The Texas Energy and Power Newsletter ENERGY CAPITAL PODCAST “The Energy System We Need” The Energy System We Need with John Arnold

“He walked away from it all to focus on philanthropy and reshaping public policy. Now through Arnold Ventures, he's tackling some of the biggest challenges.”

Transcript:

John Arnold (00:02.754)

And by I kind of looked back. I had been in this industry for 17 years. I kind of met all my professional goals, met my financial goals, and said, I'm kind of finished.

Doug Lewin (00:16.738)

What would make one of the most successful energy traders of all time walk away? John Arnold built his career at Enron, rose to the top of the energy trading world, and made hundreds of millions running his own hedge fund. But in 2012, he did something unexpected.

He walked away from it all to focus on philanthropy and reshaping public policy. Now through Arnold Ventures, he's tackling some of the biggest challenges

Doug Lewin (00:45.846)

in energy, infrastructure, and climate policy, among other areas. But here's the question. Can philanthropy and policy improve the grid, lower costs and emissions, and enable new market opportunities and economic growth? That's what we're getting into on today's episode of the Energy Capital Podcast. I'm Doug Lewin, and my guest today is John Arnold, one of the most fascinating figures in the energy world. Today we'll break down

Doug Lewin (01:14.434)

what John learned at Enron and how it shaped his approach to markets, how economic incentives, not ideology, are driving the energy transition, the biggest obstacles in permitting reform, infrastructure, and grid expansion, his investments in nuclear, geothermal, and transmission, and what's actually scalable. I'm excited about this one because John isn't just a trader or a philanthropist. He's a systems thinker.

Doug Lewin (01:40.12)

By end of this episode, you'll see why he believes we're at an inflection point for energy markets, infrastructure, and public policy. As always, please like, share, and review the Energy Capital Podcast wherever you listen. Please give us a five-star review. It does help other people find the podcast and share it within your network to help us reach more people. Let's dive in. Hope you enjoy the episode.

Doug Lewin (02:02.808)

John Arnold, welcome to the Energy Capital Podcast. I've been looking forward to this for a while. You're obviously a very interesting guy. I want to start with, so we'll talk about philanthropy, which is obviously what you're doing full time these days. But before we do that, it's an energy podcast. You're an energy guy. Your background's in energy. Tell our audience a little about your background.

John Arnold (02:04.738)

Thank you and great to be here.

John Arnold (02:24.216)

Sure. So coming out of college, I wanted to go to Wall Street. I thought that was where the game was. And I tried to get a job at one of the big investment banks and that didn't work out. Closest thing I got was a job at this kind of emerging investment bank down in Houston for the energy business, Enron. so think I heard it. 21 years old, I moved to Houston to go and work there. Got lucky enough to get put on the energy trading floor on my first day. It actually started in the oil.

John Arnold (02:54.754)

It was kind of the quant at the end of the road, doing a bunch of Excel spreadsheet work, then kind of assisting on anything possible. And turns out I kind of fell into perfect career for me. so stayed with Enron to and through bankruptcy. was quite the ride both ways. It was a company that was doing amazing things for a period and then obviously kind of got over its skis and created a lot of pain for many people.

Doug Lewin (03:27.374)

So you, John, you started there in 95, Fresh out of college. you were on that oil and gas side that really became sort of infamous through, was it? The smartest guys in the room or whatever. That was sort of this, all this like capital infrastructure going on, but it was kind of a different side of the house. Is that right?

John Arnold (03:29.9)

Right. Yeah, so there were a number of divisions. There was a group that was building power plants in India, a group that was trying to do broadband, a group doing water. I think they took this original concept, which was the deregulation that happened in the natural gas industry.

Doug Lewin (04:06.306)

Kind of like 92, it was complete.

John Arnold (04:09.334)

detour you exactly. a lot of this was started, there was this steps and iterations going on in the 60s and 70s and then Carter, Reagan going into Bush. And so this market got deregulated early 90s and became this traded product and let the market decide the price and let people take the price signals and decide how much quantity to supply into the market. And I think there was...

John Arnold (04:38.83)

this idea of, you do this in other commodity type markets? And so obviously it's transferred pretty easily to power, a bit of fits and starts there. But then the kind of questions about, can you actually trade broadband capacity in the same way? Can you do water in the same way? And obviously, or even trucking. And some of those markets have developed into commodity markets and some haven't.

Doug Lewin (05:09.026)

That's so fast. There's still, there's obviously active discussions around water and what that would look like. We could go a lot of different ways down that. so you did quite well there. You had a really rapid rise at Enron. When Enron collapses, you then start your own firm and you're trading gas. you're trading gas again during this period where it's kind of free.

Doug Lewin (05:36.25)

I mean, there's some shale and fracking going on, but it's pre-shale boom. so talk a little bit about like, what was your philosophy there? How were you so successful in that particular space at that particular time?

John Arnold (05:51.47)

Yeah, so Enron went bankrupt in December 2001. I ended up starting Centaurus Energy in August. We started trading in August of 2002. And if you remember back in those days, kind of post-Enron, there were a number of companies that had a model similar to Enron, the Dynagys and Southerns, et cetera. And so there was this string of dominoes that fell whenever Enron...

John Arnold (06:20.866)

went bankrupt. Some had a very similar model, notwithstanding the kind of financial community, Wall Street said, we don't know what's going on here. We're not funding any of this. And so the pure plays all started to have problems and the utilities that had gotten into this market all kind of pulled back. So you had the same demand for hedging that existed and why this market exists in the first place.

