Cultivating Agricultural Cleantech

An expanding world population, coupled with increasing concerns about resource scarcity, land availability, biodiversity conservation and global warming is fostering interest in sustainable agriculture technologies.

Large companies and clean technology investors are focused on energy, and some are following water. Yet very few are tracking opportunities in breakthrough clean and green agricultural technology. And that suggests opportunity.

Certain innovations from a new crop of companies have the potential to expand yields, increase efficiencies, reduce waste and address concerns about toxicity, safety and the environment. There are innovative companies that are potentially poised for success across all categories of the taxonomy of agricultural cleantech—which Kachan & Co., having just published a major report on the subject, characterizes as follows:

Kachan agricultural cleantech taxonomy

Kachan & Co. agricultural cleantech taxonomy, a section of the larger Kachan cleantech taxonomy, which spans other sectors such as clean energy, transportation, water and others. Source: Kachan & Co. analysis.

In its new report on agricultural cleantech, Kachan uses the following criteria to differentiate cleantech developments from generic agricultural innovations:

  • improved efficiency of resource use
  • reduced ecological impact
  • smaller carbon footprint
  • sustained or enhanced profitability

Technologies which reduce the demand for water and chemical inputs are included as they reduce strain on the global water supply and reduce the impact on surrounding ecosystems via the introduction of foreign chemicals. Technologies which enhance the health and yield of crops and herds are included as these reduce waste from the industry and alleviate pressure to convert native land into agricultural fields. Innovations which reduce the carbon footprint of agriculture are included as they directly address the climate challenge we face today. Also included are land and resource management practices which decrease or eliminate nutrient drain and erosion of soils such that the land may sustain cultivable yields indefinitely. Focus in this definition is given to technologies which function at a commercial scale (as opposed to subsistence farming and hobby practices).

The following walks through the above taxonomy, offering definitions of each of the five main categories and profiles one leading company within each. The five companies profiled in this blog have either reached an exit (trade sale or IPO) or are simply compelling examples of the category in question. The full Kachan agricultural cleantech report goes through the taxonomy line by line and profiles a total of 57 companies.

Crop farming
Crop farming includes the cultivation of grains, fruits, vegetables, fiber crops, fuel crops and other plant varieties like mushrooms and fungi. This sector is of particular importance as cropland covers 12% of the earth’s ice-free land, and grain cultivation alone accounts for 50% of the world’s food supply (when supplies fed to livestock are considered).

Sustainability in crop farming focuses on increasing yields as well as improving resilience and persistence of crops. Greater yields are, and will continue to be, needed in order to feed the growing population with existing agricultural lands. Crop resilience describes the capacity of the plant to buffer shocks and stresses, which helps ensure food security in the face of climactic stresses. Persistence describes the ability of arable land to sustain a crop rotation indefinitely without diminishing yields.

Innovator Example: Plant Health Care
Plant Health Care (AIM:PHC) is best known for two natural crop amendments; Harpin and Myconate. Harpins are proteins produced by a variety of pathogens which cause plants to release cellular calcium and increase their metabolic rate. Photosynthesis and nutrient uptake rates rise, resulting in greater immunity and growth. Plant Health Care synthesizes Harpin proteins which have been shown to increase yield and shelf-life of certain crops. Harpin, discovered by Plant Health Care’s chief scientist, was a cover feature of Science Magazine. Myconate, a compound naturally secreted by drought resistant crops like red clover, promotes the colonization of plant roots with beneficial networks of fungi which work to increase the effective surface area of roots. Plant Health Care has developed a process to generate synthetic Myconate. Ultimately, the company claims, Myconate allows greater access to water and nutrient resources which has been shown to generate yield increases on the order of 9% for corn crops and 13% for soybeans.

Plant Health Care is headquartered in the USA with offices in the UK, Iberia, the Netherlands and Mexico. The management team has been involved in the agriculture industry for decades and retains the discoverer of Myconate as their chief scientist. The board of directors draws on similar experience in the agricultural and chemical industry with past endeavors at Arista and ICI. Long-term partnerships with Bayer CropScience, German Seed Technology, Syngenta and Monsanto, among others, have and continue to provide a secure revenue source alongside direct product sales. Plant Health Care continues to research new Harpin proteins which may have higher activity levels, applicability to different crops and elicit greater disease resistance.

Controlled environment agriculture
Just over half the world’s population currently resides in urban areas. This fraction is expected to rise over the coming decades, reaching 67% (~6 billion people) by the year 2050. Urbanization presents a myriad of challenges for the agricultural industry and introduces new environmental considerations associated with food production and distribution. One way of addressing these issues is by finding ways to cultivate food within city limits. Urban agriculture practices can take a variety of forms, from greenhouse farming to vertical farming in unused indoor spaces to rooftop gardens and so on. Urban agriculture can reduce risks associated with weather and spoilage. Indoor climates are predictable and controllable, thus droughts and cold snaps pose no threat. Shorter transport distances to markets reduce the fraction of food lost to spoilage and the carbon footprint of products. On top of the practical advantages of urban agriculture, society as a whole has a preference for local food. Research has indicated that citizens of developed countries are willing to pay a 15%-20% premium for local products.

