Morningstar, Inc. (MORN) Earnings Call Transcript & Summary

[Audio Gap] full festival, we have breakouts in the main stage. This next one will be another entertain and informative session. It's the Empire State strikes back, the new green energy super highway. And we're very fortunate to have Daniel Grunwald, who is the product manager in Power and Analytics at Morningstar here to give this presentation. Just a reminder in terms of some of the housekeeping items, you may ask questions to the Q&A widget at the bottom there. So please ask questions, and we'll hope to have a little bit of time. We're doing the end at 1:30 because that's where the next breakout sessions will start though. But with this, let me now turn it over to Dan and have him take it away in the Star Wars future here. So Dan, it's all yours.

Thank you, Paul, and good afternoon, everyone. And thank you, Platts, for hosting this event. And thank you, everyone, for joining. As Paul said, my name is Daniel Grunwald. I have over 8 years of energy industry experience. I started at Cargill, working from the back office to the trade desk. In the last couple of years, I've been working at Morningstar, primarily doing written research. But now I've really stepped into old product manager, doing more kind of data science and power analytics in our Morningstar commodities and energy space. And we started down kind of this new path the Morningstar as data analytics to really provide our customers with new insights with our data and not just doing our traditional data aggregation space. And so we already do things like doing custom curves, we do employee volatility calculations, which I actually just recoated earlier this year. And kind of most recently, what we've been really working with is our short-term 7-day forecast, which we work with the client, kind of working with demand response. And so we worked in collaboration with our Morningstar [ quant ] team, and we started actually in ERCOT, but I've been starting to expand to PJM, and we've started also recently to do MISO in New England for load. And so as the Morningstar way it is, we really like to work with a transparent methodology to make sure you understand kind of what our methods are. And again, we really work with tailored solutions, commodities and energy space to fit your needs. So if you're interested with a demo or anything, please reach out. But without further ado, I really want to look and with the Star Wars analogy, get into New York and the super highway. And really, this is born out of, obviously, the Climate Leadership and Community Protection Act that New York initiated a couple of years ago. And so to really get into it, what I kind of want to get into over kind of the next 25 minutes or so is to look at kind of really in more of the 5- to 10-year space. The demand trends we've seen as well as, again, kind of a Morningstar forecast for the next 5 or 10 years as well as look at some of the transmission projects coming online and how that's going to change the kind of shape of congestion and the ability of the supply shifts, we're all looking at happening as well as, again, state goals around the supply shift. So as we look into that, just a quick high-level kind of policy backdrop before we get into demand. New York Metro has a number of things shifting demand: a, it's ranked #1 in state and local taxes, which is driving people away. We've seen since around 2018, a drop, and I believe since around 2018, we've seen over about $1.5 million or so population decrease in kind of the New York area. But as well, we're seeing retirements. We had the snowbird effect, but even so with taxes and everything else, the same permanent migrations to Florida. And there's just the sexy drop of Silicon Valley is now competing with Wall Street as far as kind of young jobs and kind of the data science and the new money space. So we're seeing that drop from New York affecting demand. But as well, again, we're seeing this massive shift in the supply side as well. So we're seeing the state and city bands, fuel, oils, 6 and 4, obviously, the COPA pushing for renewables. Obviously, the MOPR and the PJM changes that are happening with FERC as well as some of the buyer side mitigation issues in New York. And as has been mentioned in prior kind of meetings, the interconnection costs and the regulatory cost or really the red tape tax that those incur really need to be dealt with over the next coming years. So -- but to look at the load aspect of this though first, we can look at the last 10 years. Kind of a high-level view, and we think it's a really important thing to look at shape over time. So again, we've kind of shown this. And we can see, as we all kind of know, the last 10 years has been pretty flat. But since around 2016, we've started to see some demand destruction, and we've seen again with weather normalized from flats. But if we apply this to, we've seen demand destruction, and it's really started to come down over the last few years. So assuming into those last few years, what are really some of the drivers happening we see behind the meter, so coming into play. Again, [Audio Gap] apply this too, and we've seen demand destruction, and it's really started to come down over the last few years. So assuming [Audio Gap] was well on track to be hit, and we're seeing that continued kind of push closer to kind of say, the caiso duck curve happening over the next 10 years. But as well, there's a huge energy efficiency push. And again, since it was in 2018, the goals really are looking at around equivalent of 1,500 to 2,000 gigawatt hours of