Today Ross and Christophe are speaking with corporate environmental attorney and blockchain enthusiast Mike Denby of Arizona Public Service, the largest power company in Arizona. APS is a vertically-integrated utility, both generating and selling power to its customers. They discuss how blockchain technology might be utilized in the energy sector and how the conservative business culture of the utility industry is likely to impact its interest in cryptocurrency.
Full Transcript
Ross Kenyon: Hello, welcome to the Reversing Climate Change podcast with Nori. I’m Ross Kenyon, the co-host of the show, along with Christophe Jospe, who is sitting across from me. We’re in downtown Phoenix in a high rise, and it’s really beautiful up here. We just came from ASU and glad to be here. Christophe, why don’t you introduce our guest?
Christophe Jospe: Yeah, sure. Still feeling the sun on the back of my neck.
Ross Kenyon: Yeah, I guess you’re from Seattle. Are you deprived?
Christophe Jospe: I am soaking in the vitamin D. I’m beaming. It is really awesome. You’re glowing. You have a nice glow about you. Yeah. Maybe we should just set up business in Phoenix.
Ross Kenyon: We should. We keep coming back here. I feel like there’s so much stuff happening here. And I guess you spend time here and instead of Paul and I and a lot of the rest of our team. But it’s nice to have reasons to come back to Phoenix. A lot of cool stuff is happening out here.
Christophe Jospe: For sure. We might get into it. So sitting across from us here, we’ve got Mike Demby. He works at APS. I’m sure he’ll say it too, but I’ll say it first. What he says represents his own views and not those of APS. But Mike, how about you introduce yourselves and tell us what you do? Sure.
Michael Denby: I work at APS and I do environmental policy work for them. So I’ve been an attorney for the last 20 plus years doing environmental work, various places around town, mostly actually all of it in Arizona. For the last three years, I’ve been doing environmental policy work at APS, which really includes a lot of discussion about where the company is going in the future environmentally, how it’s dealing with things like the Clean Power Plan that came up, how it’s dealing with things like the Waters of the United States issues. And so it really has a forward-looking approach that tries to understand where the company needs to go in the future as it’s dealing with its current assets and its current growth patterns.
Ross Kenyon: And Mike, what is APS?
Michael Denby: Did we define it? I’m sorry.
Ross Kenyon: We’re big sticklers on like the acronyms because we can never keep track of all of them.
Michael Denby: For everybody in the rest of the world, APS is Arizona Public Service. And it is the largest power company in Arizona. It is a vertically integrated utility. So those people out on the East Coast don’t have the same perspective, which is we are the generators and the sellers of the power. We have the customers and the assets to make the power. A lot of places out in the East Coast and other places in the world will have a deregulated system wherein you have power producers who compete for the marketplace to sell and the line providers who have the customers and We sit in a rather unique little place in Arizona.
We are also one of the few states that actually has APSs just within Arizona. We don’t reach outside of Arizona, but we’re in, I think it’s 11 of the 15 counties in Arizona. There’s several other utilities in the state. SRP is one of the other big ones in the state. Do you guys have like water balloon fights between you?
Ross Kenyon: We get along for the most part.
Michael Denby: At least with my interactions with them, we do get along.
Christophe Jospe: SRP, that’s the Salt River Project?
Michael Denby: That is correct.
Christophe Jospe: So they put salt water in their water balloons.
Michael Denby: That’s right. They’re salt in the water. Yeah, they’re a quasi-governmental organization. And so they’re vertically integrated as well in the sense that they have power assets and then they sell to their customers directly.
Ross Kenyon: And you’re in an interesting position, too, because you’re someone who is both interested in environmental policy and law, but you also have a passion for things that involve the blockchain, if my understanding is correct.
Michael Denby: Absolutely. I got hooked on cryptocurrencies to start with back in about end of May, maybe March, actually, I think. By April, I was mining Ethereum and SIA coin. Anybody ever heard of that one? If you have, go buy it, please, because I got a bunch of it. It keeps coming down in value.
Ross Kenyon: I think it had a good couple of days, though, didn’t it? It got up.
Michael Denby: It’s like tripled over the last couple of days. Awesome. I need to go check in. Yeah, check your portfolio. Last time I looked, it was like, I don’t know, it was ridiculous. 0. 000. I’m like, come on, come back up. So anyway, I started mining that stuff back in April and from there decided, what else is there? And that’s where I started getting into the background, what’s behind it all in the blockchain. And ICOs were an interesting piece to me, but I’m not in the ICO world necessarily.
Christophe Jospe: Sorry, I’m going to stop you again. ICO?
Michael Denby: Initial coin offering when the startup companies are trying to get their funding through the blockchain. And so I started looking at blockchain and what really drives the blockchain and where it’s going and what its opportunities are in the future. And so I instantly put two and two together with what I do at APS with the policy side of things and sort of a forward-looking perspective. A lot of people in the power industry are either in their silo and that’s what they do. Or they are looking forward only in a very incremental sort of way.
They’re not looking long term, which is sort of what I’m there to do. So I’ve sort of taken this project on myself to try and educate as many people at APS about it. And as I mentioned earlier, the APS, like a lot of large companies, but APS is very much a petri dish for potential blockchain opportunities because they cover everything from customer payments coming in to management of insane amounts of data. We’ve got regulatory requirements, which I think is a fantastically interesting place for blockchain in the future. Right now, if you are doing compliance with the EPA, Environmental Protection Agency, or the state versions of it, we even have down to the county levels here and city levels at some points.
When you’re doing compliance for environmental purposes with them, you have to do a lot of what we call green carding, which is you send the little return receipt requested card to the agency that has your return address on it. And if they don’t get the data or if they got the data and they lost the data, there’s all this speculation about, well, who’s responsible and did we actually get it? And we’ve never seen the data. Did you actually submit it? And so from a regulatory perspective, blockchain has great potential opportunities there for people to say, you know, here’s a regulatory program where the machines themselves send the data to EPA and we never have to be in the middle of it, but the data is forever archived and forever immutable.
