Reporting from Omaha

Over the weekend, I attended the annual shareholder’s meeting of Berkshire Hathaway (NYSE:  BRK.A, BRK.B) in Omaha to hear the wit and wisdom of CEO Warren Buffett and Vice Chairman Charlie Munger.  For five hours on Saturday, Buffett and Munger fielded questions from panelists and investors on a wide range of topics.  A good synopsis of the often amusing banter was provided by an ongoing blog operated by the New York Times.

During the marathon Q&A session — quite impressive for a pair of octogenarians to endure — Buffett and Munger thrice touched upon topics of relevance to the cleantech sector.

First, Buffett commented on the excellent performance of Berkshire’s railroad, BNSF, which experienced a very strong first quarter of 2013, with much higher growth in volumes than other U.S. railroads.  Buffett noted that it was very fortunate for Berkshire to have “lots of oil discovered next to BNSF’s tracks”:  BNSF is able to take advantage of the oil boom in western North Dakota associated with the Bakken shale, due to its extensive route network in the area.   A side implication is that BNSF is well-positioned to ship oil imported from Canada, whether or not the Keystone XL pipeline gets built.

Of course, BNSF also has a large exposure to coal hauling.  However, it’s important to recognize that BNSF’s coal business is mainly centered on production from the Powder River Basin, which is both incredibly cheap and low-sulfur.  As such, it remains competitive with low-cost natural gas, and is not being displaced as much from the power generation sector as is coal from Appalachia, so BNSF is unlikely to be as hard-hit by the shale bonanza as other railroads.

Second, an investor asked about the potential effects of the increasing competitiveness of solar energy on the future financial performance of Berkshire’s utility business unit, MidAmerican Energy.  The question was likely prompted by a recent report issued by the Edison Electric Institute raising the concern that solar and other forms of distributed generation may lead to reduced revenues and profitability of grid-based electric utilities as customers source a greater share of their electricity needs from on-site sources.

Buffett and Munger noted that Berkshire was aware of the declining cost of solar energy and correspondingly saw good investment opportunities in the sector, as evidenced by three very large projects acquired by MidAmerican with over $5 billion in capital requirement.  However, they noted that these plants were central-station generation, as opposed to on-site distributed generation.  Moreover, they are located in the deserts of the southwestern U.S., not in MidAmerican’s utility territories.

Extrapolating from Berkshire’s entry into solar — central powerplants in deserts — Munger was particularly skeptical that rooftop solar would pose much of a cannibalization threat anytime soon in MidAmerican’s not-so-sunny locales in the Pacific Northwest, Iowa and the United Kingdom.

Buffett asked MidAmerican’s CEO Bill Fehrman to stand in the audience and comment further.  Fehrman opined that MidAmerican’s relationships with their regulators were sufficiently positive that tariffs would be restructured if/as rooftop solar penetrates their customer base and leads to reduced revenues/profitability associated with the grid services that MidAmerican provides to its regions.

Personally, I agree with these assessments — insofar as MidAmerican’s current portfolio of territories is concerned.  For electric utilities in far sunnier locales, and with regulatory regimes that are generally more populist in their leanings, rooftop solar may sooner pose more of a downside.

Third, another investor asked about the potential impacts of climate change and of climate change policy on Berkshire’s businesses.

Buffett began his response sarcastically by noting the unseasonably warm weather that Omaha was enjoying (which it most definitely wasn’t, as attendees had to prevail against a cold windy rain to enter the auditorium).  After this Fox-worthy cheap-shot, Buffett cautiously offered that — though he certainly wasn’t an expert — he believed that there was a real chance that man-made climate change was occurring, because most of those who really understood the issue and were worried were quite compelling in their logic.

However, he was less concerned that climate change would represent a major negative force against Berkshire — especially their insurance businesses.  At several points during the day, Buffett extolled the excellence of the pricing discipline and risk assessment of Berkshire’s insurance businesses, and Buffett indicated that he didn’t think that the risk profiles of the insurance businesses had changed materially due to climate change, at least so far.