Innovator Example: Urban Barns
Urban Barns (OTCQB: URBF.OB) claims its developments are best described as ‘cubic farming’. The company’s patent pending system is said to surpass the yield of top-of-the-line vertical farming developments several times over by making full use of the entire volume of an available space with no restrictions on floor plan or available height. The company asserts its system provides adequate growing conditions for leafy green vegetables in any building with standard climatic controls.

Urban Barns has been highlighted by experts on account of its impressive management team. The team has over 225 years of collective experience in the industry. Jack and Leo Benne (CEO and COO, respectively) have considerable experience in the area of controlled environment agriculture, Daniel Meikleham (Chairman and CFO) has had a forty year financial career with high profile multinational corporations, and Robyn Jackson (Vice president) has been a fresh food distribution entrepreneur for forty years. The technology has been implemented in North America and Puerto Rico with recent efforts to extend the business into the Middle-East.

Sustainable forestry
Forests provide a number of invaluable ecosystems services. They are hubs of biodiversity and play an integral role in global carbon and hydrological cycles. Timber is an inherently renewable resource, however proper management practices are paramount to sustaining the regenerative nature of forests. Sustainable forest management seeks to: maintain and enhance forest resources, promote the health and vitality of forest ecosystems, conserve biodiversity and ensure forest land retains its natural relation to soil and water systems. The ultimate goal is to retain the forest’s ability to support ecological, socio-economic and cultural functions beyond timber harvesting. Over the past three centuries, timber extraction has caused a net loss of 7 to 11 million km2¬¬ of forest land. An additional 2 million km2 have been converted to highly managed timber and oil palm plantations. The technologies outlined below represent new opportunities to reduce our impact on native forests and improve the sustainability of silviculture stands.

Innovator Example: Triton Logging
Triton Logging Inc. has developed a pair of devices which enable the collection of submerged forests from dam reservoirs. Harvesting these dead stands displaces live harvesting and impacts a previously disturbed ecosystem, resulting in a very low impact timber product. The SawFishTM is a remote controlled submarine equipped with a grapple and 55 inch chainsaw designed for deep reservoirs (>40m) where divers and surface mounted equipment cannot safely operate. Navigating via video, sonar and GPS, the SawFish can harvest a tree every three to five minutes (in good conditions), sending each one to the surface using reusable airbags. The SharcTM harvester is a barge mounted device with a telescopic boom and cutting head capable of harvesting timber up to 36.5m below the surface. The Sharc locates timber through sonar, remote cameras and GPS.

Triton is the only company to offer a mechanized means of collecting submerged timber at this scale and holds considerable competitive advantage. With 60,000 reservoirs globally, the company addresses a large market. Triton has operations in Canada, the USA, Ghana and a prospective project in Brazil. Triton’s Ghana project harvests odum, mahogany, ebony and a variety of other high demand tropical hardwoods from Volta Lake, the world’s largest man-made reservoir (350,000 hectares). The project is to be in full swing by 2013, harvesting 400,000m3 of wood each year. Licensing negotiations continue for developments in Brazil, where the company would profit from an estimated 300 million submerged trees. Revenue streams include eco-wood sales, inventory assessment, harvest concession development and logging services.

Animal Farming
Livestock operations present an increasingly important segment of the agricultural industry. Nations tend to increase their consumption of animal protein as they become more affluent. China, as an example, more than doubled its consumption of animal products during the 1990s. Over the next ten years, livestock is expected to provide 50% of agricultural output in value terms. Combining the land devoted to animal feed crops and pastureland, animal farming accounts for 75% of agricultural lands (3.73 billion hectares). Thirty-five percent of crop production globally is currently devoted to animal feed. Concentrated animal feeding operations (CAFOs) are becoming increasingly popular in the animal farming sector. CAFOs present unique challenges, most pressingly in the area of waste management.

Innovator Example: Livestock Water Recycling
Livestock Water Recycling (LWR) has developed a patented system that combines chemical and mechanical treatments to process manure and discharged water from CAFOs. The company claims that its technology will save operators 0.5 cents per gallon of manure produced, a substantial savings given that conventional handling costs currently sit at 1-1.5 cents per gallon. The system is also intended to address the pressing issue of manure storage. As illustrated in the following figure, the system converts animal wastes into a set of salable products, including concentrated liquid ammonium fertilizer, solid phosphorous fertilizer and potable water. The company claims that the system will save farmers nearly $10,000 for every million gallons of manure generated before profits from the sale or use of generated fertilizers. LWR estimates the market value of fertilizer product generated by each million gallons of manure at $12,500. The LWR system is said to be robust and fully automated, enabling indefinite operation with little more than routine maintenance. LWR expects a 20% annual return on investment from the system.

