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Cleantech to “Backtrack” in 2013?

Our firm, Kachan & Co., has just published its latest annual set of predictions for the cleantech sector for the year ahead.

To our analysis, 2013 is shaping up to be something of a year of backtracking for the cleantech industry, a year that calls into question some of its traditional leading indicators of health, and one that surfaces long term risk to such cleantech stalwarts as solar, wind and electric vehicles.

Do we think cleantech is finished? Not at all. But much like young Skywalker learned in Episode V, cleantech is about to find out that the Empire sometimes gets its revenge.

In brief, (click here for long version) our predictions include:

Cleantech venture investment to decline –  Expect worldwide cleantech venture capital investment in 2013 to decline even further than it did in 2012, never to return to the previous highs it achieved before the financial crisis of 2007-2008, we believe. Among the factors: the departure of many venture investors from the sector because of disappointing returns, poor policy support worldwide and a lag time in the pullback of equity and debt investment.

But this doesn’t mean the sky is falling in cleantech. Family offices, sovereign wealth and corporate capital are now having more significant roles, filling gaps where traditional VC has played in recent years. It’s a sign the sector has matured, we believe. Fewer VC cooks in the kitchen may indeed impede innovation, but deep pocketed corporate capital should help clean technologies that are already de-risked reach more meaningful levels of scale.

Long term risk emerges for solar and wind – The solar and wind markets suffer today from margin erosion, allegations of corruption, international trade impropriety and other challenges. In 2013, we think poor progress in grid-scale power storage technology will also start to put downward pressure on solar and wind growth figures. Prices per kilowatt hour are falling, yes, but the cost of flow batteries, molten salt, compressed air, pumped hydro, moving mass or other storage technology needs to be factored in to make intermittent clean energies reliable and available 24/7. When also considering continued progress in cleaner baseload power from new, emerging nuclear technologies, natural gas and cleaner coal power, the growth rates for solar and wind appear increasingly at risk.

Clean coal technologies gain respect – We predict 2013 will be the year a new set of technologies will emerge aimed at capturing particulate and CO2 emissions from coal fired power plants and help clean coal technologies begin to overcome their negative positioning. The barrier to capturing coal emissions has been cost and power plant output penalties. Our research has identified encouraging new technologies without such drawbacks, and we think the world will begin to see them in 2013. China is expected to target domination of the clean coal equipment market, like it does already in many other cleantech equipment categories.

The internal combustion engine strikes back, putting EVs at risk – Important innovations quietly taking place in internal combustion engines (ICE) could further delay the timing of an all-electric vehicle future, we think. In 2013, unheard-of fuel economy innovations in ICEs will enter the market, including novel new natural gas conversion and heat exchange retrofits of existing engines aimed at dramatically lessening fuel needs. Some of these technologies, when combined, claim to be able to reduce fuel costs by 90%. That could push out the timing of EV adoption.

Cleantech adoption in mining – Notoriously conservative mining companies and their shareholders are starting to realize that the capital expenses of new clean technologies can be offset by reduced operating costs and the potential for new revenues. In 2013, we predict more adoption of cleantech innovation in mining, in areas such as tailings remediation, membrane-based water purification, sensors and telematics, route optimization software intended to lower fuel and equipment maintenance costs, and low water and power hydrometallurgical and other novel processes for mineral separation.

Big ag steps up and cleans up – We estimate that 2013 will be the year the world’s leading agricultural companies embrace new innovation in significant ways. Expect accelerated corporate investment, strategic partnership and agricultural M&A in 2013, as agricultural leaders race to meet consumer demand for cleaner, greener ways of producing food, having weathered intense consumer GMO-related and other backlash.

Want more rationale & data? Read our predictions for cleantech/greentech in 2013 in their entirety.

Agree? Disagree? Weigh in on our original article here.

Fifty Years

Earlier this month, I turned 50 years old.  Such milestones are natural occasions for reflection.

Beyond recalling many of the phases and individual episodes of my life, my reflection included a consideration of how the world had changed in the 50 years in which I had lived.  And, naturally, given my profession, I pondered what it would have been like to have been a “cleantech” practicioner 50 years ago, in 1962.

Frankly, it’s not really possible to imagine “cleantech” back then.  50 years ago, there wasn’t much “clean” and there wasn’t much “tech”.

In the U.S., the Clean Air Act and the Clean Water Act hadn’t been passed, and there wasn’t even an Environmental Protection Agency.  Silicon Valley was still mainly apple orchards, and computers less powerful than your smartphone barely fit into large warehouses.

In the energy sector, the U.S. still dominated the petroleum industry.  Not only did Americans consume more petroleum than anyone else (accounting for about 40% of world demand), U.S. oil production was still a major factor, representing almost 30% of worldwide production.

The oil industry’s operations would still have been very recognizable by John D. Rockefeller:  production was mainly from “conventional” onshore seesaw pumpers dotting the countryside; remote locations such as Alaska hadn’t yet been touched, nor had any material production yet been achieved from offshore wells.

Other than perhaps by watching the recently-released “Lawrence of Arabia”, few Americans paid much attention to the deserts of the Middle East in 1962.

Though unnoticed by most Americans, important forces in the oil industry were already beginning to shift in the early 1960s.  Although Texas oil production had been decisive in fueling the Allied victory in World War II just two decades previously, by 1962, the U.S. had become a net importer of oil.  Yet, only King Hubbert projected a future waning of American supremacy in oil production.

Oil prices in 1962 were a little less than $3/barrel, largely due to the price-setting powers of the Railroad Commission (RRC) of Texas, then still the source of a significant share of world oil production.  When a hitherto little-noticed group formed in the early 1960s called the Organization of the Petroleum Exporting Countries (OPEC) assumed the dominant influence in pricing oil a decade later, the world would change forever, as oil prices would never again be anywhere near below $10/barrel.

It’s almost quaint to summon up memories of the oil sector of the era.  Remember what filling up at a gas station was like in the 1960s?  The attendant would come out, put the nozzle in the tank (always with the filler behind the rear license plate), cheerfully wipe the windshield and ask “may I check your oil?”.  Looking out the window, I remember seeing “29.9” on the gas pumps.  That’s 29.9 cents per gallon — which seems almost surreal to us now, but remember, oil prices were then only a few percent of what they are today.

Of course, given the now-unbelievably appalling gas mileage of those Detroit beasts, usually under 10 miles per gallon, you still had to fill up about as often then as you do now.  Back then, it was all about horsepower — it certainly wasn’t about efficiency, nor about cleanliness.  (Nor, for that matter, reliability.)

Every once in awhile these days, I find myself behind a 1960s-vintage car at a stoplight, most often on a sunny summer afternoon.  When the light turns green, I am left in a thin cloud of light bluish smoke and the fragrance of octane and unburned hydrocarbons.  Odors of my youth.  You don’t see and smell that anymore — and I don’t miss it.

Thank goodness for a plethora of cleantech innovation during the past decades:  unleaded fuels, pollution controls and fuel injection systems.

And, let’s not forget that these advances were pushed by, only happened because of, foresightful proactive policies.

