Why Smaller Venture Funds Do Better

Guest Blog – Max Branzburg, Clean Pacific Ventures

Despite cries to the contrary, the venture capital industry is not broken. The poor performance over the past decade leading critics to write VC off as “fun while it lasted” has been driven by an isolated segment of the industry: large funds. The red flags are ubiquitous, but LPs today insist on investing in underperforming, oversized funds. Small VC funds – as they have throughout the industry’s existence – continue to deliver superior returns to their investors. The successful small-fund model has been readopted by some VCs, but too many LPs, VCs, and entrepreneurs remain unaware of its historically exceptional performance and its present advantages.

Today’s best-known top tier VCs – Kleiner Perkins, Accel, Sequoia, Venrock – began their careers with double- and single-digit fund sizes (Gupta, Done Deals). Limited partners – impressed by those funds’ returns – sought to invest more in the asset class, and fund sizes grew. The average venture fund grew from $54M in the 1980s to $95M in the 1990s and to $180 in the 2000s. Today, there are more than 400 funds of $250M or more (Thomson Reuters). Limited partners – perhaps ignorant of discrepancies in fund performances – have driven up demand for large funds, and VCs have happily complied, earning hefty management fees on excessively large pools of capital.

Excluding Internet bubble-effected funds, the historical increase in fund size has been accompanied by a highly correlated decline in returns.

Figure 1: Historical VC performance as a function of fund size (funds raised in 1990s excluded)

While exogenous factors may have played a role in the asset class’s decaying performance, a closer look reveals that a shifting dynamic within the VC industry towards large funds is a leading culprit.

By recognizing the important differences between small-fund ($50M – $150M) and large-fund (>$150M) investment patterns, we can better discern which segment of the venture industry is broken. As it turns out, only 7% of the large funds raised between 1981 and 2003 achieved returns for their investors at or greater than 3x. By contrast, 24% of the small funds raised during that time achieved >3x returns. More than three times as many small funds as large funds achieved those successful multiples. Four times as many small funds as large funds achieved multiples at or greater than 5x (Preqin, as reported by SVB Capital). The portion of returns achieved by each fund size from 1981 to 2003 is shown below:

Figure 2: Distribution of VC performance by fund size (data from Preqin, as reported by SVB Capital; chart by author)

As large funds become more common, the advantages of the small-fund model become more overt. Smaller funds – like those upon which the industry was initially built – are inherently better positioned to achieve superior returns. Some reasons why:

1. Smaller exits can return the fund

The smallest “large fund” ($150M) that owns 10% of its portfolio companies and charges 20% carry must generate $5.4B of market cap to achieve a 3x fund-level net return.

If that portfolio includes 10 companies, each company must generate, on average, $540M. Consider that from 2000 to 2008, 83% of the venture-backed exits were M&As, at an average valuation of $110M (the 17% of exits that were IPOs averaged $407.1M). Every portfolio would need to be populated by a handful of YouTubes and Facebooks to make the math work.

Smaller funds make more capital efficient deals, own larger equity stakes, and are able to return their funds with more modest exits.

2. GPs profit by performing

A typical $500M fund charging 2% management fees earns $10M/year before making a single deal. Carry from a couple of successful exits might sweeten the pot, but management fees already do significantly more than just keep the lights on for large funds.

Smaller funds cannot survive on 2% management fees; their livelihood depends upon making good deals and taking a piece of what is returned to the investor. Their incentives are better aligned with those of their LPs, and exceptional performance is the mutual goal.

3. Specialized sector knowledge

Smaller funds tend to focus on particular industry sectors. A small cleantech fund might have 3 GPs with expertise in 6 different cleantech segments. A larger fund is less likely to have multiple GPs with similar or overlapping specialties and, consequently, more likely to make bad deals. Small, sector-focused funds can make better investment decisions and add more value as board members.

4. Flexible follow-on financing

Large funds like to control the financing of the companies they invest in. One way to attain control is to seed a company alone, essentially taking that company off the market for future financing rounds. Large funds may also make small (proportionate to the fund) investments in the seed round within a syndicate led by another firm, and – as a company matures – add much more capital, thus taking a much larger equity stake. By getting involved early, they essentially buy an option to load up on equity later. LPs can consult historical performance data to discover that this strategy has not given large funds an advantage over small funds.

Small funds are happy (and well-positioned) to lead deals, but they tend to invest alongside other funds, and they offer market valuations. The ensuing flexibility is highly desirable by entrepreneurs. Capital efficient companies can avoid the “load up” problem; by requiring less capital, they are less susceptible to large funds’ equity-grab.

The recent increase in fund sizes is likely attributable to an information lag in the wake of the Internet bubble, and we should expect funds to downsize as historical performance discrepancies become evident. While the advantages of the small-fund model seem especially applicable to the clean technology sector (in which too many companies are capital inefficient), a dearth of realized returns leaves LPs unsure of how to allocate their funds. Many of the most visible clean technologies require significant capital to reach profitability and do not fit into the venture model; those technologies will play an important role in our future, but they will not offer high quality venture performance. It seems clear that small cleantech funds are better situated to deliver exceptional returns to their investors.

Max Branzburg is an Analyst at Clean Pacific Ventures, a pure play venture capital fund focused on capital efficient cleantech companies.

Solar Energy’s 33 Percent Annual Growth will Accelerate

By John Addison (7/26/10)

Solar energy growth continues its strong growth. For the 30 years from 1979 to 2009, solar energy has grown 33 % CAGR (compound average growth rate). For this decade, over 40 percent is forecast. Although 2009 was hurt by a sever recession and difficulty in financing large projects, most additional power brought online in the United States, Europe, and much of Asia was renewables. 32 GW of solar power is installed globally; 7.2 GW was installed last year.

Yes, it is discouraging that U.S. electricity generation is dominated by coal and natural gas, and 97 percent of our transportation is from petroleum. The U.S. continues to spend over a trillion dollars of tax payer money each year subsidizing fossil fuels, covering health bills from pollution, and fighting wars to secure our oil supply. We suffer from our policies that support flattening mountains for coal, dangerously drilling our oceans for oil, and expanding highways instead of public transportation. Yet help is on the way as renewable energy continues to cleanly power more homes, workplaces, and rail transit. Public Transportation Renewable Energy Report

I joined 2,500 conference attendees at Intersolar North America, a premier exhibition for solar professionals. The co-located Intersolar North America and SEMICON West events, which took place this week in San Francisco, presented over 700 solar exhibitors to more than 20,000 trade visitors.

The exhibition took place at the Moscone Center, LEED certified conference center with 675 kW of solar on the roof (yes, I climbed on the roof and saw the acres of Sanyo and Shell solar panels). Equally impressive is the 80% improvement in energy efficient lighting at the conference center.

The Future is Europe buying U.S. innovation manufactured in Asia

Germany leads the world in buying most of each year’s solar production. German businesses and homeowners make money installing solar and then selling excess kilowatts with guaranteed feed-in tariffs (FIT). Although Germany is now reducing FIT rates, the cost of installing solar is dropping even faster. Germany will continue to lead in adding solar. With help from Italy and other countries, Europe will buy over 80% of solar PV in 2010. Only 6% of solar will be installed in the U.S., even though we have enough sunlight to power the entire nation.