So pieces like that are great. And it goes all the way up. We’ve got supply chain, we’ve got energy trading, which you probably all want to talk a little bit more about, but We do a significant amount of energy trading. Even though we have our own assets and we build those assets to supply our customers, we are routinely in the marketplace looking for cheaper power. If there’s cheaper power, we will not run our assets. We will buy that cheap power from California or wherever it may be coming from, from Washington and import it into the state.
And so the power trading side for blockchain is huge as well. And so there’s a huge number of opportunities within the vertical integrated entity that is APS.
Ross Kenyon: And for energy trading, is it like normal commodities trading? How do you have it delivered?
Michael Denby: Right. How does that work? So it’s fascinating how the energy trading works. And we recently, APS recently, I think it was last October, if I remember correctly. So it’s a year and Three months into when it happened, they turned it on. We joined CAISO, which is the California Independent System Operator platform, which allowed us to trade with California on – we have trading desks that are set up to look, I think it’s a week ahead, a day ahead, and an hour ahead was the way that they were set up, three trading desks.
And now it’s down to the five minute increments. So the Queso piece allows us to trade within five minute increments of that energy need showing up. And so the clouds come across the sun and the solar starts to drop. You need to have access to additional power for those 10 minutes. The solar is coming down. You can go to the grid and buy it off the grid. From California. From California. CAISO is California. It includes several other states, I think. I think it includes Washington and Nevada or somewhere else. I don’t know exactly the states in there.
But there’s a handful of states that are part of that. And you trade amongst yourselves. So the network is all contained. But it allows us to meet demand without having to ramp up generation. Or more problematic for the environment is keeping loads...
Christophe Jospe: Peaker plants?
Michael Denby: Well, there’s a term they use and I apologize for forgetting.
Ross Kenyon: Peaker pricing?
Michael Denby: You have your peaker plants, but you’ve got your plant out there, but you do it as a load following. So it’s just, it’s rotating, it’s waiting. It’s on, it’s going, but it’s not at full. It’s sort of like having your car idling, just waiting.
Ross Kenyon: I see.
Michael Denby: And so they’ll keep these out there running to meet these potential demand rise. And the demand rise hits, your plant is ready to ramp itself up because old style peaker plants would take 10, 15 minutes to get up and running. Even the larger units, the more efficient units would take, you know, 45 minutes to an hour to get up and running. And so having these ability to trade quick and in short amounts allows you to not have to run those assets in a sort of trailing mode. They could actually be ready to go.
Ross Kenyon: This is kind of like a nerdy, like finance question or commodities trading question, but do you always settle in terms of electricity or do people just speculate and say like, oh, clouds are coming. Like I bought ahead of time. I’m going to resell it for cash. Can you settle for cash in there?
Michael Denby: I’m not exactly sure. I will tell you what I do know about the process and that is that so if we do sell it to California or we buy it from California, there are a lot of people in the process. It’s not just Southern Cal Edison selling to Arizona Public Service. It is... Southern Cal wheeling it out of a substation somewhere, going through a different substation, hitting another set of lines that go 50 miles. Then there’s another group of people that own a different set of lines. It all looks the same to us.
It’s just a bunch of power lines, but there are different consortiums that own different pieces of these lines across the United States. And they all have their fingers in the pie. And so they all have to be paid, so to speak, as it goes through. It’s a very complex process that it’s magical that, you know, your lights just stay on. You don’t have to worry about like, well, it’s browning out because somebody forgot to turn the switch somewhere. It’s very self-regulating, but at the same time, it requires a great deal of anticipation.
The Super Bowl is coming up and it’s in Arizona. They know certain things are going to happen. They have to step forward to meet those needs as they come on.
Christophe Jospe: Yeah, that’s exciting. One number that shocked me the other day is when I discovered how many utilities there are in the US. It’s over 3,000. You’re basically a monopoly and you have to play by these same rules with these other monopolies. And I just find that really interesting that I’ve got these sort of dynamics that emerge and somehow, I guess where I’m getting at with my question is, how do you take a regulated approach to let the market decide how you should work?
Michael Denby: So we are regulated by the local public utility commission, what we call the Arizona Corporation Commission here in Arizona, but there are PUCs all across the United States. They set the ground rules for how we can do what we do. They set the ground rules for what we can do in terms of trading, in terms of any sort of sales that we’re doing. And within that process, we’re allowed to have our ups and downs and to move in the marketplace. At the end of the day, shareholders drive our Bottom line of what we’re doing in terms of whether we’re buying and selling.
And so if we can get cheaper power through the CAISO, it doesn’t mean that we get to pocket the difference. That cheaper power, according to the Public Utility Commission, because we get cheaper power, you get a rebate back on your bill. And so most people in Arizona don’t realize this, but if you look at your bill every now and again, It’ll be different than it normally was in the sense that it’ll be a reduced rate or there’ll be an actual refund piece on there for like fuel savings. If we saved money on fuel that we had initially allocated that we’re going to charge people for, they’ll come back and clarify that and line it out.
And it’s all very... It’s all very visible. And there are dozens and dozens of people at APS that this is their job is to follow this stuff. And I’m not one of them.
Christophe Jospe: Compliance costs are always quite high and difficult and the stakes are very high if you mess it up. But I think I finally understand the name. You’re a public service. I get it.
Michael Denby: Public service, but also a very shareholder driven company. And it’s very profitable from what I’ve been told. I don’t own any EPS stock, but apparently it’s one of the highest stocks in the power market these days. Good for us.
Ross Kenyon: Is it actually a monopoly? Do you have a jurisdiction where you know it is?
Michael Denby: Yes. So there’s a map. The people in Phoenix would probably love to see this because I never knew this until I started working there. But APS is the main provider throughout Arizona. SRP has a section that is very close to downtown Phoenix. It incorporates a big U around downtown Phoenix. We have 1. 2 million customers, I think it is, and they have like 1 million customers or something in there. And one of the advantages that they have that we don’t have is they’re very concentrated. They’re right in that locale. We have assets and lines that go all the way up into the nether regions of Arizona, which, and I was up at Havasu Falls not too long ago, about a month ago with my kids and we’re driving down this road and the road goes on forever and it’s just open and nothing out there.