Munger then chipped in with some commentary on climate policy.  He was pessimistic that any global policy on carbon would be effective, due to the massive coordination problems between all of the various countries that would need to be signatories.  However, Munger was supportive of higher taxes on carbon fuels, which “Europe stumbled into” for reasons other than climate change.  This suggestion prompted some applause from the audience, which surprised Munger.  Buffett then noted to Munger that far from everyone applauded, which drew laughter and a much louder burst of applause from the crowd — indicating that the Berkshire shareholder base on average is probably not as concerned with this issue as is your intrepid reporter.

“Power Hungry” is Filling, But Not Fully Satisfying

It had been on my nightstand for awhile, but I finally got around to finishing Power Hungry: The Myths of ‘Green’ Energy and the Real Fuels of the Future by Robert Bryce.

According to his own bio on the book jacket, “Bryce has been producing industrial-strength journalism for two decades” –whatever “industrial-strength” is supposed to mean.  And, by his own writing, he states that “I am neither a Republican nor Democrat.  I am a charter member of the Disgusted Party.”

Given his angst-ridden and self-assured stance, perhaps it shouldn’t be surprising that Bryce’s narrative is laced with the type of adjective-overladen hyperbole that has come to dominate the media in our Michael Moore and Glenn Beck era – a rhetoric style that I personally find annoying and unhelpful in its seeming desire to provoke.  (Though, I would pay good money to see Bryce call someone like Dr. Gal Luft an “underinformed-but-persistent sophomore” to his face as he implicitly does in writing.)

If one can get past the sometimes maddening and offensive passages, the book has its share of merits.  Bryce is right to focus on facts, to seek to strip away untenable claims, and to decry the lack of clarity of thinking in the national energy discourse.  Part One of the book is an occasionally masterful primer on many of the basics about energy production and consumption in the modern world, studded with facts – mostly accurate by my superficial review.

But, as the Einstein principle implies, “A theory should be as simple as possible, but no simpler.”  And, in striving to simplify the energy topic by driving towards sound-bites from a massive but still incomplete set of facts, Bryce sometimes strides too far.  He sometimes pieces the facts together in such a way so as to draw skewed conclusions.  And, his lack of nuance – indeed, his distaste for nuance – leads ultimately to oversimplification and conclusions that are at best only partly correct.

Part Two of the book is consisted of chapters devoted to debunking “myths” about green energy.  I guess it’s fair to tackle this, in that some commentators supporting green/renewable/alternative energy really have been guilty of overstating the facts and creating too much unsustainable hype as a result.  Yet, for the most part, the myths that Bryce attacks are constructed in such a way as to be too easily knocked down like a cheap strawman. 

For instance, the chapter entitled “Myth:  Denmark Provides an Energy Model for the United States” is written as though someone actually thinks that Denmark and the U.S. are sufficiently similar that the Danish energy system can be largely replicated in the U.S.  Maybe some people do actually think that the U.S. should really pattern itself after Denmark, but most of us in the energy sector know that’s a naïve thought.  Even so, that’s not to say that the U.S. can’t learn valuable lessons from the Danes – and in fact, Bryce acknowledges as such in the chapter itself, though you might not notice because of the chapter title.

I could go on with a number of other examples of how Bryce makes himself a valiant protector of Joe Six-Pack by dismissing so-called “myths” that are portrayed as elitist ideals of little substantiation and hence value – even when the “myths” he’s debating are drawn in a hopelessly indefensible manner. 

Bryce can’t seem to accept that, just because some people have said stupid things about green energy, it doesn’t mean that green energy is stupid.

It’s clear that Bryce is an devout disciple of the Peter Huber & Mark Mills school of energy analysis, in which energy density is the primary factor driving winners and losers in the energy sector.  By this way of thinking, nuclear and fossil fuels are clearly superior to wind, solar and bioenergy, which require large footprints.  It’s an intriguing perspective, and definitely applies well to mobile and transportation energy, in which density is a critical driver of commercial acceptability. 

However, I’ve never been convinced that energy density is a significant factor in “stationary” energy to power, heat and cool buildings:  it’s all about economics, and if the cost of land and delivery is sufficiently cheap (i.e., in a remote area connected via a delivery system), who cares how dense the energy is? 

(Let’s not forget that Huber/Mills have been less than an infallible source of energy prognostication, as any reader of the fascinating but yet wholly inaccurate Huber-Mills Digital Power Report from the early 2000’s – sample forecast:  ubiquity of digitally-managed distributed generation – can attest.)

