Posts

Reporting from Omaha

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

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

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

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

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

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

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

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

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

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

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

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

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

A Crystal Ball for 2013

Happy new year everyone.  As we reflect upon the year now past us, it’s also that time of year to look ahead.

For the cleantech sector, Dallas Kachan from Kachan & Co. recently put his neck on the line with his “Predictions for Cleantech in 2013”.  It’s a good read, well-reasoned.  The sound-bite version:

  • Cleantech venture capital may never again reach the heights (at least in terms of dollars invested) of 2011.  As Kachan notes, and I concur, that’s not necessarily a bad thing.  It just means that capital-inefficient deals that used to attract VC dollars won’t so much in the future.  And, it means that a lot of ineffective cleantech VCs will be washed out of the sector.  Moreover, other sources of private finance – especially corporates, but also family offices and sovereign wealth funds – will step in.
  • The solar and wind sectors face increasing challenges because grid-scale energy storage technologies aren’t coming to the fore as expected.  Dispatchable power sources with lower emissions will gain ground.  This is especially the case for natural gas, but Kachan controversially also sees a growing role for new nuclear technologies.
  • Clean-coal technologies become less oxymoronic.  Great quote here:  “No, clean coal doesn’t exist today.  But that doesn’t mean it shouldn’t.”  Kachan claims to have visibility on some promising new technologies in this realm.  Personally, I’m a little skeptical – I’ve heard such things many times before – but I’d be glad to be wrong.
  • Significant improvements are afoot for internal combustion engines, further stifling the advent of electric vehicles (EVs).  I agree with Kachan that a lot is being undertaken to improve the old piston engine.  Those innovations being pursued by tier one auto suppliers have a fair chance of quick adoption.  However, a lot of the potential breakthroughs I’ve heard about are being explored by venture-backed start-ups or garage-tinkerers, and I am less optimistic than Kachan appears to be that these companies can make large inroads into the incredibly demanding automotive supply chains within a year.
  • Mining and agriculture will become more important segments of the cleantech sector.  Especially with respect to agriculture, I agree with Kachan wholeheartedly, as increased corporate venture activity is beginning to burble in such stalwarts as Monsanto (NYSE: MON), Syngenta (NYSE: SYT), and Cargill.

Though I haven’t gone back to review his track record, Kachan claims a good history of prognostication from recent years.  I think many of his views for the near-future are justified and hence likely (if not for 2013 then more generally for the next couple of years), but he’s thrown in enough unconventional wisdom to make things interesting.

Let’s make 2013 a good one, shall we?

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.

Going With The Flow

In recent months, I’ve come across more work being done in flow batteries than I’ve seen in the prior decade.

I’ve been known in the past to say that fuel cells are kinda like fueled batteries.  Well, flow batteries really are fueled-batteries.  A traditional chemical battery is one sealed system that charges and discharges chemical elements through a set of electrodes, and the amount of charge/discharge is dictated by the type and volume of chemistry within the battery.  In contrast, a flow battery separates the electrodes from the chemistry, which is stored externally from the electrodes in tanks.  In so doing, a flow battery delinks the relationship between power (an instantaneous concept) and energy (power over time) that is essentially hard-wired within a chemical battery.  In a flow battery, it’s straightforward to expand the energy of a system by adding more to the storage tanks.  And, it’s straightforward to add more “fuel” by injecting more of the reactants into the storage tanks.

Because of this, it is natural to think about how flow batteries can improve the range of electric vehicles, which is the focus of this 2009 article from The Economist.  However, energy density remains a challenge that could limit the utility of flow batteries for vehicular purposes. 

Several flow battery concepts involving different chemistries are being worked on by a number of academic researchers.  DOE’s advanced energy R&D shop ARPA-E awarded a team from Lawrence Berkeley Labs to pursue flow batteries.  Commercially, perhaps the three most well-known flow battery technology development companies are ZBB (NYSE MKT: ZBB), RedFlow and Primus Power.

Most of these efforts are targeting to apply flow batteries in grid-scale electricity storage at the substation level.  This could be an even more impactful role for flow batteries than their use in vehicles:  if flow batteries can provide an economic solution for grid-storage, the implications for expanded renewable energy deployment — enabling intermittent wind and solar energy to achieve more than 15% share of power generation — are possibly massive.

Dark Days for the Solar Industry

With the Solyndra debacle and other bankruptcies (e.g., Evergreen Solar, SpectraWatt), and a 65% decline in the MAC Global Solar Energy Index (SUNIDX), 2011 was a bad year for the solar industry.  Now into 2012, the hits just keep on coming.

Last week, the long-time solar energy poster-child First Solar (NASDAQ: FSLR) announced it was closing its German factory and laying off 2000 employees.  Earlier in April, Solar Trust and Q-Cells filed for bankruptcy, following on the heels of the bankruptcy filing of Energy Conversion Devices in February.  Turning from photovoltaics to solar thermal, BrightSource Energy withdrew at the last-minute its planned initial public offering on April 11, citing “adverse market conditions”. 

Adverse market conditions, indeed!  Quoting the immortal Vince Lombardi, “What the hell is going on out here?”

There are at least four fundamental forces at play that are battering the solar markets: 

First, over the past few years, China has made an astounding push into solar energy.  Whereas China was a non-factor in the solar industry not long ago, today China owns about 50% market share of supply.  Achieving this massive leap-frog was clearly an act of state-driven industrial policy, as it required enormous sums of capital — far beyond what would be justified solely to supply the Chinese domestic market for solar energy.  But, it’s more than merely state-sponsorship:  in March, the U.S. Department of Commerce found that Chinese solar manufacturers had been “dumping” their products into U.S. markets at prices below cost, exploiting unfair subsidies available to them from the Chinese government but not available to non-Chinese players.  Stay tuned to this brewing trade war.

