Zach Dell - Powering the Future - [Invest Like the Best, EP.434]

So, Zach, when we first started talking about everything that you're building and doing, and your whole background, it reminded me of this book. I think the book was called The Grid, if I'm not mistaken, and it's one of these books kind of like The Box, which teaches you about shipping containers, which sounds so boring. Then you dig in, and you realize this thing is responsible for so much innovation and infrastructure in the world. I knew nothing about it, and I'm embarrassed and now interested.

The Grid feels like something similar. Anyone listening is like, “Oh, yeah, the grid. I know the grid's important.” I would love to actually just begin our conversation with you teaching me and us everything you've learned about this thing that powers our whole life and world—why it's so important, but also what it is, literally, because I think we think of it as this thing that brings us power, but we don't really know what it actually is. So maybe just start at the highest level. There's this interesting thing out there everyone's heard of, and no one knows how it works. Explain it to us.

1. The Grid Is Aging

The grid is one of the most interesting machines in the world. It is probably the most complicated machine ever built by humans. It's a little over 100 years old, so it's not actually that old, and it is something that's out of sight and out of mind for most people until it breaks. It's a real-time supply-and-demand machine that is held together by a series of participants, technologies, and regulatory bodies.

That sounds a lot more complicated than it actually is. So really, what it is is 3 grids in the U.S.: the Eastern Interconnect, the Western Interconnect, and then ERCOT, which is primarily in the state of Texas. The Eastern and Western Interconnects are split by the Rockies, and what you have is 3 main components. You have generation, so where power is created: wind farms, solar farms, gas peaker plants, coal plants, hydroelectric, geothermal, and so on.

You have transmission, so high-voltage lines that move power across long distances, and you have distribution, lower-voltage lines that move power at the neighborhood level. In terms of scale, there are on the order of hundreds of thousands of miles of transmission lines and millions of miles of distribution lines. I'm definitely going to get this fact wrong, but it's something like, if you were to string all the distribution and transmission lines together, you'd be able to go to the Moon and back a number of times. So it's just this massive network of infrastructure.

The regulatory component is a big piece here. In about 70% of the country, you have vertically integrated utilities where the generation, transmission, and distribution are all owned and operated by one company, an investor-owned utility. Then you have them broken out into service territories, and it's not exactly obvious. Some states have multiple investor-owned utilities. Some states have municipally owned utilities or what are called cooperatives, or co-ops. There's a bunch of interesting history, by the way, to how all these things came together and the sequencing of them.

But the grid is a real-time machine. There's effectively no storage on the grid. That's changing, and we're going to talk about some of that today. But it's an always-on, real-time, safety-critical machine that's unfortunately not sized for modern power demand. It's really not sized for where power demand is going. Part of why Base exists is to help scale this infrastructure to meet the power demand that we're seeing today and what we think we're going to see in the future.

I'm very grateful for the history and the companies and the people that have come before us to build out this infrastructure, and it's really been the backbone of the American economy. If you look at the turn of the century, in the early 1900s, less than 5% of people had power in their homes. That changed dramatically through the '30s and the '40s, and then the New Deal brought a bunch of electricity infrastructure to the country. The Tennessee Valley Authority and the Hoover Dam were all products of the New Deal.

Then, into the '50s, '60s, '70s, '80s, and '90s, you had the build-out of electricity infrastructure across the country. What's really interesting is the deregulation that we saw across the country in that time period—the airlines, telecommunications industry, and trucking industry. The electricity industry didn't really see that until the late '90s, and California was one of the first states to start to deregulate in the late '90s.

Very quickly, the Enron situation happened, where you had a number of market participants manipulate power prices in California, and that put a real quick stop to deregulation across the country. Now, Texas ended up carrying the torch and deregulating its power grid entirely. So now what you have is Texas as this laboratory for energy innovation.

What we see now is that Texas is the leader in wind and solar and, broadly, energy technology in the country. It also happens to be in the middle of the Sun Belt, in the middle of the wind corridor, and so geographically it's a very good place for those assets. But the competitive dynamics in that market have led to a bunch of innovation in technology. That's a big reason why we're based here.

I'd love you to do something similar to what you just did for what I'll call the physical and historical piece of this. It's the 3 components; it's broken into these things. We can all visualize that—the wires going to the Moon and back—and do it for the flow of dollars, and talk about the regulatory history here. I think that's a key part of this.

Utilities that are investor-owned have weird quirks. They've got limits on the returns on equity. They've got all this strange stuff that people may not know about. But if I think about it, there's this big physical infrastructure I can kind of imagine in my mind. There's a dollar cost and value to the power that gets transmitted through this system to my house or my office or whatever. I suspect that people haven't thought too deeply about this.

So talk about the same system, but focused on the flow of dollars and returns, I guess, or ownership.

2. Utilities Earn On CapEx

We'll start with the power bill. Your power bill—and this obviously varies by geography, and I'm going to oversimplify here—is roughly half the cost to generate the power and half the cost to move the power. We talked about how there's a real-time system, so you have to get power from where it's generated to where it's consumed in real time.

The cost of moving power across the transmission grid and the distribution grid has gone up really significantly in the last couple decades, primarily because this infrastructure is really aging. The way that this infrastructure is built out and upgraded in the regulated utility markets is that utilities will basically propose CapEx to their public utility commission, which then gets added into their rate base.

So if I'm a utility and I want to build out infrastructure for transmission or distribution, I say, “Hey, I want to go build X.” The PUC approves it, and then X gets added into my rate base. That number is divided by the amount of ratepayers or customers, and that is what you pay on a per-kilowatt-hour basis for electricity.

What you have is this incentive for the utilities to build, not to innovate, because they're actually incentivized not to innovate. If they show up to the PUC with some kind of new technology that's unproven, which is the definition of innovation, the PUC says, “Well, that's not a very good use of dollars, and that's too risky, and we're not going to approve that.”

What you have is this incentive to build, where you're earning a rate of return—a regulated rate of return, return on equity—on the CapEx that you deploy. The more CapEx you deploy, the more return you generate for the shareholders, and so you've just seen this massive growth in rate bases, but conversely, in electricity prices due to this incentive structure.

In terms of where the profit pools sit on the regulated utility side, you have this return-on-equity concept and rate-base concept, and then you have the IPPs and the generators. These are really a function of the deregulated parts of the market, but you also have IPPs in regulated parts of the market that are able to sell power to the utilities.

This is a supply-and-demand game. You build a gas plant, you build a solar farm, you build a wind farm, and you're bidding that capacity into the wholesale markets. There's really 2 parts of the wholesale markets. There's the real-time spot market, and then there's the day-ahead market. There's the futures market.

The objective for an energy developer is to generate power at the lowest cost possible. An electron is an electron. There are no special electrons, so my electron and your electron are priced in the same way. It's a cost game.

When you talk about different forms of energy generation—wind, solar, natural gas, coal, nuclear, geothermal, hydroelectric, et cetera—really, what it comes down to is cost. You hear in the industry that it's referred to as levelized cost of energy, or LCOE. That is the core metric. The lower the cost that you can generate an electron, the higher your returns as a developer.

Then there's maybe 1 more component, which is retail electricity. In the deregulated parts of the market, the transmission and distribution utilities that run the poles and the wires are not allowed to own generation, and they're not allowed to own retail.

You have pure-play generators—wind farms, solar farms, gas plants. You have pure-play retailers, which are really just energy brokers. They're buying wholesale power, marking it up, and selling it at retail.

By the way, those businesses are primarily sales- and marketing-led. They're kind of like hedging energy-trading businesses. There's no technology or innovation. They basically have a marketing function, a support function, and a risk-management function.

There's a checkered history of those businesses doing really well, doing really poorly, going out of business when they take too much risk, and that kind of thing. They're notoriously not very good businesses. They're 10% to 20% gross margin and not all that profitable, although they can be quite cash generative, given their low operating burden.

Then you have what are called gentailers. People probably know of Vistra, NRG, Constellation, and Calpine, and these are some of the more scaled and publicly owned gentailers. They own generation and retail.

Really, what that means is they have a long book and they have a short book. When you sell retail power, you're taking a short position. You're saying, “I will sell you, Patrick, power at 10 cents a kilowatt-hour no matter what.” If power goes to 20 cents, I'm taking a bath. If power goes to 5 cents, I'm jumping for joy.

Generation is a long position. You own power, and if the price goes up, you're really happy. If the price goes down, you're really sad. The gentailer business is more hedged, it's more diversified, and that's been a strong business model. You can see that in the stock prices of NRG, Vistra, et cetera.

