Energy’s Dirty Little Secret

Opponents of renewable energy are quick to point out with disdain that renewable energy sources wouldn’t be viable without subsidies.

As one who tends to hate subsidies because of their tendency to create perverse market distortions, as well as their spurious on-again/off-again nature (e.g., wind PTC circa 1999-2004), I am sympathetic to arguments that employ a dislike of subsidies.

But, what bothers me even more than subsidies is hypocracy and disingenuousness. And, those who rant against renewable subsidies are guilty as charged.

The dirty little secret in the energy industry is how vastly subsidized conventional forms of energy are. I recall estimates from the late 1990’s suggesting that the U.S. subsidizes fossil fuel to the tune of about $30 billion per year, through various mechanisms but mainly relating to military activities/presence in the Middle East whose costs do not get reflected in energy prices. In case you missed it, these estimates were from the late 1990’s; if they were accurate, the magnitude of fossil fuel energy subsidies must surely be higher now.

Another way of considering the subsidy issue is to examine Federal R&D spending on energy, as CRS has done. By their reckoning, between 1948 and 1998, the U.S. government spent $74 billion on nuclear programs, $31 billion on fossil programs, and $15 billion on renewables. In other words, R&D funding on more mature energy forms outweighed R&D spending on immature renewables technologies by a factor of 7 to 1. By another measure indicating the tilt against renewable energy — federal tax breaks between 1998-2003 — fossil energy received $10.2 billion, nuclear $1.5 billion, and renewables $0.4 billion.

This last estimate was provided by Alexandra Teitz (Minority Counsel, Committee on Government Reform, U.S. House of Representatives) last week in her presentation to the monthly ABA Renewable Energy teleconference, provocatively titled:

“Renewable Energy in the Energy Policy Act: Business As Usual = Failure”.

One can argue about how to properly quantify the estimates, but the directional implication is without doubt: conventional energy forms receive gluttonous quantities of subsidies. Could someone explain to me why fossil energy interests, who have had a century to build a solid market position, should receive any government subsidies at all? Anyone at the Cato Institute listening?

I would be delighted if the subsidies on renewable energy were removed, if the subsidies on conventional energy were also removed. Let’s play on a fair playing field. I argue that would be a far better situation for those of us who care about energy security and the environment.

Until then, as much as I dislike subsidies of all forms, and think that undue reliance on them is a danger for renewable energy industries, I would seriously prefer those who rail loudly against renewable energy subsidies to simply shut up and get wise to the facts. Or better yet, to turn their venom to all energy subsidies, not just those accruing to renewables.

Making the Grid "Smart"

The realization that America’s electricity infrastructure is shakier than a palm tree during a hurricane hits us every few years, when some blackout or rolling brownout reminds us of our electro-vulnerability.

But to truly understand what we’re up against, it’s important to step back for a moment to see just how vast — and how vulnerable — our electricity infrastructure is:

The North American electric power industry comprises more than 3,000 electric utilities, 2,000 independent power producers, and hundreds of related organizations. Together, they serve 120 million residential customers, 16 million commercial customers, and 700,000 industrial customers. With about $275 billion in annual sales, the industry is one of the continent’s largest – 30% larger than the automobile industry and 100% larger than telecommunications.

North American utilities own assets with a book value of nearly $1 trillion, roughly 70% in power plants and 30% in the grid. The continent has 700,000 miles of high-voltage transmission lines, owned by about 200 different organizations and valued at more than $160 billion. It has about 5 million miles of medium-voltage distribution lines and 22,000 substations, owned by more than 3,200 organizations and valued at $140 billion. The North American electric power industry will purchase more than $20 billion in grid infrastructure equipment in 2005, nearly one quarter of the worldwide total of $81 billion.

That analysis comes from a report released today: “The Emerging Smart Grid” (Download – PDF), produced by the Redmond, Wash.-based Center for Smart Energy. According to the report, as much as $45 billion is up for grabs by new advanced technologies for modernizing the electric power infrastructure.

The idea of the smart grid is to make the existing grid work more efficiently — so much more, in fact, that it could reduce the need for additional power plants, or for costly redundant systems designed to work “just in case” of peak demand. That’s the vision of a growing corps of researchers and companies working on grid optimization, a term that describes a wide range of information technologies that better understand and analyze exactly what’s going on in a complex energy system on a minute-by-minute basis, then optimize the system in a way that’s cost-effective.

