From data to demand: Inside the transformation of the US power grid with Duke Energy

Rebecca Sherlock:

Good afternoon and welcome to the First Sentier Global Listed Infrastructure Fireside Chat. For those that don't know me, I'm Rebecca Sherlock, a portfolio manager at First Sentier Investors, and I'm joined today by Brian Savoy, Chief Financial Officer from Duke Energy. Thanks for joining me, Brian. Great to have you here.

Brian Savoy:

Wonderful to be here, Rebecca.

Rebecca Sherlock:

So Brian, just for listeners that are less familiar with your company, could you just give us a quick 60-second rundown of a little bit about your company and the service territories that you operate in?

Brian Savoy:

Absolutely. So Duke Energy is one of the largest regulated utilities in the United States. We operate in the Midwest and the Southeast with 10 million electric and gas customers. We have a variety of generation from nuclear to natural gas to solar and batteries, along with the largest grid in the United States.

Rebecca Sherlock:

Yeah. And I mean, like data centres, AI, obviously that is a really topic du jour. Can you talk a little bit about how that is changing load growth in your service territory? Clearly it's very different than it was 10 years ago. And just some of the implications of that on your business.

Brian Savoy:

It's totally changed load growth. Most of my career, load growth has been sub half percent a year. And AI and data centres, along with advanced manufacturing that consumes more energy across various sectors, has really moved the needle from a half percent load growth per annum to somewhere in the 4 to 5% that we're looking to the end of the decade, and it continues into the '30s. So it's really changed our planning. It's changed our speed to power thinking and how we can move fast, seize the moment, and capture this growth.

Rebecca Sherlock:

And when these hyperscalers are coming to you, what is the key things that they're after? What are the top three things that they're coming and asking you for?

Brian Savoy:

The conversations obviously vary across the different customers, but I would say that the top three things, first, speed to power. I mentioned it a second ago, and really tooling our organisation to meet their timeline on when the data center's ready, that we're ready to energise it. That's thing one. Thing two is around cost, right? The energy is not the largest cost of a data centre, but it's an ongoing OpEx that they have to manage. And data centres want to pay their fair share, but they don't want to pay a dollar more than their fair share. So finding that right cost benefit balance with the customer is super important. And I think lastly, increasingly clean. The Carolinas, North and South Carolina, we have 50% of our generation from nuclear and the rates are very low. So it's very attractive for data centre customers, which is where we've signed most of the customers to date.

Rebecca Sherlock:

I mean, I can't go anywhere and not have a client meeting without talking about affordability. What are some of the regulatory safeguards that you're putting in? So mom and dad, these residential customers are not paying for some of the Microsoft, Googles to come to your service territory.

Brian Savoy:

It's so important. And ensuring our existing customers are not subsidising these multi-billion trillion-dollar companies is paramount and our regulators expect it and our customers deserve it. So the protections are wide-ranging from minimum billing for ED's customers and the way we design our rates, 75% of the megawatts this customer's asking for is take or pay effectively. So whether the customer uses it or not, they're paying 75%. And that's spanning over about a 15-year contract term ensures we recover the investments made to connect that customer on and there's no spillover effects to the existing customer base.

Rebecca Sherlock:

Okay. I understand. And what as a business can you do in terms of self-help measures so that you can kind of minimise your OpEx pressure on the customer bill as well?

Brian Savoy:

There are a number of things to do to manage cost at any utility. And actually, I used to be the chief transformation officer and ran the gamut on transforming processes using technology, machine learning, old AI, but now there's new AI. And the genAI is untapped in the utility space. And we actually just named a new head of AI, a senior leader. Her job is to really drive this throughout the company. And she came from our customer organisation, so that's the first, that's the easiest area to adopt generative AI, making our chatbots really smart chatbots that they can do more functions for customers without human interaction, which customers want sometimes. Sometimes they want the human.