Maybe say 1 click more about—you've said regulated, deregulated—Texas is this unique innovation and experimental ground. What was the literal regulation that changed in the late 1990s? Give us the before, the after, and the present state.

3. Texas Became An Energy Laboratory

In Texas, it was the early 2000s, and the Public Utility Commission basically said, “Okay, transmission and distribution are going to be owned by the utilities.” They're going to be what's called TDSPs, transmission and distribution service providers. They're not allowed to own generation. They're not allowed to own retail.

They are going to operate like a traditional investor-owned utility, so they build infrastructure and earn a rate of return on that CapEx. They're not going to own generation assets, and they're not going to be able to sell retail power.

Now, it's worth mentioning that, first of all, deregulation is kind of a misnomer. The energy space in Texas is highly regulated. There is this market-structure dynamic that creates competition in Texas, and that's really the better way to frame it.

It's also worth mentioning that, in Texas, 80% of the market is this competitive market, and 20% is still regulated. I live in Austin. I'm here in our office in Austin, and we're in Austin Energy territory. We buy our power from Austin Energy, and we don't have a choice.

If you live in San Antonio, you probably are a customer of CPS Energy. They're another municipally owned utility. Across Texas, you have a bunch of co-ops like Bluebonnet, Pedernales, Bandera Electric, and Guadalupe Valley Electric Co-op that are member-owned co-ops.

This is really a relic of the period of deregulation, where, in the early 2000s, the PUC came in and said, “Okay, we're going to create retail choice. We're going to create energy competition in most of the state, but not all of the state.”

The answer to why not all of the state is probably something I don't fully understand, but I think it's politically motivated for the most part. A lot of it, frankly, is that many of the geographies where these co-ops exist are rural. You kind of needed this community-driven effort to build out electricity infrastructure, and that's why they're member-owned. That's why they're cooperatives.

In 80% of the state, you have this deregulated construct where you have utilities like Oncor, CenterPoint, TNMP, and AEP that manage the poles and wires. They charge everyone in a certain rate class the same rate based on their rate structure, and they earn a regulated rate of return on their CapEx.

In those same areas, you have generators, retailers, and what are considered gentailers, which do both sides. In about 20% of Texas, you have vertically integrated municipally owned utilities, or MOUs, and co-ops. Those look more akin to the investor-owned utilities in the rest of the country.

Maybe we could take 1 step back now, having described the physical and dollar infrastructure of the grid, and talk about why this is so interesting and important in the first place.

Everyone's heard this phrase, “Energy too cheap to meter.” In the AI world, this has become popular again because maybe we're also getting some form of intelligence that's too cheap to meter. The idea is that basically any human progress—the core input elements are energy, the ability to move stuff and do stuff, and design intelligence.

These are 2 very big concepts that it seems like, if humanity's able to produce more cheap, abundant energy and intelligence, a lot of cool things are going to happen. That seems to be what's happening.

Talk about the energy side of that equation. I don't want to take for granted how important energy is to our world. The fact is, like you said, it's only been around for a couple hundred years. It's a fairly novel thing in human history, and we obviously have seen the economic explosion on the back of that.

Give us that perspective on this whole thing: what energy does, why it's so important, what it's historically been used for, and then, of course, where that's going to go in your mind.

4. Energy Drives Human Prosperity

There's a chart I imagine many people have seen that plots energy consumption per capita with GDP per capita, and it is 1 of the strongest correlations in economics. There is no such thing as an energy-rich, poor country. Energy abundance and human prosperity are just inextricably linked.

I think that realization was part of why I was taken by the energy industry as a college student and has gotten me so excited to work in this space. One way to think about this is that the viability of certain industries is defined by the cost of electricity.

Once you hit a certain cost of power, you're able to do things you previously were not able to do. For example, desalination is very expensive unless you have access to cheap power. There are tons of examples of this in heavy machining, manufacturing, and industrial use cases where the thing didn't make sense before power was cheap enough to make the math pencil.

Anything that's energy-intensive—the lower the cost of the electricity, the higher the returns of that activity. Lowering the cost of power at the micro level, at the home level, is a massive benefit to homeowners and people who are trying to make ends meet. They think about buying their groceries and paying their electricity bill in kind of the same way.

Also, at the economic level, it unlocks new technology. Take AI, for example. In a world where power prices just continue to go up, the cost to compute continues to go up linearly with those increases. In a world where the cost of power goes down, the cost to compute goes down too, and that allows us to do things with these models that we wouldn't be able to do if those costs were to only increase.

We are currently in a regime of increasing electricity prices, and those prices have been going up really rapidly, particularly over the last 2 decades, which is quite concerning. If you look to China, I think we all understand the dynamic there with regard to the race toward AGI or ASI, or however you want to define it. They’re building incredible amounts of electricity infrastructure to drive the cost of power down, and that, of course, drives their cost of compute down.

So if we don’t work maniacally to build out the infrastructure in this country and drive the cost of electricity down, we’re going to lose the race in AI. But we’re also going to lose the race in quantum, biology, and the next couple of areas of innovation that are inevitably energy-consumptive.

If you think about the 2 chapters here, just to massively oversimplify, there are some of these things you just mentioned that seem to be putting a kink in the normal curve of demand for this stuff. Historically, if you had a pie chart, what have been the major components of power use?

We can talk about sources and uses. For a long time, coal, nuclear, and natural gas were the sources of power in the US. That has shifted in the last couple of decades, first with wind, mostly subsidy-driven, and then solar, at first subsidy-driven. Now, net of subsidies, solar is the lowest-cost marginal source of power.

That’s geographically defined, to be clear, and I think this is a very important point to make: energy is a geographically defined problem. There are certain parts of the country where wind and solar make a ton of sense. It’s very windy, or it’s very sunny. There are other parts of the country where they don’t make any sense at all.

There are also parts of the country where things like geothermal and hydroelectric make a lot of sense, and other parts of the country where they don’t. It’s more nuanced than saying solar is the cheapest form of power on the planet. I happen to believe that will be the case over the next couple of decades in more of the planet than it is today, based on where the cost curves are going.

But back to your question, most energy use in the US is heavy industry, manufacturing, machining, and industrial use cases broadly. Over the last few decades, you’ve had the build-out of the electrification of the transportation industry, which has not really made a significant dent in energy consumption. It’s certainly starting to, and then in the last couple of years, you’ve had the build-out of computing infrastructure, which has started to add to that stacked bar chart of energy consumption.

A lot of the consumption, historically and today, is still industrial use cases, home HVAC, and commercial HVAC as well. If you look at a state like Texas, which has pretty volatile weather in the winters and the summers, a lot of the swings in power prices are due to home HVAC.

Historically, it’s been industrial use cases, heating and cooling at the home level, and heating and cooling at the commercial level. Over the last couple of years, that has started to transition to the electrification of transportation and then the build-out of computing infrastructure.

What do you think it looks like in 5 to 10 years?

Unfortunately, the answer to that is dependent on what we do with regard to energy infrastructure and technology. If the price of power continues to go up at the rate it’s been increasing over the last decade, we’re going to use a lot less power than if the price of power goes down or goes up at a slower rate. It’s a supply-and-demand market, and there’s going to be some level of price-signal response.

My view is that we’re really early in the electrification story. If you go to a dinner party in the US in a major city—New York, Chicago, LA, San Francisco, or Austin—and ask a group of 10 people, “If you guys had to guess what percent of new cars sold this year will be electric?” most people will guess 20 percent, 30 percent, or 40 percent. The real answer is 7 percent. In Europe, it’s closer to 25 or 30 percent, and in China, it’s upwards of that.

My view is that that number is going to go from 7 percent to 30 percent to 50 percent over the next 5 to 10 years. That’s going to create an incredible amount of stress on the power grid. Things that we talk about less than consumer transportation are long-haul trucking, and you see the Tesla Semi and other companies moving into that space, some more successfully than others.

I think that’s going to drive a lot of demand for electricity. Then the build-out of AI compute infrastructure is real, and it’s here. You can see it in the interconnection queues. You can see it in the statements of the publicly traded companies talking about the partnerships they’re announcing. You see Microsoft and Three Mile Island. You see Oklo and some of the partnerships they’re announcing. Obviously, the CoreWeave IPO is topical. Companies like Crusoe are raising a lot of capital.

So this build-out of infrastructure is coming. You can talk about model training and inference, the difference between those workloads, and how much electricity they consume, but I don’t have a crystal ball for what electricity demand is going to do. I think if you look at the last 50 years, you’ll see electricity demand has grown at roughly a 2 percent CAGR.

