Policy Talks @ the Ford School: Gerry Anderson on energy policy and Michigan's economic recovery

Well, thank you, Caitlin. Glad to be here.

I think I would have to trace that to my father. I had a father who was deeply interested in sustainable energy. He was an engineer in the agriculture industry, but late in his life developed what he called a passion to try to figure out how to use agriculture waste and convert that to energy. It never really played out for him. It never happened, but it carried with me as a young person. I studied engineering and physics at Notre Dame, but as I worked my way there, this interest in energy has stuck with me. I remember traveling as I left Notre Dame. My brother and I took a trip around the world, and I remember sitting on a hill and writing in a journal in Switzerland that I hoped I could connect my career to sustainability. When it came time to go to grad school, I weighed sustainable energy engineering or economic development, and much to my dad's chagrin, I chose economic development. I went into policy studies and eventually got an MBA as well. I thought I would end up in the public sector, but got a random letter from McKinsey. Didn't know who they were at the time. I had my roommate tell me they were a consulting firm and I ought to take the interview, which I did. I ended up working there for five years. When I was there, one of the partners asked me if I would be interested in an energy study. I said I would, and that led to a specialization serving electric and gas companies and certain banks. After a series of events, I ended up at DTE to start up businesses. The first was a renewable energy, waste methane at landfills, which morphed over time into what it is, a renewable business working on agriculture operations around the country to take waste agriculture products and convert them to be used in the California carbon markets. Strangely, after a long trip, I was doing what my dad aspired to do. Not quite the same way. I also, along the way, did get involved in utilities, and in utilities got involved in, at one point, somebody asked me, 'Could you want to chair the environment or industry committee?' And I said, 'Absolutely.' That led me to development of environmental policy. And tied to that, as things went forward, I found myself involved in the kingpin of all sustainability issues, which is climate change, of course. From that early interest that my dad had, through a lot of steps, I found myself doing what I thought about on that mountainside, hoping I would be tied to sustainability. I'm getting a chance to work on it. I can't tell you how helpful my public policy training is for the work I'm doing. Honestly, perhaps the best educational training I have had.

In our industry, you need to be aware of them, not be dictated by them. Your strategy needs to be able to look longer term. We are the most capital-intensive by a wide margin. Our assets, from planning to regulatory... I'll give you an example. I remember telling my wife at Christmas, I feel like I threw away a year of my life. It was the truth because of the way things evolved. In early 2017, after all of the work, I found myself inundated with questions about whether we were going to abandon clean energy plants, whether we were going to hold onto our coal plants. That's frustrating because it wasn't at all where we were headed or what we were thinking. I pulled our team together and said, 'Look, what do we believe and what are we going to stand for here?' And it was very clear we believed there was the critical issue of public policy issues and that we were responsible for it and needed to be in the middle of the struggle. In early 2017, right in the middle of all of the talk, we actually came out and said we are going to reduce our carbon emissions 80% and retire our coal plants in the process. I was afraid the President would take us to task on Twitter, but in reality, the reaction was overwhelmingly positive. We got big press coverage worldwide because people were interested in this whole topic. Since then, the whole industry has moved in that direction. The industry moved hard in the direction of commitment to decarbonization in the middle of the Trump administration because the industry believes that's where we are headed. We heard it from our investors, employees, and we believe it personally.

I said I would like to pull together leaders of some of the most influential environmental and climate change groups with the goal of us coming and committing to net zero for the industry and the economy by 2050. But I want your help in establishing a new narrative and a new understanding by politicians and the public on what that will take. The industry can't front that. We need the environmental community to do that. So, Fred thought about it and came back and said, 'I think this can be consequential. We can do this.' I can't name all of the leaders we had together because it's confidential. We have centered on a clean energy standard as the policy vehicle. And through that, I have been spending a lot of time. I probably met with 40 or 50 members of Congress for the past month and a half, all of it trying to tell them that the industry is not only open to, but is desirous of trying to establish what we call an ambitious, but technically grounded clean energy standard. We are there. The mindset is ready. You are not dragging us by the nose. We want to see if we can't figure this out together. Fred has been doing the same from the environmental side. We worked together and compared notes, and I am hopeful that the current construct in Congress may produce this. As you know, it's an incredibly tightly balanced legislature, but the most lasting things done on the environmental front are bipartisan. So they are not overturned every time you get a shift in political balance. So, that's what we are working on. In the deep inside of this topic, for example, former Obama Energy Secretary, now at MIT, Ernie Moniz will tell you we have to do 100% carbon removal. We will do 100% renewables. We are going to need new technologies to keep the grid stable and reliable. In particular, we are going to need zero-carbon baseload technologies, technologies that run when you tell them to, versus intermittent. We will need technologies that generate zero-carbon electricity. It may be hydrogen or natural gas with carbon capture. Some talk about nuclear reactors, but we'll do a ton of renewables and pair them up with technologies to pull off the net zero aspiration. That's the difference between... and that, by the way, was little understood a year ago. I wanted Fred to help us. That was little understood on Capitol Hill a year ago. Widely accepted by many now. A big shift in understanding.

