When Texas lawmakers restructured the electric markets in the late 1990s, they left one part of the business fully regulated: the poles and wires companies. In Texas, CenterPoint is the second largest of these entities and serves Houston and most of the surrounding area. They serve about one-fourth of the total peak demand even though they cover only 3% of Texas’ landmass.
It’s been a theme on this podcast and will continue to be: who’s going to be the orchestrator of all the small sources of power on the distribution grid — who will be the distribution system operator, or DSO. My guest this week, Jason Ryan, is Executive Vice-President of CenterPoint and he makes the argument that the operator of the distribution grid is already and should continue to be the utility.
Jason is forward thinking. He chairs the Aggregated Distributed Energy Resource (ADER) Task Force established by the Public Utility Commission and has helped the PUC and ERCOT launch a successful virtual power plant pilot (VPP) program. He has been vocal about the need for an “all-of-the-above” strategy which includes distributed resources and energy efficiency particularly as transportation and industrial sectors are electrified. Jason talked about research showing that CenterPoint will double — or even triple — its load in the next few years. To put that into context, Houston, covering only 3% of Texas, will add a New York worth of power (not New York City, New York state) in the next two decades or so, as vehicles, the massive Port Houston, and the industrial consumers along the Ship Channel electrify.
The pace of change is staggering and we’re struggling to keep up.
CenterPoint is also a gas utility in multiple states and Jason also talked about the evolution of the gas system as the energy transition picks up speed.
I learned a lot as I always do when I talk to Jason. I hope you do, as well.
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Timestamps
3:30 What the grid will look like in the near and long term future and how that will be different for consumers
6:30 The Aggregated Distributed Energy Resource (ADER) Task Force and the virtual power plant (VPP) pilot, and why Jason chairs the Task Force
10:00 Why does CenterPoint want to see DERs and VPPs in their service territory? Why are many other utilities less enthusiastic?
16:30 Utility concerns about losing investment opportunities from DERs and CenterPoint’s stance
19:00 Impact of electrification on load growth, including industrial loads in Houston.
25:00 The challenges of managing load growth
31:00 The need to increase energy efficiency using data to maximize opportunities and compare demand side solutions with supply side solutions
39:00 The need for distribution resource plans (DRPs) created by utilities and ERCOT
42:30 Finding the balance between planning and markets
45:30 Distribution system operator (DSO) model
50:00 How has resilience improved since Uri/Harvey and where and how can we can continue to improve
55:45 The future of natural gas utilities in the energy transition, CenterPoint’s experience in Minnesota
59:00 Are we doing enough to build transmission? Can we build more transmission based on economic criteria and not only reliability criteria
1:07:30 The most important policy to increase reliability, lower costs, and lower emissions in Jason’s view
Show Notes
Podcast with Former PUC Commissioner Will McAdams
Commissioner Cobos quote on transmission cost tests: "Today's economic problem is tomorrow's reliability problem."
Transcript
Doug Lewin
Jason Ryan, welcome to the Energy Capital Podcast.
Jason M. Ryan
Doug. It's great to see you again. Happy New Year.
Doug Lewin
Yes, to you as well. So glad we're having this conversation. Really been looking forward to this for a while. Let's just start. Can you just let the people know who you are, what you do, and tell us a little bit about CenterPoint Energy.
Jason M. Ryan
Sure, so I grew up on the legal side of our gas and electric utility business, started working for the company about 23 years ago, and currently lead our regulatory and government affairs group. At CenterPoint, we own and operate gas and electric utilities throughout the Mid-Continent. I think we'll spend most of our time today talking about our Houston area electric utility, where we're the transmission and distribution system operator.
Doug Lewin
Yes, and a gas utility in Houston as well, right?
Jason M. Ryan
We have the privilege to serve almost 2 million homes and businesses with natural gas service around Texas, yes.
Doug Lewin
Yep. All right, great. So I want to start with a general and wide ranging question that can let you go in lots of different directions. And I'm really curious to hear your answer to this one. What do you think the grid is going to look like? And you can pick five or 10 years somewhere in that range. So not next year, not 20 years from now, but somewhere in that five to 10 year range. And how will it be different for consumers?
Jason M. Ryan
Great question, and you're right. I think we could go lots of different places with this. So I'll start out by saying, nobody knows for sure, but I think you can start to see some trends. You certainly are seeing more distribution level generation resources, right? People at their homes and businesses having some kind of generation, whether it's solar with batteries, you know, whatever the distributed generation is. So you're seeing more people use the distribution system not only to receive power, but actually to put power on the grid to benefit their neighbors and communities. So I think you're gonna continue to see more of that.
The trends that we've been seeing is that continues to grow. The growth here recently has slowed down a little bit versus in the last couple of years, but there's still significant growth in that. So I don't know that you can tell that there's a trend in the slow of growth, but we have seen that.
I also think that customers will continue to use the grid more, right? So usage continuing to increase as things get electrified, especially in the industrial sector, especially around electric vehicles with fleet. Right? So not only are we using the distribution grid more for this generation that's distributed literally thousands and thousands of different places along the grid, but we're going to be using the grid even more in terms of our usage. So lots of exciting policy initiatives come out of those two things. So I'll stop there because I think we can we can dive off in a couple different places.
Doug Lewin
Yeah. So you talked about just now about distributed generation and how you think there's going to be a lot more of that. You are the chair of the Aggregated Distributed Energy Resource Task Force, the ADER task force in Texas. Obviously talked with Will McAdams in the first podcast about that quite a bit, but I'd love to hear from you, your perspective as chair.
Can you describe a little bit for folks maybe that didn't hear the earlier podcast, what it is? Why are you leading it? Why? It's obviously a big time investment for you and for your company. So why is that important to CenterPoint?