efficiency reductions per year. That adds up being around 150 to 200 megawatts hourly. And so that's going to be another driver of this. But obviously, we saw the COVID effect as well. That's also done this. And if we look at kind of the 2018 and some of the recent year trended effects versus COVID-19 effects, we can see that, again, we had that behind-the-meter effect. And so if you look at the chart, we can really see that the delta effects here of 2019 to 20 -- or 2018 to 2019, we're actually very similar to 2019 to 2020 minus, again, these COVID effects. So if we look at the trended reductions, we can kind of back into what the likely effects were being driven behind the meter as well as some of these energy efficiency and population reductions. And so again, that residual, we can really see what we saw last year. You heard me talk on ERCOT. Again, it's that snow, the effect where we're seeing that reduced morning peak load as well as a slight dip in the evening peak as we see just some of the commercial versus residential shift happening. But we also see divisional impact as well. But the concentrations are also happening more downstate, upstate being a little bit flatter. So when we see that, a, some of the concentrations of energy efficiency are, obviously, having an impact in zone J as well, but as well, again, that regional tax from New York City is also having that effect. And as we really look at the transmission, the main story is always the upstate/downstate New York. MISO says this all the time, the kind of story of 2 different states. And again, that flow is going to be a major impact. And so this is one of those balancing effects that will help improve things. If this continues to happen as downstate versus upstate differential kind of starts to balance out at least helps in that effect. But, a, looking into a bit of a forecast, we see a lot of demand destruction, and we see a lot of these things continue. So again, we see behind-the-meter continuing. So again, you see if we extrapolate that out with the 2030, that has a significant good factor as well as energy efficiency disruption. But I think as Roger said in one of the prior panels here, EV, once people get to it, they're going to love it. And so we also see this, too. Right now, there's only about, say, 69,000 megawatts hour EVs on the road. But we're really just shifting from the kind of the innovator -- sorry, if we look at the production -- adoption curve, we're really just moving from the innovator to the early adopter. And in the next decade, we're going to see that early adopter moving to the early majority. And so again, some targets are really looking at about 1 million to 2 million EVs on the road with, I think, New York having somewhere around 11 overall vehicles on the road right now. So that will be a decent dent. Right now, it's not there, but we do see that increased demand coming. And again, that really has a positive impact on differentiating the shape of our curves. As well, we've talked about electrification. We included that in our forecast. But again, there's a lot of downward pressure on how much that electrification is going to add and where it's coming from. Is it coming from EV electrification, heating and elsewhere? So there is a lot of that impact. And one of the big things that's really hard to forecast for right now. And we're seeing these trended things so you can do longer-term impacts on that, but we see these increasing weather events, cyclone events. And so again, as those tails kind of become more prevalent or more somewhat often that's going to be a huge demand factor and really increase some spreads with more ambient demands being lower, yet again, for reliability needs at max peak, given whatever hour that is actually potentially increasing over time, which again makes this whole complexity of the shape over the next 10, 20 years that much more complex to deal with. But yes, looking at the actual energy highway. So right now, we can look at some of the main flow gates. And there's a number of congestion constraints happening. Right now, we see Moses-Adirondack constraints happening with wind curtailments up in the north: a, I remember trading zone A. And again, we have that Niagara congestion, a, some improvements have been made with the coal retirements. But again, we're going to see that, but we see an old highway system. In large part, the system has really not been that with, and we haven't looked at infrastructure improvements in quite some time. In fact, again, looking at 30 years of kind of desert with any major projects. In fact, some of the projects are looking to replace, 60- to 80-year old transmission lines. So we're going to see now that this has picked up more and more transmission upgrade. And so we can see a few highlighted ones here with the New York Energy solution, the Moses-Adirondack and the northern New York transmission projects all coming online to help kind of, again, alleviate that North wind convention as well as some of the Empire State line helping in the West. And we, again, see some secondary projects already being announced potentially with the RISE Power and what, CatCo's renewable connector, about another 1,200 megawatts by 2026. We still see kind of fights over the Champlain Hudson Power Express, which is looking to try and be online by 2025. So a lot of fun and interesting projects that would really change the shape of this. And I think, again, when we think about the cost and the capital expenditures of all this, we look at the real-time cost of using congestion. And Erica is one of the higher congestion