It’s equally clear that Bryce passionately hates several things:  virtually all political figures of all stripes, T. Boone Pickens, wind energy, and biofuels.  Bryce has no use for them, can find no virtue or benefits from any of them; the dislike seems to go beyond the rational. 

Putting aside politicians and Pickens, I’m well aware of the limitations of wind energy and biofuels, but that doesn’t justify throwing the baby out with the bathwater, as Bryce does.  Rebuttals to Bryce’s diatribes on wind energy and biofuels can be constructed to indicate where, how, when and why wind and biofuels can indeed make sense, but it would be a Herculean task just to overcome the volume of volleys he lobs.

Part Three of the book provides Bryce’s (over)simplifying conclusion to our whole energy problem:  we’re finding immense amounts of natural gas in shale, more than we could have ever expected a few years ago, so we need to use all of this to bridge to a nuclear future, which is the ultimate long-run solution and for which technology and economics will ultimately prevail.  As Bryce calls this vision of natural gas to nuclear, N2N.

I’m not intrinsically against increased utilization of natural gas and nuclear energy.  I’m more sanguine about the natural gas – though I don’t know if the shale plays will have the duration Bryce expects, due to the steep decline curves encountered so far – than I am about nuclear energy, which both has poorer current economics and lower public acceptability than the wind energy that Bryce damns to high heaven.  (And, Bryce is super eager to gladly accept all the hype he can accumulate on nuclear energy, especially about waste management safety and fuel recycling technology advancement.)

The problem I have with Bryce’s N2N synopsis – the oversimplification resulting from his lack of appetite for nuance – is the “silver-bullet” mentality about energy that has played a large part in getting us to where we are today.  Bryce seems to think that there should be one answer for most if not all our energy needs:  natural gas in the immediate future, nuclear in the longer future.  He doesn’t see a future for renewable energy, in large part because he seems to think that something that represents only a part of the solution isn’t really a solution.

I disagree, and believe we need a highly diversified all-of-the-above energy strategy, as I don’t see a one-size-fits-all energy approach as workable.  For example, if wind can supply 15% and solar 15% of our needs (at prices that are likely to decline with volumes to levels approaching competitiveness with fossil fuels), that shouldn’t be pooh-poohed just because it doesn’t supply a majority of our needs.  Indeed, going from less than 1% to more than 10% in either of these forms of energy represents a huge growth potential and huge wealth creation opportunity.

Notwithstanding its flaws, I do recommend cleantech advocates read the book.  It is cited widely by opponents of renewable energy and media articles and outlets unfavorable to renewable energy, so it’s good to have read the raw source material. 

Though you may need to have some industrial-strength antacid at your side when reading his so-called “industrial-strength journalism”.

Report from the Berkeley-Stanford Cleantech Conference

The Berkeley-Stanford Cleantech Conference, a biannual conference organized by Berkeley and Stanford students, successfully brings some of the best and brightest minds together to discuss cleantech-related topics. Past themes have included Electric Vehicles, Big Solar, Energy Storage, and Smart Grid; this year the conference was organized around Distributed Generation. This year’s event took place at the PG&E General Office Conference Center in San Francisco.

The first panel of the afternoon, “Customers Turned Producers: The State of Distributed Generation,” provided a comprehensive introduction to distributed generation (DG) and the various issues and problems that may come with increasing adoption. The panelists covered a wide variety of backgrounds: Helen Priest from PG&E, Eric Dresselhuys from Silver Spring Networks, Sky Stanfield from the law firm Keyes & Fox, Chris Marnay from Lawrence Berkeley National Labs, Peter Asmus, a Senior Analyst at Pike Research, and Eric Wesoff from Greentech Media.

The first topic of consideration was the definition of distributed generation, for which there was considerable ambiguity. Sky Stanfield proposed a standard definition of 20 MW for SG, but participants were quick to point out there are varied definitions, depending on location and application (as Eric Dresselhuys commented, “the one consistent rule is that there is no consistent rule for DG”). Peter Asmus reminded the audience that DG is not necessarily just renewable energy, pointing out that diesel-based power (considered one of the dirtiest energy options) is a common DG source. Regardless of the energy source, distributed generation must align peak generation as close to peak load as possible.

