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To manage the clean energy transition, it may have to get into the leveraged buyout game.
The United States produces more natural gas and crude oil than any other country ― it isn’t even a contest. But these “molecules of U.S. freedom” aren’t free: They’re extracted and transported through a network of rigs, drills, pumps, and pipes that are, increasingly, controlled and operated by myriad private equity companies. As a society, we have a strong interest in winding down these climate-polluting assets in a swift yet orderly fashion. But as businesses, their private equity owners don’t.
Over the past decade, pressure from shareholders and activists has succeeded in pushing many fossil fuel majors to consider how best to reduce their emissions. (Although that, too, has come at a cost.) But rather than winding down or cleaning up their most polluting and least profitable assets, many have instead simply divested. Coal companies in West Virginia have sold off their mines to undercapitalized vulture firms, which rely on continued coal sales to (in theory) pay for expensive environmental remediation costs. The same is happening in the oil and gas industry, where private equity firms have rolled up many of the drilling sites and pipelines, the capillaries and veins of the country’s energy infrastructure.
Shielded from the scrutiny of public markets, private equity funds have thus become some of the country’s top methane emitters by asset ownership in the natural gas sector. These opaque owners, capitalizing on other companies’ disinterest in holding high-emitting assets, are betting that fossil fuel infrastructure will keep paying out for quite some time; recent massive increases in expected energy demand have only juiced this trend toward industry consolidation.
Private equity firms and private debt funds, with their short-term profit horizons, concealed balance sheets, and seeming imperviousness to tighter financial regulation and shareholder activism, work well with fossil fuel assets, particularly those sold at fire-sale prices by publicly traded fossil fuel majors. Despite those assets’ long-term market value instability, their near-term cash flow prospects are what matter.
But what’s been good for fossil fuel majors’ balance sheets has been bad for the planet. Many of these buyout firms — well-capitalized private equity funds and scrappy vulture funds, alike — are not budgeting anywhere near enough for environmental remediation. One company, Diversified Energy Co, has been purchasing the rights to operate almost-depleted natural gas wellheads at scale, extending many of their lifespans by decades; far too few wellheads are closed each year to stem the methane spewing unimpeded into the atmosphere.
Rather than accept a situation where utilities and fossil fuel majors toss their liabilities to unaccountable vulture funds, sustainability-conscious investors and shareholder groups have begun screening transactions for responsible asset phaseout plans. But the lack of a binding set of transition standards has revealed a huge coordination problem: What counts as a responsible phaseout, particularly when private asset owners get to decide? The federal government has put down guidelines, but not its foot. A disorganized drawdown of assets under a patchy regulatory framework, without a doubt, leaves vulnerable communities on the hook for the financial, environmental, and health damages.
Progressive analysts have long argued that nationalizing fossil fuel assets and folding them into a state holding company is the best solution to sidestep this particular problem. The federal government is well staffed with energy and electricity experts who, operating under a public mandate to preserve grid reliability, can phase out fossil fuel assets on a unified, coherent timeline responsive to community needs while continuing to operate those assets as the “peaker” or “reserve” capacity required to ensure grid stability. A series of climate shocks has even convinced conservative leaders in Texas of the importance of public power for grid resilience, achieved through state ownership of “peaker” gas plants. This course of action is far worse than investments in, say, battery capacity ― California, for instance, is now reaping the benefits of massive battery deployment, which reduces the state’s need for gas ― but the logic behind building public reserve capacity is sound.
What advocates of a state holding company-type model do not often discuss is how exactly a government goes about acquiring all these soon-to-be-stranded fossil fuel assets. As just one example, a recent proposal from the Roosevelt Institute suggests that a state holding company should be “free to engage in debt financing, make equity investments, and acquire assets.” Sure, proposals like these are meant to buttress the case for why nationalization is a far better way to achieve a managed phaseout than surrendering that process to yield-seeking investors, not to detail the financial mechanics of a buyout. But still: this is vague!