components, if we look at zone J here. The OMP has been reducing with the supply shifts and some of the bill reductions. But at the same time, we're looking at 15% to 20% congestion component of that OMP. When you look at, say, a PJM being in 2% to 3%, and New England being fairly negligible. Again, this is a fairly costly language and so of not having more throughput in that kind of upstate to downstate capacity. And we've seen EVA looking to promise at least a few hundred million per year over the next decade and other transmission projects, which is really going to change the shape of New York. And again, looking at some of these congestion how it factors. In the recent trends we've seen it mostly off-peak, coming again from some of that wind upstate as well where we're seeing the majority of the hours of congestion, with the strength really being still more on-peak or flattening in the last couple of years. As these projects kind of come up [Audio Gap] line though, we're going to see a reduction in that off-peak and it's really going to become potentially more on-peak-oriented. But we can see just a massive shift in, again, from the New York estimates of that congestion component. With the Indian 0.3 retirement here just in April, we've already seen some congestion come from that. But again, we'll see in 2021 here, the considerable congestion pattern that kind of really offsets any of even the low impacts that we've seen. But again, after 2025, without any further transmission, we see an increase of congestion coming back into the system without a second round of transmission to handle the increased upstate wind and solar build-out that's coming online. And again, even looking at the [ Caris ] report from New York, I would say, to some degree, the generation forecast, they implemented in this forecast picture really still had a fairly moderate generation growth upstate. Which means if we see actually that further growth and build-out, this congestion component without further transmission upgrades is likely undershooting the increased congestion again into 2030. So when we look at kind of some of these new improvements, we see increased flow gates, where, again, that Moses South Corridor is improved, [indiscernible] East is improved. A -- to really get to the super highway, though, we really focus is going to need to be done in that downstate kind of IJK Corridor with the offshore wind and to have a full super highway from really zone A to K. But as well, we're going to even need to further that Central East or the total East to West Corridor, for, again, this increased build-out, which is, again, largely centering in the upstate balance. So if we take a look at the overall balancing, there's going to be a lot of balancing effects to kind of account for. And so we see a number of things improving that balance over the next few years as well as a handful of things decreasing that balance. So again, we've seen the load is likely going to help improve bounds. If you see continued more destruction downstate versus upstate. A, we see a decreased balance from the [ peaker ] plants, and we'll speak to some of the nitrogen oxide that is coming to place that will push some of that to retirement, but we have some battery storage coming online, downstate. It's help alleviate that and cover some of that peaking load. But again, we have the upgraded transmission improving the balance, and then we have the generation mix. We have offshore wind downstate helping and we have increased hydro and upstate land and solar and wind are decreasing. So again, it's going to be important to kind of get that supply and demand upstate versus downstate, understood and any modeling. And again, as we take a look at here. So what is this really new transmission capability enable us to do? A, again, part of it, and it's part and parcel of the overall thing goals. As we go to renewables, obviously, we need the transmission to pull this all in and again, gain those regional risk factors that are inherent in some of the reliability from renewables, being Sony in one spot and not Sony in the other. And again, with a wind and solar potential largely being upstate and the land and space being upstate. But again, New York has slated a number of goals as well as roles that are going to be coming online. Obviously, we have the GHG rules, the nitrogen oxide being the next kind of one, we've already seen a large kind of push out of coal that happened earlier. But we'll see again some of these fuel oil kind of peakers, retire, we've seen about, what, 3,000 megawatts or so that will impact. Part of that will be done with batteries as well as we are -- see a mix of some compliance plans coming to place to keep them online. And we see this again with nat gas, and we've seen it with other presentations. As well, and we agree with that, that hydrogen is part of that solution, and there's going to be battery, and there's going to be an interesting mix of investments and new technology that is going to come into play here. But, a, the big one and the big name is a 70/30 for New York, a 70% of renewables by 2030. And so that's going to take a mix of hydro, wind, solar and batteries to achieve. And again, with behind-the-meter solar, it's looking on track to happen, at least really be close to the mark. But we also see, again, energy efficiencies being a huge part of that as well with large got out of that. And then again, with the buy and administration, we've seen, again, some of those first offshore wind approval is really coming into play. And we see kind of somewhat of a domino effect potentially