Security and Resiliency in Action: Supercharging the energy supply chain

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Caitlin Ludwig: Hello, Making Sense listeners. You're listening to the first episode of our Security and Resiliency in Action series, where we unpack the big moves and macro trends shaping our economic future. Over the course of this series, JPMorgan experts will cover industries that are critical to national security and resiliency, including energy, healthcare, pharma, manufacturing, defense, and technology. In this first episode, we're covering all things energy, why energy demand is on the rise, the need for new energy sources, supply chain challenges, and how industry deal making is evolving. We'll hear from Dr. Sarah Kapnick, Global Head of Climate Advisory, and Michael Johnson, Security and Resiliency Lead for Energy and the US government. If you'd like to learn more about the Security and Resiliency Initiative, visit jpmorgan.com/SRI. So with that, let's jump into the conversation.

Michael Johnson: So the Security and Resiliency Initiative, which we call SRI, is a commitment on two fronts. It's a trillion and a half dollar commitment to facilitate and finance and invest in companies over the next 10 years that fall within security and resiliency in secure supply chains, in defense, and energy, and frontier technologies, and in pharma and healthcare.

Sarah Kapnick: I find it's really important for the future of innovation of science and technology being commercialized because these new technologies, they're capital intensive. The SRI initiative is going to be so important for scaling these types of companies and really allowing them to grow so then we have access to those technologies. And all of the different areas that we're focused on funding and financing, they are what we will need in this changing world going forward. We need new types of pharma. We need new sources of energy. We need more resilient grids. We need quantum and other computing capabilities because that is the future that will drive economies. And so I'm really excited about all the activities that we're doing because we're really supporting the future of the economy.

Michael Johnson: The scaling is such a great point. Um, the trillion and a half dollars over 10 years, we would have already done a trillion dollars of activity, just our normal business, but we added 50% or $500 billion of additional scaling, and that's exactly because of what you said. It's that capital intensity of all these businesses that need it.

Sarah Kapnick: Yeah. And if the private sector doesn't support these things, we will not see that growth. We will not see that innovation. So I'm hopeful that doing this is going to accelerate all that innovation, accelerate the economy in ways that otherwise wouldn't have happened if we had not made this initiative.

Michael Johnson: So data centers in the US, we'll start there, have been playing what I call a game of musical chairs for the last two years, and that's going around the country and finding spots of excess power.

Sarah Kapnick: Mm-hmm.

Michael Johnson: 'Cause our grid, as you know, there's not one grid, there are many small grids, and there are different levels of usage, and they were able to find places in Columbus, Ohio, or Atlanta, Georgia, uh, or Fort Worth, Texas that had latent power, that was excess power, and they could sign a 15-year contract and build it. That's all taken up. All the excess is gone, and now the real challenge is they have to bring power with them.

Sarah Kapnick: Yeah, I agree. It was a race to collect all the low hanging fruit, and now people are realizing they really need to think about the planning in ways that they haven't previously. And so now we're going to see more interesting financing. We're going to see new technologies brought online. We're going to see new types of companies that haven't existed before that are going to try and piece together all those problems to be able to bring the energy online.

Michael Johnson: I think we both know natural gas is gonna be one of the biggest sources in the near term, and then they'll layer in solar and wind to decarbonize that and to add electrons. And then longer term, I think starting in 2030, really ramping up 2035, uh, we'll have nuclear really kicking into the grid.

Sarah Kapnick: Storage has been incredibly important in the recent years to also bring that line in Texas. That is where storage has been being put onto the grid, to be able to take all that excess also from when the wind blows for when it, then when the energy is needed. And the same with solar. And that will be really important with these data centers as they're trying to bring it on with renewable energy sources on site as well. And also for the backup power when there's greater intermittency problems, because those data centers need power all the time. And so those will be put in place also to ensure that they have that steady power that they are needed.

Michael Johnson: The storage, I agree with you, and it's being added like crazy every day, but they still can't get storage to be much longer than four hours. Is that right?

Sarah Kapnick: There are a couple early stage companies, and that's part of the reason SRI is so important, is that there are early companies that are out there that are starting to be built, and they're building their first factories for storage that goes out to 100 hours. And so those need to be built up and they're CapEx intensive. And I think we're going to see more of these companies available and making that later stage, um, with the investments, and they need to be deployed, um, because the demand is there for more than four hours. A diversified energy mix is really important for ensuring that you actually can get all the electrons on the grid, but also as you are trying to balance the loads from the different energy sources, it allows for being able to ensure that you can have all that energy continuously in meeting the demand, and the demand through many different times when you have extreme weather of heat, when you have cold, you have to actually have that full mix to be able to make sure that you're bringing enough onto the grid, and being able to balance all of that as that's coming online.

Michael Johnson: It is a balancing act. It's, it's amazing to me that grids keep producing with all the demands and all the changes and all the weather. But I'm curious, the point you made about all the sources, how do you feel about dispatchable 24/7 energy versus intermittent energy and how they play into the mix?

Sarah Kapnick: Well, I see it as a scientist. It's a big science question, an optimization problem of being able to get all those different sources on. And, you know, historically with the grid, as you were saying, dispatchable and 24/7, there were certain types of energy that it was really fossil fuel based where you had to have it where you could fire it up, fire it down. But now when we have all these different sources, but also new grid technologies, you can have the baseload power with nuclear, you can have wind, you can have solar, you end up now having storage coming online in larger quantities because they're trying to be able to match it for when you have supply versus when you have demand. And as more technology of smart technology for grid management come- becomes available, you integrate all of those in to be able to actually use the sources of the energy that you have on the grid.