While the financial bonanzas and corporate/family dramas enabled by oil discoveries and production had thoroughly captured the American imagination by the early 1960s — consider everything from “Giant” to “The Beverly Hillbillies” — natural gas in 1962 was an afterthought.  Other than some use for power generation in Texas and Oklahoma (where there was no local coal resource), natural gas was mostly flared at the wellhead.  In many ways because (and many people now forget this) natural gas prices were then regulated at depressed levels, the companies that produced gas as a side-consequence from oil production didn’t see much value in making the investments necessary to collect it and transport it to markets.  In fact, natural gas was widely considered a nuisance in 1962.

Certainly, gas is no longer considered a nuisance.  In fact, it’s now being touted by politicians across the U.S. as the Godsend:  providing lower energy prices, lower emissions, higher domestic employment and reduced dependence on foreign energy sources.

No, the oil/gas industry — and those two fuels are today inextricably intertwined — is now much more aggressive in capturing and processing every Btu that courses through the markets.

In the late 1960s, our family lived in the Philadelphia area, and I remember being awed – almost scared, really – by the immense flames emitted by the refinery near the mouth of the Schuylkill River.  All those now-valuable hydrocarbons…gone, wasted, up in smoke.  You don’t see that anymore at refineries, thankfully.

Oil company practices have massively changed in the past 50 years to capture everything of possible economic value.  Of course, that’s the effect of a 30x increase in oil prices, driven by a worldwide search and race to find and produce new reserves to replace five decades’ worth of depletion of much of the cheap/easy stuff in the face of a tripling of global oil demand (mostly from outside the U.S.), counterbalanced by technological progress on a host of fronts over the span of five decades.

Today, oil is pretty consistently trading between $80-100/barrel, and while U.S. oil production has rebounded a bit to approach early 1960s levels, American production now accounts for less than 10% of world oil production.

But think about how low U.S. oil production would be and how high oil prices might be today if not for offshore oil production, directional drilling, 3-D seismic, and an untold number of other innovations produced by the oil patch in the last half-century to enable production from hitherto undeveloped places.

Of course, beauty is in the eye of the beholder, and not all of these developments are viewed positively by everyone.  The current debates about fracking and development of the Alberta oil sands would have been unimaginable in 1962.  At the time, fracking barely existed as a practice, and the Alberta oil sands were then hopelessly uneconomic as a source of fuels.  Moreover, there was virtually no environmental movement to give voice to the concerns of citizens.

It wasn’t really until Rachel Carson published Silent Spring just a few weeks after I was born that much attention was paid to pollution.  Later in the decade and into the 1970s came the grassroots emergence of the environmental groups, such as Greenpeace and the Natural Resources Defense Council.

If you are about my age or older, you may well remember this 1971 commercial.  The tagline (“People start pollution, people can stop it”) and the image of the Native American shedding a tear remain indelible decades later.

Before this, there was virtually no accountability placed on emitters, and anyone could pretty much dump whatever they wanted, wherever they wanted, whenever they wanted.  And, in the early 1960s, no set of interests benefitted from ongoing inattention to environmental considerations in the U.S. more than the coal sector.  For those with coal interests, the times before environmentalists were truly the glory days — and in 1962, the future for coal in the U.S. at that time was terrifically bright.

Sure, trains had just moved from coal steam to diesel-electric, but over half of all the electricity generated in the U.S. in 1962 was based on burning coal.  With burgeoning demand for electricity (especially to keep pace with the exploding utilization of increasingly-ubiquitous air conditioning), coal was poised for significant growth, as thousands of megawatts of new coal powerplants would be added to the nation’s energy grid each year during the 1960s.

While coal is certainly no poster-child for the cleantech sector today, back in 1962, coal remained a particularly brutish and nasty form of energy.  288 American miners were killed on the job in 1962, and all of the coal burned was subject to minimal pollution control – no electrostatic precipitators or baghouses to capture particulates (i.e., soot), much less scrubbers for sulfur dioxide or selective catalytic reduction for nitrogen oxide emissions.  You pretty much didn’t want to be a coal miner or live anywhere near a coal-burning powerplant, as your health and longevity were seriously at risk.

Indeed, some observers speculate that the uncontrolled emissions from powerplants (not to mention other industrial facilities, such as steel mills) threw up such large amounts of material into the atmosphere that the 1970s became a period of unusually cold temperatures — to the point that many scientists were projecting a future of damaging global cooling.  (Although the then-common theory of global cooling is now mainly forgotten, climate change deniers are quick to employ this prior dead-end of thought as one reason for dismissing the strong likelihood suggested by climate scientists that global warming is probably occurring today.)

Of course, the U.S. still mines coal, lots of it, to fuel lots of coal-fired powerplants.  Production in 2011 was 1.1 billion tons, more than double 1962 levels.  However, employment in the coal industry had fallen by over 40% during the same period.  (And, mercifully, annual fatalities have decreased by a factor of 10.)  The primary factors for these changes:  productivity increases due to new technologies (e.g., longwall mining), lower rates of unionization, and a shift from underground to surface mining (now accounting for nearly 70% of U.S. production).

With respect to the latter factor, Wyoming coal activity has exploded — now representing more than 40% of U.S. production — at the expense of Appalachia, whose coal sector is now but a shell of what it was 50 years ago.  The causes are simple:  the subbituminous Powder River stuff from Wyoming is much more abundant and cheaper to mine, and generally has much lower sulfur content to boot, than what is available from Appalachia.

On a broader level, coal is on the retreat in the U.S.:  while coal still accounts for almost 50% of power generation, this share is dwindling.  It seems as though U.S. coal production levels have plateaued at just over 1 billion tons a year.  While so-called “clean-coal” technologies may at some point provide the basis for a resurgence in the industry, the possibility of future growth certainly seems far from obvious today.

Many legacy coal powerplants – some of which remain in operation from well more than 50 years ago – are fading away.  Tightening emission requirements, particularly on toxic emissions such as mercury, are just one  competitive disadvantage facing coal; coal power is increasingly uncompetitive with cheap and cleaner natural gas powerplants and (in some places) wind and solar energy.

“Wind energy” and “solar energy”:  50 years ago, these would have been oxymorons.  Other than the minute niches of sailboats and waterwell pumping in the Great Plains, a good wind resource had virtually no commercial value in 1962.  At the same time, Bell Labs scientists were wrangling some with solar energy technologies — primarily for satellites – although a lot more attention was being paid to a related device called the semiconductor.

For energy, scientists were mainly working on nuclear power, moving from weapons and Navy submarines to powerplants.  The nuclear era was dawning:  electricity was going to be “too cheap to meter”.

The very first commercial nuclear powerplant, the relatively puny 60 megawatt plant at Shippingport in Western Pennsylvania, had been running for only a few years in 1962, though dozens of nuclear powerplants were just coming onto the drawing boards.  Visionaries were even talking about nuclear-powered automobiles in 1962.  (“Electric vehicles?  Puh-lease.  Batteries are for cheap portable Japanese radios.”)

Perhaps as a psychological defense mechanism to drown out the anxieties associated with potential Armeggedon from a Cold War missile exchange, such was the sense of optimism in the possibilities of the age.

Apparently, no-one could foresee Three Mile Island, Chernobyl or Fukushima at the time.

The future held boundless possibilities.  Back then, who needed to recycle?  To think about efficient utilization of resources?  To care about water quality or air quality?  There was always more and better, somewhere, to be had.  And we Americans would surely obtain it, somehow and someway.  It was Manifest Destiny, ever-onward.