Doug Lewin (06:50.466)

There's not that many folks doing it.

John Arnold (06:52.054)

somebody has to price and manage a warehouse risk, right? The demand for that stayed the same, but the amount of capital and number of providers of that service severely pulled back. So August of 2002, the market was a bit chaotic, and it was fairly easy for someone who had experience to sit down and start making money day one, and that's what we did.

John Arnold (07:20.27)

obviously got built back up and is very, very efficient today. even during that 10 years where Ransom Tours, the market got built up and new players came in, new capital came in, sensing the opportunity fairly quickly. But at least in 2002, there was a great market opportunity for somebody with capital.

Doug Lewin (07:41.026)

And there was like a particularly cold winter in there where you had stronger positions and a lot of folks who made some money there. There was Hurricane Katrina and some of the risk that was taken there by others and by you. Can you talk a little bit about sort of that period and then sort of want to bring the story into where you decided not too long after that.

Doug Lewin (08:07.246)

I guess just a few years after Hurricane Katrina, somewhere in the 2010, you can let us know you had some kind of a change and you were like, I'm not going to do this anymore. want to pivot and focus on philanthropy at this point. if you would kind of walk us through that timeline and how that all went down.

John Arnold (08:25.166)

Yeah, in some ways natural gas is one of the best markets to trade in the world. It's a closed system. It's one in which, because of Fork Order 636, the producers and the end users have to be differentiated. And so the pipelines cannot take title to the gas like they can in oil. And so the molecule has to hands. And she...

John Arnold (08:53.698)

generally will need an intermediary to do that. And then there's aspects about it, certainly in the 2000s, when it was getting, least the first part of the 2000s, it was getting harder and harder to find the next molecule. And demand for natural gas was very much driven at the margin. So it was the most expensive source of power generation.

John Arnold (09:20.928)

And so on particularly hot days or particularly cold days, you would use a lot of gas, and it was the marginal fuel. And so either you needed a lot of it or a little bit. It was not a base load fuel. And it was, of course, subject to these extraneous shocks, particularly hurricanes or a very cold winter, for instance. And so because of that, in order for the market to balance,

John Arnold (09:47.682)

you had to have either very high or very low prices. There was very little supply elasticity in the market and very little demand elasticity as well. so, instead of the market having to go up 10 % in order to balance, it might have to double or even triple, which we've certainly seen in history.

John Arnold (10:13.666)

coming from Enron, which was very much a fundamental base trader. was count the molecules, figure out where every molecule of supply is, every molecule of demand, and really try to model the past so you can predict the future. And kind of taking that same dynamic, having some capital and some success behind me, and trying to staff with the best people I knew in the industry at the firm led to this

John Arnold (10:43.566)

fantastic run of 10 years. And got to 2012, as you said, yeah, there was, you know, cold winters, warm winters, there was Katrina, there was a number of blow ups in the industry that were happening around me. saw a lot in that. You saw the emergence of Shell, which dramatically changed the dynamics of how natural gas is priced in this country. And by 2012, I kind of looked back. I had been in this industry for 17 years.

John Arnold (11:13.782)

I kind of met all my professional goals, met my financial goals, and said, I'm kind of finished. I'm ready to step aside. I think there was kind of one day where I realized, you know, was like Sunday night. And historically, I love Sunday nights because that was Monday morning. It was back on, right? And I loved going in to work on Mondays. And kind of one Sunday night, I was like, it's Monday.

John Arnold (11:43.182)

Like, okay, this is time. Like if I'm not excited about going into work, number one, I shouldn't be spending my time doing it. Number two, I'm probably not going to be top of my game anymore. And it's an extraordinarily competitive field. And if you're not top of your game, you're not going to be successful.

Doug Lewin (11:59.116)

Yeah, mean, so then you kind of decided, okay, I've done these other things, I've had success, I'm going to put the focus at that point on philanthropy. So can you talk a little about your approach to philanthropy, what you think is right about philanthropy, what's wrong about it, and how you're doing it different here

John Arnold (12:22.402)

Yeah, so I had started giving some money away even back when I was working at Enron and kind of gotten very interested in K through 12 education. And this question about how do you have two schools that are both educating on a very similar demographic, similar kids that are getting two very different outcomes. And so kind of started a 10 plus year journey on that that continues up and through today.

John Arnold (12:52.162)

of trying to figure out what's the theory of change? How can we get more schools to look like the better school rather than the worst school? And I think during that first 10 years of that journey, it was trying a lot of things. And I think there was a lot of dynamism in K-12 philanthropy, K-12 reform.

John Arnold (13:21.368)

There were a lot of ideas and we were looking at a bunch of them. And yeah, I finally settled in to what are the policy levels? And it was policy over programs. And we found that if we wanted to do things that were sustainable, that were structural, that were scalable, it was hard to do that through the introduction of a new program for a number of reasons. It was much easier to do that through policy. And I think the outcomes...

John Arnold (13:49.414)

of any system, including the education system, are as much a function of the policy, the framework around it, what are the rules and incentives of a system as they are about the program and the people involved. So that's how our philanthropic journey started. Met my wife during this time. She was an &A lawyer that had moved to Houston to help start an oil and gas company. She did that for a few years, kind of realized...

