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Authors join peers, scholars, and friends in conversation. Topics include environment, humanities, race, social justice, cultural studies, art, literature and literary criticism, media studies, sociology, anthropology, grief and loss, mental health, and more.
Electricity is not a typical commodity. It's incredibly hard to govern. It's just really difficult for markets to distribute it efficiently.
Shelley Welton:Boy, is it a moment for energy policy. And if you think about what's happened over the last thirty ish years, it's been a story of major transformation in coal and natural gas.
Conor Harrison:Hi, I'm Conor Harrison. I'm an associate professor at the Department of Geography in the School of Earth, Ocean and Environment at the University of South Carolina. And I'm the author of Brokers of Power, the Financialization of The US Electricity System which is out now through the University of Minnesota Press. The book takes on what I view as two really critical industries, energy and finance and particularly how Wall Street is influencing the pace and the trajectory of The US energy transition. And I'm very pleased that joining me today to talk about the book is my friend and colleague, Doctor.
Conor Harrison:Shelley Welton.
Shelley Welton:Hi. So nice to be with you, Connor. I am Shelley Welton. I am a professor of law and energy policy at the University of Pennsylvania Carey School of Law and Penn's Kleinman Center for Energy Policy. And it's been a distinct pleasure of mine to get to coauthor with Connor several times over the past many years and just consider him a great friend.
Shelley Welton:So I'm very excited to be here to talk about his new book. I thought as a starting point, I would just say a little bit about what I see as sort of the dominant narratives that have been told about The US electricity system over the past several decades. Because I think Connor's doing something really interesting to force us to reconceptualize or expand on these narratives. So I thought I'd start with just a little bit of background on that, and then we'll get into what Connor's book does that I think is really new and interesting. So I would say there's really two sort of big stories that are often told about what's been going on with The US electricity system.
Shelley Welton:One of these stories is a story of deregulation. Right? So we used to have an electricity system that was really heavily regulated with a big utility owning all of the generation that makes electricity, all of the poles and wires that move it, and delivering electricity to consumers. And back in the nineteen nineties, as part of a larger deregulatory effort, a bunch of advocates started to push for introducing more competition into these sectors, having companies compete to sell electricity instead of have it be so heavily regulated and done by a single entity. And so part of what you've seen change in the sector over the last thirty years is this move towards electricity markets, towards...
Shelley Welton:You know, we often call it restructuring in energy, not deregulation, just because it still takes a lot of work to keep the lights on all the time. But the system looks really different now. It looks much more competitive. There are a lot more markets, at least in parts of the country. The other story that I've heard told a lot about the electricity system in the last thirty ish years is a story of change in sources.
Shelley Welton:Right? So we used to have a system that was extremely dominated by coal with natural gas playing a smaller role and renewables playing a very tiny role in the grid. And if you think about what's happened over the last thirty ish years, it's been a story of major transformation in coal and natural gas. Right? Hydraulic fracturing unlocked tons of gas resources.
Shelley Welton:We've seen coal really start to decline. Natural gas become the dominant source. And then there's the story of renewables that have picked up more recently to really rapidly grow and become an ever more important part of the grid, although that's complicated in some ways we'll get to. Okay. So that's all just to sort of set the stage and say, you know, I think these are the two narratives that I've heard told.
Shelley Welton:And when Connor said, I'm writing a book about the history of The US electricity sector over the last several decades, I was like, what's he gonna do that's new and different? And I think you really are adding something important and new and fresh to this story. So I thought I'd just start by asking you to talk a little bit about your angle. Right? So, like, where did the idea for taking this angle come from, and and why did you pick finance as the entry point here?
Conor Harrison:Good question. So the origination of the book came from two points. One of them was I was talking with a colleague, Sarah Knuth, who Shelley knows, at a conference and sort of lamenting that there hadn't been any books written about The US electricity sector lately. And she said, well, you should do it. And then I thought, well, that seems like maybe a bad idea.
Conor Harrison:But then over time I of warmed to the idea. The other thing about and why I sort of started thinking about it in terms of finance is I was working with one of the reference librarians at South Carolina on a class project and students were gonna trace a commodity of their choosing from sort of the start to finish. And she was showing me some of the different databases that the library subscribed to but included in that were these financial databases. And as the students were kind of learning how to use it, I also went in and started looking at just some of the different electric utility companies and looked up one in particular, Next Era, which is the world's largest owner of renewable energy, but at the same time they were also interfering or kind of creating a referendum in the state of Florida that would basically trick people into voting against their ability to put solar on their roof. So to me, I was always struck by this.
Conor Harrison:Why would the largest owner of renewable energy in the world be also trying to trick consumers into not putting renewables on their own roof? And as I looked at one of these financial reports that talked about it explicitly and it said, well, NextEra is going to catch some heat for this, we actually understand what they're doing and we think it's going to be good for their bottom line. And so at that point it all kind of coalesced for me that maybe one way that we can understand what's going on and how these decisions are being made around the things that Shelley talked about, around deregulation, around sort of the move to gas, the rise of renewables, maybe another entry point, another window that we could look into to understand this is through the world of finance.
Shelley Welton:One of the things I really like about the opening to the book is, you know, I think people hear that you're gonna tell a story about energy finance and, like, some eyes glaze over probably. But one of the things that I think you do really nicely at the start is really think about how this connects to real people and their lived experiences. And you opened with winter storm Uri, which had devastating impacts on Texas. And I thought you might... I might get you to talk a little bit about...
Shelley Welton:You know, tell us a little bit about the storm and its impacts, and then how it sort of speaks to the importance of finance as an entry point into the book.
Conor Harrison:Yeah. So I think what's important to think about is that Winter Storm Uri, first and foremost, was a was a tragedy, right? There was freezing temperatures that descended on Texas in the February 2021 sort of, you know, as an ice storm, it led to power outages that lasted for more than two weeks in some places. I think around one hundred and fifty deaths have been attributed to Uri. There's been billions and billions of dollars in property damage as pipes froze in people's houses.
Conor Harrison:So just an tragedy. And I think what was so remarkable is in the aftermath of the storm, people started trying to figure out why it happened and what were the causes. And people in the news and the media, they tended to point to a lot of different things. So, on sort of some sides of the political spectrum, people pointed to wind power and that it was wind turbines that failed during the storm. And Texas is remarkable in that it uses a whole lot of wind power.