Livestock Water Recycling has a well-rounded team with experience in chemical engineering, waste water treatment, biological science, business development, industrial design and marketing. The company has had past success remediating contaminated aquifer sites throughout North America, working on projects related to pipeline spills and railway sites. LWR is fully integrated, addressing all matters from initial design to follow up and maintenance. In this way it plans to protect its proprietary process from copy-cat operations. The company is currently backed by AVAC investments and has earned an F.X. Aherne Prize for Innovative Pork Production, a Top-10 New Products award at the World Agricultural Expo and an Emerald Award for Environmental Excellence. The company has completed extensive testing of the system and says it is currently installing systems for customers at both dairy and hog operations in North America. LWR claims to have international inquiries and plans, in future, to extend its focus to areas including China, Korea, Europe, and Russia.

Aquaculture
Seafood currently provides 17% of the world’s protein and over 25% of protein in low-income countries. Roughly half the fish entering the market come from aquaculture and half from fisheries. The aquaculture industry is said be growing at 8-10% per year, making it the fastest growing sector of agriculture. Aquaculture is widely recognized as having a pivotal role in fighting world hunger and promoting the sustainable acquisition of dietary protein. The impacts of commercial scale aquaculture are, however, poorly understood. Primary concerns surround the acquisition of fishmeal and the impact on supporting ecosystems. Sustainable growth in the aquaculture industry will require innovations that minimize ecosystem impacts from open ocean aquaculture operations and methods of providing adequate nutrition to growing fish stocks in a manner that enables maintenance of feed fish populations. Recently a number of developments have occurred that support integrated multi-tropic aquaculture (IMTA), which describes nested aquaculture systems that raise fin-fish in conjunction with mollusks and other species, mimicking a natural ecosystem and lessening the load on the supporting environment. While such developments may play an important role in increasing aquaculture sustainability and a number of fish farms, like Cooke Aquaculture, have taken up the practice, the technology itself is not saleable per se and so has not been included herein.

Innovator Example: Marrone Bio Innovations
Marrone Bio Innovations (MBI) produces natural products for pest management. The company’s Zequanox product has demonstrated 90% mortality rates for zebra and quagga mussels, invasive pest species originating in the Caspian and Black seas which wreak havoc on aquatic ecosystems in North America. Zequanox consists of dead cells of a particular micro-organism which contain a compound naturally lethal to the target species. The company claims that at proper dosages Zequanox is safe for fish, insects, crustaceans, plants, algae and even native mollusks. In September of 2012, the company was chosen as a 2012 Top 50 Water Company by the Artemis Project on the success of its Zequanox product.

Zequanox finds a large market in North America as zebra and quagga mussels are a burden not only to aquaculture operations but also to industrial operations, power generation facilities, irrigation systems, public infrastructure and recreational facilities. The company has extensive experience in natural pesticides. Pamela Marrone, the company’s CEO, also founded AgraQuest in 1995.

As the world’s population grows and developing nations become more affluent, increased agricultural output and protein production will be necessary to meet demands. Issues of land and water scarcity alongside concerns about climate change and ecosystem degradation require increased emphasis on sustainability in agriculture.

Consensus on the ideal form of sustainable agriculture has not been reached. There are those who support a mix of high yield, heavily managed lands interspersed with sections of land reserved as natural sanctuaries, and there are those who support an agro-ecology approach where lands are farmed in a less productive manner while retaining ecosystem services.

A variety of agricultural cleantech innovations are emerging in the areas of crop farming, urban agriculture, sustainable forestry, animal farming and aquaculture. Venture capitalists have expressed only modest but growing interest in the area of agricultural cleantech, and increased investment is expected as our understanding of what truly constitutes sustainable agriculture evolves.

Latest Agricultural Technology Innovation, published November 2012 by Kachan & Co., details agricultural cleantech trends and drivers and profiles 57 important clean agricultural technology companies worldwide. This article was originally published here. Reposted by permission.

 

A former managing director of the Cleantech Group, Dallas Kachan is now managing partner of Kachan & Co., a cleantech research and advisory firm that does business worldwide from San Francisco, Toronto and Vancouver. Kachan & Co. staff have been covering, publishing about and helping propel clean technology since 2006. Kachan & Co. offers cleantech research reports, consulting and other services that help accelerate its clients’ success in clean technology. Details at www.kachan.com.

Electric Cars are a Niche? Or Able to Beat Conventionals?