happening with kind of some of the next stages of all the gigawatts that we see in offshore wind coming. So some fun exciting time is coming into play. And what does that look like for the New York generation stack? So right now, we still have a fairly traditional stack overall, especially downstate, largely being nat gas-oriented or possibly learned to upstate still being nuclear and winded hydro. But as we see 2025, a, we see some utility solar actually come into the for and actually have some sizable megawatts as well as we have some of the first offshore and battery starting to place downstate. And starting to budge that heavily predominantly fossil fuel downstate generation mix. And as we approach 2030, we see even further build-out that offshore win, the start of potentially some solely build-out downstate as well as upstate. And we see largely 2030 upstate is going to be largely taken over by renewables. But what the dispatch though really shifts is that you're going to see that huge dispatch coming from upstate to downstate with cheaper cast marginal units upstate wanting to still hit the biggest energy sync in the country of New York. And so we can see that, that stack shift really increases the renewables batteries win and increases that stack out. But again, unless we see any other technology changes, we still see, again, that nat gas still needing to be that imbalanced factor. And so again, I think, we've heard it from Bill Berg. We think shape is a really important aspect to take into account, not just peak hour anymore. But kind of really understanding the capacity factors for each hour of the day and how that looks. And so again, we can take a look at the shape now. The shape now really looks like a pretty additional stack with nuclear, hydro and some imports. Really kind of largely taking the kind of base load with then, again, that TC taking some of that, but nat gas overall being load-following and taking that intermediate load. But we do start seeing already now just some peak shaving and some movement from wind and solar. And even, again, obviously, we have some storage capacity already in New York. That's shifting some of those peak load hours. As we get to 2025, though, we start seeing some decently impactful solar and wind build-out where nat gas is really going to mean to start following that net load factor more and more and more as those impacts really start being felt. And so you see that in 2025 behind-the-meter solar as well as utility solar and offshore and onshore wind start reshaping the net load factor and pushing the nat gas and this higher kind of fuel and offer price out of the stack a little bit. And as we get to 2030, yes, in summer, in winter, we still have a decent amount of nat gas, but it's really going to become seasonally adjusted where in the shoulder months, when we see even lower, you could see, again, like we've seen in California or even SVP now in some places, where it's 95% or 100% wind and renewable and optic hours, and nat gas is completely pushed. And you're going to see some of these CC plants again, having to ramp and/or move around to find hours of generation. So it will be a really interesting and a far more diverse mix of generation over the 2030 profile. So as we kind of look beyond though, just some kind of final ideas, and especially as we look at that last kind of 30% to 100%, there really is some R&D and investment rates going on here. We see kind of hydrogen again fighting for that place to keep nat gas, and there's tons of expertise that can piggyback on to and/or even do a hybrid technology where again, they can use the transportation expertise and really come into play and maintain a presence there. But there's further risk factors of kind of even behind-the-meter wind generation coming into cycle even more behind-the-meter generation and take that away from the wholesale space. But again, if we don't come in with these, we can see even batteries, technology come around to be longer lasting. So there's all kinds of interesting ideas. I think a lot of the technology is likely on the board. It's really just trying to find the best fits, the lowest cost. And so we'll find out what that look -- space looks like. So I hope you guys learned something, and I think the key takeaways I hope you kind of really get it is that, again, energy efficiency and behind-the-meter already look like they're going to be pretty decently demand destruction -- demand destructive. I think transmission supply factors is still, at least right now, look like they're going to outweigh any real load factors, especially when it comes to the balance over the next few years. That Indian point is going to increase in the short-term congestion price issues. But, a, we have a lot of things coming into play. So if you're not paying attention to that, again, we see that final release congestion likely collapsing into 2025. As well, though, we have sizable amounts of onshore, offshore and solar wind in the generation queue. But again, we've seen with the Dunkirk kind of issues and others, we see a huge interconnection queue issue and until that's alleviated, a lot of these projects are going to see a lot of cost. And with fix kind of beneficiary pays, we could see really changes happening there to increase the speed and reduce the cost of that interconnection cost. And so we see all these initiatives really already helping us drive that renewable build-out, but we'll see what the hurdles and risks due to delays and reduced build-outs. So I think, with that, we'll go to QA. Yes, if you have any questions, please reach out.