This isn’t entirely news. Wired magazine published a seminal piece on The Energy Web in 2001. My company, Clean Edge, suggested in its Clean Energy Trends 2003 report that “optimizing the grid” would soon propel both investors and innovators to grab onto a multi-billion-dollar opportunity. But the CSE report takes that view to a much deeper level. For starters, it offers the seven key characteristics of a modern, optimized grid:

  • Self-healing. A grid able to rapidly detect, analyze, respond and restore from perturbations.
  • Empower and incorporate the consumer. The ability to incorporate consumer equipment and behavior in the design and operation of the grid.
  • Tolerant of attack. A grid that mitigates and stands resilient to physical and cyber security attacks.
  • Provides power quality needed by 21st century users. A grid that provides a quality of power consistent with consumer and industry needs.
  • Accommodates a wide variety of generation options. A grid that accommodates a wide variety of local and regional generation technologies (including green power).
  • Fully enables maturing electricity markets. Allows competitive markets for those who want them.
  • Optimizes assets. A grid that uses IT and monitoring to continually optimize its capital assets while minimizing operations and maintenance costs.

    Several factors are driving the need for a “smart grid.” For example, deferred maintenance that can no longer be ignored is mandating billions in upgrades. Regulatory changes mandate still more new hardware and software.

    Still another driver is the substitution of “bits” for “iron” — using smart systems to delay or reduce the need for expensive capital assets:

    Smart technologies can reduce the need for power plants, power lines, and substations. To name just four examples:

  • Demand response programs that shave peak loads, reducing the need for expensive (and polluting) peaking power plants
  • Sensors and meters that show exactly where power is being used, so utilities can expand only where needed and when needed
  • Electronics and control software that monitor power fl ows in real time, to run existing lines much closer to capacity without compromising reliability
  • Sensors and software to remotely monitor expensive equipment to know when it really needs to be replaced
  • According to studies by PNNL, the Rand Corporation and others, the savings from measures like these could be $50-100 billion over the next 20 years.

    Skyrocketing prices for oil and natural gas are bringing a new sense of urgency to all energy issues, including the grid, and this report represents a call to action to consumer groups, trade associations, utilities, scientists, and environmental organizations, among others. As we continue to electrify everything, and increasingly feed in electricity from countless solar, wind, and other distributed installations — and do it in a 24/7 world — the needs for a sturdier, smarter grid will grow daily. And our failure to upgrade our electricity infrastructure could threaten our economic — not to mention our national — security.

    As we noted in our 2003 report, “Given that the cleanest energy plant is the one that you don’t have to build, grid-optimization represents the ultimate clean-energy play.”

  • Oil Prices Still Falling?

    Crude oil futures dipped lower this week, just below $60/barrel. MSN article. That’s now down 15% off of the hurricane induced high.

    US inventories, both crude and gasoline, are up by several measures. Apparently the market’s previous concerns over US production glitches following Katrina and Rita were at least somewhat overstated, especially given emergency supply increases in the interim and adjusting demand.

    I have read a few reports suggesting that consumers are finally feeling the bite, and demand is adjusting to the higher price regimes. I’ve been waiting for this to happen. As always, demand forecasting is the tough one.

    Would the Million Solar Roofs bill save California money?

    SB-1, California’s hot topic million solar roofs bill, lost out last month. A definite setback to the solar industry here. I’m personally in favor of the solar roof bill, but some of the analysis around it was a little odd.

    A couple of months ago a solar company called Akeena, put out a whitepaper saying that if California adopted the Million Solar Roofs Bill that it could save over $6 Billion over and above the costs of the $ Bil subsidy. Akeena WhitePaper.

    They were quoting $9 Billion in benefits for $3 Billion in incentive costs over 10 years. They estimated total system costs at roughly $7/watt, and projected declining subsidies.

    Most of the “savings” was projected from $7 Bil avoided cost of building new infrastructure, both generation and T&D, with smaller amounts $0.5 Bil from emissions reduction and $1.5 Bil from new jobs and taxes. The amounts were calculated over a 10 year basis. The main driver is that avoided cost for new generation and T&D.