This American philosophy may have confronted its limits early in my lifetime with the ultimate realization, brought home so vividly at the end of the 1960s by the first-ever images of the solitary Earth as provided by the Apollo program, that we’re all utterly dependent upon a finite planet in an infinite sea of otherwise-unpopulable space.  Earth Day followed in April 1970.

To commemorate this first Earth Day, I remember our second-grade class picking up scads of litter along the side of a section of highway.  Upon reflection, I am glad to note how much litter has declined in subsequent years — a case of how values can be reshaped and behaviors can be changed, if people are just a bit more conscious.

That’s a positive take.  However, one can reasonably look back on 50 years of the evolution of the energy sector and say, well, that not that much has really changed in America.

True, the basic structure of American life may not have changed too dramatically.

We still primarily live in single family dwellings, in suburbia, dependent upon cars that look more or less the same, fueled by gasoline available at stations just down the road.  The power grid is still there, powered by central-station powerplants; the light switches and outlets haven’t changed, with refrigerators still in every kitchen and TVs in every living space.

By all measures, Americans are still energy hogs, relative to the rest of the world.

Even so, I would assert that a lot has changed, at both the macro and micro-level, that have consequentially altered the trajectory of resource utilization in America from the path determinedly being travelled 50 years ago.

Admittedly, some of the changes we have experienced are a bummer:  niceties like summer evenings with the windows open are much rarer.  Nevertheless, I claim that most of the changes of the past half-century are positive – and can be attributed to a significant degree to what we now call “cleantech”.

Our energy bounty, improved so significantly by technological innovation, has been achieved while simultaneously improving environmental conditions in almost every respect.  Notwithstanding the substantial increase in carbon dioxide emissions, almost all other manifestations of environmental impact from energy production and use have dramatically improved in the past half-century.  Standards of living enabled by modern energy use, here in America and even more so in the rest of the world, have dramatically improved.

Moreover, the trends for further future improvement on all these fronts are favorable.

With the proliferation of improved technologies such as LED lighting, energy efficiency continues to advance.  Renewable energy continues to gain share:  wind and solar energy represented about a quarter of new U.S. electricity generation additions in 2010.  Citizen understanding of energy and environmental issues continues to become more sophisticated.

Beyond the forces specifically pertaining to the energy sector, a number of broader influences in U.S. society are improving the prospects for accelerating cleantech innovation and adoption.  Entrepreneurship is booming, consumerism is increasingly being called into question, capital markets are more amenable to investment in this sector and more capital is arriving accordingly, and the Internet makes an immense and ever-expanding pool of information freely available to enable better decisions.

Not to mention:  much of the opposition to a transition to the cleantech future emanates from people in generations that are older, that will die out in the next couple of decades, to be replaced by younger generations that are generally more supportive of increased cleantech activity.

So, while it’s easy to get discouraged by the impediments to cleantech progress on a day-to-day basis, over the long-view, it’s pretty apparent that big positive things can happen and in fact are happening.

50 years from now, in 2062, I hope to be alive and well at 100 and still contributing to the cleantech sector.  That may be overoptimistic.  But I don’t think it’s at all overoptimistic that we’ll see more changes, and more changes for the better, in the cleantech realm over the next 50 years than in the previous 50.

Holy Grail 12.0: Is Our Quest At Its End?

I’ve been working with new energy inventions and their creators for almost 15 years now.  I don’t know how many times I’ve heard a new technology described as “the Holy Grail”:  solving all of the world’s problems forever.

Well, here’s the newest one using the Holy Grail cliche:  a supposedly carbon-neutral method of using microbes to convert electricity into natural gas.

Thanks to an article written by Brita Belli of Ecomagination at GE (NYSE: GE), I was pointed to the recently-reported work of a team of researchers led by Alfred Spormann at Stanford University and Bruce Logan of Penn State University.  These researchers have determined that an organism called Methanobacterium palustre, when submerged in water on an electrically-charged cathode, will produce methane (i.e., natural gas, CH4) — supposedly at an 80% efficiency rate.

The carbon-neutrality of this approach stems from (1) using surplus electricity generation from non-emitting wind or solar and (2) the microbe extracts the carbon atom for the methane from the CO2 in the atmosphere.

So, in theory, one can make an infinite supply of a relatively clean fossil-fuel from renewable electricity by sucking carbon out of the air.  And, given the extensive natural gas pipeline, storage and distribution network, this fuel could be used for baseload power generation, traditional space/water heating and cooking purposes, and even transportation (e.g., natural gas vehicles).

The catch:  as is often the case with early discoveries in university labs, the researchers don’t know how to scale the technology and achieve consistent/stable results at commercially-useful levels.  The economics are also highly uncertain.

Don’t hold your breath.  This type of invention could take a very very long time to turn into something that’s viable for the energy marketplace.  As a long-time executive from one of the supermajors once said to me, it takes 12-24 months to really prove something at the next order of magnitude — and in energy, it’s usually several orders of magnitudes of expansion from the laboratory to the field.  Thus, what seems like an overnight success story usually has a decade or more of development behind it.

So, while this discovery might turn out to be the Holy Grail — and it definitely seems worth monitoring — one should not get too excited just yet.  There are a lot of potential hurdles to be overcome, and some of them may not be surmounted.  Even if the technology develops favorably, it’s a long way from being ready for prime-time.

In the meantime, this is the only Holy Grail to which I will pay attention.

Shale gas is starting to affect markets….

The oil gas ratio hit a new record high December 27th with gas trading at $3.11/mmBtu and WTI going for $101.25/bbl yielding an energy ratio of 5.61.   In simple terms this means gas is  trading at the equivalent of $18.05/bbl crude.

The market is starting to notice this rapid shift in natural gas economics.  Back on Dec 10 I mentioned a few of the sectors, such as chemical processing, that would be likely winners due to lower priced gas.  Companies are now starting to announce their plans to build new plants.  Royal Dutch Shell PLC is planing an ethylene plant in the Appalachian region, Nucor is building a gas fired iron plant in Louisiana, Dow Chemical Co. is planning two new chemical facilities in the Gulf coast, and CF Industies is planning to boost its ferterlizer production made from gas.  (WSJ, 12/27/2011, A3) .  All due to relatively low gas prices.  If LNG importers are not able to “reverse to flow” and turn into LNG exporters, then the price of gas can stay low until domestic consumption has a chance to absorb these lower cost supplies.

One of the other sectors that should benefit from the relatively high oil/gas ratio is the CNG (compressed natural gas) transportation buisness.   In October I analyzed Clean Energy Fuels’ [CLNE] stock performance relative to the energy ratio and couldn’t really see any coorelation between the fundamental driver of their business (the oil/gas ratio) and their stock price.   Checking back today I’m still not seeing any sustained improvement in the company’s stock price.  So I’m still looking for the breakthrough in the transportation business.

In other news, shale gas is certainly affecting the price of electricity, both spot prices and prices offered for term contracts for renewables.   In the western US, on-peak spot prices in southern California today were $30.37 $/MWh….lower then they were 30 years ago in 1981 when our company (www.henwoodassociates.com) started producing power.  And the natural gas based market reference price (MRP) used by the California PUC for evaluating renewable projects is off about 15% from the last MRP posted by the CPUC.