Beautiful country, but just in these power lines, small power lines, there’s going and going and going. And my kids ask like, are those APS lines? And I’m like, I don’t know if they are or aren’t. And I went back to the map and looked and we don’t actually serve Havasu Falls and Havasupai and Supai area, but we serve up close to it. And you’re talking probably 50 miles without seeing a house, 20 miles maybe without seeing a house. That’s a lot of money stringing up those lines for that one person to pay us $100 a month.
Are you obligated by regulation to serve that person? Yes. And so we have to serve them. It’s a big network. And so it takes a lot of people and a lot of effort to maintain it, which is fabulous. And they do a great job on it. It’s a very cost-intensive business.
Ross Kenyon: We tend to be very skeptical of monopolies. I don’t want to put you on the spot, but what would it look like if it wasn’t a monopoly? It’s maybe a little off topic, but I’m very curious. Texas. Texas, yeah.
Christophe Jospe: Well, I say that jokingly because they have deregulated energy markets, but I’d be interested to hear your thoughts.
Michael Denby: So even the deregulated markets are still controlled at some level. They’re certainly not monopolies in that sense, but they do have a service area. So the wires people have a service area, and that is theirs that they get to claim control over. The deregulation side, from my understanding of deregulation, is you’re just separating the generation of assets from the wires and transfer side.
Ross Kenyon: They legally can’t be vertically integrated?
Michael Denby: Right. Oh. Deregulation says you’ve got to sell off that generation asset. And so they broke the companies into two and they would have sort of the mob L approach, but they’re still connected to the power lines in the sense that somebody has to serve those houses. And so when a deregulated company has The power lines that service your house and you change providers of your, you know, I’m going to buy power from this guy instead of that guy. It’s still coming through their lines and they have a wheeling tax, I’m sure.
I’m not exactly sure of it, but I’m sure they got a wheeling tax because somebody has to pay to maintain those lines of the houses when they go down or... And you can’t claim that’s somebody else’s customer now and they got to go out and fix your power pole.
Ross Kenyon: So there’s still like public utility kind of style regulation.
Michael Denby: So it’s not completely a free market in terms of that. You own the lines and then generation becomes where you get the free market who can compete for the cheapest generation and to put them onto the lines. But the line people are still your line people.
Ross Kenyon: I see. Okay. We got to talk about climate change.
Christophe Jospe: I could pick your brain all day long about this stuff though. I’m sure you saw just climate change fuming out of my eyes. That was my next question.
Ross Kenyon: I’m sorry. I had to know.
Christophe Jospe: So the name of this podcast is Reversing Climate Change. We are crazy enough to think that we can build a business. As you know, I hope climate change comes from greenhouse gases in the atmosphere, which are emitted from burning fossil fuels. And when America designed its power grid, we didn’t take this externality. And to consideration that when we burn fossil fuels, it emits this problem and someone else is going to deal with it. Well, it’s today’s generation’s problem. So we want to not emit fossil fuels. I’m going to start with the slow pitch, but we’re going to take it up a little bit.
What’s APS’s energy fleet? What is your fossil versus non-fossil assets? And how do you think about that? Energy fleet? Oh, yeah. Let’s get away from the lingo. How do you generate power and give it to people? Yeah.
Michael Denby: We have a quite a diverse portfolio of power generation. So we run and have ownership interest in a Palo Verde nuclear power generating station, which is the largest nuclear power plant in the United States out here in west of town. So that is our nuclear side. And it is the wish you let me know you’d ask that question because I would have brought some materials that would have given exact answers. But I think the presentation is working on just the other day that had a lot of this in it. I think 80% of the carbon-free emissions in Arizona come from Palo Verde.
And so it’s one of the largest sources, which is great. And it is an amazing operation. I grew up in the era of nuclear power and like, okay, what’s it all really mean? They sent me out there about three months ago to spend a month doing a systems course to learn how you actually make nuclear power from start to finish. And I Off topic a little bit, but it was fascinating because everything about the plant is designed to be left alone in the sense that Three Mile Island failed because people tried to override a system.
Chernobyl failed because people tried to manipulate the system. In Japan, there’s two different segments of the plant that were hit. And the guy apparently in one of the plants who did the right thing, everything worked out fine. The other guy took a different approach and everything went bad. It was fascinating that this system is designed because if it gets too hot, it actually shuts itself down naturally. It’s not a mechanism. And then if it gets too cold, it needs to warm itself up to run. So it wants to sit at this optimum temperature and optimum range.
Versus the coal plants or the gas plants, they don’t want to sit at 100% capacity. That’s like taking your car to redline all the time. They don’t want to be there, but nuclear power wants to be right there because that’s the soft spot for it.
Ross Kenyon: The sweet spot is just at 100% capacity for nuclear. It just equilibrates on its own.
Michael Denby: Yeah, that’s the whole beauty of it is it wants to do a self-equilibrium. If it gets too cold, if the process begins to cool the water and cold, you know, relative term, it’s, you know, 500 degrees Fahrenheit or some crazy number. But if it starts to cool down, the reactions will pick up to compensate for it. So nuclear power is pretty interesting. And I certainly got my eyes open when I went over there and spent a month there working with those guys. So back to your question about the fleet. So we’ve got nuclear power.
About a third of it’s from coal and about a third of it from gas and oil. And then we’ve got solar in there. Solar plays a big part of it. We have, I think it’s, I want to say like 150 megawatts worth of solar. Don’t quote me on that number. That’s just our assets that we own. What we actually supply on a daily basis from energy. Where’s that source coming from that keeps your lights on? That is a more movable number in terms of whatever is available asset-wise. And I can tell you the more that California adds solar to its system, the more solar that comes into Arizona.
Because what we end up doing is end up buying cheap solar from California because they have an overabundance of solar at certain times of the day. We will take that and use that as an asset here.
Ross Kenyon: Is it just because they can’t store it very well still?
Michael Denby: Right. There virtually is no storage. Energy storage is coming along. It’s fascinating. Battery storage. We’ve got a project that we’re just opening up here called the Pumpkin Center, which is energy storage. I think it is a two megawatt system. And energy storage is on the cusp of...
