energy problem. It's already being done, as I mentioned, with maintenance and how do you put generation online, but it'll be a really exciting part, solving some of the challenges we had today. So, in summary, I want, I hope you all are really enthused by this area. We have a huge growth and boom in data centers. It's not going to be stopped, connected to a very complicated energy system. And when you put those two together, you're going to just have a host of problems, challenges. And with that comes solutions. And if you're the guys who are on the cutting edge of the solutions, you should make a lot of money. So I hope that's a little bit of an intro, and I guarantee you you're all set for the podcast tonight on Energy.

Okay, so it seems like consumers in the United States have gotten a bit of a free ride on all of this, except when it comes to recent outages. Texas, California. I think the public's consciousness is starting to get triggered not because they want to save the Planet and put solar on. Some people do not because they can save money. Some people do. That didn't seem to drive a lot of consumer and consumers seem to be not the majority, but obviously significant here, but redundancy and batteries. And one of the great things that seems to have happened is with smartphones and EVs, battery technology has just absolutely been extraordinary. So how do batteries play into all of this? And maybe you could speak to that opportunity. I had a company on this week in startups two weeks ago that's just not putting solar in houses in Texas. They're putting batteries in your house to load them up during the low cost times and then deploying it during the peak times.

Peak shape. Yeah, they're, they're, they're load manually within the home. Right.

And they told me it's an 8x difference in cost between peak and trow. In terms of costs in Texas, let.

Me say there are a lot, there's lots of, It's a great question. Lots of things going on there. It'd be great if I could say it's a question, wouldn't it be great? But it was actually good.

Well, no, I was thinking it was such a comprehensive, it was a comprehensive talk.

The one thing on the company is Texas has a weird regulatory thing. So you have to be a little careful of that company. I do know it's a great company, just whether it scales beyond Texas. So that's the first thing. What your friend Elon Musk has done for energy cannot be overstated. Think about a home that has a power wall in it, a Tesla and solar on the roof. That home now has a mobile battery that is of significant size and that allows for things like, okay, I'm not going to use as much electricity at the highest peak rate. I can store it, I can move it. And I believe the projections are in about a decade there'll be more power in electric vehicles than there are in nat gas power plants at a certain moment in time. So you are right, it is going to change everything because we've never had that size of battery at our house. And I think it's only the lightning. Sonny used to be a Ford that allows bidirectional you can plug in but soon every car will. Is that right, Sonny? Cybertruck. Cybertruck. We have one outside. So that's going to change everything, Jason and one of the neatest facts is when you have your electricity bill, let's say it's 100 bucks, only 25 bucks of that is from the generation source. The rest of the wires to get it to you. But electricity in Texas is a good example. Might cost you 3 cents a kilowatt hour at a cool winter day. In the summer, that can jump to almost $1,000 kilowatt hour to the utility. They don't pass it through. But I can't think of a commodity in the world that goes up 300x in a day. No 3000x in a day.

Just GameStop.

Right?

Just GameStop. Right, right. So a battery allows you to arb GameStop. So that's a long way saying there are a lot of great things there, but they're all true.

All right, everybody.

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We'll take one question from the audience.

Everybody has a great question. You know, we used to hear about the demands of blockchain and crypto, and so that seems to have gone away with the demands of AI.

And so I'd like maybe you can.

Sort of talk about where you see that going and the demand. And then when you talk about software solutions. Are you talking like solutions like power ledger things where they're doing peer to peer trading.

