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Survey of Advanced Energy Business Executives

In April, the Advanced Energy Economy Institute (AEEI) released the synthesis of a survey of executives in the advanced energy sector conducted by PA Consulting to suggest priorities for U.S. energy policy.

The report, Accelerating Advanced Energy in America, outlined business challenges and policy challenges thwarting the growth of the advanced energy sector, in order to identify policy improvements that could overcome these challenges.

The most significant business challenges identified were:  financing of emerging technologies, scaling technologies from development to commercialization, declining electricity prices (primarily owing to the natural gas boom), and recruiting a qualified and skilled workforce.

The most significant policy challenges identified were:  regulatory/policy uncertainty, “static definitions” of technologies qualifying for support, inadequate R&D support, and politicization of advanced energy.

From these challenges, AEEI summarized the respondents’ observations to make the following suggestions on sound energy policy:

  • Business leaders want stability and predictability in market structures.
  • They want a level playing field with their competitors – with traditional energy, and with each other.
  • They want government to support research across a wide range of technologies.
  • They want subsidies that make new technologies more competitive to be limited in duration, and phased out in a gradual, predictable manner, not maintained forever or cut off after arbitrary deadlines.
  • They want government policies crafted around broad problems, rather than pre-ordained solutions so that the market can identify the best ways forward.

It’s a reasonable wish list to ask of policymakers.  But, then again, when did “reasonable” last prevail in Washington DC?

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.

The Advent of SPS Policy?

In the cleantech sector, pretty much everyone knows the acronym RPS, for Renewable Portfolio Standards.  Since the first RPS policy in the U.S., implemented in Iowa in the late 1990s, 30 states have passed similar policies to promote the installation of renewable energy projects and expedite penetration (overcoming the ambivalence or outright opposition of utilities) of renewable energy in electric power supply.

Now, as reported in this article, California is considering the adoption of what looks to be the first Storage Portfolio Standard:  requirements for utilities to install grid-scale energy storage.  Specifically, in early August, the California Public Utilities Commission (CPUC) voted unanimously to adopt a framework for analyzing the energy storage needs of each utility.  This builds upon a previous bill, AB 2514, which included a mandate for the CPUC to “determine appropriate targets, if any, for each load-serving entity to procure viable and cost-effective energy storage systems to be achieved by” the end of 2015 and 2020.

Not surprisingly, the three major electric “load-serving entities” (i.e., electric utilities) in California — PG&E, SCE and SDG&E — all opposed this movement.  As did the Division of Ratepayer Advocates (DRA), the consumer watchdog organization, which argued that “picking arbitrary procurement levels…would most likely result in sub-optimal market solutions and increase costs to ratepayers without yielding commensurate benefits”.

As one of my former McKinsey colleagues noted on a number of occasions, quoting an executive who worked his entire career at a large electric utility, “No technology has ever been widely adopted by the electric utility industry without having it mandated by the regulators.”

The storage analogue of RPS policy — let’s call it SPS — faces some hurdles, no doubt.  But so did RPS policies.

Given that GE (NYSE: GE) is now working on a grid-scale battery technology, given how much GE’s wind business has benefited from the expansion of RPS policies over the last decade, and given how active GE tends to be in energy policy circles, it’s not a stretch to think that there will be a push for SPS-like policies across the U.S.

It will take time to fully implement, but perhaps grid-scale energy storage will soon be following the path blazed by renewables over the past 15 years, with a domino-effect of SPS requirements spreading across the country.

 

 

How About A Sane Energy Policy Mr. Obamney?

It’s Presidential Election year.  Ergo, time to discuss our 40 year whacked out excuse for an energy policy.  Royally botched up by every President since, umm?

Objectives:

Make US energy supply cheap for the US consumer and industry, fast growing and profitable for the American energy sector, clean, widely available and reliable, and secure, diversified, environmentally friendly and safe for all of us.

or

Cheap, Clean, Reliable, Secure, Energy

 

An Energy Policy that leaves us more efficient than our competitors

An Energy Policy that leaves us with more and more diversified, supply than our competitors

An Energy Policy that leaves us more reliable than our competitors

An Energy Policy that makes us healthier and cleaner than our competitors

An Energy Policy that makes us able to develop adopt new technologies faster than our competitors

An Energy Policy that makes it easy for industry to sell technology, energy, and raw materials to our competitors

An Energy Policy that keeps $ home.

A Sane Energy policy

 

Think more drilling, less regulation on supply, lower tariffs, more investment in R&D, tighter CAFE and energy efficiency standards, simpler and larger subsidies for new technologies, less regulation on infrastructure project development.

 

A couple of key action items:

  • Support the development of new marginal options for fuel supply, and support options that improve balance of payments, whether EVs ethanol, solar et al
  • Make crude oil, refined products, Gas, LNG and coal easy to import and export
  • Drive energy efficiency like a wedge deep in our economy
  • Support expansion and modernization of gas, electric, and transport infrastructure
  • Support long term R&D in both oil & gas, electric power, and renewables
  • Reduce time to develop and bring online new projects of any type (yes that means pipelines, solar and wind plants, offshore drilling, fracking and transmission lines).
  • Support policies and technology that enable  linking of energy markets
  • Challenge the OPEC cartel like we do EVERY OTHER cartel and break the back of our supply contraints
  • Support the export of our energy industry engineering, services and manufacturing  sectors overseas
  • Incorporate energy access into the core of our trade policy
  • Support deregulation of power markets
  • Support long term improvement in environmental and safety standards
  • Broadly support significant per unit market subsidies for alternatives like PV, wind, biofuels, fracking as they approach competitiveness

Or we could do it the other way:

  • Leave ourselves locked into single sources of supply in a screwy regulated market that involves sending massive checks to countries who’s governments don’t like us because that’s the way we did it in the 50s?
  • Keep massive direct subsidies to darling sectors so the darling sectors can fight each other to keep their subsidies instead of cutting costs?
  • Keep a mashup of state and federal regulatory, carbon and environmental standards making it virtually impossible to change infrastructure when new technology comes around?
  • Promote deregulation in Texas, and screw the consumer in every other market?
  • Every time there’s a crisis, we can shoot the industry messenger in the head, stop work, and subsidize something.
  • Continue the Cold War policy of appeasing OPEC so they can keep us under their thumb for another 30 years
  • And drop a few billion here and there on pet pork projects

Come on guys, stop the politics, let’s get something rational going.  Oh wait, it’s an election year.  Damn.

And in the meantime how about making energy taxes (a MASSIVE chunk of your gasoline and power prices) variable, so they go DOWN when prices go up.  Then at least the government’s pocket book has an incentive to control cost, even if they’re incompetent at putting together a policy that does so.

Top 10 Cleantech Subsidies and Policies (and the Biggest Losers) – Ranked By Impact

We all know energy is global, and as much policy driven as technology driven.

We have a quote, in energy, there are no disruptive technologies, just disruptive policies and economic shocks that make some technologies look disruptive after the fact.  In reality, there is disruptive technology in energy, it just takes a long long time.  And a lot of policy help.

We’ve ranked what we consider the seminal programs, policies and subsidies globally in cleantech that did the helping.  The industry makers.  We gave points for anchoring industries and market leading companies, points for catalyzing impact, points for “return on investment”, points for current market share, and causing fundamental shifts in scale, points for anchoring key technology development, points for industries that succeeded, points for industries with the brightest futures.  It ends heavy on solar, heavy on wind, heavy on ethanol.  No surprise, as that’s where the money’s come in.

1.  German PV Feed-in Tariff – More than anything else, allowed the scaling of the solar industry, built a home market and a home manufacturing base, and basically created the technology leader, First Solar.

2. Japanese Solar Rebate Program – The first big thing in solar, created the solar industry in the mid 90s, and anchored both the Japanese market, as well as the first generation of solar manufacturers.

3. California RPS – The anchor and pioneer renewable portfolio standard in the US, major driver of the first large scale, utility grade  wind and solar markets.

4. US Investment Tax Credit for Solar – Combined with the state renewable portfolio standards, created true grid scale solar.

5. Brazilian ethanol program – Do we really need to say why? Decades of concerted long term support created an industry, kept tens of billions in dollars domestic.  One half of the global biofuels industry.  And the cost leader.

6. US Corn ethanol combination of MTBE shift, blender’s, and import tariffs – Anchored the second largest global biofuels market, catalyzed the multi-billion explosion in venture capital into biofuels, and tens of billions into ethanol plants.  Obliterated the need for farm subsidies.  A cheap subsidy on a per unit basis compared to its impact holding down retail prices at the pump, and diverted billions of dollars from OPEC into the American heartland.

7. 11th 5 Year Plan  – Leads to Chinese leadership in global wind power production and solar manufacturing.  All we can say is, wow!  If we viewed these policies as having created more global technology leaders, or if success in solar was not so dominated by exports to markets created by other policies, and if wind was more pioneering and less fast follower, this rank could be an easy #1, so watch this space.

8. US Production Tax Credit – Anchored the US wind sector, the first major wind power market, and still #2.

9. California Solar Rebate Program & New Jersey SREC program – Taken together with the RPS’, two bulwarks of the only real solar markets created in the US yet.

10. EU Emission Trading Scheme and Kyoto Protocol Clean Development Mechanisms – Anchored finance for the Chinese wind sector, and $10s of Billions in investment in clean energy.  If the succeeding COPs had extended it, this would be an easy #1 or 2, as it is, barely makes the cut.

 

Honorable mention

Combination of US gas deregulations 20 years ago and US mineral rights ownership policy – as the only country where the citizens own the mineral rights under their land, there’s a reason fracking/directional drilling technology driving shale gas started here.  And a reason after 100 years the oil & gas industry still comes to the US for technology.  Shale gas in the US pays more in taxes than the US solar industry has in revenues.  But as old policies and with more indirect than direct causal effects, these fall to honorable mention.