Second, a ton of capital has been invested over the past several years in next-generation solar technology ventures.  While the technologies have differed widely, all have been premised on significantly reducing the costs of solar energy and enabling the market to expand by orders of magnitude.  Although some of these ventures have crashed-and-burned (e.g., Solyndra), others are still alive and may end up doing very well.  At the very least, these ventures have pushed the boundaries of innovation in the solar industry overall, which in turn has reduced the costs of solar energy in many ways and aspects — which in turn is in fact exponentially expanding the potential market for solar energy.

Third, European demand for new solar installations has fallen off a cliff.  Many of the leading European solar markets — Germany, Spain, Portugal and Greece — all had very aggressive “feed-in tariff” policies, promising very high prices for any electricity generated by solar installations.  These prices had remained high, in fact escalated, while solar costs declined precipitously, enabling solar investors windfall profits:  a classic bubble, which has now largely burst, given the financial straits in which many of the above-noted European countries find themselves.  (Dedicated readers of this blog will recall my long-standing lack of enthusiasm about the feed-in tariff subsidy approach.  Its flaws are now being starkly revealed.)

Fourth, plummeting natural gas prices — due to the surge in supply, associated with the shale gas boom enabled by the broad deployment of advanced fracking approaches — are causing U.S. electricity prices to fall, and solar companies struggle to compete.  A quote from Andrew Beebe of Suntech (leading Chinese manufacturer, widely accused of dumping) in a recent New York Times article called “Clouds on Solar’s Horizon” speaks volumes:  “We’re really not competitive” at current natural gas prices.

The first two forces have dramatically increased supply and reduced costs of solar energy, whereas the second two forces have substantially depressed demand for solar energy.  When combined, the conclusion is simple:  the solar market is experiencing a massive glut.  Solar customers clearly benefit, but solar companies feel the pain acutely.

So, these are dark days for the solar industry.  According to this article in the Washington Post, even the Chinese companies that have come to dominate are hurting. 

But, as they say, it’s always “Darkest Before Dawn”…which in fact is the title of a new white paper by McKinsey & Company that presents the flip-side of this story.  The authors — Krister Aanesen, Stefan Heck and Dickon Pinner — argue that the impending shakeout and consolidation is quite typical of industry at solar’s stage of maturity, and that there will be a bright future for solar energy not that long from now.  That may be more true for customers and the planet, as low-cost and non-emitting solar energy becomes much more widespread, than for industry participants, who will face increasingly intense and relentless competitive pressures to constantly innovate and improve their technologies and business processes. 

From an investment perspective, perhaps the bottom is approaching or is being hit right now for the solar industry.  Earlier this year, Gordon Johnson, solar industry analyst from Axiom Capital Management, reversed his 14-month bearish position on the industry.  However, as of this writing, SUNIDX is still trending downwards — though the decline is shallowing.

For those in the solar sector, the road is bumpy and will be for at least awhile.  Seat belts fastened, please.

Concentrating (on) Utility-Scale Solar Energy

Last week, at the invitation of organizer Green Power Conferences, I attended their Solar Power Generation USA conference in Las Vegas.

Of course, there are innumerable events pertaining to the solar energy space, and each needs its own niche of differentiation.  This conference pertained solely to utility-scale solar power projects.  In other words, this is the remaining part of the solar industry when rooftop and off-grid installations are excluded.

“Focus” is a key word that describes this portion of the solar industry, because the two primary technologies for large-scale solar projects both employ lenses to concentrate sunlight to achieve lower costs per unit of energy produced.

Concentrating solar power (CSP) involves the use of lenses to focus sunlight on a vessel containing a liquid.  As the liquid is heated, it then drives a steam turbine to generate electricity.  At a conceptual level, this type of power generation has been used for decades in conventional utility powerplants fired by fossil fuels (coal, oil or natural gas), only with CSP the sun is being harnessed to provide the heat.

Concentrating photovoltaics (CPV) involves the use of lenses to focus sunlight on super high-efficiency PV cells.  In contrast to conventional PV modules, which have conversion efficiencies of less than 20% (i.e., less than 20% of the sun’s energy is converted into electricity), CPV enables conversion efficiencies approaching 40%.

Common to both technologies, a typical power project entails several modular installations spread over a sizable chunk of land — usually patches of desert — aggregating to tens or even hundreds of megawatts, with a common point of interconnection to the utility grid.  See, for example, the Ivanpah project of 392 megawatts being developed in California by BrightSource Energy.

The overall message was that CPV and CSP projects can be undertaken today, with power purchase agreements priced at 10 cents/kwh or lower.  A key theme expressed at the conference was the “bankability” of CSP and CPV — no doubt, to assure the risk-averse universe of bank financiers, utility off-takers, and project developers in the audience.   Although not necessarily household names for Americans, the involvement of such large publicly-traded (albeit European) corporations as Areva (Euronext: AREVA.PA), Acciona (BMAD: ANA), Abengoa (BMAD: ABG) and Soitec (Euronext:  SOIT.LN) should give comfort that adequate financial wherewithal stands behind CSP or CPV projects to support long-term warranties. 

Each of these concentrating solar technologies has its advantages and disadvantages.  CPV makes more sense than CSP where water is very expensive, because CPV doesn’t involve the steam cycle.  On the other hand, unlike CPV, CSP’s thermal inertia enables energy storage that can extend the power production period beyond solely the daylight hours, and also “rides through” passsing clouds with minimal power fluctuations, thereby reducing the need for CSP owners/operators to purchase ancillary services (e.g., voltage control, frequency regulation).  This tends to make CSP a higher-value power generation solution for grid operators than CPV.

In any event, CPV and CSP will not dominate the world.  They are only economically viable where direct normal irradiation (DNI) — known to the lay-person as clear sunlight — is very high.  Thus, CSP and CPV will not be ubiquitous, but rather a solution only in certain (typically sparsely-populated) parts of the world, and thus will remain only a minority segment of the solar industry, which will be dominated by conventional PV. 

Even so, it is possible to imagine these technologies being widely adopted in deserts in the decades to come — and there is a lot of desert footprint on this Earth.  That growth potential is why some of the big names listed above have been concentrating their attention on concentrating solar energy.

Solar Eclipse

The sections of the blogosphere concerned with energy topics were abuzz last week with the news that Solyndra had filed for bankruptcy.  

