Three car companies walk into a bar…

The Michigan grid, and an opportunity to accelerate EV adoption

Investing is fundamentally the search for Alpha; The investor’s thesis / insight / arbitrage opportunity / ouija board / whatever that allows them to develop conviction in market-beating financial returns. Every investor has their own methodology to find Alpha, all of which are valid and few of which are effective. We digress. Using our primary thesis of climate tech as a macro & microeconomic lever, team Coral prefers to look for local inefficiency, and to identify regionally specific stakeholders who can align incentives to fix said problems. 

Today’s piece is about Alpha, inefficiency, and a modest (ed; lol) proposal for an interested group of stakeholders to stop wasting money and jump in to fix things. 

Let’s talk about the Michigan electrical grid. 

Ice, Fire, and Power

Much has been made, and in our eyes exaggerated, of Michigan’s economic decline. The narrative is largely bullshit; Downtown Detroit is one of the most vibrant and interesting cities in the US, and the state’s GDP ranks 14th in the country at just under $600bn, per CNBC. The auto companies continue to print money, local manufacturing is booming, and the University of Michigan has done wonderful work in spinning up startup hubs. 

While certainly imperfect, we’d hardly call Michigan a wasteland. So why, we have to ask, does their electrical grid suck quite so badly?

Specifically; Michigan residents experience an average of 10-14 hours without power annually (4th highest in the country), per the EIA, and outage restoration is among the slowest in the country. Note; We’re hesitant to give exact data here, because it’s inconsistent from source to source, and self-reported by utilities, which have an obvious incentive to spin. It’s pretty clearly a problem. 

The utilities, DTE and Consumers Energy, have given a number of explanations for the situation, which range from the farcical to the downright insulting. Chief among their excuses are the presence and existence of trees, of which Michigan has a wonderful variety, and will sometimes fall on above-ground power lines during storms. 

A few points that we found intriguing here; DTE pays a hefty 3.94% dividend yield (in line with historical averages), representing an even heftier 55% payout ratio on earnings (S&P 500 stocks typically have 20-50% payouts, with anything over 50% typically considered unsustainable), and the company has admitted to tree-trimming practices which are, how do we say this, borderline malpractice but excellent for the stock price. Unregulated monopolies are wonderful things for the investor, and shitty for the consumer. 

We are further intrigued that Minnesota, which is next door and similarly beforested, doesn’t have these problems. Is it because Xcel Energy, the state’s largest utility, actually spends the money to stay in line with forestry best practices? Who can tell? 

Lest anyone think Coral has gone soft; We’re capitalists and have no issue with companies turning a profit or issuing dividends. We think that a utility company should be proactively obsessed with the reliable delivery of electricity, and not simply responsive to regulatory bludgeoning and consumer outrage. 

This situation does, however, create an opportunity for some of Michigan’s most prominent corporate residents. 

Streets of tomorrow

Have you seen the meme that floats around twitter every few months, of the cities of tomorrow? It’s a good joke construction; If we can only solve X problem, then we’ll get {insert image of futuristic, glass & chrome metropolis, flying cars, smiling people, warm light from above}. 

Hey Ford, GM, FCA; You all have corporate venture funds, endless capital, and massive interests in making EVs into the transportation modality of the future. One of the most common knocks on the technology now is that battery range is limited, chargers are scarce, and weather & bad roads hammer the utility of these vehicles. Basically, EVs require good infrastructure and incredibly reliable electrical grids in order to reach feature parity with ICE cars for the consumer. 

So what if, instead of sinking your piles of cash into competitive battery and autonomous driving startups that you’re just going to buy in a couple of years anyways, what if you pooled resources, spun up a collective venture studio, and made Michigan into the shining examples of what EVs can be?

The Michigan Infrastructure Fund

Let’s call it $1bn to start, coming equally from each of the big 3 auto companies. 

The rules; The fund can’t invest in any in-car technologies (ie, autonomous driving, batteries, Lidar, etc) to prevent IP headaches. Instead, it focuses on companies that (1) enhance the quality of life for residents of Michigan through access to cheap & reliable electricity, and (2) flatten the curve towards widespread ownership of EVs. 

Do you want examples? Of course you do. 

• Materials-science company that 3D prints replacement pole-top brackets (a common grid failure point), and sells the same to DTE, Consumers, and eventually everywhere at a healthy margin. The auto companies have endless pools of talent qualified to work on this problem. 

• Next-gen drilling systems to place utility cables underground, as they should have been all along. All the LPs keep perpetual licenses to use this IP in constructing their newest plants and facilities worldwide. 

• Co-developed charging stations, coupled with a universal charging connector compatible with all three EV fleets, and placed literally everywhere. Do this right and it becomes the first true competitive edge against Tesla. 

• Cover the upfront cost for Our Next Energy to place battery walls in first-responder facilities, hospitals, and emergency aid centers statewide. Lease these to the state government and turn a profit after year 3. Couple these centers with solar farms, and make controlled charges available at no cost in large outages. 

• Spray money at Overstory until they open a Detroit office, and help DTE get the trees under control. 

• EV-focused communication firm. Short form, glossy videos, highlighting the cost savings and quality of life improvements of purchasing EVs. All content licensed back to the auto companies to do with as they wish. 

Incentives

Adaptation to climate change is all about the healthy alignment of incentives at scale. We hope that the auto companies take this piece as inspiration to put their dollars to work in making more of the same, and making a better way of life for the citizenry that’s supported them for so many years.

And, as always, we’d love to help make this into reality.