Are electric cars a Niche?  Or just coming into their own?  I’ve been asked that question twice now in the last week in various forms, so thought I’d blog my answer.

Electric Drive Transportation Association has the total number of US sales at just under 400,000 this year, or 3.3% market share including hybrids.  Hybrids they have up 33% YTD compared to the whole of last year’s sales, and EVs/PHEVs up 375%.  But the EVs still make up only 10% of that total number.

In June The Street did a great article on EV sales forecasting line by line an estimate of 62,000 for the year, already at 18,000 at that point.

And while sales have been sluggish, they have been creeping up, with more and more and cheaper and better versions coming out in 2013 and 2014.

The price gap, somewhere between $8K and $25K, is closing.

Nissan just announced a cheaper and longer range Leaf version in Japan (yes it can be done, why didn’t you have the guts to do this last year Nissan?), Tesla’s 160-300 mi range Model S just started shipping and garnered the 2013 Motor Trend Car of the Year Award.

The Chevy Volt, for it’s struggles, as Forbes reported in September, is outselling the “Audi A6, BMW 7-Series, Porsche Cayenne and Mercedes-Benz S-Class, and it outsold most hybrids including the Toyota Prius plug-in, Honda Civic, Kia Optima, Toyota Highlander and Lexus RX 450h”.  Not yet high volume success, but then when you operate in small volumes and only send your dealers 1 or 2 at a time to start, it’s hard to blow sales numbers away.  Forbes comment was “If indeed the Volt is a “failure,” as some of its critics have contended, we’re sure there’s several auto executives out there that would like many of their slower-selling models to suffer the same fate.”

And how does this compare to the Prius?  The car that in many ways redefined the car industry and helped push Toyota to the top?  The first fours years of sales it struggled well south of 20,000 per year, the next 3 years globally shipping 30-40K/year, respectable, and strong, not earth shattering.   It took 6 years and price cuts and a second and 3rd generation to make it to the 100K/year mark.  Over 10 years to get a million sold.  Two years to get the second million sold.

But now every major car company and over half the top car models have a hybrid version now, barely 15 years (about two car design cycles) after initial launch.  Toyota shipped a million hybrids in ten months this year, 14% of sales for the world’s largest car company.  Honda reached the 1 mm number in hybrids shipped, Toyota is at 4 mm.  Does that sound niche to you?

Anyone really want to bet that in 6 years NO EV or PHEV has made it to the 100K level?

 

So why do we like EVs?

Among other things, 1) electrics cars run dead quiet, 2) electric cars have instant torque and terrific acceleration at low RPMs, performance which cannot be matched by gasoline engines, 3) electric cars have platform flexibility, turn radius/handling that can be amazing, since you can use distributed motors, all electric control etc, the same promise that fuel cell cars had, but couldn’t deliver, and 4) maintenance goes WAY down, virtually no fluids fewer moving parts.

Bottom line, once an EV or PHEV comes close on range and cost, it’s a better car than a gasoline car.

 

On the downside, cost is still cost, charging is still charging, range is still range.  But let’s look at those:

Best I can tell, we’re at an $8-$35K price difference to hybrids and conventionals, depending on the assumptions.  Since we’re still measuring at 10s of thousands of cars a year, I don’t think direct cost comparisons are yet fair.  Eventually one of these is going to take off in one market or another.  When it does, it’ll drive volume, and continue to collapse cost.  In addition the R&D work on EVs is paying off, manufacturers are finding ways to bring costs down in interim anyway.

I’ve had a couple of discussions about fast charging.  Charging is not a huge limitation, its a technology and cost choice.  Charge time is effectively a function of battery size, onboard charger size, and volts.  Let’s start out by saying we’re not going to be charging EVs at 110.  Too slow.  But charging at 220 is very doable.  220V home chargers today are in the 1-2K range. They will not stay that high for long.   Onboard charging The Leaf chose a 3.3Kw onboard charger.  Big mistake, done to skim $2K off the price of the car and keep it inline with the conventional Camry price point after tax credit.  They should have offered multiple options.  The Focus and Volt noticed this went with a 6.6 kw job,  the Tesla Model S comes with a 10 – 20 kw.  Faster charging is pretty much an ask and you shall receive issue.

Range.  Range matters.  Big time.  I contend the sub 100 mi car is idiocy and poor product management and fear of high costs.  Tesla, and the Volt and now Nissan is showing we can bring to market medium and long range EVs.  Betting against ranges getting longer is a bad bet.  I predict by 2015 the average EV/PHEV range will approach 200 mi, and range anxiety will be a thing of the past.