Jason M. Ryan
Sure. And I appreciate Commissioner McAdams' leadership on this topic. He, along with Commissioner Glotfelty, have really been leading the way to get industry to figure out how to get off go with aggregating all of these distributed resources and having them participate in the market in concert as if they were one large power plant. So I also like to call it a virtual power plant just for ease and avoid the ADER, but they're one of the same in my mind for purpose of this discussion.
So the task force was formed by the Texas PUC in August of 2022, and it is comprised of 20 different companies and organizations and nonprofits, a very diverse group of interests coming to the table to figure out how to make this work. And by the way, this is being done all over the country and all over the world, right? These trends that I mentioned before of assets at the premise level that could put power on the grid is not a Houston trend, it's not a Texas trend, right? This is happening everywhere. But nobody really has moved as fast as we have here in Texas and I give a lot of credit to the Commission and ERCOT and the members of the task force all working together with a clear vision of where we wanted to go. And that is to figure out how to make this work with existing systems, with existing requirements to participate in ancillary services to the greatest extent possible and get going.
So, the reason why I was honored to be asked to chair this is because it is consistent with our goal at CenterPoint to have a more resilient distribution system. Right, so we sit here on the coast in the greater Houston area, we have hurricane risk, we have flood risk, all things that are foundational to why we're making investments to have the distribution system hold up just as well as the bulk transmission system in the face of these threats.
That becomes even more important when customers are using the distribution system, not just to get power, but also to put power on the grid. So, plus as the entity that has to work to interconnect all of these devices, it just makes sense that we're sitting at the table. So a lot of different reasons why I think it makes sense for a utility to be at the table leading the conversation in terms of what the utilities role is, but also, you know, I try to facilitate the discussion more than lead people to a particular outcome, because since we are the poles and wires company, we're a little more neutral to where the group wants to take this. And so I see my role not steering us in the direction that I want it to go but making progress every waypoint to make sure that this conceptually continues to move forward, looking for progress, not perfection in terms of how we move forward. Again, the goal being to have Texas lead in this and have other states and other places literally around the world looking at us to figure out how we made it work.
Doug Lewin
Yeah, it's really interesting. So there's a lot there that I want to unpack and dive into. And I just want to first, because you did a great job doing, what we always try to do is make this accessible for people that are new to these topics. Everybody's interested in the grid post-jury, right? And to energy professionals that are in this space. You mentioned virtual power plants. In case folks haven't heard that before, we're talking about enough small resources that actually add up to the amount where they could equal a large power plant, thus virtual power plants. And so virtual power plants and distributed energy resources to you are kind of the same.
I'll say, Jason, and I think for particularly for those that are in the industry and have been following these issues for a long time, it's interesting to see a utility leading that ADER task force. The general I think assumption of folks that have been around these spaces for a long time, regulatory spaces, is, utilities generally, and I'm speaking in generalities here, and I want to be clear for everybody listening, Jason and CenterPoint, Jason specifically and CenterPoint generally have been great in this process of making sure that there is an avenue for these distributed energy resources to get into people's homes and garages and buildings and into the market. In general though, utilities have not been, I think this is fair to say, huge champions of distributed energy resources, partially there's a logical sort of financial reason, which is if people are generating solar on their roof, they're using less of your product. You guys exist as an investor-owned utility. You have a requirement to your shareholders and the less energy you sell, the less money you make. Help square that circle for us. Why does CenterPoint want to see more of these distributed energy resources and virtual power plants out there within your service territory?
Jason M. Ryan
Sure, so I think there are a couple of reasons that drive that. Number one, unlike other parts of the country where the utilities are making investments in generation themselves and earning a return on that investment and that's how they're growing their business to meet their financial goals and to meet their customers' energy needs, right? That's not the case in ERCOT with the investor-owned utilities. Right?
We own the poles, the wires, the substations, the meters. We deliver power that's generated by others. And we are indifferent to who those others are. They could be large power plants. It could be wind, solar, gas, coal, nuclear, geothermal. It can be large or small. And in the case of ADER, it can be extremely small.
And so, as a delivery company, we deliver the energy. I think it gives us more flexibility than perhaps some of our peers in other places that are looking for their own investment opportunities and generation. That's not being overly critical of them. It's just a different business structure. So I think that's one reason. I also think that given the, we talked about this at the beginning, given the incredibly significant growth and usage that we are seeing happen on the grid today, that all indications are will continue materially in the future. I think we need an all of the above approach to meet Texans energy needs, right? So we need sufficient capacity on the bulk system from a generation perspective. We need generation at the local level, if customers are investing in their own equipment that have the ability to put power on the grid when it's needed most, and they're doing that thousands of times over on the distribution grid, we absolutely have to figure out how to make that work in the most efficient and effective way to aggregate it and have it be the equivalent of another large power plant, right?
We also need to do more on energy efficiency, demand response, right? So it's part of an all of the above approach to meeting Texas energy needs, keeping energy affordable. So it really does check a lot of the boxes that we're interested in seeing as we look for ways to most effectively serve our customers.
Doug Lewin
I think there's a lot of utilities, and obviously not saying this is the way CenterPoint sees it, but I think there's a lot of utilities that look at all these ADERs, these distributed resources like solar and storage and even energy efficiency and demand response and say, well, okay, if this is done right, this could actually reduce the need for investment in the distribution grid. And that could hurt our bottom line.
But it seems obvious to me you guys don't see it that way. Is that right? I mean, do you think that if, A, do you think that assumption is correct, that if these are deployed the right way, take for example, any given street ends up with five, six, ten Ford Lightning electric vehicles on it. That's a hundred KWH battery. It's going to more than double the load of each home there, that could take a whole lot more infrastructure, which would be an earnings opportunity for you, but would also cost a lot of money to all of your customers, or they could be integrated with smart charging software, maybe not as many upgrades are needed. Are you worried about losing investment opportunities, or do you see it otherwise?