John Arnold (14:17.934)

She was getting pulled more and more into our philanthropic efforts at the time I was still doing centaurs full time. But I was spending, know, at the beginning one hour a week and then one hour a day and then a couple hours a day and was getting more excited about some of that work. And so, you know, by 2012 we had as a foundation had started to spread into other areas, including into criminal justice and the public finance.

John Arnold (14:46.698)

We're starting to think about healthcare and this was becoming a bigger enterprise and I was more interested in that on the Sunday nights. And so decided to leave energy, at least running an investment fund with outside capital, stop doing that and go spend most of my effort on film.

Doug Lewin (15:06.126)

I have that same feeling for Philander because I'm sure there's quite a rush with energy trading, The feeling you're describing on Sunday night of being excited on Monday morning. I mean, it's different, but is it similar as well? Do you get that kind of feeling from the work?

John Arnold (15:22.158)

Yeah, it's completely different. Yeah, I couldn't have chosen a more different feeling, which makes it very intellectually stimulating and challenging. I think one of the great things, also one of the bad things about trading is the immediate returns. The market tells you whether you're right or wrong.

John Arnold (15:43.63)

and switch to a field of public policy which has very, very long-term deferred feedback. And you can spend years and years working on something without having clear feedback about, know, are you making progress or not?

Doug Lewin (16:01.378)

Yeah, yeah. So I've heard you speak before about the difference between philanthropy and charity. And I think you were just getting at it there, right? If you're thinking of schools, you can do things like pay for school supplies. Teachers make these wish lists on Amazon, right? And like that is, that's great. That's really important. Teachers really need shame, quite literally, for our society. They're like teachers are having to pay out of their pocket for school supplies.

Doug Lewin (16:28.948)

But you can only do that so much, even with as much money as you have, you can only do so much of that. But with systems change, you can actually drive the change to either have more sustainable funding, right? So can you talk a little bit more about how you view that difference between philanthropy and charity? And you do both of them, but they both have kind of different roles.

John Arnold (16:50.028)

Yeah, so I think charity is defined as meeting the immediate needs of people. And philanthropy is more thinking about what's the root of the problem. And there's not a prioritization between the two. In fact, we do some charity. We give to the food bank. We give to some of the local hospitals, et cetera. But I think in some ways,

John Arnold (17:20.45)

The work of looking at the causes of problems, the root of the issue is much harder. It just takes more time. It takes more people, more expertise. And so few people have the resources, have the time and money in order to really dig into the root of the problem. And so I thought that there was a lot of white space.

John Arnold (17:50.38)

And so again, there's not a prioritization of philanthropy is better than charity. is that looking at their root issues is that there's more opportunity for us given out of our resources of both of us willing to put real time into this, of being willing and able to hire experts in the fields and having the capital to go make the investment.

Doug Lewin (18:16.142)

Yeah, it's kind of fascinating because it really is an extension in a weird sort of way. what you're doing with works, you have to be able to calculate kind of risk reward a little bit, right? If you invest in systems change, it's a less sure result than buying X number of cans of food, but actually trying to address the root causes of poverty or hunger. You could get into healthcare, like you are into healthcare, criminal justice, all of those things. There's things you can do on the surface that make a big difference.

Doug Lewin (18:45.334)

And you know, like if I put money here, it's going to go to this and this result. But then you have to start being able to kind of weigh probabilities, don't you? And like being able to kind of weigh like, if I take a chance on this, it may not work. But if it does, the upside to society, now you're not thinking about your own returns with philanthropy, you're thinking about the upside to society, might be really, really big if we could, if we could, you know, fill in the blank. What are the things? Is that how you view it?

John Arnold (19:10.646)

It's exactly right. giving is just another form of investing. When you invest financially, you're looking for a financial return. Through philanthropy, you invest and you're seeking societal returns. And just like in investing, there's things you can do that are at a low risk, low return or high risk, high return. There's the same in philanthropy.

John Arnold (19:38.72)

I can give a dollar to a school when they're building a new building and I am very certain that that dollar went for a brick. Yeah, you see it. And in fact, they might even put my name on it. Right. Right. Do you do that? you have your name on it?

John Arnold (19:56.226)

I don't have my name on Betty. Okay. But, and so again, there's a role for that, right? There's also a need for people to do some of high risk, high reward stuff. Things that you might put money in and get a zero return, right? They just might not work. And I found a lot of people who transition from investing into philanthropy took a lot of risk in their investing career and we're very comfortable with that. And then they get into giving their money away and they get very risk averse. Yeah.

Doug Lewin (20:35.106)

Very interesting. So obviously you worked in a number of different areas. Talk to me about some of your theory of change within the energy space. Obviously, Energy Capital podcast, you guys have put a big emphasis on infrastructure. You launched a project a couple years ago focused on, well, I'll let you say it. So tell us about your theory of change and the role Arnold Ventures wants to play.

John Arnold (21:05.792)

Sure. I think you're kind of alluding to two things. One, we have a line of work around infrastructure. And then we have a line of work around energy and climate. So let me start with the first infrastructure. And maybe I'll give the longer version here. Yeah. So go back to World War II. So did the very long version, right? So everybody comes home from World War II. All the soldiers come home. We have all these factories that we're making.

Doug Lewin (21:21.134)

Please. It's, that's what podcasts are for.

John Arnold (21:35.95)

You know, stuff for the war, they get repositioned for consumer items. And the mid-40s for the next two, two and a half decades was a boom time. The post-war boom, there were very few environmental rules in place during this time. And so this is also the era of Robert Moses, right? Just build, build, baby, build, right? You can go barrel through neighborhoods for it.