That’s moved around a lot. The growth between 1900 and 1930 was extremely high, and then the Depression stunted that growth. The New Deal brought it back, and then we had more growth in the ’40s, ’50s, and ’60s. Things slowed down a little bit in the ’80s and ’90s, and we’ve gone back to growth in the last decade.

But it’s been roughly a 2 percent CAGR over the last 50 years. I think it’s broadly consensus that that CAGR is going to go from 2 percent to 10 percent. It could be much higher than that. At the scale we’re talking about, that has massive implications for the economy, and we’re going to have to do a lot on the engineering side with regard to the power grid to enable that growth.

That’s a massive change, especially off a huge base. A 10 percent rate isn’t high, but the absolute amount of marginal new demand just in electrons is crazy. I don’t know the consensus super well, but that’s mostly from transportation and data centers. Are those the 2 biggest contributors to that?

That’s right. You’re also seeing tons of electrification in heavy industry, which is going to drive a lot of that.

Does the grid change, or does it need to look different, to address those demands? You said it’s 100 years old. I’m sure there are parts of it that are old, aging, and suboptimal. If you started today, you would do it differently. Talk about the health of the actual infrastructure itself.

5. The Grid Cannot Keep Up

Something along the lines of 40 percent of grid infrastructure was built before the ’70s. This infrastructure is just aging, and that causes reliability problems and increased cost. If something ages out or breaks and you need to fix it, that gets added to the rate base.

What we need is more capacity. This is a supply-and-demand, always-on system. As demand scales, you have to build supply, and I think the problem is that we can’t bring on supply fast enough.

If you look at the interconnection queue, we have basically twice the amount of capacity in the interconnection queue as we have on the grid today, in terms of generation. But the interconnection queue, depending on the state you’re in, can be on the order of 5 to 10 years to get a new grid asset interconnected.

That’s partially a supply-chain problem. Transformer shortages have been well documented. It’s partially a regulatory and political problem, and it’s partially a blocking-and-tackling problem involving trucks, crews, poles, wires, and execution.

There are also some financial shenanigans going on where developers will submit multiple applications into the queue and only be serious about a number of them. They wait to see which one gets through fastest, and that’s the project they actually fund.

A lot of people have done good work to study the queue and see how much of it is actually real, especially in Texas. Somewhere on the order of 20 to 25 percent of the projects that are actually in the interconnection queue end up getting through.

Really, what we need is more capacity to meet that demand. Right now, capacity development is stunted by this interconnection-queue problem and just the cost and time it takes to go build a big utility-scale solar farm, wind farm, gas plant, and so on. That’s really a big part of our mission at Base: to deploy flexible capacity to the grid faster and more efficiently with our distributed architecture.

Perfect time to describe what it is that you’re building and why. Maybe start with the basics—literally what your product does and what you hope the company does over time. We’re going to go into lots of detail about it, but maybe just start at the highest possible level.

6. Base Makes Backup Affordable

We think of ourselves as an energy technology company, but really what we are is a battery developer and asset owner. We design, develop, install, own, and operate battery storage in Texas.

If you live in the deregulated part of the state, where you can choose your electric provider, you can sign up with Base and we become your power company. We install our battery on your home, and you pay $500 upfront and $16 a month. When the grid’s up and running, we use that battery to support the power grid, and when the grid goes down, you get that battery to back up your home.

We’re also able to save people on the order of 10 to 20 percent a month on power, primarily because our main business is owning and operating this battery storage and using it as a grid resource.

We're not focused on making as high a gross margin as possible on the retail power; we're focused on deploying as many batteries as we can. If the other retailers in the market are trying to make 20% or 30% gross margins, we're perfectly happy making a 10% or 15% gross margin on retail power and generating most of our contribution margin through the battery that's installed in the home.

The other way to think about it is that we use some of the income that we generate from the battery to buy down that rate for the homeowner. Our customers, of which there are almost 1,500 today, save about 10% to 20% a month on electricity. When the grid goes down, their power doesn't, so they get all the benefits of home backup without the high upfront cost.

For what it's worth, if you don't live in Texas or in a state where home backup is top of mind, the options on the market today for home backup are incredibly expensive. You can buy a home battery for anywhere from $15,000 to $30,000 if you want to back up your entire home, or you can buy a home generator for on the order of the same price. There's maintenance that comes with that, and they're loud and they smell bad.

What we've done is said, "Hey, we don't want to sell batteries; we want to sell a service. We want to sell affordable, reliable power." There's a business-model innovation behind that, which we can get into, that enables this value proposition for the homeowner.

Pretty clear value proposition to the homeowner. There's a much lower-cost way of always knowing I'm going to have power, and then my cherry on top is that I pay a little bit less for power. That seems like a straightforward trade-off.

Say more about the other side of the equation. Like you said, you use the battery to support the grid. What does that literally mean?

7. Building A Distributed Battery Farm

The way to think about the business at the system level is as a distributed battery farm. If you think about battery storage as an asset class, 99% of the storage on the grid is utility-scale storage. Think of shipping-container battery farms in a farm field somewhere, doing energy trading with the grid.

This asset class has been a good asset class for the last decade, and you've seen all the big asset managers back platforms in this space. Blackstone owns a business called IPA Power, BlackRock owns Jupiter Power, and Apollo owns Broad Reach Power. There are tens of billions of dollars of capital expenditures deployed into this asset class at high rates of return.

But the asset class is fundamentally limited for 2 reasons. One is interconnection capacity, as we discussed, so it takes 5 to 10 years to get a grid battery interconnected. The other is transmission congestion. Where you actually need the power, which is the densely populated city centers, is not where you can put these big shipping containers.

You spend a bunch of time and money trying to figure out which node on the grid you're going to place your utility-scale battery, and you inevitably get it wrong because by the time you get into the interconnect queue and get through the interconnect queue, the conditions on the grid change. There are other dynamics at play with regard to transmission congestion that make it really challenging for battery developers.

The insight of Base is around this idea of a distributed architecture: let's go deploy energy-technology assets, starting with storage, where the grid already exists, so you don't have to wait in the interconnection queue, co-located with the power load, so you circumvent that transmission congestion.

Our business is really a fleet of storage assets that generate cash flows that we can finance at the portfolio level, and that are used to support the grid in times of high demand. Literally, what's happening is that when power prices are low, we're charging up the batteries. To oversimplify, think about it as midnight to 4:00 AM, when people are sleeping.

When power prices are high—think about it as 5:00 to 7:00 PM or 6:00 to 8:00 PM in the summers, and then what's called the morning ramp in the winters—we're discharging the batteries. These batteries are used as a grid resource 365 days a year, charging when the power prices are low and discharging when power prices are high. Then they're used as a local resource for the homeowner when the grid goes down.

There's another dynamic at play here, which is called the ancillary-services market in Texas. It's kind of like a capacity market, where ERCOT, the grid operator, basically calls on resources to show up with capacity for different reasons: for voltage, for frequency, or for literal electrons—or I guess in either case they're electrons—but for capacity. You're also compensated for that.

You have to go through a qualification process to do that, build a bunch of systems, and directly connect to ERCOT's communication systems. We're going through that process now.

The way to think about Base as a grid asset is as a distributed fleet of storage. It is a utility-scale battery farm that's chopped up into thousands of pieces and deployed behind the meter at the home for 2 reasons.

First, we think that this distributed architecture allows us to deploy storage at a lower cost and much faster. Literally, on a dollar-per-kilowatt-hour basis, we think we can get a battery landed on the grid significantly cheaper and faster than a utility-scale battery.

Second, we think we can generate more value on a dollar-per-kilowatt-hour basis from that battery because we also have the added revenue stream of selling that homeowner retail power, making a margin on it, and then charging them for that resiliency—that $16 a month that we discussed.

As an asset, what we're developing is a cash-flow machine. You deploy this asset in the ground at a lower dollar-per-kilowatt-hour cost than a utility-scale battery, and you generate a higher dollar-per-kilowatt-hour return from that battery than a utility-scale battery. We think, obviously, the returns will be much higher as a result.

I want to zoom in on the moment where you're discharging the battery. Energy is flowing out of the thing that you've filled up to give power to some other point that's demanding it on the grid. What is the competition for that? It's coming from there instead of from somewhere else.

Talk about the competition for that specific discharge of power. Who's bidding? Who's buying it? How is it determined that they're going to buy it from you? In what way do they buy it from you?

There are 2 ways this happens. One is through bilateral agreements, so you can think of power-purchase agreements as bilateral agreements. I agree to sell Patrick a block of power—a megawatt, 10 megawatts, 50 megawatts, whatever it might be—on August 7 from 3:00 PM to 5:00 PM for X dollars per megawatt, and we have an agreement that's like a bilateral trade.

