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Failure Is An Option: Cost Is Not No Object

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Luntz on Climate

by Richard T. Stuebi

Frank Luntz is an influential pollster in Republian circles. So, it’s notable when Luntz releases findings that support movement on the climate front.

That just what happened in late January, when Luntz’s firm The Word Doctors collaborated with Environmental Defense Fund to announce recent polling data that suggest that a majority of Republican voters continue to believe that human-induced climate change is a real phenomenon and want action to address it.

Some of the more interesting findings in the report “The Language of a Clean Energy Economy” include:

  • The concept of “carbon neutral” does not resonate well with the American public. “Energy efficiency” and “healthier environment” carry more weight.
  • The statement “it doesn’t matter if there is or isn’t climate change; it is still in America’s best interest to develop new sources of energy that are clean reliable, efficient and safe” is the most compelling framing of the issue.
  • National security tops every other reason to support climate action — particularly among Republican voters but also among a large segment of Democratic voters.

As Luntz summarized in his own words, “Americans want clean, safe, healthy, secure energy. That’s why Republicans and Democrats alike strongly support action to address climate change. Sure, Republicans are more concerned about the national security component and Democrats the health component, but support for action right now spans all partisan and ideological lines.”

It’s a fine and pleasant synopsis, but I’m not as sanguine as Luntz, only because energy independence is a strained rationale (not to mention probably more unattainable than major carbon emission reductions) for dealing with climate change. Why? Two reasons:

  • One, if you want to maximize domestic energy production immediately and cheaply, you’ll rush right to coal — which only exacerbates the climate concerns.
  • Two, until America’s vehicle fleet becomes electrified — a long way off — you can’t run America’s vehicle fleet on coal or any other lower-emitting form of domestically-produced electricity. For the foreseeable future, we’ll have cars and trucks running primarily on (mostly imported) oil, and producing carbon emissions to boot.

I’m not the only observer to be concerned about an unrealistic or even ill-advised pursuit of energy independence — see “Oil Independence: Realistic Goal or Unrealistic Slogan?” for a good summary of the literature, and a nuanced and balanced view of the notion of “energy independence”. This reinforces how unfortunate it is when the seemingly only basis for bipartisanship on climate policy is a principle that is very slippery at best and easily warped at worst.

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.

The Problem With Polls

by Richard T. Stuebi

Recently, I’ve been working more closely with people who are active in setting and shaping policies, and it’s clear that they’re wired differently from me. As an economist, my first question in considering policy usually is: “What are the costs and benefits?”. The policy-wonks tend to first ask: “What do the polls say?”

When it comes to energy issues, it’s increasingly clear to me that an instinctual reliance by politicians and staffers on polling data is a dangerous thing. That’s because the average citizen/voter is so badly lacking in basic understanding of the key issues that the opinions of Joe/Jane Six-pack on energy/environmental matters, sadly but frankly, ought not to be given much weight.

That doesn’t seem to stop firms from conducting more and more surveys on energy topics, and from touting their fresh results to support their pet positions. For instance, Deloitte recently conducted a survey on alternative energy, and the generally pro-renewables press release claimed that “a majority of customers said they would pay more for clean energy because it is good for the environment”.

However, the frothing anti-renewables critic Robert Michaels, writing in the June 8 New Power Executive, offered an opposing interpretation of the Deloitte poll results: that the indicated support of the average customer is actually rather lukewarm when reviewed in detail.

Moreover, Michaels points out, rightly, that survey data often overstates customer enthusiasm for renewables, relative to what customers actually do decide to purchase when offered renewable energy.

And, Michaels brings up the inconvenient truth that I’m bringing up today: that Americans are clueless about energy. Michaels refers to a survey conducted earlier this year by Enviromedia Social Marketing, which reported in its press release that “more Americans have no idea what fuels their electricity than those who can name any particular source — either correctly or incorrectly.”

As an even more damning anecdotal piece of evidence, Michaels trots out a 2004 survey from Kentucky in which 41% of respondents identified coal, steel and oil as renewables. Yikes!

Do we really want the public sector following the wishes of the masses on energy, if this is what the public thinks it knows about energy?

I think the last word on the lunacy of polling Americans on critical energy issues must go to the blogger Engineer-Poet who posted the following missive on Alternative Energy Blog about two years ago in response to a Yale poll on environmental positions:

“92% considered dependence on imported oil to be serious or very serious. 89% considered the high price of gasoline to be serious or very serious. Only 19% supported a pollution fee on gasoline, and a mere 15% supported a general increase in the gasoline tax. It takes a lot of ignorance to hold such contradictory opinions.”

I think that little ditty says it all.

In general, I don’t know where I stand on the Jefferson-Hamilton spectrum, but I don’t think policy-makers ought to make policies just to appease and pacify the ignorant.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President at NextWave Energy, Inc.