Posts

Contrarian Wisdom Isn’t Necessarily Better Than Conventional Wisdom

For years, many observers (including myself) have argued that — from an environmental perspective — it is preferable for energy prices to be higher, so as to (1) discourage consumption of energy, mostly from fossil fuels which generates significant environmental impact, and (2) make various forms of energy efficiency and cleaner (if not zero-emission) alternative sources of energy more economically attractive to customers, which in turn will produce a virtuous cycle of further improvement in energy efficiency and alternative energy to penetrate markets in an ever-increasing fashion.

Recently, Carl Pope (formerly CEO and Chairman of the Sierra Club) penned an article that aims to turn this wisdom on its head.  In “The Road To Climate Heaven Is Paved With Ever Cheaper Oil”, Pope makes the point that the most environmentally-damaging forms of oil — such as the oil sands in Alberta — are intrinsically the most expensive to produce.  As a consequence, if oil prices were consistently at $70/barrel or less, production from these resources would be unprofitable and would relatively quickly cease, which in turn would (paraphrasing here) save the planet from future horrible devastation.

Pope notes that — of world oil demand at levels around 85 million barrels per day — about 80 million barrels per day can be sourced from relatively-clean conventional oil resources that are economically recoverable at much lower prices, rather than the dirty stuff which are economically viable only at higher prices.  In other words, the world supply curve for oil is pretty flat and low up to about 80 million barrels per day, and then goes vertical beyond that.

Assuming that his analysis of global oil supply is approximately accurate, Pope asserts that we just need the largest consumers of the world to somehow reduce demand levels by about 5 million barrels per day — permanently — and then the dangerous sources of marginal supply will be shut out of business.

It’s an interesting argument.  But I am not persuaded.

First of all, let’s consider how we got here:  World oil prices have consistently been hovering in the $80-120/barrel range since mid-2007 (except for a brief period in 2009 during the absolute trough of the global economic meltdown).  Why is this?  Except during the economic standstill, global oil demand has been robust at (as Pope says) around 85 million barrels per day — even in the face of high (and generally increasing) prices.  Note that U.S. demand has essentially been declining, so the rest of the world (especially China) has been picking up the slack.  (Imagine for a moment how much more demand there would have been had prices not increased so substantially!)

Put aside for a moment the question of how to achieve a demand reduction of 5 million barrels a day from the developed economies.  (Pope himself fudges on this point by stating that the developed economies could “encourage transportation efficiency and fuel diversity” in some unstated way.)  What would happen if Pope’s dream were somehow to be achieved?

At first, as Pope would hope, world oil prices would no doubt fall.  I don’t know if they’d fall by tens of dollars of barrel, but it’s possible.  If that were to happen, it almost certainly would cause a significant increase in demand within not-too-much time, which in turn would spur prices upward again.  Eventually, this force of increased demand would push prices back into the range that again makes viable production from the dreaded dirty marginal resources.

This is the notion of an equilibrium, central to free-market economic thought:  that any exogenous shock to the system will produce a response from the market that will tend to bring the system back into balance.

For Pope’s fantasy to play out, there would have to be not only an immediate reduction in developed-world demand for oil on the order of 5 million barrels per day (thus dropping oil prices to a significantly lower level), but an ongoing reduction from the developed-world to offset the faster growth in oil demand that would be generated by much lower oil prices that would somehow need to be maintained by ever-shrinking demands from the developed world.

I simply don’t see this happening.  Efficiency won’t be enough; it requires a massive shift off of oil for transportation — the “fuel diversity” for which Pope argues.  Low-cost natural gas (largely due to fracking, another environmental bete noire) for compressed natural gas vehicles and better (higher performance and lower cost) batteries for electric vehicles will help, but daunting investments in fueling/recharging infrastructure would be required for either (or especially both) to achieve mass-penetration — and I don’t see the money for these laying around.

With his recent article, Pope reaches for a similar conclusion, but coming from a different angle, as those who are seeking to forestall the construction of the Keystone XL pipeline to thwart access to markets for oil sands from Alberta and thereby prevent their development as a means of protecting the planet.  They share a supply-oriented mindset:  curtail supply by whatever means necessary (in Pope’s case, taking actions to depress market prices; for pipeline opponents, fighting legal/regulatory battles) to prevent consumption of a particular source of oil.