Conor Harrison:It's I think among the highest installed capacity and wind power in The US right now. Other people pointed to natural gas. Texas is also the largest user of natural gas And the plants there were not insulated against the cold in large part because in Texas it's a highly deregulated system. And so a lot of people pointed to the fact of Texas' fairly unique electricity governance system where they really incentivize generation to come online, but there's really strong competition, the generators tend to try to do it on the cheap, right? So they don't do frivolous things like insulate their plants against the cold.
Conor Harrison:People also pointed to the market design and said, well, Texas is its own grid. It's not really interconnected to other places. So there was all of these kind of fingers that were being pointed about who was at cause for this. If you looked at it from a different perspective, if you started looking at URI, I guess from the perspective of the financial press, the financial world, they started talking about other things. And one of the things that really stood out is while you had two weeks of power outages, you still had some power companies or some generators that managed to stay online.
Conor Harrison:And those that managed to stay online because of the nature of the Texas grid where when you have this real scarcity of generation, the prices really skyrocket. Some of those generators may just gobs and gobs of money. There's one that I profile in the book called Temple Generation one that I think was fascinating because it had been a very middling generator. It had gone in and out of bankruptcy and just decade that it had been open. I thought it was also interesting that the owners of the generator, the developers of the plant were also involved in low level professional wrestling.
Conor Harrison:I thought that was a nice tie in. But at the time, Temple Generation had gone into bankruptcy and at that point was owned by a consortium of financial companies. Guggenheim, part of JP Morgan. These are not our typical generators. So I thought that was something interesting.
Conor Harrison:If you also dig in a little bit further, you saw that some while power was out for a lot of people, there was still power that was being traded on the market. And so, electricity traders made out like bandits. This is something that didn't exist in the world of electricity prior to about 2000. So a relatively new development. You had wind turbines that couldn't meet their contractual obligations and so they got their ownership of the wind turbines was taken over by their lenders, by their creditors.
Conor Harrison:So just like if you're foreclosed on your house, it gets taken over by the bank. You have some companies that were involved in kind of non traditional ways of providing electricity to households, right? So these kind of competitive generators who went belly up, right? And so just the mere existence of a lot of these financial entities in the electricity industry was really a market change over what we had seen, you know, that kind of developed over the previous two decades. And then last, if you look at sort of the financial markets themselves, while you have people who are suffering, people who are dying, people who are without power, whose homes have been destroyed, they're making bets on which companies did well during the storm and which companies did poorly.
Conor Harrison:Financial bets. So, you're watching stock prices rise and fall in the month after as sort of the damage assessment has. So I think URI really laid bare these two sides of the issue that we've seen. Both a changing grid but also a changing grid in which the financial industry is really playing a much larger and I think I argue in the book a more central role than it did before.
Shelley Welton:That's really fascinating. I mean, makes me think about two other things. One is just, you know, I think part of the story that you're telling there is the story of, like, who makes money in disaster. And under climate change, we're just gonna see more disasters. And so, you know, I think it's a fascinating angle into thinking about how do you sort of protect consumers in a disaster.
Shelley Welton:The other thing it made me think about is this article I have my students read. I think it's from the New York Times, and it came out right after Fury. And it was about this guy, mister Willoughby, who didn't lose power. Right? So he was, like, one of the lucky ones, but his bill spiked to something like $20,000, right, for six days of electricity.
Shelley Welton:And so, like, somebody's bearing the cost when financial traders are in the background here making money. And I just... You know, it really... I think it really drives home some of the points you're trying to make about why it's so important to understand finance in this context. I'm gonna use that as an entree to get a little bit wonkier and ask you to talk about this term that you have in the title, financialization.
Shelley Welton:Can you just talk a little bit about the idea? How has it been used in the past? How are you using it in the book?
Conor Harrison:Okay, so I'll start by saying financialization is a loaded term. It's a term that gets thrown around, I think, a lot without a lot of basis in terms of what it actually means. So I wanna try to be fairly precise about how I'm using it. So sometimes we talk about financialization as you might see in the overall economy, right? We have a growing proportion of profits that come from finance versus what we think of as like the so called real economy, right?
Conor Harrison:So we move away from these kind of industrial companies that are the giants to banks, JP Morgan or Bank of America. And in this view, kind of finance is seen as parasitical, right? It's sort of leaching off of the industry. So that's one way that we think about it. Others have talked about financialization as kind of the growing use of financial tools to organize companies.
Conor Harrison:So that we use kind of tools of finance like securitization, or we use depreciation, or we use time value of money. All of those things start to shape the companies themselves and we see a real focus on the tools themselves, the tools and metrics that are used. And then other people talk about the financialization of everyday life, right? So we think about how our pensions, our mortgages, our credit card balances all get taken up into this world of finance beyond this of individual relationship that we might have with a financial institution but they start to bundle these things and sell them and chop them and change them. They might do the same thing with our personal data, right?
Conor Harrison:So we have this kind of financialization of everyday life. And I think one of the reasons I've been reluctant to use the word financialization initially to think about The US electricity system is that it's always been financialized. Finance has always had a very key role to play. And this goes back to Thomas Edison and the first sort of central station was built on Pearl Street in New York City, which is one block off of Wall Street. And that's not a mistake, right?
Conor Harrison:His first customer was JP Morgan, the JP Morgan, Now JP Morgan, the financial institution, right? So because of the really large upfront costs that come with building electricity infrastructure, finance has always been really important. The way that I wanna use this idea of finance and financialization is really draws on to scholars Steven Maher and Scott Aquano, right? Who have talked about this idea of the new finance capital. And the way that they describe it, I think really captures what we're seeing in the electricity industry.
Conor Harrison:And they talk about it in terms of it being a fusion between the financial and the industrial corporation. So what does that mean? So you can think about it in terms of how industrial corporations have been reshaped. So you think about something like General Electric. Long time ago, General Electric produced the electricity generators that we use and power plants.
Conor Harrison:And over time, it started to get into other things. It got into consumer appliances. You go a little further forward and they're getting into insurance, right? Like GEICO. They're getting into owning media networks.
Conor Harrison:And then they have all this cash around and they start financing different projects as well. And so General Electric starts to become this kind of holding company, right? Overseas a bunch of different industrial subsidiaries and they're allocating money in between each one. So the primary corporate functions become how does the holding company allocate money between the high most profitable industries, right? And typically we think about banks playing that role of allocating money to this industry or that industry, but it starts happening within the companies themselves.
