Sustainability as Strategy: The New Era of U.S. Electricity Markets

RB Sustainability Pod Ep. 8 Transcript

Tue, Sep 23, 2025 2:25PM • 24:42

SUMMARY KEYWORDS

Electricity markets, demand growth, data centers, renewable energy, natural gas, nuclear power, re-industrialization, supply chain, capital projects, engineering capacity, demand response, power generation, transmission infrastructure, energy efficiency, policy shifts.

SPEAKERS

Pedro Caruso, Sean McMahon

Sean McMahon 00:03

Hello everyone, and welcome to sustainability as strategy, a podcast brought to you by the experts from Roland Berger Americas. I'm your host, Sean McMahon, and today's topic is the evolution of electricity markets in the US. Joining me for that conversation is Pedro Caruso, a senior partner from the Houston office. Pedro, how you doing today?

Pedro Caruso 00:27

Sean, I'm doing great. Thank you for the opportunity to talk to you about this important topic.

Sean McMahon 00:32

Yeah, it's great to have you on the show. As I mentioned, today's topic is the evolving landscape for electricity, and as anyone who follows these markets knows, policy shifts and a rapidly evolving market dynamic are changing, not only where electricity is needed, but also how it's being produced. So to start our conversation, let's talk about the demand side of the equation. How are you seeing things change there?

Pedro Caruso 00:54

The demand side of the story is fascinating, Sean. We're going from examination to growth and just to just to give our listeners some reference points, in the 1990s our electricity demand in the US grew about 27% that 27% became a 9% in the 2000s and a negative 2.7% in the 2010s and we were reaping the benefits of better energy efficiency. And the consequence, as well as a bit of the industrialization, that minus 2.7% in the 2010s is going to become a plus 25% in the 2020s right? And it could even be a plus 30% in the 2020 so we're going from stagnant, negative growth in the recent past to significant acceleration, and that is driven by mainly three forces. One of them is and everybody talks about the data centers, we're happy to double-click a bit on why they're so data-hungry, and some of the uncertainties around the data centers, then a bit of that on electrification, still... there's some of the policy changes, there's still the expectation there'll be more electrification in the system, and then potentially from industrialization, particularly with reassuring of some key industries. So this stagnant decline to fast growth is a significant change with tremendous repercussions for the industry.

Sean McMahon 02:28

Yeah, you mentioned data centers. They're in the headlines everywhere nowadays. Lots of big projections about the kind of demand they're going to place on the grid. How much of that is real and how much of that is hype?

Pedro Caruso 02:41

That's a great question, Sean, and I think there's a lot of reality. And every time we think a number is high, then the actual numbers come and they prove to be on the right track. It's just tremendous. I mean, the total data center demand is already over 1% of global electricity demand, and they were almost non existent in the recent past, and it's just set to grow significantly. Out of that, call it 600-900 terawatt hours of power demand growth in the in this decade. 300-500 could come from data centers. So we're talking about half of the total growth in generation may come from data centers. I like translating those things into into number of power plants. And just for our conversation, today, I'm going to use a typical natural gas combined cycle plant as a reference point. The 550 megawatt plant we're talking about data centers alone will need a good...50-100 new of those plants in the US. It is significant.

Sean McMahon 03:41

Alright, and then, on the capacity side, we've heard the last few years about how new capacity has been coming primarily from renewables. You know, there's been some policy changes here in the US that I don't think it's a bold prediction to say that that might change, and that the shift is going to maybe lean back towards, you know, gas or nuclear. How is that going to change the marketplace?

Pedro Caruso 04:03

Great point on change of mix. So a lot of our focus on the power generation side has been about adding renewable sources over the last two decades, right? And just as a reference point, we've lost a significant portion of the coal generation capacity and almost all the diesel slash petroleum generation capacity. In this country. And at the beginning, a lot of those changes were being supplanted by natural gas plants. We had a very large build out of natural gas plants in the 2010s - by the way, driven in big part by the advent of shale gas and then the low cost of natural gas we are enjoying in the US because of that development in the oil and gas industry, but that natural gas emphasis kind of was replaced by wind and solar. So we went from virtually zero wind in 2000 to about over 140 gigawatts of capacity, which is a good chunk our 1.0 terawatts of capacity that we have in this country. And then solar, we added about 90 gigawatts of capacity in the last 10-15, years alone. So a lot of emphasis has been on that capacity addition, and that's just changing for multiple reasons. Number one, the intermittency of those resources, the need for transmission and stabilization capacity, either in terms of natural gas peaking capacity, or batteries and so on, as well as when you put all of those pieces together, some of those investments needed some some subsidies, and you know, regulatory environment that is that is certainly shifting. But let me just double click on the natural gas side, which I think is where a lot of change is going on. But from the natural gas side, we went from about 100 gigawatts of capacity in (the year) 2000 to about 400 gigawatts of capacity in 2010 and at this point, we're sitting on a slightly over 500 gigawatts of capacity of natural gas. So we basically saw a significant period of growth and then a bit of a slowdown on that capacity. And that has translated into...just to give you a rough sense, in a number of plants per year - this magical 550 megawatt plant that I'm talking about - We went from about 40 plants per year in the 2010s to about 15 plants per year so far in the 2020s right? And our expectation, or expectation that everybody has, is that that has to be over 25 even 40 plants per year. So you see a big swing on the number of plants that are needed, and that therefore comes with more turbines and more of everything that needs to be in place for the plants to be built. So significant change in the in the natural gas side of equation.