    What I didn’t understand at first was that the report calculated the benefit of the full avoided cost for new generation and T&D capacity that we would skip by adding 3,000 MW of solar capacity, but the cost side of the equation only seemed to include the subsidy, or STATE’s portion of the total solar bill. Each company or homeowner that put in a system would pay thousands of dollars more in costs as well. When you include that in the equation, the numbers don’t look so good, and probably show a small net gain at best, and more likely a net loss, over 10 years.

    It seemed to me the analysis only included half the cost, while adding all the benefits.

    The reality check is simple, the payback for a homeowner putting in one new solar system is 25 years with no subsidy, 16 with the state’s subsidy, by the report’s own analysis. So it’s really hard to believe analysis saying that if we subsidize putting in 1 million homes, instead of one, then we as the state can get 3x our money back in 10 years. The answer: we can’t, not if we include ALL the costs.

    This all said, I still the like the million solar roofs idea. California is a green state and should be at the forefront of alternative energy. We’ve put our money where our mouth is before when it comes to the environment, and we can again, but I like to know how much I’m paying.

    Take on the Energy Storage Conference – San Francisco

    I have spent the last couple of days at the EESAT 2005 Conference in San Francisco, hosted by the Electrical Storage Association with Sandia Labs and the DOE. The forum was focused mainly on large scale storages schemes. It was a long running well run forum, done every two years, 150+ attendance. Frankly, about the presentations themselves, I was disappointed. Very few of the discussions were down to earth where I could relate. I listened to a lot of discussion of the importance of electrical storage to the region, but the discussion was very academic, heavy on the study side, very light on either the technology or products coming to market. And the policy discussion lacked a sense of the reality of what economics were going to be.

    A few of the flow battery folks were there: VRB Power and ZBB (an Australian company, I was surprised to learn), as well as other perennial battery developers, Electro Energy some of the flywheel companies: Vicon, Pentadyne, Active Power, Boeing, Beacon. and EPRI and the State of California was well represented, as well as lot of academics, consultants, and a few global firms scouting progress or talking up a pilot they were involved in. There were also a number of papers on concepts like compressed air storage, which have been around for years with no takers.

    I felt I was watching the CHP discussion of 5 years ago all over again, except it was on storage. A lot of teams chasing a market that is unlikely to materialize in the way or of the size they are expecting. The bright spots included a realization that integration was the key, but there was very little sense of near term products or projects being brought to market.

    The most interesting discussion I thought was by a Japanese firm I had not heard of called Power Systems Co. (Very little of their English language website is finished.) I am not sure why they were giving a paper at this particular conference, but the engineer who presented said they had built a $25 mm plant to manufacture a next generation of supercapacitors, that they termed NanoCaps, product name ECaSS, and were selling an earlier generation now in Japan. Frankly, they were the only credible presentation I saw on a near term commercial business.

    Noticeably absent or in short supply across the board were investors, customers, buyers, or other people with non-R&D based budgets. So that’s either opportunity, or perhaps just symptomatic of the state of large scale electrical storage today.

    Project Finance for Renewables

    Structured energy project finance has been relatively commonplace in supporting the development of new energy facilities over the past 20 years. Central to the concept of project finance is disaggregating risk and parceling it out to specific parties who can accept that risk. As a result, project finance works great for the 30th or 40th deal of the exact same type, but it is typically very hard to use project finance approaches for funding the development of facilities using innovative technologies or commercial arrangements.

    Accordingly, project finance has historically been somewhat problematic for renewable energy interests to procure. Financiers central to structuring the deal were either unfamiliar or uncomfortable with the risks posed by renewable energy technologies, most of which have not been in commercial operation for decades. This lack of project finance capacity has thus been a major barrier to the widespread deployment of otherwise viable renewable energy technologies in commercial-scale projects.

    The good news is that project finance capacity is increasingly opening its doors to renewable energy opportunities. Financial professionals with deep knowledge of the true abilities of renewable energy are finally beginning to amass capital to deploy in sponsoring the development of renewable energy projects. The recent announcement of the $80 million bankroll behind US Renewables Group is but one indicator of the growth in this pivotal capacity for the future growth of renewables.