The second way is in the spot markets: the day-ahead market and the real-time market. Those are liquid. Think of it as the New York Stock Exchange for electricity, and ERCOT is the grid operator that's managing these markets.

We're a price taker in those markets. In a bilateral example, you can structure hedges around your exposure and around when your power's available versus when it's not. That's why you see solar and wind typically engage in this PPA structure, primarily solar, because they have very predictable generation.

When the sun's out, you're generating a lot of power; when the sun's not out, you're not generating power. You have to structure these financial products around your generation profile. Batteries are similar, but for now, we participate mostly in these liquid real-time markets: the day-ahead and real-time spot markets.

When you're marketing these things—the actual service—to the customer, you said 1,500, I think, is the number of installs that you've done. What is the pitch? How are you positioning this with them? How are you getting it in front of them?

What do you think the primary reasons are that they're buying? I'm trying to extrapolate this forward, where everyone in the world has one of these batteries on their house and it's just a normal part of having a house, like any other part of the house's infrastructure.

We think it's really simple. It's about affordability and reliability. That's it. We joke that there are no sexy electrons. People just want their bill to go down and their lights to stay on.

Typically, customers are looking for one of those 2 things. They want to save money on their monthly bill, or they're looking for affordable backup. Most of the people who are looking for backup have thought about buying a battery, they've thought about buying a generator, and the price is prohibitively expensive.

They don't have $10,000, $20,000, or $30,000 lying around, and they come across Base because they heard about it from a friend, saw it in an ad, or got a mailer at their house. They're like, "Wait a minute, I can protect my home and protect my family for $500 upfront, not $15,000 upfront, and the monthly fee is cheaper than Netflix. It's cheaper than Amazon Prime. It's like a Costco membership. That's a no-brainer."

Those are the 2 motivations, typically: cost savings and backup protection. But the backup is really a savings pitch, too, because if home batteries were free, everyone would have one. But they're not. They're extremely expensive, and so we compete on cost.

I think this is a key part of our strategy. We're eyes wide open about the fact that electricity is a commodity, and if you're competing in a commodity industry, you have to take a cost-focused approach. You have to have a cost-structure advantage.

The way I would describe our strategy as a business is developing a compounding cost advantage through vertical integration.

Why do we design the batteries? Why do we manufacture them? Why do we install them ourselves from our own warehouses with our electricians? Why do we own them on the balance sheet and finance them at the portfolio level?

Why do we sell the power ourselves? Why do we trade the power ourselves? Because by doing it ourselves, we can take cost out of each part of the equation, which drives our returns up, which drives the cost that we have to charge the homeowner down. In a commodity industry, your North Star has to be delivering the commodity to the customer at the lowest price possible, and that is our North Star.

We want to be in a position where we can land a battery and eventually a solar panel on the grid cheaper than anyone on the planet on a dollar-per-kilowatt-hour basis, which means that we can sell an electron cheaper than anyone on the planet on a dollar-per-kilowatt-hour basis. That’s really the vector on which we compete.

Can you talk about the economics of a battery? I think I saw the V1.1 in Austin, so I’m sure they look cooler and cooler, like that Raptor engine or something that you see from SpaceX.

If you think about the cost to you, the expected rate of return, and the variance of that rate of return over time, just talk about what a battery installed is worth to you, how much it costs you to buy it, build it, and do it. I’m just curious about the battery-level unit economics of what you’re doing.

8. Batteries Have Attractive Economics

Today, it costs us on the order of $10,000 to get a battery in the ground, and that’s inclusive of the BOM cost of the hardware—the battery and the inverter, all the pieces that go into that—the installation cost, so getting a truck out to the house and having 2 electricians on-site for 4 to 6 hours, and then the cost to acquire the customer. So, today, that’s about $10,000.

The customer pays $500 upfront, and then we receive a tax credit, an ITC, as part of the IRA for up to 30% of the cost of the project. That goes to 40% in some parts of Texas that are considered energy communities. Most of our installs are in that area, but for simplicity, let’s call it 30%. So, if it costs us $10,000, we’re getting $3,000 back in the form of a tax credit. The customer’s paying $500 upfront, so you have on the order of $6,500 of cost on a totally unlevered basis.

The customer is then paying us $17 a month. That comes out to $200 a year, and the average person’s electricity bill is on the order of $150 a month, or $1,800 a year. At a 10% to 15% gross margin, that’s anywhere from $180 to a little over $200 a year in margin. So, that’s $200 a year in margin from retail power, $200 a year in margin from the monthly payments, and then the battery is used to do energy arbitrage, as we discussed, and we do a bunch of modeling to figure out what that’s worth.

In some years, it’s worth $100 a kilowatt-hour. In some years, it’s worth $20 a kilowatt-hour. Those cash flows are extremely spiky. So, in 2023, you had an incredibly profitable year for batteries. In 2024, you had a less profitable year for batteries. When you think about financing this kind of asset with super-valuable cash flows, you obviously have to take that into consideration.

Our math suggests that a battery in ERCOT over the next 10 years will average on the order of $40 a kilowatt-hour. If we’re installing a 30-kilowatt-hour battery, which is the form factor of our Gen 2 product, that’s $1,200 of trading income a year—$40 a kilowatt-hour times 30 kilowatt-hours. So, you have $1,200 of income off the energy trading. You have $200 of gross margin from retail power. That’s $1,400 in margin, and you have $200 in margin from the customer payments. That’s $1,600 in margin on $6,500 of upfront cost net of the ITC.

That’s on the order of a 4-ish-year payback on an unlevered basis with Gen 1. Our strategy as a company is to drop our cost structure over time with successive hardware generations. So, with Gen 2, we’ll bring more of the design in-house and more of the manufacturing in-house. We’ll have better control over the supply chain, and our costs will go from roughly $10,000 to get a battery in the ground to closer to $8,000 to get a battery in the ground. That takes the paybacks from 4 years to 3 years. I’m using high-level numbers, obviously, so people can check my math.

With Gen 3, we potentially will build our own factory and manufacture these things entirely ourselves, and we’ll take that from $10,000 with Gen 1 to $8,000 with Gen 2 and then to $6,000 with Gen 3. Now the payback looks like a 2- to 2.5-year payback on an unlevered basis. When you introduce leverage, the returns start to get extremely attractive.

For what it’s worth, these are on the order of 10- to 15-year useful-life assets, depending on how many times you cycle them. A 4-, 3-, or 2-year unlevered payback on a 10- to 15-year useful life is a really attractive unlevered IRR. Batteries are quite bankable.

Now, merchant batteries are less bankable than batteries that have a contractual offtake agreement. What merchant means is you’re participating in this energy arbitrage where, in 1 year, like 2023, you could make $100 a kilowatt-hour, and another year, like 2024, you could make $20 a kilowatt-hour, and there’s inherent risk in that volatility. Obviously, there’s upside, but there’s obviously downside.

The loan-to-value, or the amount of leverage you’re able to get on a merchant battery in ERCOT, is much lower than the loan-to-value you’re able to get on a contracted battery in ERCOT. So, you see LTVs on contractual battery assets in ERCOT in the 70s and 80s. Merchant is probably much lower than that, and they’re harder precedents to find, but they’re going to be on the order of 30%, 40%, 50% loan-to-value.

If you look at our cash flow stream, the biggest chunk of it—that $1,200, that $40 a kilowatt-hour times 30 kilowatt-hours—is merchant exposure today. Now, we’re working on different ideas and opportunities to make some of that contractual, and there are interesting financial products you can get involved with that help with that.

But assuming that is merchant, the $200 of retail energy margin and the $200 of customer payments are more contractual because the customer signs a contract with us. They’re with us for the life of the battery. They pay us every month for electricity, and if they want to keep that battery in their house, they’re going to pay that $17 a month. Those look a lot more like contracts than the merchant.

If we can get our loan-to-value to 50%, those 20% to 30% unlevered IRRs obviously go up really significantly. So, we think it’s a really attractive financial asset if you’re able to do all of the really hard engineering to drive that upfront cost from $10,000 to $8,000 to $6,000, and then also the engineering to be able to monetize that asset in the wholesale markets, support the customer, and do all those other things.

I think there are really interesting adjacencies to go downstream into the home. Solar is the obvious one. We can talk about that. If you’ve got a battery and inverter on the home, you’re selling the homeowner power every month. You’ve been to their house. You have pictures of their panel and their meter. You’re really well set up to go add solar to the equation.