But we serve... 10 million customers is a wide gamut, but I think the biggest opportunity is really the field crews. We've done a lot on the generation plants to ring out cost and be more efficient, but those are confined areas that we control. The field crews are out and about. We've got over 15,000 trucks out every day doing service work and jobs may take longer. How do we redirect those other crews to ensure we have productivity throughout the day? And that productivity needle is a big unlock for utilities and for Duke Energy.

Rebecca Sherlock:

I mean, obviously, and I've covered Duke Energy long enough to know that you have had a history that's included M&A. Can you talk a little bit about the merger of subsidiaries and what that could mean on the customer build impact?

Brian Savoy:

Yeah. We have a unique opportunity in the Carolinas to bring together two very sizable utilities, Duke Energy Carolinas and Duke Energy Progress. And this will be one of the largest utilities in the US put together. Think about Florida Power and Light, Pacific Gas and Electric. Those are six or seven million customers each. This will be a six million customer utility by itself. And we will unlock efficiencies across the system. And there's just limitations on things like power flows and planning that we have to spend money to buy purchase power for one utility or the other. We can't use the reserves collectively. Bringing these utilities together brings value to customers immediately.

Rebecca Sherlock:

I mean, something else I'd observe with Duke because you do have one of the largest nuclear fleets in the US as well. Can you talk about the benefits of that to stakeholders in your company and just how you see nuclear evolving through time? Is this going to be the answer to the net-zero question mark out in the 2040s? Is that something you're interested in pursuing longer term? Maybe you could just give us a little sense of that.

Brian Savoy:

No, certainly. Look, Duke Energy has the largest nuclear regulated fleet in the United States, 11,000 megawatts. It took massive courage for my predecessors to take those leaps of investments that were bet the company investments in the 60s and 70s. And these plants came online in the late 70s and early 80s and have served our customers for over 50 years. We've extended the lives of some of our plants for 80 years, and we're making the way through all the plants that they'll have 80-year lives. It's very cheap power. It's reliable power.

Our nuclear fleet set a record last year of 96% capacity factor. That's amazing to get that much energy, zero carbon for our customers at a very low price. New nuclear is in our plans, but currently the investment proposition for new nuclear is too risky. The financial risks are too great. We can't find certainty on schedule or cost to build one because the designs are not fully estimable at this time. And we've got to work through this with the supply chain for new nuclear, the EPC providers that might construct new nuclear and the government on what role they might play in new nuclear. But to hit our net-zero ambition by 2050, nuclear is going to play a critical role.

Rebecca Sherlock:

Yeah. And obviously with all this new generation that we talk about, all of it needs to be connected to the grid. I think this is the piece that so many people miss. Can you talk a little bit about the investment needs that you need from a grid perspective and maybe just some of the obstacles or the challenges that you're finding in terms of grid connectivity?

Brian Savoy:

Grid planning has really advanced leaps and bounds in the past decade. We've used a lot of tools to evaluate the right areas where solar should be built on the grid, where electrification might take hold, where large load customers should be cited. And we've taken proactive measures to build the backbone of our transmission system, so we're ready before they're ready. And when a customer comes, we show them, here's the best sites for you to think about a data centre, to think about a solar farm or a battery array. And that has really helped us move with speed to ensure the grid's not falling behind.

The other areas on the grid are resiliency. So we have hurricanes that come through our system pretty much every year and changing wood poles for steel and concrete sounds very basic. It keeps the wires up and the power flowing. And so we started in Florida, which definitely sees its share of hurricanes. And when we've pressure tested this through several storms, the poles don't go down when they're stealing concrete. The wires might fall, but you restring the wire, customers are back on in a day. We've taken that same model into the Carolinas, and we're about 30% done with our grid hardening programme in the Carolinas, so we have a lot of investment in the next several years to go.

Rebecca Sherlock:

Look, I think we're out of time. So look, thank you so much for joining me today, for giving our clients a little bit of insight to Duke Energy, and enjoy the rest of your time in Sydney.

Brian Savoy: 

Thank you so much.