    Other boutique project financiers specializing in renewable energy opportunities are also emerging, and others will continue to form to capitalize on the rapid growth potential virtually uniquely offered by the renewable energy sector. We will know that renewable technologies and projects are truly mainstream when the big banks like Citi and JPMorgan lead the honor rolls of renewable energy project financiers. With the purchase of Zilkha Renewable Energy by Goldman Sachs earlier this year providing an immense boost to the credibility of renewables on Wall Street, these days cannot be long from now.

    Is Bush Still Weakening the Clean Air Act?

    Is the Bush Administration continuing to weaken our environmental regulations?
    By and large the US has been getting cleaner and more environmentally friendly on a per unit basis for the past 30 years. This is a good thing, though we still have a long way to go.
    I think that the future of power in the US includes a significant combination of coal generation (today still 55% of our electric power). Most electric power people would agree these days. So clean coal policies and clean coal technologies are very hot topics for me.
    The electric utility industry understandably has concerns about the economic impact on its power plants from new and increased regulation and requirements. I have no desire to see our power prices jump overnight and put the brakes on the economy.
    But it really bothers me to see a weakening enforcement of laws already on the books. I want to see measured increases in emissions restrictions year after year across the board. No major jumps, and no backwards steps. That way technology and capital planning can go hand in hand, and the industry can build a culture of long-term improvement. The biggest problem for industry in my mind is not increases in restrictions, but not knowing when and how much those increases will be. Or worse, believing that it can reduce the effect of restrictions currently in the rulebook. That only promotes industry lobbying to game the system.
    Does the Bush Administration understand this fact? Check out one article suggesting it does not, or post a comment if you disagree.

    Toyota’s Hybrid Recall News – Set Back for Cleantech

    Toyota today announced it was recalling and repairing 75,000 Prius cars due to engine stalling. I think that is on the order of half of their total fleet.

    It doesn’t sound like a big fix is required, but certainly a massive PR setback for the most popular hybrid our there.

    I’ve personally been waiting for the Ford Fusion hybrid to come out in 2007. Has anyone heard much about that one?

    Recall Article

    The Race for Small Cleantech IPOs Continues

    Small cap cleantech IPOs have been especially hot lately, and definitely global. The big cleantech news seems like that the whole world is getting in on the IPO game. It’s not just in the US, the equity markets in Australia, on the ASX, and the London AIM exchange have lots of activity.

    The other striking thing is this activity is not being done by the big banks, nor for the market leaders in each energy or environment technology sector. Many of these recent IPOs have been definitely “emerging” businesses.

    IPOs in recent news include a biodiesel company announcing it will raise A$37 mm in Australia,
    Axiom Energy IPO. Hoku Scientific went public a few months ago in the US. An early stage fuel cell membrane company, it is up 100% since then. Polyfuel, another emerging US competitor to Hoku, has also looked at plans to IPO on the AIM, Polyfuel IPO.

    Babcock & Brown is affiliated with a recent wind energy company listing in Australia, now raising US $275 mm for growth.

    In solar in the US we have seen micro IPOs in CIGS from Daystar last year on Nasdaq, and Solar Integrated Technologies, a US based company on the AIM exchange. SunPower, another solar company whom Cypress Semiconductor has sunk tremendous amounts of money into, has filed for a $115 mm IPO in the US. Total revenues are just south of $30 mm, putting even this rather large IPO by cleantech standards well south of the top 10 solar players, who are mostly private.

    My own firm advised one in green thin film processes for RFID antennas and EMI shielding, Block Shield, that floated on AIM last year and has done well.

    The real question is how strong are these companies, are the valuations reasonable, and how will they perform? By and large most of the recent cleantech IPOs are very young businesses, not ready for the public markets by historical standards.

    Renewable Portfolio Standards: Good or Bad?

    In his columns featured in New Power Executive, Professor Robert Michaels of Cal State Fullerton is usually good for ruffling a few feathers. Recently, he took on the issue of renewable portfolio standards, with his typical contrarian stance that they are an abomination.

    In defense of his position, Prof. Michaels leaned heavily on the work of David Montgomery of CRA International. Montgomery presented a paper in May at the Harvard Electricity Policy Group — a very interesting repository of leading-edge thinking on the electricity sector — entitled

    “Renewable Portfolio Standards: A Solution in Search of Problem?”.

    The Montgomery/Michaels position is that RPS requirements do not effectively address the core issue they aim to tackle (air emissions), and instead only produce significant economic distortions and hence inefficencies in the operation of power markets.