Actually thinking through the specifics suggests that, interestingly enough, a comprehensive state-led buyout program could work a lot like an existing private equity transaction, for two key reasons.
Before we get there, we should separate private equity’s deserved reputation as an opaque asset owner from the way the industry works. Private equity’s calling card, the “leveraged buyout,” is little more than the act of raising debt to 1) purchase equity in and, therefore, ownership over an asset, and 2) refinance the asset’s liabilities. To do so, private equity funds work with banks or, more commonly these days, private debt or private credit funds, to raise debt that is generally backed by the combined assets of the purchaser firm and purchased asset.
But leveraged buyouts themselves are technically something that any financial institution could do. Take the federal government, the country’s most liquid debt issuer, whose debt anchors the global economy and backstops private financial institutions. It could raise debt (leverage) to finance a buyout of fossil fuel assets at interest rates far lower than private investors could. And because private credit funds, like other institutional investors, already buy loads of government bonds to match their liabilities and hedge their risks, this kind of nationwide leveraged buyout ― which would require substantial new debt issuance ― could actually help stabilize the financial system against potential shocks from within notoriously inscrutable private markets. The government can do exactly what private equity does, only a lot better, and with wider benefits.
The government has already planted the seeds of a leveraged buyout program across the country’s coal ash heaps. The Loan Programs Office, thanks to the Bipartisan Infrastructure Law and the Inflation Reduction Act, now offers far-below-market-rate loan guarantees to developers, including state governments and utility companies, seeking to repurpose fossil fuel assets through its Energy Infrastructure Reinvestment program. This program’s authority allows borrowers to use their financing for “refinancing outstanding indebtedness directly associated with eligible Energy Infrastructure.” All policymakers have to do now is scrap the program’s 2026 end date and, ideally, endow a federal institution with the power to borrow from this authority to purchase and refinance fossil fuel assets, rather than leave that task solely in the hands of state governments and utilities, with their varying capacities for and interest in coordinating a coherent phaseout plan. And now that interest rates are poised to fall, this refinancing becomes much cheaper.
That’s reason number one. Reason number two has to do with private equity funds’ ability to shield the assets in their portfolio from valuation volatility on publicly traded stock markets. Private equity funds need not publicize how much their portfolios are worth, except at infrequent intervals and when they sell assets. But thanks to private equity’s reputation as a high-return investment, fund investors pay a premium for the illiquidity of not always knowing the value of their assets. Purchase assets, juice returns, sell, and repeat ― this is the conventional private equity playbook.
But macroeconomic conditions today are such that private equity companies are now struggling to sell their portfolios. High interest rates have made leveraged buyouts of new assets and refinancing debts on unsold assets much more costly, and have tempered rapid asset value growth. As this once-frenetic industry slows down, funds are anxious to get assets off their books ― hence the recent wave of consolidation.
This is an opportune moment for the Feds to step in. It’s not just that the government’s capacity for undertaking leveraged buyouts is the greatest; more importantly, it never needs to sell. The valuation volatility that first prompts fossil fuel majors to divest from dying, dangerous assets yet incentivizes private equity funds to pump as much as they can out of them to resell them later at a profit is simply not something the federal government needs to worry about. A state holdingcompany can siphon distressed assets off public markets and shut down the “merry-go-round” of asset sales and resales.
Objections to government intervention here are likely premised on the fact that, well, it’s the government. But the government would still be purchasing assets from private owners on financial markets, just like any market actor would. Today’s uncoordinated constellation of private fossil fuel firms and funds, on the other hand, cannot manage a coordinated phaseout, especially not under binding profitability constraints ― which the federal government does not share.
Local communities can’t finance phaseouts or cleanups themselves, and leaving hundreds of billions of dollars worth of stranded assets in the hands of under-regulated private firms will only accelerate climate catastrophe. The government must use the financial techniques that private equity funds have already pioneered to bring them to heel, in service of public goals.
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Want to understand what’s happening to electric cars? Look at the Golden State.