It's highly regional. These threats, obviously, California is just dealing with an intense mix of issues—fires, just incredibly difficult for the electric sector out there to deal with. The Texas event, I'll spend a minute on that. Frankly, that was an event that many of us have simply wondered when it's going to happen. For a couple of reasons. They had a cold weather scare a decade ago, and a lot of people told them, 'You better harden your systems for cold weather,' and they didn't. Much of the issues down there: gas wells freezing and power plants not conditioned for cold weather. They will have those now. You'll see that moving through the Texas legislature, but that was part of the issue. Another part of the issue was they had a deregulated market where they count on scarcity pricing to drive reliability investments. Many of us have seriously questioned that construct as well. And the $10,000 residential electric bills that people got was all a product of a deregulated market where marketers can pass through the price spike to homeowners. The price of electricity went from $30 to $9,000. You are getting a year's worth in a day at that rate. That was a mess, but not one that was not predicted and one I think they will finally come to recognize and deal with. As you look to other places, each place has its own unique risk. Hurricane-prone states, a lot of prediction of increased intensity of hurricanes. I think we are seeing that—more regularity and intensity. They will have to do things to adjust those. California, wildfires—not the only ones in the West who could deal with this over time. I would say we probably sit in Michigan with the least intensity of the issues around climate-driven adaptation. We are seeing some—certainly seeing an increase in warmth. You look over the past 30 years, and I often say to our people, the first 15 of those 30 become less relevant because the last 15 are increasingly warm. So, we are seeing warming, for sure, and we may be seeing some increase in the wind intensity of storms and therefore need to deal with the system for that. But I would say not like the hurricane-exposed or wildfire-exposed states are dealing with.

Gradually. People say to me, 'Give us enough time and we'll be North Carolina, and the UP will be like the Lower Peninsula, and we'll see population shifts.' I was on a call from a member of Congress from Florida on Wednesday, and he was wringing his hands about population exodus due to increasingly hot summers and people not wanting to be in states where there is such intense heat for so prolonged periods. You can see that in the West, where it's ideal. In Arizona, 115-degree days. You might hear people saying, 'That's enough of this.' We aren't counting on it any time soon, but it wouldn't surprise me that a long-term pattern could be population shifts with weather.

That's a good question. I would say, for starters, in electrifying to deal with the climate issue, the first thing will be transportation. So transportation has now taken over as the sector with the largest contribution to carbon emissions in the country. And I also think economically, right, it wasn't ten years ago, but electric vehicles are there in terms of commercial attractiveness and consumer readiness. That's why you see companies like GM saying, 'Give us 15 years and we won't be making anything but these.' And you look at our grid in 20 to 30 years, electric vehicles will take over. To do that is a big deal. Our sector is ready to take a vehicle electric. One of the reasons, the load comes across the year as opposed to concentrated in one period of the year. We'll plan for the increment of load, and it looks like by the mid-to-late 20s or 30s, we could have a load increase of 20-25% on taking on transportation. But we can handle that. You get to other sectors behind transportation and electricity. Behind that is home heating. Heating is eventually a big deal. It isn't as ready yet, and it's going to be more challenging. And I'll tell you why it's not as ready yet: because gas furnaces are a lot more efficient than cars. 95% efficient. Cars are 40% efficient. And natural gas has a lower carbon fuel than petroleum. When you put them together and look at what the grid can do, in parts of the country, it's a toss-up as to whether or not electric or gas makes a difference. But that will change over time. To get to net zero, we'll have to figure out commercial heating. Two tools, I think. One will be heat pumps. As it gets cleaner, there are big advantages, and when it gets to net zero, it's a zero-carbon way of heating. There is a challenge that comes with that. Heating is highly concentrated in a few months of the year. You get this big bulge in electric use. Our solar output in December, January, February, a small fraction of the summer, and our wind is the strongest in the fall or spring. We go through what is known as renewable droughts where we could go ten days with little renewable output. That seasonality is dealt with by storing 5 trillion cubic feet of natural gas beneath the surface of the country, here in Michigan and elsewhere in the country. That's pulled out in the winter and used for home heating. We are going to need something else that does that, and I don't think it will be batteries. Because when you do the math, the scale of battery investment it would take to replace the natural gas, it's off the charts. So, people talk about hydrogen as a potential replacement, and people talked for a period about natural gas with carbon capture, being able to zero out the carbon but contribute to storage and energy regeneration. But we'll need something to complement that to deal with the storage. We call it the seasonal storage issue. Batteries work pretty well to take energy from this evening to tomorrow. They aren't so good from taking it from November to December or January. We will need something else to handle that challenge. By the way, I don't see it as a threat or conflict for DTE. We just have to deal with it. As an infrastructure company, part of our job is to meet the needs of society and sustainability goals we need to go after. This will be a long-term journey. New technologies and new infrastructure, some may be repurposed. We might find pipelines carrying oxygen that used to carry natural gas. We'll figure it out as we go.