An excellent summary of the solar market is Renewable Energy World’s Solar PV Market Analysis by Paula Mints, Navigant Consulting.

U.S. innovation has been a key driver for solar. First Solar’s CdTe thin film has brought manufacturing cost below $1.00 per watt. SunPower has achieved record 24% commercial efficiency. Key inventions of PV and semiconductors are from the U.S. Innovation continues everywhere from universities to venture backed start-ups. Optimistic presenters predicted that their technology would reach 50 cents per watt to make. Balance of system and installation costs could double or triple that number. A major issue for start-ups is difficulty in getting projects financed. Risk aversive lenders often prefer established companies who can back 20-year warranties, to start-ups with the perceived risk of staying in business 20 months. Installed PV is expected to drop from around $3 per watt today to $2 per watt in 2014.

Despite all the innovation taking place in the U.S., it is less expensive to manufacture in Asia. Navigant estimated that 77% of solar PV is made in Asia; only 5% in the U.S. Asia’s lead is likely to grow, with companies with integrated supply chains like Suntech and Sharp playing major roles.

PV growth is likely to be over 40% annually this decade. Solar is now 100X less than in the 1970s. The learning curve continues with costs falling 20% each time volume doubles. Industry leaders are squeezing out costs in everything from panels to paperwork, from inverters to mounting. Now, 95% of PV is grid connected, by 2014 it will be 97 to 99%.

By 2015, several researchers expect thin-film solar to reach about 30% of the market, but they expect silicon to continue to dominate. c-SI costs more per watt to make, but it is less expensive to install. Importantly, more efficient SI takes less space on roofs and in open areas. GTM also offers free summaries of a number of excellent solar research reports about silicon and thin-film PV. http://www.gtmresearch.com/list

Solar Growth Accelerates in Middle Markets

Several conference presenters examined the solar market in 4 categories:

  • Residential
  • C&I (commercial, industrial) 100 kW to 2MW
  • Utility DG (distributed e.g. commercial rooftops) 500 kW to 20 MW
  • Utility CG (central) > 20MW

Several forecast that the highest U.S. growth in the middle categories of 100 kW to 20 MW. These segments appeal to electric utilities that face RPS requirements in 30 states. Commercial distributed solar is often well matched with the location of electricity demand, minimizing transmission and distribution investment. Transit operators including LA Metro, New Jersey Transit, and MARTA are among the dozens of agencies heavily investing in solar in the 100kW to MW category. Public Transportation Renewable Energy Report

Smaller residential solar in the U.S. has been seriously injured by the wonderful companies in the middle of the recent mortgage crisis, namely Fannie Mae and Freddie Mac, who have stopped city PACE programs around the country that made residential solar affordable. If you want to laugh or cry about how the U.S. is giving the solar industry to Asia, take a look at PACE NOW.

Utilities will also continue to invest in large scale solar PV and concentrating solar power. In much of the U.S. large solar cannot compete with large-scale wind. There is 20 times as much wind power installed in the U.S. Utility-scale projects also face years of delays due to NIMBY (not-in-my-backyard) opposition to the renewable projects and the high-voltage lines needed to transmit power to major residential and industrial centers.

Intersolar Exhibitions and Conferences will take place in several locations over the next 12 months and return to San Francisco next July. In 2011, we are likely to see that solar grew strongly from rooftops to utility scale projects.

Truly impressive is solar energy’s decades of growth that exceeds 30 percent annually. Efficiency continues to improve and cost continues to fall. Energy is more secure as generation moves closer to consumption in homes, commercial centers, and transportation.

By John Addison. Publisher of the Clean Fleet Report and conference speaker.

Resource Recovery from wastewater – the new paradigm

Everywhere you look people are trying to do more with less. Reduce costs, increase efficiency, reduce energy use, recover resources. There are strong economic drivers to do all of these things, they also happen to be sustainable.

Last Thursday (July 22nd 2010) I moderated the first in the BlueTech Tracker(TM) Webinar series: Mineral & Resource Recovery from Wastewater. We featured four companies with innovative technologies, and perhaps even more importantly, innovative business models. The companies were Ostara Nutrient Recovery Technologies, Calera, CASTion and Oberon. Ostara produces a slow release fertilizer product, Crystal Green(TM) from wastewater, Calera, a Khosla Ventures backed company whose technology is part of a new infrastructure designed to view carbon, not as a pollutant, but as a resource. Calera might be accused of having a Superman complex in the cleantech sector, in that their technology simultaneously contributes to solving two of the most pressing environmental issues of our time: climate change and water scarcity. Calera sequesters carbon from power plants, produces a low carbon cement and helps to desalinate water. The CASTion Corporation has an Ammonia Recovery Process (ARP) which can produce an ammonia fertilizer product from wastewater and recently won a $27.1M contract with the City of New York to provide a cost effective method for the City to achieve compliance at its 26th Ward Wastewater Treatment plant.

Concluding the quartet, was Oberon FMR. Oberon takes wastewater from the food processing industry, and through the application of some clever biotechnology (single cell protein synthesis), produces a value added, high protein, fish meal replacement for use in the aquaculture industry.

A few key take-aways:

1. This is about Costs
To get out of the starting gate with wastewater technologies in this area, you have to have a compelling value proposition. Resource recovery can enable a technology provider to off-set operational and capital costs and thereby provide a cost effective solution to their clients.

Ahren Britton, CTO with Ostara put it very succintly with the observation, ‘as a standalone wastewater treatment technology, we wont always be the cheapest way to remove phosphorus; as a fertilizer production company, we might not compete with current ore prices, but put the two together, and that’s what makes for the winning proposition’.

David Delasanta, President of CASTion noted that the decision by the City of New York to go with their ARP system on a new project was driven by economics. The City had a regulatory requirement to remove ammonia and the ARP system represented the lowest cost option occupying the smallest footprint. The City in fact sole-sourced this option from CASTion.

The Sustainability and political angle can help to push these projects over the line, as the person who finally signs off on expenditure is likely to be a political animal. However, to get this far in the process, you first have to convince the people on the ground that this is a good idea, and their concerns tend to be less politically motivated and more related to ‘will this work and how much will it cost?‘.

Seth Terry, Oberon VP of Operations said they have found that the Corporate Sustainability angle of their approach to turn food processing wastewater into a feedstock for fish meal replacement production, has peaked the interest of a number of major Corporations and was one of the factors which helped them to secure a contract with Miller Coors to construct a full-scale demonstration facility at their site.

Here again though, there is a monetary value to a company in terms of brand value to be able to show its shareholders that instead of generating a waste product which required disposal, they were able to ‘up-cycle’ the resources in their wastewater and in doing so, off-set the unsustainable harvesting of biomass from oceans to produce fish-meal for fish farms.
2. Resource Recovery is becoming a geo-political and security issue
Certain resources such as phosphorus are becoming a geo-political issue. China has recently put an export tax on phosphorus to discourage the export of this valuable commodity, to preseve it and keep it a home to enable food production. China is known for its ability to take a long term view on things and this is an early indicator of how important this resource may become. It is worth noting, that like oil, phosphorus resources are found in a number of unstable regions of the world.