Texas Power Deregulation – A huge anchor to wind power growth in the US.  There’s a reason Texas has so much wind power.  But without having catalyzed change in power across the nation, only makes honorable mention.

US DOE Solar Programs – A myriad of programs over decades, some that worked, some that didn’t.  Taken in aggregate, solar PV exists because of US government R&D support.

US CAFE standards – Still the major driver of automotive energy use globally, but most the shifts occurred before the “clean tech area”.

US Clean Air Act – Still the major driver of the environmental sector in industry, but most the shifts occurred before the “clean tech area”.

California product energy efficiency standards – Catalyzed massive shifts in product globally, but most the shifts occurred before the “clean tech area”.

Global lighting standards /regulations – Hard for us to highlight one, but as a group, just barely missed the cut, in part because lighting is a smaller portion of the energy bill than transport fuel or generation.

 

Biggest Flops

US Hydrogen Highway and myriad associated fuel cell R&D programs.  c. $1 Bil/year  in government R&D subsidies for lots of years,  and 10 years later maybe $500 mm / year worth of global product sales, and no profitable companies.

Italian, Greek, and Spanish Feed in Tariffs – Expensive me too copycats, made a lot of German, US, Japanese and Chinese and bankers rich, did not make a lasting impact on anything.

California AB-32 Cap and Trade – Late, slow, small underwhelming, instead of a lighthouse, an outlier.

REGGI – See AB 32

US DOE Loan Guarantee Program – Billion dollar boondoggle.  If it was about focusing investment to creating market leading companies, it didn’t.  If it was about creating jobs, the price per job is, well, it’s horrendous.

US Nuclear Energy Policy/Program – Decades, massive chunks of the DOE budget and no real technology advances so far in my lifetime?  Come on people.  Underperforming since the Berlin Wall fell at the least!

 

Predictions For Cleantech In 2012

It’s December again (how did that happen!?) and our annual time for reflection here at Kachan & Co. So as we close out 2011, let’s look towards what the new year may have in store for cleantech.

There are eggshells across the sector for 2012. Global economic uncertainty in particular is leaving some skeptical about the chances for emerging clean technologies. And those who watch quarterly investment data, or who look only in a single geography (e.g. North America) may have seen troubling trends brewing this past year. But the true story, and the global outlook for the year ahead, is—as it always is—more complicated.

As you’ll read below, we predict a decline in worldwide cleantech venture capital investing in 2012. But as you’ll also read below, we believe the gap will be more than made up by infusions of corporate capital. And the exit environment, depending on who you are and where you list, still looks robust in 2012 for cleantech (it may not have felt so, but it was actually surprisingly robust in 2011, according to the data. See below.) All in all, if you’re a cleantech entrepreneur seeking capital, our advice is brush up that PowerPoint and work the system now… while there’s still a system to work.

Because, as we detail below, the largest risk, to cleantech and every sector in 2012 we believe, is the specter of precipitous global economic decline and the systemic changes it might bring. Details below.

Here are our predictions for cleantech in 2012:

Cleantech venture investment to decline
In the face of naysayers then forecasting a cleantech collapse, in our predictions this time last year, we called an increase in global cleantech venture investment in 2011. We were right. At this writing, total investment for the first three quarters of 2011 is already $6.876 billion, with the fourth quarter to report early in 2012. Given historical patterns (fourth quarters are almost always down from third quarters), we expect 2011 to close out at a total of ~$8.8 billion in venture capital invested into cleantech globally. That’d be the highest total in three years, and second only to the highest year on record: 2008.

cleantech 2012 predictions venture investment
Total 2011 investment is expected to show growth from 2009’s figures once the fourth quarter (dashed lines, estimated) is added. However Kachan predicts total venture investment in 2012 to decline from 2011’s total. Data: Cleantech Group

Yet in 2012, we expect global venture and investment into cleantech to fall. Not dramatically. But we expect cleantech venture in 2012 as measured by the data providers (i.e. companies like Dow Jones VentureSourceBloomberg New Energy Finance,PwC/NVCA MoneyTree, and Cleantech Group) to show its first decline in 2012 following the recovery from the financial crash of 2008. Our reasoning? There are factors we expect will continue to contribute to the health of the cleantech sector, but they feel outweighed by factors that concern us. Both sets below:

On one hand: What we expect to contribute to growth in cleantech investment in 2012

  • China gets a hold on its economic turbulence – For five years now in our annual predictions, both here at Kachan and when I was a managing director of the Cleantech Group, we foretold the rise of China as cleantech juggernaut. Yet, now with China having become the largest market for and leading vendor of cleantech products and services by all metrics that matter, and now receiving a larger percentage of global cleantech venture capital than at any point in history, there have been recent warning signs. New data just in (for instance, falling Chinese property prices and sluggish export growth because of faltering first world economies, not to mention the first decline in clean energy project financing in China since 2010 as wind project financing declined 14% in the third quarter of 2011 on fears of over-expansion) suggests the Chinese economic engine is slowing. On the face of it, that might look bad for cleantech. But we put a lot of faith in China’s central government and the seriousness with which it views this sector as strategic. Even now, the country has just gone on the record forecasting creating 9 million new green jobs in the next 5 years. Nine million! And China has a good track record in executing its 5-year plans.
  • Rise in oil prices – Cleantech is a much wider category than energy. But for many, renewable energy is its cornerstone. And while there’s no question about the long-term markets for renewables, the biggest factor affecting their short-term commercial viability is the price of fossil-based energy. The good news: indications are that oil prices are headed upwards in 2012, which should be expected to help make renewables more economic. Naysayers maintain that a poor global economy will destroy demand for energy, keeping the price of oil artificially low. For much of 2011, the price of oil was relatively low. But we argue the price per barrel will continue its inexorable rise in 2012 given continued growth in the size of the global market for oil, driven by market expansion in the developing world. Further adding to the expected oil price increase is a little-known fact: there’s been a decline in the quality of oil the world is seeing on average. And the poorer the quality of the oil, the more it costs to refine it into the products we require. Oil prices are headed up.
  • Corporations’ even stronger leadership role – Corporate venturing was up in 2011, possibly setting new record highs, according to the data providers (4Q data not in yet.) Cleantech corporate mergers and acquisitions globally were up in 2011, again possibly setting new record highs, according to the data. The world’s largest companies assumed the leadership we and others predicted they would last year at this time—and indications are they will continue to do so in 2012, with balance sheets still strong.
  • Solar innovation as a perennial driver – Investment into good old solar innovation and projects is still strong, and has remained so for years, while other clean technologies have risen and fallen in and out of investment fashion. And that’s despitemost solar companies being in the red and having billions of dollars in market capitalization disappear over the last year. As some solar companies will continue to close up shop in 2012, look for investment into solar innovation to remain strong in 2012 as the quest for lower costs and higher efficiencies continues.
  • Persistence of the fundamental drivers of cleantech – The sheer sizes of the addressable markets many cleantech companies target, and the possibilities for massive associated returns, will continue to draw investors to the sector. Why? The world is still running out of the raw materials it needs. Some countries value their energy independence. More than ever, economies need to do more with less. Oh, and there’s that climate thing.

On the other hand: What worries us about the prospects for growth in cleantech investment in 2012

  • Investor fundraising climate tightening – Today, limited partners (i.e. “LPs” – the organizations and/or wealthy individuals that fund venture capital companies) are still bankrolling cleantech worldwide; in its 3Q 2011 Investment Monitor for clients, the Cleantech Group details 34 dedicated cleantech and sustainability-focused funds receiving billions in capital commitments internationally in the third quarter of 2011 alone. But we expect a slowdown in venture fundraising in 2012. Blame Solyndra for negative American LP sentiment. Or blame the lack of rock star returns in cleantech of late. But there are more indications than ever that some LPs are becoming increasingly reluctant to fund cleantech. They’ve been grousing about cleantech for years. But the politicizing of the Solyndra bankruptcy has amped the rhetoric higher than ever, and will foster a self-fulfilling prophesy in 2012, particularly in America, we believe.
  • Waning policy support in the developed world – Expected conflicting government policy signals to continue in 2012. Don’t expect cleantech-friendly U.S. policy leadership in 2012, an election year. We wouldn’t be surprised if the ghost of Solyndra and other U.S. Department of Energy stimulus grants and loan guarantees continued to haunt American cleantech through the whole of 2012, making any overt U.S. government support of clean or green industry unlikely. While cleantech is far from solely an American phenomenon, there’s no mistaking that the (now expired) American national loan guarantee program helped loosen private cleantech capital in an immediately post-2008 shell-shocked economy. However, continued uncertainty over the future of the U.S. Treasury grants program and production tax credits is holding the U.S. back. Policy support suffers elsewhere in the developed world. For instance, in the UK, investor confidence was recently dealt a blow by a dramatic drop in solar feed-in-tariff (FIT) rates, and the erosion of renewable policy support in Germany and Spain is well known.
  • Lag time of negative sentiment – Even if the sky indeed started falling in cleantech (and we don’t believe it yet has), it would take a few quarters to show in venture or project investment numbers. Remember, deals can take quarters to consummate. Transactions being counted now may have been initiated a year ago. Fear takes several quarters to manifest. Which is why we believe today’s uncertainty will start to show in 2012’s performance.
  • VCs still circling their wagons – In 2007, before the financial crash, the percentage of early stage venture investments into new cleantech companies was roughly the same as later-stage venture investments into established companies. Since the crash of 2008, deals have remained skewed—both by number and size of deals—towards later stage companies, illustrating investors’ preference to keep existing investments alive than take risks on new companies. While the exact ratio varies quarter to quarter, and from data provider to data provider, there have been generally fewer early stage companies getting funded. That’s hampering cleantech innovation. We expect the trend to continue into 2012.
  • Perennial concern about exits and IRR – Despite the size of its massive addressable markets and near-record amounts of capital entering the space today, on the whole, cleantech investors are still seeking the returns that many of their web and social media tech brethren enjoy. Even now, 10 years into this theme that we started calling cleantech in 2002. That’s not for lack of exits; 2010 saw the largest number of cleantech IPOs on record (93 companies raised a combined $16.3 billion) and 2011 has already had 35 without the last quarter reporting. And cleantech M&A activity in 2011 was strong and significantly higher than last year. No, the concern is for lack of multiples. For instance, 8 of the 14 IPOs of the third quarter of 2011 were trading below their offering price as of the publication of the Cleantech Group’s 3Q 2011 Investment Monitor. Don’t let anyone tell you exits aren’t happening in cleantech. They’re just underwhelming. And/or they’re happening in China.
  • Macro-economic turbulence, collapse, or at least, reform – They’re the elephants in the room: The Occupy movement. Arab Spring. Peak Oil. The continued and growing mismatch between overall global energy supply and demand and food supply and demand. Ever-increasing debt and trade deficits. Currency revaluation or political/military developments. Any or all of these could spur another massive global economic “stair-step” downwards of the scale we saw in 2008, or worse. Concern about all of these points and the impact they’d have on the cleantech sector weighs heavy on us here.