But there are really interesting home energy products that we’re excited about: smart EV charging, electric water heaters, electric heat pumps, and other appliances in the home that can be electrified. When you have a battery on the home, which is really like a computer on the circuits, you can do some really interesting optimizations if you’re able to control other electric appliances that ultimately are just there to save the homeowner money.

Back to affordable, reliable—that’s what matters. Lower the bill, keep the lights on. That’s our North Star today. That’ll be the North Star in everything we do.

If I had to zoom in on the thing that sounds the scariest to an outsider, it would be the variability between 2023 and 2024—$20 versus $100. Describe more of what drives that and how risky it might be that you could have 6 straight years that look like 2024, not 2023.

And if so, what would explain a world where something like that happens that really throws a wrench in that math that sounds fantastic on average? What does a drought look like, or something?

Back to the point of electricity as a commodity industry, commodities have boom years and bust years. There are a couple of things that drive it. A big one here is weather, which is notoriously unpredictable. As we discussed earlier, a big driver of power prices in ERCOT is home HVAC.

So, if it’s crazy hot in the summer and if it’s crazy cold in the winter, you’re going to see massive power demand, and if that weather doesn’t show up, power demand’s going to be lower.

A big dynamic here also is just supply and demand, or price signals, I would say. It doesn’t always play out as simply as I’m describing it, but in 2023, you had a massive year for batteries. The weather was really intense, prices were really high, and batteries were extremely profitable. So, in theory, you see a ton of battery build-out. Battery developers are saying, “Oh, batteries are super profitable.”

In 2024, you had the opposite. The weather didn’t show up, prices weren’t that high, and volatility was really low. You had a bunch of battery build-out because the year prior, batteries were incredibly profitable. Now, the actual response isn’t that quick. We talked about the interconnection queue and how long it takes to get online, and so I’m more speaking at a high level.

When batteries are really profitable, a bunch of people build batteries. When batteries are not really profitable, people stop building batteries. And so, you have this boom-and-bust dynamic with the CapEx cycle where, in really good years, a bunch of battery developers get excited, raise a bunch of capital, and build a bunch of batteries.

In bad years, the opposite happens. It’s a naturally volatile market. That’s something that we’ve spent a lot of time thinking about, and our view is that batteries have fundamental value on the power grid. Yes, they’re very useful for energy arbitrage, but they’re very useful for other things, too. I think of batteries as more akin to poles and wires than to wind and solar.

Poles and wires move energy through space; batteries move energy through time. Over time, I think what we’re going to see is more utilities realizing the value of distributed storage and tapping into opportunities to improve their infrastructure, add additional flexible capacity to the grid, and, ultimately, lower costs for their ratepayers and customers by using batteries—particularly at the edge, in this distributed manner.

We think batteries have fundamental value. Yes, a lot of that value today is in energy arbitrage in Texas, but in other markets it’s through things like voltage control, frequency response, and CapEx deferrals for infrastructure upgrades. I think more of that is starting to play out as the discourse and acceptance of what’s referred to as VPPs, or virtual power plants, becomes more mainstream.

We really have 2 businesses. We have the core deregulated business, where we’re your power company, we’re the name on the power bill, et cetera. Then we have a utility partnerships business, and we’ve announced our first partnership with Bandera Electric, which is fantastic in Texas. They were the first ones to really take a bet on us, and it’s starting to work out really well for them and us.

We show up and say, “Hey, Bandera, you need flexible capacity in your service territory. We can deploy it faster and cheaper than anybody else.” We deploy batteries in their territory and hand them the keys to the fleet, for which they pay us for the dispatchability of that fleet. They’re able to use those batteries to lower their cost to serve their customers, but also to do frequency control and voltage regulation.

They can defer CapEx on their infrastructure. They don’t need to upgrade transformers as frequently because they can take demand off at the neighborhood level during times of high prices. We’re starting to work really closely with them and other utilities in Texas and across the country on creative ways to use distributed batteries as a grid resource outside of energy arbitrage.

Price volatility is fundamental to commodity markets, and so electricity will probably be volatile for quite some time. We think our batteries will benefit from that. But batteries are fundamentally valuable as a grid asset for many other reasons, and I think that over the next decade you’ll see utilities across the country start to embrace that.

Can you teach us about batteries? Obviously, a very central piece of this is the literal thing getting slapped up on the house, and your ability to build them over time, make them cheaper and cheaper, more and more efficient, hopefully longer and longer lives, and more and more capable.

I’m trying not to take for granted any of the simple things we’ve all heard about a battery. Increasingly, I think people, if they’ve seen a Tesla, know there’s a big battery in there. They know about these big battery factories. Teach us about the history of batteries, how they work, and concerns we have. Is there a constraint on how many of them we could make, and if so, what are the raw materials that constrain us? Just teach us a bit more about batteries, since it’s the central part of the asset.

The building blocks here are the cell, the module, and then the pack. When we talk about batteries, really what we’re talking about is the pack. The pack is a collection of modules, and the module is a collection of cells.

When it comes to cells, there are a bunch of different cell chemistries that have been commercialized over the last couple of decades. The growth in the EV industry, for the most part, has been driven by NMC chemistry. This is a lithium-ion chemistry that’s nickel-based. NMC stands for nickel manganese cobalt.

That chemistry is very energy-dense and has a very high C-rate, which means you can charge and discharge it very quickly. That’s super important for a car when you need to go 0 to 60 in 3 seconds. It’s also quite light relative to its energy density, which is also very important for a car.

The dominant chemistry, and really what we’ve seen take over in energy storage over the last couple of years, is also lithium-based, but it’s lithium iron phosphate, or LFP. This chemistry is much heavier. It has a way lower C-rate, so you can’t charge and discharge it as quickly, which is not as important if you’re not in a car, but it’s a lot safer.

It has lower energy density, and it’s way less prone to thermal runaway, which is a fancy way of saying fire. You’re seeing interesting R&D happening in sodium-ion chemistries and iron-air chemistries for long-duration energy storage, and in things like thermal batteries. There are pros and cons to all of these different chemistries and their relative applications, but I think we’re going to see continued innovation on this front.

I’m very excited about what’s happening with regard to cell chemistry. I think sodium-ion is super promising, and there are a number of startups working on novel sodium-based chemistries that we’re keeping a close eye on.

The truth is, though, that the Chinese and the Koreans have been on the bleeding edge of battery chemistry for a long time. Interestingly, for a long time it was really just NMC chemistries that were getting built at production scale. The Chinese made a bet on LFP much quicker than the Koreans did, and so now companies like Samsung, SK, and LG are trying to catch up with regard to LFP capacity.

The Chinese companies like CATL, BYD, and Gotion are far ahead in LFP production capacity. If you want to buy an LFP battery today, you basically can’t do it outside of China. That’s changing. A bunch of companies have gotten started in the US over the last decade to spin up LFP capacity, and basically all of them have run out of money before getting to production scale.

Obviously, the Northvolt unraveling has been well documented, although that’s not a US-based company. Other companies—Our Next Energy, KORE Power, and American Battery Factory—make up a kind of graveyard of businesses that have tried to get this kind of manufacturing capacity off the ground.

The reality is that building an LFP factory—and I’ve been to many of them at this point—is not quite semiconductor complexity, but it’s pretty darn close. They take billions of dollars and many years to get up to production scale, and the Chinese are really, really far ahead.

There’s some really incredible engineering at the Korean companies, and they’re working fast and making good progress. You’re seeing a bunch of JVs with the auto OEMs that are plowing CapEx into the supply chain. That’s a trend that we benefit really strongly from: all the auto OEMs are investing super heavily in the battery value chain.

That’s driving the cost of these cells down. If you look at the cost curves of LFP cells and NMC cells, they’ve come down extremely dramatically over the last decade. Now you’re seeing these auto OEMs, some of these Korean companies, and the Chinese companies form JVs to build factories here in the US.

Fascinating. I would sum that up as: you’re going to have more and more control. You’re not particularly worried that a vector for failure here is the world ceasing to be able to meet the demand for new batteries. There’s enough innovation and manufacturing know-how distributed around the world, and that can be brought here to solve that problem. Is that a fair summary?

That’s fair. I think the materials problem is one that people like to worry about. They’re like, “Oh, we don’t have enough minerals to build all these batteries.” I think that’s just fundamentally untrue.

I’d point people to Tesla’s Master Plan Part 3, where they address this head-on. That is a really clear documentation of the abundance of these minerals in the Earth’s crust. It turns out there’s a lot of lithium, a lot of iron, a lot of manganese, and a lot of cobalt.