Ross Kenyon: Call Elon up.
Michael Denby: Yeah. See what’s going on. Yes, you see it in the news. It’s exploding in that sense of it is really gaining traction. And it makes sense because right now in California, they’ve got something called negative pricing. And so if they have so much electricity on their grid that they can’t use it, it makes the grid unstable. And so they will pay people to take that energy from them. And so negative pricing will allow somebody like APS to actually get energy from California and be paid for the privilege of taking that from them.
Ross Kenyon: But that’s just business to business. You can’t do that as a consumer. They never pay me. I know.
Michael Denby: It’d be great, wouldn’t it? No. So negative pricing is a huge issue because a lot of these solar assets, but the negative pricing comes at not the best time of day. That’s why it’s negative in the sense it’s coming, you know, 11 to 2. Like, well, people are at work. Yeah, we don’t need the power ourselves. And so there’s a lot of it that we I’ve been there for three years, and it started before I got there, but getting into the solar piece, we’ve got a solar innovation project that they put together.
We’ll see you next time. If you’re putting them on the west roof, is that the best? Is the south roof the best? In different locations. And so what they’re using it for as well is they’re using it for controlling the grid stability. And so what happens with voltage issues for renewables sometimes is you get these voltage drops and it causes problems on the grid. And so if you can use some of these assets to just maintain voltage, not even supplying energy to lights, but just maintaining the voltage is another aspect that helps keep the grid stable, which the normal way we used to do it and still do it to some extent is you turn on your coal-based or your gas-based plants to keep that base load going.
And so if you can find ways to have the renewables control some of that, then you don’t have to have that spinning reserve. That’s the word I was looking for a while back. You don’t have to have the spinning reserve waiting to be utilized.
Ross Kenyon: I wouldn’t have had that one in my quaver for years. This whole thing is like magic to me that people are like, yeah, obviously you just turn on your light switch and you expect it to work. And if it doesn’t, you’re angry.
Christophe Jospe: And it’s your fault if it doesn’t.
Ross Kenyon: Yeah. Yeah, Mike, we’re coming for you.
Michael Denby: They get very angry. And the first place they go is the Arizona Corporation Commission. Why aren’t my lights turned on faster?
Christophe Jospe: How do they file a complaint? Do you have to read the comments box or something?
Michael Denby: No, they talk to the Corporation Commission and usually the closer you are to the voice of power, the quicker you get your issue heard.
Christophe Jospe: All right. So I got the $50,000 question now that we clearly understand that you have to deliver this public service, which is when I flick my light switch, the lights go on. And if you don’t do that, you’re in deep water. And if you don’t make money, your investors are pissed. But there’s this externality that someone needs to deal with. And so two thirds of your Energy production is emitting fossil fuels. How do you deal with that?
Michael Denby: There’s an interesting approach that I’ve been exposed to here in the last year. The Clean Power Plan came along and everyone’s like, oh, the Clean Power Plan is going to kill fossil or kill coal and it’s going to change everything. We were actually in a balanced position at APS. So the Clean Power Plan was actually, we were looking at it at the end of the day, in all honesty, we were sitting around thinking, do we support this thing or do we go against it? Because if we support it, we could actually ride this wave because we’ve got enough renewables, we’ve got enough other assets to offset the emissions elements that they were requiring.
But we sat back and we’re like, I don’t know, what’s this really going to do? And then history is telling you what happened. So the Clean Power Plan is pretty much gone now through the Trump administration. And you sit back and think, well, does that mean we’re turning coal plants back on in the sense of ramping them back up? And the answer to that is no. That ship has sailed. As part of the policy reviews that I do, I do a lot of tracking of where things are going in the marketplace.
And it’s not an instant answer for carbon, but it is certainly a better answer in the sense of gas is the, whatever his name was, it’s talking about the bridge. And it’s driving the price of energy down, down in terms of the production costs. And it is causing coal to suffer. I think it was actually the Department of Energy that finally put out their document that acknowledged that the main reason coal is dying is because natural gas is eating its lunch. It can’t survive in natural gas territory.
Ross Kenyon: Natural gas comes from fracking, right?
Michael Denby: A good portion of it comes from fracking.
Ross Kenyon: Do we do that here?
Michael Denby: Oh, yeah.
Ross Kenyon: Oh, in Arizona? Yeah.
Michael Denby: No, no, not in Arizona.
Ross Kenyon: Okay.
Michael Denby: Yeah, but no, throughout the whole Midwest and up through the Permian Basin and all that stuff. But on net, it’s much better than coal. Yes. On net, it’s about half the CO2 emissions of coal, natural gases. So you’re halfway there by just using natural gas. And what you’re also finding with renewables coming online and natural gas playing a role. The thing that really struck me about a year ago was we got a letter from an investment group. And the investment group represented this list of all the nonprofits or whatever it was that they have as their investing pool.
And so you’re looking at a very large group of investors here. They weren’t APS investors. They didn’t own APS stock. At least I’m not aware they did. I think they were actually European based. So they came out of England or something, but they had interests all around the world. And their comments to us were, what are you doing about carbon? And I can tell you without a doubt that all the discussions of the Clean Power Plan, people talked about carbon. Yeah, yeah, yeah. But when the investment community asked us what we’re doing about carbon, everybody’s eyes opened.
They’re like, wait a second, we need to take this seriously. Really? This is for real.
Ross Kenyon: It’s like that’s carrots instead of sticks, right?
Michael Denby: Exactly. And it really comes down to, for APS, it comes down to telling your story better and what else is out there to do to the next level for taking care of this question. Because it’s becoming more and more of an issue of investors and businesses want to know what you’re doing. Supply chain elements want to know what you’re doing for carbon because it’s impacting them. And, you know, Meeting with the guys at Intel, they’re 100% renewable energy out of SRP. So they use it for their Ocotillo facility down here in Chandler.