Until recently one of the poster children for cleantech, Solyndra’s apparent demise was all the more notable due to its blue chip investor roster and its prominent selection by the Department of Energy in March 2009 for a $535 million loan guarantee.  Indeed, President Obama visited Solyndra’s facilities only 16 months ago touting the company as a shining example of cleantech innovation, job-creation, and wealth-creation.

Solyndra follows closely in the footsteps of fellow solar module manufacturer Evergreen (NASDAQ: ESLR) to receive substantial government financial support…and fail not long thereafter.

So many commentators have written about Solyndra in the last few days that I’m tempted to look at another topic for this week’s posting, but I feel compelled somehow to chip in my $0.02.

The first penny:  what is going on in the solar business that’s causing companies like these to crash and burn?  Isn’t the solar business booming? 

Yes, the solar business continues to grow rapidly.  One of the reasons that the industry is growing is that the price of solar energy is falling, becoming more economically attractive for more potential customers.  This is a good thing.  However, it does put pressure on the companies that make products for the solar marketplace.  Simply put, like most forms of energy, solar energy is generally a commodity, where lower-cost producers win and high-cost producers either have to improve or die.

By its own account, Solyndra was not the lowest-cost producer:  its product was inherently more expensive, but promised other advantages that would reduce costs elsewhere in the total installed solar energy system.  It’s quite possible that these theoretical advantages never really materialized, as most implementers of solar projects – while still with plenty of room for innovation – have begun to standardize their business practices (e.g., sales, marketing, procurement, installation) relative to conventional PV modules, most of which are available from other suppliers at a lower cost.  In other words, Solyndra’s proposed solution did not neatly “fit” the marketplace in which it was competing.

While it is indeed good news that the price of solar modules has been falling, it’s nevertheless inescapable to point out that this trend is driven heavily by increasing penetration of supply from Chinese PV module manufacturers, capitalizing on their low cost structures and immense financial/policy support from the central government – neither of which are readily available to U.S. PV module innovators.  In other words, for newbies in the PV industry like Solyndra to succeed, they are going to have to produce a module at a cost comparable to those sourced from China – yet with higher wages and taxes, more stringent rules for doing business (e.g., environmental regulations), and less government support. 

If you say it can’t be done, you’d be wrong:  U.S. based First Solar (NASDAQ: FSLR) is widely-recognized as the leader in today’s global PV market, with a very low cost structure due to several proprietary inventions.  The Chinese and new entrants from the U.S. alike will have to aim at First Solar as its target.  At the same time, First Solar will have to hustle to maintain its competitive edge in the dog-eat-dog solar business.

My second cent:  the hue-and-cry from many pundits that Solyndra’s collapse is evidence of faulty energy policy from the government – not just the loan guarantee program and Solyndra’s selection, but all of the efforts to promote clean energy technologies like solar energy.

There’s no question that the government is not great at picking winners.  In my view, it’s far more effective for the government to put in place market-based mechanisms with overarching goals, and then let the private sector players compete fairly.

The problem is, when it comes to the energy markets, those who oppose subsidies for renewable energy like the loan guarantee program are almost unanimously also opposed to any market-based mechanism that aims to internalize the cost of emissions associated with fossil fuel energy so as to make the playing field for clean energy closer to fair. 

(As an aside, these same opponents also tend to oppose the removal of subsidies for fossil fuel energy.  And, these same opponents also tend to deny that anthropogenic climate change is likely to be happening.  And, these same opponents also tend to oppose a variety of environmental regulations.  And, these same opponents are often led by sources of information that derive financial gain from fossil fuel interests.  A lot of generalizations in the above passage, and while generalizations are often dangerous and there are undoubtedly some exceptions, I feel comfortable in making these statements on the whole.)

Lacking any political will to try and structure the energy marketplace in the most logical manner to drive towards clean energy solutions, the government thus resorts to incremental, tactical, second-best (actually, probably closer to nth-best) policy mechanisms like the loan guarantee program.

As a venture capitalist, the loan guarantee program does very little to spawn technology innovation and support start-ups of interest to me.  Rather, the program is aimed to provide some security to lenders to offer debt for scaling up companies whose technologies are essentially proven.  The loan guarantee program mitigates execution risk in the growth or expansion stage, or in early project deployment.  Typically, the assets against which the loans are made (e.g., manufacturing equipment) have substantial residual value. 

Thus, as Solyndra goes through the liquidation process, the private sector lenders behind the company are likely to get some of their money back – and the hit to the taxpayer will probably end up being less than the face value of $535 million, although my fellow CleanTech Blog colleague Neal Dikeman is not too optimistic.  Time will tell.

As for concerns that Solyndra was improperly or inappropriately selected by the Obama Administration to receive the loan guarantee in the first place, this is an issue worth further investigation.  Improprieties wouldn’t surprise me, as I’ve sensed improprieties of similar flavors in various governmental operations and civic affairs over the past few years.  In my opinion, the U.S. has become a country in which government – federal, state and local – has become increasingly “pay-to-play”. 

If Solyndra turns out to be yet another example, it would bother me…but I would also add two further comments: 

1) I would be willing to bet a considerable sum that the list of companies in conventional energy that have recently received public sector finance benefits unfairly or unethically is very long (as “big energy” has lots of money and they throw it around very liberally in the lobbying arena), and

2) Let’s implement market-based mechanisms in the energy sector to discourage emissions, so that we can get rid of targeted subsidy programs where undue influence in government selection can occur.

Failure Is An Option: Cost Is Not No Object

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rethinking the Power Pole

If there’s one segment of the energy sector that you’d think might be beyond significant technological innovation, it would be power transmission poles.

And you’d be wrong!

As profiled in a recent article in The Economist a novel transmission tower design called the Wintrack pylon has been co-developed by TenneT, the operator of the Dutch electricity grid, and KEMA, a consulting and engineering firm. 

Although beauty is always in the eye of the beholder, the Wintrack  is arguably much more attractive than the traditional lattice tower structures seen maligning the landscapes of the world. 