Doug Lewin (22:05.571)

We will put a link to The Power Broker, which is one of the greatest books ever written. So read it if you have...

John Arnold (22:10.638)

Don't worry yet. Agree. And by the 60s, you started seeing the environmental impact of building without constraints. And they were negative. And I think there was kind of broad agreement across the political spectrum that we needed to do something. And so starting kind of a three-year period, starting January 1st of 1970 for the next three years,

John Arnold (22:40.334)

was the framework for environmental rules that exist today got passed. So this is a creation of EPA, passage of NEPA, the Clean Air Act, Clean Water Act, Environmental Species Act. And this was trying to address real problems that were happening in society.

Doug Lewin (22:59.602)

This was also, John, right, the era when the Cuyahoga River was on fire. Really dramatic.

John Arnold (23:03.63)

All right, but the other stories are real. Santa Barbara oil spill, right? You had the air quality in places, including Houston and LA and Pittsburgh was horrible.

Doug Lewin (23:13.142)

Anyway, there was pretty broad bipartisan consensus on all this, too. Nixon, of course, was present. Right, Nixon was the president, he was the Democratic Congress at the time, think. So strong bipartisan bills, right? And I think looking back, those bills and laws were largely a great success. The waterways got cleaned up, the air got cleaned up, we started to have, know, think about, we don't just want to build all projects, we want to build good projects. And that's what those laws were really meant to. I'd say starting around the turn of the century,

John Arnold (23:47.406)

A couple of things happened. One was courts became more aggressive and ambitious on how they interpreted those laws. And so the rules started to change about what developers had to do. Second was that opponents of projects started to get smarter about how to use those laws to stop projects that they didn't like. And so there's this natural conflict in the system that...

John Arnold (24:15.852)

Society needs infrastructure, but communities have a preference for that infrastructure to be built somewhere else. And so if every community wants that infrastructure to be built somewhere else, then it never gets built. And I think that one of the problems we have today is that there's been too many vetoes that have been given out on projects undeveloped. And so not only do we not have bad projects being built today, which we shouldn't,

John Arnold (24:44.566)

Right. But we don't have good projects being always a-

Doug Lewin (24:46.51)

lot of the things that we really be.

John Arnold (24:48.822)

So we started a line of work at the foundation about how do you build infrastructure cheaper, faster, easier, because the inability to do so is really starting to affect quality of life for people. So this includes energy infrastructure, includes housing, transportation infrastructure, metals and mining, so all these things. it's like, again, not looking to go back to the 50s and 60s, but let's make sure that good projects can get built expeditiously.

John Arnold (25:18.935)

and can be built cost effectively.

Doug Lewin (25:22.038)

Yep. Okay, so that's infrastructure, energy, climate.

John Arnold (25:24.846)

Yeah, so energy and climate, obviously there's a lot of people thinking about climate today. There's a lot of philanthropic capital pointed at the climate space today. think with my background in the energy field, a lot of people in the climate space are friends of mine, and I had the ability to speak to people. I still have a lot of friends in the oil and gas space. I have a lot of people I know in the climate space. so I had this somewhat unique perspective for a while.

John Arnold (25:54.766)

of how do you meet the needs of both systems? And I think everybody agrees we need an energy system that's affordable, reliable, clean, and secure. I've never met anybody who says we want the system to be dirtier. And so then there's the question of how do you meet those goals, especially when sometimes there's a trade-off between the two.

John Arnold (26:24.238)

And so you can think about, Texas had this debate after URI about reliability versus affordability. How many nines do we want to build the system to? Do we want to build to a 20-year storm, a 50-year storm, a 100-year storm? We can improve reliability. comes at a cost. You can think about California having these debates about clean versus affordability. Luckily, in the United States, for the past 10, 15 years, we've

John Arnold (26:53.11)

largely locked down the security aspect of energy. so, you you see this debate in Europe about energy security versus affordability. And so I think we try to approach it with that all four of these goals are important and it's how do you balance the goals? How do you balance these four really important goals of the system? So affordability, reliability, clean and secure.

Doug Lewin (27:17.215)

Say the four.

Doug Lewin (27:24.782)

Yeah. So that's the focus on energy and climate. So yeah, I really think that this is really one of those fascinating areas because whether you enter the space as somebody very concerned about climate or whether you enter the space to your point of safe, reliable, affordable, national security could be your biggest thing. I mean, you could even throw in there-

Doug Lewin (27:49.442)

you know, economic development, if you kind of enter these discussions as like, need to make sure there's enough jobs for people and enough economic growth, we're going to need to build things. so I guess, I mean, it's in my head, like the infrastructure and energy and climate, there's a lot of permeability like between the... In other words, like there's a lot of overlap between those two goals. So how does that play out? What kind of policies do you think would make the biggest change and...

Doug Lewin (28:18.892)

particularly ones that check all those boxes, safe, reliable, affordable, add in there if you like economic development, like which sort of, I know you spent a lot of time on permitting reform, what other kinds of policies are you...

John Arnold (28:32.364)

Yeah, think permitting reform kind of goes along with what we talking about earlier, the infrastructure and the need to kind of rethink about how do you allow good projects to get built. I think there's the question of what's the role of subsidy versus mandate in the system? And the market failure is that emissions aren't priced.