3. Companies which succeed in this area need to know two markets
The flip side of producing a product while treating a waste, is that you need to simultaneously build an outlet and channels to market for your product, at the same time as you are developing the infrastructure to produce it. This is challenging when working with a variable feedstock (wastewater) and when the quantities you produce, initially, do not make a dent in the larger market for that commodity.

To succeed, companies need to understand the wastewater treatment market and also, understand the market for the commodity they are producing.

In the case of Calera, this means they have to know the concrete and aggregate business. In the case of Oberon, they have to know the fish-meal business. Ostara and CASTion both have to understand the dynamics of the fertilizer industry. When you hear Calera CEO, Brent Constanz speak about the nuances of the concrete and aggregate market, and then switch back to the importance of piloting on different wastewater streams, you get a feel for the level and depth of understanding required to succeed in straddling these divergent worlds.

At least a part of the sustainable business advantage these companies have, is their ability to understand and create a business model which meets customers needs on both sides of the fence. Companies that can do this are pulling away from the herd. When you combine this with technical know-how, continued innovation and a strong IP position, you have a sustainable first mover advantage which will be difficult for a ‘me-too’ to catch up with in the short term.

The next Webinar in our BlueTech Tracker(TM) Series is on Thursday July 29th at 12 noon PST and will put the spotlight on Microbial Fuel Cells and Bioelectrochemical systems. This group of technologies has the potential to generate electricity from wastewater and produce fuels and chemicals which can be sold. Again the approach is the same, how to squeeze some value out of that wastewater.

Paul O’Callaghan is Principal of O2 Environmental, a consultancy group providing water technology market expertise, founder of the BlueTech Innovation Forum and co-author of ‘Water Technology Markets 2010’.

Keeping Cool

Richard T. Stuebi

As pretty much everyone knows, it’s been a hot summer — here in the Northeastern U.S. and across the globe — as 2010 is shaping up to be the hottest year on record. This weekend was brutally so, and to capitalize on it, the Plain-Dealer here in Cleveland ran a couple of articles on air conditioning in yesterday’s paper.

The more interesting article (which obviously was syndicated nationally, as here is the version from the Los Angeles Times) was a piece by Stan Cox entitled “AC: It’s Not as Cool as You Think”. Cox is promoting his new book Losing Our Cool, which profiles the utterly pivotal role of air conditioning in shaping today’s world.

Cox points out some staggering numbers. Only 50 years ago, just 12% of U.S. homes were air conditioned; today, that’s up to 85%. Of course, AC enabled the massive migration from the U.S. Northeast to the South and the Southwest — which would be pretty uninhabitable without air conditioning — and the development of suburbs and commuting patterns that will prevail for a long time to come. According to statistics cited by Cox, air conditioning in the U.S. is responsible for half a billion metric tons of carbon emissions annually — more than the total emissions of Australia, France, Brazil or Indonesia.

To the extent there’s good news here, it’s that substantial opportunities exist for improving air conditioning technologies. For instance, geothermal heat pump systems have long been proven to be a far more efficient method of cooling buildings than conventional AC — if only more architects, engineers and building owners would become aware of this option and consider making a modest additional investment to reduce their future energy bills. And, as noted in the article “Keeping Cool and Green” in the July 17 issue of the Economist, a plethora of innovative approaches on the drawing board promise the potential for further reducing energy consumption requirements associated with air conditioning.

Given that about 40% of U.S. energy requirements are associated with buildings, and about 40% of building energy consumption is associated with climate control, it behooves us to get much more serious about getting cool. Especially if climate change over the next few decades makes summers like this one seem mild.

Richard T. Stuebi is a founding principal of NorTech Energy Enterprise, the advanced energy initiative at NorTech, where he is on loan from The Cleveland Foundation as its Fellow of Energy and Environmental Advancement. He is also a Managing Director in charge of cleantech investment activities at Early Stage Partners, a Cleveland-based venture capital firm.

GE Bets 10 Billion on Digital Energy

By John Addison

GE Smart Charging Stations for Electric Cars

General Electric intends to be the leader in smart grid charging of electric vehicles. GE’s Watt Station EV Charger was personally unveiled today by CEO Jeff Immelt. Globally, GE already helps thousands of electric utilities be more efficient in generating power and in distributing power. With a growing family of smart grid solutions including smart charging of vehicles, GE will help utilities lead in the intelligent generation, management, distribution, and use of energy. Mr. Immelt refers to this as Digital Energy.

After attending the presentation by Jeff Immelt and other luminaries, I was able to talk with Michael Mahan, GE’s Global Product Manager of EVSE.

The GE Watt Station is the first in a family of vehicle smart charging products and services from GE. It will be piloted this year at commercial sites and universities such as Purdue and the University of California San Diego. Within a couple of months we will see the announcement of a GE home plug-in car charger. These products will be made available commercially in 2011 simultaneously in all markets including the Americas, Europe, and Asia.

Although GE’s press release positioned the Watt Station as having a faster charging rate than some competitive offerings, this Level 2 220 volt / 32 amp smart charger delivers electrons at the same speed as other Level 2 chargers such as Coulomb Technologies, Aerovironment, and Ecotality. These competitors have the early lead in installing 15,000 charging stations in the United States. GE is taking a fast-follower strategy with the intent of being the market leader.
The Watt Station complies with J1772 smart charging standards. Its attractive design will appeal to consumers, with a simply friendly interface and retractable cord protected inside the supporting pole. The Watt Station is modular and upgradeable. It can be purchased with an optional credit card reader, or that can be added later. Watt Stations also have optional smart suite communications to utilize smart metering and wireless AMI.

Where GE does have competitive advantage is in its long-term relationship with utilities, its family of end-to-end system solutions, its partnerships, and its financial prowess. Communities littered with last decades charging stations, some no longer working from bankrupt companies will find comfort in the GE brand.

GE Provides Digital Energy End-to-End

As global electric utilities modernize and embrace the added opportunity of transportation that depends less of petroleum and inefficient engines, and more on electricity and efficient electric drive systems, GE can be a major partner. Electric vehicles can be smart charged with GE charging stations, managed with GE software services. Areas with high concentration of electric vehicles can turn to GE for new substations and distribution equipment. Power plants can be upgraded with the latest GE turbines, and supplemented with GE wind turbines, solar power, and grid storage. With a digital energy demand can be shaped off-peak.

GE Unveils Nucleus™ and Brillion Home Energy Management

GE also unveiled Nucleus™, an affordable, innovative communication and data storage device that provides consumers with secure information about their household electricity use and costs so they can make more informed choices about how and when to use power. Nucleus is expected to be available for consumer purchase in early 2011 at an estimated retail price of $149-$199.
GE’s Nucleus brings the promise of the smart grid into consumers’ homes. As utilities deploy smart meters, the Nucleus will collect and store a consumer’s household electricity use and cost data for up to three years and present it to consumers in real-time using simple, intuitive PC and smart phone applications, helping consumers monitor and control their energy use.
Nucleus is the first product in GE’s Brillion™ suite of smart home energy management solutions that will help consumers control their energy use and costs. In addition to Nucleus, GE’s Brillion suite will include a programmable thermostat, in-home display, a smart phone application and smart appliances for the entire home.