I think there will be some permanent shifts. You read every company is rethinking how they will use the office and office workers, and there isn't one CEO I know who thinks they will go back to anything like what it used to be. The typical employer may have an employee coming in two days a week, and that means three days less commuting. Some have to go to jobs that require you to be there, but for the 40% of Michigan employees that work in an office, they won't be traveling as much. The same for business travel. A lot of people have found they can get their business travel done on electronic devices. I used to fly all over the place meeting investors. We have done all of our meetings in formats like this, and it worked fine. So, that's going to affect business travel. I think those will be permanent changes for the better in terms of lower energy use. One thing in the opposite direction: people use their homes more. Energy use in homes has clearly risen. We continue to see it. Home energy use and demand is up. That's likely to be permanent, too.

So, I remember very clearly the evolution here. It was a little over a year ago, March 12th, I was on my last in-person business meeting. It was a board meeting. We had a handful of cases in Michigan, but the noise was beginning to rumble. I remember saying to the board, 'This feels like this will reshape everything in the year ahead.' It only took a couple of days and we had every employee at DTE who could be home was home. Days after that, the Michigan economy was shut down, essential businesses only. And I can remember, I was and still am chairman of Business Leaders for Michigan, thinking at the time, all of the former work, Business Leaders for Michigan is toast. Why don't we focus on that. The focus was to figure out how to be in business. We began to pull together CEOs, companies all over Michigan together, multi-nights a week calls to understand what do we do to keep our employees safe. We particularly focused on companies that had operations overseas in China, Italy, Spain. They had seen it a month or two ahead of us. I remember so clearly a conversation I had with an industry executive in Italy who said earlier, 'Do not underestimate this. Get anybody in a mask that is doing work around other people and do it fast.' As we started to get this input, we decided what we needed to do is put together workplace safety rules for COVID-19. And we began to design by industry sectors, one took offices, another manufacturing, another retail and so forth. And we developed safety protocols which were enshrined in regulation. But at the same time that was playing out, the hospitals in Detroit filled up to the top. I remember being on call with hospital executives that were running out of PPE and managing it by the hour. And in the middle of that, I remember thinking, how on earth are we going to find our way out of this intense dual, economic and health crisis. Because there was no playbook. It was at that point, I went to the governor and said it seems you would be well served to get the best advice you possibly can from business leaders, health care leaders, public health leaders, university leaders, anybody that can bring intelligence to this. We ought to pull together. It was a year ago, tomorrow, April 1st that she said yes, let's go. And we dove in with a team and began to think about what you asked in your question. And what became quickly, the risk varied by geography and industry. On geography, it was all about connection of people. We began to use cell phone data to show how people commuted or traveled and we used that to determine the regional dimensions of the pandemic. And we tore up our industry by workplace type and figured out how many people in each geography worked in workplaces, retail, outdoor work, manufacturing. The disease risk varies by workplace. The voice put us in touch with a range of experts who knew workplace risk and other risks and we could bring those two together. And we ended up ranking workplace type and geography by risk level. The risk was intense in Detroit, but not so intense in the Upper Peninsula and so forth. Outdoor work was incredibly different from working in a restaurant. In the end, we developed a system to stand the economy back up workplace by workplace. We started with outdoor work, small number of employees, but safe. And we went to construction and outdoor construction and worked our way through manufacturing and restaurants did curbside and eventually retail reopened. And we were developing protocols, safety protocols, everybody in a mask. What sort of screening might be done at the entrances and so forth. And I would just say that the first two months of that were probably more intense work than I ever had in my career. My wife accused me of being rooted to my chair, I was in it 14 hours a day, seven days a week. Once we got to May or June, things slowed down. We have remained active until just a few weeks ago when I went to the governor and said vaccinations are in full swing, maybe we should stand down. And she said, 'Why don't you stand by rather than stand down' because this virus might take another swing at us. That's the mode we are in now.