Conor Harrison:As the company becomes more financial, they start to use all kinds of tools and techniques that we traditionally associate with finance. So as we go, as I kind of outline in the book, we talk about things like financial models and how those are used to develop solar farms. We talk about securitization, which is a financial technique that they use to shut down coal plants. We talk about new types of investment vehicles like project finance or kind of different types of financial entities like passive asset managers or private equity. So I think about how sort of the role of finance has changed in the utility industry as much as how it's become financialized.
Shelley Welton:Great. Okay. Well, I think we should just dig in a little bit more and talk about some of the tools or strategies of financialization that you get into in the book. Let's start with chapter one, which digs into this idea of energy convergence as a concept. So I thought I'd just get you to talk a little bit about what it is and how you trace this trend happening in the sector around the same time period that I was talking about that real changes started to happen.
Conor Harrison:So, yeah, the energy convergence chapter, you kinda go back to the nineteen nineties when the discussions of deregulation are just getting going. And one company I think that still resonates with a lot of people when you talk about sort of deregulation of the energy system in The US, but also bad corporate behavior is Enron. And so there's been a lot written about Enron, a lot talked about Enron. And Enron kind of came onto the scene, did a whole lot of things and then sort of, you know, disappeared. There are some contemporaries of Enron that stuck around.
Conor Harrison:One of them was a company called Dynegy and Dynegy still exists in some form today. And so I traced Dynegy from its sort of origination as a natural gas trading company in Texas to becoming a full service energy company that combines ownership of natural gas, electricity and energy trading, right, is at the core of what they do. And this is where kind of the energy conversions idea comes from. And it was the belief that if you had control over physical assets like natural gas pipelines, natural gas storage and then natural gas power plants, you could use those in combination with financial techniques to make more money in the energy industry than you would otherwise. So the boring old energy industry which traditionally was regulated and you had set rates of returns as deregulation came on and you were able to start moving away from what had traditionally been sort of the average price of electricity and start to do marginal prices, idea was that you could start doing hedging and trading and arbitrage where you could buy gas in one location and sell it as electricity essentially in another.
Conor Harrison:And so this was sort of the dream, right? That you could basically realize outsized profits And for a little while they did, but what's kind of proven over time is that the industry is incredibly volatile and goes through these periods of booms and busts that have made it more difficult to make money in that industry than maybe they... You would have... They would have they thought at the... Initially.
Shelley Welton:So, you know, I was reading the proofs of your book sort of against the backdrop of the newborn Iran and a lot of volatility in energy markets, which have been causing Americans a lot of pain. And there was this really striking sentence to me, I think, because I was reading it in this context. I'm just gonna read it. Dynagy claimed that the more volatile natural gas and electricity prices became, the more success they would experience. And I just thought I'd get you to talk a little bit about who's losing when Dynagy wins in this new theory of the energy convergence?
Conor Harrison:I think that's a great question. Yeah. I mean, think for everyday people, right? If you look at the case of California, for example, where Dynagy was involved in, a lot of other power companies were involved in during that deregulatory period. There were consumer price spikes.
Conor Harrison:There were instances where the power companies were colluding to shut down power plants in order to drive up prices. Initially, it was quite clear that the consumers were losing. You mentioned that we've gone from thinking about this as deregulation to restructuring. And I think over the years there's been a lot of kind of pullback and a lot of introduction of rules to try to keep those things from happening. One of the things that kind of came out from that is Dynegy claimed that they were going to be successful in any of these circumstances and they weren't.
Conor Harrison:They do well when the prices are high, they do poorly when the prices are low. That's kind of been the way that of deregulated electricity world goes. One of the things is if you look at those companies, they've all become a lot more opaque. If you think about consumers, if we think about sort of information and the ability to understand where your power is coming from, who's providing it, who to call, who to complain about, who to be an activist against, It's all gotten a lot more complicated and a lot more difficult. And I think that's been sort of a net loss to consumers.
Shelley Welton:I I like... I found myself just time and again as I was reading your book, like coming back to current events and thinking about how to make sense of them in light of what you've written about. Maybe I'll just give a tiny bit of historical context here. One of the really interesting and troubling phenomena of early days of electricity regulation, so we're talking, like, nineteen tens to 1930, was that you started off with smaller companies, and then these smaller companies realized, like, if you build a bigger plant and connect it to a lot of people, you get some economies of scale. So we'll get ourselves a little bit bigger.
Shelley Welton:And then ultimately, you ended up with these huge holding companies that bought up a bunch of utilities across all of diff... All these different states, really opaque structures exactly like what you're talking about. And they turned into functionally pyramid schemes. Right? They were issuing stock at very watered down rates.
Shelley Welton:Like, at the end of the day in the Great Depression, grandmas ended up losing all their money because they thought they'd put it into the safe local utility, but it turns out that it was part of this holding company conglomerate that had, you know, overextended itself and boom, crash. And we saw congress step in and regulate and basically tell utilities they couldn't create these holding companies anymore in the 1935 statute, which then got repealed in the nineteen nineties amidst all of this deregulation. Okay. And so now we're in this place where you have this, like, creeping opacity and evermore consolidation, which is a story that you really think about in the book. And I was thinking about this in light of the recently proposed merger between NextEra, which you mentioned a little bit, and Dominion Energy, which is the utility that serves the city where Connor lives and I also used to live, also serves Virginia.
Shelley Welton:And functionally, what they're proposing to do is to create the largest electricity company in the world. And, you know, this is a trend we've been seeing going on. I think this is just a pronounced recent example. And I think your book really helps us to understand why we're seeing this happen and what the consequences of it might be. So I thought I'd get you to say a little bit about how you think this financialization concept helps us make sense of this trend towards consolidation that we're seeing again.
Conor Harrison:Sure. Yeah. And I think that's a great example. The Dominion NextEra merger and I do talk about NextEra quite a bit in the book. They're held up as sort of the the...
Conor Harrison:Probably the most successful electricity company. At one point in the late 2010s, they became more valuable than Exxon based on their market capitalization and the stock market, sort of a short term thing. What's important is if you... Again, to try to understand how it is that the utility companies try to make money. It's kind of a straightforward thing, but it's not always just selling more electricity, right?