Jason M. Ryan
I think it may change how we design and operate the system, but I don't think the system goes away, right? If that makes sense. So a long way of saying no, I don't see it as competing with our investments in the grid. In fact, I see it quite the opposite, that if we are ever more relying on the grid for what we do in our everyday lives, increasingly in transportation, increasingly to put power back on the grid to serve others, not just meet our own energy needs and make our investments in these things that we're putting in our homes and businesses even more economically beneficial to us, right? That means I need to have a more resilient grid, I think that which, requires the investment, right? So I think that it may be that if the system's being operated in the most efficient way, which means not charging your vehicle in the peak of the day, but moving that charge to off-peak, maybe it does impact how I invest in the system, but I don't think it overall means we don't need the grid to the, to the same extent as we need it today. We actually need it to perform almost always on, right? Even in extreme events, which is gonna drive investment.
Doug Lewin
Yeah, I think that's right. And I think that that's why it makes more sense to view it that way. And I think also Jason, and I know this is something I've heard you talk about before at conferences, even if, and we're going to come back to energy efficiency in a minute, but even if we get much more energy efficient in the sense that we're reducing, for instance, heating and air conditioning loads in some sectors is dropping, it's not only electric vehicles. There's going to be all sorts of other forms of electrification going on as well. Can you talk a little bit about where else you see electrification coming and what that means for load growth, particularly in the area you serve in Texas, the Houston area, obviously an industrial center?
Jason M. Ryan
Yeah, so just to orient folks to Houston, although a lot of your listeners will know this, we are the fourth largest city in the country on pace to become the third largest in not too many years. We have the largest petrochemical complex on the planet here, so a lot of industrial load.
We have the largest port in the country in terms of foreign tonnage. We have the largest medical center on earth right here. And we are home to, I think it's around 25 Fortune 500 companies headquartered here. So we are extremely small geographically in Houston. We make up probably less than 3% of the total landmass of the state but we use about a quarter of the state's electricity right here in Houston. And so as you see the port electrify, as you see industrial electrification projects, you are necessarily going to see much more significant usage in an area where there's already significant usage, right? So that's gonna, that's what's really driving that. We need all of the above.We need more transmission. We need more power plants, virtual or otherwise. We need more energy efficiency, right? Because I think, and there's a study from Greater Houston Partnership that should be coming out first part of this year that will go into more detail on what I'm talking about, but it really shows the likelihood of significant stair-step increases in industrial usage associated with electrification.
Maybe I'll just give one example. So currently, at many ports around the world, and this is certainly true of ours, ships come in. And while they're loading or unloading, they're running on whatever fuel they're using to run the ship. Once you have that ship plug in and run on power at the port, diesel or whatever it is that their fuel is, you not only get the environmental benefit of cleaner energy use while the ship is in port, but you get significant increase in load at the port, right? So those are some examples of electrification of existing facilities that will really stair-step up the usage.
So I think industrial electrification is going to be the biggest driver. And I think what you're going to see over the next 10, 20 years, is that that's actually going to be what moves the needle in load growth, less so electrification of our transportation sector. That's still significant, but it's going to be dwarfed by like, by a lot. The industrial electrification that we see happening here in Houston. And again, that's not a Houston phenomenon. You're going to see it across the state. You're going to see it across the country and across the world eventually, right?
Doug Lewin
Your peak load right now is roughly what, 20 gigawatts give or take?
Jason M. Ryan
20 yes. And so if you think about the possibility of doubling, tripling that load as we get between now and 2050, I think that's what you'd see if you pull some studies that are looking at this. And by the way, those are not max electrification cases. Those are kind of mild electrification cases.
So and even if you, and so they're predicting the doubling or tripling of electric load in Houston over the next 25 years with a lot of those projects front-end loaded in that timeframe, you could start to see Houston's load approaching what the total ERCOT load is today. And again, Houston's not the only one that will experience that.
So, that's the future that I think we have to be looking at. And look, Doug, if you only get half of that mild case, you're still significantly increasing the electric needs of Houstonians and of Texans more generally. And so that's the challenge that I think we as an industry need to start taking on. That's the context in which we have advocated for energy efficiency to a greater extent, load management to a greater extent, transmission lines getting built faster, ADER as a real tool to help power our communities. So again, that's the kind of the context around the all the above approach that we're taking.
Doug Lewin
Just to put another frame of reference on what that kind of growth would look like, in a mild case, the electric demand growth in the Houston area alone would be like adding a New York State worth of power over the next couple of decades. That is just wild. And we're not talking about the growth of the Metroplex, the growth of the Valley, the growth in Austin, San Antonio, all of these, the growth in the Permian Basin, like all of these places have explosive growth. And we're just talking about Houston and we're talking about adding a New York. So this, I think leads us to, it's going to lead a lot of different places, but it leads me to a couple of different places.
One, you can have significant growth in energy if you're able to effectively manage that peak. You can have significant growth in energy demand and actually not have decreased reliability or decreased environmental performance or, you know, another way to say that, you wouldn't have increased emissions, decreased reliability, increased costs. You can avoid those bad outcomes if you are managing that.
And then the inverse of that is true filling that valley. So those times of day, which are most times of day and most times of the year, when there's not a, you know, supply and demand are not getting close, there's plenty of excess capacity. So that really is what this ADER task force and the virtual power plant and all these things is to create some kind of a market or a mechanism and have some entities coordinating that, that you're reducing the peak and filling the valley. Because if your only strategy is to build enough capacity to meet those kinds of peaks, adding in New York just to the Houston area in the next couple of decades, you're always going to struggle to keep up, correct?