Sean McMahon 06:54

Okay, and then earlier, you mentioned re-industrialization, right? And you know, here in the US, President Trump, a big part of his agenda is to, like you said, re-shore manufacturing, or just build out new manufacturing for new industries. So I guess the question is two parts, do we have the capability to generate enough energy for those projects, and do we have the grid that can get that energy where it needs to be?

Pedro Caruso 07:20

That's the $1 trillion question, Sean. The answer is, I mean, we're America, of course, we can do it right. We can do we can do anything we set our mind to achieve, and it probably will be different to the way you can dream it. Today, we have significant abundance of natural resources. So we have tremendous amount of natural gas in this country to provide for an advantage feed stock, or advantage source of energy for the future. We have tremendous amount of sun and wind and so on. Our infrastructure is lacking right, particularly not only on the generation side, but the transmission side. And of course, the re-industrialization, we're talking about, a new manufacturing plan...Demand for those plans don't turn on and off based on the time of day or whether there are clouds on the sky or there's wind or not. So there's a mismatch in between some of that demand pattern and the generation pattern, and it costs money to be able to bridge that gap, either through new gas power plant or new nuclear power plant, which we could talk about, or because we're going to have to add batteries or other sources of resiliency. We should probably talk at some point about the demand response as well, which is a great tool to smooth the grid changes. So do we have the infrastructure needed to achieve that dream of re-industrialization? Not at this time. Could it be built? With a lot of effort and regulatory support.

Sean McMahon 08:51

Okay, so when you talk about building out that new generation, new power generation, I used to say, to meet that demand, what does that mix look like? You know, I'm hearing a lot about, you know, obviously we've talked about gas, significantly, lot of talk about nuclear, but there's a build out time associated with that too. So talk to me a little bit about just the overall mix of what that generation will look like.

Pedro Caruso 09:12

Yeah, that's a great question. Sean, we know something. That is, that we're going to need almost everything we can get our hands on to satisfy the demand. So renewables have a role to play. Nuclear, a lot of people in the industry are expecting the extensions of licenses, so the expected plant closures can actually be avoided, maybe the comeback of a couple of the recent closures, or not so recent closures as well. A lot of excitement about small nuclear reactors, and for listeners that are not obsessed about the industry, these small reactors are not necessarily that small. We're talking about the definition of less than 300 megawatts or less. So they can be very large. You know, it's not, it's not the generator you're going to put on the back of your house when the storm goes out. These are massive industrial units. But nonetheless, small compared to the historical size of the nuclear reactors and plants. And the expectation, or the hope, for the small nuclear reactors is that, because they're going to be more modularized, you can build more of them repeatedly, and therefore you can have better economies of learning, right? So that the nth unit is significantly cheaper than the first unit and so on. So there's a lot of excitement about small nuclear reactors. A lot of serious companies with very interesting technology (are making) progress on that end. I'm not an advertisement to other people in Roland Berger that we actually have people that know nuclear very, very deep. So I'm not going to try to speak speak as much as I could, but the potential is real, but unknown, and that talks a lot about the uncertainties. And that unknown comes with a lead time that you pointed out to Sean, which is, it's not happening tomorrow, right? We're not adding 50 gigawatts of nuclear capacity in the next 2 years, not even 5 right? Maybe not even 10. And it shouldn't come as a surprise to anybody that we're have in supply chain constraints on gas turbines. But when you go from 40 plants a year to 15 plants a year to now back to 25-40, you cannot expect manufacturers of the key pieces of equipment for these plants to just keep the capacity for levels of demand that they don't have. So the demand is seriously outstripping the capacity, the ability of the big gas turbines. We can talk about who they are, the numbers, everybody knows who they are, and they're all having backlogs like serious, multi year backlog. So what used to be a typical, give me two and a half, two years of lead time, and you have your gas your gas turbine can now be even up to seven, so to the point that the companies that have been able to place placeholders on demand ahead of others are even getting a premium on some of their valuations, because they're expected to be the ones that can add that capacity. And given that the data centers, the industrial capacity as well, but the mega centers, the data centers in particular, can be placed in multiple areas of the country. Whoever builds the capacity to supply them will win. They will be the ones getting that demand, and that's very exciting. It's part of why utility companies have gone from boring and stable utility companies from a valuation standpoint, where people think of them as bonds, to actually being growth stocks in many cases. So a lot of concerns about the supply chain in general, particularly gas turbines, which is the one people typically expect to be, to be the ones you can plug in the short term.