Guest blog by Andrew Lonecker

The potential safety and legal issues of distributed generation were also discussed. For instance, although utility-scale and grid-connected systems can easily close all downstream components in case of accidents (e.g., inclement weather situations), for DG, with multiple input and output points, this is not possible. Panel participants mentioned situations in which live and dead connections of DG systems were confused, causing significant safety issues.

Finally, the panel began a discussion of microgrids, which are autonomous “island” grids that can be connected and disconnected to the larger grid. Peter Asmus estimated that there were 140 microgrids in existence, comprising over 1.8 GW, primarily at college campuses and in military applications. Helen Priest acknowledged that the prevalence of microgrids would currently be a “nightmare” for some parts of PG&E, although she was optimistic that PG&E innovation would be able to solve these issues. Billing was viewed as a consistent problem, particularly with the growth of intermittent solar and wind and electric vehicles.

The second panel, “Scaling down to size: the technology landscape,” provided an overview of the technological opportunities and challenges in distributed generation. Panelists included Matt Lecar from GE Smart Grid, Carrie McLaughlin from Nordic WindPower (which provides 1 MW utility-scale turbines), Kevin Passalacqua from Bloom Energy, Liang Downey from Nextek Power Systems (which integrates native intermittent DC sources to provide uninterrupted DC power for load), and Ed Sappin from BP Solar.
The first topic regarded early adopters and potential customers segments for each company. Bloom Energy, whose first customers were Google, eBay, Adobe, and others, have searched for early adopters who are not risk averse and are very cost focused. Further, Bloom Energy has searched for large corporate partners that have an existing customer base, allowing for future expansion. Nordic WindPower’s end customers are usually schools or small business looking to “green” their business (in fact, ROI is often less important than the marketing opportunity). Nextek Power Systems’s first customers were building and facility owners in California, focusing on lighting (and move to LED), data centers, HVAC, and in emerging markets.

As a result, the technologies created by each of the companies are tailored to these customer segments. Bloom boxes, for instance, are modular 300 kW systems that can be combined for larger uses. Further, Bloom Energy designed their boxes to be extremely quiet, to minimize the NIMBY (“Not In My Backyard”) concerns. Also, Nordic WindPower must design their products and services to align with complicated safety issues (e.g., noise and safety guidelines). For each of the panelists, project financing and lack of certainty in US policy are their largest barriers to success.

The last panel of the afternoon, “Stories from off the grid: DG & Microgrids in operation,” provided an perspective on the operations side of distributed generation. Panelists included Olaf Groth from Monitor 360, Sheldon Kimber from Recurrent Energy (a solar provider), Ryan Levinson from Wells Fargo (involved in renewable energy investment), Matt Heling from PG&E, and Matt Singleton from Prologis (an industrial real estate developer involved in rooftop solar installations).

The primary topic of discussion involved the various operational challenges inherent in distributed generation. For instance, the primary challenge for PG&E is to devise system that supports DG but without raising costs for everyone else. As part of this topic, the panelists struggled with the tradeoff between being a business person, and rational developer of DG, and an advocate. Matt Singleton commented that Prologis has recently struggled with bank willingness to finance their larger, and multi-building, projects (for reference, approximately 200 square feet of rooftop space equates to 1 MW). Commenting on the involvement of Wells Fargo to finance these projects, Ryan Levinson explained the other side of the pendulum, in that small-scale projects (on the order of 100 kW) are also difficult to fund due to their lack of scale. To solve this, Wells Fargo works with developers to aggregate multiple projects together to standardize and save costs.

To end the conference, Scott Jacobs, the Head of McKinsey & Company’s cleantech practice, discussed the state of cleantech and McKinsey’s involvement in the industry. According to Jacobs, McKinsey is probably one of the top 10 largest cleantech companies in the world, by revenue. They have had over 1000 cleantech projects over the past two years and over 2000 consultants working in the industry. According to McKinsey estimates, the opportunity in cleantech is massive, comprising over $1 trillion in market potential by 2020. Renewable energy is becoming cheaper (while conventional energy is getting more expensive), governments are moving aggressively, and there is a huge need for human capital. In fact, according to Jacobs, McKinsey’s cleantech work can be seen as a signal that corporations of all sizes are prioritizing this in their strategy.

Guest blog by Andrew Longenecker.  Email him at