Jason M. Ryan
That's right. And I think that's where, when you take an all the above approach, you can achieve those kinds of outcomes, right? If all we were going to do was to build to an ever increasing peak, you know, that is one approach, but you've got other tools in your toolbox and we need to make sure, I feel you need to max out every tool in the toolbox. And as we move forward, if we discover that there are tools that we need, we need to work from a policy perspective and make sure that we get those tools.
This is a, especially in our business, you can't just build the infrastructure overnight, right? These are long lead time projects and it's significant infrastructure that needs to be built. It's significant programs on energy efficiency that you have to get customers to participate in.
So the time to address this problem is now, so that we can continue to see the Texas miracle that we've been experiencing over the years. So you mentioned adding a New York in terms of usage. We have been adding to Houston the equivalent of a Corpus Christi every two years just in terms of population growth or adding a Waco every year, right? However you want to think about it, we are adding about 50,000 new meters every single year. And so if you think about what we've been doing then to accommodate that, is we've been essentially building the same kind of grid that you would need to serve Corpus every two years. We're building the grid all over again. So, just think about how extensive of a project that is. We've been doing that year after year leading up to this, right? And I think that trend continues, right, in all the forecasts. And on top of that, you've got the industrial electrification. So while it sounds far-fetched that you might add something like the state of New York's power consumption, I don't think it's far-fetched at all. We've been seeing significant growth just in population.
And none of the people that move here bring infrastructure with them. So that means we have to be ready to accommodate it in advance of it happening. Right. So just it requires a lot of long term planning. That in order to keep up with it, so we don't have to tell people we can't we can't let you open your new manufacturing facility. We just can't interconnect you. We can't serve you. That would be a bad outcome, right.
Doug Lewin
Yeah, no, not an option. Yeah. I mean, I guess it is an option. It's a really horrible option. I agree. And, you know, it's interesting because I do hear this a lot, right? People, we got a lot of people moving here. They can’t bring their own water. They can’t bring their own roads. They can’t bring their own power. And sometimes I go, actually, they could bring their own power. We do have solar storage, energy efficiency, but your broader point, of course, is correct because they, even if they bring their own power, they need to be able to connect to the grid.
There are, to your point earlier about the grids not going anywhere, the distribution grid is going to continue to serve. Sure, it's possible for people to do cord cutting like they do on TV and all that, but we've spent so much on the grid. It is the National Association of Engineers called it the greatest invention of the 20th century, the electric grid. I mean, think about that above the, the telephone and the internet and computers like the electric grid was number one. It would be a shame for people to have to like build enough redundancy to do it all themselves. We need the grid to be robust. So your broader point is well taken.
I do want to, and you may want to respond to that and you can do it in the next answer, but I do want to ask you about energy efficiency. You brought it up a couple of times and it is absolutely critical and CenterPoint plays an important role for those that may not know in the restructuring bill, Senate Bill 7 in 1999, there were established by the legislature goals for the transmission and distribution utilities of which CenterPoint’s one to reduce energy efficiency. In fact, the original goal was expressed as a percent of growth of demand for some of the same reason you're talking about. We need an all of the above, we need to work, we’re a growing state, we need to meet some of this through energy efficiency. That goal was then, it was then increased again in 2010 by the PUC and then that was codified in 2011. And then really nothing over the last 12 years as far as sort of a major increase in goals. Is it time to increase those goals? What should be done from your perspective on energy efficiency at this point?
Jason M. Ryan
Yeah, so I'll cut to the conclusion, and then we can maybe unpack it. I would like to see us investing in energy efficiency based on data that compares it to other things that we could do to meet Texan's energy needs, right? And by saying that, it necessarily means that you're going to part from the framework that was set up in the ‘99 Restructuring Act and that's been modified over time, I'm not critical of that framework. We needed a place to start. I think it's good that it's been modified over time to increase the importance of energy efficiency as a tool in our toolbox. But today, it is divorced from the cost of other alternatives. So a percentage of your load growth may be the right way to look at it, but it's hard for me to believe that the same percentage is the right percentage for every area of this state. And again, we don't look at the cost of the alternative versus maybe doing a little bit more or maybe a little bit less. I'm guessing it's going to show we should do more.
But at the end of the day, I want it to be based on data. And I think that's where we've really struggled at times in the State House is, is your percentage better than my percentage when they're both divorced from data that would suggest what we should really be doing. So that's why I think modifying the existing framework is not a bad path. I just don't think that's the best path.
Because the facts are just very different. Texas has been growing for a long time. That's not necessarily new. But there's just explosive growth in the last decade versus the decade before when this framework was set up. And if you're looking forward to solving for Texans energy needs over the next couple decades, I think a framework that's based on cost benefit analysis, that's gonna necessarily be different depending on the geography of the state that you're talking about, is a better way to have the energy efficiency discussion. Because then, Doug, I can say I should invest more in weatherization of existing structures versus build a new power plant versus build a new transmission line versus whatever.
Or maybe if there's an area on the grid that would need some additional infrastructure, I could maybe meet those needs with energy efficiency if that's the lower cost option. Today, once I max out under the current framework, I stop, even if it makes sense to do more because there are cost caps in today's structure that, again, are kind of divorced from the benefits of the program once you hit that cap, right? That's why I think the framework needs to change so that we make decisions based on data and analysis versus just hitting a threshold that was set and been modified over time. Again, not critical of that structure. It made sense at the time. I just think we need to move away from it.
Doug Lewin
I want to suggest a way forward and then get your reaction to it. So every year, the transmission distribution utility CenterPoint, Oncor, AP, TNMP, and actually the investor, the vertically integrated investor owns within Texas as well, El Paso Electric, Xcel, et cetera, put in a plan for the year. It goes in on April 1st.
