The energy-water nexus Part II

Water is undeniably important to our physical survival, and energy is the main physical ingredient in our development of modern society. Shortages in either could have major impacts.

The politicization of cleantech and the history of energy subsidies

In the wake of Solar Trust’s recent bankruptcy, conservatives were eager to brand the company’s collapse as another Solyndra. Cleantech has become highly politicized, so much so that Obama’s first reelection ad was a defense of his clean energy policy. Looking back at the responses to Solar Trust’s bankruptcy, my personal favorite was a tweet from Arizona Congressman David Schweikert:

@repdavid.Screenshot.Cropped

I liked a couple of things about this one. First was the fact that Schweikert is factually incorrect. Solar Trust never took any government money, even though it was offered a DOE loan guarantee. The other thing I liked was the rare acknowledgement that yes, the federal government subsidizes the oil industry through tax breaks.
I recently spoke with Roger Bezdek, a 30-year energy consultant who at one point directed energy research at the Department of Energy, and who briefed the McCain and Obama staffs on energy policy during the 2008 election. During his long career Bezdek has done the painstaking work of analyzing the U.S. government’s energy incentives for all industries, from oil to solar, going back 60 years to 1950. This involves doing things like going over more than half a century of Office of Management and Budget (OMB) budgets as well as incorporating policy decisions and budgets from individual agencies like the Department of the Interior to get a complete view of how the government supports certain energy sectors.
Bezdek’s 59-page report, which he did for the Nuclear Energy Institute last October, found $837 billion (in 2010 dollars) in incentives were expended over the past 60 years with oil, coal and natural gas getting 70 percent of that, or $594 billion. Oil alone was the big winner with $369 billion by itself while renewable energy, defined primarily as solar and wind, has received $74 billion, about what nuclear has received.

Summary of federal energy incentives, 1950-2010 (Billions of 2010 dollars)

BezbekTable2

Source: Management Information Systems, Inc.


These historical figures are instructive during an election year in which incentives for clean energy are under constant political attack. We can have ideological debates about the role of government in financing energy development—whether it should only be supporting research and development programs like ARPA-E or whether there’s a role for it to play in picking sectors and companies with programs like loan guarantees, tax credits, or tariffs—but we cannot dispute the fact that the government has been providing incentives for over sixty years, primarily to fossil fuel industries.
And this raises secondary questions: Are the oil, coal and natural gas industries where they are today because of historical subsidies? And where would be in 60 years if we subsidized renewable energy the way we have subsidized fossil fuels over the past 60 years?
The answer to this first question tells us a great deal about how fundamentally differently we have to look at renewable energy incentives versus fossil fuel incentives. Even if the fossil fuel industries received a boost from subsidies, today’s price of oil, no doubt, has not been much impacted by historical subsidies precisely because oil exists in a global market where prices spikes have been driven by surging demand in India, China and Indonesia.
But renewables are not, by and large, governed by pricing volatility in natural resources because their fuel—wind, sun, geothermal—is free. Meaning any subsidies that improve upon and lessen the price of the technology that produces renewable energy should hold up over time, which isn’t true of incentives for fossil fuels. You can design a better oil rig but demand for the underlying fuel remains the driver of price, unless you take drastic market intervention steps like the ones Venezuela takes, selling gas for as little as 12 cents a gallon. A solar panel that is twice as efficient, however, should stabilize future energy prices downward.
The answer to the second question of where we might be say, if we dumped four or five hundred billion dollars in incentives into renewables over the next half century, is unknowable but we can assume that prices would come down, just as they have over the past 20 years with the modest incentives provided. For the record, people like Bezbek are firmly in the Bill Gates camp of not believing that market interventions like tariffs work, and we’re clearly seeing some of the problems as the rollback on solar tariffs in Europe is hurting the solar industry. These folks all want to keep government support limited to research and development, even if those solutions are unlikely to have a major near term effect on greenhouse gas emissions.
With most governments facing debt problems, it’s unlikely that any energy sector will see significant subsidies in the next ten years. When asked whether the renewable energy industry deserved its shot at subsidies, Bezbek said “the idea that oil got a hundred billion dollars, and we [renewable energy] want a hundred billion, is simply not going to fly.” But as we think about how we got to the place we’re in—increasing energy prices, growing greenhouse gas emissions, a wholesale move of the U.S. energy economy toward natural gas—we might just keep in historical perspective, which energy sectors have really taken the lion share of government help. And if everyone can’t agree on intervening in the market with tariffs, we could all agree that the government should make very large R&D investments to remove as much technology risk as possible so that renewables can get to market.

Question of the week

What’s the right role for government in terms of incentivizing energy development?

My great hope for the energy future

Professor Tom Murphy lays out his rosy vision for what he thinks the world could accomplish in the near term to maximize the chances of coming out shiny and happy on the tail end of the fossil fuel saga.

LanzaTech raises $56M, targets Asia with biofuel tech

Asia, with its rapidly growing number of car owners and large pollution problems, could very well be the biggest market for biofuels and green chemicals one day. LanzaTech, which announced Monday it has raised $55.8 million, is certainly finding more willing customers and partners Asia.