By 2012, US utilities are expected to install more than 40 million smart meters. These digital meters enable utilities to charge “time-of-use” rates for electricity throughout the day. When demand is low, electricity will cost less, and when demand is at its “peak,” utilities will charge more to encourage off-peak consumption.

Future Brillion options will also include alerts to assist consumers with daily tasks, such as when to change the refrigerator’s water filter or when the dryer cycle ends. Software upgrades will further enable Nucleus to monitor water, natural gas, and renewable energy sources, as well as plug-in electric vehicle charging.

$10 Billion Ecomagination R&D

GE is driving a global energy transformation with a focus on innovation and R&D investment to accelerate the development and deployment of clean energy technology. Since its inception in 2005, 92 ecomagination products have been brought to market with revenues reaching $18 billion in 2009. With $5 billion invested in R&D its first five years, GE committed to doubling its ecomagination investment and collaborate with partners to accelerate a new era of energy innovation. The company will invest $10 billion in R&D over five years and double operational energy efficiency while reducing greenhouse gas emissions and water consumption.
CEO Immelt expects over 30 new ecoimagination product announcements in the next 24 months, including the GE Watt Station EV charger.

Electric Car Charging and Smart Grid Reports

By John Addison. Publisher of the Clean Fleet Report and conference speaker.

Nuclear Energy: Threat or Opportunity?

by Richard T. Stuebi

Several months ago, I was asked by the Chagrin Foundation for Arts & Culture, in my lovely home town of Chagrin Falls OH, to speak on the topic of nuclear energy at their Chautauqua-at-Chagrin lecture series this summer.

I agreed, and proposed the title of my talk “Nuclear Energy: Threat or Opportunity?” I thought that it would be kinda catchy, and that I could figure out something interesting to say under that heading.

Well, the talk is tomorrow (Tuesday July 20 at 6 pm ET), so this past weekend, I forced myself to organize my thoughts on what to say. It was more challenging than I had anticipated.

This is because the title of my talk actually turned out to be truly apt: nuclear energy is both a threat and opportunity. There are huge advantages and substantial risks associated with nuclear energy. It’s easy to see one side of the coin or the other, but it’s hard to see and accept both sides of the coin at the same time.

Among the points I intend to make in my lecture:

There is no easy, cheap, one-size-fits-all answer for powering our economy in a way that provides the standards of living we’re accustomed to, at the costs we’re accustomed to paying, in avoiding the bad future to which continued status quo will drive us. Nuclear energy can be a major part of the total solution, but only if we’re willing to accept the costs and risks.

Many people tend to think that nuclear powerplants are inherently dangerous, thinking of Chernobyl. Chernobyl was truly an aberration – all safety systems were intentionally disabled and the plant was pushed to limits as an experiment. (Hey, that’s a really good idea!) Three Mile Island was a more plausible worst-case scenario — and its environmental impact of was/is small relative to the long-term impact of coal mining or burning, or petroleum extraction or refining. The BP Gulf oil spill is far worse of an ecological catastrophe than Three Mile Island, but no-one’s talking about banning oil. Instead of environmental risks, the real risks of nuclear energy are about fuel security and fuel disposal.

The U.S. taxpayer has long heavily subsidized, and continues to subsidize, nuclear energy. With maybe a hundred billion dollars of cumulative R&D funding over the decades, plus substantial tax credits and loan guarantees, the U.S. government has been and remains the biggest benefactor of the nuclear industry. Private industry sure isn’t: there hasn’t been an order for a new nuclear reactor in over 30 years. When opponents discredit renewable energy due to subsidies (which they admittedly do receive), it’s pretty hypocritical: nuclear (and fossil) energy has gotten and still gets far more subsidy dollars than renewable energy has and does.

If we shut down all the nuclear powerplants in operation today, the risk associated with spent fuels would still exist, and emissions would likely go up – at least unless/until enormous amounts of new wind/solar installation were to backfill nuclear retirements. For the time being, the economics of new wind and solar energy (indeed, any new powerplants) are considerably higher than the costs of running existing nuclear plants, so electricity prices would go up if nuclear were to go away. So, shutting down operating nuclear plants doesn’t seem like a promising strategy from either an economic or environmental perspective.

The costs of new nuclear are completely unknown. There hasn’t been a new nuke completed in the U.S. since the 1980’s, and no new orders since the late 1970’s. New designs are on the drawing board, but none have been implemented. Including earning a fair return on investment in new plants, costs could be as low as 8 cents/kwh or as high as 15 cents/kwh. The range is so wide because it could take 5 years or 15 years to complete a new plant – based upon uncertainties about licensing, approval and permitting processes. The cost of new nuclear is generally more than new wind, and while less than new solar today, the costs of new solar should become competitive with technological advancements in the coming years. So, it would seem that this argues for massive wind and solar installation, rather than new nuclear (or new fossil powerplants).

But, it’s not so easy. Wind and solar are not “round-the-clock” – at least unless/until there’s cost-effective energy storage for the power grid (don’t hold your breath). And other options aren’t so appealing either.

New gas-fired powerplants have fairly low emissions and can be approved/built quickly, but price/supply of natural gas is uncertain and highly volatile. New coal powerplants would be an even riskier bet.

Using conventional technology and ignoring greenhouse gas emissions, the cost of energy from new coal powerplants is probably on the order of 6-8 cents/kwh. However, if the U.S. ever becomes serious about dealing with climate change via a carbon policy, then the economics of coal power will deteriorate significantly — either to capture carbon (largely untested and expensive technology) or to pay for the costs of emissions. In a carbon-constrained world, it’s easy to project the costs of new coal power at > 10 cents/kwh. So, if we don’t care about climate change, coal is likely to be the dominant answer, and few new nukes will be built in the U.S.

On the other hand, if climate change matters, then there’s a potential role for new nuclear in the U.S. This role is amplified if we want to deal seriously with the other energy imperative we face: eliminating our reliance on petroleum for transportation. Clearly, we won’t see nuclear powered vehicles. But, with improvements in battery technologies, we can (and likely will) see more electrification of transportation – through plug-in hybrids and even pure-electric vehicles. If/as that happens, we’ll need much more power generation capability — especially if a lot of old coal plants are retired in response to climate legislation. But, where will that new power come from? If we want it to be from zero-carbon sources, and if we’ve already installed as much wind/solar as we plausibly can (assuming no effective grid storage technology), nuclear will be a very interesting option.

Summarizing, the more we try to deal with climate change and oil dependence, the more appealing nuclear becomes. Environmentalists are torn: many oppose nuclear on philosophical grounds based on their perceived risks, while other thought-leaders (e.g., James Lovelock) are nuclear proponents based on the practical realities. Which risks are more pressing: climate change and energy insecurity, or radioactive wastes and weapons materials for terrorists? Those are the tradeoffs upon which tilts the balance for nuclear energy. Americans don’t seem to like that answer: they want no risk and low cost, and whine when they don’t/can’t get it.