I wonder if in the short run, because it does take time to do the kinds of analyses you're talking about, I totally agree they're needed and we should be doing those a thousand percent agree. In fact, the PUC before they increased the amount back in 2010, they did a potential study. That was the last potential study, energy efficiency potential study the state of Texas has done. That was in 2008. LEDs barely existed. You had to pay 25 bucks for an LED back then. And we haven't done potential study since then. Obviously, technology has changed. I mean, the iPhone was barely out at that point, much less smart thermostats. So it is definitely time to do that. But that does take time and we never know when the next major winter storm is going to come. So I wonder if having a strong focus on heating and air conditioning, which are residential heating and air conditioning, small commercial, these are driving the peaks in both the winter and the summer.
Insulation, which because if you only change out the heating and air conditioning and you don't do anything about insulation, your benefits are not going to be not only not optimized, you may not get much benefit at all because the house is so leaky. And then smart thermostat, so that customers who want to and it's always voluntary and opt-in can enroll in programs that are like pre-cooling their homes and getting paid to reduce during peaks with good insulation, with a good HVAC, and with a smart thermostat.
They're not sacrificing comfort, but they could be paid. That contributes to the reliability of the system. What I would suggest is we do those things quickly, ramp those things up quickly. There's also some funding gonna be available from the Inflation Reduction Act, already available in the form of tax credits, soon to be available in $690 million coming to the state to help people who don't have a tax burden replace their HVAC and get insulation and things like that. So like make the utility programs in concert with that funding. Do that in the short run as we're doing these broader potential studies to compare efficiency, broadly defined, including electric vehicle charging and demand response and all these things to compare, do the kind of cost benefit analysis you're talking about.
React to that? What do I get right? What do I get wrong? Is it pragmatic? Is it possible? What are your thoughts?
Jason M. Ryan
Yeah, and so all good thoughts. And again, I appreciate Commissioner Jackson, who's really held a lot of discussions around energy efficiency and continuing to keep this ball moving forward. I don't think there's one right answer. However, I'll throw something maybe back at you. And that is, in many other parts of the country, utilities do an integrated resource plan. And again, those are more for integrated utilities that actually have generation in their portfolio. We don't. But what that does is it is data-driven analysis of what should we do to meet the energy needs of our customers of this utility, right? And it stacks up all kinds of generation, but it also stacks up energy efficiency. And it is there to guide you on how much of each of those things you should do to meet the energy needs of your customer base over thousands of future scenarios. Right? I think that the, if the utilities and ERCOT were to do that kind of analysis and use it to justify how much on energy efficiency they're going to do, how much on all the other things they're going to do, how much new transmission, how much ADER do we really want? What kind of incentives might we place there to meet energy needs? I think that kind of an analysis done by the utilities, I think put the burden back on us to do that analysis and then look at it at the statewide level, right? Of course, but each utilities area is going to be unique, and that's going to drive different outcomes. And maybe let me just unpack that for a second.
You know, Houston, there's not sufficient generation in Houston to power Houston. So on the hottest and coldest days of the year, we have to import almost 70% of the power that Houstonians are consuming, because there's not sufficient generation here locally to power Houston. That means we're taking from other parts of the state, building transmission lines, bringing it in. That set of circumstances is going to necessarily impact a data-driven exercise as to how much energy efficiency I should be doing, how much you could justify economically. And that would be different than an analysis of an area of the state where I'm actually taking the power from. Maybe they need less there because you can economically justify less because they've got plenty of power. So that's just maybe one example of why I think each utility taking into account the unique nature of the area that they're privileged to serve should do that analysis and it should be subject to all kinds of scrutiny and participation by other interests.
But that's a good starting point. And that's maybe explaining it that way helps to understand why I think the current framework of just giving us all a percentage and statute to hit. It's a one size fits all when we're not all one size. And so I think putting the burden on the utilities to bring forward the analysis maybe makes some sense.
Doug Lewin
Yeah. I think there's a mix though that's needed here, Jason, because you could be the greatest planner with the best data sets and the most diligent teams, and you're going to get things wrong because that's just the nature of planning, right? You can't... And this is where I think markets really have a role. And we have markets obviously on the bulk side, the bulk generation side.
But this is where I think it could get really interesting to have markets on the distribution side where you can actually see what those prices are instead of having a planning team. And I'm not saying the planning shouldn't happen. It should. And people should take their best guess at it, particularly right now when we don't have the markets, right? We're going to do the best we can. And I appreciate what you're saying. And I think distribution resource planning makes so much sense in so many different ways.
And that planning process would be better informed if there was actual data from actual resources competing in a market to see how much does it cost to deliver reductions from insulation and HVAC? How much does it cost to deliver reduction from a smart thermostat program, from an EV charging program, from an electric hot water heater demand response program? I could go on, right? Let all of these things compete.
That's how markets work. You see where the price is, and then you know kind of what that bogey is. Like, okay, I can see here's the price, and I know this is what it costs for transformation. I know this is what it costs to build a new natural gas plant. I could see how these resources compete and what's under the cut line and what's not. Right?
Jason M. Ryan
Indeed. Yeah. And yeah, I see our role as the utility, you know, to oversimplify it, we throw extension cords to people to hook them up to a larger network. Increasingly now putting power both ways. It's not just, so it's a two way extension cord. But we're here to enable the market to do what they want. And I think that you're right as it relates to if you once you have some basis and to form a new framework, I absolutely agree that we need to enable the market to actually implement the solution. So it's really just about how do you even know what good looks like when, foundationally, we don't have any data to start from and we have a framework that doesn't allow us to think differently.
Right. So I absolutely agree with you that you have to layer that on top then what's the role of the utility to enable the market to do what the market needs to do with the information and signals that it may now have under a different framework than what we have today.