While this is happening the solar sector is having problems with oversupply and a softening market.  The oversupply is drivien by the rapid increase in Chinese production (including two IPOs in October and November – Changzhou Almaden and Sungrow Power).   Coupled with  German demand for 2011 reported to be 29% below 2010 levels two German producers, Solar Millennium and Solon SE filed for insolvency this month.  The supply/demand combination is also driving layoff such at those reported at SMA, Suntech, and First Solar.   And stock prices for solar companies, as measured by the solar ETFs KWT and TAN, have dropped by over 60% YTD and their market cap has fallen below the $70 million level that was related to me as a break-even size for an ETF.   In fact, all of the sponsors of sector specific ETFS –  KWT, TAN, FAN, PWND, GRID –  are losing money on their offerings if this is still the break-even number.  Which one will close up first like the progressive transportation ETF did in 2010?

How much of the market woes facing solar producers stems from gas competition?  I’m not aware of any analysis of the relationship of subsidies and RPS mandates to gas prices in the US, but reason tells us there must be some connection beyond a mere correlation of gas prices and solar woes.

I think this is just the start of the disruptions caused by low gas prices.  On a very small scale our company is affected in contract renewals and the prospects of lower electric prices/subsidies for new project development.  Many other businesses will be forced to adapt and potentially sooner then anyone expects.

Originally posted here .

Disclosures – no postions in any securites mentioned.

 

Shale gas drives oil / gas spread to a new record

On January 13, 1994 the ratio(*) of the price of oil to the price of natural gas was 1.14.   Today it hit a record high over this period of 5.26.   Gas traded at $3.28 today, just 21% of the $15.38 / mmBtu it traded for on December 13, 2005.   Shale gas is providing gas in volume at moderate cost driving this record high price disparity.

IMO, the impact of moderately priced gas hasn’t been factored into energy policy to any great extent.   Nor has the balance of the energy market had time to react.  And the media hasn’t realized this is happening.

But there should be many winners – combined cycle generation, CNG vehicles, chemical processing that uses gas, and gas consumers.  Why isn’t there a stamped into new fleet conversions to CNG….it’s way cheaper than gasoline?

The will also be disruption, – coal, climate change strategies, and renewable generation will be impacted.   Why sequester carbon when you can replace a coal plant with a super efficient, super clean, combined cycle plant and emit 50% less CO2?

My prediction for 2012 – electric generation clean tech feels some competitive heat.

(*) The energy price ratio is the price of crude on a $/mmBtu basis divided by the price of natural gas on a $/mmBtu.  The crude prices used are the front month NYMEX contract for WTI crude at Cushing Oklahoma.  The $ per barrel price is converted to $/mmBtu using 5.8 mmBtu / bbl.   The gas price used is the front month NYMEX contract for natural gas at Henry Hub Louisiana.

Originally posted here

A World of Hurt

Seemingly generating nary a ripple here in the U.S., the International Energy Agency (IEA) just issued its 2011 World Energy Outlook — its annual synopsis on the future of the global energy sector. 

If ignorance is bliss, then we’re certainly blessed by generally not bothering to confront the pretty-alarming conclusions of the report. 

A pastiche of the highlighted snippets in the Executive Summary, when stitched together, provide a glimpse of the world we’re now choosing to invent for ourselves and future generations:

“There are few signs that the urgently needed change in direction in global energy trends is underway.”

“Global investment in energy supply infrastructure of $38 trillion (in year-2010 dollars) is required over the period 2011 to 2035.”

“The age of fossil fuels is far from over, but their dominance declines.”

“The cost of bringing oil to market rises as oil companies are forced to turn to more difficult and costly sources to replace lost capacity and meet rising demand.”

“Factors both on the supply and demand sides point to a bright future, even a golden age, for natural gas.”

“Coal has met almost half of the increase in global energy demand over the last decade.  Whether this trend alters and how quickly is among the most important questions for the future of the global energy economy.”

“The dynamics of energy markets are increasingly determined by countries outside the OECD.”

“All of the net increase in oil demand comes from the transport sector in emerging economies, as economic growth pushes up demand for personal mobility and freight.”

“China’s consumption of coal is almost half of global demand and its Five-Year Plan for 2011 to 2015, which aims to reduce the energy and carbon intensity of the economy, will be a determining factor for world coal markets.”

“Russia’s large energy resources underpin its continuing role as a cornerstone of the global energy economy of the coming decades.  Russia aims to create a more efficient economy, less dependent on oil and gas, but needs to pick up the pace of change.”

“International concern about the issue of energy access is growing.  Around $9 billion was invested globally to provide first access to modern energy, but more than five-times this amount, $48 billion, needs to be invested each year if universal access is to be achieved by 2030.”

“We cannot afford to delay further action to combat climate change.”

“New energy efficiency measures make a difference, but much more is required.”

“Widespread deployment of more efficient coal-fired power plants and carbon capture and storage (CCS) technology could boost the long-term prospects for coal, but there are still considerable hurdles.”

“Events at Fukushima Daiichi have raised questions about the future of nuclear power.”

“The wide difference in outcomes between [the scenarios analyzed in this report] underlies the critical role of governments to define the objectives and implement the policies necessary to shape our future.”

When observing the dysfunctional nature of the current political ecosystems in the U.S., in Europe, and in world affairs (e.g., the United Nations), and the increasing imperative for economic austerity to resolve the shortfalls in public coffers, it is hard to believe that governments (other than autocratic places like China and Russia) will be able to take any meaningful action to nudge the energy sector from its trajectory of “muddle-along.”  The chaos that IEA describes in the world energy scene will thus likely only intensify.

Lots of challenges in this world.  But, then again, lots of opportunities too.

The Story of Ethylene… now starring natural gas

It’s a $160 billion a year market you’ve probably never heard of.

Ethylene, the intermediary chemical compound from which popular plastics and many other high value products are derived, has traditionally been made in the petroleum industry via steam cracking, an energy- and carbon-intensive process. It’s the most produced organic compound in the world; annual global production is in the hundreds of millions of tons. To meet ever-increasing demand, production facilities are being added globally, particularly in the Persian Gulf and China.

The problem is, it’s complicated and expensive to make ethylene. And, or course, petroleum reserves are waning.

For decades, chemical engineers have been pursuing cost effective ways to make this key industrial compound from other things. Now, a handful of companies think they’re honing in on ways to make ethylene from the methane in natural gas with commercially viable processes.

If making ethylene from methane turns out to be possible at scale, it could be a watershed for the chemical and petroleum industries. Ethylene from methane could potentially be much less expensive, given that natural gas is one-fifth the price of oil. And its supply could be more sustainable, given the massive and growing size of natural gas reserves.

The methane conversion space is more crowded than one might expect. Kachan & Co. recently performed a consulting project for a client that uncovered and profiled 24 announced and stealth mode startups in this space, along with 19 blue chip companies and 6 universities and government labs. The project involved interviews with company and research personnel, a review of venture investment data, interviews with investors and trade organizations, an intellectual property patent search and a literature review that included media and scientific sources.