In my mind, this is not the way the modern economic world works.  In the market-oriented economy that generally prevails around the world, it is demand — not supply — that drives all the mechanisms.  World oil markets are fungible:  pushing down in one place will cause counterbalancing forces elsewhere, mostly negating the initial restriction.  Trying to control markets by somehow altering supply is futile, as the forces of demand will insidiously work around any inhibitions.

To see an example of this, look at the ineffectiveness of the so-called war on drugs:  demand may be lowered from unfettered levels but nevertheless remains abundant, against all social wishes.  The market is not destroyed; be assured, the market remains — it’s just been driven underground to all sorts of illegal and nefarious suppliers.

Similarly, the lack of a Keystone XL pipeline will not prevent the tapping of the Alberta oil sands (as long as oil prices are high enough).  Participants in the market are too nimble and inventive.  Oil sands output is already being shipped to the U.S. not only over existing pipelines, but as they approach capacity, by an increasing number of rail cars.  In addition, the Canadians may build their own pipelines to the Atlantic or the Pacific Coasts, allowing oil sands to reach world markets even with constrained access to the U.S. if Keystone XL is never built.  So the opposition to the pipeline will mainly have ended up being for naught — other than to drive up oil prices a little bit, due to the extra costs introduced into the market by denying an economically-attractive project from being built.

I respect Pope for all he has done in his career for the environment, building awareness of the critical issues our planet faces and generating urgency for action.  But, at least in his most recent writing, his unconventional economic wisdom does not ring true to me.  I’m often a contrarian myself, but in this case, I believe that Pope’s out-of-the-box thinking should probably be put back in the box.

Fracking: Where Do You Stand?

In the energy sector, there are few topics that generate more debate today than the relative merits/demerits of fracking.  To see just how strongly-held yet evenly-divided opinion is, check out this online debate moderated by The Economist and sponsored by Statoil (NYSE: STO).

The question is framed simply:  “Do the benefits derived from shale gas outweigh the drawbacks of fracking?”  Writing in defense of the “pro” position was Amy Myers Jaffe, the Executive Director for Energy and Sustainability at the Graduate School of Management at the University of California Davis.  Writing in opposition was Michael Brune, the Executive Director of the Sierra Club.

The final tally of the debate:  51% voted “No”, while 49% voted “Yes”.

Honestly, I lean more towards the “Yes” side of the ledger.  While fracking raises significant concerns, I believe that they can be managed — though it’s up to us as engaged citizens to ensure that the powers-that-be fully hold accountable those who participate in fracking activities to the highest standards.

My hunch is that the beliefs and the numbers of the “No” side have been strongly influenced by films such as “Gasland” and the more-recent “Promised Land”.  I confess that I haven’t seen either of them, and while I suspect that they have oversimplified complex issues and stretched the facts/truth to fit a convenient dramatic storyline (as so many movies do), it really is unfair for me to criticize them.  Even so, it’s clear that — other than the ever-dependable defender of all-things fossil fuels, Fox News — there are few “pro”-fracking vehicles in mass-culture appealing to the middle-ground to provide a counterbalancing force from the seemingly-dominant message that fracking is dangerous and bad.

As a friend of mine likes to say about thorny political dilemmas:  “I have friends on both sides of this issue, and on this issue, I’m with my friends.”  With respect to fracking, this applies.

Water: The Big Issue for Fracking

On February 13, the Cleveland office of the law firm McDonald Hopkins hosted a panel to discuss the pivotal water issues facing producers of oil/gas from shale via fracking.  In addition to three MH attorneys, the panel also included Jeff Dick (Director of the Natural Gas and Water Resource Institute at Youngstown State University), Samuel Johnson (Director of Water Asset Development for CONSOL Energy (NYSE: CNX)), John Lucey (EVP of Business Development and Engineering for Heckmann Corporation (NYSE: HEK)) and Sudarshan Sathe (President of Water and Wastewater Equipment Co.)

I took away three main observations from the panel discussion.