Scale.  Most of these are scale issues.  EVERY manufacturer of EVs started out viewing this as a few tens of thousands per year volume car platform.    In my first discussion on the Leaf with their Leaf product head, I kept asking whey they didn’t roll out faster charging options and longer battery range options for the consumer to start, and why spend all that marketing if only 10K were going to be available year one in the US.  The real answer, no guts no glory, they weren’t sure enough of success to roll this car out like they would have any other.  Even Tesla figured out the multi option idea!  In my first test drive of the Volt, the dealer admitted they had only 1 salesman trained to sell it.  And they could only get 1 car at a time in their allocation.  Not exactly setting their channel up for success.  Frankly guys, we’re not getting anywhere with that.  These are better cars, GO BIG OR GO HOME.

 

Niche? High cost? For today yes, but that’s how technology disruption happens.  Their parent cars broke through that ceiling, and they will too.  I think these cars are underperforming sales expectations that were all hype.  I think they are overperforming what we should have expected.  And I think we’ll look back on 2012 and 2013 as set up years.  It won’t be forever.  Electric is just a better platform once we get it right.

 

 

 

 

Betting on Black Swans

The phrase “Black Swan” was coined in the book of the same name by author Nassim Taleb to describe an event that is hugely important and influential that was not anticipated but yet in retrospect could have been.

September 11, 2001 is a classic example of a Black Swan.  It was only a failure of imagination by most Americans (including myself) to never have contemplated beforehand the possibility of such a dreadful day.  But, the terror attacks of that fateful day were pulled off with pitiful ease, without requiring any enabling technical or social developments.  Upon reflection, we should have seen it coming.  And, because it came, most countries around the world undertook a host of incredibly expensive actions.  Everything changed on 9/11.  The trajectory of human events was irrevocably and dramatically altered.

Of course, there have been many other Black Swans in recent history:  the Pearl Harbor attacks, the unveiling of the atomic bomb, the launch of Sputnik, JFK’s assassination, and so on.  Each was shocking, and changed the course of history.

These are all geopolitical examples, but there have been commercial examples as well.  In the past 50 years, the way we live has been wholly altered by such inventions as the transistor, graphic user interfaces (GUIs), touchscreens, and the Internet.  The way medicine is practiced has been overturned with the advent of medical imaging and non-invasive surgery, and the Genome project promises radical breakthroughs that we generally can’t foresee yet.

In energy, probably the most significant Black Swans in our lifetimes so far relate to advanced methods for discovering or extracting oil and gas from resources that were previously believed to have little economic opportunity.  This most notably includes hydraulic fracturing (a.k.a. “fracking”) to tap natural gas and oil from shale formations, but also embraces deepwater offshore exploration/production and steam-assisted gravity drainage (SAGD) recovery of the Athabasca oil sands in Alberta — all of which were pipe dreams (at best) a decade or two ago.

These hydrocarbon breakthroughs were largely made possible by the emergence of massive computational power to enable 3-D seismic imaging of deep geology and precision control of drilling and subsurface operations, assisted by dramatic improvements (in many cases, evolutionary over decades) in materials and mechanical technologies.  Some wags have said that the best rocket science occurring today is not aimed towards the heavens but instead is aimed underground.

Needless to say, these Black Swans in energy have transformed the oil/gas sector — one of the largest economic enterprises on the planet — which in turn has shifted the economic and financial fortunes of many players in the industry by untold billions of dollars.

So, the question becomes, are there Black Swans lurking ahead in the cleantech space?

Vinod Khosla certainly thinks so.  One of the most visible of the cleantech venture capitalists, Khosla penned last year a wide-ranging and ambitious thought-piece entitled “Black Swans Thesis of Energy Transformation”.

Khosla thinks that many other venture capitalists — including, presumably, me — are too cautious in pursuing “what could be” in energy.  By focusing mostly on the potential for attractive returns, venture capitalists have become captive to the pursuit of incremental improvement, and are thus overlooking “game-changers” that admittedly have higher risks.  A large part of his argument is built on the notion that forecasts are largely bogus, and too much weight in investing and managing is placed on the projections of the future by even the most expert of observers.

Khosla acknowledges that failure is a strong possibility with his bolder philosophy, but that is the price to be paid for aiming high and achieving great things.  Quoting Robert F. Kennedy, “only those who dare to fail greatly can ever achieve greatly.”  Now, maybe having a billion dollars of your own wealth, stemming mainly from his role in founding Sun Microsystems, helps to give Khosla the confidence to accept a high likelihood of failure.  However, through his fund vehicle Khosla Ventures, he is investing other people’s money too, so he can’t afford to be too cavalier — at least for very long.

Khosla’s mantra is “shots on goal”:  making lots of bets in potentially transformative technology areas.  In his paper, he singles out twelve of the portfolio companies of Khosla Ventures as being particularly ambitious, with the potential for huge returns.