Conor Harrison:So they can sell more electricity, but it's also about how they become sort of more valuable or perceived as more valuable in the financial markets. And I think there's kind of four ways that you can look at that they do that. The first is that, a successful utility in the eyes of Wall Street needs to have a big base as a monopoly, right? And so, as we've been talking about, all parts of the country are... Not all utilities operate as monopolies, right?
Conor Harrison:Vertically integrated monopolies that own generation all the way to the meter on the side of your house. And so NextEra and Dominion are two of those utilities that operate as monopolies. NextEra primarily through one of their subsidiaries, Florida Power and Light, and then dominion operating as dominion in Virginia. And they also have the benefits of being in sort of rapidly growing territories both Florida and population growth and Northern Virginia in terms of especially data centers which we can talk about later. So that's one thing.
Conor Harrison:They also, a parent company like NextEra or the Dominion parent company can also own deregulated assets, right? So NextEra as I mentioned is world's largest owner of renewable energy and they've been developing most of that energy in places like California, places like Texas, and they have lots and lots of wind, they have lots and lots of solar and most of that operates in deregulated markets, but as I talk more about in the book, they do it on kind of a particular basis where it looks like a regulated asset through contracts, but what's really important is that they wanna have some deregulated assets but not too much, right? So if they get too much deregulated in terms of their overall mix, Wall Street seems to perceive that starts to perceive that as being too risky, right? So they like to have a good amount of monopoly. And so the third one is that utilities have started to do is through mergers and acquisitions.
Conor Harrison:And primarily that's been through merging and acquiring other utilities, other electric utilities. The number of regulated utilities since the repeal of the Public Utility Holding Company Act of 1935, which I think happened in the Energy Policy Act of 2005. It's gone from about a 100... We had more than a 100 different investor and utilities and now we're down to somewhere around 40, right? And they've just been merging and acquiring each other.
Conor Harrison:And so part of that is to try to get bigger. Part of that is to find sort of efficiencies and how much, what their cost of capital is to build new projects. For NextEra, one of the reasons that they're trying to merge with Dominion is that the success of their renewable platform meant that they started getting too deregulated, right? So they wanted to acquire a regulated monopoly in order to get that sort of balance right. And then the last part is just kind of what I refer to as winning the regulatory game.
Conor Harrison:NextEra has been really good at this. They supposedly in Florida employed one lobbyist for every two legislators. They've been kind of all over the place in DC, they're always cozying up to whichever the political administration is at the federal level, but also they have a really big impact in the states that they operate. And that's gonna be an issue I think when it comes to approving these mergers and acquisitions because they're not above getting involved in sort of the dirty politics of sort of local states things. So electoral meddling and other things like that.
Conor Harrison:They reportedly had a secret bar that operated in Tallahassee in Florida where the legislators could come and drink for free. So they've been involved in a lot of different things. And sort of the financial part of this, right? So this is what Wall Street likes. What's notable, right?
Conor Harrison:And this is for every major company in The US is that a big chunk of it is owned by sort of people's pensions, people's retirement through these giant passive asset managers, through groups like Vanguard, State Street. And because of the way that they operate and because of the way they choose the companies that they're gonna buy, they buy companies and put them in these index funds because they're big, not because they think that they're good, not because they like their corporate governance, not because they like their stance on sustainability or renewable energy, but because they're big. And so when you have that much ownership consolidated in companies just because they're big, right? There's not gonna be a whole lot of kind of pushing them to improve their corporate governance, to improve their stance on renewables or any of those sort of ESG environmental, social sustainability governance, things that were pretty big in the late two thousands. Sorry, late twenty tens and early twenty twenties.
Shelley Welton:I mean, your book does such a good job of explaining how mergers make these companies money. I just wanna push you a little bit. Like, when a regulator's looking at this, like, in Virginia or South Carolina where they have to approve it, what are they thinking that consumers are getting out of these mergers? Like, what are the companies promising in exchange for being allowed to just get ever bigger?
Conor Harrison:Often not a whole lot. I think the regulatory standard is that the regulators are supposed to keep is that it doesn't harm consumers. Right? And so, you know, in theory any kind of synergies that come from the company, any kind of savings that come from, you know, being able to consolidate your accounting or your back office, All those in theory should be passed back to consumers. What we've seen is that when these mergers happen, oftentimes it's just they'll say, yeah, we understand that this is gonna happen but we're gonna do a lot of investment in your community.
Conor Harrison:We're gonna build a call center that's gonna employ 200 people in your state and the regulators will say, okay, well that's enough. Even though the potential profits or kind of profit increases are billions and billions of dollars that we're talking about. So I mean, I think you talk about winning the regulatory game, right? This is a big part of it is how do you grease the wheels to make sure you get what you want.
Shelley Welton:Totally. It's an interesting question you're raising about whether mergers mean that you're ever better at the capturing regulators game. I wanted to pivot just a little bit. As I was reading, one of the questions I had... I mean, this isn't the point of the book, but it is, like, one of the dominant conversations that I feel like happens in the energy law and policy space, which is just this enormous debate over, like, which model is better.
Shelley Welton:Right? The old sort of southern model where regulators regulate everything, the utilities are vertically integrated, there are no markets, or the new model where utilities have joined together to regionally operate the grid. There's an electricity market. Generators can sell in. Sometimes utilities can sell into.
Shelley Welton:They buy out of the market. Your book really talks somewhat about players that are operating, you know, across these spaces and using them to their advantage. But I couldn't tell where you came down in this sort of, like, markets versus competition debate. Like, do you have a stake or a stand here about which you think is working better? The sort of old school vertically integrated model or the new regional transmission organizations markets model?
Conor Harrison:Yeah, mean, think you can try to look at the evidence, right, or look at the data and decide, you know, so what it that you're trying to prioritize? So is it lowering prices? Well, if you look at all the data, consumer prices between regulated and deregulated, there's not much of a difference. It kind of depends on the timeframe that you're looking at. If you look at it in terms of which places have had the best outcomes in terms of energy transition, again, it kind of depends.
Conor Harrison:It depends on the timeframe that you look at, it depends on which states you look at. You've seen some states that are deregulated that have virtually no renewables, you look at some states that have remained regulated that have done quite well. We used the case of North Carolina and solar in one of the chapters. My view is I think just in terms of if I think simplicity, I like the regulated model. Obviously there's all kinds of issues that come with sort of regulatory capture But I think with, if you can dream of a strong state and a strong regulator, I think perhaps you can have the outcomes that you want more directly there without having to deal with sort of the chaos of the markets and sort of what we see from time to time when the markets aren't doing what we want them to do.