Venture dip made up for by rise in corporate involvement
The world’s largest corporations woke up to opportunities in cleantech in 2011, making for record levels of M&A, corporate venturing and strategic investments. General Electric bought lighting and smart grid companies. Schneider Electric bought some 10 companies across the cleantech spectrum. Corporate venturing activity was high, as were minority-stake investments. In just the third quarter alone, ZF Friedrichshafen invested $187 million in wind turbine gearbox and component maker Hansen Transmissions of Belgium, Stemcor invested $137 million into waste company CMA in Australia, and BP invested $71 million into biofuel company Tropical BioEnergia in Brazil. And there were dozens more minority stake transactions like these throughout the year.

Look for even more cash-laden companies to continue to buy their way into clean technology markets in 2012, supplementing the role of traditional private equity and evidencing a maturation of the cleantech sector.

Storage investment to retreat
Significant capital has gone into energy storage in recent quarters. In 3Q11, storage received $514 million in 19 venture deals worldwide, more than any other cleantech category. Will storage remain a leading cleantech investment theme in 2012? We’re betting no. Here’s why.

Storage recently made headlines as the subsector that received the most global cleantech venture investment in the third quarter of 2011, the last quarter for which numbers are available. An analysis of the numbers, however, shows the quarter was artificially inflated by large investments into stationary fuel cell makers Bloom Energy and ClearEdge Power. Do we at Kachan expect more investments of that magnitude into competing companies? No. Why? Even if you believe analysts that assert that stationary fuel cells for combined heat and power are actually ramping up to serious volumes (oldtimers have seen this market perpetually five years away for 15 years, now), just look how crowded the space currently is. Bloom and ClearEdge are competing with UTC Power, FuelCell Energy, Altergy, Relion, Idatech, Panasonic, Ceramic Fuel Cells and Ceres Power … just some of the better-known 60 or so companies vying for this tiny market today. And many are still selling at zero or negative gross margins.

But the main reason we’re not bullish on storage: Smoothing the intermittency of renewable solar and wind power might turn out to be less important soon. Sure, nary a week goes by without announcements of promising new storage tech breakthroughs or new public support for grid storage (e.g. see these three latest grid storage projects just announced in the U.S., detailed halfway down the page.) But we believe that utility-scale renewable power storage might be obviated if utilities embrace other ways to generate clean baseload power.

In 2012 or soon thereafter, we expect those clean baseload options will start to include new safer forms of nuclear power (don’t believe us? Read Kachan’s report Emerging Nuclear Innovations—U.S. readers, don’t worry: nuclear innovation won’t apply to you.) Or NCSS/IGCC turbines powered by renewable natural gas delivered through today’s gas distribution pipelines (see The Bio Natural Gas Opportunity). Or even geothermal (gasp!) or marine power (see below). All of these promise to be less expensive than solar and wind when you factor in the expense of storage systems required—incl. electrochemical, compressed air, hydrogen, flywheel, pumped water, thermal, vehicle-to-grid or other—if solar and wind are to be relied on 24/7.

Marine energy to begin coming of age
I’m a closet fan of marine energy, despite today’s extraordinarily high cost per kilowatt hour. We started covering wave, tidal and ocean thermal energy conversion equipment makers in 2006. Anyone who’s heard me talk publicly on the subject has had to suffer through hearing how I’d much prefer invisible kit beneath the waves than have to gaze upon solar and wind farms taking land out of commission.

In 2006, the lifetime of equipment from then-noteworthy companies like Verdant Power and Finavera (which since exited marine power after a failed test with California’s PG&E) in the harsh marine environment could sometimes be measured in days. The designs just didn’t hold up. Even Ocean Power Delivery, now Pelamis Wave Power, with its huge, snakelike Pelamis device, had hiccups in early onshore grid testing. Back then, the industry clearly had a long way to go.

Today, six years later, we think it’s time to start taking marine energy seriously. A high profile tidal project is now underway in Eastern Canada’s Bay of Fundy. Several weeks ago, Siemens raised its stake in UK-based tidal energy developer Marine Current Turbines from less than 10% to 45%, because it liked the predictability of ocean energy, and Voith Hydro Wavegen handed over its first commercial wave project to Spain. And last week, Dutch company Bluewater Energy became the latest vendor to secure a demo berth at the European Marine Energy Centre at Orkney, Scotland—the most important global R&D center for marine energy. Things are going on in marine power. Still, its major hurdle is the large variation in designs and absence of consensus on what prevailing technologies will look like.

2012 won’t be the year marine power becomes cost-competitive with coal, or even nearly. But you’ll hear more about marine power in 2012, and see more private and corporate funding, we predict.

Increased water and agricultural sector activity
Look for increased venture investment, M&A and public exits in water and agriculture in 2012.

At one point, only cleantech industry insiders championed water tech as an investment category (and, frankly, at only a few hundred million dollars per year on average, it still remains only a small percentage of the overall average $7B annual cleantech venture investment.) Industrial wastewater is driving growth in today’s water investment, with two of the top three VC deals of the last quarter for which data is available promoting solutions for produced water from the oil and gas industry, and the largest M&A deal also focused on an oil and gas water solution. Regulations aimed at making hydraulic fracturing less environmentally disruptive to will spur continued innovation and related water investments in 2012.

Where water was a few years ago, agriculture investment appears to be today. There was more chatter on agricultural investment than ever before at cleantech conferences I attended around the world this past year. Expect it to reach a higher pitch in 2012, because of:

Investing in farmland is even resurfacing, in these uncertain times, as a private equity theme.

Remember the food crisis three years ago, when sharply rising food prices in 2006 and 2007, because of rising oil prices, led to panics and stockpiling in early 2008? Brazil and India stopped exporting rice. Riots broke out from Burkina Faso to Somalia. U.S. President George W. Bush asked the American Congress to approve $770 million for international food aid. Those days could return, and they represent opportunity for micro-irrigation, sustainable fertilizer and other water and agriculture innovation.

And so concludes our predictions for 2012. What do you agree with? What do you disagree with? Leave a comment on the original post of these predictions on our site.

This article was originally published here. Reposted by permission.

The Great State of Uticana

Last week, at the stunning student union of The Ohio State University, Battelle convened a meeting entitled 21st Century Energy & Economic Summit on behalf of Ohio Governor John Kasich, who both opened and closed the conference with some observations.   The agenda covered a wide spectrum of energy issues facing Ohio, and didn’t lack for interesting moments.

One of the hot issues in Ohio energy policy is whether the renewable portfolio standard and energy efficiency provisions of the last major energy act, SB 221 from 2008, are vulnerable.  Indeed, some of Kasich’s fellow Republicans in the Ohio Senate recently released SB 216, a bill to completely eliminate the renewable and efficiency requirements of SB 221 — although it is widely viewed that the bill has no chance of passage.  Acknowledging this, as reported by The Columbus Dispatch, Kasich said in his introductory remarks that several parties are “trying to get me to say we don’t need renewables here.”  But, he continued, “of course we need renewables.  Of course we need solar and of course we need wind.”  In his concluding remarks at the end of the two-day event, he reiterated that “I believe in renewables.  My kids believe in renewables.”

Kasich also had a kind comment for his predecessor, noting that the Strickland Administration had done “a number of good things on energy efficiency for the state” that needed to be built upon.

Nevertheless, expect some retrenchment that will not fully please renewable and efficiency advocates:  in his closing remarks, Kasich circled back and noted that he thought SB 221 would probably benefit from some tweaking, using as an example his exasperation that cogeneration hadn’t been given appropriate eligibility.  All signs point to hearings in the Ohio Assembly later this year to re-evaluate SB 221, although the Governor’s stated position providing some cover to renewables and efficiency seems to indicate that SB 221 at least won’t get entirely discarded or thoroughly trashed.  Stay tuned.

Indeed, one of the central themes of Kasich’s comments was that all players in the energy sector need to get along, that there’s a place for everyone, albeit maybe not to the degree that any one segment would ideally like.  As the Dispatch termed Kasich’s comments, “company executives in gas, solar, coal and other energy sectors needed to agreed to give up some turf as his administration crafts its policy.”  In kicking off the event, Kasich asked for “natural gas to work with coal, and coal to work with natural gas, and renewables to work alongside fossil fuels, and for the utilities to get along — well, that might be too much to ask,”  a perfect segue into the electric utility panel.

