Failure Is An Option: Cost Is Not No Object

I’m pretty skeptical when it comes to polls about energy issues.  Way too often, the questions are posed in such a way that they practically compel the respondent to answer in a certain way. 

Seriously:  if someone asks you “would you like the energy you use to have less environmental impact?”, are you going to answer “no”?

Valuable polls force people to make tough tradeoffs, as it is under “either-or” situations that true preferences are more accurately revealed.  In the case of energy polls, since most consumers are fundamentally economic decision-makers, questions have to be wedded to the potential dollars-and-cents implications.

And so I put a bit more credence in the results of a recent poll by the investment banking firm Lazard (NYSE: LAZ), in which they asked U.S. voters how much more they were willing to pay for lower-carbon sources of electricity. 

As reported in an article by the Financial Times, the Lazard poll indicates that, on a scale of 1-10 (1 meaning highly unwilling, 10 meaning highly willing), only 21% of respondents reported a score of at least 8 in terms of willingness to pay more for clean energy, with an average willingness to pay of an extra $9.74 on the monthly electricity bill.

Since the average American household spends about $100 per month on electricity, these findings suggest that the average American would be willing to tolerate about a 10% increase in electricity bills.  Implicitly, this means that the average American would be willing to pay about twice as much as they normally pay for electricity — for 10% of their electricity supply.  Given that the average price of electricity in the U.S. is about 10 cents/kwh, the typical American would thus be willing to spend up to 20 cents/kwh for 10% of their electricity to support an accelerated transition to cleaner power generation. 

Unfortunately, many clean electricity generation options — especially those that can achieve large-scale in the many locations not endowed with truly excellent renewable resources — remain at costs at or above 20 cents/kwh delivered to the customer. 

Consequently, it’s unrealistic for clean electricity technologies to supply more than a small portion of the overall power generation portfolio in the U.S. unless and until that fact changes.

In other words, without significant cost reductions, the promise of many clean energy technologies will remain just that:  promise.  Customers — citizens, voters — will not bend over backwards economically to foster a high degree of penetration of new clean energy technologies.  And, we’ll keep more or less doing what we’re doing today.

Against this backdrop, it’s interesting to read the recent report by Google (NASDAQ: GOOG), “The Impact of Clean Energy Innovation”.  Google recognizes that the clean energy movement needs significant cost breakthroughs to become massive in scale, and aims to depict what could happen if such breakthroughs were achieved over the next few decades:  offshore wind down from 20 cents/kwh today to below 5 cents/kwh, solar from 15-20 cents/kwh today to 2-4 cents/kwh, and carbon-sequestered coal generation from ???? (i.e., unavailable) today to below 5 cents/kwh.

As much as anything, the report is a call to unstick the lethargy and break from the status quo do-nothing posture that tends to befall the energy sector.  It’s as if Google aims to goad the energy industry into action, with such implorations as “Technologies that innovate fastest win” — something that Google should know about first-hand.  The closing line of the study couldn’t be any clearer in prodding for acceleration:  “The benefits [of energy innovation] are clear, so let’s go!” 

But Google is fundamentally a nimble and entrepreneurial Internet company, and they are shouting into the din of the massive and bureaucratic energy sector.  It seems naive, to me, that their words will resonate with their (presumably) intended audience.

Alas, along with the rah-rah cheerleading, the Google report’s authors also identify the immense obstacles to the path they themselves promote.  Notably, they confess that “smart policies are needed to drive innovation.”  In today’s toxic political environment, it is difficult to imagine any substantive new policies encouraging further energy innovation being implemented, much less so-called “smart” policies — always difficult to achieve in the best of times.

And, as Devon Swezey of the Breakthrough Institute notes in his recent essay “The Coming Clean Tech Crash” in the Huffington Post, “In an era of heightened budget austerity,  the subsidies required to make clean energy artificially cheaper are becoming unsustainable.”

At bottom, Google recognizes the challenge:  “Coal is very hard to displace on economics alone.”  Coal-fired generation is just so damned cheap (as long as environmental issues are overlooked), that its 50+% market share in the U.S. will be hard to dent materially if the invisible hand of the market is the only hand on the tiller.

Compounding the issue is the return of cheap natural gas.  As Google notes, greater utilization of natural gas generation driven by recent low gas prices would be good in the short-term for reducing emissions, but will slow innovation leading to wider-scale deployment of truly clean (i.e., zero or near-zero emissions) energy solutions truly necessary for the long-term:  yet another example of the type of tradeoffs often faced in the energy sector and indeed in society at large — with the short-term usually winning out over the long-term.

So, ultimately, a cleantech utopia is only achieveable with major technology breakthroughs to reduce costs to politically acceptable levels, yet clean energy innovation is greatly hindered (though not entirely stymied) by many of the forces at work.  This is the playing field on which we in the cleantech sector are faced with playing.  Sound like fun to you? 

Before you opt in, be aware that failure is indeed an option.  Don’t jump into the game thinking that this will be easy, because it will be anything but.  And, the way to score big points in the game is to reduce costs, period.

1 reply
  1. Muir Woods
    Muir Woods says:

    I recently attended an invitation-only briefing by a "high ranking official in the DOE" on this very subject. Here's the rub, we're going to be paying more for energy no matter what we do, and the utility industry is gearing up to pin that tail on the renewables donkey, even if its actually the lowest cost option going forward.

    Today, we have an electrical supply system that generates power at a wholesale cost of around 5 cents per kW-hr, and sells it retail for roughly twice that. Unfortunately, the system contains a lot of components that are 30-50 years old, many past their retirement age, and riddled with deferred maintenance. Since these assets were built before the Vietnam-era inflation hit, their replacement cost, in today's dollars, is going to be much, much higher than we're used to. Get used to the idea of 15 cents per kW-hr wholesale, maybe 20 if you love CCS and nuclear, and these costs go up every year.

    Renewables are headed for 10 cents per kW-hr LCOE and continuing down for the foreseeable future at a rate that looks a lot like cellphones and personal computers. The Colorado Governor's Energy Office did a study of our electrical energy supply system in 2050 and determined that a high mix of renewables is the lowest-cost option. The US DOE has come to pretty much the same conclusion.

    This development is going to turn the utilities' business model upside down, much like what packet switching is doing to the phone companies and they don't like it one bit. For them, this economic crisis couldn't have come at a better time but drastic subsidy cuts may not be enough to turn the tide of history so blaming renewables for the inevitable dramatic increases in the cost of electricity is the next best option.

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