As California goes, so goes the American car scene. This sentiment has long been true, given that the Golden State is the country’s biggest automotive market and its emissions rules have helped to drag the car industry toward more efficient vehicles.
It is doubly true in the EV era, since California is where electric vehicles first went big and where electric adoption far outpaces the rest of the nation. A look at the car sales data from the first half of 2024 shows us a few things about what the electric car market is and where it’s headed.
Electric cars went mainstream in a hurry here, growing from 5.8% of California car sales in 2020 to 21.5% in 2023. Then the graph flattens out: For the first half of this year, EVs made up 21.4% of new registrations. That would seem to support the gloomy narrative of a supposed EV sales slump. The truth, as it tends to be, is more complicated.
Look at the numbers broken down by quarters, rather than years, and the chart looks a little different. EV sales reached a peak in the third quarter of 2023, dipped a bit, and then jumped back up in April to June 2024 to the second-best quarter ever. That’s a blip, not a crisis, as EVs appear poised for slow growth but growth nonetheless.
Consider the context for a moment: California reached a place where 1 in 5 new cars sold are electric even with the EV affordability problem. That trend wasn’t going to continue unabated up to 30, 40, or 50% of auto sales without the industry putting out vehicles that can compete on cost with a $25,000 Honda Civic or a $30,000 Toyota RAV4. In its summary of the numbers, the California New Car Dealers Association blames inflation and rising monthly car payments for suppressing all vehicle sales at the moment, EVs included. Money matters will decide where things go from here.
The flipside of this year’s EV doomerism is the notion that drivers are turning to hybrids instead. The numbers bear out that sentiment for the moment in California. Traditional hybrid vehicles (excluding plug-in hybrids) more than doubled their market share from 6.1% in 2020 to 13.2% in the first half of 2024. Not too surprising, considering their wide availability and how appealing they are for California drivers who buy some of the nation’s most expensive gasoline.
Plug-in hybrids accounted for 3.4% of sales in the first half of this year, not far from the number they posted back in 2021. That might sound odd, given automakers’ rumblings about turning to these vehicles instead of true EVs, but a new wave of PHEVs is still in development. For now, the difficult calculus remains: Plug-in hybrids are a great choice for a lot of drivers, but they are significantly more expensive than combustion cars for not much electric range, and PHEVs can be hard to come by.
Take all these electrified powertrains together, however, and the picture is clear. Compared to 2018, when gas- and diesel-burners made up 88.4% of auto sales, that number is down to 62% for the first half of this year. Combustion-only is sinking fast, a trend that will spread from the West Coast to the rest of the nation.
My eyes don’t deceive me. Since the start of 2024, it has felt like Rivian’s trucks and especially SUVs are all over Los Angeles, driven by the kind of people who used to own Range Rovers. It turns out RJ Scaringe’s company is the fastest-growing car brand of any kind in California, with sales up nearly 77% in the first half of 2024 compared to the same period in 2023.
Now, that number is deceiving. It’s easy to grow by big percentages at the beginning, and Rivian’s sales numbers are relatively small: It moved just shy of 7,000 vehicles through June, which pales in comparison to the 100,000 Teslas and 150,000 Toyotas registered in California during the same period. But Rivian’s early success in California suggests the brand is finding traction and that it might pick off plenty of drivers from Tesla's bread-winning Model Y once the more reasonably priced R2 and R3 arrive.
After all, the story of the supposed EV slump is actually the story of Tesla squandering its huge halftime lead. Ford, Toyota, Mercedes, Rivian, BMW, and Hyundai/Kia EV sales are up this year, but Tesla’s slump wipes out much of their gains.
The Model Y and Model 3 remain California’s best-selling EVs by far, with the second-place Model 3 selling three times the volume of the third-place finisher, Hyundai’s Ioniq 5. Yet Tesla sales in California are down 17% from the first half of 2023, and its market share dropped from 64.6% to 53.4%. Its only new model, the Cybertruck, sold 3,048 in the first half of this year. Californians bought nearly a thousand more Chevy Bolts — and GM isn’t even building that car right now.