First, it’s important to keep in mind the distinction between produced water and flowback water.  Flowback water includes all of the fluids used in the fracking process to initially stimulate oil/gas production.  Produced water is defined as the flows associated with ongoing oil/gas production long after the fracking is complete,  as has long been the case with all conventional oil/gas wells that never required fracking, since all oil/gas production usually contains a sizable fraction of water.  The water treatment issues for flowback waters and produced waters are thus different.  In particular, flowback waters are contaminated by the proprietary ingredients that fracking operators want to protect for competitive advantage, whereas produced waters contain loadings of the minerals that leach out from the particular oil/gas bearing shale strata being tapped.

Second, as significant as the challenges are for treating the water resulting from fracking operations, sourcing the quantity of water from fracking operations may be even more challenging.  Simply, fracking operations require enormous quantities of water.  While the voluminous Great Lakes would seem a natural supply basin, the Great Lakes Basin Compact signed a few years ago by the jurisdictions within the Great Lakes Basin precludes transporting Great Lakes water outside the basin — and while the Marcellus and Utica shale plays are not far at all from Lake Erie as the crow flies, it nevertheless so happens that they generally lay outside that basin.  Thus, fracking operators in the Marcellus and the Utica have to get their water from somewhere else.

Lastly, for a company that is historically rooted in the coal industry, CONSOL comes across as highly progressive.  Among other eyebrow-arching comments, Mr. Johnson argued that environmental regulations associated with fracking operations needed to be tighter than they currently were simply to drive further technological advancement — existing practices just weren’t good enough.  I leaned over to a colleague and said that either (1) Mr. Johnson is out of step with his management, (2) CONSOL was outstanding at “greenwashing” with convincing public relations messaging, or (3) the company is genuinely trying to differentiate itself from many of its peers.

The panel was timely:  just a week prior, in an appallingly flagrant disregard of environmental law, a renegade operator in Youngstown called Hard Rock Excavating was caught by regulators dumping untold tens of thousands of gallons of untreated wastewater into the Mahoning River (which drains into the Ohio River).  The principal of the operation, a Mr. Ben Lupo, is subject to up to three years in prison and up to $250,000 in fines if convicted of violating the Clean Water Act.

(Oh, by the way, even though he was only just recently caught red-handed, this event doesn’t appear to have been the first for Mr. Lupo, who seems to have a long history of illegal water dumping, according to this article by the Vindicator.  Not to mention, Mr. Lupo also owns and operates another company, D&L Energy, which was responsible for the injection wells thought to have triggered the seismic activity in Youngstown in late 2011.  It’s almost as if Mr. Lupo is waging a one-man public relations demolition derby for the industry.)

My guess is that everyone on the panel, and presumably in the audience, would be in favor of strict punishment for Mr. Lupo, assuming that his guilt is confirmed.  Not only are the environmentalists up in arms, the panelists and others who seek to pursue fracking in the Marcellus and Utica shale know that they can’t afford many bad black-eyes like the one(s) wrought by Mr. Lupo’s apparent disregard for good practices.

Water’s just too important for the fracking business not to handle wisely.

Betting on Black Swans

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tell that to George Mitchell.

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

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

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

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

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

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

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!

 

Danger: Silly Season Ahead

Here’s a musical experiment for you:  play a song such as “Penny Lane” from The Beatles (or, if you prefer classic rock, “Whole Lotta Love” by Led Zeppelin will do nicely) on your sound system…but with the balance set all the way to one side or the other.  There will be enough recognizable content for you to still recognize the song, but you will not be able to hear the whole song, and will miss many important elements.

This is like getting your information on topics of the day from Fox News or MSNBC:  significant portions of the story being reported upon will simply not be heard.

If you play “Penny Lane” (or “Whole Lotta Love”) through an old monophonic transistor radio, you will hear both “sides” (as it were) of the song.  But, the fidelity will be very poor, and you won’t hear the nuances and richness of the song.

This is like getting your information from the USA Today, or most local newspapers:  any deep appreciation of the underlying issues will remain out of reach, because it is inherently lacking from the reporting.

As we move into the so-called “Silly Season” of election politics, in an era of “sound-bites”, incumbents and aspirants — and perhaps more importantly, thanks to the Citizens United decision, the flotsam of PACs and SuperPACs that wallow around the political discourse — are flinging about half-truths about all sorts of important issues. 

Most of these issues — health care, fiscal policy, immigration, “values” — are ones in which I claim no sort of expertise, and accordingly I will not render any public assessments on them. 