His lament is that there aren’t more firms or funds or organizations taking similarly audacious and numerous “shots on goal”.  “If there were a hundred such Black Swan venture funds [similar to ours], each with its own points of view, we would have 10,000 ‘technology’ shots on goal over a decade, or at least more than 1,000 non-overlapping attempts.  With that number of shots, or even just a thousand, I believe we would have a near certainty of at least ten assumption-shattering successes in major market segments.”

I don’t have a clue as to where the other 99 funds like Khosla’s will come from.  I don’t know many investors who have that risk-appetite, especially in today’s turbulent world.  There may be some needles in the haystack out there, but they are few and far between.  Moreover, it’s unclear how much wealth those rare individuals possess and can allocate to helping hatch the Black Swans of cleantech.

It’s notable that Khosla supports the efforts of ARPA-E, the group within the U.S. Department of Energy tasked with providing funds to risky but promising energy innovations.  He probably knows that the other Black Swan funds he’d like to see from the private sector aren’t likely to emerge.  Indeed, in his white paper, Khosla really doesn’t offer much of a logical investment thesis for Black Swan investing, beyond some wishful thinking and a deep trust in the law of large numbers.

Alas, low-cost public sector capital is simply more well-suited than private capital to cleantech Black Swans, which after all are big/bold bets offering large long-term social value.

In turn, this reliance on public sector grant support for new energy innovation causes many observers in the political realm to buck up their backs in opposition, complaining that the government shouldn’t be in the business of “picking winners and losers”.  Unstated but underlying this criticism is the belief that our conventional energy system based on hydrocarbons never benefited from such largesse, so why should cleantech?

Tell that to George Mitchell.

For many years during the 1980s and 1990s, Mitchell and his firm experimented with fracking, with limited success.  Many in the oil patch told him that he was wasting his time…and his money, about $6 million of it.

But, as this recent analysis by The Breakthrough Institute concludes convincingly, the development of fracking technology to enable the production of shale gas would not have happened if the U.S. DOE hadn’t provided a substantial amount of support for decades along the way.

Today, years later, shale gas has dramatically reshaped the playing field in the energy sector.  The tireless efforts of George Mitchell and his willingness to bet big bucks have rewarded him with a fortune worth billions.  He built that Black Swan.

But, then, he did so with the help of U.S. taxpayers.  Mitchell almost certainly wouldn’t have achieved what he did without substantial involvement of the government.

It’s the kind of public-private partnership that will need to be replicated to achieve more breakthroughs in cleantech in the decades to come.  The resulting Black Swans will also generate a number of cleantech fortunes, and these should be celebrated, as the appetite for risk-taking by devoted entrepreneurs and inventors must be commensurately rewarded by enough examples of success.

And, it should be hoped, these future cleantech billionaires can plow back large shares of their fortunes into philanthropy and investment in efforts to address and solve the world’s problems of that later era for subsequent generations.  Much like Vinod Khosla is doing today.

The Deeper Meaning of Sandy

Watching the video feeds from the New York and New Jersey areas in the wake of Sandy reminded me of the images seven years ago from New Orleans being decimated by Katrina.

Other than perhaps providing a warning not to call a particular geographic area “New” anything, what do these storms tell us?

Like Katrina did, Sandy reminds us most poignantly how little most Americans think about the reliability and importance of energy – until it’s not there.  And then, they think about it – a lot.

The sight of people lining up for gasoline, and fighting about who gets to the pump first, is evidence of the dependence of our society on commodities over which individuals ultimately have minimal control.

The sight of people screaming at civic leaders about the slow pace of power restoration says volumes about the resentment about our subservience to technology – and the necessary prerequisites that enable technology to actually work.

The sight of people desperately tapping into scattered energized cell phone charging sites, so that they can maintain connectivity to others that they depend on or that depend on them, confirms the observation that our species is no longer able to be truly self-sufficient, much as some may like to think otherwise.

Sandy thus reminds us that our vehicles and our buildings and our communications need constant access to energy, whether electricity, gasoline, diesel or natural gas.  Without energy, these artifacts of modernity quickly become irrelevant.  Without energy, 21st Century humans can barely survive at all.

In turn, the supply line of energy provision is an immense enterprise that can nevertheless be easily disrupted.  The short-term consequences can be acutely tragic, with damaging economic effects that can linger for a long, long time.

One consequence of Sandy is that, like Katrina, it has elevated the topic of climate change in the national discourse.

Many advocates had been complaining about “climate silence” during the 2012 Presidential campaign, but New York Mayor Michael Bloomberg threw the issue into the spotlight in the wake of Sandy by endorsing Obama over Romney.  The endorsement came in large part because Bloomberg believed that Sandy was amplified by climate change, and that candidate Obama was more committed to taking action to combat climate change, thereby reducing the risks to low-lying places such as New York in the future.