Doug Lewin
And that's where I wonder about this distribution system operator model. And I'm agnostic on this. I'm not sure who the right entity this is. I like to ask this on just about every podcast. I hope the listeners don't get tired of it. But I think it is one of the most dynamic areas in the electric grid, which is incredibly dynamic. So I say that fully aware that that's actually a high bar. There's a lot going on in the grid right now.
But what entity is responsible to coordinate and orchestrate all of these distributed resources? There's definitely a role for the utility in there, whether that's as the distribution system operator or something else. I don't know yet. I don't know if that's something you want to comment on or weigh in on or not.
Jason M. Ryan
Yeah, I think there probably isn't a single right or wrong answer because we're so early stages. And I like to approach problems with an open mind as to what the solution is. And so I can't tell you, Doug, that this is the silver bullet. There's no silver bullet in life. I'm not sure there's one on this one either. I wouldn't discount the utilities role, especially in these early stages.
Yeah, we do operate the distribution system today with fairly sophisticated information about what's going on with our infrastructure. You now have to layer on to that, and this is why I think it's a very good question of who should do this, thousands and thousands of other things interacting in the market. It’s not just infrastructure that's feeding electricity to a meter and we keep up with how much is being consumed there and we report it to the retail provider who then sends a bill. Right? That's not all that's happening today.
But I wouldn't say that the utility has no role in that. I think we have to decide as a market, what do we want? To what end do we want a distribution system operator? And I think that… you'd get different answers from different people on that. And as a result, I think you get different solutions because we're all approaching it slightly different. I think this is a conversation that needs to evolve. And I don't know what the forum is for that evolution.
Doug Lewin
Maybe it's this podcast.
Jason Ryan
It could be if you're asking everybody what they think. Piece it all together. Yeah, yeah.
Doug Lewin
So I do want to ask you about a couple of things. These are related. So obviously, Winter Storm Uri was a traumatic event pretty much for the entire state, certainly for some more than others. But it's not only Winter Storm Uri. Obviously, Harvey was particularly traumatic for the Gulf Coast and Houston, right in the center of that.
Can you talk about where you think resiliency has improved, whether in a Harvey or Uri context specifically, or if you want to speak more generally, open to however you want to address this, where have things improved, and what do you see as kind of the next wave where things could get better, where we are making improvements, but we need to focus and make more improvements?
Because I want to be clear. And I hope everybody sees it this way. I don't think there is an endpoint where we just sort of wipe our hands and say, great, now we've got this fully reliable, resilient grid, it's done. It's dynamic. As we were talking about earlier, there's more load coming in. The weather's getting more extreme. We're going to continue to get hit with these punches of these extreme storms. So it's going to be a process of continuous improvement.
So in that spirit, I'm curious where you think the focus and the effort needs to be, but I also want to hear about where the improvements have already been made.
Jason M. Ryan
Yeah, I think resilience is an incredibly important topic, and I'm glad that word is being used more and more often now as it relates to the utility infrastructure, and even more broadly across the spectrum of all the market participants.
But I like to start out talking about resiliency in terms of what in the world do I even mean by that word? Because I think it's also a word that means something different to a lot of different people. I think about it as taking a punch and getting back up quicker. And Winter Storm Uri and Hurricane Harvey are examples of those punches, right? Where we have to get back up quicker to the benefit of our customers, our communities. And so maybe before I talk about the go-forward, I can talk about a little of the examples of what's already been done. And I think that will prove the value of being able to get back up quicker.
So maybe take Hurricane Harvey. Tremendous flooding event in the greater Houston area, more than 50 inches of rain in a very short period of time. So we had for the first time a substation that flooded during that event that obviously knocked out power to the area local to that substation. We fortunately had invested in a mobile substation. None of this is easy, so I'll talk about it as if it were easy to do. But we basically brought a substation on wheels, parked it in a parking lot near the old substation, recreated a grid that could tie it into the local distribution system there, and tied it back into the transmission system and operated in the parking lot of a church next to our substation that was underwater. So that is an example of taking that hit and getting back up quicker versus waiting for the water to recede, then rehabbing the substation that was underwater. That would have taken weeks or more versus days, right? That is taking a punch, getting back up quicker.
So the utilities have been making those kinds of investments in the past, preparing for events that are maybe in the tails of the probability curve just so that you're ready. We tend to be in the tails of the probability curve more and more often now. So that’s why I’m glad resilience is getting renewed focus, right? The legislature last year passed a law that enables utilities to come forward and bring resilience investment plans to the commission. For the commission to have that visibility for parties to look at it, understand what we're doing, understand the cost and benefit of what we're doing. Because the, I think that will then enable us all to learn from what all the utilities are doing on the resilience side and make good collective decisions on what we should be doing to manage the various risks in our communities.
You know, when we invested in that mobile substation, I don't think there was great visibility in the industry, at the commission, into that investment. It was something that we felt was necessary. We used it. It paid off with the benefits of getting that community back up. But these plans that utilities will file starting this year, I think, will really raise the bar of visibility into resilience projects. You'll be able to compare and contrast what the various utilities in the state are doing. And ultimately, you'll get the most beneficial projects that are moving forward bringing those benefits to customers so that the next time we take a punch, you've got that resilience investment that's gonna pay off. That's when you'll see those benefits. The good thing is that many projects that bring you better resilience also bring you better reliability, even on blue sky days. So a lot of these investments that I think you're gonna see the utilities talking about will not only pay off in those significant events where we need better outcomes, but will reduce duration and frequency of outages even outside of major events, right? So I'm excited about what that's going to look like. I think it's remarkably forward thinking by the legislature, the PUC's rule implementing it has been passed. They did that in a very short period of time. I think it all underscores the need for us to get going with more resilient outcomes for Texans after these major events.