Conor Harrison:So we create new markets to try to help them do that. And you think about that with capacity markets or all the different kind of sub markets that operate within the markets. But I'll turn it around. What do you think?
Shelley Welton:Well, maybe I'm gonna hedge a little bit here and just say what I think your book does really well to help me sort of, like, clarify my own thinking about this question is just make the case that, like, these are sophisticated entities, and they're gonna figure out how to make money in whatever construct you give them. Right? So you give them a fully regulated construct, and they're gonna hire two lobbyists for every legislator... One lobbyist for every two legislators and, you know, figure out how to really work the system so that the regulations bend in their favor. You give them markets, and you tell them they're gonna have to compete with each other.
Shelley Welton:Well, they're gonna get together and figure out, you know, how do you exercise market power in ways that aren't technically illegal but still lead to being able to keep prices, you know, higher than costs. Right? I think, you know, it's just... It's really complicated because you're gonna see these companies that, like, have a profit imperative because we tell them to have a profit imperative. Right?
Shelley Welton:Like, we tell them they're supposed to please their shareholders, and that's how they continue to exist. And they're working both systems. So I will just say, you know, because I increasingly think that it's very difficult to regulate under either of these systems, I am more and more of a public power person. Not that publicly owned power does not have its own challenges. I think it does.
Shelley Welton:And, like, you know, there are real governance issues with a lot of our public power entities. But at the end of the day, if it's really hard to control private companies through markets and it's really hard to control private companies through regulation, like, maybe it is better to just sort of in source some of these functions and have a direct link between democratic imperatives and outcomes. And I will say, you know, I mean, I think the other really interesting data point here is as affordability concerns are getting ever more front and center, the entities that perform best on affordability metrics at the end of the day are public power entities.
Conor Harrison:Well, and I think related to that is just that electricity is not a typical commodity. I think it's both, you know, more important than a plain white t shirt in terms of what it means to our everyday life. The plain white t shirt being kind of your typical commodity. But it also is incredibly hard to govern, can't really store it or at least you can not store it on the levels that we need. So you know, it's just really difficult for markets to distribute it efficiently and not to deal with these periods of outages.
Conor Harrison:I mean, we have expectation for almost 100% uptime with our electricity and so we have to do a lot to keep it running and it works I think remarkably well for all of its faults. But I would agree with you. I mean, I think increasingly it does seem like public power is is the way to go. It's not perfect but you know, it's... As you said, you can't control these these entities.
Conor Harrison:They're really sophisticated and good at what they do.
Shelley Welton:Yeah. Or, I mean, sometimes I just come back to the sort of, like, old FDR theory from the nineteen thirties that, like, you need some of each to check each other so that you can at least try to show what a system can be under a public system, and then that helps, you know, a regulator understand what they can demand of a private entity. But sometimes I also think I just like that because it's what we have. And so it's easy to say, yay, experimentation, because it's not looking like we're gonna shift away from anything like that very soon. I want us to think a little bit about renewable energy because it's having a rough go of it right now, but I think your book does a really interesting job thinking about what makes it work under different circumstances.
Shelley Welton:Right? And, you know, like, the classical story that I hear a lot of people tell about renewable energy is just it used to be really expensive, and then we made more of it, and policies made us make more, and then its cost fell really rapidly. And now it's so cheap that everybody's doing it. Right? Like, just this sort of, like, classic economics, you know, you make it cheap, the people will take it up kind of story.
Shelley Welton:And I think you you do a really nice job explaining some of the complexities that actually go into deciding who builds renewables and when. And so I thought I'd just get you to talk a little bit about that.
Conor Harrison:Yeah. I think as a starting point, when you think about this, I I lean on the work of Brett Christopher's here who has, I think, a very simple but a very important point when it comes to renewables and sort of any kind of development project is that we can talk a lot about price, right? As the price gets cheaper, that's, you know, has its benefits. But what's really important if we're trying to understand where people are gonna invest, right? The question is actually want a profit, right?
Conor Harrison:So you can have something that's quite costly, quite expensive, but if it's quite profitable, that industry, then the investment can go there. So what I think if you sort of reframe our understanding of where renewables developed along the lines of thinking about profitability and not just price, right? We start to be able to think about it in a little bit different way. So I use the case of North Carolina which I think is a great example of this. So North Carolina, if you look at sort of the rankings of renewables and which state has the most And for most of the 2010s, number one was California, which makes a lot of sense.
Conor Harrison:But number two wasn't like Arizona or New Mexico or someplace that would make a lot of sense because of the sun, or it wasn't New York or Massachusetts someplace that maybe had really progressive kind of governance. It was North Carolina, right? And I think that was a bit of a surprise for a lot of people. So it's worth, think digging into that. And so in the course of this, I talked to a lot of people who were involved in that early period, right?
Conor Harrison:People who were from financial, doing finance law, people that were working for banks, people that were developers. And I heard some really interesting stories about it. Basically the story they told was the ability of finance to pull together a bunch of different kind of incentives and loan guarantees and tax credits and things that weren't really intended to work together, but they figured out how to make them work together. And pretty quickly they've learned how to develop these little five megawatt solar farms and to do it profitably and to make it sort of consistent, safe and sort of a safe investment that was gonna pay out. And once they did that, it was just like overnight, these things were just popping up all over North Carolina, especially in the Eastern part of the state where there's a lot of farmland.
Conor Harrison:Farmers were looking for ways to diversify their income. There were these loan guarantees, there was tax credits. So you take all this together and it was as one of the people called it just kind of a perfect storm where they just exploded overnight. Over time, the utility kind of caught on to what was going on and they started chipping away at the different rules that made it less in ways that made it less profitable. And so they kind of fought back as they realized that they were starting to lose out on some of the generation.
Conor Harrison:But I think it is a remarkable story about how to sort of make an industry... How sort of finance can make an industry really viable and do so really quickly.
Shelley Welton:The other piece of your renewable story that I found really interesting is the, you know, the rise of private equity in this space. And you introduced me to a term I never heard before that I thought maybe the listeners would like to hear about too, which is the solar coaster, riding the solar coaster. Will you talk a little bit about this idea of the solar coaster and then just more broadly, like, what do you see as the, you know, the potential upsides and downsides of having private equity get excited about renewable energy?