More important than cosmetics, by virtue of the architecture of its physical design, the Wintrack produces much smaller ambient magnetic fields than what emanate from conventional transmission towers.  These magnetic fields create the buzz and static that can often be heard from high-voltage lines — and form the basis for fears (founded or otherwise) about suspected human health effects due to electromagnetic field (EMF) radiation from power lines

Between its aesthetic and magnetic benefits, the Wintrack pylon might, just might, make it incrementally a bit easier to site new transmission lines, which in turn would help alleviate grid-constrained load centers and debottleneck access to areas of abundant solar and wind energy resources that tend to be far removed from populated areas.

“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”.

Branding Solar Energy

by Richard T. Stuebi

One of the biggest challenges facing cleantech, relative to other forms of technological innovation, is that the basic markets being served are widely viewed as commodities.

In high-tech, many people are willing to pay very high (and profitable) prices for new gadgets with cool functionality.  Witness just about everything that Apple makes, along with anything in the videogame sector.

In health care and life sciences, cost is often not much of an object.  When you face the prospect of (for instance) prostate cancer treatments, you might be willing to pay a LOT more for a non-invasive approach.  I know I would.

However, rarely does anyone want to pay one iota more than necessary for something like energy.  And, that creates a huge problem for those who are trying to sell into these markets but have high cost structures. 

In the photovoltaics industry, German companies that dominated the sector have now given way to Chinese module manufacturers that can kill them on price and cost.  As this recent article from the New York Times discusses, the German players are attempting to maintain share and profitability by positioning themselves as premium products, worth paying more to obtain.

I wish them well, but I think it’s going to be a tough sell.  In my view, the only way possible to fetch a price premium is to make the case that the full life-cycle ownership cost is lower (i.e., less maintenance, more power production) when the higher-priced product is bought.

Otherwise, branding in the solar energy field will be extremely challenging.  You might look cool driving a Porsche, and might get an ego stroke from wearing a Hermes tie, but I’m having a very hard time imagining you’ll get any psychic benefit from buying a higher-priced solar panel — no matter what a well-paid pitchman may say.

Rare Earth

by Richard T. Stuebi

Remember the white soul group on the Motown label, Rare Earth? If you do, sorry: this posting isn’t about them….

Nope, it’s about the fact that rare earth metals represent a unique problem — and opportunity — in the cleantech realm.

As PBS reported on “Newshour” a few months ago (transcript here), rare earth materials are important commodities essential to the production of many environmental technologies — from batteries to wind turbines to solar panels. Unfortunately, many of these materials are highly toxic and thus pose significant environmental hazards if mis-managed.

Regrettably, since most of the world’s endowment of these rare earth materials is found in China, the extraction of these materials from the ground is often done with little concern for environmental protection.

In addition, to the extent the world becomes reliant on technologies that depend upon rare earth materials, substantial geopolitical issues emerge as these elements become strategic inputs for economic activity. (In other words, replace “Saudi Arabia” with “China”, and “oil” with “rare earth metals”, and you get the idea.)

So, cleantech innovators would do well to find economical, widely-available, and environmentally-friendly substitutes for rare earth metals — or to re-engineer cleantech widgets so that they don’t require these scarce and nsaty materials. There’s a lot of money to be made, and a lot of headaches to be saved, if we don’t become stuck over the rare earth barrel.

Richard T. Stuebi is a founding principal of NorTech Energy Enterprise, the advanced energy initiative at NorTech, where he is on loan from The Cleveland Foundation as its Fellow of Energy and Environmental Advancement. He is also a Managing Director in charge of cleantech investment activities at Early Stage Partners, a Cleveland-based venture capital firm.

Making Niche With Solar

by Richard T. Stuebi

One of the better business books I’ve ever read is The Innovator’s Dilemma, by Clayton Christensen, a professor at Harvard Business School.

The core message of the book is that disruptive technologies — ones that ultimately change an entire industry — only penetrate a marketplace by first serving tiny niches that aren’t big enough to attract the interest of the incumbent mainstream players. In other words, disruptive technologies can’t and shouldn’t attack a huge market head-on, but rather in underserved little ways that eventually accumulate into big successes.

Solar photovoltaics (PV) has often been touted as a disruptive technology, allowing humans to move off of centralized fossil fuel powerplants to distributed renewable generation sources. As I’ve watched the PV industry for the past decade, I’ve always been amazed at how many advocates try tackling “mainstream” solar, trying to compete head-to-head against the grid. At its current stage of maturation, PV represents a very expensive way to generate electricity, so the only way to make such business models work in places where electricity isn’t very expensive is to gain large subsidies from the public sector (such as the lucrative feed-in tariffs in countries such as Germany).

So, it’s been fun watching the emergence of little niche applications for PV, where the technology can make a difference right away, without requiring the helping hand of government. One such niche has been in compacting public trash recepticles, which was nicely profiled in an article in last Friday’s USA Today.

The secret to the success of PV in this niche is its obviously compelling economics. Sure, at $4000, the solar-powered trash compacter is much more expensive than a generic can. But then again, these compacters require many fewer visits by trucks to pick up full containers. In Philadelphia, trash pickups have been reduced from 17 visits per week to 5 per week, saving $13 million in cumulative trash collection costs over the next 10 years.

Not exactly a sexy application for PV, but the dollars make sense. It’s these types of success stories that will continue to increase demand for PV modules, driving the technology down the learning and scale curve, continually reducing its costs, and in so doing opening up ever more segments of application, until PV becomes cheap enough for virtually all grid-connected applications without subsidies.

Richard T. Stuebi is a founding principal of NorTech Energy Enterprise, the advanced energy initiative at NorTech, where he is on loan from The Cleveland Foundation as its Fellow of Energy and Environmental Advancement. He is also a Managing Director in charge of cleantech investment activities at Early Stage Partners, a Cleveland-based venture capital firm.

Meeting the Energy and Climate Challenge

Dr. Steven Chu, Secretary of Energy and co-winner of the Nobel Prize for Physics (1997) delivered this speech “Meeting the Energy and Climate Challenge” at Stanford University on March 7, 2010, where he was formerly a professor.