Today in Cleantech

The Washington Post reports that the Obama administration is announcing a rejection of a Canadian firm’s application to build the Keystone XL pipeline. Congress cornered Obama by inserting a mandate in the payroll extension legislation requiring Obama to make a decision on Keystone by February 21st. With the election just 10 months away, Obama had already been trying to push a decision on the pipeline, which will link Canadian oil to Texas, off. It was a lose-lose situation for Obama, who has had the choice of staying loyal to his environmentalist, clean energy constituents and risk being labeled “anti-jobs” amid $4 gas. Or cave and lose some support from his base. A new application addressing safety and environmental concerns will likely come but I suspect the Canadian firm will wait till after the election, in case Obama loses and it knows it’ll have an easier time getting approved.

Wanted in cleantech: Operations and scaling experience

Startups looking to disrupt the traditional energy industries — oil, coal, gas-burning cars — need to have more than just innovative technology. They need a team and a plan in place that can scale their technologies to compete on the massive scale needed.

Today in Cleantech

Well, it’s happened. The Keystone XL pipeline, which would deliver 700,000 barrels a day of oil from Alberta’s oil sands to Texas refineries, has been postponed.  The State Department has ordered that the pipeline be rerouted around environmentally sensitive lands. I still think the pipeline will get built, but this move allows Obama to take the issue out of the 2012 election, since a review of the new pipeline routing won’t finish until 2013. Way to kick the can down the road.

Today in Cleantech

I have long been convinced that the Keystone XL pipeline would get built, making it possible to transport more oil into the U.S. from Canadian oil sands. But after months of protest, there are signs that at the very least the Obama administration is acknowledging that it will pay a political price with environmentalists if it decides to approve the pipeline, perhaps a larger price than it had initially thought. Obama would be well served to read today’s post on earth2tech from UCSD Professor Tom Murphy. Murphy is concerned that there is data showing that oil production may have already peaked, starting in 2004. If that’s the case, it’s even more urgent that we invest in alternatives to oil, not support an increasingly expensive product that’s declining in supply.

Defining success for cleantech companies

Last week at the AlwaysOn GoingGreen conference, cleantech venture capitalist Vinod Khosla answered critics of cleantech investing by proclaiming that Khosla Ventures had netted a billion dollars in liquid profits from now-tradable shares. But for an industry with a moral imperative — to free the U.S. from the security risks associated with its dependence on fossil fuels and to save the earth from global warming — should we be measuring the success of an investment purely based on an IPO exit? If anything, the monofocus on IPO exits could be leading to some dangerous behavior for cleantech as a whole, with companies pushing to raise money in public markets well before there’s evidence that a viable business exists.

There has been no shortage of prominent tech billionaires who have stepped up in the past 12 months to let everyone know that cleantech investing is not working. Paypal co-founder Peter Thiel described cleantech as  “an increasingly large disaster,” and Napster darling Sean Parker spoke about it in the past tense when he said, “it looks like it was a bubble.” As in, forget about the next deal that might yield a return. It’s over.

As many have pointed out, cleantech does not lend itself to the type of disruption that is the lifeblood of Silicon Valley startups. Rather, the business is built around the baseline price of a commodity — natural gas, oil, coal — and figuring out a way to compete with the price of that commodity. The government supports renewable energy because, as hard as it is for hard-core capitalists to accept, profitability isn’t the only goal. The goal centers on national security (energy independence) and global security (climate change). When Obama strayed from the strictness of these goals and claimed cleantech was a solution to unemployment, it actually backfired and ultimately, muddied the message.

My concern is that, because of the long-term and risky technology bets that are inherent in cleantech, many companies are beginning to think that public markets are a reasonable way to raise capital when private markets get tight or when government funding dries up. Given that 2011 has seen the most IPOs shelved ever, this is faulty logic at best, and at worst a very quick way for the cleantech industry to gain a reputation as the very IPO “bubble”Parker described.

If we look at Khosla’s big biofuel IPOs, one company has no revenue (Kior) and two have lost increasing amounts of money in terms of net income for the past three reported quarters (Gevo and Amyris). Cellulosic ethanol company Mascoma filed for a $100 million IPO a few weeks back with a net loss of $14.5 million in the first six months of 2011, $4 million more than it lost during the same period in 2010.

In the end, success for cleantech is not another IPO. Success is a company that offers a reliable supply of renewable and non-carbon emitting energy, and a roadmap for how that energy source will narrow the price gap with prevailing fossil fuels. The most widely deployed renewable energy, wind power, has shown signs recently of reaching parity with fossil fuels, as an August power auction in Brazil found wind power cheaper than natural gas. That’s the trend and message that companies should be focusing on.

The next 12–24 months will be critical. The Breakthrough Institute estimates that over 70 percent of federal funding support for clean energy has lapsed or will lapse in the next three years. If the funding mechanism of last resort becomes the IPO, then there will be a number of IPO disasters, which will, in turn, make earlier stage funding harder to come by for all cleantech companies. A resistance to cleantech will settle in on public markets and send a shockwave across all of cleantech finance. It’s a vicious cycle that no one wants.

Question of the week

How should cleantech measure its success?