The hand-wringing conversations occurring now are similar to those immediately post-Katrina, and I expect that the U.S. will similarly act on climate change now as it has consistently since then – with no action.

Alas, that’s because the political climate in Washington is probably in worse shape than the atmospheric climate covering the planet.

Although we can’t say for sure that Sandy (or Katrina, or any of the other mega-storms of recent years) were caused or even worsened by anthropogenic climate change, most experts agree that the frequency and magnitude of extreme weather events is likely to increase as the energetic content of the atmosphere and oceans has risen with decades of carbon dioxide emissions – from consuming the energy upon which we so utterly rely.

Moreover, experts also agree that the emissions of the past decades have still yet to exert their full impact on the climate, so some additional worsening is likely baked in, even if the world (especially the U.S.) finally decides to do something to control emissions on a going-forward basis.

So:  Expect more Sandies and Katrinas.  Expect more heat waves.  Expect more droughts.

In fact, expect more blizzards too.  The average temperature of the planet may be increasing, but the probability distribution of temperatures is widening, which means cold events will still happen on occasion.  And, when they do, they may well be accompanied by more moisture – hence, blizzards.

All of this illuminates a central thrust of how the cleantech sector can best help mankind in the decades to come, in the face of what is likely to be increasing climate chaos:  adaptation.

Adaptation has many forms.  For instance, adaptation should force a re-think about the wisdom of civil construction right along ocean shorelines.  Adaption might involve people relocating to live within reasonable walking distance of their workplace, not reliant on vehicles or public transportation.

Adaptation also suggests that, given an increasing exposure to storms like Sandy (and other threats such as terror attacks), the energy system should be designed and built with greater redundancy and dispersion of assets, to be more robust in the face of overwhelming events – of which Sandy is just the latest.

Sandy should provide an impetus for increased installation of uninterruptible power systems and backup/standby generators – especially at gasoline stations, many of which in the Northeast were put out of commission due to lack of electricity – as well as an awareness NOT to situate these devices in places where they will be flooded and hence unusable exactly when they’re most needed.

More broadly, becoming more resilient in a more turbulent world implies a move away from a centralized energy topology based on large-scale refineries and powerplants, and the huge corporations that own and operate them.

Making that transition would not only be expensive, as it implies a massive change-out in the nation’s energy infrastructure, but it would be highly uncomfortable.

Although they like to think that the nation has been built largely from the bottom-up via individual initiative, Americans are stuck in an outdated “top-down” mentality when it comes to the energy sector.

Americans are complacent about their reliance on the power grid and on petroleum-fueled vehicles.  They want continuous access to any form of energy at virtually no cost.  While they prefer minimal environmental impact and detest the strategic reliance on the Middle East for oil, they heartily trade off higher emissions or ongoing geopolitical subjugation for a just few cents cheaper.

Americans may not much like Big Oil, or utility monopolies, or the dirtiness of the coal sector, but they don’t want to sully themselves by doing much to disrupt them from their current dominance.  They certainly have limited appetite for taking energy matters into their own hands by supporting novel smaller-scale distributed energy approaches being pursued by cleantech innovators that may entail a little more cost (at least currently).

In many ways, the American willingness to go along with the energy status quo mirrors the American dependence on large institutions – governments and corporations alike – that are nevertheless widely-hated and even antithetical to the idealized notion of American self-reliance.

Sandy thus has highlighted the deeply-seated fear and loathing of the United States, circa 2012, in a way that would do Hunter S. Thompson proud.  The physical damage wrought by Sandy upon New York and New Jersey is a metaphor for the salt that Sandy has thrown in the open wounds of the collective American psyche.

There is a joke that asks “How many psychiatrists does it take to change a lightbulb?”  The answer is “Just one, but the light bulb really has to want to change.”

Whether Americans in the wake of Sandy will want to undertake the effort to change, in order to not only heal themselves but inoculate themselves against challenges posed by future storms like Sandy, is a major question.  The evidence, post-Katrina, indicates a high willingness to moan and groan, but a limited appetite for making the necessary commitments and sacrifices to effect meaningful long-term improvement.

Meanwhile, the cleantech community continues to press forward, under the forecast that opportunities for positive impact will only increase in the years to come.

The Proper Role of Government in Energy

Since tomorrow’s election is heavily focused on the appropriate scope of government, I have spent a little time lately reflecting upon the proper role of government in the energy sector.

In regards to the U.S. Presidential race, I will refrain from analyzing the respective policies and stances concerning energy of the two candidates.  This recent article from Fortune does a not-bad job of that.

Rather than get down into the weeds with an inordinately long list of specific ideas for a highly complex economic sector, I prefer to keep this discussion at a high-level, articulating basic principles that offer suggestions to guide elected officials and bureaucrats on how energy policies and regulations should be set.