On balance, I think the risks associated with climate and oil outweigh the nuclear waste and weapons risks. Accordingly, I tend to think that nuclear needs to be a bigger part of the energy toolkit of the future – at least until ocean-based power generation and/or grid-scale energy storage become economically viable. If nuclear is not to be part of the energy solution of the future, then there will be other costs/risks to bear — some of which could be very dramatic.

If we get it badly wrong, either way, the future of life on this planet may be seriously jeopardized.

Richard T. Stuebi is a founding principal of NorTech Energy Enterprise, the advanced energy initiative at NorTech, where he is on loan from The Cleveland Foundation as its Fellow of Energy and Environmental Advancement. He is also a Managing Director in charge of cleantech investment activities at Early Stage Partners, a Cleveland-based venture capital firm.

Toyota Prius PHV Fights Chevy Volt

By John Addison (from original post in the Clean Fleet Report 7/6/10)

As the world leader in hybrid cars, Toyota is fighting to extend that leadership in both plug-in hybrids and battery electric cars. In plug-in hybrids, GM plans on first mover advantage with the Chevy Volt. In electric cars, the Nissan LEAF has a sizable lead over the . But Toyota has more cars on the road with electric motors, advanced batteries, and electric drive systems than all competitors put together. Toyota does not like second place.

In talking today with Toyota’s Cindy Knight, she assures me that Toyota is on track on all fronts. A number of U.S. fleets are already driving the new 2010 Toyota Prius PHV including the following:

San Diego Gas and Electric
Zipcar Washington DC
Ports of New York and New Jersey
Silicon Valley Leadership Group
Portland State University
Qualcomm
Southern California Air Quality Management District

By year-end, 600 Prius PHV will be on the road including 150 in the United States. A number will be in 18 month lease programs. In one prefecture in Japan, the Prius PHV can be rented by the hour. Ten of the Prius PHV will be part of Xcel Energy’s SmartGridCity program in Boulder, CO. Boulder residents will participate in an interdisciplinary research project coordinated by the University of Colorado at Boulder Renewable and Sustainable Energy Institute (RASEI), a new joint venture between the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL) and the University of Colorado at Boulder.

During the test of 600 plug-in hybrids, Toyota will be receiving extensive wireless data from each vehicle, giving a near realtime profile of electric range, frequency and speed of charge, mileage, use, and reliability of the cars. Aggregated data will be posted on Toyota’s EQS Website

By 2012, Toyota will offer customers with a wide-range of vehicles with fuel efficient drive systems. The Prius will be the best seller, but the 2012 Toyota Prius PHV will be in demand from those who want to be greener with a 14 mile electric range. A compact hybrid will help the more price conscious buyers. The Toyota Camry Hybrid will continue to be offered. Lexus hybrids will continue to deliver at least 35 mpg along with their host of luxury appointments.
Ford will also offer customers a wide-range of fuel efficient and electric cars, starting with a Ford Focus that customers can buy as with ecoboost fuel economy, or as a hybrid, or as a plug-in hybrid, or as a pure battery electric. Ford will expand this range of offerings to other lines in the years past 2012.

Toyota’s Transition to Lithium Batteries

The 2010 Prius PHV has three lithium-ion battery packs, one main and two additional packs (pack one and pack two) with a combined weight of 330 pounds. In contrast, the Prius NiMH battery pack weighs 110 pounds. Each battery pack contains 96 individual 3.6 V cells wired in series with a nominal voltage of 345.6 V DC.

When the PHV is fully charged the two additional battery packs supply power to the electric motor. Pack one and pack two operate in tandem with main battery pack but only one at a time on the individual circuit. When pack one’s battery’s charge is depleted, it will disconnect from the circuit and pack two will engage and supply electrical energy to the drive line. When pack two has depleted it will disconnect from the circuit and the vehicle will operate like a regular hybrid. Pack one and pack two will not reengage in tandem with the main battery pack until the vehicle is plugged in and charged.

The Prius PHV’s larger HV battery assembly requires additional cooling. The vehicle is equipped with three battery-cooling blowers, one for each of the three battery packs. Each battery pack also has an exclusive intake air duct. One cooling blower cools the DC/DC converter.

Like all Toyota hybrids, the lithium-ion batteries are built to last for the life of the vehicle. Toyota is using lithium not NiMH batteries in its Auris hybrid. Mercedes, Nissan, Ford and others have announced hybrid plans using lithium. Will 2012 be the year that Toyota offers a hybrid Prius with lithium batteries? Toyota is not yet ready to say.

Toyota has a number of advanced battery R&D programs with nickel-metal, lithium-ion and “beyond lithium” for a wide variety of applications in conventional hybrids, PHVs, BEVs and FCHVs. Toyota uses Panasonic and Sanyo battery cells. When Panasonic acquired Sanyo, Toyota increased its ownership to over 80 percent in the Panasonic EV Energy Company which makes prismatic module nickel metal hydride and lithium-ion battery packs. Toyota also owns about 2 percent of Tesla, a major Panasonic partner.

an Urban Electric Car

In 2012, city drivers will have fun with the , a pure battery-electric car. Currently Smart car drivers are saving $20 per day squeezing into parking spaces too big for other cars. By 2012 Smart will have competition from the which is over 4.5 feet shorter than the Prius. For the microcompact space, Smart is introducing an electric version, as is Mitsubishi with the iMiEV. All these cars can squeeze in four people with skinny waists.

Toyota’s FT-EV is an electric vehicle with a 50-mile range and a maximum speed of 70 mpg. The lithium battery pack can be charged in 2.5 hours with a 220/240 volt charge and in less time if not fully discharged.

By John Addison. Publisher of the Clean Fleet Report and conference speaker.

Water Water Everywhere

by Richard T. Stuebi

One of the fastest growing “themes” of the cleantech sector is water. While clean energy gets the most attention, clean water is also becoming a high priority. According to Richard Smalley, the late Nobel laureate and nanotech pioneer from Rice University, water trailed only energy on the list of humanity’s top challenges over the coming decades.

Like all things cleantech, a major difficulty has been trying to earn good investment returns from innovations in the water sector. And so it is that the Water Innovations Alliance was formed, to serve as an industry association to promote the emergence of a vibrant entrepreneurial sector in water technologies.

In May, the Alliance held its annual conference in Dayton Ohio. I attended, and heard a number of good presentations providing some interesting tidbits on the water sector.

In his overview, Mark Modzelewski (the Executive Director of the Alliance) gave some eye-opening statistics. Only 3% of the water on earth is freshwater, and little of that small sliver is accessible for human use, with 1.5 billion people globally not having access. By his measures, water is the third largest industry on earth, representing $550 billion of revenues. Modzelewski cited data indicating that 75% of U.S. water infrastructure will need to be replaced, at a cost of “hundreds of billions of dollars.” Soberly, he noted that “the way we move, treat and filter water has changed little since the time of Julius Caesar: we move water through trenches and tubes, we force water through tiny holes to clean it, and we put poisons in water to kill other poisonous things.” Unfortunately, innovation is not happening at the required pace: only $130 million in venture capital was placed in 33 water deals in 2009, with minimal corporate, academic and public sector resources and centers for water R&D.