Doug Lewin
Yeah, makes a lot of sense. So I want to ask you just a couple more questions before we end. One, you guys are also a gas utility. And I know we're mostly talking about Texas, but I know you're also operating in states where there's a real push to electrify everything and not have as much gas and that. And I believe you guys are doing some interesting projects with like… is it geothermal loops in some of those other states? Can you just talk briefly about what that looks like in those states and then more generally what the future of a gas distribution utility is? Because I think those are, it's not something we've talked about on this podcast yet, but I'm interested.
Jason M. Ryan
Sure, so I appreciate that question. At CenterPoint, we are one of the largest natural gas utilities in the country, especially by miles of pipe in the ground that we operate to serve our customers every day. And we are the second largest gas utility in Texas. We're the largest gas utility in the state of Minnesota, which is where we've got the proposal that you mentioned on geothermal. We also have the privilege to serve customers in other states throughout the mid-continent with natural gas.
Let me talk about Minnesota. So legislation was passed there in 2021 called the Natural Gas Innovation Act. And that Act set up a framework for the Minnesota Commission to consider proposals by natural gas utilities on doing new and different things to meet the energy needs of customers and at the same time reduce emissions and meet some environmental goals that our customers also have and our communities share. And so, we're in the business of moving energy through pipe. And if you can meet energy needs of our customers using ground source heating and cooling and move that around in a networked system, we should be looking at that, right?
That's part of what the Natural Gas Innovation Act allows, is for us to bring new ideas to the table and get input from other stakeholders, have oversight by the Public Utilities Commission there to make sure that it makes sense for us to make that investment. And so I'm excited about that project. Yeah, we also have a hydrogen project up there where we are blending hydrogen with traditional methane in the system. Again, to reduce emissions. There are other, I think we proposed 18 different projects under that act and a couple of R&D projects as well. All aimed at achieving the goals of our customers and all aimed at doing things that we can learn from before you try to do it at scale. You know, I think that that's exactly what that legislation was meant to accomplish. And I look forward to continuing that discussion with stakeholders up there.
Doug Lewin
Fascinating. We could probably do an entire podcast just on that. I have so many other questions, but I'm going to ask you one more question then we're going to end, just asking you what policy changes you think would be most impactful.
But before I do that, I do want to ask you about transmission because you guys are a transmission distribution utility. Building more transmission seems to be, it gets more and more attention these days. People talk a lot about interconnecting ERCOT to other grids. We had an incident on September 6th, the one time that we've had an emergency alert, I believe since Uri, right? I think it's the only time we've actually had an energy emergency alert was September 6th. And a large part of it was because of transmission congestion and a manual curtailment by ERCOT of a line to South Texas.
You and I both know, and I think a lot of our listeners will know, the PUC did approve more transmission to South Texas. That's being built by AAP and others.
But it takes six years-ish, right? Five, six, seven years to build these big projects. Are we doing enough right now to build more transmission? I know there was a long period where there wasn't a lot being built, at least in my view. What is your view? Are we moving fast enough, again, knowing that there's these long lead times and what you were talking about earlier with Houston getting 70% of its power imported? Critical, we do distributed energy resources, but this isn't an either/or.
It's not like just build small sources or transmission. We're going to need to do both. It's going to be all the above. Are we moving fast enough? And if not, where's the log jam?
Jason M. Ryan
Yeah, I think what I'd like to see more of is transmission projects that are based on economic criteria moving through the system and getting approval to be built. And so maybe unpack that a little bit. Historically, we, and importantly, look at reliability as the justification for new transmission lines, right?
How do we make sure we can keep the lights on with new transmission line? That's an incredibly important factor to take into account. But it's now not the only factor, right? So legislation was passed three years ago now that enables transmission projects to be approved based on economic factors, reducing congestion costs, reducing other costs, right? Those projects that could be justified on economic criteria today, many times will be the projects that are based on reliability criteria five years from now.
So to your point of how do you get earlier transmission lines built before it becomes a critical reliability issue is by building more lines based on economic criteria, which makes all the sense in the world, right?. If you could build a project, there's obviously a cost of building the project, but if it is net beneficial to customers economically, then you should do it every day. If economics is your only criteria, right? And I know it's not. None of it is as simple as what I just said. But it addresses the issue that you brought up of how do you get these long lead time projects built with sufficient time before they become problematic.
Not knowing what the situation is going to be. A lot of situations could create the problem, right? So I think if we what continue to work to implement that legislation from a couple years ago, I Think you'll start to see improvement there. I also think we should look at higher voltage transmission projects DC transmission projects, I think I think all the above again in terms of what should we be looking at should be on the table, but I would start by implementing the economic transmission line concept more robustly than I think we've done so far.
Doug Lewin
Yeah, I'm paraphrasing here, but when they were considering the South Texas line, I believe Commissioner Cobo said something along the lines of today's economic sort of problem or, you know, the line that is, it becomes tomorrow's reliability problem, right? If you don't move forward, on the economic basis and you wait till it's a reliability problem. It will become a reliability problem and then you have to take six years to build it. So I mangled her quote. I'll put it in the show notes. She said it far better than I did, but the basic point is if you don't move forward with those economic lines, you're setting yourself up for reliability problems.
Jason M. Ryan
That's right. That's not going to always be universally true, but I think there's a lot of truth in the vast majority of cases, right? That you can address the reliability problem a lot sooner than when the problem is staring right at you and you have just enough time to build the transmission line to solve it, right? We should get out of the mode of operating that way when there are other options within the regulatory framework for us to use. We just have to shift there and it takes time, right? But it's time to make that a priority.