Michael Johnson: The most exciting things in dispatchable energy, you know, I believe this geothermal.

Sarah Kapnick: Mm-hmm.

Michael Johnson: Right? I really think it's time has come and it's been promised for a long time. But the new methodology, the new technology really are gonna break through, I think, finally. Uh, so that's one of the most exciting developments. The other one, of course, is nuclear, which has been long the promised land. And I'm curious if you agree with this. When my kids ask me, "How are we really gonna reduce carbon emissions," I say one of the best solutions is broad use of nuclear.

Sarah Kapnick: Oh, I agree. And it's starting to come back with people are very excited about nuclear and the future of that technology. I'll also add on geothermal. Part of this unlocking is where technology is and being able to drill f- further down and being able to drill horizontal wells. That is being able to place geothermal in places where we haven't had geothermal before. And so instead of just being in those tectonically active places where geothermal has traditionally been, you're going to be able to unlock the capability across many more land spaces around the United States, but also globally. With matters of national security, you want to make sure that you have resilience against multiple different scenarios. And so a diversified energy mix is really important for making sure that you have that diversity in all of your supply chains, but also all the energy that's coming onto the grid. And that protects against trade issues, it protects against supply chain issues. For renewables, sometimes it also protects against certain types of weather. And so you have that layering of these different types of energy that allow for it to be continuously available so you don't have any of those weak links that could lead to blackouts and brown outs.

Michael Johnson: I totally agree. Think of, think of if you've only had gas when Uri hit in Texas, you, you just would have had no power, which they had for a short amount of time. So sometimes wind and solar pick up the slack, sometimes gas picks up, gas fired power picks up the slack. And I also think that a diversified source actually helps internationally, 'cause think about the generation growth that we've had in this country from solar. That actually allows us to export more gas, which helps the allies.

Sarah Kapnick: Well, and I'm also seeing it outside the United States. There's an interest in self-sufficiency of energy. And so there's this push towards development of renewables, development of storage so that they're no longer beholden to volatility for certain types of energy, but then also to be able to produce their own and not have to rely on imports continuously, but that's once they have the infrastructure in place. And the trading partner diversity matters then for what's actually being built as well.

Michael Johnson: Remember when energy independence was a pipe dream and a joke in this country?

Sarah Kapnick: Mm-hmm.

Michael Johnson: Like we just really never thought it could happen, and then it happened. It's, you know ... People, clients tell me, "If you give the engineers enough time and enough money, they will figure it out," and we've seen that happen.

Sarah Kapnick: Oh, as a scientist, I completely agree with that statement.

Michael Johnson: In deal making, what we're seeing is consolidation with different kinds of energy. So think of companies that are big nuclear producers buying natural gas, so that now they can-

Sarah Kapnick: Why is that?

Michael Johnson: That, so that they can just provide more forms of energy. If you're good at natural gas, you can stand up new generation quickly. And if you're good at nuclear, you can stand up low carbon generation for the long run. So the same companies are combining to be able to do both of those.

Sarah Kapnick: And is that because of the complexity of the grid, that they're trying to generate energy of different types and have control across that? Why is it that they would do that?

Michael Johnson: It's, it's partly because, to be honest, they're economies of scale. Big companies can usually become more efficient.

Sarah Kapnick: So it's really a big infrastructure play of being able to build all this out at once.

Michael Johnson: The other thing that we've done, especially as we staff up SRI, is we're starting to tackle the supply chains behind the supply chains, behind the supply chains, and we're going to companies who we're saying, "What are you worried about?" You know, you, you need to build, you know, you need to build automobiles, right?

Sarah Kapnick: Mm-hmm.

Michael Johnson: What are you worried about? What supplies, what things are you worried ... Everybody knows about rare earth magnets. Can't make a car without rare earth magnets, but what else is in the supply chain? And many of the things, you know, tool dies and things like that are made by small companies, and that's where SRI comes in. We're gonna reach all the way down to those and help those.

Sarah Kapnick: Yeah. I see this in the way you're describing it, we're widening the aperture to understand where, where everything is coming from to make sure that everything fits together so we can be able to do this and build, build the cars, build whatever needs to be built.

Michael Johnson: One of the things we've done that we are very proud of is to help bring to the US shores this giant zinc smelter that's gonna create and produce 11 of the 13 critical minerals that we're short of.

Sarah Kapnick: Critical minerals are really important for energy resiliency because they are the building blocks for being able to build most energy types. It's important for the wires and the transmission. It's important for solar cell development. It's important for wind. It's important for nuclear. We actually don't have access to many of the minerals that we need to be able to build out the energy of the future unless we start having access to those supplies.

Michael Johnson: I agree. As we've started to dig into this, now I'm learning, I need, I really need a periodic table on my wall because I'm learning about all these things that I never knew were so important. You, you can't make an airplane without scandium, right?

Sarah Kapnick: Mm-hmm.

Michael Johnson: We, you need, you know, bismuth and antimony and germanium and gallium, and all these elements that are critical for things we use every day.

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