Dr. Chu called on the students and faculty to take part in a new Industrial Revolution. At the epicenter of Silicon Valley, Stanford has been at the heart of the Information Technology Revolution – a catalyst for innovators such as Intel, Cisco, and Google. “America has the opportunity to lead the world in a new industrial revolution,” he was quoted in the Stanford Report.

Humans are causing Global Warming

The Novel Laureate discussed the irrefutable case for anthropogenic climate change. “There is a mountain of climate data going back to 1860.” Climate deniers say that humans are not causing global warming; rather it is a variance of solar energy including sun spots. Dr. Chu presented a chart showing the long-term continued rise in the global surface temperature while the solar energy reaching the atmosphere followed a predictable 11-year cycle of 1366 and 1367 watts per square meter (W/m²).

CO2 concentration has increased 40% since the start of the first industrial revolution, including all GHG such as methane the equivalent increase has been 50%. Irrevocable effects are under way. The Earth must warm until a new equilibrium is reached in about 150 years due to time lags such as deeper ocean warming. Added temperature increase will result from the long life of greenhouse gases, such as CO2, and from increased emissions.

The effects of warming can be measured. Satellites can now measure with good precision the mass of the earth. Dr. Chu observed that the ice mass is decreasing quadratically in the Greenland and decreasing in the Antarctic.

He also pointed to potential tipping points. There are huge uncertainties with the risk of 3.5 to 6 degree temperature increases.

United States Innovation in Energy Efficiency, Renewables, and Transportation
“The U.S. innovation machine is the greatest in the world,” said Dr. Chu. “When given the right incentives, [it] will respond.” Energy efficiency and renewables present major opportunities.

The U.S. market share of photovoltaics peaked in 1996 at over 40 percent of global production;
it is now less than 10%. Asia has the lead in batteries. China is spending $9 billion a month on clean energy. For example, the State Grid is investing $44 billion by 2012 and $88B by 2020 in UHV transmission lines with transmission losses over 2,000 kilometers that are less than 5%. China is committed to produce 100GW of wind power by 2020.

The United States Recovery Act is making an $80 billion down payment on a clean energy economy to regain our global competitiveness and create U.S. jobs. Dr. Chu described how the United States could be the world’s innovative leader. The most immediate opportunity is in energy efficiency.

Since 1975, the electricity saved from energy efficient refrigerators with smaller compressors exceeds the total energy produced from wind and solar. Consumers respond to Energy Star ratings. We are expanding our energy efficiency standards to include buildings. In answering a question, Dr. Chu noted that energy efficiency can be extended beyond buildings to city blocks and cities themselves. The Energy Secretary got laughs from the students when he demonstrated how to adjust the sleep mode settings on their PCs and Macs.

Optimistic about Research Breakthroughs

There is good reason for optimism for renewable energy. The cost factor of wind power has decreased by a power of ten. Learning curves for photovoltaics has also declined by over a factor of ten. On a large roof, the installed solar cost is still around $4 per watt. If you get to $1.50 per watt installed, solar takes off without subsidy.

Because renewables are variable they benefit from local and grid storage, and from a smart grid. Pumped water storage is often 75% efficient; compressed air has the potential to be 60 percent efficient. The DOE has funded research for a variety of grid and vehicle battery chemistries.
Currently the United States is dependent on oil. Most proven reserves for oil majors such as Exxon, BP, Shell, are now off-shore. It will cost more to extract from tar sands and with more CO2 emissions.

Transportation is the hardest area to improve, mused Dr. Chu. Liquid petroleum fuels have excellent energy density. A Boeing 777 departs with 45% of its weight in jet fuel which has an energy density of 43 Mj/kg and 32 Mj/liter; a lithium battery, only .54 Mj/kg and 0.9 Mj/liter, yet batteries can compete in cars because of the efficiency of electric drive systems and learning curve improvements. We need an automotive battery pack for less than $10,000 with 5,000 deep discharges and 5X higher storage capacity, stated Dr. Chu.
We need breakthroughs. Much can from great research labs, such as Dr. Chu’s former Bell Labs. Scientific research for new breakthroughs will be encouraged with multiple programs:

Energy Frontier Research Centers = university sponsored scientific research for
innovative energy solutions.
Energy Innovation Hubs = multi-disciplinary,
highly collaborative teams working under one roof.
Advanced Research Projects
Agency – Energy (ARPA-E) = short term, high risk – high reward research
projects

Energy Secretary Chu concluded with the first view of Earth from the Apollo 8 orbit of the lunar surface and with these two quotations:

“We came all this way to explore the moon and the most important thing is that
we discovered the Earth. – U.S. Astronaut Bill Anders (Dec 24, 1968)

“…We are now faced with the fact, my friends, that tomorrow is today. We are confronted with the fierce urgency of now. In this unfolding conundrum of life and history, there is such a thing as being too late.” – Dr. Martin Luther King (1967)

Video of Dr. Chu’s Speech at Stanford

John Addison publishes the Clean Fleet Report and speaks at conferences. He is the author of the new book – Save Gas, Save the Planet – now selling at Amazon and other booksellers.

National Cut Your Energy Costs Day

by Richard T. Stuebi

Did you know that yesterday, January 10, was “National Cut Your Energy Costs Day”? Until a couple days ago, I didn’t. That is, until the folks at SunRun, a provider of residential solar energy systems, promoted the day by sending out the following blast email:

“Five quick tips on how cut costs and save energy this new year.

1. Power Strips: Plug your TV, computer, and other home electronics into power strips and flip the switch when they’re not in use. Even when appliances are turned off, they’re still running on phantom energy. If you don’t use power strips, remember to unplug your appliances when you’re done with them.

2. CFLs: Switch out your incandescent light bulbs with compact fluorescent light bulbs. CFLs last up to 10 times longer than and use about one-fourth the energy of incandescents.

3. Solar Panels: Reduce your electricity costs by installing solar panels in your home. You use the same amount of energy but pay less for it, because you can lock in a rate with solar, rather than be subject to your utility’s rate increases.