Current conditions: More than 300,000 people in Louisiana are without power after Hurricane Francine • Hungarian lawmakers met in a dried riverbed yesterday to draw attention to the country’s extreme drought • An Arctic blast could bring snow to parts of the U.K.
More than 60 scientists have co-authored a new study, published in The Lancet Planetary Health, warning that human activity is damaging the natural systems that support life on Earth. Almost all of these support systems – including the climate, soil nutrient cycles, and freshwater – have been pushed into danger zones as humans strive for ever more economic growth. Thus, the researchers say, the health of the planet and its people are at risk, and the poor are the most vulnerable. The study concludes “fundamental system-wide transformations are needed” to address overconsumption, overhaul economic systems, improve technologies, and transform governance.
The Lancet
Carmaker Stellantis announced yesterday it is pouring more than $400 million into three facilities in Michigan to ramp up electric vehicle production and boost the company’s “multi-energy strategy.” The Sterling Heights Assembly Plant will be Stellantis’ first U.S. facility to build a fully electric vehicle, the Ram 1500 REV. The Warren Truck Assembly Plant will be “retooled” to produce the upcoming electric Jeep Wagoneer. And the Dundee Engine Plant will be upgraded for parts production for the company’s STLA Frame architecture. As The Associated Pressexplained, Stellantis “is taking a step toward meeting some commitments that it agreed to in a new contract ratified last fall by the United Auto Workers union after a bitter six-week strike.” The company is aiming for 50% of its passenger car and light-duty truck sales in the U.S. to be electric by 2030.
Police arrested a 34-year-old man suspected of starting a wildfire in California that has now burned more than 36,000 acres and is less than 20% contained. The Line fire is one of several large blazes burning in the state and threatening thousands of structures. Last month another man was charged with arson on suspicion of igniting the Park fire, which consumed 430,000 acres in Northern California. As Heatmap’s Jeva Lange reported, arson officially accounts for only about 10% of fires handled by Cal Fire. But when there are thousands of fires across the state during a given season, that’s not an inconsequential number. And a warmer world has made extreme fire conditions more common, as have decades of misbegotten fire suppression policies in the Western United States. As a result, arson fires in rural areas are more likely to burn out of control than they would have been half a century ago, Lange wrote. Experts warn that California’s fire season, fueled by “weather whiplash,” is only just ramping up and is likely to intensify with the arrival of the Santa Ana winds.
Brazil’s President Luiz Inácio Lula da Silva has pledged to finish the paving of a controversial road through the Amazon rainforest. The BR-319 highway would connect some major cities and improve cargo movement, which has been disrupted by record-low water levels in the Amazon River due to drought. But its construction could also hasten deforestation, including in old growth forests. “Without the forest, there is no water, it’s interconnected,” said Suely Araújo, a public policy coordinator. “The paving of the middle section of BR-319, without ensuring environmental governance and the presence of the government in the region, will lead to historic deforestation, as pointed out by many specialists and by Brazil’s federal environmental agency in the licensing process.” Lula made the pledge during a visit to assess the damage from massive fires in the rainforest, which his Environment Minister Marina Silva blamed on extreme drought caused by climate change.
A new survey of more than 1,000 EV owners in California has some interesting insights into what these drivers want from a charging station. It found they were 37% more likely to choose a charger with additional amenities like restrooms and convenience stores. “This symbiotic relationship between businesses and EV chargers may benefit both EV chargers and local businesses,” said Alan Jenn, assistant professor at the Electric Vehicle group of the Institute of Transportation Studies at UC Davis.
Next 10
Also, California’s EV drivers really don’t want to wait to charge up, and are willing to pay almost a dollar more per 100 miles of charge if there’s no wait time at the charger. With every minute of extra wait time, a driver’s willingness to use a charger falls by 6%. The survey was conducted by the non-profit Next 10 and the Institute for Transportation Studies at UC Davis.
