Crossing the Cleantech Chasm pt. 2

Over the last few months, with the precipitous rise in petroleum prices, we've seen the call from many politicians and thought-leaders for an "alternative energy Manhattan Project" or "the renewable energy equivalent to the Apollo program."

At the risk of sounding ungrateful for the attention to the industry that I work and personally invest in, I think that this is misguided.

These two historically significant exercises in national will had a key point in common that is critically missing from the requirements of the next energy solution. Both of these efforts were based on MNO budgets. Money No Object. They were about the demonstration of our political will and technical capabilities, not about cost effectiveness or affordability.

If it was determined to be in our national interest to build a 100MW photovoltaic power-plant in orbit above the earth and to microwave the power down to a receiver station in the Mojave desert, we could do it.  The question is would it be easier and cheaper than two frame 7F, 50MW GE gas turbines?  Probably not so much.

The unique challenge is that we need to develop not only novel solutions to our energy supply problems but to do so in a way that is either directly cost competitive or close enough that relatively modest public policy efforts can make them so (e.g. tax credits, feed in tariffs, etc.).

The problems we face with petroleum is two-fold. First, is the high and growing demand for a product whose price is controlled by a cartel. From a pure Michael Porter competitive forces viewpoint, if you can't find an alternate supplier you had better find a substitute product.

The second problem is the more talked about issues of climate change. The high and getting higher levels of CO2 in our atmosphere are at best, worrisome and at worst, disastrous. Compounding this problem for us is that, on a statistical basis, most people in the world don't care.  

They care about getting out of poverty. They care about food, clean water and better transportation - immediate needs for family and self that overwhelm what might be in so many years. In short, the renewable energy solution that they need is the one that is cheaper than fossil fuels.

In each case, as painful as price increases around crude oil are, they make us that much closer to a cheaper  solution to both problems around the world as well as at home.

Now that we have admired these world-class problems, what might the US government (or other capitalism-based government do to solve them?

In part 1 of this story, I identified a chasm of funding for new technologies. They can best be characterized as projects too expensive to attract venture capital and too new to attract debt.

If I may criticize my own industry, others in it tend to call for government intervention (subsidies, credits, etc.) all too often to help our cause. Since I have been relatively quiet on this topic, I now feel that it is my turn to ask.

There has been a program in the US Federal Government's Small Business Administration to invest in venture capital. I know because Fluke Venture Partners, where I am a limited partner has the SBA as a special limited partner. The SBA takes a special position whereby they get a limited but preferred return on their investment. FVP gets to nearly triple the size of their pool of investable funds. The other limited partners get the prospects of the lion's share of the returns after (and only after) the SBA takes their cut.

While this SBA program is now being curtailed, I think that it or a similarly structured debt fund is an excellent approach for solving our new technology funding chasm-the chasm that impedes the commercial scale deployment of new, innovative energy technologies.

Now some will say "aren't there government loan guarantee programs that would accomplish that?" Actually, no. While there must be exceptions, every loan gaurantee program that I've come in contact with was either administrated directly by a government agency (=very risk adverse) or by a commercial bank that lacked depth of industry or technology experience.  In both cases, guarantees seemed to go to the firms that did the best job of schmoozing the administrator rather than advancing the state of the industry.

The creation of such a project finance fund would allow the government to direct where the money goes generally - project finance for first commercial scale (call it 50MW) use renewable energy technologies while allowing talented fund managers with real track records to pick those projects that have the right mix of talent, technology and risk mitigation.  

But this is a presidential election year, small chance of that happening.  Oh well.

Comments

[Bill Lemon]

Wow, that's quite a set of comments, Dave. Let me reply in order:

Today, one of the biggest headlines on my RSS feeds "Senate Fails to Pass Solar ITC Extension (Again)." The reasoning is that the Republicans want to open more US land to oil exploration and they won't play ball on renewables legislation until they get at least a vote on the issue in Congress.

I see this as an example of the larger issue of presidential election year politics where efforts to get something good done take a back seat to efforts to make the other party look bad. Investment and Production tax credits might ultimately get extended but I stand behind my assertion that significant new changes in renewables legislation extremely unlikely this year.

Now, as for your scenarios;
1) Democrats take the White House and have a 2/3rds majority in both Houses of Congress.

I would expect to see a national renewable portfolio standard be enacted and perhaps even a national feed-in tariff for renewable power. I would expect to see bigger carve outs for photovoltaic power in the form of a super incentive above and beyond any national feed-in prices. I would expect to see a significant expansion of loan guarantee programs operated and administrated by the same entities as today, just more of it. I would also expect to see award criteria set to favor projects to be built with organized labor (you have to dance with whoever brought you). Transmission access for new renewables will continue to be a very big problem as overcoming NIMBY issues and construction on environmentally sensitive lands run counter to much of the Democratic base. National labs would be incented and funded to spend more on renewables research and finally, I would absolutely expect to see cap and trade carbon emission rules put in place.