A lot of it hasn’t been mined, and the cost to mine it is high. There are complexities and nuances, and it’s not easy, but these minerals exist in great abundance in the Earth’s crust, and I think that is not a real constraint. Getting them out of the ground is a constraint, and there are certainly hard problems to solve there.

But yes, we will not live in a world where we’re unable to build incremental battery capacity because of some kind of mineral constraint or unsolvable engineering problem.

Can you also say a little bit more about the capital markets component of all this? On the one hand, you’ve got this one compounding story of vertical integration with the physical stuff that you’re building, the teams you need to install it, and the smarter and smarter systems overlaid on top of that. That’s all super exciting and hopefully just keeps getting better and better.

What’s also interesting about what you’re building is that it seems as though you require almost as much innovation, scale, and vertical integration on just the pure capital side. Most startups raise equity capital, and that’s the story. They raise more equity capital if they’re successful at a lower cost of capital, and they scale up and whatever.

This has way more complicated capital markets requirements, I guess is how I’d put it. Talk about what those are, how you’re thinking about it, and what the innovations could be there. It’s like a twin part of the story that seems almost as important as the part we’ve explored so far.

9. Capital Markets Finance Batteries

One way to think about what we’re building is battery storage behind the meter at homes in Texas. Another way to think about it is a yield curve.

It’s just a cash flow stream. I’ll simplify it here. It’s matching that cash flow stream to a cost of capital that has the appetite to underwrite those cash flows. We put money in the ground, and then money comes out of the ground toward us at some frequency, and we have to find the capital provider who’s willing to underwrite that amount of money and the frequency by which it comes relative to the amount of money we put in the ground in the first place.

There’s volatility, predictability, and unpredictability in each part of it. On one hand, it’s complicated asset-backed financing, and people have to underwrite batteries and their salvage value, the volatility of the grid, and all that kind of stuff. On the other hand, it’s just cash flows. If you understand how the capital markets work, how lenders think, and how to communicate with them, you can finance these assets in a super capital-efficient way.

There’s a pretty mature industry out there for what I’ll call tax capital: tax credit transfer vehicles, and then tax equity, what are called partnership flips. These are basically ways to monetize tax credits if you don’t have a large tax liability. Unfortunately, we aren’t insanely profitable and generating tons of taxable income, so we have all these tax credits that we can’t monetize. We have to either transfer those tax credits to someone who can monetize them or sell them in a tax equity partnership structure to someone who can monetize them.

These tax credits have been around for some time. There’s precedent for this, and there are structures in place that firms and companies have used. You’ve seen it in residential solar. I think Sunrun is probably the best example of a really mature capital markets team that has nailed the securitization and tax equity playbook, and we’ll talk about securitization in a second.

So that’s the tax side. On the debt side, you really have 2 flavors: project finance and asset-backed securitization. Project finance is typically taking a bunch of assets, putting them in an SPV, and then lending against the cash flows that go into that SPV. There are a bunch of things to consider here: What kind of asset is it? Is it wind, solar, or storage? What’s the geographic diversity? Is it all in Texas, or is it across a bunch of different markets? And then what’s the quality of the cash flows? Is it merchant, contracted, or some combination of the two? How much of it is merchant versus contracted?

That project finance world has financed the solar, storage, and wind build-out over the last couple of decades. On the other side of that, you have securitization, which has basically defined the scale-up of the residential home solar companies, notably Sunrun, which has done this most successfully. Of course, there are examples like SunPower and Sunnova that have done this less successfully, and that’s kind of all unraveling. You develop a bunch of projects, and then you securitize all of those projects. You capture value today for access to the cash flows later, and that’s just a financial engineering product. Securitizations are done in all kinds of different industries, and they’re typically the largest, most liquid, and lowest-cost part of the capital markets.

Where we are today is that we finance our CapEx with debt, and most of that debt has been raised on the back of large equity fundraises. Those lenders, which are more akin to venture debt lenders, are really looking at the cash on our balance sheet and our ability to raise incremental equity capital and saying, “Okay, we can get comfortable with this amount of debt.” As the fleet grows—and as you know, it’s growing quickly—the amount of debt that we’ll need to raise and deploy is going to be way greater than the amount of equity we have on the balance sheet. We’re not going to be able to collateralize that debt with cash on the balance sheet, so we’ll have to go into more creative structures.

Where we’re going long term is almost certainly the securitization market. Like I said, it’s large, liquid, and low cost, and there’s precedent for these kinds of assets being securitized. If you actually look at the models and understand the numbers, they’re just cash flow streams. If you have transparent and predictable operating history—we have almost 1,500 of these things in the ground, and we’re deploying 20 a day. That number’s going to go to 50 a day over the course of the next couple of months—you can say, “Okay, well, dollars go out at this time, and they come in at this time.” There’s a process by which you underwrite that and apply a risk premium to it. Then the lender has their cost of capital, and we have the cost of capital of our equity.

We think that we can access the lower cost of capital through debt, and so we think there’s a path to scale this business in a really capital-efficient way, leveraging the capital markets with some combination of asset-backed financing, tax capital, and, of course, equity, which we’ve raised to date.

If I think about one version of this story, you could just say, “Okay, you’ve walked us through the unit economics of the individual unit. The Gen 4 is way cheaper. The payback period is way shorter. There’s one of these things on every available home.” You do that math, and I think everyone would have a victory parade. Great. Awesome. Incredible job. Great business. Cool innovation. Support of the system, value delivery, blah, blah, blah.

What parts of the vision have we not talked about that you’ve thought about that excite you? You talked a little bit about other things you could sell into the home because of your unique positioning there. That’s 1 dimension of other things that you could do. What other things does this give you the right to win in this big story that’s so captured your imagination?

I started the conversation by saying we see ourselves as an energy technology company. This strategy of compounding cost advantage through vertical integration is defined by engineering. We are building the most efficient grid resource on the planet in the form of battery storage. We think there are equivalent engineering problems to solve that will create cost advantages with regard to residential solar, but also other products like commercial batteries, commercial solar, EV charging at the home level, EV charging at the commercial level, and things like electric heat pumps at the residential and commercial levels.

As you mentioned, going downstream into the home and into the built environment means thinking about gas stations, grocery stores, quick-service restaurants, and small commercial office buildings. These are massive consumers of power. They should also have on-site storage and solar, and they should have smarter controls around charging, HVAC, and those kinds of things.

We think about the business as a technology company that is developing solutions to electrify the built environment. We’re starting with the home. We think the commercial space is really interesting. We’re starting with storage. We think solar is really interesting. We think some of these other downstream products are really interesting.

But then, if you look upstream at the utility and you look at substations and transformers, we come back to this utility incentive question and problem. The utilities have no incentive to go innovate on transformer design. They’re not R&D-led businesses. The percentage of employees at a utility who work in R&D is sub-1%. At the average tech company, it’s 20%, 30%, or 40%. The reason is that they’re not incentivized to spend money on R&D. They don’t earn a rate of return on it. They earn a rate of return on CapEx.

We think there’s a ton of R&D that should be happening at the utility level, whether it’s the transformer, the substation, or the software by which they manage all these systems. As we partner with these utilities—Bandera Electric in Texas and some others that we’re working with in the state, as well as some that we’ll announce across the country over the course of the next year—we’re learning a ton about how they operate, and we’re seeing massive opportunities for R&D in a place that’s never seen it.

We think that we can build some really interesting solutions upstream. We talked about downstream. We think we can build some really interesting solutions upstream of the home, upstream of the building, to serve these utilities in the modern electric era. We see a really big opportunity to partner very closely with utilities outside of just deploying distributed storage at the home, basically being their R&D function.

There’s a play here to be the Palantir for utilities, where you go in and bring a bunch of world-class hardware and software engineers who really understand the systems that they’re working with, and you help them solve problems that they’re not well-positioned to solve.

Can you talk a little bit about your personal story—what has brought you to this specific topic area and source of motivation? Why are you doing this thing? What formative experiences or lessons got you here?

10. Zach Became A Founder

When I was younger—in middle school and high school—it never occurred to me that there was anything interesting to do in the world other than be an entrepreneur. My dad was an entrepreneur. I looked up to his friends who were entrepreneurs. I saw company building and problem-solving as synonymous, and the harder the problem, the larger the economic outcome downstream of the solution. That was something that struck me as a young person.

I knew that I wanted to build companies and solve hard problems, and I experimented with different things in high school and college, building things with some really awesome people. In college, I was struck by the energy bug. I alluded to this chart of energy consumption per capita and GDP. I had this obsession with creating opportunities for people to get access to affordable, reliable power, because that’s the best way to improve their lives.