Unfortunately, we are in a race between vaccination and this disease because since we had that conversation with the governor, we have transitioned from a bottom five state in cases to the number one state in the nation in terms of cases per million. Michigan is tops in the nation. We are tops in the nation in terms of the COVID-19 variant presence as well. I had outreach yesterday from a couple of the hospital CEOs and one of them told me, 'My hospitalizations have tripled in the last month and half of them involve these variants and I'm seeing a lot of young people that are sick, really sick.' The good news, we have not seen deaths move the way they did to the cases. And I think the reason is America pushed hard. It became clear that all of the death risk was in 50 and above, especially 60 and above. You went from a 20% mortality rate to 0.01 as you got in the 20s and 30s. So it made so much sense to get our older citizens vaccinated. We have two-thirds of people 65 and above vaccinated. But only 17% of the state fully vaccinated and 27% got one shot. So we don't have anything like enough of the population vaccinated for immunity. Cases are running fast. I would tell people, do not drop your guard and do not toy with this thing as a young person. What these hospital executives are describing in terms of the symptoms are not nice. So, I would just say we have got, this disease is taking one last swing at us. We need to get through the vaccination process. Vaccinations are incredibly effective in protecting people from intense symptoms and proven have been good at breaking spread as well. We need to hurry and get through this.

I take it this means we are highly depending on foreign manufacturers in renewable resources. That has gotten a lot of discussions as a part of COVID-19. A lot of policy discussions in the circles I have been involved in and reassure our manufacturer, the intense cost pressures in solar, particularly, from China, have played into the upsurge in solar deployment in this country. But it's not lost on people who are becoming dependent on that. I think it's a really good question. I think there is an appetite to see a material portion of that reshored. Whether we will see that play through in policy as part of the infrastructure bills that are coming, I don't know, we'll have to see it. I think it's too early to say on that.

Well, that last question is a good one. Essential minerals, so I would say a couple of things, renewables and home-based renewables and then batteries, maybe I'll address all three. Renewables have gone from expensive to incredibly competitive over the past decade or 12 years. And in some parts of the country, you can incorporate them at no cost, but they can't do everything. In the Great Plains, wind is really cheap and you can do wind cheaply, you can displace the burning of coal in a power plant. Wind is competitive. Solar, very expensive. Relative to a decade ago, it isn't any more. The state of play in Michigan for large-scale renewables is we can bring them in at a healthy clip. We still have to manage the cost, but it is nothing like a decade ago. So much more competitive, so, I think we can get to a very substantial mix of renewables and do it economically as long as we take some time to do it. Home-based renewables, typically, home-based solar versus large-scale solar, there is a three-to-one price differential and that's a scaled economy. If you watch the construction of a large-scale project, you are laying out hundreds of megawatts in a relatively short window. When you watch home projects, each one is in some ways its own project with its own interconnection. As you watch it over time, pretty consistent pattern, three-to-one price difference. I think there is a role for home-based solar, but if we lean on it too heavily, it would cross the cost equation. Batteries, when you try to balance from high solar in the afternoon to higher usage in the evening, but they cannot play that role of taking energy over very long time frames from the summer into the intense months of the winter. It's simply way too much battery, especially when given what is going to happen to the auto sector. The person that asked the question is right, that much battery demand would take our precious minerals demand through the roof and we will find ourselves tied to places we don't want to be. We are going to have to complement them with things like hydrogen.