However, a large number of polemical skirmishes on the 2012 political battlefield are shaping up to be based on energy and environmental topics.  The list is long:

Keystone XL pipeline.  High gasoline prices.  EPA regulations.  Fracking and shale.  Nuclear energy.  Energy independenceSolyndra.  Extension of the wind production tax creditSubsidies to fossil fuels.  Dumping of solar panels from China.

The airwaves are crackling with a cacophony of messages for and against these issues…and I’m hearing lots of misstatements and oversimplifications.

I’ve been ruminating on the advent of Politifact, that aims to prove or debunk political claims in as unbiased a fashion as possible, and thinking that there ought to be some similar effort focused on the issues of importance to us in the cleantech community.  Maybe someone will take this on…

…But, in the absence of such an effort, and lacking the personal will to tackle it comprehensively on a topic-by-topic basis, I will use the remainder of this post to offer general advice to thoughtful citizens wishing to weigh energy and environmental issues in something other than a knee-jerk or dogmatic fashion. 

First, I am reminded of some advice from mentors upon beginning my career in the late 1980’s, as an economic analyst of various energy and environmental policy issues on behalf of (primarily) Federal clients:  “Be an ‘equal-opportunity offender’.  If you’re pissing off people on both sides of an argument, then you’re probably close to the truth.”

In my experience in the energy sector over the intervening 25 years, this is so much more a truism than can possibly be imagined.

The implication of this insight is that any message you might hear or read from any one source — unless that source is doggedly determined to be unbiased — is likely to in fact be highly biased.

If the only source of information you use to develop a perspective on energy issues is, for example, Americans for Prosperity, you will arrive at a selective and skewed view.  As noted in this articleThe Guardian recently reported on how AFP, and other groups of its ilk, are making a deliberate effort to discredit many policies to promote renewable energy, and so are unlikely to present any evidence that paints renewable energy in any positive light. 

Then again, it should further be noted that The Guardian is pretty well-known to have an agenda it seeks to advance.  Indeed, even most highly-respected newspapers known for excellent reportage — from the Wall Street Journal to the New York Times — have editorial boards that are widely-recognized to have a distinct political philosophy that they aim to espouse.  So, one must always take what information is obtained, even from the most reputable of sources, with a grain of salt. 

Alas, there is little substitute for decades of direct experience in an industry, examining issues from multiple angles, working productively (or at least trying to) with people from across the spectrum of interests.  It could be argued that this is the only professional asset and advantage I have accumulated over the years.

In addition to being slanted and aiming to press forward a position — regardless of whether the facts fully support it or not — most reportage of energy and environmental topics suffers from woeful lack of basic understanding of science and economics.  Publishers and journalists are approximately equally guilty. 

And, with its grave innumeracy — and the consequent inability to make tradeoffs — the electorate is subject to being swayed and stuck to a position only because it sounds right, best “fitting” their pre-existing and fairly unmalleable mental model, coming from a source they unblinkingly accept.

In energy and environmental issues, just about everything involves tradeoffs.  There is no perfect solution, no silver bullet.  There are benefits, but there are also costs, to all possible options.  When confronting a world of this much complexity, it may be comforting for many to resort to idealistic dogma.  However, those positions — which tend to be on the extremes — is not where reality usually lies, and it’s not where the action is.

If you were to limit my intake to one and only one general information source, I would choose (drum roll, please) The Economist.  OK, this is surely no surprise to those who have followed me for awhile.  Sure, I was trained as an economist,  but that’s not why I endorse the publication.  Simply, I find its weighing of all the diverse factors, and its understanding of the underlying facts and evidence, to be more thorough and — yes, actually — fair and balanced than other outlets.

Even so, The Economist can’t cover all energy and environmental matters.  A better approach to developing a healthy and informed perspective on these topics involves more work, accumulating from a variety of sources from across the spectrum.  It is unfortunate but seemingly the case that certain media — and especially, the blogosphere — has joined politics in becoming an adversarial contest of opposing views, where one side or the other will not let certain facts get in the way of telling the story they want told.

In the upcoming Silly Season, I urge conscientious voters to weigh all sides of energy and environmental issues, from multiple sources of information, before coming to any conclusions.  Don’t take what is said by the Democratic or Republican candidate, or their PACs, as gospel.  Don’t blithely assume that what environmental advocates or industry trade groups are reporting is the truth, the whole truth, and nothing but the truth.