“If Harris is now bragging about her administration’s support for fossil fuels, if she is casting the Inflation Reduction Act as a law that helped fracking, that means climate activists have much more work to do to persuade the public on what they believe. The Democratic Party’s candidate will not do that persuasion for them.” –Heatmap’s Robinson Meyer on Kamala Harris’ energy playbook.
The rapid increase in demand for artificial intelligence is creating a seemingly vexing national dilemma: How can we meet the vast energy demands of a breakthrough industry without compromising our energy goals?
If that challenge sounds familiar, that’s because it is. The U.S. has a long history of rising to the electricity demands of innovative new industries. Our energy needs grew far more quickly in the four decades following World War II than what we are facing today. More recently, we have squared off against the energy requirements of new clean technologies that require significant energy to produce — most notably hydrogen.
Courtesy of Rhodium Group
The lesson we have learned time and again is that it is possible to scale technological innovation in a way that also scales energy innovation. Rather than accepting a zero-sum trade-off between innovation and our clean energy goals, we should focus on policies that leverage the growth of AI to scale the growth of clean energy.
At the core of this approach is the concept of additionality: Companies operating massive data centers — often referred to as “hyperscalers” — as well as utilities should have incentives to bring online new, additional clean energy to power new computing needs. That way, we leverage demand in one sector to scale up another. We drive innovation in key sectors that are critical to our nation’s competitiveness, we reward market leaders who are already moving in this direction with a stable, long-term regulatory framework for growth, and we stay on track to meet our nation’s climate commitments.
All of this is possible, but only if we take bold action now.
AI technologies have the potential to significantly boost America’s economic productivity and enhance our national security. AI also has the potential to accelerate the energy transition itself, from optimizing the electricity grid, to improving weather forecasting, to accelerating the discovery of chemicals and material breakthroughs that reduce reliance on fossil fuels. Powering AI, however, is itself incredibly energy intensive. Projections suggest that data centers could consume 9% of U.S. electricity generation by 2030, up from 4% today. Without a national policy response, this surge in energy demand risks increasing our long-term reliance on fossil fuels. By some estimates, around 20 gigawatts of additional natural gas generating capacity will come online by 2030, and coal plant retirements are already being delayed.
Avoiding this outcome will require creative focus on additionality. Hydrogen represents a particularly relevant case study here. It, too, is energy-intensive to produce — a single kilogram of hydrogen requires double the average household’s electricity consumption. And while hydrogen holds great promise to decarbonize parts of our economy, hydrogen is not per se good for our clean energy goals. Indeed, today’s fossil fuel-driven methods of hydrogen production generate more emissions than the entire aviation sector. While we can make zero-emissions hydrogen by using clean electricity to split hydrogen from water, the source of that electricity matters a lot. Similar to data centers, if the power for hydrogen production comes from the existing electricity grid, then ramping up electrolytic production of hydrogen could significantly increase emissions by growing overall energy demand without cleaning the energy mix.
This challenge led to the development of an “additionality” framework for hydrogen. The Inflation Reduction Act offers generous subsidies to hydrogen producers, but to qualify, they must match their electricity consumption with additional (read: newly built) clean energy generation close enough to them that they can actually use it.
This approach, which is being refined in proposed guidance from the U.S. Treasury Department, is designed to make sure that hydrogen’s energy demand becomes a catalyst for investment in new clean electricity generation and decarbonization technologies. Industry leaders are already responding, stating their readiness to build over 50 gigawatts of clean electrolyzer projects because of the long term certainty this framework provides.
While the scale and technology requirements are different, meeting AI’s energy needs presents a similar challenge. Powering data centers from the existing electricity grid mix means that more demand will create more emissions; even when data centers are drawing on clean electricity, if that energy is being diverted from existing sources rather than coming from new, additional clean electricity supply, the result is the same. Amazon’s recent $650 million investment in a data center campus next to an existing nuclear power plant in Pennsylvania illustrates the challenge: While diverting those clean electrons from Pennsylvania homes and businesses to the data center reduces Amazon’s reported emissions, by increasing demand on the grid without building additional clean capacity, it creates a need for new capacity in the region that will likely be met by fossil fuels (while also shifting up to $140 million of additional costs per year onto local customers).