Going to a comment you made earlier, I would distinguish between 80% renewable to 80% clean which means zero carbon. I don't know we will ever be 80% renewable. I'm convinced we will be net zero carbon. But I think it will take other things to pull it off. Hydrogen, nuclear, combined with other things. Policy-wise, the one I like the most is a clean energy standard and it sets just an increasing bar for the percentage of energy production that is clean or zero carbon and the flip side of that coin is lower and lower carbon emission levels. The reason that is favored by the industry versus a carbon fee is that carbon fees, especially where they might be set by Congress, don't necessarily correlate to a known carbon reduction unless you know where to set it in terms of price to get the result that you want. That's one thing. But there is something more fundamental and that's in regulated companies like mine. They come from the way we use electricity. We need to stop using coal plants. We are constantly managing customer ratings and affordability, a carbon tax lays on top of these capital plans and increases costs. You kind of have to go with one or the other, either tax and let companies manage to that or put in place something like a clean energy standard. And I think for our industry, clean energy standard, driving lower and lower carbon emission levels is one that we, and frankly, Congress and the environmental community seem to be centering on. There are advocates for taxes for sure, but the discussion, the Clean Bill Act is a clean energy standard, a dominant bill in the House. Most of the discussion I had with senators is on the clean energy standard as well.

I think there is two questions there. One is rates and one is for low-income. One thing I would say especially for electricity, but also true for natural gas, you need to distinguish between rates and bills. What you will find, DTE has relatively high rates and relatively low bills. You say why is that, it's really a volume question. The lowest rates tend to be in the highest electricity usage states. Those are generally southern states. The reason why is because they have a whole lot more air conditioning than we do. Go to Houston, air conditioning two-thirds of the year and they tend to heat with electricity, because their electricity load is not as intense. You put it all together. The average home in Louisiana will consume twice the electricity that a home here in Michigan does. Obvious impacts on when you amortize across volume, but they have to pay for all of those units. Will you find the southern states have low rates, but high bills for homeowners and here in Michigan, we have high rates and low bills generally. Conversation with policymakers, I remember asking that question to our people, why are our rates so high relative to other states. When you pull it apart, it was driven by a couple of things, one was volume and the other was access to low-cost fuel. So, what about low-income, energy for the low-income. Really big issue. We were worried about it because of COVID-19. But it didn't end up being such a problem because there was so much federal assistance. Consumer spending went up, so it wasn't such, we thought it might be an issue during COVID-19. It did not turn out to be an intensifier, but we are always dealing with a segment of our community that have struggling to pay their bills. It is poverty and you tend to find the same group of people that struggle with food insecurity, and other things. One trying to expand the state programs that focus on assisting those individuals. By the way, huge increase in this $1.9 trillion stimulus plan passed. Big increase on energy assistance. That will be helpful. But just as important as the level of funds is the ability to access them. I have to tell you for a lot of our low-income citizens, to access these funds is enough to put them off from even trying. A lot of our efforts have been having days we call customer assistance days, low-income customers come down and sit down with a DTE employee and takes them through the 30 pages they may have to work through to get assistance. Fundamentally, we are trying to do away with the 30 pages and get it down to two to fundamentally simplify the process. I think in the current administration, we have someone that wants to get to that so someone that wants assistance can do it without the strain of hassle.

Maybe I'll handle the last one, hydrogen blend is something we are looking at evaluating. It won't come in one step, it will be blended in small volumes and greater volumes. When you get to a certain level, your systems have to be modified so they won't be brittle, but, yes, we are thinking about that, we are thinking about pilot-scale carbon capture storage projects, in fact we are doing it in California serving customers in one of our non-utility businesses. We are working with ethanol to capture carbon dioxide they produce and store it permanently underground. We are interested in working with those technologies, carbon capture and hydrogen and hydrogen blending on a smaller scale so we learn them and as they evolve, we'll be that much more knowledgeable. Concerning nuclear, I don't think the current technology is built in $10 billion projects over the better part of the decade or the future of nuclear. I think most people concluded we need a technology that could be deployed as a predictable cost and small-scale, something more like a manufacturing setting. Rather than go to a construction site and build this project. These are known as small modular reactors or SMRs, the whole generation ahead on safety features. The most recent large plants are ahead, but the small reactors take it even further. And I think if you look at today, can a small modular reactor compete with gas or renewables. The answer to that is no, when you get down the road and they ask, what zero-carbon firm emission source will compete, then they are competing with turbines that burn hydrogen and all of those are higher costs. It will be very important so I think it will be bit of a horse race to figure out what it is that will complement, will it be hydrogen or nuclear, small modular reactors make a resurgence. And I think the general mindset that you see in Congress and a lot of places is that we can't predict that right now. We need to create a policy regime that enables all of them to find their place and most effective technologies will win. And then, I think the questioner was right that nuclear has some PR issues that need to be overcome. That said, when you get inside of the environmental community, really, not necessarily publicly, but when they talk to you, they get the roles nuclear is playing and may need to play in zero-carbon. It does have that challenge, but, as we push into the zero-carbon future, people could have a role to play. We'll see which technology wins.