Conor Harrison:Yeah. So nearly all the long term solar people I talked to would refer to the industry as the solar coaster. And I think what they meant by that is that it was just kind of full of booms and busts. And a lot of it was around the timing of potential end of different federal tax credits. So they've kind of gone up and down since they were put into place in the mid 2000s.
Conor Harrison:So the percentage will go up to 20 and then it's gonna sunset at the end of the year and there were these kind of last minute, last gas ways that it would stay. So they were always thinking like, oh, the industry is about to crash. And then there would be states that would introduce a renewable portfolio standard and be like, ah, that's the state. So everyone would rush into that state and get involved in the development there. So the people I spoke with who were in there were really used to these kind of booms and busts and they were just kind of, oh, this is just riding the solar coaster.
Conor Harrison:We're going to have booms one year, the next year everything's going to go bad. At the time that I was doing a lot of these interviews was the early 2020s, right? And so this was kind of the peak of, I think the ESG pressure, environmental, social governance pressure that was being put on the financial industry. And a lot of private equity companies were getting this heat from their limited partners, those partners, those people who've given them the money that they then invest. As we're thinking just a little bit, I think about what private equity is.
Conor Harrison:So it's not a hedge fund, that's sort of different. A lot of people kind of confuse these different things. It's not venture capital, that's something different too. So what private equity does is they basically borrow money from big investors. So they get institutional investors to provide them with funds and so these will be like pension funds, it might be a family office from a really wealthy family.
Conor Harrison:People who are looking for what are called alternative investment vehicles. They don't wanna just put something in the stock market, they wanna put it into a different kind of entity that they think can get them better returns. And the way that private equity works is that they take over a company, they put some money into it and then they borrow a whole lot of money to use to acquire that company, right? So they have some amount of money that came from their limited partners, they borrow a whole bunch of money and then they take over these companies, they try to get whatever they can out of them. Any kind of returns, ideally they wanna kind of spruce the company up and four or five years later sell it for more than they bought it for.
Conor Harrison:But they'll also do things like in the retail industry, they'll take over a company like Toys R Us and sell all of its real estate off and then rent the real estate back, but that generated returns and then the sale. So they get into lots of different things, but they got really heavily involved in the solar industry because their limited partners were saying, hey, we want you to invest in ESG for us. And so they started to look at the solar industry in terms of where could they develop. And one of the things that's important to think about solar is that it comes in a bunch of different stages, right? So the early stage of solar development, it's basically like real estate development.
Conor Harrison:You're trying to find a site where you can put up a solar farm. You're trying to find a place that's close to transmission lines. So there's like a sort of locational calculus that goes into it. So initially you find a site and then you pay somebody an option to control that land. And then you start getting into all these other things.
Conor Harrison:You've gotta like find a way to interconnect to the grid. You've gotta do the engineering. You've gotta get all the permits that you need financial permits, right? And as you sort of go along the development process, you start to acquire all these rights, what all the developers would refer to at a certain point as you had this project which is really just a bundle of rights. And what was I think really notable to me is that along the way these projects change hands.
Conor Harrison:So you may just have a project that has site control and someone else will say, well, I want that project so you could sell it to them. So you could sell just the site control. You could be a little further along and say, I've got all the environmental permits I need and I've got a grid interconnection and you could sell it then. And at different stages, the further along you go, the amount of risk goes down. But for private equity, private equity actually likes risk, right?
Conor Harrison:Because they need that risk in order to get the sort of returns that they like. So they really, really focus in on the not the operating solar farms, right? But just the early stage development. So they started really pouring into this industry in the early 2000s and really started to kind of buy up these solar development farms. They started to sort of spin them up on their own.
Conor Harrison:They'd find four or five people who had development experience and say, okay, you guys are starting a solar development company, we're owned by private equity, go for it. And that's what was just happening all over the industry at that time period.
Shelley Welton:So I just wanna push you on the other part of my question. Like, is this a good thing? Right? It sounds like maybe nobody else is willing to take this risk and private equity is like doing a solid, or are there reasons to be skeptical?
Conor Harrison:I think there's a lot of reasons to be skeptical. Think, you know, it was really trumpeted by the solar industry and said, look, all this private investment is coming into industry, right? And we're no longer reliant on sort of public investment. This was sort of celebrated as, you know, the private sector has finally realized that renewables is real business and that it's gonna be able to make it, it's gonna do great. I would say if you look at private equity's track record, there's a lot of reasons to be suspicious.
Conor Harrison:So I mentioned Toys R Us earlier, it's sort of a case study and how private equity can drive a company out of business and make a ton of money along the way. So if we... If, you know, one of the driving motivations behind solar, right, is to try to have a successful solar industry that's not emitting lots of carbon, right? So if your primary criteria of success is to think about, can we put less carbon into the atmosphere as we generate electricity? In theory, you could have a private equity company that has enormous success, right, financial success, but does very little in terms of putting less carbon into the atmosphere.
Conor Harrison:And I think we're actually starting to see that. If you look at the sort of traditional private equity timeline, they like to be able to sell these companies off in about five or six years. And since they started this big investment, right, we've gone from having the Inflation Reduction Act and a really good sort of promising environment for solar development to one that's quite difficult now. So I think it's gonna be really interesting to see how private equity is able to get out of these deals and how much solar we actually get from them. So I I don't necessarily think this is a good thing at all.
Shelley Welton:You've talked several times through our conversation about interviews, and I thought it might be nice to pivot and just talk a little bit more broadly about the methods of the book. I'm a lawyer here by training, talking to a geographer by training. And when I think about, you know, how a lawyer would tell these stories or, you know, a legal academic would tell these stories, I think it would be very focused on sort of, like, a top down rules based story. Right? Like, we created this set of institutions in the financial sector and this set of institutions in the energy sector, and they promulgated these regulations.
Shelley Welton:And these regulations, you know, incentivized x actors to do y things. This is why law review articles are long and kind of boring. I did not find your book boring, and your methods are are quite different from that. So I thought I'd just need to talk a little bit about, you know, methodologically, how did you think about this project and what did... What sorts of tools did you bring together?