So first on the crypto. I've never understood the focus on crypto power usage, for example. Let me give you an example. Let's say you wore Loro Piana sweaters. I don't know but I would guess that the energy used to knit and make a Laura piano sweater is 100x a J. Crew sweater. But we don't do it there. So there are lots of things in life, I bet the best wine is more energy use energy in it than the worst. So I think there are lots of things in life that improve with energy use. And for some reason we say I want to know how much it costs to make a bitcoin. I'm okay with that, but let's do that with everything. So. But you are right that with the other power usages there's been less focus on it. Now there's one really neat thing about bitcoin mining and maybe data centers too. And this goes to inference versus trading, which I don't really get. Sunny does. If you could stop using your power at key times, as I mentioned, it's very valuable, particularly in the state of Texas. And the crypto miners can do that because they're making a straight trade. So they've become very good. And you've probably read about the swing capacity turn down when electricity and maybe you can do the same with data centers. So that'd be another example of a software that would shut you down at key moments. But yeah, peer to peer is one.

So in the United States, EV adoption has stalled out right now at about 10%. And the U.S. government has put a few billion dollars at this problem and it's been a couple of years and they really haven't built out the charging infrastructure. Why do you think that is? And do you think we'll have the.

Infrastructure to hit about 50% by 2030.

In the United States?

Yeah. Today I don't think I ever mentioned the word government. And you know, there's a $2 trillion government program called the Inflation Reduction Act. I've lived in Washington for 30 years of my life and the less I think about government, the happier I am. I'm not against it. I just don't. You know, our funds are 10 years in duration. I can't count on policy one way or the other. I think every advance in energy, whether it's solar or electric vehicles or anything, is because technology has improved and a product's been created that people want. And I think that's going to continue to happen with EVs and chargers. And so I have utter confidence that no matter who's president, who's in Congress, that the forces that are creating energy transition in the United States, whether it's avoiding blackouts or whether it's reducing carbon, whether it's driving a Tesla because it's better than a GM Saturn, whatever they are, are in stop, they're not stop. They are inevitable. So, yes, I think all those things are going to happen and it's going to be incumbent on people like us to make it happen through the private sector. And the government may help us, but it's really our job do it, not theirs.

Where's the most unlikely innovation going to happen? I've been reading that solar just keeps making more innovations that were unexpected. We'll say, what does Solar keeps making unexpected gains and costs keep plummeting. Is that the place where you think there'll be maybe some unknown unknowns that allow us to get much more energy created? Do you think it's fission? I mean, I know some of this stuff is science fiction, but if you had to place your bet on something crazy, that could happen.

Yeah, I think. Let me kind of give you three ideas of what it could be. I think storage is going to be the first one that we're going to see a huge reduction in energy storage. Full disclosure, I'm talking my own book. We're big investors in Form Energy, but there are lots of other companies trying to do it and they want to see reductions in energy storage across the board, which will be really impactful on supply and cost of electricity. So that's 1, 2 on vision. It's possible. But even the best CEOs, the best vision companies, say there's work to be done to see if it can actually work. So yes, that could surprise us, but that would be a surprise. The third thing that I'll say is whenever I fundraise, I always tell every lp, I guarantee you'll there'll be a blackout during this fund. There's always a blackout somewhere in the United States and the grid, as you pointed out. The thing I think I'm close to being able to say is I think in our children's lifetime, electricity would be close to being free because there'll be so much solar, so much wind, and so much storage that will really drive it down. Like WI fi, right? When WI fi first came out, you had to pay for it. It born electricity first came out, you pay for it. Now we get free WI fi, free electricity. Don't even think about it with our cup of coffee. So I think you see that at a whole scale and it goes negative sometimes in the country now. So it's not the most absurd thing.

For me to say.

This has been amazing.

Give it up for Phil doi.

Great ending.

On a super positive note.

That gap that Phil mentioned between how fast we can build data centers and how fast we can build new electricity generation capacity I think explains why we're seeing so many modular nuclear reactor startups. One of my favorite niches out there. Anyways, before we go, I do want to thank the sponsors from the event that Phil's talk came from. That was Forge Global. They do a lot of secondaries trading. I'm sure you've heard of them. Vensure, which provides end to end solutions for payroll, HR benefits and risk management. And then finally Eventus Advisory, a quote, leader in on demand finance and accounting support they helped put on the show. We appreciate them. We appreciate you and we'll see you back on Twist real soon. Bye.