    As an economist by background and a free-markets capitalist by philosophy, I am generally sympathetic to their arguments against RPS. In an optimal world, I too would prefer not to have RPS requirements. However, the Montgomery paper notes only in passing the real issue: that there is no policy in the U.S. to deal with the externality of CO2 emissions. If there were a binding U.S. policy on CO2 emissions — cap and trade, carbon tax, whatever — then I totally agree with the Montgomery/Michaels thesis that RPS programs are undesirably distortive. But, unless/until there is U.S. CO2 policy (which we badly need), then I believe RPS to be a fairly good second-best solution.

    What do you think? Are there better ways to reduce CO2 emissions from the power sector than RPS requirements?

    Plug-In Hybrids: New Contender for Clean Car Mantle

    I’m gratified Neil Dikeman invited me to contribute to the CleanTech Blog. I may sometimes duplicate what I say at Power, Plugs and People at HybridCars.com.

    I thought I’d start with a backgrounder that will bring readers up to speed about plug-in hybrids, the existing-technology solution that has been the subject of much attention in recent months. This is a version of a column published in the Green Car Journal, the quarterly publication that’s read both by consumers and auto industry insiders.

    This year, batteries and electric motors are back in the news, spurred by the popularity of gas-electric hybrids and the recognition that fuel-cell cars are electric vehicles. The plug-in hybrid (PHEV), long consigned to a footnote as an interesting but unrealistic idea, may soon enter the mainstream as an automotive option.

    Here’s how our organization, The California Cars Initiative (a non-profit group of engineers, environmentalists, entrepreneurs that combines technology development and advocacy), explains how PHEVs work for drivers. “It’s like having a second small fuel tank you always use first. You fill it at home with electricity, at an equivalent cost of under $1/gallon. Your energy is cleaner, cheaper and not imported.”

    Now support for PHEVs comes from unexpected places. Neoconservatives seeking rapid reductions in oil dependency. Engineers immersed in online communities. Futurists concerned about a vulnerable centralized power grid. Ethanol advocates discovering feedstock alternatives to corn. Clean-Tech investors are supportive but haven’t yet determined how to participate.

    They’ve joined forces with long-time supporters like renewable energy advocates, utilities with cheap off-peak power, fleet owners eager for green cars and component suppliers seeking new markets.

    One by one, objections have fallen away:

    * The complexity of two systems. Today’s hybrids use advanced technology to remove components and engineer some of our highest quality and customer-value cars.

    * The national power grid is too dirty. Argonne National Laboratory and other studies show electric vehicles beat out gasoline vehicles on well-to-wheel greenhouse gases.

    * No one is interested. Journalists have jumped on CalCars’ and EDrive’s high-MPG conversion stories. They understand how flex-fuel PHEVs would use almost no gasoline. Admittedly, some reporters haven’t factored in electricity and biofuel costs. But when the bipartisan National Commission on Energy Policy dug into the emissions numbers and looked for achievable strategies, they gave plug-in hybrids the highest grades. Then Orrin Hatch, Barack Obama and other Senators, along with George Shultz, James Woolsey and other former Cabinet Members, hailed the 2-4 cents/ mile cost for local travel as a breakthrough this country needs.

    * Car companies won’t build them. DaimlerChrysler is now completing the firstOEM PHEV prototypes. Recent statements from Toyota and Ford indicate they are weighing the concept as well. We hope at least one company will jump on the opportunity to differentiate itself, leapfrogging over current hybrids.

    * Batteries cost too much and won’t last. This remains a subject of debate. Even discounting promising materials science advances, batteries are competitive through incremental but substantial technology, production and cost improvements, rising gasoline prices. Soon we’ll have data from DaimlerChrysler Sprinter vans with NiMH and Li-Ion batteries. A forthcoming Electric Power Research Institute (EPRI) study will report no technology impediments and see affordable batteries when produced in volume.

    * Overly long payback. This topic is fading as many auto buyers demonstrate their willingness to pay more up front for green cars. They recognize that energy security and global warming are not simply issues of “dollars and cents at the pump”. Meanwhile, EPRI studies project lower lifetime costs for PHEVs than for any other type of car. And growing concern over the danger of further delay in reducing oil consumption led to tax credits that scale by MPG, and prompts companies like Hyperion Solutions and Timberland to subsidize employees’ hybrid purchases.