They use 100% renewables, but I know that SRP doesn’t have enough renewables to supply that giant fab. That thing is enormous. So they’re buying it on the market? So SRP goes out to the market and finds renewables and wields it to them. And obviously there’s a fee in there, but they’ve negotiated and these are contracts for like five or 10 years. This is not just a day-by-day thing. Are they futures contracts or... I don’t know exactly what kind of contract, but it’s a long-term contract. And the concept is we want to buy renewables and we want to be committed to this.
We want to make sure that everybody’s in on this. It’s not going to be one day we’re on renewables and the next day we’re back on coal. You just lock it down, right? And so they locked it down. And so all these things are starting to come into the utility space. And when you deal with the growth of renewables into the utility space, along with the growth of gas, you’re dealing with a completely changed What used to be baseload facilities are no longer baseload. APS has two major baseload facilities. One’s four corners up at the four corners of Arizona, New Mexico, and Nevada.
Christophe Jospe: And just for our listeners, could you define baseload?
Michael Denby: Baseload is your classic old... Coal-powered power plant that’s going 24 hours a day, 7 days a week. And just like a nuclear power plant wants to stay operational at 100% load, coal plants ideally want to stay operational, but not at 100%, but they want to stay up and running. They don’t want to shut down and then restart, shut down and restart. Not in their bailiwick at all.
Christophe Jospe: That’s an expensive process.
Michael Denby: Well, and it’s very hard on the equipment. So the equipment is not designed to cool down and then restart. The equipment is designed to get up and stay at an operating temperature until sometime when you get planned maintenance to take it down. Some of the earlier gas facilities, similar concept. You bring them up and keep them running. Now, with the newer and newer innovations into it, they’ve got these turbines, which are basically jet engines attached to an exhaust pipe, that can come online within 5-10 minutes, produce 100 megawatts, and be shut off within 20 minutes, 30 minutes.
And they come on and off. And so they don’t need that baseload piece. And so it’s changing the dynamic of the value of coal-fired power plants. And we don’t need that... Because you’ve got those 3,000 megawatts coming out of that facility, you’re set in the sense of here’s a good base load and pick everything else off of that. Which creates other issues for large companies like us, which is, well, you know, Cholla Coal Fire Power Plant is our other coal plant. You’ve got, I’m going to just take a wild guess, you know, 300 people employed up there.
Probably more than that. Where is this? Up near St. John’s. It’s in Holbrook area, St. John’s. Oh, okay. It’s far up there, yeah. When you close a plant like that, you decimate a community. Like, there are people that have lived there for 50 years. That is their job. There are people that work at Hardee’s that their job is to serve food to the people who, you know, Come through the community who are the power plant people. It’s not just the power plant jobs you lose. When you lose it, you lose a lot of the community jobs.
And so the company has to look at how you weigh those things and what do you do to help those communities and how do you deal with that. And you can’t just pick them all up and move them to Phoenix because that’s their life up there. They don’t want to just pick up and move. And it’s a difficult piece for them. More and more, they’re trying to figure out how to use our story of how we’re dealing with carbon and how we’re moving ahead with all the innovation and energy. To tell the story that helps people understand.
And another piece, and maybe I’ll proactively jump in before you can ask the question on it. One of the things that’s important to understand too about the power companies is, so if we build a $500 million power plant that’s designed to last for 30 years, the PUC down here, Public Utility Commission, Gives you a payback on that and says, okay, that’s your asset and you get to charge the customers X pennies per kilowatt for the next 30 years to pay for that asset. You get to be reimbursed for it. But if we’re just to turn it off tomorrow, our shareholders aren’t going to like that.
You can’t just turn off a $500 million asset and walk away from it because you now have an issue with your corporate side that says you should be doing that. And so it’s not just a simple, oh, we’re going to keep doing this because we don’t care. There’s a business side, there’s the social side, and then there’s the environmental side. Companies have to balance all these together, which is pretty interesting.
Ross Kenyon: Well, you’re right and you’re wrong because Kristoff wasn’t about to ask you that because we actually talked about that on the last podcast. Did we not? That came up?
Christophe Jospe: It came up, but I like the preemptive answer because it set up another question, $100,000 and total pitch for Nori at the same time. Okay, let’s do it. So you’ve got these assets which are delivering energy, which we all like and need and rely on really in a major way that aren’t going to go away and are going to continue to emit carbon. Which the world has agreed is a problem and we need to manage. So how does the utility manage these assets, which might now have an additional price to pay?
And where would you look for? And would some buy now because it’s cheap and it’ll be worth more in the future cryptocurrency be relevant at all to a company that might be looking for efficient ways to offset or negate the carbon that is coming from some of their power plants?
Michael Denby: So I would have to say from a cryptocurrency standpoint, I wouldn’t think that any utility would be excited about cryptocurrency.
Ross Kenyon: Are they kind of conservative institutions? Yes.
Michael Denby: So they are enormously conservative, not politically, but from a business perspective. They don’t like risk. And the fact that Bitcoin is up, you know, 11,000, whatever it is today, that doesn’t impress them at all because it can go down the same amount tomorrow as far as they’re concerned. But the U. S. dollar isn’t going to jump that much. It’ll a few pennies a day maybe, but that’s about it. And so they’re very conservative in that approach. And they want to make sure that what they’re doing makes sense for 5, 10, 20 years in the future.
They don’t want to look for today and tomorrow. They’re looking long term for, you know, their own Well-being, they don’t want that to happen. They don’t want it to happen for shareholders because then the shareholders lose value if they did something like that. And they certainly don’t want to do it if they end up bankrupting themselves and then the PUC has to make the rate payers pay more to bail them out of that because then they would forever be beaten on by the PUC for doing that. It’s created this culture and it’s rightly so at some levels, a very conservative business culture that says one of the guys that I work with was quoted as saying that, you know, we’re followers, not leaders.
And so when everybody else is doing it and it works in the system, we’ll come on board.
Ross Kenyon: You’re kind of a weirdo though, aren’t you? You’re leading the pack in your field.