Paul Gagligardo of American Water (NYSE: AWK) noted in his presentation the huge size of the water technology market: $172 billion of water-related capital expenditures in 2009, with $30-60 billion per year expected in North America over the next several years. Alas, he also noted how balkanized the demand-side of the market is, with 52,000 community water systems and 155,000 non-community water systems in the U.S.

Notwithstanding the difficulties facing companies trying to profit from water technology innovation, a number of presentations from leading firms hinted at the opportunities.

Peter Williams, the CTO of Big Green Innovations at IBM (NYSE: IBM), described IBM’s activities to parallel the smart grid in the water sector. In his presentation, Williams noted that 20-25% of all treated water is lost through leaks, and moving/treating water consumes 3-5% of all energy in the U.S. — implying that smarter water management represents an enormous economic and energy opportunity area.

In his presentation, Ed Hackney of United Water — a subsidiary of Suez Environnement (Paris: SEV, Brussels: SEVB) — took the smart water grid theme further, by noting the need to push intelligence from already-sophisticated treatment centers through the relatively-dumb network.

Probably the biggest splash made at the conference was by Veolia (Paris: VIE, NYSE: VE), a major sponsor with a significant presence, including several speakers. It’s clear that Veolia is trying to show itself as the leader in the water technology field. As profiled in a presentation made by Finn Nielsen, the Chairman of VWS (Veolia Water Systems) North America, Veolia has created the Veolia Innovation Accelerator to work closely with start-up companies on their water treatment technologies to speed up the pace of commercial adoption, by helping such companies validate/improve their technologies and introduce them more rapidly to the marketplace through Veolia’s vast channels in the water industry.

Other presentations from the conference are available, and are worth perusing to gain a better handle on this important but often-overlooked segment of the cleantech universe.

Richard T. Stuebi is a founding principal of NorTech Energy Enterprise, the advanced energy initiative at NorTech, where he is on loan from The Cleveland Foundation as its Fellow of Energy and Environmental Advancement. He is also a Managing Director in charge of cleantech investment activities at Early Stage Partners, a Cleveland-based venture capital firm.

A Few Conversations on the State of Cleantech

I’ve had a number of conversations in the past couple of weeks about the state of cleantech and the various sectors that make it up.

No real answers, just food for discussion.

The IPO market – a few threads that keep perking up.  A need for the IPO market in cleantech to get healthy.  A general sesne of relief that Solyndra did not get out.  Massive skepticism over Tesla’s prospects.  All hopes pinned to Silver Spring.

Carbon / Climate change – determination that the oil spill shall not go in vain, so to speak.  Jaded lack of awareness about cap and trade and carbon globally replacing the pre-Copenhagen hype, despite that the underlying policies are getting more an more rational, and more and more real work and debate is occuring.  Bifurcated Over $1 Billion in smart money acquisitions in carbon in the last 9 months (JP Morgan, Barclays, Reuters, ICE, Bloomberg), the summer solider and sunshine patriots have bailed for now.

Venture capital – growing unease that the 2 and 20 managed money model is broken, and especially broken in cleantech.  Growing disbelief at the “picking winners” strategy and the massive hundreds of millions per company from the DOE in its loan guarantee program – inflation comes to cleantech?

A strengthening sense that like CNG was crowded out of the transport discussion by PHEV and ethanol a few years ago, EV and PHEVs are crowding out a market very jaded with the always over the horizon promise of biofuels to replace corn and sugar cane ethanol.

More discussions on water use and technology than I have had in years.  But still no answers.

A sense from those who know, that the US shale gas and the BP Horizon spill have the potential to shift the whole debate.

Or maybe it’s just me projecting my feelings on everyone I talk to, or ignoring those saying stupid things!  Since I didn’t do a real poll, the world will never now.

Neal Dikeman is a partner at Jane Capital Partners LLC, and the Chairman of Carbonflow.  He is the longtime chief blogger of CleantechBlog.com

Clean Technology Venture Investment Increases 65 Percent in First Half of 2010

Matches 2008 Investment Record

The Cleantech Group and Deloitte released preliminary 2Q 2010 results for clean technology venture investments in North America, Europe, China and India, totaling $2.02 billion across 140 companies.

Cleantech venture investment was up 43 percent from the same period a year ago. The number of deals recorded in 2Q10 was down from a record high of 192 in 1Q10, but still represents a strong quarter by historic standards. This completes 1H10, up 65 percent on 1H09.

Corporate activity around cleantech innovation has continued to play an important role in maintaining the levels of investment activity. Corporations are becoming key participants in many of the largest venture and growth capital investment rounds. Strong corporate involvement was evident again in the quarter’s top ten deals: Intel Capital, GE Capital, Shell, Votorantim, Alstom, and Cargill Ventures all contributed, the latter two making their first publicly disclosed venture-stage investments in cleantech.

Corporations have multi-faceted roles in cleantech. Any single utility or multi-national could play any or all of the following roles – investor, partner, customer, acquirer, or competitor. As such, their activity levels are a key indicator of the health and growth of the broader market for clean technology products. The strengthening of corporate commitment to renewable energy and broader cleantech are evident in the strong growth of multi-national corporate and U.S. utility investment for the first half of 2010 :

1H10, total announced capacity additions by U.S. utilities increased 197 percent compared to 2H09, from 1,393MW to 4,134MW, primarily driven by wind and solar. Power purchase agreements (PPAs) rose 148 percent in 1H10, compared to 2H09, from 621MW to 1,539MW, likely due to the pressure of meeting Renewable Portfolio Standards in many U.S. states. Corporate investment announcements from the global corporates tracked reached a new high of $5.1 billion in 1H10, a 325 percent increase from the same period last year.

“The significant strengthening of corporate and utility investment into the cleantech sector, relative to 2009, is very encouraging, given the key role they will play in enabling broader adoption of clean technologies at scale,” said Scott Smith, partner, Deloitte & Touche LLP and Deloitte’s clean tech leader in the United States. “Major U.S. utilities are increasing direct investments in wind and solar due to improving cost scenarios, favorable tax credits and incentives, and evolving pressure to meet Renewable Portfolio Standards. Meanwhile, the largest global companies are seeing the business case for operational cleantech integration, leading to record corporate investment. This uptick was driven by companies looking to improve energy efficiency and reduce carbon emissions in order to reduce operational costs, mitigate energy price volatility risk, drive sustainable growth, and comply with existing and pending regulations around carbon and climate change risk disclosure.”

VENTURE INVESTMENT BY TECHNOLOGY SECTOR

The leading sector in the quarter by amount invested was solar ($811 million), followed by biofuels ($302 million) and smart grid ($256 million). Energy efficiency was the most popular sector measured by number of deals, with 31 funding rounds, ahead of solar (26 deals) and biofuels (13 deals). The largest transactions in these sectors were:

SOLAR – $811 million in 26 deals

Solyndra, a California-based thin film company raised $175 million from existing investors instead of following through with its planned IPO. BrightSource Energy, a California-based developer of utility-scale solar thermal power plants, raised $150 million in Series D funding from new investors Alstom and the California State Teachers Retirement System (CalSTRS) as well as existing investors; the deal followed a conditional commitment from the U.S. Department of Energy for $1.37 billion in loan guarantees that was made in February and Amonix, a California-based developer of concentrated photovoltaic (CPV) solar power systems, raised $129.4 million in a Series B round led by Kleiner, Perkins, Caufield & Byers.