Here are some of the more interesting of the 24 small organizations we found at the forefront of methane-to-ethylene commercialization today:

Co. Name HQ Website Type Dev. Stage Tech Description Partners or Alliances Investors
Carbon Sciences Santa Barbara, California www.carbonsciences.com Public Experimental phase Reforming methane to syngas to fuel using advanced catalysts. Emerging Fuels Technology (EFT) & University of Saskatchewan N.A.
Fertilizer Research Institute Pulawy, Poland www.ins.pulawy.pl  Polish national research lab Unknown Currently operating a pilot methane to ethylene facility based on oxidative coupling of methane (OCM). Governmental facility N.A.
LanzaTech Auckland, New Zealand www.lanzatech.co.nz Private Prototyping, commercialization in 2013 Gas fermentation process that produces both fuels and high-value chemicals from low-cost resources such as steam-reformed methane. N.A. Series A investment from an investor consortium led by Khosla Ventures; Series B financing led by Qiming Ventures.
Quantiam Technologies Alberta, Canada www.quantiam.com Private Research & development  Working on a feasibility study on a novel catalyst for methane conversion. BASF, IRAP BASF ($3M), Ursataur Capital Management ($3M), Small investors ($2.3M)
Siluria Technologies San Francisco, California www.siluria.com Private Research & development A “revolutionary approach combining the latest developments in nanomaterial science, biotechnology and chemical engineering.” New type of oxidative coupling of methane (OCM) process. None disclosed Wellcome Trust, Alloy Ventures, ARCH Venture Partners, Kleiner Perkins Caufield & Byers, Altitude Life Science Ventures, Lux Capital, Presidio Ventures. $13.3M Series A. $20M Series B.

Excerpt from private Kachan & Co. study of 24 methane to ethylene companies, October 2011

The companies we found worldwide pursing methane-to-ethylene arranged themselves into rough groupings by type:

  • IP Provider: Develops IP related to methane-to-ethylene, does not go beyond IP phase
  • Technology Provider: Developed a technology and a prototype, intend to license to other companies (e.g. Carbon Sciences)
  • Application Provider: Developed a technology, and sells engineering services to build facilities (e.g. BCCK) or manufacture technology (e.g. Rentech)
  • Technology Operator: Goes beyond the licensing and directly operates facilities (e.g. CompactGTL)

Global oil and gas majors have been working on the challenge of methane to ethylene for years themselves, with dozens of patents issued. But none have cracked the code of profitable commercial scale production.

Global oil majors and number of patents in converting methane to ethylene

Chevron 80
Exxon Mobil 72
Shell 54
BP 29
BASF 17
Nippon Oil 14
Innospec 10
Lubrizol 9
Celanese 7
Saudi Basic Industries Corporation 5
Total Raffinage 5
General Electric 5
Honeywell 3
Cosmo Oil 3
Eni S.p.A. 3

Source: IP Checkups, October 2011

High value chemicals like ethylene from natural gas would be even more compelling if the gas was derived from renewable, biological sources, and not from conventional reserves or fracking, as today. Small volumes of renewable methane are available today from anaerobic digestion and landfill gas. But large volumes are promised by a new wave of companies commercializing thermal gasification and other approaches to creating bio natural gas from wood waste and other widely available feedstocks (see the Kachan report The Bio Natural Gas Opportunity).

Complicated science aside, it won’t be easy for companies to bring methane to ethylene innovations to scale. Ethylene and other high value chemicals today are an oligopoly, a market hard to crack. Any new process will likely need to be championed by one of today’s 5 big suppliers as a partner to enter the market. Then there’s the culture clash between small, fast-moving venture backed companies seeking quick exists and the notoriously slow, conservative petroleum and chemical industries.

But those challenges are likely surmountable, according to the bets that are being made by name brand cleantech venture backers of the companies in this space.

Originally published here. Reproduced by permission.

Cleantech Investing: A View From 21

Ordinarily, I let my fellow blogging colleague Neal Dikeman of Jane Capital take the lead in covering cleantech IPOs and publicly-traded stocks. 

However, I recently received the May 2011 newsletter from 21Ventures, and found the commentary by David Anthony on cleantech public equities an interesting complement to Neal’s most current take — sufficiently so to expound upon it herein.

According to David, “by the end of Q1 2011, we will have seen the bottom of cleantech investing and valuations”, with three key subpoints:

1.  “Oil seems stuck above $100/barrel.”

2.  “Nuclear energy may be too ‘radioactive’ as a source for baseload grid power.”

3.  “Renewables will fill the void left by dwindling nuclear capacity.”

It’s a nice newsletter, well worth reading, though I think David’s analysis is a bit too sanguine.  Oil prices will remain volatile, and each time they go down somewhat, the rank-and-file will think (again) that our energy crisis has passed, thus reducing the pressure for change or action in moving towards cleantech.  David overlooks the growing sense of many that natural gas from shale will represent the answer to most if not all of our future energy supply challenges for years to come, thereby mitigating the need for renewables and/or energy efficiency.  And, David neglects to discuss the future role of coal, which I believe will hang on for a long time to come, and whose benefactors will rain on the parade of cleantech as much as possible whenever possible to elevate coal’s relative position in the energy scene. 

All of these factors will mean that cleantech investing will still experience more than its fair share of bumps along the road.  It will be a tough and choppy market to navigate, and I don’t think the public markets lend themselves well to companies unless and until they have very sizable and stable earnings — which most purely cleantech firms (including publicly-traded ones) do NOT have.  Thus, cleantech is an industry that, for awhile, will mainly be capitalized through private equity and venture capital markets, with liquidity events through sales to major corporate acquirers that have sufficient scale to float well on public markets, rather than IPOs for the most part.

But, I do share David’s closing summation:  “We have always believed that dwindling low-cost fossil fuel reserves, climate change, growing middle classes in emerging markets, and urbanization will converge to create some of the best investment opportunities in our lifetime.”  I think Neal would share this conclusion too.

Why you need to pay attention to bio natural gas

At the bustling intersection of renewable energy mandates, carbon emissions regulation, economic growth and legacy infrastructure lies untapped potential for producers of bio natural gas (BNG).

It’s new. It’s important. It’s certainly not to be confused with plain biogas. And particularly if you work or have invested in solar, wind or energy storage, you need to know about it.

BNG is known by other names—like bioSNG, renewable natural gas and biomethane—but as a biologically-created compound chemically similar to commercial fossil-based natural gas, it’s poised to make an impact on the natural gas marketplace and as a new entrant in the world of next generation advanced biofuels.

By BNG we mean a refined biomethane, typically obtained today from sources like landfills and dairy waste in a raw form via anaerobic digestion, and, in very limited quantities today, upgraded to a quality similar to its analogous fossil natural gas. In the near future, a small cadre of emerging vendors promise large quantities of pipeline-injectable BNG using thermal gasification from agricultural and food processing waste, forestry by-products, source-separated organic municipal solid waste and biosolids from wastewater treatment facilities.

By our definition, BNG must be of a high enough quality to be:

  • Combusted in any system that would use fossil fuel natural gas, including utility-scale power plants
  • Injectable into natural gas pipelines for transportation, and
  • Compressible in LNG/CNG forms for transportation fuels

BNG is not synonymous with raw synthetic gas, or syngas. Syngas is combustible and often used as a fuel source or as a process intermediary, albeit with a lower energy concentration than natural gas or BNG, but syngas does not meet the three bulleted criteria above.

As a drop-in replacement for natural gas, the biggest impact for BNG could be on its green energy brethren—traditional intermittent renewables like wind and solar. As the installed base of intermittent renewables increases, BNG could find itself playing an intermittency smoothing role, with “green” dispatchable resources like NGCC/IGCC turbines powered by BNG forestalling the need for other renewable storage. If solar and wind are peaky today, they could be made baseload, and still 100% renewable, by combusting BNG in utilities’ existing natural gas plants.