John Arnold (29:00.652)

Yeah, it's a trade off of the system, right? And because of that, if you allow just the private sector to act, we'll have too much pollution, and too much carbon, too much methane in the air, and the ramifications from that, right? And so that then necessitates public policy to try to correct for those market failures. And then the question is, what's the right policy? And I think that's subject to very active debate and questions about...

John Arnold (29:29.824)

mandates and subsidies. And the question in my mind is that the subsidies are much easier politically. The cost of them is hidden. It's in reality, it's probably through inflation. And people don't tie inflation to climate policy, to kind of the energy system. It's got a one step removed. Whereas

John Arnold (29:57.666)

Something like a carbon tax has always had problems passing because it's a direct link between energy and affordability.

Doug Lewin (30:05.07)

Yeah, I mean, even the whole like carbon dividend, I get asked about that all the time. There's a lot of people that really like the sort of idea of tax, but then flow it back to people, but it's really hard.

John Arnold (30:18.126)

Right, exactly. Yeah. It's not a word that is well-liked in policy circles these days. And so I think it's around policy design. So for instance, the EV tax credit, $7,500 EV tax credit. Number one, it is a highly, highly inefficient use of funds. So the cost per ton of carbon... What's the right?

John Arnold (30:48.238)

We're doing well. The cost is very high. Per time, right? And so what has actually worked very well is continuing to increase CAFE standards. so give industry... Right. But if you give industry the target, the performance target, and say you have to match this, do it however is most efficient.

Doug Lewin (31:04.27)

Subsidy versus mandate. Right.

Doug Lewin (31:14.88)

Some will increase the efficiency of internal combustion engines, some will go hybridization, some will go electric, but they'll meet that. Exactly. Innovate. But that's often viewed, like you said, like the subsidies are easier politically. Because mandate became a dirty word, really, a lot of this kind of comes down to, and you have probably as much of a fascinating perspective on this, anybody having been an energy trader and been at Enron, it's this constant sort of debate intention in society of regulation versus competition. But I think in a lot of cases, regulation actually enables competition, if you do it right. In other words, if you can kind of like, here's the box, what you do within there, we're going to watch and make sure there's not like market manipulation or anything like that. But here's the policy outcomes that the policymakers and the regulators want.

Doug Lewin (32:12.598)

Now companies go innovate within there to reach that could be reliability, corability, playing it to be secure. The economic development could be any of those things. But I think a lot of times people view the regulation and the mandate as like the heavy hand of the state. If it's done right, it could actually be the exact opposite and unleash a lot of competition and innovation.

John Arnold (32:33.004)

Yeah. And in fact, any system has rules around that define the competition. Then you frequently find within systems, private actors, know, poke around and try to find loopholes in the rules. And this happens in healthcare, happens in finance, happens in energy systems, et cetera, right? And so the regulator's job is to be as smart as possible designing those rules, but then be willing to go back

John Arnold (33:01.502)

and fix the loopholes that are inevitably going to be there. And this constant cat and mouse game between industry and regulators. Regulators are trying to make it so that there's healthy competition, that the rules and incentives of the system are aligned with the goals of society. And private actors are trying to make money. And so it has to be the standardization or some constraints on making sure that in your attempt to make money that you're creating good outcomes for society.

Doug Lewin (33:35.948)

Yeah. I want to ask you, we said kind of keeping on the subsidy discussion, like the inflation reduction act to me is so fast, right? Obviously lot of what's happening, we're recording on January 31st. And so you've just had, we've been through a sort of remarkable week where the administration says all funds are frozen. And then the next day they say, no, they're not all frozen, but still some of the funds are frozen.

Doug Lewin (34:04.066)

What I find most interesting about this, and it kind of comes back to the pillars you were laying out, like safe, reliable, clean. If the Trump administration has their main focus as America first and energy dominance, there's a lot of levers they could conceivably pull within the Inflation Reduction Act to focus on that. So you were talking about the EV subsidies, but there's so many different parts of the Inflation Reduction Act. The 45X manufacturing...

Doug Lewin (34:33.454)

credits. If the agenda is energy dominance, presumably we'd want to keep that. had, at one point, I think it was in a tweet, maybe you reported in an article, but you said, one of the side effects of the energy transition is a rebirth of manufacturing in places where those kinds of jobs were supposedly gone forever. What do you think is going to happen? Not asking you to predict the future, maybe I should ask it this way. What do you think could happen over the next few years if we could have

Doug Lewin (35:02.542)

There's some bipartisan agreements around things that I think we all think are important, having manufacturing here, having a secure supply chain for the energy sources we all rely on. Is there some potential there or are we just in for tearing apart of all this for the next couple of years?

John Arnold (35:23.92)

So I'm going to tread carefully trying to predict the next few years.

Doug Lewin (35:28.814)

Yeah, yeah, it's be very unpredictable. You could predict that.

John Arnold (35:31.918)

What I'll say is that the debates, the political debates on energy have changed a lot, and even in the past. We're not debating about whether manmade climate change exists. Anyway, really we're not. I think a lot of the debate has gone to the trade-offs associated that we're talking about earlier. And I think it's the, do you prioritize amongst the goals of the system? And the right answer isn't to tear it all down.

John Arnold (36:01.806)

The right answer is that you can only prioritize one of those goals, but it's how do you balance that? And so I've found that the quality of debate in DC has in general gone up over the past 10 years on these issues.

Doug Lewin (36:20.59)

It's interesting, because a lot of people don't feel that way right now, but I think if you kind of step back and look back over 10 years, the general, there's ups and downs, but the general.