It’s a very rough generalization — and as Alexandre Dumas once said, “All generalizations are dangerous, even this one” — but I submit that most pro-environmental positions underweigh economic considerations.  It’s simply naive to argue for tighter environmental control and then dismiss any possibility of negative economic consequences.  And, environmentalists are sometimes prone to “sky-is-falling” hyperbole, which undercuts their credibility in legitimate policy debates.

On the other hand, self-interested messages from the conventional energy sector are often disseminated through the filter of so-called “astroturf” (phony grassroots) organizations, that sound as if they’re representing the views of Bob & Betty Buckeye but instead actually are reciting the scripts of oil, gas, coal and utility companies.  The old adage from Watergate still applies:  “Follow the money.”  It’s incumbent upon the citizen to pierce the fog and see through to who is paying a lot for these media buys so you can hear their opinion.  Also:  don’t forget that the conventional energy sector has a lot more money to throw around than the other side in telling the stories they want you to hear.

And, in the end, to maintain your sanity in the face of inanity, it’s a good thing to fall back on this gem of folk wisdom.

2011 In The Rear-View Mirror: Objects May Be Closer Than They Appear

It’s that time again:  sifting through the detritus of a calendar year to sum up what’s happened over the past 12 months. 

Everybody’s doing it — for news, sports, movies, books, notable deaths…and now even for cleantech:  here’s the scoop from MIT’s Technology Review, and here’s a post on GigaOM.

So, my turn [drum roll, please], here’s my top 10 take-aways from 2011:

  1. Solyndra.  The utter failure of Solyndra, and the messy loan guarantee debacle, has been a huge black-eye to the cleantech sector.  It’s a political football that will be kicked around extensively during the 2012 election cycle, further widening the schism of support levels by the two major U.S. political parties for cleantech.  In other words, cleantech is becoming an ever-more polarizing issue — with Solyndra serving as the most visible tar-baby.
  2. Shale gas and fracking.   A chorus of ardent proponents of natural gas development, most vocally Aubrey McClendon, the CEO of Chesapeake Energy (NYSE: CHK) — the largest player in the shale gas game — is repeatedly chanting the mantra that shale gas is so plentiful that it can very cheaply serve as the major U.S. energy source for the next several decades.  And, recovery of this resource will create a bazillion jobs for hard-working Americans in rural areas.  In this view, who needs renewables?  Interestingly, this view also poses increasing threats to coal interests as well.  On the flip side, of course, the concerns about the use of fracking techniques, and the implications on water supplies and quality, are constant fodder for headlines.  Clearly, shale and fracking will continue to be hot topics for 2012.
  3. Keystone XL.  The proposed pipeline to increase capacity for transporting oil from the Athabasca sands of Alberta to the U.S. is the current lightning rod for the American environmental community.  Never mind that denying the pipeline’s construction will do very little to inhibit the development of the oil sands resources — Canadian producers will assuredly build a planned pipeline across British Columbia to ship the stuff to Asia.  Never mind that blocking the pipeline will do nothing to reduce U.S. oil consumption — which is, after all, the source of the greenhouse gas emissions that opponents are so concerned about.  This has become an issue of principle for NRDC and other environmental advocates:  “we must start taking concrete steps to wean ourselves from fossil fuels.”  Nice idea in theory, but this action won’t actually do anything to accomplish the goal, and will only further paint the environmental community in a damaging manner as being anti-business and anti-economics.  In my view, we have to work on reducing demand, not on curtailing supply; if we reduce demand, less development of fossil fuels will follow; the other way around doesn’t work.  The Obama Administration has punted approval for the pipeline past the 2012 election, but Keystone XL — like Solyndra — will be a major framing element in the political debates.
  4. Fukushima.  The terrible earthquake/tsunami in Japan in March killed over 20,000 people — and sent the Fukushima powerplant into meltdown mode in the worst nuclear accident since Chernobyl in 1986.  As costly and devastating as Fukushima was to the local region, it pales compared to the damages caused by the natural disasters themselves.  Even so, the revival of the perceived possibility that radioactive clouds could spew from nuclear powerplants put a severe brake on the “nuclear renaissance” that many observers had been predicting.
  5. Chevy Volt.  Released after much anticipation in 2011, sales of the plug-in electric hybrid Volt have been well below expectations.  Furthermore, as I recently discussed here, a few well-publicized incidents of fires stemming from damaged batteries have been a huge PR blow to gaining widespread consumer acceptance of electric vehicles.  Clearly, Chevy and others in the EV space have their work cut out for them in the months and years ahead.
  6. Challenges for coal.  As I recently wrote about on this page, the EPA has been working on promulgating a whole host of tightened regulations about emissions from coal powerplants.  These continue to move back and forth through the agencies and the courts, and coal interests continue to wage their battles.  But, between this set of pressures and low natural gas prices (see #2 above), these are tough days for old King Coal.  Not that they couldn’t have seen these challenges coming for decades, mind you, and not that some of their advocacy organizations don’t continue to tell their pro-coal messages with some of the most heavy-handed and dubiously factual propaganda outside of the recently-deceased “Dear Leader” Kim Jong Il
  7. Light bulbs.  One of the most absurd and petty dramas of 2011 unfolded over the planned U.S. phase-out of incandescent light bulbs, as provided for in one of the provisions of the Energy Independence and Security Act of 2007Representative Joe Barton (R-TX) led a backlash against this ban, arguing that it was an example of too much government intrusion into consumer choice — and succeeded in having the ban lifted at least for a little while, tucked into one of the meager compromises achieved as part of the ongoing budgetary fights.  This was accomplished against the objections not of consumers, but the objections of light bulb manufacturers themselves, who had already committed themselves to transitioning to manufacturing capacity for the next-generation of light bulbs:  CFLs, LEDs and halogens.  Now, the proactive companies who invested in the future will be subject to being undercut by a possible influx of cheap imported incandescent bulbs.  Way to go, Congress!  No wonder your approval ratings are near 10%.  Is it possible for you guys to focus on the big important stuff rather than on small bad ideas? 
  8. PV market dynamics.  Solyndra (#1 above) failed in large part because the phovoltaics market has become much more intensely competitive over the past year.  Module prices have fallen dramatically — no doubt, in large part because the market is now saturated by supply from Chinese manufacturers, who are sometimes accused of “dumping” (i.e., subsidizing exports of) PV modules into the U.S. marketplace.  This is stressing the financials of many PV manufacturers, including some Chinese firms and other established players.  For instance, BP (NYSE: BP) announced a few weeks ago its exit from the solar business after 40 years.  However, the stresses are falling mainly on companies that employ PV technology that cannot be cost-competitive in a lower pricing regime, whereas some of the new PV entrants — not just Chinese players, but some U.S. venture-backed players like Stion (who just raised $130 million of new investment) — are aiming to be profitable at low price levels.  And, after all, the low prices are what is needed for solar energy to achieve grid-parity, which is what everyone is seeking for PV to be ubiquitous without subsidies. 
  9. Subsidies.  Ah, subsidies.  In an era of increasing fiscal tightness (see #10 below), pro-cleantech policies are under greater scrutiny.  In particular, renewable portfolio standards are being threatened by state legislators of a particular philosophy who are opposed to subsidies in all forms.  The philosophy is understandable, but the lack of understanding or hypocracy is less easy to defend:  the status quo is almost always subsidized too, especially during its early days of development and deployment — and often remains subsidized well after maturity and commercial profitability.  Fortunately, there’s an increasing body of high-quality work that assesses the energy subsidy landscape in a generally objective manner, such as this analysis released by DBL Investors in September.
  10. Europe.  Although not a cleantech issue per se, the vulnerability of the European economy, the European Union, and the Euro in the wake of the various debt crises unfolding across the Continent is a major negative factor for the cleantech sector.  Europe is the biggest cleantech market, and many of the leading cleantech investors and corporate acquirers are European, so a recession (or worse, depression)  in Europe will be a very big and very bad deal for cleantech companies.

In all, 2011 was not a great year for the cleantech sector, and I don’t see 2012 being much better.  But, that’s not to say that good things can’t happen, or won’t happen.  Indeed, there will always be rays of sunshine among the clouds…or, to use another metaphor, you’ll always be able to find a pony in there somewhere.

Happy New Year everyone!

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.

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?