Michael Denby: You’re trying to push them along? I’m trying. As a whole, we’re definitely a follower, not a leader. But we’ve got a whole energy innovation group that’s doing phenomenally exciting new innovation stuff to try and see what’s next. And they’re the ones that started this battery project. And so they want to be out there trying to see what they can do. At that, it takes a lot of pushing to get the administration to do, the corporate administration to do what they would hope you could do as the next level. And so I think they’re becoming more and more flexible in terms of seeing value in the future because the old system doesn’t work anymore.
The old system of baseload and let’s just keep going and get an R5% or whatever the difference is off of it. That whole market has changed and they see that and they understand it, but They’re still trying to figure out how to deal with it without putting themselves into peril. So from a currency perspective, I don’t think they would be at all interested in a currency itself. But if the currency was in a market that had an impact on them, then that would be a phenomenal way to elevate the system and to move the carbon capture or the carbon sequestration element into play would be The best way to influence anything that happens at a public utility is through the PUCs.
At the PUCs, we have a renewable portfolio. Again, not my area of expertise, but I think it’s 20% by 2020 or something like that or 20% by 2025 or something like that. And we’re way ahead of our goals and we’ve got no problem making that. But that whole thing came up as a result of the PUC saying, we want to see something because our constituents are coming to us and complaining and we want to see you guys do something. The other day I did this presentation I think it was 30 million dollars we spent last year on energy efficiency like giving away light bulbs and stuff to people for energy efficiency projects in Arizona.
There’s a lot of money and a lot of effort being spent to do things. And the whole reason that energy efficiency program started was because the PUC said you need to go out there and do something to help consumers lower their energy bills.
Christophe Jospe: Right. Because in a way, that’s counterintuitive to your bottom line.
Michael Denby: It is. You know, the 24 looks at you cock and you’re like, you want me to do what? You want me to give you light bulbs so that you will then buy less energy from me? Like how is this working out? I lose on the front and the back. But no, overall it makes sense and it works. And I think that the leadership over there understands that. Because at the end of the day, if you reduce the energy use at some level, you’re creating less need for us to build more generation assets, allowing us to use more flexible alternatives to meet the needs.
Ross Kenyon: It might be less volatile. The needs might be more even potentially.
Michael Denby: Well, and like the Pumpkin Center, they’re looking to put in this two megawatt battery storage. Part of it is because if they can do the battery storage and prove that it works, then they don’t have to build this additional power line, this additional transmission line that would bring power from a high voltage power over to it, which would save the company, you know, 20s, 30s, 50 millions, I don’t know, whatever it is of dollars for building that power line. And so it’s one of these where they’re like, hey, let’s invest in something that maybe makes it easier for us to do it.
Ross Kenyon: Are you going to do some cool blockchain things? Is that what you got coming up at APS?
Michael Denby: So I am very much trying to encourage APS to look into blockchain and we’ve had some really good meetings so far and I think people are excited about it. The things that really interest them, obviously, and what I think the big elements of blockchain are going to be removing the middleman. Anytime you’re removing the middleman is going to be a fabulous way to control the system and reduce expenses.
Ross Kenyon: You got to say the buzzword. I hear it like four times a day. Disintermediation.
Christophe Jospe: How many times a day do you hear that, Paul? Half of them are from you.
Ross Kenyon: No, me complaining about it. That’s a good word.
Christophe Jospe: Ross Disintermediation Kenyon. No, no, no. Stop nicknaming me. The other buzzword we need to throw out is immutability also, which would probably matter when you’re reporting on data that you can say, hey, this is the truth.
Michael Denby: Absolutely. It’s just in the energy marketing side of things. It’s fascinating. If you look at what it takes us to sell a megawatt to Southern California, it goes through all these different wheeling lines. It’s not just us selling in Southern California giving us a check. There’s a lot of people in the middle of that. Then there’s a lot of auditing that has to go on to establish that you actually got that megawatt and that it didn’t get diverted or there’s other problems going on in the system and you didn’t get a full megawatt.
There’s Rooms full of people that do nothing all day except validate these transactions. And it takes, you know, I don’t know what it is, 30 days, 60 days before you actually get a check for doing that. And I’m like, well, you could do that instantaneously with the blockchain. And so there’s great opportunities. And, you know, beyond that, not just taking out all the delay in the process, but if you are looking at it and saying, if it’s just Southern Cal and APS buying from each other, does it need to be in cash?
Does it need to go through a bank? I don’t know if it does or not, but at some point in time, you could even take the banks out of the picture potentially. So there’s lots of opportunities like that. And so I’ve been very much a proponent of trying to encourage them to look at it and see. They’re not plugging anything in tomorrow and I don’t have any plans to try and get them to plug in anything tomorrow. But I think the more opportunities they see out there for it and the more value it can provide to them, the more likely it is to happen.
Ross Kenyon: I’m sure you’re not too popular with your colleagues, though, if you’re trying to replace all their jobs with weird internet technology.
Michael Denby: I am very popular. Everybody comes in and wants to talk to me about Bitcoin all the time. Even with all the mining I’ve done, I still have like $5 of Bitcoin. That’s all I’ve ever owned. I use it as an intermediary. I use Bitcoin to buy other coins, and then I have a few little 0. 000000s left over. That’s exactly right.
Christophe Jospe: I have pennies of Bitcoin littered all over the internet.
Ross Kenyon: Yeah, I think that’s me too. I think like $3 right now. I feel like if you don’t work in cryptocurrency and blockchain and you’re into it, you’re just like the most popular guy at the office whenever it’s in a bull rush. What’s the big geology building that’s right north of the airport, that company over there? And it has like some sort of like beautiful, like Greek sounding, oh, We’re back to that again. Like nice, like soft vowels and whatever. My buddy works over there as a geologist though. And like every day, like people are like, oh, are you watching the market today?
They just like never leave him alone. He’s just like, yeah, I became like quite a popular man. That was me at your wedding.
Christophe Jospe: Oh, yeah. You kept sending people over to my table the entire reception.
Ross Kenyon: I was like, oh, you’re interested? Yeah, go see people. Paul, he’s over there. He’s a good sport about the whole thing. But that’s you at your company, though.