Conor Harrison:That's a a great question. And as I started writing the book, it it was me just trying to sort through those kind of legal and policy things and I quickly realized that I could read all I wanted and it wasn't gonna go very well. I felt like I would have a lot more success and learn from a lot more if I could just talk to people who are involved in that. And so then it became a question of how can you get access to these people, right? So this is kind of...
Conor Harrison:These are elite networks. And so I sort of leveraged kind of everything I had in terms of people I knew and people I could connect with, places I could show up. So I attended a lot of energy finance conferences which was really fascinating and you go to one on project finance and it was kind of almost inspiring. These were people that wanted to build projects and were out there working hard to try to make things happen. You could go on electricity trading and they were quoting Hayek and Milton Friedman and saying that the problem was we didn't have enough markets and at different times I'd hear them kind of quietly discussing how firms that had gotten in big trouble for breaking laws were actually doing something that was good.
Conor Harrison:So it was a really different tone. So the conferences were great. I participated in trainings, I did a six week solar MBA to try to learn more about how to develop solar farms. And I think as you go through you meet people who are really passionate about what they do and give you some really incredible insight. And I think if you can sort of bring those characters that you meet and some of them are big characters, right?
Conor Harrison:And so to the extent that you can bring these characters into the book, it makes those stories, trying to unpack finance and electricity, it makes them maybe a little bit more interesting, a little bit more compelling.
Shelley Welton:Yeah. I mean, I was really shocked by some of the ways in which you were able to get access and the extent to which some of these people, once you're a white guy in the room with them, will just talk to you. But I wanted to ask, you know, like talking to this group of people to put together your book brings this whole new perspective, and it also might leave other perspectives out. So sort of, like, how do you think about what gets gained and what gets lost by this sort of like infiltrating the finance sector as a framing for the book?
Conor Harrison:I think like anything you can... And probably this happened to me at some points, you get blinded or you know, you start to think that this is actually the most important thing. And I would have to check myself a lot and be like, well, a lot of what they're doing is sort of, you know, aligning themselves around a set of policies that have been developed, right? I think so, I think probably to some extent, you know, the legal kind of policy part of it gets underplayed a little bit. So that the sort of financial parts of it could be brought up.
Conor Harrison:You know, one thing I don't do a lot of and it wasn't the intent of the book was to talk about the implications for kind of everyday people. I only try to do that really in the conclusion. But I think that that's something that I hope people are able to use the book, right? To then take the next step to say, okay, I understand what's going on here. Now what are these sort of on the ground implications in particular situations and places that they live?
Shelley Welton:That's perfect because that was something I also wanted to get you to say a little bit about, right? Like, you do this beautiful job in the conclusion, I think, of trying to synthesize what a reader has learned about all of these tools and techniques and bring them home to a place. Right? And you pick Lower Richland County where you live in Upper Richland, where I used to as well. And you describe, I think, really poignantly, you know, how this sort of accreted set of financial tools and decisions comes to roost in a place in a way that I think, like, I'm sure your geography training really helped you do this.
Shelley Welton:But it was your attempt to bring all of this back to the everyday. And will you just say a little bit about how you think through making sense of these big swirling forces and their impacts on an everyday community?
Conor Harrison:Yeah. Thanks for that. I think Lower Richland County, just to give just a little description, it's a really interesting part of South Carolina. It's sort of situated along the Congaree River, which is there's a national park there. So it's really low lying, a lot of swampy land.
Conor Harrison:It was traditionally home to plantations, lots of plantation agriculture. The swamps provided kind of a hideout for indigenous communities and maroon slaves to live and exist. So it's, and there's still this really strong tradition of hunting and fishing that is really common among the African American community that still lives there. So it's a really interesting place. It's also unfortunately been sort of the site of a lot of industrial development, polluting development.
Conor Harrison:There's a Westinghouse facility that makes nuclear fuel there that has been leaking forever. There's a big coal power plant there, there's a big paper mill there. So it's got all the kind of industrial pollution that you can have. One of the things that's happened probably since about 2020 is that there was a really big solar farm that was developed there. And if you stand in one point and look at the solar farm, can see the smoke stacks of the coal power plant in the background.
Conor Harrison:And to me, it was really kind of this clear example of kind of the energy transition. But along the way, as they were developing the solar farm, the community started to be like, kind of what's going on? Who's doing this? Who are we supposed to talk to about this? People had some concerns in the local community, I thought fairly legitimate concerns, but it was really difficult for them to find anyone to talk to, right?
Conor Harrison:And so when you started to think about how these solar projects can change hands, they initially were like, we were talking to this person and now we're talking to this person, like which company is involved in this? It becomes sort of really opaque. The coal power plant has a shutdown date associated with it. But when it's gonna shut down has now gotten quite complicated because of how much of the plan is left to get paid off in terms of its sort of depreciation. This is something I touch on a little bit in the book.
Conor Harrison:And so, one of the things is that there's a lot of activism in this community, but there's just to try to understand kind of the questions of ownership, of regulation, to understand why these companies are doing things and why and how they're doing it. That was really what I wanted to kinda try to bring home in the conclusion is kinda like, okay, how can we start to unpack some of this in ways that this can help us get better outcomes, hopefully get better outcomes in in in local communities?
Shelley Welton:I thought maybe we could end with something kind of like a lightning round where we talk about some of the more forward looking implications that your book offers for a bunch of the current energy policy issues because, boy, is it a moment for energy policy. Right? Like, every governor is running on energy affordability platforms. It is constantly brought up in the media right now. When you track how many families are struggling to pay their bills, it's enormous.
Shelley Welton:I thought we'd walk through... I mean... And not to mention, right, like, I think the other big story going on right now is that, you know, many states have leaned heavily into the energy transition and clean energy. And the second Trump administration has, you know, I would say, aggressively taken an anti clean energy stance that's causing a lot of friction between state and federal policies. So lots to lots to think about.
Shelley Welton:And one of the things I really liked about reading your book was the way that it sort of... I I I spent a lot of my time sort of trying to think about, like, how does what Connor explained in this chapter help me make sense of some of these current swirling trends? And now I don't have to wonder anymore because I have you here to answer the questions. So I'll just throw out a few trends, and maybe you can sort of just react to sort of, like, how you think financialization and the story you're telling helps us to understand what's going on. So the first one I thought we would talk about is coal, which is a nice segue from the Laura Richland story you were just telling.