Sean McMahon 12:33

Are there any other spots on the supply chain that you know people maybe aren't thinking about, but then when you see it, you're like, oh, wow, that that could turn into a pretty serious choke point there, whether it's just an individual part, I know that, like inverters, you know, there's talk about that on the solar side, and then we've discussed, you know, turbines on the gas side. But any other pieces out there that you know, you think deserve a little more attention.

Pedro Caruso 12:55

When you double click on all the equipment and materials needed there, there are parts where you see, gee, this can be particularly triggering, but the one I like to talk about the most is engineering capacity, right? It's the human ability to design and build these plans, and not only from the engineering and procurement contractors, but also from from the standpoint of the companies themselves. So back in the day, just to use the phrase, all these power companies would have very strong capital projects, teams with experience building multiple large scale capital projects, plants and the distribution centers, and the transmissions and so on. With the shift in...well, with the with reduction in demand and the shift of whatever capacity was being added to renewables. Those renewable projects look very different from the large scale projects. Not necessarily the turbine ones, because turbines can be large capital projects on themselves, but the way you build a solar farm is very, very different from the way you built a nuclear plant and different from the way you built a natural gas plant. So a lot of those capabilities are have to be rebuilt and enhanced, and they have to be rebuilt and enhanced at the time where the way things are being done is very different, and it's going to continue to look very different from the past. We're seeing a lot of our clients that are thinking about, how do I actually improve my ability to deploy capital projects? Because capital projects is not only about putting the capacity so that the reliability exists, and of course, companies have a responsibility to guarantee the reliability through supply, but it's also linked to their growth ambitions, and they know that there is a competition between different regions and different companies to be the ones that put the capacity on the ground first. So to your question, I'll be paying a lot of attention to the engineering and then the ability to build, right, the welders and all that part of the supply chain.

Sean McMahon 14:56

Yeah, I like that. The Human Capital might be the supply chain kink that gets in the way of some of the major capex projects themselves.

Pedro Caruso 15:04

Yeah, we have been putting a lot of emphasis on college education for a lot of the right reasons, and we're going to need a lot of very good paying blue collar jobs to fulfill the promise that is the growth in power generation and supply carries with it

Sean McMahon 15:23

Anything else that's out there that companies need to be thinking about that's again, kind of under the radar at this point.

Pedro Caruso 15:29

Thanks for the question, Sean. I will not presume that these are under the radar topics for companies, but part of my job as a consultant, and part of our job in Roland Berger is to synthesize what companies need to do so that they can they can drive focus and emphasis on particular areas. I think, at the same level of improving the ability to deliver capital projects, there's also the need to make sure that they're getting their full potential for their existing assets and that typically includes work around maintenance and reliability, includes work on the bottlenecking, includes work around the resiliency of the whole grid. So the operation teams at these companies not only have to work on making sure they can deliver the capital projects, they also need to make sure that their existing production and distribution infrastructure is up to par and continuously to the next level, so they can extract more value from those assets. Now the advice is not only from the people that deal with the operations, is also for the people that deal with the customers, and from a customer side, you see and agree that companies should be putting a lot of energy, pun intended on capturing that data center growth. This is we're entering a unique moment in history where industries change and those are able to develop those capabilities sooner, will will benefit disproportionately from it. So getting to know the lingo, getting to understand who's building them, building the sales force and service capacity around that so they can capture that demand is paramount, and also related in the customer side, but now in the interface between customer and capacity is significant opportunity on the demand response side of the equation.

Pedro Caruso 17:20

Demand response basically means that that somebody has the ability to consume less power when the demand on the grid is very high. So that...in absence of ability to add capacity to the grid, you're reducing that peak demand, which has the same effect. Some people actually talk about demand response as an additional source of capacity, and the reference to that in that way. Historically, demand response had been an opportunity tackled with commercial and industrial customers, which are the ones that have the biggest source of demand, is becoming more and more a distributed asset on on residential houses, right? You see companies investing in helping control the thermostat, a lot of offerings on a power bank or a battery on your house, and you will be able to draw from the grid when it's cheaper and use it in your house when it's more expensive and so on. So a lot of opportunity on on that end, and customers are willing to pay for it, right? There's value in having that, either because the customers want that ability to arbitrage between the high cost or the low cost, or because they're very willing to give you some of the value - share, the value of them dropping their demand when the money's on its peak.