Attendees got to see some pretty feisty verbal jousting between Tony Alexander, CEO of First Energy (NYSE:  FE), and Mike Morris, CEO of American Electric Power (NYSE:  AEP), who differed strongly on whether competitive markets or regulated rate-base recovery mechanisms led to the best outcomes for electricity prices to consumers.  Not surprisingly, First Energy favors competitive markets — as they’ve spun off all their generation into an unregulated subsidiary and can earn attractive margins on their deeply-amortized powerplants — and is therefore unenthusiastic (to put it mildly) about renewable energy and energy efficiency requirements.  On the other hand, AEP believes that only regulation can provide enough price certainty and stability to ensure investments in new generation capacity that are both prudent for investors and customers alike. 

Keith Trent of Duke Energy (NYSE:  DUK) tried to split the difference, arguing for competitive energy markets to induce operational efficiencies and regulated capacity markets to foster capacity investment decisions that avoid boom-and-bust cycles of tightness-and-glut.  Perhaps even more striking was the different stance of American Municipal Power (AMP), the generation and transmission cooperative serving several municipal utilities in the Midwest.  To be sure, they do have a significant reason to have a different perspective:  as a non-profit corporation, they are exempt from regulatory oversight by the Public Utilities Commission of Ohio and not subject to any of the requirements of SB 221.  AMP’s CEO, Marc Gerken, indicated that his customers — the municipal utilities — were driving AMP to invest more in renewables such as hydro and wind, in large part to insulate themselves against the likely prospect that wholesale power prices will only increase due to rising fuel prices, more stringent environmental requirements and tightening capacity markets.  

Regarding coal, which the Dispatch article referred to as “long a driver of the state’s energy economy that is still subsidized with state taxpayer dollars,” Kasich noted that “we’re not going to walk away from coal.”  I remember Kasich also saying that “we’ll be using coal for the rest of my lifetime.”  However, Kasich said that we also “have to be mindful of the downside of it.  And we’ve got to think about cleaning it.”  In a subsequent interview with ClimateWire, as reported in The New York Times, Kasich acknowledged climate change as a legitimate concern, not taking the skeptical or denial positions so common to the beliefs of many of his fellow Republicans:  “there isn’t any question that the activities of humans have an impact.  As to what the extent of it is, I don’t know.”  

So, while he’s keeping the door open for coal, and supports its continued use, he’s also not blindly defending it to the death either.   I wonder if Kasich was amused or embarrassed by the impassioned rant of Robert Murray, President and CEO of Murray Energy Corporation (a privately-held Ohio-based coal mining company), in which he loudly called for the defeat of “Barack Hussein Obama”. 

All of this was preamble to the clear centerpiece of the event:  the discussion of opportunities afforded by the Utica Shale resource underneath much of Ohio.  And, the star of the show was Aubrey McClendon, CEO of Chesapeake Energy (NYSE:  CHK), by far the most visible cheerleader for shale gas exploration and production in the U.S.

As reported by BusinessWire, McClendon stated that their early test drilling results indicate that the Utica shale opportunity was likely to be very large — as large or larger as the most productive shale plays in the U.S., such as the Bakken, Barnett, Eagle Ford and (closer to home) Marcellus.  Also, it appears that it offers the potential for a three-prong play:  natural gas, gas liquids and oil.  When pressed to give a sense of magnitude of the Utica prize in Ohio, McClendon offered that he thought it could be worth $500 billion — “I prefer to say half a trillion dollars, it sounds bigger”.

McClendon restated what he had claimed in an early August appearance on Jim Cramer’s “Mad Money” CNBC show:  that he can foresee $20 billion of investment per year in Ohio for the next 20 years to pursue Utica opportunities.  Coinciding with the event, the Ohio Oil & Gas Energy Education Program (OOGEEP) released initial results of an economic analysis that estimated about 203,000 jobs in Ohio to be created by 2015 — just three years from now! — associated with pursuit of Utica shale gas.

Of course, these kinds of incredible (non-credible?) numbers being thrown around cause officials in economically-challenged Ohio to salivate.  According to the New York Times, Kasich said that “we’re sort of experiencing a gold rush.”   

The only pushback to unfettered pursuit of Utica is the rising chorus of concern from a wide range of environmental advocates about the use of hydraulic fracturing, more commonly-known as fracking, to produce gas from shale.  Among other places, New York, New Jersey and Maryland have issued moratoriums on fracking, primarily due to worries that the process will lead to water contamination, and secondarily due to fears that the activity may lead to ancillary emissions of methane (a potent greenhouse gas) and may increase prospects for earthquakes.

In the New York Times account, Kasich was adamant:  “There’s no problem with fracking.  I dismiss that.”  One of the reasons Kasich feels so confident:  under the prior Strickland Administration, the state of Ohio passed SB 165, a set of laws concerning oil/gas production that are claimed to be among the most stringent in the nation, including strong requirements for triple-casing all drilled holes to mitigate the potential for contamination or leakage to seep into other strata or release to the surface.

It appears that the Kasich Administration is bending over backwards to clear the path for Utica shale development, recently reassigning David Mustine from being the head of the Ohio Department of Natural Resources to a position that Kasich called “Shale Czar” in the newly-created privatized economic development agency JobsOhio.  From being invisible a year ago, Chesapeake has become a high-profile sponsor of Ohio State football — probably the most-scrutinized activity in Ohio — and McClendon has been known to meet frequently with top officials from Ohio.

Personally, I worry that the Utica shale is being viewed by the Kasich Administration and by certain segments of the government and private sector as the answer to all of Ohio’s issues.  Based on what I’m seeing, the state may soon be renamed “Uticana”.

I have no problem with environmentally-responsible fracking, which I believe is in fact doable, and endorse the pursuit of shale gas as long as it is truly “done right” (a phrase used often during the two-day event).  However, I fear that the Utica shale opportunity will be less spectacular than claimed — and if so, then putting all of Ohio’s eggs in that basket will have been a mistake.  McClendon and others on the shale panel noted frequently, as a disclaimer, that the drilling test results were still preliminary.  And, as the experience in other shale basins indicates, decline rates from shale production have been very steep — much more so than from conventional gas wells.

For the U.S. has long been insufficiently diversified:  we have an energy system that depends way-too-much on oil for transportation and coal for power generation.  As a result of that long over-reliance, we’re now painted into a challenging corner on a variety of environmental, geopolitical and economic fronts.  I don’t believe that any one energy solution — even those I have advocated for in Ohio, such as the offshore wind efforts being undertaken by the Lake Erie Energy Development Corporation (LEEDCo) and its partners — is the cure-all for our current challenges, or the road to future successes. 

Betting the farm on any one thing, even something as seemingly-compelling as Utica shale, will just paint us into another corner a few years from now.  To avoid this outcome, we need a more resilient and robust energy system — one that only diversification can provide.  In turn, this will require regulatory innovation, technological innovation and capital.

If I have a criticism of the two-day summit, it is that the last two input factors — technological innovation and capital — were mainly excluded from the proceedings.  There was literally no discussion of financing of the energy sector in the coming deacdes.

As for technology, the master of ceremonies, Joe Stanislaw, helped frame the conference at its outset with some big-picture remarks, including his provocative observation that “energy represents the new Great Game for the 21st Century”:  there is an intense global competition not only for the energy resources of the world, but the technologies to enable continued access to affordable energy to fuel economic growth.  Alas, the discussion panels never picked up on Stanislaw’s point.

If Ohio is to be something more than Uticana, not only does it need to pursue other energy options with some degree of vigor, it must also commit to creating an environment conducive to cleantech innovation and entrepreneurship — the font of much job-creation and wealth-creation in the 21st Century.  Surely, this is something that should be well-appreciated by Mark Kvamme (Kasich confidante, head of Jobs Ohio, and long-time venture capitalist at Sequoia Capital) and Wilber James (Kasich confidante, long-time venture capitalist at RockPort Capital, and planner of the agenda for this two-day event).

Notwithstanding the potential riches associated with the Utica shale, we cannot allow Ohio to become primarily a resource-extraction economy.  While some degree of resource-extraction is inevitable in modern society, examples near (West Virginia) and far (Nigeria) suggest that overreliance on this segment of economic activity is a path towards massive inequities and injustices, environmental degradation, low standards of living, and a wide variety of social ills.

Cleantech Blog’s Parameters for a Workable Energy Policy

Energy is life, the rest runs on it.

Since the 70s through every presidential administration and every Congress, we have had an energy policy that boiled down to fighting the cold war through oil and getting lucky on locally sourced coal and gas.  It’s not a zero planning energy policy, we’ve spent money, defined policies, written rules, set goals, etc.  We’ve just done our planning with 50 year old assumptions and zig zagged our way to idiocy.

One of my first ever blogs over five years ago touched on this topic:

My comments at the time after the 2005 energy bill:

We need to achieve low oil prices, and ensure that no one country is able to control our fuel supply. We have just passed a new Energy Bill. It does not do so. What we do need to do: Drop the ANWR fight and instead break the back of OPEC, slash consumption, and work closely with China.

But first things first.  This time I’d like to simply lay out the parameters of what ought to be in a workable, comprehensive, energy policy for the US in a post cold war era, where economic powers are shifting, where the war on terror is real, where environment matters, and where energy supply sources are changing and maybe getting more expensive.

Cleantech Blog has defined 20 parameters needed in a good energy plan.