And long story short, I spent most of college trying to develop systems to do anaerobic digestion in rural parts of the world, particularly in India, to turn human waste into biogas. So basically, kill two birds with one stone: on the order of 1 billion people in the world don't have access to sanitation infrastructure, and they also don't have access to reliable, affordable power. If you could build these systems to allow them to process waste into compressed methane, they could power things like lamps, stoves, and lights. I spent basically all of college working on that.

About halfway through college, I realized, after some long, sweaty summers in New Delhi, that this wasn't a business. This was a cool project, but it wasn't a company. I didn't actually really know what excellence and truly high-performing businesses looked like, and that was what I wanted to learn. I went into finance because I wanted to see what that looked like and learn how to analytically dissect a business.

I was always really interested in markets and investing and studied the great investors. That was always a hobby for me, and I figured, “Okay, I'll just go study finance until I find the pitch to swing at.” At the time, Blackstone was one of the only firms hiring undergrads right out of college on the buy side. I really wanted to work on the buy side, so I applied for an internship there and got the internship on the private equity team.

When I was an intern at Blackstone, one of the guys on the team was working on an opportunity to carve out a lithium mine from a public company. I went up to him and said, “Hey, Sam”—awesome guy, Sam Young, super sharp investor—“I want to work on this with you. I think lithium's interesting. I think energy's interesting. There's an opportunity in battery storage.” This was 2018. He said, “Okay. Yeah, sure.”

This wasn't something the firm was super focused on. It was a project that was getting tossed around. Long story short, when I came back full-time the next year, the project had become real. I became the analyst on the deal. If you're going to buy a lithium mine, you have to take a view on the price of lithium because you're going to own a lot of it.

I spent a couple of months trying to figure out what lithium was going to do, what the price of lithium was going to do over the next decade. In doing that, it just became obvious to me that battery storage was going to be this incredible source of growth, really for no reason other than the marginal cost of solar plus storage was going to be lower than the marginal cost of coal and natural gas. Incremental capacity on the grid was going to largely be solar and storage, and it was clear that we had really underbuilt storage.

We started looking at distributed storage platforms. After I left Blackstone, IPA Power was bought; it is one of the largest utility-scale developers in the country. Around that time, I had this insight about the 2 constraints that utility-scale storage faces: the interconnection constraint and the transmission constraint.

Towards the end of my time at Blackstone, I was introduced to Kareem, who you've had on the pod and who's a partner at Thrive Capital. He and I hit it off, and he introduced me to Josh. Josh introduced me to Vince, and Vince introduced me to Gaurav. I started meeting the Thrive team, and I was struck by them as people and by their strategy as investors.

The way that I saw it was high conviction, high concentration, and high involvement: make very few investments, have very strong conviction in the business, and then, when needed, actually really help move the needle for the company. That was the kind of investing that I always wanted to do, partially because I really wanted to be an entrepreneur, and I wanted to be close to entrepreneurs and actually help entrepreneurs, but partially because I think diversification is the enemy of returns.

All that matters as a growth-stage or startup investor is identifying which companies are actually going to be part of the S&P 500, then owning as much of those companies as possible and not selling. I ended up joining the team at Thrive, and I was there for 2 years. I have a ton of admiration and respect for the people there and am really grateful for the time that I spent there.

Really, in the second year I was there, I spent most of the year picking this battery storage thesis back up, with the idea in the back of my head that I might start a company in the space. As I picked the thesis back up, we made a large investment in Anduril, and I went down to do a factory tour as part of diligence. My tour guide was the head of manufacturing at the time, who's now my co-founder, Justin Gage.

We spent a day together. He showed me around the factory, and I peppered him with questions all day long. At the end of the day, I thought, “Man, that is one of the smartest people I've ever met, and he is a machine.” We hit it off, exchanged numbers, started texting, and started talking about big ideas.

A couple of months later, I called him, and I think the line I used was, “I want to start a company, and I think that if you built a really high-quality battery-pack assembly business in the U.S., it'd be really hard to lose over the next decade.” He said, “Yeah, I agree with that.” There was so much demand coming from batteries. It is really hard to do really high-quality pack assembly, and there's not enough supply here in the U.S. That was where we started.

I had this core insight, and then together we pulled the idea out of each other. For the next 3 months, we would get on the phone basically every night at 9:00 p.m. and bat ideas back and forth. The thesis really evolved over time. At one point, we were like, “Oh, we're going to do neighborhood batteries,” or, “We're going to sell directly to utilities first. Yes, we want to be a retailer in Texas. No, we don't want to be a retailer in Texas. We're going to start in California. We're going to start in New York.”

We maniacally researched the opportunity until we crystallized a more platform-like, vertically integrated approach, which to both of us just felt like the holy grail of company opportunities. Justin, before Anduril, was at SpaceX, and he led manufacturing at the Starbase Boca Chica site down there. I think what SpaceX did to aerospace and what Anduril did to defense, Base wants to do to energy.

Go after a really large industry with a bunch of entrenched incumbents that are not engineering-led, technology-focused, or R&D-driven, and build the engineering-led, technology-focused, R&D-driven company in that space. That's really how Base was born and what Base is designed to be.

I want to ask you about engineering culture, pace, quality of people, and all those kinds of things. I think it's more interesting to hear what the examples are that you've seen firsthand of extreme excellence in business. I'm looking for stories and anecdotes here—the things that have made a lasting impact on you.

You saw it with your own eyes. Someone did something, and that changed what you thought was possible in terms of the quality standard for thinking, operating, and innovating. What are the formative anecdotes or people that have informed your view of how culture can and should be at a business?

As you and I have discussed before, I love this concept that everyone's definition of good is just the best they've personally seen. I've been very fortunate to witness some really exceptional business cultures firsthand.

At Blackstone, where I started my career, I saw how process orientation and analytical rigor could become a competitive advantage. The leaders of that firm had a way of encouraging teams to turn over every stone, really break businesses down to their atomic units, and deeply understand the core questions that truly mattered when evaluating companies.

Witnessing that level of disciplined analysis, thoroughness, and clarity of thinking taught me that excellence often lies in how deeply and systematically you can think through complex business problems, which, in this context, at least at Blackstone, usually required deep knowledge in domains like accounting and capital markets.

At Thrive, where I went after Blackstone, I learned a very different but equally powerful form of excellence from Josh Kushner. Josh has a remarkable ability to think clearly far into the future, recognize exceptional talent early, and see opportunities for what I'll call deal-making where others can't.

Josh's approach to, in air quotes, “deal-making” is very unique, I think. He's not penny-wise and pound-foolish. He doesn't optimize for the last dollar. He really optimizes for the next deal. When you work with Josh, you leave the interaction wanting to work with Josh again.

He's creative, fair, extremely intelligent, and a lot of fun to work with. He also has totally unmatched ambition, which has been incredibly inspiring for me. We often talk because he's the first person I call when I have a really crazy idea, which happens frequently, and I know that I can count on him to push me to think bigger, which is a lot of fun.

In building Base, I'm honestly continually learning from the people around me. My co-founder, Justin, has really taught me what true ownership looks like: taking accountability end to end without excuses. He's mastered the concept of extreme ownership, a skill that I think he developed working for Elon at SpaceX and leading the manufacturing efforts at Anduril.

Cole and Jared, who are 2 of our first hires and both came from the Starlink team at SpaceX, have really taught me how speed can become a strategic weapon. Even when urgency doesn't feel necessary, it almost always leads to better outcomes.

They've really helped me understand this idea that speed and rapid iteration unlock new problems that the team earns the right to solve, which moves us forward. Said differently, if you do 10 of a thing, then 100 of a thing, and then 1,000 of a thing, there are new problems that you get exposed to when you go up in orders of magnitude that you wouldn't be exposed to if you didn't reach that new level of volume, and they're really worth solving. Running from 10 to 100 to 1,000—in our case, that thing is installations of batteries—just speeds up that learning so dramatically, and that's been an incredibly valuable lesson.

Dana, one of our first hires and our head of deployments, who worked with Justin at Anduril, has really taught me the importance of process orientation in an operational context. She brings a Blackstone-like attention to detail to day-to-day operations and has really leveled me up in a big way in this regard, as someone who's come from a finance and investing background and doesn't have a lot of operational experience. She's helped really bring that to life for me and bridge that gap.

And then finally, Dino, our head of hardware, who led power wall engineering at Tesla—he was there for 13 years and worked on the original Roadster—has really brought all of us up to a new level of clarity of communication. His ability to communicate complex ideas in simple terms is truly world-class. He just has an incredible ability to drive clarity of thought and quick decision-making in a highly technical context, which has been a secret weapon for us as we develop the next generation of our technology.