Pedro Caruso 18:34

So just to recap, right? So a few things that CEOs of power companies need to have in mind from power generation all the way to customer will be make sure your assets are running to their full potential. Make sure you are building the ability to add the capacity that's needed and avoiding overruns and delays built on this demand response opportunity, and then capture the demands from data centers. And when you put all that and you compare it to the agenda over the last few decades and how that agenda has changed, this is, Sean, just an exciting time to be in power. It really is an exciting time to be in power. And you can feel it when you walk into the power companies and you see people motivated to do a good job that not only is foundational to the way we live, but it's actually foundational to the economy we're building for the future. And that's real. You know that your job is related to that, and you know you're competing with others for it. It's exciting, and you can feel it.

Sean McMahon 19:39

Okay and now, so you know, we're talking a lot about different things that kind of all need to happen at the same time. And so, you know, if I'm a utility company, what advice would you have for me in terms of how to make sure I can execute on all these projects? like I said, at the same time, it's not just one focus, it's about eight or nine or 10. And all with different lead times and different supply chain challenges and and, you know, so many different variables. So what kind of capabilities would I need?

Pedro Caruso 20:08

That's a great question. Sean, thank you for asking it. I'm gonna answer it, and then I'm gonna touch on other areas that I know most of our clients and our companies are considering. When it comes to capital projects, the key is to have a very robust capital projects organization that, to a certain extent, centralizes the capital project activity. And centralizes in a way that's smart enough to recognize that not all capital projects are done the same way. So if you apply the standard processes and procedures you do to build a nuclear plant, and you apply them to a solar farm, I am going to show you that solar farm is going to be late and with excess cost and a lot of headaches along the way, just from applying the wrong processes. And it is obvious when you when you put the two extremes on the table, but it is also different to build a natural gas combined cycle plant, and it's very different to build transmission, and it's very different to build the last mile distributions and upgrading the...transformers and so on. So companies have to look at their portfolio of projects and segment them, and decide which ones are going to need the full rigor of a massive capital project plan, which ones need a more flexible approach so that you can build them faster, and which are actually just a repetition of projects that look very similar to each other, so you're not reinventing the wheel every time you do one. And once you as a company, segment your portfolio of projects that way, then you need to redesign the systems you use to deliver them. You need to tailor capital project common process. You need the tailor controls, you need tailored scheduling - You know the way to do scheduling, the way to use operations. The whole operating model around how you deliver these capital projects needs to be tailored or you're going to pay in terms of excess cost or excess duration on the project.

Pedro Caruso 20:10

Now, to make it more exciting, you're doing all that in the context of at the very least two changes that need to be taken into account. One is all the digital and artificial intelligence tools are now available that are amazing and incredible, and they're moving so fast that humans and organizations are having a very hard time staying up to speed with what's possible, and, very importantly, selecting of what's possible, what you actually want to apply to your own process, right? Knowing that every time you change something, you have to train people and bring them along and so on. The second change is the globalization of engineering, right? And Long gone are the days where you will just hire an EPC company. Everybody will be in the team room in a high cost location. That's just not the way things work anymore. So, you know, just to bring it back, centralization of capital projects with a segmented view on how you actually deliver them, so you actually have the right set of processes and tools to get each of those different projects done. And that's easier said than done, and companies that do well have a competitive advantage. The other piece that goes hand in hand with that is improve supply chain capabilities. In order to deal with complex supply chains that have bottlenecks, you need supply chain people are able to understand the market dynamics, build total cost of ownership, help the project teams challenge their own designs, and those are capabilities are built on purpose, right? They have to be invested over time. And we are seeing a lot of effort and energy from from supply chains that wanna you know, see their opportunity to become not just the people that optimize span, but the people that actually enable growth, and that's very exciting to a lot of the supply chain professionals in the industry.

Sean McMahon 24:11

Well, Pedro, listen. I can sense that excitement that you're talking about. And as far as our conversation goes today, you know, this podcast is called sustainability as a strategy for a good reason, and I think you've shared excellent strategy ideas for business owners out there who are navigating this evolving landscape, so thank you very much for your time.

Pedro Caruso 24:31

Sean, thank you very much for the opportunity and the conversation. I really enjoyed it.