John Arnold (36:29.708)

Yeah, and I think it's going to be a very interesting year. Again, I don't want to make any predictions, but you look at a state like Texas, and yesterday for many hours you had more generation coming from wind and solar than from coal and gas. In fact, that's true of many hours of many days in Texas.

Doug Lewin (36:50.626)

Probably close to image.

John Arnold (36:52.832)

Yeah. And so you don't want to tear that down. That wasn't done because of a mandate. That was done because of economics and that having a mix and a portfolio of energy sources has real value. And the ERCOT grid, there's a reason why manufacturing wants to come to Texas today. It's not just because of the taxes.

John Arnold (37:22.114)

But because property tax is relatively high here. And it's why a lot of data centers want to get built here today, is that we can build stuff. We can have a very robust energy grid. And I think that's vital for economic development, as you're talking about, is vital for the ratepayers, for reliability of the system. And so trying to tear that down and to favor one over another.

John Arnold (37:51.446)

I think is the wrong answer and I don't think is going to happen. Yeah, there's been a lot written about and the amount of the manufacturing renaissance is happening in red states. My background talking with politicians has been things and policies that are supportive of economic development in their geography tends to be very... Their support is very, very strong.

John Arnold (38:21.21)

It'll be interesting. There's already a caucus of Republicans who have come together and said that the IRA needs to be dressed with a scalpel and not a sledgehammer. that's avoiding trying to make predictions, but I would not be surprised if it's a scalpel. And I think one can look at parts of the IRA that have been ineffective. I think they can look at parts of the IRA that were

John Arnold (38:50.816)

where the cost per ton abated was very high, and let's scrap that stuff and keep the stuff that's working.

Doug Lewin (39:00.268)

Yeah, I could definitely see that happening. It's a possibility. So yeah, and just sticking with the, you brought up the ERCOT grid and obviously I talk a lot about the ERCOT grid on this pod, but I think that there is something really important happening that isn't talked about enough. It's getting talked about more, but I still think not enough. A lot of times I think in some policy makers mind and some in the public,

Doug Lewin (39:29.526)

It's this kind of cage match against oil and gas versus renewables. But we're actually seeing in the real world is a lot of oil and gas companies trying to power their fracking operations with wind and solar, like trying to connect to the grid. A lot of industrials that are in the petrochemical business trying to connect the grid because, like you were saying, want to, manufacturers want to come to Texas because those costs are lower. So there's really something I think happening.

Doug Lewin (39:57.067)

in this energy transition that is, it is often talked about as an energy expansion. Like we're going to do more and all these things are going to kind of work together. Is that your view of the world or do you view it differently?

John Arnold (40:08.622)

I think that strongly aligns with my view.

Doug Lewin (40:14.03)

So let's talk a little bit more about some of the things you're investing in, because you still are an investor. You have some companies that you have invested in, very related to what we're just talking about with the energy transition and all of these energy sources working together. You're pretty bullish on geothermal. You've invested in superconductors, transmission companies. I don't know if you've invested in nuclear yet, but you...

Doug Lewin (40:42.272)

I have. You have? Okay. So talk about any of those, whatever you're excited about. It's a podcast, we got time. What are you excited about as far as new energy technology?

John Arnold (40:52.898)

Yeah. Look, I think the hope and dream of geothermal, which is becoming more reality than dream as we speak, is that you can have baseload clean resource that shows up in the 2020s. And that's hard to do. And you can do it at a cost. again, some of the forecast costs make it extraordinarily competitive with any other fuel source.

John Arnold (41:22.51)

You know, the technology is not 100 % proven. The cost forecasts are not 100 % proven. But we're getting more more certain on those things.

Doug Lewin (41:34.358)

And I think one of the really exciting things there too, speaking of sort of the connection between oil and gas and renewables, is the potential for oil and gas workers to work in that industry. Automation and I think AI is probably going to do this even more in the future, have led to a reduction in jobs in oil and gas. In Texas, it was somewhere around 300,000 in 2014. Now, even though production is at alt, finding those industries like geothermal,

Doug Lewin (42:02.478)

Nuclear could potentially be another one. There's some oil and gas executives that are getting into nuclear. Where are you invested there? that, I don't know if you can't...

John Arnold (42:13.558)

Yeah, so I'm invested in several fusion. And I think there's a lot of reasons why fusion might not work. The reason that it doesn't work shouldn't be because it didn't have access to capital. Right. I think it is the holy grail of energy. And we were just talking about geothermal, even with enhanced geothermal, which allows

Doug Lewin (42:17.479)

wow, we're Irosion, alright.

Doug Lewin (42:22.178)

Yeah.

Doug Lewin (42:30.53)

would be physics at the end of the

John Arnold (42:42.422)

and it opens a lot of rock that wasn't previously permeable to being available for geothermal, you still have to have the right heat at shallow depths. And so geothermal works very well in parts of the West. It doesn't work well in the East. It's particularly in the Atlantic seaboard.

Doug Lewin (42:46.008)

Yeah.

Doug Lewin (43:05.462)

to go down like three, four miles and like it's technically possible at some point in future.

John Arnold (43:10.766)

It

John Arnold (43:11.166)

might work in the future, but, you know, certainly with the techniques we have today.

Doug Lewin (43:16.686)

And in Texas, we're kind of in between, It's not Utah, Nevada, California, where the heat is six, seven, 8,000 feet. You got to go down a little deeper here, but not as deep as the Eastern Sea. I'm pretty bullish on geothermal here, and I do think it's going to take a little while. Fusion, I haven't really thought that much, but you're excited about it.