4. Sleep mode: Set your computers to sleep mode, rather than screen saver mode, when not in use. It takes about 100 Watts/hour to run a screen saver on your graphics card. Cut energy costs by letting your screen go black.

5. Air sealing: Seal cracks and openings to prevent outside air from otherwise entering your house. Paired with proper insulation, air sealing can increase energy efficiency and drastically reduce your heating and cooling costs.”

Well, truth be told, #3 above really isn’t an energy saving tip, but I’ll cut SunRun some slack because at least they are honest in pointing out that anyone interested in solar energy should first implement all cost-effective energy efficiency possibilities. It’s crazy, but too often the case, for someone to install a solar energy system when the building itself is terribly inefficient. There’s no point in generating relatively expensive electricity and then wasting it — especially when the costs to avoid the waste are often so modest.

We’ll have made real progress in this country when every day is National Cut Your Energy Costs Day.

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.

Renewables Supply 10 Percent of U.S. Energy

According to the most recent issue of the “Monthly Energy Review” by the U.S. Energy Information Administration (EIA), renewable energy (i.e., biofuels, biomass, geothermal, hydroelectric, solar, wind) provided 10.51% of domestic U.S. energy production during the first nine months of 2009 – the latest time-frame for which data has been published.

Domestic energy production from renewable sources grew by 4.10% during the first nine months of 2009 compared to the first nine months of 2008 – an increase of 0.228 quadrillion Btu’s. Most of that growth came from wind which expanded by 28.46% during the first nine months of 2009 compared to the same period in 2008.

The mix of renewable energy sources consisted of hydropower (35.16%), biomass (30.72%), biofuels (20.25%), wind (8.17%), geothermal (4.52%), and solar (1.17%). Renewable energy’s (RE) contribution to the nation’s domestic energy production is now almost equal to nuclear power, which has been holding fairly steady in recent years at 11.6%.

“When Congress resumes its debate on pending energy and climate legislation in 2010, it would do well to take note of the clear trends in the nation’s changing energy mix,” said Ken Bossong, Executive Director of the SUN DAY Campaign. “Renewable energy has proven itself to be a solid investment – growing rapidly and nipping at the heels of the stagnant nuclear power industry – while fossil fuel use continues to drop.”
In the electricity sector, conventional hydropower accounted for 6.89% of U.S. net electrical generation during the first nine months of 2009 while other renewable energy sources (biomass, geothermal, solar, wind) accounted for 3.32% — for a total of 10.21%. By comparison for the first three quarters of 2008, renewables accounted for 9.18% of net electrical generation.

While renewably-generated electricity has grown, overall net U.S. electrical generation was 4.72% lower for the first nine months of 2009 compared to the first half of 2008 with coal-generated electricity dropping by 12.86%.

The U.S. Energy Information Administration released the “Monthly Energy Review” on December 23, 2009. It can be found at: http://www.eia.doe.gov/emeu/mer/contents.html. The relevant tables from which the data above are extrapolated are Tables 1.2 and 10.1. EIA released its most recent “Electric Power Monthly” on December 16, 2009; see: http://www.eia.doe.gov/cneaf/electricity/epm/epm_sum.html. The most relevant charts are Tables 1.1 and 1.1.A

Renewable Fuel — Without Biomass

by Richard T. Stuebi

In recent years, there’s been a major push for renewable fuels — to reduce our needs for petroleum, as well as to reduce the carbon footprint associated with burning petroleum-based fuels.

The common thread of all of these renewable fuels has been the use of some sort of carbonaceous feedstock — typically biological organisms, till now agricultural crops like corn and soybean, and moving towards cellulosic wastes and algae — from which to produce a liquid fuel for vehicles. In other words, sunlight begets botanical growth begets fuel.

Now comes word of a company emerging from stealth-mode called Joule Biotechnologies, based in Cambridge MA and funded by Flagship Ventures, which has developed what the company is calling the “Helioculture” process for making fuels directly from the photosynthetic conversion of sunlight and CO2 — without requiring any biomass (nor any water, for that matter).

According to its press release, the company’s “SolarFuel” will satisfy current vehicle specifications. Although still a few years away from commercial production, Joule is projecting yields of more than 20,000 gallons per acre per year at long-run economics competitive with oil at $50/barrel.

Of course, entrepreneurs and inventors love to tout new ideas with great potential — potential that is often never achieved. But this idea at least has considerable intuitive appeal, and is very out-of-the-box relative to much of the innovation being pursued in the transportation fuels arena, which makes Joule definitely worth watching in the coming years.

Richard T. Stuebi is the Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc. Effective September 1, he will also become Managing Director of Early Stage Partners.

Peter Huber: Low-Confidence in Low-Carbon

by Richard T. Stuebi

A few weeks ago, I wrote here that it is often a good thing to read and reflect upon intelligently-crafted opinions that differ from those you hold.

A good example is offered by the essay “Bound to Burn” by Peter Huber, a Senior Fellow at the Manhattan Institute. In this thought-provoking piece, Huber makes the following interesting statements about the challenges to be faced in moving to a lower-carbon economy:

· “We rich people can’t stop the world’s 5 billion poor people from burning the couple of trillion tons of cheap carbon that they have within easy reach….We don’t control the global supply of carbon.”

· “We no longer control the demand for carbon, either. The 5 billion poor – the other 80 percent – are already the main problem, no us. Collectively, they emit 20 percent more greenhouse gas than we do. We burn a lot more carbon individually, but they have a lot more children. Their fecundity has eclipsed our gluttony, and the gap is now widening fast.”

· “Might we instead manage to give the world something cheaper than carbon?….For the very poorest, this would mean beating the price of the free rain forest that they burn down to clear land to plant a subsistence crop. For the slightly less poor, it would mean beating the price of coal used to generate electricity at under 3 cents per kilowatt-hour.”

· “Fossil fuels are extremely cheap because geological forces happen to have created large deposits of these dense forms of energy in accessible places. Find a mountain of coal, and you can just shovel gargantuan amounts of energy into the boxcars. Shoveling wind and sun is much, much harder.”