    PHEVs are an extendable platform that welcomes other solutions like engine efficiencies. They can be designed for any fuel type, starting with gasoline and evolving to biodiesel, cellulosic ethanol and even hydrogen. This way, PHEVs solve both the “chicken and the egg” infrastructure dilemma and the uncertainty of predicting future technologies.

    CalCars.org and our allies plan to partner with OEMs on demonstration programs. We know the auto industry can deliver. After Pearl Harbor, Detroit switched from cars and trucks to planes and tanks in a year. With PHEVs, we have the opportunity to find out how clean and efficient cars can be right now.

    Are Oil Prices Finally Coming Down?

    Oil prices are made up of components, supply and demand.

    The market tends to forecast near term supply for oil reasonably well. There is a lot of data out there, and a lot of smart people crunching it.

    The big bugaboo in predicting oil prices, however, is forecasting short term demand. The main variables in demand tend to be economic growth rates in the US, Europe, China, and SE Asia. If those economic growth rates exceed what oil analysts expect, oil prices tend to rise. If they don’t, oil prices suffer.

    As you can see in the recent press, oil price recently fell about 10% on overinflated demand predictions.

    Falling Oil Price News Article

    The last time oil hit a low of $11/barrel was only 7 years ago in 1998/1999. It was right after oil had risen to a recent high of $35/barrel in the mid 1990s caused mainly by heavy demand growth from rapidly growing SE Asian economies, and the solid US economic growth during the Clinton Administration, at a time of tight supply. During this time many OPEC countries were producing above their quotas, and when the “Asian flu” hit and took a bite out of demand, oil prices cratered. On the supply side, several years of relatively high stable prices had seen increasing investment in new oil production, just like today. And those new supplies kicked in just as demand dropped. OPEC, which usually balances supply, did not act quickly due to internal fighting, and we saw oil prices drop by 2/3rds in a very short period.

    Similar situation today. No one knows when demand will falter, but when it does, watch out.

    This is a cyclical industry. Let none of us forget it.

    Cleantech Investment Forum in Australia

    I just wanted to put a plug in for the Cleantech Forum in Melbourne, Australia in late Novemeber. I am moderating one of the panels on investing.

    The founder, Jeffrey Castellas, has been looking to make a splash in cleantech for some time. I am excited to see he is doing it in Australia, as my firm does a lot of work done there. Australia has a tremendous amount of technology in the cleantech area, partly because natural resources is a sector where Australian punches outside of its weight, and partly because of a very strong university and government investment in research.

    Check it out. Cleantech Forum

    Coming Convergence of Energy, Environmental and Capital Markets

    I recently had the pleasure of sitting down with Peter Fusaro in New York to discuss the evolution of the energy and environmental marketplace. For those of you who know Peter, spending time with him is akin to drinking triple-shot espresso out of a fire hydrant — a mixed metaphor perhaps, but one that should indicate the overwhelming volume, rapidity and forcefulness of commentary and opinions that Peter expresses.

    These days, Peter is spending most of his time embedding himself in the energy hedge fund community, which gives him a distinctively insightful perch from which to view the current situation and near-term future. From his perspective, he is passionate in his conviction that the environmental markets will transform the energy markets, and furthermore will more deeply intertwine both markets with the capital markets. He rattles off several statistics and anecdotes demonstrating that interest in energy and environmental markets by the hedge fund community is exploding, and that such activity will fundamentally make the future quite different from the past.

    After letting my head spin down from our discussion, I read Peter’s latest article, which he publishes through his relationship with Utilipoint. It’s intriguing stuff, and presents a window into Peter’s thinking — and, by extension, into the way the world of hedge funds is viewing energy and environmental matters.

    “Turbulent Markets Ahead: Why the Energy & Environmental Crisis Will Continue For Many Years”

    Cleantech Venture Network Now Streaming Cleantech Blogs

    The Cleantech Venture Network is now streaming several Cleantech blogs on their site, Cleantech.com.

    The stream is heavy on the technology investment and venture capital content at the moment, but several good blogs are already streamed there.

    Check it out. We at Cleantechblog are big fans, and support all the Cleantech Venture Network is doing to drive investment into the cleantech, energy technology, and environmental technology community.