  1. Has a clear cut and articulated vision – including acknowledging that energy security is not just  “energy independence”
  2. Deals with both demand and supply issues holistically
  3. Considers least cost path in any change
  4. Is phased in manageable ways
  5. Takes into account our current supply mix, load growth forecasts, and geographic considerations
  6. Includes both transport fuels and electric power
  7. Provides us with least cost or comparative advantage in energy both today and in the future vis a vis our core economic competitors
  8. Provides secure and interchangeable supply of energy resources and flows both domestic and cross-border
  9. Doesn’t destroy our current energy industry
  10. Allows time for energy and industry change
  11. Does the least environmental damage possible, and includes ongoing improvement in environmental impact
  12. Survivable under multiple energy demand growth scenarios and resource supply shocks in a global world
  13. Provides reliable energy to our industry and population
  14. Deals with or changes the current state and federal regulatory and permitting structures
  15. Considers the practicalities of infrastructure change, both lead time, economics, financing, technology, and regulatory
  16. Deals with the political considerations of OPEC and the Middle East
  17. Takes into account supply resources where we do have a comparative advantage
  18. Is fair and equitable during any shift in costs for one region or group
  19. Addresses and capitalizes on technology improvement in the US and globally
  20. Deals with China and India and Brazil as rising consumers and producers of energy resources

The energy policy itself should be simple in concept, and the energy plan hellishly detailed and complex in implementation.  But we desperately need this energy plan.

Energy is life, the rest runs on it.

Cleantech Industrial Policy for the United States

I’ve been thinking a lot over the past several months about industrial policy: actions by the public sector to help promote a fledgling industry so as to ensure, foster and/or accelerate its emergence.

In the cleantech sector, questions about industrial policy are particularly salient. It’s no secret that many aspects of cleantech – especially low carbon energy technologies – are not economically competitive at present, and that large profitable corporations in the U.S. are happier with the status quo than with supporting any push to accelerate a cleantech future. In other words, cleantech generally needs policy help to successfully penetrate the market, but helping cleantech is viewed by many as damaging to the economy.

Given that the incumbents have much more financial resources than the cleantech upstarts, they also tend to spend more on lobbying to preserve this status quo as much as possible, so it’s no wonder cleantech consistently faces such an uphill battle in the corridors of elected power.

Former Michigan Governor Jennifer Granholm is currently serving as a Senior Advisor to the Clean Energy Program of the Pew Charitable Trusts, and is doing a road-show to argue for Federal clean energy policies (excluding cap-and-trade as a non-starter in the current political climate) as a platform of long-term economic revitalization for the U.S. At her recent stop in Columbus at the University Clean Energy Alliance of Ohio annual meeting, I asked her what objection she most frequently encounters with her pitch, and how she attempts to overcome the objection. She was unhesitant: opponents don’t think that the government should be in the business of picking winners and losers.

What’s the retort? Granholm pointed to Pew’s recent report, The Clean Energy Race, and asserted the view that objections to industrial policy were “obsolete”, hangovers from an era in which the U.S. didn’t need proactive industrial policy because it was the only giant standing the wake of World War II and through the costly Cold War.  Today, China, Japan, Germany, Spain, the United Kingdom and others are going gangbusters in cleantech, far more willing to pull the levers of industrial policy to pursue leadership positions in the cleantech future, and Granholm (and others) argue the U.S. will surely be totally left out of the biggest game of the rest of the 21st Century if we don’t act.

Let’s pause for a minute and consider the strategy of these other countries. Will their proactive approach to promoting the cleantech sector create many thousands of jobs and immense fortunes for investors in these countries? Or, does their instinct for meddling with the market lead them down the path towards a financial calamity at some point in the future when public coffers can no longer afford supporting the promises that were made?

Consider some of the carcasses littered along the road of history, in which U.S. energy policy to promote some market or technology has often failed miserably, costing U.S. taxpayers large sums of money and thereby adding to our woefully immense national debt.  This sad history is amply chronicled in this paper written by Peter Grossman, Professor of Economics at Butler University.

Can we afford proactive cleantech industrial policy in the U.S.? Can we afford not to? Are the biases against industrial policy in the U.S. really “obsolete”?

“Industrial policy” is one of those terms fraught with baggage. To some, its very essence connotes “socialism” and just about everything negative that can be associated with government intervention. One of the great things about America has been that our capital and labor markets are very flexible, so that resources can be shifted quickly from one opportunity area to another as circumstances change.  And, isn’t it the business of industry to spawn and grow new industries?

But, it would be inaccurate to claim that the U.S. doesn’t do industrial policy. As Jesse Jenkins of the Breakthrough Institute notes with his excellent report Where Good Technologies Come From, the U.S. Federal government is pretty much solely responsible for creating the market and therein seizing U.S. leadership in a host of innovations dating back to the birth of the nation. The government played an essential role in cultivating innumerable technologies – and just as importantly, the markets and hence the companies that commercialized them and brought benefits to American customers and jobs to American citizens.  We’ve actually been picking winners for decades, centuries even.

More generally, the case can be made that the overarching U.S. industrial policy is to favor the industry of consumption. We have Federal taxes on income and capital gains, but with some minor exceptions, no Federal sales tax. We have deductions on home mortgages and accelerated depreciation of capital equipment, but precious little encouragement of productive investments in research.

These choices have broad implications on the shape of America: as Bruce Katz of Brookings noted in his excellent talk at the annual meeting of the Greater Cleveland Partnership in April, the cumulative effect of these policies has been to tilt the U.S. economy away from manufacturing and away from the Midwest, towards the coasts with its subsidized real estate and towards the service/consumption economy we know so well today.

Let’s face it: consumers are inherently fickle and are obsessed with the short-term. For the most part, individual Americans will not do what’s in the long-term strategic interests of their own selves, much less for their own country. For the sake of saving a few dollars, the average American is perfectly content to walk into Wal-Mart and buy clothing made in China, cheerfully saying hello to the greeter with the wan smile who used to work at the local textile mill, and worrying about how to pay the credit card bill later. If we in the U.S. want a more secure and sustainable future, putting it all in the hands of the customer is not the answer.

Unless you’re safely in the top few percent of American income or wealth and also don’t really care about the rest or about the future of this country at large, you would probably agree that the consumerist-industrial policy the U.S. has followed for decades, as described above, hasn’t served us particularly well.

Dennis Bushnell, Chief Scientist at NASA Langley, noted in a recent talk at the Blue Tech Forum that “China has a thousand year strategic plan, but the longest planning horizon of relevance in the U.S. is four years, associated with the Presidential election cycle.  As a result, America is terminally tactical.”  If one’s greatest strength is also one’s greatest weakness, then America’s fondness for market forces at the expense of industrial policy represents not only economic and social lubricity, but also a case of attention-deficit disorder in a deficit-laden society and economy.

While it’s true that industrial policy mitigates the flexibility of a fully free-market system, it also prevents the possibility of taking our eye off the ball for awhile if circumstances become unfavorable for a period — as it did for energy in the U.S. between 1986 and 2006, or for manufacturing since the 1970s.

An American cleantech industrial policy offers the possibility for the resurgence of manufacturing – a sector in which the U.S. used to excel. The status quo represents the ongoing dominance of resource-extraction – a sector that historically is highly correlated with corruption and kleptocracy, in addition to environmental degradation and social injustice.

This doesn’t mean stopping resource extraction in the U.S.  But, it does mean making sure that resource-extraction to feed rampant consumerism isn’t the primary leg of the future economic stool of the U.S.

Also, it’s eminently reasonable to be concerned about the unintended consequences associated with a cleantech-oriented industrial policy.  Accordingly we should be careful before acting, thoughtful in designing any programs, and diligent in our ongoing review of impacts.  

Even despite these risks and caveats, I nevertheless conclude that it would be hard to do any worse than what we’ve got now.

Alas, industrial policy involves a kind of public-private collaboration that chafes at both the left (which often distrusts private enterprise and the profit motive) and the right (which dislikes government intervention and would rather let markets sort things out).  This is the uncomfortable middle-ground in which I frequently tread, and in today’s political climate in America, it’s akin to the no-man’s-land between the trenches, getting ripped by machine gun fire from both sides. 

It’s no wonder, then, that stalemate prevails, and little of importance gets accomplished these days in developing a sane cleantech industrial policy for the U.S.

What If…?

…someone invents an economically-competitive energy storage technology that could be deployed at any electricity substation at megawatt-hour scale?

…the power grid were brought up to 21st Century standards to match the true power quality needs of our increasingly digital society?

…high-speed rail was not the exclusive province of Europe and Asia?

…customers had real choice about electricity supplies, via ubiquitously cost-effective on-site generation options?

…cities and industries pursued viable cogeneration options with real vigor, and companies like Echogen revolutionize the capture of waste heat?

…the use of fracking was reliably paired with other technologies and solid oversight to assure that local water quality is not harmed when shale gas is produced?

…recovering coal and tar sands was undertaken only via mining approaches that don’t leave huge gouges in the earth’s crust?

…all companies involved in the mining and burning of coal would honestly acknowledge and deal responsibly with the environmental challenges associated with coal?

carbon sequestration technologies are more than just a pipe dream and can be widely applied with confidence that no leakage will occur?

…environmentally-responsible technologies were commercialized to produce oil from shale in the Piceance Basin, making the U.S. self-sufficient for years to come?

Joule is really onto something and can produce liquid fuels for transportation directly from the sun?

…fuel cells expand beyond niche markets via continuing improvements in technology and economics to penetrate mass-market applications?

nuclear fusion could ever become viable as a technology for generating electricity?

…new technologies for the production and use of energy in a more environmentally-sustainable matter were responsible for a major share of new jobs and economic growth in the U.S.?

…we stopped sending hundreds of billions of dollars overseas every year to fight both sides of the war on terrorism?

…we stopped subsidizing mature and profitable forms of energy?