John Arnold (43:37.974)

So the reason why nuclear is really the holy grail is that you can put a nuclear plant in theory, right? You're not constrained by geology, wind speed, solar radiance, right? It can go anywhere. And so as we're talking about climate and emissions as a global problem, it has to have a global answer. It's not just that this thing can work in one spot. Those solutions are helpful, but again, the holy grail

Doug Lewin (44:03.886)

Yeah.

John Arnold (44:08.106)

is nuclear, it's one that's baseload and it's clean. There's always been questions about security. think with fusion, you answer the security question. With next gen fission, is that

Doug Lewin (44:22.754)

just

Doug Lewin (44:22.904)

because there's not like uranium and I'm ignorant, it's forgiven.

John Arnold (44:28.226)

Why is it? So

John Arnold (44:30.967)

it's just naturally safe. you don't have. OK. OK. OK. And then next gen fission also addresses some of the uranium emissions. So you've either largely addressed or completely addressed the safety aspect. Now, the big question is affordability. Right. It's not affordable today.

Doug Lewin (44:35.03)

as far as you don't have one runaway reaction.

Doug Lewin (44:56.076)

Yeah, right. Not too cheap to me.

John Arnold (44:58.574)

And so this is why there's lots of talk about nuclear plants. And one of the fundamental problems has been in order that the equipment itself to do a nuclear reaction is fairly inexpensive. The equipment necessary to make that safe and the security and safety of that necessitates an enormous amount of infrastructure.

John Arnold (45:25.462)

and also creates this economies of scale that you have to do these massive plants that take a long time. And the capital costs associated with that from when you break ground to when you get COD is very long. But again, so the question over the coming decade with nuclear is can the technology advance such that it becomes economic?

Doug Lewin (45:50.862)

Yeah, somewhere late 2030s, Refusion, mid 2030s. Like, what is the trajectory?

John Arnold (45:57.006)

So you have Commonwealth that's putting together a pilot in 27, I believe. Oklos believes that they're coming out in 28. They're fission. They're fission. yeah. But by the time we get Fusion at Gale, you're looking late 2030s at best. Yeah. For sure, right? And so we can't count on this. Right.

John Arnold (46:23.338)

But I think you also have to invest. because it's such a long timeframe before you get revenues from this industry, it's one that doesn't naturally fit with the investment perspective of most private capital. I've actually been a little surprised that there's been the Fusion funding to date. Pacific Fusion just raised $900 million from largely VC funds.

Doug Lewin (46:52.941)

Yeah.

John Arnold (46:53.486)

You're seeing the market, to my surprise, willing to fund these firms. But I think in any case, this is going to be a public-private.

Doug Lewin (47:04.566)

Yeah. So I think one of the things that has made all of these conversations around nuclear, geothermal, mean even around energy efficiency, around so many different aspects of the energy systems, so much more urgent and top of mind is the load. I mean, it's really been incredible to see how much just over the last year, 18 months, two years, it has just-

Doug Lewin (47:32.546)

completely changed conversations. Have you seen that in lot of the work you're doing? I know you're also involved with Breakthrough Energy Ventures, so you've been involved in energy throughout your career. You're very involved in a lot of the cutting edge stuff. How has this low growth conversation changed some of the things you're involved with, either on the investment side or plant-

John Arnold (47:53.998)

Yeah, it's a great time to mention Grid United, a company I founded at Michael Skelly. And we're trying to build into regional transmission. And I talked earlier about you often have these trade-offs on the goals of the system, affordability, and clean. There's a few things that benefit all the goals, that there isn't a trade-off. You can think about batteries. You can think about demand management as two of those things.

John Arnold (48:23.502)

A third is ore transmission. So trade reduces costs, makes the system more efficient, can help reduce emissions. And so it's one of those great solutions. And when Michael and I started talking about this, it was 2020, 2021, there had been such frustration from the first generation of...

John Arnold (48:54.322)

HVDC developers, they started projects generally in the 2005 to 2010 timeframe, expecting these to be five-year projects, and here it was getting on 15 years and they hadn't even started construction.

Doug Lewin (49:08.248)

Shabbat Red superpower. We'll put a link to that Russell Gold's great book on exactly this top hearted mission.

John Arnold (49:15.446)

Exactly. And so kind of everybody got frustrated. The limited amount of capital that had been in the industry kind of all pulled. The space became unadulterated. And I started to foresee the demand for transmission to be increasing. As you go from the first phase of renewables that were very easy to add onto the grid, think about building solar in Arizona.

John Arnold (49:44.908)

The first solar panel you put down, super easy. You just scale back gas fired gen during the day. Eventually, you end up with the duck curve, right? And you've kind of met all of the daytime load locally from solar in the Southwest. And so in order to build more solar, which the economics are great there, you either have to add battery or you have to add transmission. And in reality, we have to do...

John Arnold (50:14.182)

have to do both at significant scale. so you had the need for transmission was about to reach an inflection point as you bring on this next phase of renewables at the same time that the previous round of developers had all pulled back and all private capital had pulled back. So I think going back to my trading days, I always thought that my superpower was

John Arnold (50:43.8)

How do you see inflection points in the market for somebody else does? And most of the time I could put that on through a financial trade. It was always easier just to get on your computer and click a few mouse buttons and buy or sell. But sometimes you have to do that through assets. And so throughout my career, had been investing in assets as well and developed different energy assets or invested passively in assets.