BIOFUELS – $302 million in 13 deals

Amyris Biotechnologies, a California-based developer of technology for the production of renewable fuels and chemicals, closed the final tranche of a $61 million Series C round and also raised a further $47.8 million from Temasek Holdings; Virent Energy Systems, a Wisconsin-based developer of a catalytic bio-refinery platform, raised $46 million from Shell and Cargill Ventures; and Kior, a Texas-based developer of a catalytic cracking technology for turning biomass into bio-crude, raised $40 million.

SMART GRID – $256 million in 11 deals

Landis+Gyr, a Switzerland-based smart metering company, raised an additional $165 million from Credit Suisse to add to the $100 million it raised in mid-2009, while OpenPeak, a Florida-based developer of home energy management products, raised $52 million from Intel Capital and existing investors, and GreenWave Reality a Denmark-based developer of home energy management products, raised $11 million from Craton Equity Partners and other undisclosed investors.

ENERGY EFFICIENCY – $147 million in 31 deals

Nualight, an Ireland-based developer of LED illumination products for refrigerated displays in food retail, raised $11.4 million from Climate Change Capital Private Equity, 4th Level Ventures and ESB Novus Modus. This was the largest deal in the energy efficiency category after OpenPeak ($52million, as above).

VENTURE INVESTMENT BY WORLD REGION

North America accounted for 72 percent of the total, while Europe and Israel accounted for 24 percent, India 3 percent, and China for 2 percent.

NORTH AMERICA: North American companies raised USD $1.46 billion, down 11 percent from 1Q10 but up 47 percent from 2Q09. The total of 76 disclosed rounds was high by historic standards, but down by 41 percent from the record 128 in 1Q10. As the most significant region for VC investment, the sector trends broadly match those described globally. The largest deals were for Solyndra ($175 million), a California-based thin film solar company, BrightSource Energy ($150 million), a California-based developer of utility-scale solar thermal power plants, and Amonix ($129.4 million), a California-based developer of concentrated photovoltaic (CPV) solar power systems. California led the way, with $980 million (67 percent total share) in investment, followed by Massachusetts ($124 million, 8 percent).

EUROPE/ISRAEL: European and Israeli companies raised USD $476 million in 54 disclosed rounds, up 48 percent (by amount) from 1Q10 and up 100 percent from 2Q09. The largest deals were for Swiss smart grid company Landis+Gyr ($165 million) and French solar plant developer Fonroche ($66.1 million). The large growth capital deal for Landis+Gyr places Switzerland ($165 million, 1 deal) at the top of the country league table, followed by France ($82 million, 11 deals), and Norway ($59 million, 4 deals). The UK had the most deals (17) with investment totaling $59 million.

CHINA: Chinese companies raised USD $30 million in 5 disclosed rounds. The largest deal was for Prudent Energy, a developer of flow batteries, which raised $10 million from JAFCO Investment Asia, Mitsui Ventures and CEL Partners.
INDIA: Indian companies raised USD $59 million in 4 disclosed rounds. The largest deal was for Krishidhan Seeds, a producer and distributor of hybrid seeds for the farming industry, which raised $30 million from Summit Partners.

GLOBAL M&As AND IPOs

There were 19 clean technology IPOs during the quarter, totaling $2.31 billion, up slightly from 18 IPOs in 4Q09, also totaling $2.31 billion. China accounted for the majority of transactions, with 12 offerings, which raised a combined $1.73 billion (75 percent of the overall total). There were three North American cleantech IPOs in 1Q 2010, which raised a total of $304 million, the lion share netted by the high-profile $226m IPO of Tesla Motors on June 29, 2010.
However, the largest global cleantech IPO recorded during the quarter was Origin Water, a China-based developer of membrane filtration systems for municipal and industrial sewage treatment and recycling, which raised $370 million from an offering on the Shenzhen Stock Exchange. The company’s share price more than doubled during the first day of trading, valuing the company at about $3.3 billion.

Clean technology M&A totaled an estimated 160 transactions in 2Q10, of which totals were disclosed for 45 transactions totaling $6 billion. Two of the most significant deals were in smart grid: Swiss engineering company ABB acquired U.S.-based software maker Ventyx for more than $1 billion to provide it with broader access to the utility enterprise management market; and Maxim Integrated Products acquired U.S.-based smart meter semiconductor company Teridian Semiconductor for about $315 million in cash.

TOP GLOBAL VC INVESTORS

2Q10 Most Active Cleantech Venture Investors (# investments)
Carbon Trust Investment Partners 6 = Helveta, Green Biologics, Intamac Systems, ACAL Energy, Arieso, Concurrent Thinking,
Kleiner Perkins Caufield & Byers 4 = Amonix, Amyris Biotechnologies, Fisker Automotive, EdeniQ
Angeleno Group 3 = Amonix, Coda Automotive, EdeniQ
Draper Fisher Jurvetson 3 = BrightSource Energy, EdeniQ, Scientific Conservation
Khosla Ventures 3 = Coskata, Amyris Biotechnologies, Sakti3

The Cleantech GroupT, providers of leading global market research, events and advisory services for the cleantech industry, along with Deloitte, which provides audit, tax, consulting and financial advisory services to cleantech companies, released these preliminary 2Q 2010 results for clean technology venture investments in North America, Europe, China and India, totaling $2.02 billion across 140 companies.

The Petroleum Industry: Past the Tipping Point?

by Richard T. Stuebi

as posted to Huffington Post

As Jon Stewart so beautifully satired a couple of weeks ago, American political leaders have long said “enough is enough” about the lack of a coherent national strategy regarding oil.

In the wake of the BP oil spill in the Gulf, is this time different? Will the U.S. finally be able to change its stance on petroleum? Will the petroleum industry itself be irrevocably altered?

Though I don’t always agree with its perspectives, one of the better (i.e., more well-informed and reasoned) weekly energy newsletters I receive is “Musings from the Oil Patch”, written by Allen Brooks, Managing Director of the boutique investment banking firm of Parks Paton Hoepfl & Brown.

In the June 8 issue, Brooks provides an excellent analysis of the future of the petroleum sector, entitled “BP Oil Spill Pushes Industry Beyond Tipping Point”. The main conclusion of the essay is that the oil industry will never be the same – and all of the ways in which it will change should drive up the price of oil. His summary:

“Onshore oil and gas resources will become more valuable than offshore ones. Shallow-water petroleum resources may be worth more than deepwater ones. International markets will be more active and attractive for energy and oilfield service companies than the U.S. market. The domestic oil and gas industry will be less profitable in the future. New U.S. offshore drilling and operating procedures will become more onerous and expensive and likely require different, more capable equipment.”

One of the more interesting tangents of Brooks’ article is the discussion of the Obama Administration’s response to the BP spill.