…we determined that climate change was simply too big of a risk to keep ignoring and decided to tackle the issue out of concern for the future?

…Americans were willing to pay at least a little bit more for energy to help defray the costs of pursuing much — and achieving at least some — of the above?

…we later found out that we didn’t spend that much more money and also found ourselves living on a healthier planet and in a more fiscally-solvent country with a viable industrial future?

…certain fossil fuel and other corporate interests would cease misinforming the public on many economic and environmental issues related to energy consumption?

…Democrats and Republicans could come together and do what’s best for the country rather than what’s best to strengthen or preserve their party’s political power?

…more Americans cared about the above than who wins American Idol, Survivor or Dancing With the Stars?

Obama’s Blueprint for a Secure Energy Future

Last week, President Obama unveiled his Administration’s “Blueprint for a Secure Energy Future”.

Like most big-picture strategic summaries of complex subjects, a whole lot of content gets reduced to a few simple phrases that have become almost devoid of meaning.  In this case, the Obama Energy Blueprint distills into three priorities:

  1. Develop and secure America’s energy supplies
  2. Provide customers with choices to reduce costs and save energy
  3. Innovate our way to a clean energy future

How can anyone object to these motherhood and apple-pie themes?

At the next level of detail, the Obama Energy Blueprint  proposes a long list of individual recommendations, such as incentives for more domestic oil/gas development, programs to facilitate the transition of the vehicle fleet away from petroleum fuels, tighter energy efficiency requirements, and a national clean energy standard.

One by one, most of the listed initiatives have merit.  Unfortunately, some are probably pretty ineffectual, each has its own set of unintended consequences, and there is considerable potential for interference among programs in such a voluminous mixed bag of policy items.

Alas, this is what happens when government is forced to accept suboptimal solutions because the optimal approach is foreclosed due to political realities. 

At a fundamental level, with this Blueprint, the Obama Administration is seeking to simultaneously (1) end American reliance on foreign oil for transportation, (2) reduce U.S. greenhouse gas emissions caused by burning fossil fuels, (3) ensure that the U.S. profits from development and adoption of next-generation energy technologies, and (4) accomplish (1)-(3) without costing U.S. citizens more money on energy expenditures.

The challenge is that all four of these objectives cannot be achieved simultaneously, especially in the near-term. 

Actually, objectives (1), (2) and (3) can be achieved pretty quickly, say within a decade or so, if you’re willing to ignore the fourth objective about reducing energy costs to citizens.  But, alas, the fourth objective is really the only one that most Americans care about with any intensity, and if the U.S. is going to focus on the fourth objective, the first three are hard to tackle in any meaningful way.

To achieve the first three objectives, all that’s required is some fairly simple — if broad-reaching — policies:  namely, higher taxes on oil imports and a carbon tax.  With higher energy prices facing consumers, the millions of economic actors across the U.S. will make investment and consumption decisions that will spur the development and deployment of alternative energy approaches to displace oil and reduce emissions while fostering U.S. leadership in the clean energy industries of the future. 

But, of course, such taxes — for that mattter, any taxes — are anethema in Washington these days.  Having spent all of his political capital (and then some) over the past two years on health care reform and economic stimulus, Obama does not have the strength to propose a straightforward energy policy to achieve the goals that implicitly underlie his Blueprint. 

Frankly, I think the energy policy imperative is a great opportunity for a politically bold leader to take on the issue of restructuring U.S. taxes so as to boost economic output.  Maybe I’m naive, but I don’t see why increased taxes on energy cannot be enacted as part of a quid pro quo for reduced taxes on income and capital gains — which would be unquestionably a tonic for the economy. 

I know that a common rationale for opposing such a change is that a shift in taxation of this kind would be regressive (i.e., fall disproportionately highly on lower-income citizens), but it shouldn’t be all that difficult to come up with some mechanism for providing rebates on increased energy tax burdens borne by the poor.  In other words, there should be an answer that reconciles higher energy taxes among the populists on both the left and the right of the political spectrum.

Actually, I think the real reason that higher energy taxes don’t get any traction in D.C. is that the major incumbent energy companies would be unambiguous losers, and they simply won’t allow that to happen.

As a result, President Obama must resort to issuing documents like the one released last week:  a blueprint that looks like a building designed by a hundred architects each working on a different room.

Following the Money

by Richard T. Stuebi

I get a kick when climate skeptics decry the work of climate scientists by claiming that the scientists are only in it for the money. Get real.

The real money is in opposing climate legislation. Check out this recent posting by Daniel Weiss, Rebecca Lefton and Susan Lyon entitled “Dirty Money” by the Center for American Progress. According to their research, over $500 million was spent within the last two years by large energy corporations (mainly oil companies and electric utilities) on lobbying, much of which to oppose climate legislation. This is more than ten times the amount reportedly spent on lobbying by alternative energy companies. On top of the $500 million spent by companies directly, trade associations generally opposed to clean energy policies are said to have spent almost an additional $300 million on lobbying.

In today’s pay-to-play world, why is it surprising to anyone that U.S. energy policy is so favorable towards maintaining the status quo of fossil fuel dominance over alternative energy and energy efficiency interests?

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.

The World’s Energy Portfolio Needs Rebalancing – NOW

The World’s Energy Portfolio Needs Rebalancing – NOW

Point Roberts, South Salem, New York- August 17, 2010 – Investorideas.com and its green investor portal, www.renewableenergystocks.com publish new energy market commentary from solar contributor, J. Peter Lynch .

The World’s Energy Portfolio Needs Rebalancing – NOW!!!
J Peter Lynch

Solar Stocks Commentary with J Peter Lynch
http://www.renewableenergystocks.com/PL/

The U.S. has taken a shortsighted approach to “financing” our energy future for decades. We are rapidly depleting our energy capital of oil, gas and coal at greater rates each year, and giving very little thought to the long-term (20-50+ years) consequences.
The major difference between the financial world and the energy world is that our primary energy capital is NOT replaceable; fossil fuels are non-renewable by their nature. We are responsible for the future of this planet and must manage its “energy portfolio” by creating an “energy balance sheet”, with the proper mix of fossil fuels and renewable energy sources to allow for sustainable growth for generations to come.

In the long term there really is only one source of energy (that is viable now) that can adequately handle our future energy demands and that is the sun. Take a look at the link below and you will get a picture of why this is the case. NOTE: The renewable sources in the picture are ANNUAL amounts available, the demand is ANNUAL and the fossil fuel reserves are the TOTAL amount left (not an annual amount available). This is truly a picture that is worth far more than 10,000 words

http://www.asrc.cestm.albany.edu/perez/

We should not be using our limited energy capital for jobs and processes that can be completed by unlimited renewable assets.

For example: fossil fuels should NOT be utilized for applications, such as heating and lighting for homes or commercial buildings.

Does it seem logical to burn something at thousands of degrees to heat your homes hot water? This task can be efficiently accomplished with a simple solar panel that heats water to 160 degrees, pays back in three to four years, continues to pay you “free money” for the next 20+ years and has zero emissions, as an additional benefit.

Does it seem logical to use incandescent light bulbs that are terribly inefficient at producing light (5%) and great at generating unnecessary heat, instead of LED lights that are much better at producing light and hardly create any heat?

The main macro problems, as I see it are a lack of leadership, especially from those in Congress, and lack of widespread dissemination of knowledge to the public – people cannot make informed decisions without more detailed and accurate information.

1. Lack of Leadership: America has failed to assume its leadership position – to organize and lead the world in solving this problem.

The world cannot address a problem of this magnitude without cooperation from the United States. We are the world’s richest country and consume nearly 25% of the energy on Earth, while only having approximately 4% of the world’s population. What we need is a Long Term Energy Plan, and in the short term, a “Marshall Plan” (the U.S post World War II economic plan to reconstruct Europe) for energy. The current U.S. administration, although far better than the previous, has made some minor progress in the right direction. But they have been constantly hamstrung by a dysfunctional, borderline incompetent Congress whose goal appears to be to make compromises that can only result in failure. Our leaders must unite (or resign), stop taking money from the special interests and put the welfare of the country first and tell the American people the true magnitude of the problem at hand.

As one of the great men of the 20th century and one of our most distinguished Presidents once said:

“We have become great because of the lavish use of our resources and we have just reason to be proud of our growth. But the time has come to inquire seriously what will happen when our forests are gone, when the coal, the iron, the oil, and the gas are exhausted, when the soils shall have still further impoverished and washed into the streams, polluting the rivers, denuding the fields, and obstructing navigation…The minerals do not renew themselves. Therefore in dealing with the coal, the oil, the iron, metals generally, all that we can do is try to see that they are wisely used. The exhaustion is certain to come in time”. – Theodore Roosevelt

If Theodore Roosevelt saw the writing on the wall in 1907, why is it so difficult for the current Congress to see it now? In light of the recent situation in the Gulf of Mexico, it seems impossible to miss the ramifications of our current course of action. If we cannot see the dimensions of this issue now, when will we be able to? America must start to think proactively and NOT reactively, as we have for the past 40 years. To not adequately prepare for an inevitable situation of this magnitude such as energy is a colossal failure of leadership of historic proportions.

2. Lack of widespread accurate information: I truly believe that people will do the right thing if they are apprised of the facts and TRUE costs of ALL the alternative actions. However, the American public are not getting nearly enough information on this crisis and the media in general puts little, if any, serious focus on this subject.

Most articles I have recently read seem to indicate that the top concerns of the American people are:

· Economy
· Jobs
· Terrorism

I agree that this is a fairly accurate picture of what Americans are concerned about. However, before a solution to a problem can be applied, it is important to understand the “true cause” of the problem. The true underlying cause of all three of these problems is the world’s dependence on fossil fuels. As a result, this dependence is really our number one problem.