Thank you very much, Dan. I appreciate that. That was a very interesting presentation. We do have a question from the audience here. And it has to do with, you were talking about transmission upgrades and how that will bring congestion down, how it will be facilitating the different wind and solar generation, et cetera. But there's a sense by people to that, well, the communities in New York aren't going to be too eager to approve transmission lines going through their backyard. So what's your thought on that development of communities permitting the transmission system to build-out? And how that may be a risk?

Yes. I think kind of New York and New England has really been plagued by, I guess, as the NIMBY effect. They really -- there's been a lot of pushback on that. But in some of this -- some of the cases is just upgrading and really the -- some of this is really kind of brownfield projects where they're taking, again, current corridors and actually reducing the amount of transmission lines. So the more that can happen, the better. And again, when it comes to cost reductions, at some point, we're seeing some of these projects come online. So we're going to see cost reductions. And so again, they can see some of that. That's all for the better. So yes, I think, there's definitely pushback, I think, especially with some of the Hydro-Québec lines. We've seen a lot of pushback from regulatory space there, especially, frankly, as some of the generator just want to protect some of their price premiums now and not bringing that generation, but we'll see. But yes, there's definitely a pushback there.

Understood, Dan. Thanks for the response. Let me read this next question from the audience to you then. With the significant alleviation of congestion due to shifting mode, offshore wind build-out and transmission upgrades, what do you see as impacts to the capacity market, in ROS? GHI and New York City?

Yes, I think capacity markets there are going to be interesting. And I think it really comes down to a weather effect for me. As we see these reduced loads, and again, the intermittent renewables, capacity markets are going to be interesting because we could see reduced energy prices, but at the same time as we've stressed the liability question, I think over the next 10 years, you could start seeing, again, some increased capacity pricing to really maintain some of the reliability generation needed as those things emerge, the ambient average load kind of being lower with the peak load still staying or maintaining kind of current levels. And so that divergence is going to be an interesting challenge, I think, for the icell end markets to handle.

And then maybe one last question here, which is on one of your slides, Slide 23, to be explicit. It showed a reduction in hydro imports to near 0 in 2025 beyond both. Why is that?

I have to take a look at that. But it might be, but I can take a look at that site and get back to them on that.

Okay. Thank you. So you'll be able to maybe respond afterwards, et cetera. Maybe it's the Canadians that we're using so much more electricity, we aren't able to send anything down to the U.S. At any rate, thank you very much, Dan. Appreciate it. We're almost here to 1:30, where basically now you can shift over. Go back into the auditorium, everyone, and you can pick questions you want. Again, a session that you don't choose to attend, you can at least see on video app towards up until June 30. So thank you, and I'll meet you all back here 2:50 at the main stage. Again, Dan, thanks for your presentation. Very informative.

Thank you.