John Arnold (51:11.854)

And the stories became a line that the world needs transmission or the United States needs transmission, particularly going across the big seams that had never been really economic to do up until now. But that the price differentials they were seeing across and trying to link the various energy fuels necessitated going across.

Doug Lewin (51:25.324)

Yeah.

Doug Lewin (51:36.642)

No, it makes a lot of sense. I get where... Yeah, it's like one of those spaces that a lot of other folks had pulled back from, but still is a major need. Another one that I think is similar to that, you mentioned demand management. It checks all the boxes. That still seems to me like one of the major under-invested, under-focused kind of areas, because a lot of our winter problems are driven by inefficient heat. You have a lot of...

Doug Lewin (52:04.654)

flexibility on the demand side, particularly homes that are well insulated or if you add insulation to homes, there's no reason you can't use homes and buildings actually as batteries. They could be thermal batteries. Store up the cool in middle of the day when you got plenty of that good, cheap solar power, and then use a little less in the evening as prices go up. It's difficult because it's distributed. It's a lot of different people and a lot of different homes and buildings. Is that anything you think about?

Doug Lewin (52:32.95)

It's also, by the way, one of those John, it's like, we were just talking about with subsidy versus mandate, the balance between competition and regulation. This is one of those that seems to me like with a little bit of regulation to create the space, you could unleash a lot of market dynamism, competition and innovation, but it's almost like without that regulatory framework in place, none of that other stuff can happen.

John Arnold (52:59.394)

But be very careful on this subject, because I think you know 10 times what I do on this.

Doug Lewin (53:05.95)

but I think it's one of those areas that no matter how much you know, nobody's figured this out. Yeah. I think I know more than the average bearer it, but I don't have the answers. I love talking to people about it because nobody's figured out how to do this.

John Arnold (53:19.999)

Yeah, I talked earlier about that the actors in a system are going to respond to the rules and incentives of the system, right? And so right now, many utilities are incentivized to build, build more. That's how they make money, the difference between the regulated rate of return and their cost of capital. And so providing solutions that reduce the need to build aren't going to be naturally taken up by the utility.

John Arnold (53:49.87)

And so, that's... We've identified the market failure, right? And so, is kind of, okay, so you need a public policy solution to that. You need a regulatory solution. And I think, as an outsider in this, think that's where the struggle has been is how do you devise the rules and incentives so that you get utilities to want to actively encourage demand management rather than discourage it.

Doug Lewin (54:17.73)

I think that is a huge part of it. think there's another market failure there too, right? Which is if you're a home builder or a developer of apartments, you can put in a resistance heat unit to heat that place for 200, 300 bucks. Forget that it's going to cost the customer 10 times the amount of a more efficient heater. Forget that that 200 300 bucks for a 5kW strip heat is going to take

Doug Lewin (54:42.286)

$10,000 $15,000 worth of generation capacity to serve it in the wintertime. You're talking about a market failure, right? And so this is one of those I would love to keep in touch with you on. And I'm talking to people about it all the time. like, do we create markets that actually incentivize the behavior we want, which is to not waste a whole lot of energy, particularly at the times when we need it most, like on a cold winter morning, right? There's no market for

John Arnold (55:09.922)

Yeah, I think this has been... Yeah, the struggle is that most consumers kind of undervalue energy efficiency whenever they're something, whether it's a car or a house or appliance. And this is why, yeah, like the role of public policy to go in and kind of create some performance standards. And I think that's probably what's necessary in this market as well.

Doug Lewin (55:32.342)

I have thoroughly enjoyed this conversation so many times on this podcast. I wish we had another full hour. I have a bunch on the list I didn't ask you about, but is there anything you wish I would have asked you or anything you're sort of loose thread you want to tie together before we end?

Doug Lewin (55:54.398)

I'll ask you one more and you can think about what you want to close with. I'm very interested if you have a perspective if you're following power markets. obviously built your career as a gas trader. Enron did some power trading. I don't think you did any in your career, but do you observe the power markets? Do you have thoughts about market design? That's not a great close or 60 second question, but I am super curious.

John Arnold (56:22.218)

Yeah. Look, I'm a tourist in the power markets. I'm an observer. I know many of your listeners, including you, are experts in this. So I want to be careful getting over my skis. think the big question, of course, is ERCOT, right? You specialize in ERCOT. Yeah. And I think as it went from energy only to starting to tech on this bike.

John Arnold (56:50.872)

do a little bit of capacity. And I think each ISO RTO is trying to learn from the others. And we have one of the benefits where I find from our philanthropic work working on public policy is federalism, where you have 50 states trying 50 different answers to the same problem. And states can learn what's working well somewhere else. What's laboratory on democracy. And I think that's what's happening in the

John Arnold (57:19.968)

ISOs, RTOs. Is it? One's doing energy only, one's doing very much heavy-handed regulation, and you learn from each other and try to idolize.

Doug Lewin (57:30.348)

How you turn that dollar? That becomes even more... How do you deal with that? I think they're all looking at each other for... Okay, great. Anything else you want to say? No.

John Arnold (57:39.768)

think we've

John Arnold (57:40.311)

covered a ton, and thank you very much for having me.

Doug Lewin (57:43.288)

Thanks, John, really enjoyed it. Thank you for listening to the Energy Capital Podcast. I hope you enjoyed the episode. If you did, please like, rate, and review wherever you listen to your podcasts. Until next time, have a great day.