1. The Economy – The economy is currently growing at a very slow rate, with the actual growth probably resulting from recent government spending. However this is NOT a long term solution, real growth must come from the private sector, not the government. If you want to cause a much LARGER problem in our economy all you’d have to do is limit or cut off our oil supply. Our economy literally runs on oil. Almost everything in our economy is dependent on fossil fuels and oil is now more limited, much less secure and the margin of error today is razor thin. This is a historically dangerous position for our country and it is a major threat to our national security, possibly the greatest threat we have very faced.

If you have the interest and the time here is a study that was recently finished (2-2010) by the Kuwait Petroleum Institute what will clear point out how “razor thin” the actual margins currently are. This is the most complete and technically accurate study I have ever seen and it is very sobering indeed.

http://pubs.acs.org/doi/abs/10.1021/ef901240p

2. Jobs – Jobs are directly related to how much our economy grows. It is tough to properly allocate scarce resources when we are:

Ø Spending hundreds of billions of dollars each year importing oil
Ø Spending additional huge annual sums protecting the foreign oil infrastructure and transportation routes with our military forces; and
Ø Fighting two wars simultaneously while literally funding the enemy with our oil purchases.

3. Terrorism – Terrorism is rooted in the Middle East, where most of the oil is located. We are there because of oil; we spend hundreds of billions per year “protecting” our oil supply and have been executing this massive cash drain for decades. There is nothing logical or rational about these actions. They are the actions of an addict who only wants one thing, to get his fix. In our case – OIL.

All of this is the result of the U.S. failing to properly balance our worldwide energy portfolio and not understanding how to properly structure our energy balance sheet. We are presently trapped in an upward price spiral which cannot cease unless the basic laws of supply and demand change (unlikely) or we shift our strategy and thinking to one of energy capital preservation, rational energy utilization and developing renewable assets. We must learn how to shift from nonrenewable resources to assets like solar, wind, geothermal, biomass etc. We all have to recognize the fact that there are major problems in the energy area and we must move to solve them now.

“We can’t solve problems by using the same kind of thinking we used when we created them”. -Albert Einstein

Our thinking in the U.S. is to use as much as we want, based upon the false premise that there will always be enough or we will just find more. There has not been a major oil discovery in 30 years, we are using far more oil than we are discovering and prices have fluctuated from below $10 to just about $150; the “market will take care of it” idea simply doesn’t work. There is little serious thought given to conservation or the welfare of future generations. This is precisely the thinking that got us here and will certainly not be the thinking that will get us out.

As long as we insist on being dependent on non-renewable energy sources and refuse to recognize the true cost of fossil fuels we will continue to face price increase after price increase.

We must take immediate steps to preserve our energy capital and rapidly expand and develop our energy assets from renewable sources such as solar energy, wind and biomass. This transition will take decades and the longer we wait the more severe the penalty we’ll pay.

“To each generation comes its allotted task; and no generation is to be excused to perform that task.” -Theodore Roosevelt

We must change the current path we are on, take responsibility for our situation and move to a financially stable and environmentally sustainable path, or suffer the consequences of our shortsighted and financially irresponsible actions. It is “our” problem, we caused it and we need to fix it now.
__________________

J. Peter Lynch has worked, for 33 years as a Wall Street analyst, an independent equity analyst and private investor, and a merchant banker in small emerging technology companies. He has been actively involved in following developments in the renewable energy sector since 1977and is regarded as an expert in this area. He is currently a financial and technology consultant to a number of companies. He can be reached via e-mail at Solarjpl@aol.com or at his site for the promotion of solar energy www.sunseries.net.

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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.

Top Ten Energy Myths

by Richard T. Stuebi

I get a kick out of trite little lists that I can quickly report on and provoke some thinking and conversation.

And so it is that I recently came across the “Top Ten Energy Myths”, as suggested by Thomas Tanton, a fellow at the Pacific Research Institute.

As listed in the table of contents, the ten myths are:

  1. Most of our energy comes from oil.
  2. Most of our oil comes from the Middle East.
  3. We have no choice but to import vast quantities of oil.
  4. Offshore oil production imposes environmental risks.
  5. Reducing our peroleum (sic) use through alternative energies like solar and wind will increase U.S. energy security
  6. Energy companies will not invest in clean reliable energy.
  7. Renewable energies will soon replace most conventional energy sources.
  8. The U.S. consumes large amounts of energy and thus emits a disproportionate amount of the world’s greenhouse gases.
  9. Federal mandates for higher-mileage cars means less energy consumption
  10. Forcing drivers to use alternative fuels will help solve global warming.

As Tanton notes in the introduction, Mark Twain is attributed to have said that “it ain’t what you don’t know that gets you into trouble; it’s what you know that just ain’t so.”

And so it is: some facts are myths. But, then again, some facts are factual too, and some claimed facts are myths. For instance, at the conclusion of a brief commentary on these top ten myths in the February issue of Power, Tanton presents as “fact” that “increased oil production can have green results”, with the supporting claim that “new drilling technology, developed by private energy companies, has greatly reduced the risk of oil spills.”

Uhhhh…..

I guess the moral of the story here is that readers have to be pretty discerning when considering the writings of thought-shapers, to not accept commentary as absolute, definitive and permanently correct, but rather to look between the lines in identifying biases and competencies that underlie their arguments. And, if a writer is neither competent to discuss the topic, nor unconflicted in discussing the topic, readers are well-advised to not put a lot of trust in the writer’s opinions.

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.

Why Corn-Based Ethanol Sucks

by Richard T. Stuebi

While it is increasingly recognized that subsidies for corn-based ethanol are bad policy, a nod must be given to C. Ford Runge, a professor at the University of Minnesota, for his pithy and merciless analysis in his note “Biofuel Backlash” published in the May/June issue of Technology Review.

In the space of just a few short paragraphs, Prof. Runge cites the work of Earth Track (a firm dedicated to exposing subsidies detrimental to the environment) projecting $400 billion of U.S. subsidies to ethanol between 2008-2022, notes a recent estimate by the Earth Policy Institute that the 2008 U.S. corn crop diverted for ethanol production would have been sufficient to feed 330 million people for a year, and provides a reference to modelling that indicates a near-doubling of greenhouse gas emissions due to changes in land-use patterns associated with corn-for-ethanol production.

It’s amazing that such awful policies, which are so adverse on so many dimensions, can survive. But, in the gameboard that is U.S. energy, environmental, and agricultural policy, only grand compromises supported by the big boys can get enacted — which are then extremely difficult to overturn when they are seen to be nothing more than gifts to their well-positioned and deep-pocketed sponsors and supporters.

Reiterating a point I’ve made before: I have nothing against ethanol per se. Cellulosic ethanol, if it can be accomplished cost-effectively, is a promising prospect for reducing greenhouse gases and reliance on Middle Eastern petroleum without chewing up valuable foodstuffs. But corn-based ethanol plainly sucks. And, the notion of using corn-based ethanol as a bridge to cellulosic ethanol is dubious at best.

The old adage says that a camel is a horse designed by committee. Would it were that U.S. biofuels policies were as lovely as a camel.

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.

Cracking the Codes

by Richard T. Stuebi

One of the big line-items in the energy-related provisions of the American Recovery and Reinvestment Act was energy efficiency. Over $3 billion was allocated to efficiency investments, with the expectation of a 7:1 economic return, based on previous results of the DOE’s State Energy Program since its inception in the late 1970’s.

Alas, it’s becoming evident to some observers (see article) that results will not be so good this time around. Part of this is almost certainly due to declining marginal returns: the $3.1 billion in ARRA efficiency investments is fully 70 times the normal annual investment by DOE in efficiency. Thus, it should be no surprise that returns will be diluted with such a huge one-time spike in funding.

But one of the big, and highly unfortunate, impediments to good returns on these ARRA energy efficiency investments is the obsolescence of building codes around the country. As building professionals know so well, building codes tend to be difficult to change, often due to resistance from builders and trades who prefer to maintain the status quo because…well, just because they’re more comfortable with and accustomed to the status quo.

While retrofit opportunities represent a large portion of the potential energy and emissions savings afforded by increased efficiency — and many of these, as analysis by McKinsey suggests, can be done at negative societal costs — it will be important to surmount this inertia and opposition to establish new and more stringent baselines for our new building stock, if we’re going to tackle our energy and environmental challenges in a permanent fashion.

Richard T. Stuebi is a founding principal of 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.

Energy Efficiency: How NOT To Do It

by Richard T. Stuebi

On October 5, First Energy (NYSE: FE) announced a planned energy efficiency program, involving the delivery of two compact fluorescent lightbulbs (CFLs) to each of its residential and small commercial customers in Ohio. This was to be a part of First Energy’s revived energy efficiency programs, stimulated in large part by the 2008 passage of Ohio SB 221, which stipulates that utilities must reduce their customers’ energy consumption by 22.5% by 2025.

Approved in a case by the Public Utilities Commission of Ohio (PUCO) without comment on September 23, the plan would have had each customer pay $21.60 on bill surcharges over 36 months for this package of two CFLs – whether they were used or not, or even wanted or not.

The story accompanying the roll-out of this program in the Plain-Dealer went into considerable detail about its economics. The $21.60 in extra charges not only covered the cost to First Energy of acquiring and delivering the two CFLs, but also would reimburse First Energy for the reduction in revenue associated with the use of these more efficient CFLs in lieu of traditional incandescent bulbs.

Although seemingly shocking to Ohio readers, the provisions of SB 221 do in fact allow for utilities to recover lost revenues associated with energy efficiency implementation, in recognition of some basic utility economic realities.