Some news outlets are portraying the calamity in the Gulf as Obama’s Katrina, or perhaps more astutely as his Iranian hostage crisis – either of which would imply a dragging down of his Presidency. Brooks instead sees the Obama Administration somewhat more sympathetically: as “family members outside a hospital operating room following a severe auto accident. While the surgeons work their magic on the victim with techniques beyond the understanding of ordinary people to fully comprehend the knowledge and skills being applied, the family members remain powerless to influence the outcome. Rather, they stand around praying or crying as emotions overwhelm them. Soon they become angry and demand immediate justice or retribution against those responsible for the accident.”

And, of course, that’s what happened when President Obama determined “whose ass to kick” and exacted his pound of flesh from BP in securing their agreement for contributing $20 billion into a clean-up fund. This, in turn, raised vocal objections from Obama’s opponents — including those formerly arguing that Obama hadn’t done enough about the oil spill — about undue executive privilege. The infamous “apology” by Rep. Joe Barton (R-TX) to BP, and Barton’s subsequent apology about the apology, was the zenith/nadir of the political grandstanding about this spill from all sides.

The ineffective posturing and inane bickering in Washington has contributed nothing towards stemming the flow of oil from the sea bottom, nor to clean up the waters and the beaches in the Gulf of Mexico. But does the venom being spewed over the airwaves from all parts of the spectrum indicate that the petroleum industry is now approaching a tipping point?

In terms of energy policy, I think not. Call me a cynic, but when it comes to national energy policy, I will always take the under on what our Federal leaders will accomplish to improve our long-term prospects.

Why am I so negative? Just like our economy is fueled by energy, our political system is fueled by money. And, there is hardly anything in the economy as wealthy as the energy sector. The industry as a whole and its leading companies are both extremely cash-rich (certainly much more so than the principal advocates of change) and willing to spend money in Washington to support/defend their entrenched interests.

For the big oil companies, it’s not surprising that their primary objective is to protect the status quo, as opposed to making any transition. This point is well articulated by Deborah Gordon and Daniel Sperling in “Big Oil Can’t Get Beyond Petroleum” (a clever play on BP’s slogan “Beyond Petroleum”), as run June 13 in the Washington Post.

Kevin Leahy, Managing Director of Climate Policy at Duke Energy, recently gave a presentation in Columbus in which he opined that “Moderates are the new endangered species in Washington”, adding that sane national energy policy requires tradeoffs and compromises that can only be achieved by crossing party lines — which is traitorous anethema in the current political environment.

No, I don’t think the politicians will have the courage anytime soon to lead us out of our energy challenges. As an economist, I think price signals may be the only way to move us in a different direction.

Absent any rules to change the dynamics of the market, energy prices will move (largely) as a function of supply and demand. (I say “largely” because the petroleum market is a classic oligopoly, controlled by a swing monopolist — Saudi Arabia — with the greatest supply at the lowest costs, so pricing doesn’t follow pure supply/demand forces as they would in a totally free market. But, close enough.)

That’s where the peak oil theory comes in. There are innumerable postings on the Internet about peak oil (see, for instance, the Association for the Study of Peak Oil), so I won’t go into detail here. But, suffice it to say: in a world of increasing demand for petroleum (especially from places like China, where oil demand is growing at “astonishing” rates) and a finite planet with ancient organic matter (e.g., dinosaurs) converting to hydrocarbons not anywhere near as rapidly as hydrocarbons are being extracted, the long-term price trend can pretty much only be upward.

In the June 21 issue of ASPO’s weekly newsletter “Peak Oil Review”, editor Tom Whipple interviewed Jeff Rubin — formerly the chief economist of CIBC World Markets and author of Why Your World Is About To Get A Whole Lot Smaller: Oil And The End of Globalization. Below is a somewhat lengthy but nonetheless fascinating passage from that interview:

“Depletion does not have to be apocalyptic. It will only be apocalyptic if we continue to consume oil as we have in the past when it was cheap and abundant. Because I’m an economist and believe in the power of prices, I believe that we’re going to change. I believe that a global economy, when we move resources all around the world to be assembled by the cheapest labor force and then be shipped to the other end of the world — that’s not a rational way of doing business in a world of $150-a-barrel oil. What we’re going to see is a whole reengineering of our economy, and while we’re going to make a lot of sacrifices in terms of our past energy consumption, we’re going to find that our new smaller world has a lot of silver linings. And in a lot of ways it is going to be more livable and sustainable than the old oily world we’re leaving behind. Peak oil will be an agent of change, and much of that change will be positive, not negative. If we continue to commute 60 miles each way in SUVs, we’re going to get screwed. All of a sudden, peak oil will equal peak GDP; that’s not just an economic recession for a couple of quarters, that’s a world of no economic growth. The point of my book is that, while we can’t do anything about triple-digit oil prices, they don’t have to be so devastating as in the past. We have to reduce, in effect, oil per unit of GDP, and the way we do that is to go from a global economy back to a local economy because a global economy is an extremely oily way of doing business. And that switch isn’t something that the Federal Reserve Board or US Treasury or the Bank of Canada or the European Central Bank is going to put in place; that is going to be the aggregate result of all the micro decisions that consumers make about what we eat, where we live and how we get around. I think triple-digit oil prices will lead us to make the right decisions on those fronts, and the result will be a very different economy than the economy we know.”

Whew.

I’ve said to many people that I’m one of a very small (and widely-disliked) minority — and clearly Mr. Rubin is in this camp — who believes that high energy prices are and will be a good thing, from an environmental perspective, an energy security perspective, and a technology innovation perspective. And, if Mr. Rubin’s thesis bears out, high energy prices can also represent a force for reattracting much of the economic activity that has left the U.S. in recent decades to other parts of the world.

Globalization can continue for virtual things like ideas and communication, but for physical and material goods, an increasing oil price can only mean a reversion towards greater localization of economic activity.

A consistent re-migration of manufacturing back to the U.S. would really be a signal that a tipping point has been achieved. However, the big worry is summed up nicely in a quip by Mr. Leahy during his talk at the workshop “Opportunities for Ohio Businesses in a Clean Energy Economy”: “In his 2006 State of the Union speech, President Bush said that ‘America is addicted to oil.’ To which I say, ‘Unfortunately, every time America kicks the habit, the dealer drops the price.'”

While true in previous decades, price-cutting in the oil markets may not be so inevitble in the future. With the insatiable appetite for oil and the increasing challenges of supplying it from more difficult and remote resources, I don’t think even manipulative actions by OPEC to “keep America hooked” via lowered oil prices can or will work for very long — in a future world of ever-tightening supply/demand balances for black gold.

What American politicians can’t do via the laws of man, the laws of petroleum engineering and the laws of economics can and will eventually do.

I doubt that there will ever be a discrete tipping point for the petroleum industry, but rather a gradual ebbing. Perhaps the ebbing has begun. If there is a tipping point, as noted petroleum analyst and banker Matthew Simmons likes to say, it will only be obvious in the rear-view mirror.

Richard T. Stuebi is a founding principal of NorTech Energy Enterprise, the advanced energy initiative at NorTech, where he is on loan from The Cleveland Foundation as its Fellow of Energy and Environmental Advancement. He is also a Managing Director in charge of cleantech investment activities at Early Stage Partners, a Cleveland-based venture capital firm.