Michael Denby: Yeah, it is. We’ve actually tried to start a little blockchain group. And so far, it’s me. And I sit there and talk to two or three other people that come in that know nothing about blockchain and they want to know more. And so they come to talk to me. I’m like, well, I guess we’re a blockchain group because you’re talking with me. But... It’s interesting and I love it. It’s a fascinating world to me. And you all maybe saw the news article from TechCrunch just a day or two ago about CryptoKitties.
Have you seen that?
Ross Kenyon: Oh, yes. We’re very familiar. We already had a few conversations about it today.
Michael Denby: Fascinating. Like if they can do that, they can do anything. Energy trading shouldn’t be a problem if you can do CryptoKitties.
Ross Kenyon: Very optimistic.
Christophe Jospe: That’s like a hopeful note. That’s good. So you’ve drunk the Kool-Aid then. You’re in. I’m in. Do you think blockchain is going to change the world?
Michael Denby: I think it’s going to change the gears and mechanism inside the world. The outside of the world is going to look very much the same to the average person. My mom and dad aren’t going to notice the difference between how their services run today or tomorrow. But I think the gears inside are going to change completely. I think that’s the way I look at it, which is fascinating to me because it does require sort of you to be able to do that, change it in process, which is cool.
Ross Kenyon: My favorite quote about this is the Andreas Antonopoulos, like he’s looking forward for the day when blockchain is boring and it’s just sort of like in the background and everything works really well and it’s better than what we already have.
Michael Denby: Yeah.
Ross Kenyon: I don’t know how far off that is. I hope it’s exciting for at least a little bit longer. Yeah. It’s fun. Gets that dopamine every day going. But yeah, it would be nice if it’s just like, oh, this all works and it’s now the backbone of the entire world.
Michael Denby: Yeah.
Ross Kenyon: I think we’re headed there.
Michael Denby: I think we are. I think we are. And I think in the energy sector, you’re definitely headed there. And coming in through the PUCs or however you want to do that. But if you encourage the action, there will be a result. But right now, on its face, one of the issues that I’ve tracked, and it’s a serious concern in the utility industry, is there’s two carbon capture projects in the United States from an energy production standpoint that are sort of the opposite sides of the same seesaw. And one is Kemper, which was a complete disaster.
Yep, been there. And $7 billion in the hole. And the other was Petronova, which is the energy success down in Texas. In my mind, the flaw with both of them is that they’re both linked to injection or EOR, whatever it is, enhanced oil recovery is where they’re both linked. And so, yes, there may be an offset in terms of you get a greater reduction in CO2 than you are by pumping out the oil.
Ross Kenyon: What is this? I’m not familiar with this.
Michael Denby: So what they do with these carbon capture techniques that they’ve employed, one of them was a place called Kemper in Mississippi. The other is Petronova. And we’ll talk more about Petronova because it’s actually up and running. Kemper has been mothballed. But Petronova, they take a bypass of the flue gas coming out of the coal-fired power plant. And they take that flue gas and they inject it into the ground. And it goes out, I don’t know what it is, 80 miles or something, out to an oil field. They inject it into the ground and they use it as EOR, Enhanced Oil Recovery.
And so it basically pushes down on the oil so it displaces the oil and makes the oil come out of the oil wells better.
Ross Kenyon: They pay a lot for this, right? I mean, like companies who are drilling, they want that carbon there, that CO2.
Michael Denby: So my understanding of how it goes down is that Petronova has the assets on site. They have an additional facility that pumps this CO2. It doesn’t want to naturally go over there. They got to pump it. So there’s an energy intensive piece. But then NRG gets a payment back for the amount of oil coming out. So they get some sort of a share in the amount of oil. The more oil that comes out, the more profitable it is for them to do this. The lower the price of oil, the less profitable it is for them to do this.
And so if oil prices go really low, then they will turn it off because it becomes a loser for them versus a winner. It’s like hung up on these pieces that like those aren’t sustainable in my mind. I forget what the project is in Illinois.
Christophe Jospe: Decatur.
Michael Denby: Decatur, yeah, at the ADM plant. Again, that’s not sustainable. It’s only a Yeah.
Christophe Jospe: The whole carbon capture industry is illustrative to how we’re approaching this, which, frankly, we hope to maybe motivate the carbon capture and storage industry to exist, but we are not necessarily the carrot that’s going to pay them because we’re focused. Yeah. It’s funny. I remember sitting in one of the Southern power facilities. Once I say this on the air, Southern won’t want to come on our podcast. But it was a very fateful day. I wrote about this. It was when Lisa Jackson announced the clean power rule. And Southern, unlike APS, decided, ah, we’re just going to sue the Environmental Protection Agency, which they did.
So they did what they say they were going to do. And it was very interesting because For me to see on the inside, okay, well, here we’ve got utilities which are going to do what’s in the best interest of the utility, but not the climate. And so part of what we’re trying to do is to create a way to say, okay, we all know that this climate change thing is real. We need to not only stop emitting, but reverse the emissions that we’ve previously been responsible for. And so I guess this leads me to my question, which is it’s kind of a public utility to be part of the cleanup crew.
Where you’re not necessarily providing energy, but you’re providing negative emissions. How does that resonate?
Michael Denby: I don’t think it would resonate too well to start with telling them they got to just clean it up. But again, if you get the PUC involved, the Public Utility Commission is the one saying you got to clean it up or you got to take these efforts or buy these offsets. It’s very similar to the way we operate in California. When we sell energy to California, you got to have offsets for that. It’s very similar to our energy efficiency programs. You got to just do it. And so you do it and you find ways to make it financially viable.
To me, the carbon capture world is a fascinating opportunity if you can get true carbon capture. The proverbial machine that just sits out there and absorbs carbon dioxide out of the air that can do it forever type of thing versus we’re going to inject it in to get an enhanced oil recovery. Maybe a net benefit, but kind of a gray area to me. Like, are you really saving CO2?
Ross Kenyon: Well, I at least like it because that technology will get perfected and hopefully we’ll focus on mineralizing it rather than focusing on oil extraction. But I think like that’s like the road it’s taking. That’s like the only thing that I’ve seen that’s like really hopeful about that. If people can start monetizing their carbon, even in like unideal kind of ways, maybe we start heading in a better way.