For that matter, with wide-scale BNG, would utilities even need solar and wind? An analysis by Kachan & Co. in conjunction with three North American gas utilities suggests BNG could emerge as the lowest cost renewable power in the future, once available at scale. Utilities might be able to avoid putting steel in the ground for capital-intensive solar or wind farms if they could simply source fungible, renewable gas from their exact same pipeline today and meet or exceed clean energy standards—even if the gas costs a premium over today’s fossil-based natural gas. That’s disruptive.

Technology Capacity Factor Input fuel costs ($/MWh) O&M costs ($/MWh) Cost of Capital ($/MWh) Unlevelized cost
of production ($/MWh)
NGCC (BNG) 85% $65.27 $2.83 $10.13 $78.23
NGCC (Fossil NG) 85% $44.23 $2.83 $10.13 $57.20
Coal Plant 85% $15.79 $8.91 $28.33 $53.03
NGCC w/CCS 85% $51.43 $5.13 $21.43 $77.99
Coal w/CCS 85% $23.36 $15.39 $52.95 $91.70
Biomass to Power 90% $33.56 $15.85 $58.54 $97.45
Biomass Co-firing 85% $28.64 $19.10 $66.50 $103.74
Wind 35% $ – $13.25 $87.90 $101.15
Solar Trough 22% $ – $24.35 $267.75 $292.10
Solar PV 25% $ – $12.10 $194.60 $210.70
Table 8 from The Bio Natural Gas Opportunity by Kachan & Co. Electricity generation cost comparison by fuel/genset type. Source: Vendors, US DoE, EPRI, California Energy Commission, Kachan analysis. See Appendix 2 of the report for detailed assumptions behind this table.

 

We had a chance to look at leading BNG companies for a report on the topic. Some of these companies are still running under the radar and don’t yet have web sites. If BNG produced by vendors profiled in this report and elsewhere can reach scalability and indeed leverage the global natural gas infrastructure, BNG could become one of the most valuable renewable fuels for electric power generation and other applications.

While carbon emissions policies remain in flux given the world economic situation as of this writing, BNG could also represent potentially massive carbon savings for end-users of natural gas, providing a significant commercial opportunity for entrepreneurs, investors, and potential strategic partners, including natural gas suppliers and utilities.

Additionally, an opportunity exists for BNG to serve as a drop-in biofuel that can leverage new and existing natural gas and power generation infrastructure, while using renewable biomass feedstocks with little destructive exploration that satisfies existing renewable energy mandates and carbon emissions rules.

Other findings of our research include:

  • Policy support expected – Existing renewable energy mandates in the US and elsewhere already recognize biogas as an acceptable fuel source. A new Clean Energy Standard from Washington (a new US national RPS) could create an energy portfolio mix cementing natural gas as a bridge fuel. These could create a template for other countries and an incentive infrastructure for BNG.
  • Taking pressure off transmission – While coal-fired power plants will need to be modernized in most developed countries, electricity transmission lines are more problematic. Building new electrical transmission lines is litigious, costly and slow. Producing power from BNG transmitted through the existing natural gas grid would lessen the pressure to build new power transmission to satisfy renewable energy mandates.
  • Benefitting from natural gas’ growth… Both developed and developing nations are adding new gas-fired generation capacity quickly, and seeing growth in natural gas vehicles in response to rising oil and gasoline prices, and, as a result, will be turning towards natural gas more frequently.
  • … that’s not expected to slow anytime soon – Increasing exploitation of non-conventional shale gas fields onshore means that more capacity and more gas transmission infrastructure will come online in more diverse locales.
  • Inside the fossil fuel timeline – Emerging BNG technologies such as biomass gasification could still be a decade away in scale, but a new offshore gas field discovered today also takes 10-13 years to bring online, suggesting BNG has a market window.
  • New partners arise – In addition to traditional fossil fuel providers, BNG technology should incentivize a whole new cohort of “raw fuel” producers, especially in the forestry sector—hard hit by the economic downturn that dried up demand for its main products of lumber and paper, it could find new vigor as a producer of biomass fuel.

With BNG technologies still in their early stages and energy prices ramping up from increasing demand and political turmoil, there are many twists and turns ahead for this segment of the green energy market, but its positioning could be dead-center of the energy world’s sweet spot: a fungible, storable and renewable fuel that moves and burns like natural gas.

Kachan & Co.’s new report, The Bio Natural Gas Opportunity, equips the reader to better understand the potential market impact of BNG, identifies benefits and market barriers, and makes recommendations for removing these barriers and seizing opportunities in this emerging technology.

Originally published here. Reproduced by permission.

 

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.

“Power Hungry” is Filling, But Not Fully Satisfying

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Gas Chamber

Recently, the U.S. Chamber of Commerce released its prescription for U.S. energy policy.

“Facing Our Energy Realities:  A Plan to Fuel Our Recovery” is a more balanced document than what I might have expected.  Given the Chamber’s ardent undercutting of all efforts to deal with climate change in a thoughtful manner during the last Congress — see, for instance, this Washington Post article from late 2009 profiling how Apple (NASDAQ: AAPL) decided to leave the Chamber due to its strident positions — I was prepared to title this post “Chamber of Horrors”, expecting the Chamber to call for continued status quo on energy, only perhaps a little better.

The outline of their recommendations is as follows:

I.  Maximize America’s Own Energy Resources:  Promote Energy Efficiency.  Produce More Domestic Energy.  Improve Access to Federal Lands.  Allow Development of New Resources.

II.  Make New and Clean Energy Technologies More Affordable:  Commit to Innovation.  Demonstrate New Technologies. 

III.  Eliminate Regulatory Barriers Derailing Energy Projects:  Create A Predictable Regulatory Environment.  Streamline, Not Weaken, Environmental Reviews.  Prioritize Siting and Permitting of Interstate Transmission.

IV.  Do Not Put America’s Existing Energy Sources Out of Business:  Ensure Adequate Supplies of Energy for a Smooth Transition. 

V.  Encourage Free and Fair Trade of Energy Technologies and Resources Globally:  Promote Free Trade.  Eliminate Trade Barriers.  End Discriminatory Content and Trade Policies. 

To be sure, the primary message of the Chamber in this pamphlet is “more”:  especially, more production of fossil fuel based energy from domestic sources.  And, to be sure, this stance is being greatly enabled by the recent promise of a surge in natural gas available by producing from heretofore uneconomic shale plays due to advancements in new drilling/extraction technologies.

I have nothing against producing more natural gas domestically, particularly if it can be economically used to displace more environmentally-damaging coal-based energy or strategically-damaging petroleum-based energy.  However, we can’t put all our eggs in the natural gas basket — if for no other reason than we’ll end up painted in a corner someday from over-reliance on gas, just as we’re painted in a corner now from over-reliance on coal and oil. 

I’m glad to see that the Chamber has made some room and recognition available for energy efficiency and renewables (e.g., by supporting the suggestion of a Clean Energy Bank) in its public platforms, but the Chamber is clearly full of gas.

Predictions for cleantech in 2011

It’s December, and time for an annual reading of the green [tech industry] tea leaves. What will the new year have in store for cleantech?

