Jigar Shah Has $40 Billion To Lend Green Energy Projects Via US DOE

Energy
Thursday, July 14th, 2022 5:43 pm EDT

Jigar Shah is currently Director, Loan Programs Office at US Department of Energy where he has $40B of authority within manufacturing, innovative project finance, and tribal energy. But that’s just the most recent chapter in his career as a clean energy leader. Shah sat down with CleanTech Talks for a broad ranging discussion of the practical challenges of transforming the US grid in line with 2035 targets.

Jigar’s modus operandi has been about commercialization of technology. When he was young he was fascinated about both nuclear and solar being commercial offerings, yet still being relatively stagnant. He subsequently went down the path of commercializing solar. A key thing he learned was that it didn’t help to villainize anyone in the effort to bring low carbon electricity to market. Instead, it’s necessary to identify the barriers to commercialization and slowly break them down. However, his bullishness on nuclear was likely a necessary prerequisite for a senior role in the US DOE, as about half of its budget of $88 billion is devoted to the technology, something that surprised a previous Secretary of Energy who thought it would be almost entirely fossil fuels.

His background in mechanical engineering leads to a certain humility about what it takes to build infrastructure that lasts for a hundred years. We agree that Silicon Valley missed the necessary slowness of essential electrical infrastructure transformation. From Shah’s perspective they leaned too heavily on the comparison to running fiber, but missed a few key factors, the first being that the costs of under-grounding fiber are inconsequential compared to the expenditure on the end product, but have much larger impacts on the bottom line for electricity.

Another factor is that while HVDC alleviates many of the challenges related to its alternating current alternative, including much lower resistance when under-grounding it and greater capacity, it isn’t in the same ballpark as laser multiplexing increasing fiber capacity by orders of magnitude.

Extra costs for under-grounding transmission, similarly to pumped hydro, are now starting to be considered within the systems context, instead of just as a component cost. In the US, while others have pointed me at the regulatory burden for pumped hydro, Shah doesn’t see that as a barrier. Everyone now acknowledges the systemic value, but the markets don’t enable a reasonable return with rate-based adjustments. There’s a clear value proposition in the HVDC mesh being considered for the US northeast, especially for drawing offshore wind energy onto shore and transmitting it efficiently in the region, but who pays for it?

For the $8.25 billion in loans the loans program office has available for transmission, resilience is a factor, as their mission statement says. But the DOE only funds requests brought to them, it doesn’t create new projects. Public service commissions (PUCs), if they could, would bring only the cheapest transmission alternatives. However, over-grounding transmission through wildfire areas isn’t an option now, so proposals like that aren’t being brought forward.

From Shah’s perspective, diversification of generation is key to adapting to climate change. Wind and solar are great and cheap, and through SunEdison and subsequent ventures, Shah delivered a lot of them and made a lot of money for himself and investors, but he also sees nuclear as a key component to diversify electricity supply. However, even in Texas where there are regular incidents of wholesale electricity costs going over $500 per MWh, private firms find it challenging to build things like nuclear plants. Over-financialization of the markets during the Enron era of the 1990s is causing all of assets to have challenges in the US, and that pendulum has not swung back to the middle yet.

The UK is an interesting counter example. First, it introduced a regulated asset base (RAB) which covers nuclear energy in 2021, a mechanism it has historically applied to infrastructural components such as networks for water, gas, and electricity. That enables investors to share some of the project’s construction and operating risks with consumers, significantly lowering the cost of capital, which is the main driver of a nuclear project’s cost to consumers. The UK is also in the process of introducing a cap and floor mechanism covering pumped hydro. The UK has one of the largest offshore wind fleets in the world, and is seriously considering bringing firmed electricity from wind, solar, and storage from Morocco via underwater HVDC.

Shah thinks the UK has invested well in diversification, even while receiving a lot of criticism for things like its significant grid interconnections with Europe and the ballooning costs of the Hinkley plant, which was funded under a contract for differences model prior to the RAB. But he sees that they are weathering the commodity super cycle better than jurisdictions that didn’t diversity as much.

Continuing on the nuclear thread, Shah’s perspective is that investing 3-5 times more in transmission and expecting improvements in battery storage is a risky strategy. Shah is bullish on nuclear, especially putting new SMRs on retiring coal plants where transmission is already built.

The conversation started getting animated at this point. I’m bearish on small modular reactors because they are not commercial products today, they are not commercially deployed today, the physics of thermal generation means bigger is better while the problems with bigger nuclear are well understood, and in large part because the 17 designs that exist for SMRs, including several in the US alone, make it unlikely that any will achieve economies of manufacturing and deployment scale. It would require major economies like the US picking a design and driving it as the only option to achieve sufficient numbers to make a difference. This decade is pure development for SMRs and creation of regulatory and policy structures that would accommodate and support them. Only in the 2030s might they start being manufactured in small numbers, and then the sigmoid curve of Wright’s law would take years to get to the point where they are manufacturing a sufficient number of them that doubling reduces costs by 20% to 28% per unit.

As such, I consider betting on SMRs to be a much riskier strategy than expanding HVDC, wind, solar, and pumped hydro, all fundamentally proven technologies. I’ll believe SMRs are cheap when I see them on the grid delivering transparently costed electricity.

Shah bridled at my “believe it when I see it statement,” asserting that the US is going to do that, and that tough decisions are needed to hit the 2035 climate targets. From Shah’s perspective, believing it when you see it isn’t how the US works. It sets big goals like putting a man on the moon and doing it. And to be clear, the second half of the discussion covers why a lot of people are hoping, perhaps desperately, that SMRs actually will be inexpensive and prevalent. But it also makes it clear why the US federal government’s hands are tied about electricity moonshots.

 

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