Gas Pains

The natural gas market has always been a roller-coaster.  It’s a very seasonal fuel, typically experiencing price spikes during the winter heating months.  So, it’s important to begin any discussion about natural gas with a statement of the obvious:  natural gas prices are very volatile.

A few years ago, natural gas prices exceeded $12/mmBtu (as measured at the market’s reference point, Henry Hub).  Since then, of course, the national economy has collapsed, with sharp declines demand from many major gas-consuming industries, so that gas prices even during peak months have fallen below $6/mmBtu — less than half their recent peaks.

One of the reasons for prices falling so low has been the opening of shale gas reserves across the country that had heretofore been beyond economic reach.  With the development of horizontal drilling techniques and hydraulic fracturing (a.k.a. “fracking”), a series of geologic basins — starting with the Barnett in Texas, and now the Marcellus in Pennsylvania — are being tapped to extract large quantities of natural gas that were known to exist but previously uncompetitive absent technological advancement.

The opening of these resources has led many observers, with only one example being the American Clean Skies Foundation, to make the case that natural gas should be the central platform for American energy policy and main leg of the American energy industry stool for the foreseeable future. 

The basic premise is that natural gas is much more plentiful under our own lands than formerly thought possible, while also being much cleaner than coal or even petroleum, so we should be using natural gas not only for power generation, but also for increased deployment of natural gas vehicles to displace the need for so much imported oil.  Since gas is so plentiful, it will be cheap to use natural gas as the primary fuel of choice in our economy.

I’m not against natural gas in any way.  It is plainly a much cleaner-burning fuel than oil or coal.  It is not subject to mountaintop mining practices that are devastating coal producing regions in Appalachia, as profiled in this recent story in the New York Times.  It does not produce the wastes or the worries that nuclear energy does, as evidenced so clearly of late at Fukushima in Japan.

But, I do worry that the forecasts of long-lasting natural gas abundance — and low gas prices — in the U.S. are wildly over-optimistic.  For instance, the most recent edition of the Powers Energy Investor analyzed production from the Fayetteville shale in Arkansas and concluded that its production levels had peaked and “natural gas demand will soon substantially outstrip supply and prices will skyrocket.  All the pieces are in place for substantially higher natural gas prices, however Mr. Market will recognize the incredibly strong fundamentals of the natural gas market only when he is ready and not a second earlier.”

In short, the concern is that shale gas resources may be subject to much steeper decline curves in production than is the case for gas from conventional wells.  Many industry cheerleaders are touting decades or hundreds of years of domestic natural gas supply, but may be doing so by extrapolating a few years of production from the seeemingly-abundant shale gas reserves and applying conventional decline curves that are not nearly so severe as real-world experience from the Barnett and Fayetteville shale resources have indicated.

Also, some of the environmental concerns about production of gas from shale formations via the use of fracking are likely to have some justification.  Last week, the New York Times reported that House Democrats have discovered substantial risk of carcinogens being dumped into water as a result of the use of fracking chemicals — very closely-held industry secrets by such oilfield service companies as Halliburton (NYSE: HAL) and Schlumberger (NYSE: SLB).

Defenders of the natural gas industry have claimed that the New York Times has performed a hatchet job on the shale gas industry in their reporting on environmental issues associated with water contamination from fracking.  Perhaps. 

However, I have recently talked with someone with direct business involvement in the fracking activity in the Marcellus — a self-avowed Republican — who was unequivocally damning in noting that environmental standards regarding water quality associated with fracking are essentially non-existent in Pennsylvania.  “They take the wastewater, put it in tanker trucks, and on rainy or snowy nights, they roll the trucks and dump the water on the road.”  The annual volume of wastewater — however clean or contaminated — that’s disposed of in this manner or otherwise without any control or oversight?  According to my contact, about three-quarters the volume of Lake Erie.

Between dealing with the environmental challenges seemingly associated with fracking, the probably overblown estimates of ultimately-recoverable shale gas reserves, and the push for more natural gas adoption in the transportation and power generation markets, it’s far from obvious to me that natural gas prices will remain at these levels for very long.

In the end, we must remember that natural gas markets have long been subject to booms-and-busts.  Note that, before natural gas prices broke the $10/mmBtu level in the mid-2000s, they had lingered below $2/mmBtu for much of the 1990s, and the natural gas industry was in a state of deep and enduring pessimism.  Then, in just the space of a few years, gas surpluses evaporated as demand steadily grew, and prices quadrupled.  What makes us think that another increase of $5-10/mmBtu couldn’t happen again?