2) Dems firmly control Congress but McCain wins the presidential election.

I suspect that under this scenario, we'll see pretty much all of the things in #1 but with the addition of support for new nuclear power. All that a President McCain has to offer Congress is a speedier passage of legislation without the threat of veto (that would likely be overridden by Congress) and as such he can probably ask for more, but would have a hard time stopping anything.

3) What will Senators Murray and Cantwell do?

I'm afraid that requires a finer reading of the tea leaves than I can offer. We both know Sen. Cantwell and know her to be quite energy savvy. Her current chief of staff is a personal friend of mine and extremely clued in on the whole energy industry from both private and public sector experience. Perhaps she would take leadership on national RPS and/or feed in tariff issues. I am less familiar with the interests of Sen. Murray but offer that she is far from sitting idly by. I do expect to see my friend and representative to Congress, Jay Inslee to become THE thought leader in the House on renewable energy issues. We should look to his book "Apollo's Fire" for ideas on where he like to see the nation go.

You raise a good thought on the Interstate Highway Act of 1956. What might be the renewable energy equivalent in 2009? While there was uneasiness about the Act at the time with many wondering if it would be worth it, everyone was sure that if it happened, they wanted it to come by their town for the positive impact it would have on the local economy. I can't think of an analogous renewable energy opportunity. Most energy development efforts be they conventionally fueled, renewable or transmission are viewed as local liabilities (after the construction jobs go away) that only have regional or national benefits.

I am afraid that we will have to wait for a real crisis in the adequacy (not just price) of electricity before we'll see dramatic new legislation of the scale and scope of the Act.

You ask about the new initiative offered by oil-man T. Boone Pickens. As I understand it, he proposed to stop using natural gas for power generation, replace that power with wind farms and use the left over natural gas to power automobiles.

Firstly, this isn't a comprehensive GHG play but merely nibbles around the edges of it. You are still using fossil fuels for transportation and you haven't done anything about coal power plants. It does, absolutely address the geopolitical problems with foreign oil importation.

My difficulties are that wind power is perfectly UN-suited to replace natural gas-fired generation. Natural gas power plants fall into two categories, baseload (i.e. those running 8000+ hours/year) and peaking plants (the ones that you absolutely, positively need to run to keep the lights on when demand is at it's highest). Wind power comes when it comes so that's when you use it.

I was involved in natural gas vehicle testing back in the 80's and 90's while a researcher at PG&E's R&D labs. CNG vehicles are cool. They are retrofittable for gasoline engines and existing vehicles. The fueling infrastructure wouldn't be that hard to extend to existing homes or petroleum retailers. The biggest problem is on-board storage safety concerns and the room the tanks take up. These are all addressable but probably not in time. I think that we'll see more hybrid electric vehicles giving way to pure plug-in electric vehicles, if for no other reason than the public's willingness and downright eagerness to consider EVs over other alternatives.

As for nuclear power, I am completely convinced that the only way the world will even have a chance of achieving GHG reductions will require a huge number of new nukes. Every nuclear plant that is cancelled insures the construction of two coal-fired plants. There just isn't any way to get new, non-GHG emitting sources of power fast enough. You don't have to take my word for it. Even the Pew Center for Climate Research has come to the same conclusion.

When will we all start commuting by bicycle? Never. Bicycle rider-ship is driven by two factors, 1) a desire to enjoy the health or other existential pleasures of the experience and 2) lack of a choice. While there is clearly an increase in the number of people who fall into the first category, those who call into the second (China, India, other developing nations) are falling by the hundreds of millions.

You opened your comments with an admonition to not be too pessimistic about political solutions to our energy problems. I can only close with the observation that if you keep your expectations low enough, you are always poised for a pleasant surprise.

[Dave]

Now wait a sec, there Bill.

Punting with "Oh it's an election year and nothing will get done" is akin to pulling the plug on your game-day strategy mid-first quarter with the game tied at 0-0. In other words, given the time horizons of these projects, not addressing the overall political piece because it's an election year is dropping the ball. The Republicans are probably going to take a bath in this year's election, but there's no reason to pout.

To help, here are some scenarios I'm concerned with:
1) Let's say the Democrats win big this fall. Given both this, and their current/prospective leadership in the Legislative & Executive branches, which energy options will see the light of day?
2) Let's say that McCain wins, but the Dems take super-majority control of both houses, or maybe just the Senate. Which options play out?
3) How are the Senators in Washington & Oregon helping achieve a more coherent energy policy? What do you expect to see from them in the coming Congress?

On the MNO front, I agree that the analogies you've chosen to pick on are not good stories. However, there are other, better analogies, those which did cost a lot, but were made with an eye toward financial payoff for the country as a whole. One of these is the Interstate Freeway system.

So, recognizing the need for revised energy policy, maybe you can go far afield and help us understand more intelligent policies than our current one (?). For example, is Mr. Pickens's strategy of Natural Gas viable? What of Nuclear? When will you start riding a bicycle for primary transportation?