From our standpoint at Kachan & Co., 2011 could be a strong year for the global clean technology sector. Seemingly, the markets have been correcting themselves in 2010; valuations are returning to rational P/E multiples, price signals are emerging again after massive government investment in cleantech, early stage deals seem to be returning, corporate investment is flowing, new funds are being announced everywhere. Outside the U.S., which is having an increasingly hard time supporting the sector, cleantech is alive and well, even in exits… albeit mostly in China.

While we’re calling a positive 2011 for the industry, the largest risk, to cleantech and every sector in 2011, will continue to be the spectre of another global economic slide: another massive economic “stair-step” downwards prompted by the continued and growing mismatch between global energy supply and demand, food supply and demand, ever-increasing debt and trade deficits, currency revaluation or political/military developments. Any one, or combination of these, could result in another 2008-scale financial crisis, or worse.

Yet, if none of the above make themselves felt, 2011 could be a solid year for worldwide cleantech. Here’s why, in our analysis.

Sustained worldwide VC investment in cleantech in 2011
Predictions of cleantech’s death, or bubble, are exaggerated, we believe. Kleiner Perkins may be looking to scale back its cleantech investing. But that doesn’t mean cleantech companies won’t be getting funded, or that the sector is on the downside of a bubble, as some have called it. The big drivers of cleantech remain: resource scarcity and the drive for greater efficiencies, the desire for energy independence, and (dare we say it?) climate change—the latter of which has taken a back seat of late. We predict these drivers—particularly the real or perceived scarcity around oil, rare earth elements and other commodities—will be felt even more acutely in 2011, especially as the Chinese middle class expands, further cementing the demand for and the market validity of clean technologies.

Much media attention was given to a downturn in cleantech investing in the third quarter of this year, in particular North America’s share of it. But doomsayers missed that there was still a fourth quarter in 2010 to report. And that worldwide, cleantech investment hasn’t fared that poorly in 2010. Indeed, as tracked below, 2010 venture investment in cleantech, even simply up to and including 3Q10, has already exceeded that of all of 2009.

Cleantech Investment 2010 YTD

Venture investment in cleantech in 2010, up to and including 3Q10, already exceeded that of all of 2009. The full 2010 total will be at least $1B higher when fully tallied and reported in 2011. That'll make it the second best year on record—hardly a bubble that's burst. Source: Cleantech Group

We believe venture investors will continue to chase opportunities in cleantech in 2011, investing robust amounts from record-level funds raised recently around the planet. Make no mistake: there’s plenty of capital being allocated for cleantech in 2011. Another $500 million has just been announced from the California Public Employees Retirement System (CalPERS). Hony Capital in China is closing in on a new 10 billion RMB ($1.5 billion) fund, and there’s a new €9b ($12.4b) NER300 fund for cleantech in the EU. And that’s just three of dozens announced in the last month.

Yes, there are concerns about exits and long time horizons in cleantech, but 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.

Venture capital will continue to cede importance to corporate and non-institutional capital
As important as venture numbers are, they are no longer the single barometer of the state of worldwide cleantech investment. They don’t factor in most angel, project finance, private equity, sovereign and other sources of capital that are now making an impact in cleantech worldwide.

One of the most important sources to watch is corporate venture funding. Look for large companies to invest billions in cleantech in 2011. In recent weeks, Suez Environnement, affiliated with GDF Suez, created a venture capital fund called Blue Orange to invest primarily in waste management. GE invested $200 million+ in a handful of cleantech companies under the auspices of a competition. Corporations continue to form corporate venturing arms, driven not just by returns, but by associated corporate social responsibility (CSR) benefits.

Also anticipate an increase in corporate-led cleantech M&A activity in 2011, which reached record levels in 2010. Expect cash-laden firms to pick off even more leading technologies and concepts, as in recent transactions like Constellation buying CPower, and Sharp’s purchase of Recurrent Energy.

A return to early stage venture investments
We predict a return to early stage venture capital investing in cleantech in 2011. Already, in the last few months of 2010, data shows the pendulum has begun to swing back to early stage deals. In the third quarter of 2010, 46 percent of all cleantech deals worldwide were early stage deals, according to latest data.

Why? Investors are no longer piggybacking on U.S. government grants and loan guarantees, which had skewed investment into more mature cleantech companies. Government stimulus funds earmarked for cleantech by the U.S. and other countries globally are now largely allocated. In 2011, venture investment in cleantech will return to what it does best: seeking out emerging early stage technologies and teams that promise good multiples, and will be less influenced by governments putting large amounts of capital to work themselves. Funds are still being raised. And those funds will need to be invested.

Energy efficiency emerges as the clear rock star of cleantech
Yes, we have a broader definition of energy efficiency than others (see our cleantech taxonomy here). But efficiency—including smart grid, where we expect continued massive investment and corporate activity—really just got underway in 2010, so expect big things in 2011. To wit: GE’s huge announcements, investments and acquisitions in the third quarter of 2010. And just over a month ago, Russia unveiled a massive energy efficiency plan, given that the country apparently wastes as much energy in a year as the French economy consumes.

There were some calendar quarters in 2010 where more venture investment went into solar than efficiency, but in 2011, look for efficiency to become the clear dominant investment theme as investors continue to seek less capital intensive efficiency plays and eschew solar, where company valuations have been swinging wildly in 2010 from continued supply/demand and international subsidy havoc.

Anticipate a Darwinian winnowing of efficiency companies in 2011—partially because of concerns about differentiation, and partly because of the long sales cycles of utilities that are only starting to become appreciated to some startups. There will be failures in 2011 in certain advanced metering companies and other firms engaged in death-by-trials with utilities, and some winners among favorite brands like OPower, EnergyHub, Tendril, Silver Spring, eMeter, AlertMe, Energate. The deep-pocketed stand the best chance of surviving.

Biofuel investment could reach former highs
If economic growth continues in 2011, oil prices will rise, making renewables more cost competitive. And after several years of relatively inexpensive oil, we predict an upswing in biofuels investment in 2011, specifically, that will catch some unaware; investors still smarting from crop-based ethanol and biodiesel, cellulosic ethanol and algal oil disappointments may not see adrop-in biofuels revolution at hand.

The excitement will not be over cellulosic ethanol, which we saw disappear from headlines in 2010. Cellulosic ethanol may even disappear from investors’ portfolios altogether in 2011, if the U.S. EPA lowers its cellulosic ethanol mandates yet again. We believe the recent jump in the share price of Amyris (NASDAQ:AMRS) is representative of a larger awakening to the transportation, storage, energy balance and fungibility benefits of drop-in biofuels, i.e. chemically similar diesel, jet fuel, butanol, bio natural gas and others.

In biofuels in 2011, as elsewhere in cleantech, look for biology to trump chemistry. And for the likes of Amyris, Codexis (NADAQ:CDXS) and Gevo to make more commercial progress than cellulosic companies Range Fuels, Coskata and Mascoma.

Nuclear surprises, but not in U.S.
Expect to hear about more and more nuclear innovation in 2011, as the industry begins cautiously testing new science after decades of relative inactivity. However, don’t expect the U.S. to lead in either the science, the trials or the adoption: watch Asia, Europe and Canada as centers of innovation and where trials of new nuclear tech will be performed in 2011. Companies to watch include Thorenco (new reactor designs based on thorium fuel), Thorium One (thorium fuel for existing reactors, trials scheduled to start in existing reactors in 2011), Kurion (glass encasing of nuclear waste), General Fusion and others. Nuclear development will remain stalled in the U.S. in 2011 in regulatory and public opinion purgatory while the rest of the world passes it by.