· “Another argument commonly advanced is that getting over carbon will, nevertheless, be comparatively cheap, because it will get us over oil, too….But uranium aside, the most economical substitute for oil is, in fact, electricity generated with coal….By sharply boosting the cost of coal electricity, the war on carbon will make us more dependent on oil, not less.”

· “By pouring money into anything-but-carbon fuels, we will lower demand for carbon, making it even cheaper for the rest of the world to buy and burn. The rest will use cheaper energy to accelerate their own economic growth. Jobs will go where energy is cheap, just as they go where labor is cheap.”

· “If we’re truly worried about carbon, we must instead approach it as if the emissions originated in an annual eruption of Mount Krakatoa. Don’t try to persuade the volcano to sign a treaty promising to stop. Focus instead on what might be done to protect and promote the planet’s carbon sinks.”

· “Carbon zealots despise carbon-sinking schemes because, they insist, nobody can be sure that the sunk carbon will stay sunk. Yet everything they propose hinges on the assumption that carbon already sunk by nature in what are now hugely valuable deposits of oil and coal can be kept sunk by treaty and imaginary cheaper-than-carbon alternatives.”

By no means is Huber’s writing perfect: the essay is too long by half, runs a too-circuitous path with considerable redundancies, and doesn’t lead to a very satisfying or forceful conclusion.

Along the way, some of Huber’s snide asides are too pessimistic. As an example, he claims “there is no serious prospect of costs plummeting and performance soaring” for solar and wind energy, but there is ample evidence (and lots of activity funded by prominent venture capitalists) to dispute this assertion.

And, Huber’s clearly got some facts wrong. For instance, he talks of $500/ton carbon offsets and 15 cent/kwh wind energy. If you believe these far-too-high numbers, no wonder you reach conclusions that aren’t very favorable to low-carbon energy sources.

Huber has been wrong before. About ten years ago, he and Mark Mills launched the Digital Power Report, which was touting the emergence of advanced technologies in distributed generation and energy storage to revolutionize electricity supply. Although quite compelling and seemingly well-supported, the perspectives they put forth in their periodical were at best far premature – and less charitably, inaccurate or incorrect. After a run of a few years, Huber and Mills wound down the Digital Power Report, presumably because the world wasn’t turning out the way they were predicting.

But, I still think this latest work by Huber is a worthy contribution to the discussion. Most notably, Huber’s concluding call for much more focus on carbon sinks as a no-regrets approach is hard to dispute.

Huber is no dummy. Many of the points he makes along the way are logically sound, and ought to be factored into any strategy for moving towards a lower-carbon economy. As unpleasant as some of the concerns raised by Huber may be, they are nevertheless important to hear to develop a more compelling story that overcomes the objections to thereby mobilize more real movement (rather than just talk) towards a low-carbon world.

Richard T. Stuebi is the Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc. Later in 2009, he will also become Managing Director of Early Stage Partners.

Ich Bin Ein Freiburger

by Richard T. Stuebi

Earlier this month, I had the privilege of joining a delegation led by Cleveland Mayor Frank G. Jackson to visit Baden-Wurttemberg, the southwestern-most state in Germany. The aim of the trip was to begin building stronger commercial bridges between the Cleveland area and Baden-Wurttemberg – two heavy industrial economies of similar size. I was there to represent our region’s interests and activities in advanced energy, in an aim to identify and explore potential collaborations in the academic, civic and private sectors.

As part of our tour, we spent a day in Freiburg, a delightful university city nestled in the corner where Switzerland and France abut Germany. And, in their lovely city hall, we had the privilege of meeting with Freiburg’s dynamic Mayor Dr. Dieter Salomon and the city’s environmental minister, Dr. Dieter Worner.

Though I had previously heard of Freiburg, the two Dieters opened my eyes to what Freiburg had been able to accomplish – and, alas, what also remained to be accomplished – in the realm of sustainability, with their Freiburg Green City plan.

Freiburg frequently hosts public sector leaders from around the world to learn how to put a city on a low-carbon trajectory, as it is widely recognized to be the foremost green city in Germany, which in turn is widely recognized to be the country farthest down the sustainability path in Europe, which in turn is widely recognized to be far ahead of other continents in dealing substantively with the climate change threat.

We were humbled by what we learned. Way back in 1996, before climate change was much of a concern in the U.S., Freiburg officials decreed that it would aim to reduce CO2 emissions by 25% by the year 2010. To achieve this, Freiburg pursued two priorities.

First, it established very ambitious building energy efficiency standards – 20% below already-stringent German national levels. Yes, building professionals (architects, engineers, contractors) initially objected to this stance as being too hard or too costly. However, over time, the building community learned how to meet these tough standards at a minimal 1% cost premium over conventional buildings not meeting the standard. Now, the Freiburg-based businesses have a substantial competitive advantage in the German building marketplace. This goes to show that good policy can drive private sector innovation and subsequently economic health of a key sector of the economy.

Second, Freiburg seized upon its natural advantage – it is the sunniest place in all of Germany – to become the leading player in the soon-to-be-booming German solar market. With a major investment to establish the Fraunhofer Institute of Solar Energy, affiliated with the University of Freiburg, the city became Ground Zero for R&D on new solar technologies. This, in turn, spawned many businesses – either spun-out from Fraunhofer or founded by people who worked or studied in Freiburg – that were able to catch the wave as the solar market in Germany took off.

The net result: Freiburg now lays claim to an environmental business cluster of 1500 companies, employing 15,000, generating over 500 million euros of annual revenues. For a city of roughly 200,000 population, this is green economic development writ large.

We were also surprised by what we learned: namely, that Freiburg was really struggling to achieve significant emission reductions. Despite strong mechanisms to drive reduced emissions in the economy, Freiburg had only been able to achieve a 7% reduction in CO2 emissions since 1996. Freiburg readily admits that it won’t be able to attain the 25% reduction target it had set for itself by 2010.

So, Freiburg is finding out it’s not so easy to be as green as it wanted to be, as we all need to be.