In traditional regulatory approaches, utilities earn more profits by selling more electricity. As is the case with most businesses, the company succeeds by selling higher volumes of its product. Thus, if we agree that we want to encourage less electricity consumption, we have to eliminate the financial motivations that utilities have against that desirable goal. In other words, we have to make it equally attractive for utilities to promote saving energy instead of consuming energy; we have to “decouple” electricity volumes from utility profitability.

Recovery of lost revenues from energy efficiency is by no means a novel concept. Indeed, California pioneered such “decoupling” ratemaking treatment all the way back in 1982 with the adoption of its Electric Revenue Adjustment Mechanism. But, in Ohio, it is very new – only now being adopted in the wake of SB 221. And, neither First Energy nor the PUCO made significant effort to educate the public that ratemaking practices of this type have been employed for decades, and are being increasingly employed around the country, for very sensible reasons.

At least equally concerning, First Energy claimed that each bulb was costing the company $3.50, for a total of $7.00 for the package of two. However, a little snooping around area stores revealed that a five-pack of CFLs could be bought at Ace Hardware (hardly the lowest-cost source) for $13.99, or about 20% lower on a per-bulb basis than what First Energy was proposing to charge customers for similar products sourced elsewhere – at presumably higher volumes and more favorable pricing.

In the wake of the initial article, reader reaction was overwhelmingly negative. People didn’t want to pay for light bulbs they didn’t request, and may not use. They didn’t want to get gouged on the cost of the bulbs. And, they didn’t want to pay First Energy for kilowatt-hours that weren’t being sold.

Not only did readers call the Plain-Dealer in complaint, they called their elected officials as well – including all the way to Governor Ted Strickland, who asked the PUCO to stop the program. Within a couple of days, the resulting political pressure prompted the PUCO Chairman Alan Schriber to ask First Energy to withdraw this proposed energy efficiency program. And so, in compliance with the PUCO order, First Energy postponed the program.

As reported in a follow-up Plain-Dealer article, John Paganie of First Energy admitted that “we didn’t do a good enough job in helping customers understand the purpose, the reason for [the program] and the impact.” Yep: First Energy didn’t sufficiently communicate to customers – or engage with trusted advocates such as the Ohio Consumers Counsel in working out the details of the program so they could offer their support – before the program roll-out appeared in newspaper ink.

In the same article, PUCO Chairman Alan Schriber noted that “although the PUCO allowed FirstEnergy to implement its program, we did not approve the charge that will appear on monthly bills as a result.” In other words, PUCO gave First Energy the go-ahead to do the program, but PUCO didn’t consent to how First Energy would be compensated. Huh?

So, the net result of this program announcement was a lose-lose-lose: First Energy came off as being greedy, the PUCO came off as being inattentive to program details, and promoters of energy efficiency came off as imposing unwanted economic burdens on customers. Certainly, Thomas Suddes’ editorial in the Plain-Dealer makes everyone look bad.

I thus submit this little vignette as a classic case study of how NOT to implement energy efficiency.

In my humble opinion, this would not have been such a public relations debacle if First Energy and the PUCO had both accumulated a greater store of citizen goodwill over the preceding decades. Unfortunately, this hasn’t been the case. And, resulting from this bungling by distrusted players, the generally-favorable cause of energy efficiency gets a public black eye in Ohio.

As the Fellow for Energy and Environmental Advancement at the Cleveland Foundation, Richard T. Stuebi is on loan to NorTech as a founding Principal in its advanced energy initiative. He is also a Managing Director at Early Stage Partners, and is the founder of NextWave Energy.

Fight Stupidity Now!

by Richard T. Stuebi

As a big sports fan, I’ve become an enthusiastic listener of Mad Dog Radio on Sirius, enjoying the rantings and ravings of both hosts and callers alike. It’s quite an eyehole (or earhole) into an interesting segment of Americana.

Unfortunately, one disconcerting aspect about this segment is reflected by the advertisers that choose to send their messages to this audience. Advertisers include such products and services of dubious veracity as the Hollywood Cookie Diet, the California Psychic Hotline, and water vapor cigarettes.

Clearly, the demographic of the Mad Dog Radio listening audience is such that discriminating intelligence is not its hallmark characteristic.

To this apparently intellectually-challenged audience, an organization called the Institute of Policy Innovation has begun to run a 30-second soundbite called “Is the Earth Actually Cooling?”, narrated by Dr. Merrill Matthews. Dr. Matthews, whose stated credentials are in health care policy (in contrast to climatology, a more useful background for someone who’s going to opine on this topic), alleges – without substantiation, other than the offhand comment that unnamed “Russian scientists” are increasingly convinced – that the evidence is now suggesting that the earth is “on the verge of a mini-Ice Age”, rather than warming. He closes with the following cheap shot:

“ But at least all those global warming scolds may leave the rest of us alone allowing them to fly around in their private jets openly and guilt free.”

This dreck I find very annoying and insulting. By affiliation with its fellow advertisers, I put the Institute of Policy Innovation right alongside the California Psychic Hotline in terms of credibility. However, to an audience inclined to believe that psychics can provide good personal advice, no doubt Dr. Matthews’ asinine and unsupportable message is compelling to many.

This is not to say that cleantech advocates don’t also offer up their share of absurdities. As an example, I can’t tell you how fatigued I’ve become with “green job” mantras, almost implying that such jobs can be created by whim or fiat. No, they can’t: jobs (at least, good long-term non-governmental ones) are created only after economic opportunities for profit- and wealth-creation emerge. Instead of focusing on creating green jobs, the debate should be about creating a healthy market environment within which employers can/will hire people to pursue those economic opportunities.

I don’t know about you, but for me, I want people in key positions affecting my life – such as my doctors, for example – to be both smart and educated in their disciplines. Why don’t more of us insist that those who are debating our political and social futures, on key issues such as climate change and the future green economy, also be among the most intelligent and well-informed?

More of us need to take a stand: fight stupidity now!

Our future increasingly depends on wise choices in a complex world. We cannot abide those who pollute airwaves with misleading or erroneous statements on critical civic topics — especially to listeners whose judgment on matters more important than sports is probably not highly refined, but who nevertheless vote and otherwise make their voices heard in the political arena.

As the Fellow for Energy and Environmental Advancement at the Cleveland Foundation, Richard T. Stuebi is on loan to NorTech as a founding Principal in its advanced energy initiative. He is also a Managing Director at Early Stage Partners, and is the founder of NextWave Energy.

Money Walks, Fossil Fuel Talks

by Richard T. Stuebi

as posted to Huffington Post
Earlier in September, a group of investors from around the world with over $13 trillion under management issued a statement calling on governments to agree at the United Nations Climate Change Conference in Copenhagen this December to require greenhouse gas emission reductions of 25-40% below 1990 levels by 2020.
$13 trillion. That’s a lot of money. It’s the kind of money that makes decision-makers sit up and take note.

This money is telling world leaders that maintaining the status quo — of essentially doing nothing substantive to mitigate the prospects for human-induced climate change — will be expensive and risky relative to undertaking prudent and prompt action to reduce greenhouse gas emissions.

Since investors are the engine of the global economy, without which productive growth cannot occur, you’d think that industries seeking to be major players in world markets for decades to come would want to be arm-in-arm with the big sources of capital.
In few industries is access to capital as critical as the conventional energy industry. It takes billions of dollars to make a major oil discovery or build a new baseload powerplant. Energy requires massive amounts of capital, no two ways about it. And, in a world where energy demand growth has resumed and is likely to continue unabated to satisfy the increasing appetites of China, India and other developing economies, many trillions of dollars will need to be obtained by energy industry players from the world’s capital markets in the decades to come.
Yet, many of the main purveyors of fossil fuels — the bedrock of the energy sector — are fundamentally at odds with the growing ranks of investors clamoring for global government action on climate change.

For instance, here in the U.S., an “astroturf” (i.e., false grassroots) organization called Energy Citizens, backed (according to this recent article in The Economist) by the American Petroleum Institute and other oil/gas interests, is sponsoring rallies around the country denouncing the American Clean Energy and Security Act that passed the House a few months ago — a bill that would lead to substantially less emission reductions than the aforementioned investors wants to see.

Now, it must be said that the fossil fuel industry — oil, gas and coal — represents one of the strongest aggregations of political muscle on the planet. And, although maybe not as much as the financial centers of the planet, the energy companies have plenty of financial resources to throw at an opposing “call to inaction”. After all, consumers worldwide spend roughly $5 trillion per year on energy, putting lots of dough in the coffers of the energy suppliers.
So, over the coming months running up to Copenhagen, it will be interesting to see which side can amass more force: finance or fossil fuels.

In the U.S., it is doubtful that any climate change bill will become law this year, with Congress being mired in the ongoing health care debate. Without a U.S. climate bill passed in Congress, representatives in Copenhagen will be challenged to achieve anything meaningful. Thus, the fossil fuel folks may well win this round of the battle.

But the energy companies must remember that they will need to go to the capital markets, hat-in-hand, many times in the coming decades if they want continued successful growth. And, investors are going to be less and less willing to fund management teams for business growth if the same management teams are stifling progress on something that represents a bigger wealth-destroying factor for their overall portfolios.

Energy companies like to say that they fuel the economy. That may be true, but capital fuels the economy at least as much — and fuels the energy companies to boot.
In the long-run, I’d put my bets on the money managers making change happen, than on the energy industry preventing change from happening. Because when money walks away from them, all that fossil fuel interests will have are declining resource extraction businesses starving for capital. All they will have left, is talk. And talk is cheap.

As the Fellow for Energy and Environmental Advancement at the Cleveland Foundation, Richard T. Stuebi is on loan to NorTech as a founding Principal in its advanced energy initiative. He is also a Managing Director at Early Stage Partners, and is the founder of NextWave Energy.