Most formatively, I've learned so many lessons watching my dad run Dell over the last 20 or so years that I could really tell what was going on. I'm almost 30, so until about middle school, I was pretty in the dark. But there are so many lessons that come to mind from watching him operate over the last couple of decades. I'll just name a few.

One thing that has always stood out to me has been the tenure of the top leaders across the company. Dell has a lot of employees who have been at the company for 10, 15, or 25 years. I've always really admired this, and I think it really showed me how important it is to build a company around a mission, a vision, a strategy, and a culture that is built for the long term. That's really the only way that you get these long-tenured leaders: You set the company up to be oriented around a 10-, 20-, or 30-year vision.

Another thing I have learned from him is deep open-mindedness and the value of rigorously challenging your own ideas. I don't know that he's ever talked about this publicly, and hopefully I don't get in trouble for doing so, but he's done something in the past, and I think probably still does it, that I think is just so cool. He'll actually invite a sell-side analyst or an equity research analyst into board meetings every once in a while to basically pitch the bear case on the company to the leadership team and red-team the business from an outside-in perspective—someone who's deep in the industry and studies the space intensely.

The objective of that person is to come and highlight all the things that they might not be thinking about or that they might be struggling with. My dad has told me that he goes to the person, whoever it might be, and asks them, “Don't hold any punches. Give us your best shot. Be as negative as you can.” I think this concerted effort to constantly question the work the senior team is doing and challenge the assumptions is super, super powerful.

Finally, above all, his genuine love for the game has shown me the immense power of intrinsic motivation. He wakes up every single day so excited to go solve the next big, hard problem. He's 30 years in, and he's still running toward problems, not away from them. He's having a ton of fun doing it, so I really could not ask for a better example than that.

This has been so incredibly fun to hear. It's crazy. When I was in your Austin office a year and a half ago, or something like that, to hear the progress—not just the business progress, but also in your understanding, your thinking, and your ideas for where this could go in the future—there's nothing like having a couple of data points rather than just one. I can certainly say that, having those couple of data points, it's amazing how quickly you've come up the learning curve and how impressive the output of the team has been.

It's such a cool business concept and such a great way to teach us all about a critical thing that's lurking there all day, every day, that we don't think too much about and that we sort of take for granted. I feel like I know a lot more about the grid and its future now. It's been so much fun to have you. I think you know my traditional closing question: What is the kindest thing that anyone's ever done for you?

I can't help but think about my parents when I think about this question. They are incredible role models and have led by example in an incredible way. I'll start with their relationship with each other. It's just the most amazing example of a partnership and commitment. They've been married for over 30 years, and I feel like every time I see them together, they're a little bit more in love.

Seeing that has been incredibly fun for my sisters and me. You've talked about this concept of being born rounding third, and I feel like I was born sliding into home base. I feel just incredibly lucky for the environment in which I was raised, but there are a lot of challenges in raising a family in the spotlight when your name is on all the computers that you see walking around. I think they've dealt with that in a really impressive way, in a very humble way, and in a way that's very genuine and true to them.

I'm just very grateful for the way that they carry themselves, the way that they treat other people, and the way they've decided to spend their time and money helping others. I look up to both of them in a lot of ways, and I'm just very grateful to be their son. I've thought about different ways to answer this question, and I can't really think of any other way than talking about them.

I'll say a couple of other things. One is that there were a number of people—I'll call them, in air quotes, “adults”—in my life as a young person that I won't name individually, but they certainly know who they are, who were quite hard on me when they didn't have to be. I'm really grateful for that, and I might not have been at the time, but when I look back, I think that tough love is really valuable. I had some people in my life early who really were tough on me, and I think that was really important.

And then the last thing I'll say is my fiancée, Emily. When we met, I was working at Thrive. We were living in New York. I worked a ton, but life was pretty fun. Over the last 2 years, life has been a lot harder. I approached her and said, “Hey, this battery thing I've been talking about, I'm going to go for it, and we have to move to Austin. You've been to Austin twice, your whole family's in New York, you work in New York at Google, and you're going to have to leave your job.”

There was never a minute of, “Well, what about me and my life and all my...” It was just immediate support from day 1: “Of course, we're a team. We're going to do this together.” And by the way, this was before we were engaged. There was no commitment from my end, and she's just been 110% supportive every step of the way.

The last 2 years have been super hard. I'm in the office 7 days a week, 12 hours a day. I spend a lot of time here. I throw my life at this thing. She could've complained and put up a fight, and she's just been insanely supportive. I'm so grateful for that.

I feel like a very lucky and grateful person generally, and I don't have one kind thing that someone did. It's more a reflection on all the people who have been a huge part of my life to date. So thank you, Patrick, for the opportunity to do this. Like I said, this podcast has been an incredible gift to young people like me who want to be learning machines and want to understand the psyches and mindsets of a lot of great people. It's an incredible honor to get to share my story and Base's story with you, so thank you.

Zooming in on the parents thing, you said what I say all the time, which is, “I was born on third base” myself. I know a lot of people who have been born in all circumstances, who have succeeded or failed from all starting points, but there's no doubt that the advantage that you had and that I had growing up—forget about magnitude or degree—the reality is that it's a very lucky, privileged starting point.

Nonetheless, in many ways, I hope for my kids that that's even more true. I don't want that to be a thing that they have to feel bad about. I want it to create opportunities for them to make more impact and to do all sorts of things. I think endlessly about my kids. They're younger, of course, but I think about the ways in which I engage and interact with them, the world that I show them, the parts of my world that I invite them into, and what I surround them with.

I was listening to this interesting thing the other day that noted that it's really only been a phenomenon of the last couple hundred years that a dad and his son aren't working together all the time for the son's whole life. Now you've got this circumstance where a dad and a son, or a mother and a daughter, or any combination thereof, aren't together for major parts of their waking lives. Your parents did it the right way.

I'm curious if there's anything that you could share with me and the other parents out there who want to copy what works and do it for their kids, because it's obviously what we all want for our kids.

I'll borrow from what Ravi Gupta said on the pod, which is this concept of being demanding and supportive.

You hold your children to a really high bar, and you expect a lot out of them, but you're there to support them with unconditional love. I think it's a push and pull from Mom and Dad sometimes. Sometimes it comes from one, and sometimes it comes from the other. My parents are just such great partners that that push and pull, I think, worked really well. Another way to say it is “pleased but not satisfied.”

I think I was in sixth or seventh grade, and I was in an advanced math class. I was really proud of that because my dad really emphasized the importance of math. I got our first test back, and I got a 99, so I called my dad after school. I said, “Dad, you're never going to believe it. First test, I got a 99.” And he was like, “What happened to the last point? You ran for the touchdown and you fumbled the ball on the 1-yard line.”

That stuck with me. It wasn't, “Oh, my dad doesn't love me. He's not proud of me.” It was just, “No, I've got to be better.” My mom is an elite endurance athlete. She did the Ironman World Championships, she's completed a bunch of half-Ironmans, and she's got all kinds of course records in cycling races. A lot of what I learned about hard work, determination, and perseverance is really from her, and from leading by example in that way.

We used to go on these really long bike rides. You'd be climbing a hill, and she's, of course, 20 yards in front of me while I'm panting and trying to catch her. There was one time in particular when there was a red car parked at the top of the hill. It was a long ride—it could have been 60 or 70 miles or something—and we were pretty far into it. I was really struggling, and she's like, “Just get to the red car. Get to the red car.”

I was grinding, trying to get there, and of course, as I approached the red car, the red car drove away and drove up the hill. After the ride, we had this conversation about how this is what life is like sometimes. You see the red car and you're like, “If I can just get there, I'm going to make it,” and then the red car starts its engine and pulls away.

Both of my parents operate that way, whether it's the 99 on the test, the red car, or the way that they operate. My dad, 40 years in, is still the CEO of the company. That red car is still driving away from him. He's not like, “Oh, well, we did pretty good. We built a big business.” He's reinvented the thing 3 times, and he's still having as much fun as he had in the early days. It's so fun to see him doing that and having the fun that he's having running his business.

I think it's just this infinite game mentality of always trying to get better and always trying to improve. But then there's the supportive element: you have potential, you can do great things, but you've got to push yourself and you've got to set big goals.

Well, that was one of the most fun segments of Kindest Thing that I've ever had. I'm glad we expanded on it. Zach, thanks again so much for your time.

Thank you, Patrick.