This would be my short-list:

  1. Establish marketplace rules with long-term clarity to enable best investment decisions on long-lived assets and business strategies
  2. Ensure externalities from free-riders causing economic harm to society are fully internalized into market pricing signals
  3. Deregulate those services that can be provided competitively, force breakups where there is excessive market power preventing competition from being effective, and aggressively regulate services where competitive alternatives don’t exist (providing incentives for cost efficiency and non-discrimination)
  4. Promote full disclosure and transparency of information to all market participants to help in making optimal decisions
  5. Privatize public sector assets in competitive market sectors, and hold (potentially acquire?) assets in non-competitive segments to eliminate the possibility of exploitation by for-profit monopolists
  6. Set minimum standards of health, safety and environmental compliance, ensure these standards are met by all market participants, and enforce via meaningful penalties
  7. Facilitate responsible development and production of energy resources – as long as all health, safety and environmental standards are fully met
  8. Provide tax credits for pre-commercial research on new energy technologies to spur further innovation
  9. Structure incentives or mandates based on desired market, social or environmental outcomes rather than technological outcomes

As you can see, I am a big believer in the power of markets to most efficiently allocate capital and drive consumer behavior.   But, that doesn’t mean that the energy sector should be completely unregulated, and that the government should have little role in it.

Dating back all the way to Adam Smith over 200 years ago, it is widely-accepted among economists (at least non-Marxist ones) that free markets only produce efficient outcomes for the economy as a whole — and even then, don’t necessarily produce equitable outcomes — when (1) no participant in the market has undue power (i.e., no monopolists or monopsonists), (2) all information is available to all parties, and (3) there are no externalities (or they have otherwise been folded appropriately into market prices).

Alas, these pre-conditions do not widely apply to the current state of play in the U.S. energy sector.  As a result, even without considering questions of fairness, there is a clear need for government intervention to ensure socially-efficient outcomes.

The principles above are my thoughts on the extent and limits of proper intervention.

And, it should be noted that the principles I outlined above will only work well to produce socially-efficient outcomes when they’re all followed pretty faithfully.  For instance, without fully internalizing the social costs of carbon emissions in energy prices as stipulated in my second principle, other artificial mechanisms (e.g., renewable portfolio standards and renewable fuel standards, focused government R&D programs on low-emission energy technologies) in violation of my eighth principle are sometimes “second-best” solutions to make up for deficient attention to the second principle.

It should be evident that neither Romney nor Obama are particularly beholden to my proposed set of principles, as their campaigns pick and choose some to trumpet and disregard or oppose others.

How would you characterize what the role of government in the U.S. energy sector should be?  While it may influence how you might vote tomorrow, don’t expect either Presidential candidate ultimately to have much impact, as the U.S. President has less influence on the energy sector than is generally supposed.

At the outset of the October 16 debate, the candidates were asked by a citizen what they would do to push down gasoline prices.  Both Obama and Romney responded by touting how they had, or were going to, increase domestic production of oil (as well as natural gas).  That can help drive down prices a little, but the impact is pretty marginal:  oil and gasoline prices are set by conditions in world markets, by factors well beyond the control of the President of the United States.

Bluntly, the underlying premise of the question was horribly flawed:  the President can’t move gasoline prices, and the President can only move supply and demand a very little bit…and even then, only over an extended period of time (for instance, as new auto fuel efficiency standards come into effect or as expanded oil exploration and production opportunities are brought into play).

By the fundamental structure of the Constitution, all powers not reserved for the Federal government are delegated down to the States.  And, in many issues pertaining to energy, it’s really state policy that matters.  That allows the energy economy of California to look increasingly like the energy economy of Germany, while the energy economy of Louisiana looks more like the energy economy of Saudi Arabia.

The most one can expect from a U.S. President, when it comes to energy, is the espousal and dedicated ongoing pursuit of general principles akin to those I outlined above.  He (or someday, she) has a bully-pulpit to argue for pressing ahead on a broad vision, and taking supportive actions with lots of little strokes — many of which are far more symbolic than substantive.  (Remember Jimmy Carter placing solar thermal panels on the roof of the White House?  Remember Ronald Reagan taking them off?)

When choosing between Obama and Romney — at least for me, at least when it comes to energy — it’s a choice of lesser-among-two-evils.  Both of them are beholden to the over-simplistic dogma of their respective parties.  Neither of them is able to discard outdated or ineffective planks of his party’s overall energy platforms, or to embrace new ideas not typically advocated by his core constituencies.

Even though our choices are far from perfect — on energy policy and a whole range of other important matters — I urge all Americans to uphold their civic duty and exercise their right to vote.  As my aunt Doris used to say, you have no moral authority to complain about the government if you don’t vote.

Meanwhile, my proposed principles of energy policy remain, standing by, for some future American leader to consider.