Shelley Welton:Alright. So the story you tell in the book is, you know, coal was declining, and the financialization aspect was to try to figure out new ways to protect both maybe sort of rate payers, but also shareholders from facing real stranded asset cost pressures. Right? But now we're in a moment where you see a a federal administration that is, like, quite insistent that coal's demise is not here. So the Trump administration has put in place a bunch of orders under the Federal Power Act telling coal plants that were slated to retire, that in fact, they cannot retire and they must keep running even if it cost consumers billions of dollars.
Shelley Welton:They recently announced billions of dollars of financing for new coal projects or sort of revamped, revitalized coal projects. And so, you know, how does this story of aggressive federal coal intervention fit with the financialization that you trace?
Conor Harrison:So speed round answer would be, I don't think most utilities wanna build new coal power plants. I don't think the financial industry is supportive of companies that build new coal from what I've seen. And so I think that those incentives are gonna have to be really high. There's gonna have to be... If we just think about it purely in terms of can they be profitable, the incentives that are provided maybe aren't enough to make it profitable enough for the companies to wanna do it.
Shelley Welton:So even federal policy can't Trump Wall Street?
Conor Harrison:Even Trump can't Trump Wall Street.
Shelley Welton:Okay. So you... I think given the timing of this book, wrote most of this under the impression that there were gonna be generous federal subsidies for renewable energy going forward passed by the inflation reduction act that were really, you know, sort of shaping people's thinking around which projects to finance and how much to finance. And then, you know, last year, we saw most of these, at least on the renewable energy front, get repealed. And so how does this sort of change your thinking about the trajectory of the sector or how finance might be thinking about the sector?
Conor Harrison:Yeah, that's a great question. You know, there's a lot of stuff that spun up kind of in support of the new tax credit regime, particularly the transferability, which I think a lot of people were quite excited about. I'd say that there's a lot of lawyers that are losing out on their lawyer fees for the project finance are going to be in the future. That's one thing I would say. I talked to a lot of lawyers along the way.
Conor Harrison:I think one of the things we'll see or be interesting to see is how developers pivot and how the private equity firms that invested so much in the early stage solar development, how do they pivot? Do they get more into storage? I think that's one of the things we're gonna see. It sounds like a lot of the tax credits have survived around storage and I think utilities are starting to invest a lot more in that. So I think one of the things I've seen some of the companies I talked to have gotten much more involved in storage.
Conor Harrison:That's sort of in the short term. Whether or not those companies retain their value, whether or not the private equity firms are able to sell them off in the future or what happens there, think is a big question. And I think there's always the potential that a new administration comes in, hopefully, and with a more sort of generous idea about renewables and hopefully that can get the solar coaster back on the up.
Shelley Welton:Alright. This is my last one. We almost made it through an energy policy podcast without talking about data centers. I think you said the word once, but like, everybody's thinking about data centers. Everybody's sort of thinking about the rise of AI in many different ways.
Shelley Welton:But, you know, obviously, one of the ways it's having the most impact is on the electricity sector because you need a whole lot of power to run these things. The stat I heard recently was that one plant that is... One data center that is proposed for the region I now live in, PJM, was going to take the same amount of electricity as the entire city of Pittsburgh, which, of course, you know, like, took hundreds of years to develop. And overnight, they want that much power next door. And so, you know, this is, I think, for the the panic topic du jour in energy policy.
Shelley Welton:And I wonder just, you know, how did writing this book and thinking about financialization shape your thinking about the data center crisis?
Conor Harrison:Well, a lot of the way that I sort of think about the electricity industry is I think if you just think about sort of the political economy of it is captured by this idea of electricity capital that Matt Huber and Nikki Luke put forward. And they just talk about, you know, electricity capital is this intersection between, you know, the electricity industry, the world of finance and the world of sort of governance. I think one of the things that's happening is that there's gonna be... There's already starting to be a reconfiguration of that because you're getting a new player that's really starting to throw their weight around and that's sort of big tech, right? And they come with a lot of money.
Conor Harrison:And so, already we're seeing a reconfiguration of that. So I think that there's the potential that we actually see some fairly significant change. I think one of the things that seems likely to happen coming out of all of this is I think a lot of our markets are gonna be deregulated markets. I think there's gonna be regulated or more outside of the market generation that's coming in that's operating outside of what's been built in these places in the last twenty years just because of the speed that the data centers are trying to be connected. I think the other thing I'd keep an eye on is, one of the things I learned by looking at the kind of energy conversions if we go back to that conversation is that when the financing starts to get really complicated, that's when things start to get shady and things might seem like they're ready to crash.
Conor Harrison:So one of the things I've been keeping my eye on is all of the sort of circular investment between Nvidia and Core Weave and OpenAI and they're all investing in each other and they're all buying each other's stuff. And at a certain point that seems like maybe that's not really all above board. So I'm still thinking at some point there's gonna be a crash. I don't think that they're gonna go away, but I think that there's gonna be a financial crash around these things. I think there's certainly a bubble that's building, But, you know, when it pops and how it pops, nobody really knows.
Shelley Welton:I think that's such an interesting point. Right? And, obviously, one of lots of speculation. And I think what's what's so challenging for the energy sector, right, is, like, they wanna build a speculative AI bubble on top of what they're claiming is real energy demand, right, and, like, real infrastructure that they need to power, you know, however large the sector is gonna grow. Right?
Shelley Welton:And it just it feels like a real challenge for energy finance to understand how much of this is real and how much money to put in and who... How to structure contracts so that you're not left holding the bag at the end of the day. Right? And I think my big concern is that, you know, all of the forces that you've been documenting regarding how, like, these very large companies economically also hold lots of political power. Like, my worry at the end of the day is that consumers are gonna be left stranded with all of these assets when the bubble bursts.
Shelley Welton:Well, it has been so much fun getting to talk to you about this book. I highly, highly recommend it. It is the most insightful writing I've ever seen about sort of the clash of the titans of finance and energy and how it's played out in ways that have real consequences for all of us and the bills we're paying now. So, Connor, thanks for letting me join me for this.
Conor Harrison:Thanks for reading it. I really appreciate it and all your insights along the way.
Narrator:This has been a University of Minnesota Press production. The book Brokers of Power, the Financialization of The US Electricity System by Conor Harrison is available from University of Minnesota Press. Thank you for listening.