Recycling and mining will attract more investment
Rising commodity prices have been quietly making the economics of recycling and recovery of trace materials more commercially viable. Silver almost tripled in price in 2010. Gold doubled. Companies that recover and reprocess materials, such as scrap metal, used lithium batteries or mining tailings, will be companies to watch in 2011. BacTech Mining (CVE:BM), Simbol Materials, Buss & Buss Spezialmetalle, DeMetai Technologies, MBA Polymers and GFL Waste & Recycling (which just got a$100m private equity infusion) are examples of companies that could benefit from commodity prices that will continue to rise in 2011. That’s barring a macro-economic downturn that, like everything else, whacks the price of commodities (gold bugs note: metals are not immune to market gyrations! Gold fell substantially in the 2008 global downturn).

Natural gas emerges to threaten solar and wind for utility renewable power generation
Renewable natural gas? Today it’s fossil-based. But what if chemically identical natural gas (not just messy syngas) could be made inexpensively from practically free feedstock? Such gas, if indistinguishable from petro-based natural gas, could be transported in existing pipelines and sold at a premium to industrial customers like power utilities anxious for a cheaper renewable source than solar and wind. And, if burned in existing IGCC / NGCC plants, such power could be baseload 24/7 renewable energy. Look for scientific innovation in natural gas in 2011, increased political support for it as a transitional “cleaner” fuel, a folding in of it into renewable energy standards and general cleantech industry buzz over it being an important new wagon to hitch to.

China becomes the most important market for cleantech: if you’re not selling in China, you won’t matter
Expect the leading cleantech IPOs of 2011 to continue to be on the Shenzhen and Hong Kong exchanges, as they were in 2010. Central government support of Chinese clean technology companies on Chinese exchanges will continue to give the country’s solar, wind and other vendors advantage in access to capital, growth and, therefore, ability to scale and conquer worldwide.

Kachan & Co. made a case this past August that China had assumed the worldwide leadership position as a cleantech market and supplier. This week, Ernst and Young asserted the same thing. So it’s time to underscore it again: if you’re not selling into China in 2011, you’re missing the biggest market for your clean technology product or service.

in 2011, the leadership of cleantech vendors and service providers will be determined by the extent of their traction in China. It’s the largest and the fastest growing market for clean technologies, and to ignore it out of concern for intellectual property or other costs of doing business will be to watch most of one’s addressable worldwide market disappear to competitors that willshoulder the costs of business in China.

We’d welcome rhetoric in 2011 being less about how countries could or should compete with China’s cleantech leadership, and more focus on how to simply get on with capitalizing on the commercial opportunity that Chinese growth represents. While there’s still a worldwide financial system to profit from.

[Reposted by permission from http://www.kachan.com/cleantech-greentech-predictions-2011-forecast-trends]

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

BP Oil Spill

Barrons had an interesting take on biofuels from garbage: http://online.barrons.com/article/SB127327100968888619.html

I have been following this movement for some time and there does seem to be an extraordinary amount of capital and brainpower going into this space. People talk a lot about ethanol and I am a big of ethanol, mostly because I like the constiuency and channel to market it creates. More importantly, I am big fan of all of the other alternatives such as biofuels to garbage which has big proponents from Waste Management to others and Barrons claims that we might be able to get as much as 600,000 barrels a day of oil equivalent from this source. Not much compared to the almost 20,000,000 barrels a day that we use in the US alone.
Efficiency within existing ICE engines is another area we should focus on:
My friends at BP think that for an extra $4K per car you could reduce fuel usage by 50% within the next 4 years (typical auto planning cycle).
Electric Vehicles are a good choice as well:
For many applications, if you can put together the right financing you can achieve a lower cost per mile than diesel powered delivery vehicles today.
T Boone Pickens and others have talked about Natural Gas. With gas prices so low right now, there is some financial justification for this approach, particularly for heavy trucks — where less incremental infrastructure is required.
What the idea above show is that this will be a tough nut to crack, but on diversification arguments alone we should start the task of moving away from a largely oil based fuel future to one that diversifies away from oil.
Oh and it will be cheap and pay for itself in lower fuel and oil prices!
Jigar Shah
Carbon War Room

An Evening With Ernest Moniz

by Richard T. Stuebi

Last week, the MIT Club of Northeast Ohio hosted a talk at the Great Lakes Science Center in Cleveland by Professor Ernest Moniz, the Director of the MIT Energy Initiative, and a member of the President’s Council of Advisors on Science and Technology.

Over the course of about an hour of spirited commentary and responses to questions, Prof. Moniz made a number of interesting points. A few highlights:

  1. Arguably the key challenge facing the energy sector is the virtual monopoly that petroleum has on the transportation sector. Producing more non-petroleum options/alternatives for transportation will be pivotal to a better future. By virtue of its considerable domestic resource and lower carbon intensity, natural gas is an attractive option — either as a transportation fuel directly (e.g., CNG), or in generating electricity to support electrified vehicles.
  2. One must never lose sight that energy is a capital-intensive commodity industry subject to “complex politics”, which in turn means that the asset base changes very slowly, and (unlike other economic sectors such as consumer products) is driven first-and-foremost by considerations of cost. Technologies exist today to address most of our challenges, but “inconveniently” they are considerably more expensive, which is not attractive to either customers or politicians.
  3. Although more study at greater detail is always helpful, climate scientists have erred in framing public debates via increasingly sophisticated analysis. Over a century ago, predictions were made about carbon dioxide levels and planetary impact that are a good first-order approximation of what is being evidenced today. Rather than being required to prove that human-induced climate change is occurring, the burden of proof should be on others to show convincingly that human-induced climate change isn’t occurring — that second- and third-order effects (such as feedback loops and consideration of other variables) are somehow dominating the first-order linkages between carbon dioxide concentrations and average planetary temperatures.
  4. The exact future impacts of climate change are unknown, but the distribution of probable planet-wide average outcomes is fairly well described. An increase of 2 degrees Celsius by 2050 — what many consider to be the point beyond which planetary impacts become much more problematic — is on the lower-end of the range of possibilities even if global per capita carbon dioxide emissions are cut by 80% from today’s levels. If status quo is maintained, there’s virtually no statistical chance of containing temperature increases to 2 degrees Celsius by 2050.
  5. From a technological standpoint, advancements in all forms of low-carbon electricity generation — nuclear, renewables, and coal with carbon sequestration — will need to be pursued intensively. In addition, because some amount of future climate change is virtually predetermined given our past history, adaptation strategies and technologies should get much more attention. Although premature to employ, and scary because of the principle of unintended consequences, serious research should at least begin on planetary engineering approaches (e.g., deliberate emissions of sulfates) to offset the effects of an increased level of carbon dioxide concentrations in the atmosphere.
  6. The recent climate negotiations at Copenhagen never had much of a chance of producing a meaningful agreement without U.S. Congressional action. Hopefully, Congress will act to pass good legislation on climate change, because the prospect of EPA regulating carbon dioxide and other greenhouse gases as pollutants under the Clean Air Act is “horrific”.

In Prof. Moniz’s view, there is significant urgency for action, and a good chance of a not-very-good outcome. But, all we can do is the best we can do, so we have to move forward in a mood of determined optimism.

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.