I remember a cartoon from the late 1980s depicting a homeless man at a stoplight holding a cardboard sign that stated “Will Predict Natural Gas Prices For Food”.  Forecasting the future of the gas market is clearly a perilous game, and far be it from me to suggest I know what will happen.  But, as the history of the natural gas market has shown again and again, the future need not look anything like the present, and blindly assuming a continuation of current pricing levels and supply adequacy in the natural gas markets is by no means certain.  In fact, over the long-run, I’d bet against it.

The Two Names in Cleantech You Have to Know

Cleantech has a very short history, and an even shorter memory.  I’ve written over and over again about how it’s all about policy, and that there is no disruptive technology in cleantech.  Now I’m telling you that’s not quite true, the exception proves the rule.

I’d like to ask you to do some reading on two men from very different worlds.  One recently passed away, the second in his 90s.  Both passionate about the earth and people in it.  Both lightening rods for criticism.  And for the record, one taught at Texas A&M, the other graduated from there.

Both drove the development of technology that changed the world in profound ways.  Doing so in part with deep connections to both technology and policy.  They are household names in the worlds they lived in.  They are largely unknown in the cleantech world.

If we are to survive and thrive in a world with a lot more population and a lot more demand on our natural resources that it had when Norman Borlaug and George Mitchell started, we’re going to need to mint more of these guys like water.  It’s good to know it can be done.

Norman Borlaug

Father of the green revolution.  Nobel peace prize winner, credited with saving 1 billion people through better food production.  American agscientist, working all over the world from Latin America to Asia, responsible for the development and proliferation of high yield, resistant wheat.

“More than any other single person of this age, he has helped provide bread for a hungry world,” the Nobel committee said in presenting him with the Peace Prize.

His obituaries tell it all.  He taught and researched at Texas A&M from 1984 on.

The green revolution has often been slammed for causing severe environmental damage.  But tell that to the masses of people around world who are alive today because of it.

“Gary H. Toenniessen, director of agricultural programs for the Rockefeller Foundation, said in an interview that Dr. Borlaug’s great achievement was to prove that intensive, modern agriculture could be made to work in the fast-growing developing countries where it was needed most, even on the small farms predominating there.

By Mr. Toenniessen’s calculation, about half the world’s population goes to bed every night after consuming grain descended from one of the high-yield varieties developed by Dr. Borlaug and his colleagues of the Green Revolution.” – Italics from the NYT obituary.

George P Mitchell

Texas oil man and sustainability?  George Mitchell can lay claim to doing both, in a big way.

He developed the fabulously successful Texas community The Woodlands, the only successful development of the original HUD funded communities of the 1970s.  Now The Woodlands is a thriving energy, biotech and technology economy founded on sustainable and environmental best practices, showing the world what can be done.  

But his big contribution to cleantech was way beyond one town. It was in pioneering the shale gas revolution through combining horizontal drillling and fracking at Mitchell Energy.  But don’t believe me.  Ask the Times Online and Forbes who the father of shale gas is.

And for those of you who missed the shale gas buzz, try this Wall Street Journal Article called Shale Gas Will Rock the World.

Like Dr. Borlaug and the Green Revoluation, shale gas and fracking have been ripped apart in the press for their environmental impact.  And like in the Green Revolution, I’d suggest you ask those whose houses are heated, and whose bills manageable because of shale gas.  Or ask just where you think we’d be without gas post nuclear accidents in Japan and food strikes in the Middle East forcing us to rethink our fuel supply chain?  Gas:  that compromise fuel of the future that everyone loves to hate, but makes up a critical part of every low carbon energy plan.

And then remember who these innovations helped the most, and who will benefit the greatest from cheap abundant food and fuel?  Not the rich in Manhattan or London.  The poorest of the poor in every corner of the world.

As I said before, if we are going to continue growing our economy and not destroying the world while we do it, we’re going to need to mint a lot of guys like these, and realize that every decision big enough to matter in food and energy involves real trade-offs taht we’ll have to face.

PS One final note:  notice that neither of these guys ever took a lick of venture capital 😉