Neither hyperscalers nor utilities should be expected to resolve this complex tension on their own. As with hydrogen, it is in our national interest to find a path forward.
What we need, then, is a national solution to make sure that as we expand our AI capabilities, we bring online new clean energy, as well, strengthening our competitive position in both industries and forestalling the economic and ecological consequences of higher electricity prices and higher carbon emissions.
In short, we should adopt a National AI Additionality Framework.
Under this framework, for any significant data center project, companies would need to show how they are securing new, additional clean power from a zero-emissions generation source. They could do this either by building new “behind-the-meter” clean energy to power their operations directly, or by partnering with a utility to pay a specified rate to secure new grid-connected clean energy coming online.
If companies are unwilling or unable to secure dedicated additional clean energy capacity, they would pay a fee into a clean deployment fund at the Department of Energy that would go toward high-value investments to expand clean electricity capacity. These could range from research and deployment incentives for so-called “clean firm” electricity generation technologies like nuclear and geothermal, to investments in transmission capacity in highly congested areas, to expanding manufacturing capacity for supply-constrained electrical grid equipment like transformers, to cleaning up rural electric cooperatives that serve areas attractive to data centers. Given the variance in grid and transmission issues, the fund would explicitly approach its investment with a regional lens.
Several states operate similar systems: Under Massachusetts’ Renewable Portfolio Standard, utilities are required to provide a certain percentage of electricity they serve from clean energy facilities or pay an “alternative compliance payment” for every megawatt-hour they are short of their obligation. Dollars collected from these payments go toward the development and expansion of clean energy projects and infrastructure in the state. Facing increasing capacity constraints on the PJM grid, Pennsylvania legislators are now exploring a state Baseload Energy Development Fund to provide low-interest grants and loans for new electricity generation facilities.
A national additionality framework should not only challenge the industry to scale innovation in a way that scales clean technology, it must also clear pathways to build clean energy at scale. We should establish a dedicated fast-track approval process to move these clean energy projects through federal, state, and local permitting and siting on an accelerated basis. This will help companies already investing in additional clean energy to move faster and more effectively – and make it more difficult for anyone to hide behind the excuse that building new clean energy capacity is too hard or too slow. Likewise, under this framework, utilities that stand in the way of progress should be held accountable and incentivized to adopt innovative new technologies and business models that enable them to move at historic speed.
For hyperscalers committed to net-zero goals, this national approach provides both an opportunity and a level playing field — an opportunity to deliver on those commitments in a genuine way, and a reliable long-term framework that will reward their investments to make that happen. This approach would also build public trust in corporate climate accountability and diminish the risk that those building data centers in the U.S. stand accused of greenwashing or shifting the cost of development onto ratepayers and communities. The policy clarity of an additionality requirement can also encourage cutting edge artificial intelligence technology to be built here in the United States. Moreover, it is a model that can be extended to address other sectors facing growing energy demand.
The good news is that many industry players are already moving in this direction. A new agreement between Google and a Nevada utility, for example, would allow Google to pay a higher rate for 24/7 clean electricity from a new geothermal project. In the Carolinas, Duke Energy announced its intent to explore a new clean tariff to support carbon-free energy generation for large customers like Google and Microsoft.
A national framework that builds on this progress is critical, though it will not be easy; it will require quick Congressional action, executive leadership, and new models of state and local partnership. But we have a unique opportunity to build a strange bedfellow coalition to get it done – across big tech, climate tech, environmentalists, permitting reform advocates, and those invested in America’s national security and technology leadership. Together, this framework can turn a vexing trade-off into an opportunity. We can ensure that the hundreds of billions of dollars invested in building an industry of the future actually accelerates the energy transition, all while strengthening the U.S.’s position in innovating cutting- edge AI and clean energy technology.