Michael Denby: And one of the things that they’re also I think is helpful to the utilities to get utilities moving in the right direction is And I say this just from my own perspective. I’ve not done any poll of anybody else. But my wife is one who’s like, if I had to pay $0. 05 more for a kilowatt of energy, but I knew it was clean energy, I’d do it. Can I do that? APS did a lot of work to get a green tariff approved or a green rate approved. But the green rate is not a carbon-free rate.
It is biomass and some other things in there. And I’m like, we’ve got Palo Verde. Why can’t you just commit to obligate to buy from Palo Verde?
Ross Kenyon: Nuclear is a big no-no. Yeah.
Michael Denby: And it’s carbon-free. Or you go with the renewables. So the whole concept is if you can offer these opportunities for people to invest in a higher rate, as long as it is dedicated towards a cause, you’re bound to get more response. But right now, just choose your rate because you’re trying to find the best plan that works for you. You don’t look at it and say which one’s the least carbon intensive.
Ross Kenyon: I’m sure if like if you’re on a budget and you’re concerned about that, I’m sure like your immediate needs for I mean, it obviously trumps like any sort of ideological commitment that you might make. I don’t think anyone really fault you too much for that. Like if it’s a difference between like half and half or having like bread in your house for your kids.
Michael Denby: So this is my perspective, though, is it you’d have that group that’s always going to be there. But there’s also going to be the group that can afford it and the group that would desire it. And if you can offer it to them and enough people start to come on board, it begins to tip the scales. And pretty soon our assets have to mirror what our customers are asking for. And if our assets are having to mirror the fact that more and more people want these carbon-free rates, then we need to go out and find more carbon-free energy for them, which means we need to build up on those assets.
And after a while, it would get to a tipping point where it would tip and it would be a carbon-free basis instead of a Fossil fuel basis with a few carbon free on the side.
Ross Kenyon: If it were cheaper to just buy carbon removal credits instead of switching over the energy that you’re actually producing to carbon free, would APS consider it? Absolutely.
Michael Denby: That’s good to know.
Ross Kenyon: That’s good intel. We’ll log that away for talking to utilities. Yeah. Yeah. It’s all about.
Christophe Jospe: Sounds like it would avoid the utility death spiral.
Michael Denby: Yeah.
Christophe Jospe: Utility death spiral. What’s that? Putting you on the spot. What is that, Mike?
Michael Denby: I’m not aware.
Christophe Jospe: This was something I learned in grad school. Maybe it was just something they teach master’s students studying environmental science and policy. But the way I understand the utility death spiral is... When more and more users want to own their own solar and the utility has to buy it back from them at unfavorable rates, it begins costing the utility more to do business, which accelerates more people to want to put solar on their own roof and own their own power. And over time sort of advances this distributed sense of microgrid power plants, which is dangerous for the business model.
Michael Denby: Yeah, I know what that argument is and I’m not the expert on it, but I’ll give you my two cents on it. Again, this is all Mike Denby talking. And that is, I don’t think our utility is scared of rooftop solar putting us out of business. I don’t think they’ve ever been scared of that and nor will they. At some point in time, all those rooftop systems have to have power lines connected to them. Unless you don’t have an air conditioner in your house and you don’t have any true... And so I think at that level, it’s questionable.
And you take away the rebate side of solar panels, which is all starting to dry up from what I’ve been told. I’m not into that side of the company. It makes it harder and harder for people to justify the return on their investment for the solar panels. But at the same time, we do a lot. I mean, there’s a lot of solar power that comes through from the residential side. And what had been happening in Arizona is you had the net metering rules, which required APS to buy energy. Right. Right.
Right. And they did, I guess, adjust the net metering. So there are grandfathered people in, but everybody else new into the system doesn’t get that same benefit. I think at some level, being a vertically integrated utility, that’s a short-term thing. Because deregulation is going to happen at some level, some way along the line. Because generation assets are so hit and miss. But power lines are power lines. Yeah. Foreseeable future for the rest of my life, I’m sure there’s going to be power lines connected to my house. I’m off the grid.
It’s not really going to be a reality.
Ross Kenyon: And those seem like public goods in a sense where like the power provider is not necessarily a public good. Like you could have competitors for producing power and it seems fine. Whereas can you have like 14 different lines connected to your house? Seems like a big like capital expenditure and pretty complicated. And you have like weird easements. I’m sure you, you probably work on stuff like that sometimes. Yeah. You see stuff like that.
Michael Denby: Yeah. Weird disagreements. So when you get to the line side of the house, to the residential, to the service of the customer, compared to the transmission lines, which are completely different. The big power lines you see going up to the Hoover Dam and whatnot are all not. It’s a whole different world. But the power lines that go to your house or go to the local business that power this building we’re in right now, that’s the long-term stable money in the future. Right now, the generation, you can see it in the Midwest.
Ameren was just talking about closing a bunch of coal plants in order to bring on some wind, I think it was, they’re looking to do. And it’s all because they’re competing in deregulated markets over there. And so they got to look at what the value of that asset is to the marketplace. And like, it’s just, it’s not going to be able to compete. It currently isn’t, or is that the borderline in the next five, 10 years, it’s not going to compete. So let’s move on to other things. So you’ll see a lot of that.
So I think the death spiral may be more of a deregulation spiral that, you know, take out the asset of the generation asset, but the lines are still be there.
Ross Kenyon: Yeah. Christoph, what are you going to do about that? What are you going to do?
Christophe Jospe: Yeah, I’ll take it. And I’m satisfied with your answer, Mike.
Ross Kenyon: Oh, I think we should call it an interview, though. I think we had a good podcast, but I think we’re at that time now. So, Mike, thanks for joining us. It was super fun to talk to you. Thanks for letting me ask a bunch of boring finance questions at you at the beginning of it, quiz you about monopolies and utilities.
Michael Denby: I’m glad to be here. Thank you for letting me share my thoughts with you all.
Christophe Jospe: Awesome. Yeah, we had fun. Thanks, Mike.