That being said, I did take heart in noting that Freiburg wasn’t giving up in the face of adversity, as it is ratcheting its goal for 2030 to reduce CO2 emissions by 40%.

I also noted that a key reason for Freiburg failing to achieve its emission reductions was economic/population growth. Although aggregate CO2 emissions had only fallen by 7%, on a per capita basis, CO2 emissions had declined by about 30%. In other words, Freiburg’s population had grown substantially – one of the few places in Germany to experience population growth.

It’s hard to escape the conclusion that Freiburg’s environmental posture and ambitions are key attractors for this growth. The best and the brightest of Germany seem to be flocking to Freiburg to be part of the vanguard in moving to a low-carbon economy.

Lastly, I am inspired by Freiburg’s civic motto. By my transcription (and excuse my lack of knowledge of German), Freiburg’s credo is “Gut leben stadt viel haben”, which translates approximately to “A good life is more important than lots of possessions.”

A lovely city, Freiburg is living proof that one can live a good life and be at the forefront of sustainability.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President at NextWave Energy, Inc. In 2009, he will also become a Managing Director of Early Stage Partners.

Cleantech Venture Capitalists Beware – What You Don’t Know About Energy Can Kill You

Oil prices quietly (at least in the cleantech world), slipped below $80 last week, off some 50% from its highs a few months ago. Did I say 50%? Yes 50%. And gas has slipped, too, as with some variations, natural gas historically trades at a roughly 10:1 price ratio of Barrels to MCF.

It’s easy to get caught up in the cleantech hype and forget that only 10 years ago this year oil prices fell two thirds caught between rising supply from a decade of drilling and nasty Asian flu, triggered in part by, wait, a financial debt crisis, that time in emerging markets. Sound familiar? And oil hit less than $11 per barrel, less than 1/13th of its recent high, with people talking $6.

And it’s easy to forget that the half decade following 1998 the not yet named as such cleantech investment sector hyped fuel cells, microturbines and distributed generation on the back of clean cheap natural gas, which was the fuel of the future.

And it’s easy to forget that rising commodity prices wiped 99% of those business cases (only a few billion in value, though!) off the map until not a single cleantech venture investor today discusses distributed generation at all. But after a short hiatus, solar and ethanol exits on the back of some huge subsidies came through and cleantech was boomed.

And it’s easy to forget that only a couple of years ago we as an industry debated the viability of hybrids and biofuels – because of a breakeven at $40-50/barrel or higher (the oilman’s breakeven in Saudi Arabia is maybe $5/bbl)? Breakeven at $40 in biofuels? Corn ethanol maybe, cellulosic, dream on. But the switch from MTBE to ethanol came through on the policy side and unforeseen Chinese demand growth pushed oil prices stratospheric. And the corn ethanol plant owners built hundreds of plants at 5% of the size of average refinery, made hay and traded at tech multiples. Only to get crushed when corn prices, driven up by (gasp!) demand and higher natural gas and oil drove up their feedstock, fertilizer and transport costs and margins down. Welcome to refining, freshman.

And it’s easy to forget that the core economic value proposition for solar has the ever present cost escalation analysis – “lock in your power costs, energy prices have risen x% per year, if they continue to do so you’ll be paying 2.5x your current power prices in 30 years”. And that the solar industry quietly ignores that energy prices will decline not rise with economic turmoil. But the ITC and feed in tariffs came through paying more than half the cost and so the party goes on.

It’s easy to forget that energy is about commodity prices. And commodity prices are about cycles, supply AND demand. And that demand is GDP growth driven in energy. And that in our global markets GDP growth is more interlinked than ever, making it more, not less subject to cycles.

And that alternative energy is called alternative because it’s the most expensive form of energy, meaning it’s the swing producer, the type of guys who get killed in cycles (subsidies aside, of course).

And that the big fortunes made in cleantech investing todate have not been made on high risk early stage technology bets, but on 10 or 20 year old technologies who were in the right place at the right time when the policies came in. Or the low cost manufacturers of mature known technologies (think corn ethanol or wind developers and Chinese solar manufacturers) who moved fast when policies moved, making hordes of “that’s not a venture” bets. Disruptive technology has never been the winner.

In energy, there is no disruptive technology, only disruptive policy that makes some technologies look disruptive after the fact. In energy, the risk is in the scale up, not the R&D, and the end application is so massive, so capital intensive, and so utterly dependent on commodity prices, that you can’t invest in it like you invest in IT. It takes longer, 10x as much money, and the ante up to play the game for one project is the size of your largest fund. At scale, there is no capital efficient strategy in energy.

But we are Silicon Valley and we smash open gates with technology, and we know better than those energy dinosaurs in Houston, London, and Abu Dhabi, right? They just don’t get it, right? One game changing technology can force the oil companies and power companies to their knees. The one I’ve found really is new and different. This entrepreneur has discovered something new. And it can be *cheaper* than oil (if you define cheaper right).

Beware Silicon Valley, the great fortunes, wars, and economic crises of the world for 100 years are not technology ones, they were energy made. Half the schools you went to were built by oil money. And the entreprenuerial spirit in this industry was born in the hardscrabble oilfields of Pensylvania and Texas, and grew up in the far reaches of the globe. And the oil companies those entrepreneurs founded have forgotten more about technology in energy than you even know existed.

Be forewarned, you do not have a comparative advantage here. The oil men invented risk taking, AND risk management. The oil men are bigger, faster, smarter, richer, have more scientists and more entreprenuerial spirit than you, AND they know energy.

So while you fight the good fight to develop technology to change the world, don’t forget, be humble, learn what can be learned, build what can be built, and walk softly, because the elephant in this room floats like a butterfly and stings like a bee, and he has yet to take the field.

. . .

The little guys whose pension funds are paying you a cushy 10 year guaranteed contract are counting on you to put aside your hubris.

Neal Dikeman is a partner at Jane Capital Partners and the CEO of Carbonflow. He is the Chairman of Cleantech.org and edits Cleantech Blog. He is from Houston, is a Texas Aggie, and believes in both energy and the power of technology to change the world.