Doug Lewin
Yeah. And am I not mistaken that for that economic calculation, you have to be able to show that the total cost of the project, which could be amortized over 30 or 50 years, has to pay back within a, like a six year period?
Jason M. Ryan
Yeah, I think there are different ways that you could look at it, but conceptually you're correct, right? That there are sufficient benefits to justify the project versus the cost of that project. And so you look at it from a customer cost perspective over a relatively short period of time, and does it make sense to go ahead and do that now versus waiting for a critical reliability issue to be identified and then building perhaps that same line much later on a just-in-time basis, which again, you could do it that way. But if you've got a better way to do it, we should continue to transition to doing it that better way and bringing those economic benefits to customers today and avoiding that critical reliability issue that could come up some years from now. Right? The infrastructure will already be there when it, and avoid that reliability concern.
Doug Lewin
Yeah, because just-in-time works great for consumer goods. It doesn't work great for big construction projects that have all sorts of difficult barriers and regulatory proceedings and that have to happen. And just, yeah, the construction, the supply chains, all of that have to be managed. It's just, it's not a just-in-time thing.
Jason M. Ryan
Right. And it gets back to the, you know, we kind of end where we began in terms of the importance of this, because as I mentioned at the beginning of our discussion, the tremendous amount of electrification in the industrial sector in an area that already imports a significant amount of power to serve our customers, getting in front of those transmission needs in advance of those significant stair steps up in usage, it all kind of works together.
So building it from an economic criteria today so that you're ready for those stair step increases and demand that we're gonna see over the next couple of decades is incredibly important. That's exactly the type of long-term planning discussion that I think we need to continue to be having to serve our customers most effectively.
Doug Lewin
I completely agree. Last question, Jason. You can pick one or two or three, whatever number you want, most important policies that you think could make the biggest difference to increase reliability, lower costs, and lower pollution?
Jason M. Ryan
Yeah, so maybe I'll take that answer in a slightly different place than where we've gone today, and maybe we can have another discussion. But I think that how utilities fund the projects that they're investing on behalf of their customers is an increasingly important topic that I look forward to continuing to have.
And so what I mean by that is this. With the significant amount of investment that we're making, we have to go borrow money from a bank or go exchange a share of our stock with a shareholder in exchange for money, right? Those are two primary sources of how we get funding to invest in this business.
And the investment is more than the cash that is coming in the door from the business itself. So I'll make up numbers, but the order of magnitude is generally right. So assume you have a utility that clears $500 million a year after expenses, but is investing $2 billion a year in infrastructure in a growing environment.
That leaves a billion – even if you take everything that you cleared after your expenses and reinvest it, you still have a billion and a half dollars that you need to invest this year. And that's why you either have to go to a bank or go to a shareholder to get that money. The business isn't generating enough money to fund the capital requirements. You want to make sure that the utility is able to access those dollars in the most affordable way because the cost of those dollars is going to be passed on to consumers.
So if the utility is not able to access the lowest cost debt for whatever reason, we need to be looking at those reasons and see if we can eliminate those reasons on why the debt might cost more.
So I don't want to get too nerdy right here at the end and introduce completely different topics. But at a high level, it's going to be increasingly important because if a utility is paying even a slightly higher debt cost than what it could otherwise get with a small tweak somewhere else, with these large cost, long-term projects, that is long-term bad for customers.
So I think we need to have that discussion on a go-forward basis as we continue to increase the amount that utilities are investing in the system. It may be 20 years ago when that fictional utility that I mentioned maybe was spending a couple hundred million dollars a year on projects. Maybe it was not as important to address than when it's spending billions of dollars a year on projects. I think that trend is where we've seen. We've gone from utilities making significant, but affordable investments to now requiring a lot more from our utilities, from an investment perspective. And as you do more resilience projects, it's gonna continue to increase. As load increases, that's gonna continue to increase. I just think we need to address that affordability of capital costs for our Texas utilities.
Doug Lewin
And how does that get addressed from a policy point of view?
Jason M. Ryan
So in many ways, it relates to the assumed cost of capital that's put in a utility's rates, right? So the capital structure component of a rate case is where that occurs.
Doug Lewin
And you guys have a, CenterPoint does have a rate case this year. So is this the kind of thing that could be addressed in this rate case? Are you talking about like future rate cases for eight years from now?
Jason M. Ryan
No, I think rate cases are exactly the right forum to have this discussion. And it really just ensures that that component of a utility's rates is set based on, again, real data, understanding the ramifications of assuming a lower cost of capital than what that utility is actually incurring. Because you could otherwise get into a situation where a utility is actually losing money on every dollar that they invest because they're recovering in rates a lower cost of that dollar than what it actually cost them, which means that when the utility goes to the bank, they have to explain that I'm going to lose money on every dollar you give me to invest.
Doug Lewin
Not a great conversation with a banker.
Jason M. Ryan
And the bank may say, well, then I'm going to charge you higher interest as a result, right, which is not crazy. Versus a utility that can say, I recover, I'm not gonna lose money on every dollar that you give me to invest. That's a different conversation. That would be a different conversation in our own personal lives too. If you go to the bank and you're asking to loan money and you know you're gonna lose money, but hopefully the business more generally will make it up, you're a more risky customer to loan money to than somebody that doesn't have to explain that.
And so that's an incredibly important policy discussion so that we can hit that affordability mark that you mentioned in the question.
Doug Lewin
Excellent. All right. Well, as usual, I always have more questions and want to dive deeper, but we have gone long enough for today. I'll have to have you back in the future. But Jason, thanks so much for taking time to be on the Energy Capital Podcast. Appreciate it.
Jason M. Ryan
Thanks Doug, it's always a pleasure to talk to you.
Distributed Energy Resources and "all-of-the-above" energy solutions with CenterPoint's Jason Ryan