EfficiencyLaw.com

In the declining years of the Soviet Union, disenfranchised economists in Moscow used to joke that “the U.S.S.R. will invade every country in the world, except New Zealand.”  When a curious observer asked, “Why New Zealand?” the Muscovite economist replied, “so we can find out the market price of goods.”

Even in the United States, prices in major industries such as healthcare, telecommunications and energy are heavily influenced by government subsidies.

In the U.S. energy industry, taxpayers have always funded the production of new technologies and resources.  And these subsidies usually don’t go away.

For the first few decades of oil and gas development in the United States, the sector was heavily subsidized by the Federal Government, which accounted for half a percent of the entire federal budget.  Similarly, during the first fifteen years of the nuclear sector’s growth, beginning in the 1950s, a full percentage point of the federal budget was devoted to nuclear power production.

Between the mid-1970s and mid-1980s, the Department of Defense spent an average of $425 million annually in R&D for jet-engine technology, which at the time was considered to be too inefficient and unreliable for power generation.  Today, these turbines are used in natural gas power plants, which are increasingly replacing traditional coal power plants.  (To paraphrase an “Occupier” I met in San Francisco last month – taxpayers financed the R&D for natural gas turbines, a major source of revenue for GE; and, in return, GE didn’t pay a penny in taxes.  How’s that for a continued subsidy?)

The coal sector also continues to receive direct taxpayer subsidies, not to mention the indirect subsidies that result from the government’s failure to put a price on carbon – which, in turn, requires taxpayers to pick up the bill for the health costs and other externalities associated with pollution from carbon-emitting electricity production.

The list of government support for energy and infrastructure development goes on – i.e. railroad land grants that were used to encourage widespread adoption of the locomotive in the 19th century; and the public-private partnerships that brought telephone service and electricity to every community in the United States.

However, in the aftermath of Solyndra’s bankruptcy, opponents of government participation in the cleantech sector seemed to overlook the government subsidies that have, for years, buttressed the balance sheets of fossil fuel, nuclear and other companies in the energy and infrastructure sectors.  Instead, cleantech’s opponents use Solyndra’s name as a one-word cautionary tale to illustrate why government shouldn’t intervene in a sector that can’t otherwise survive on its own.  

But cleantech does, in fact, stand on its own.

As Clay Christensen points out in his “Disruptive Technology” Theory, new technologies are, at first, dismissed as toys.  But cleantech is no longer just “cute”, to use Bill Gates’ description of solar panels.   Just this past week, Mid-American Energy Company – the utility owned by Gates’ close friend Warren Buffet – purchased the 550 MW Topaz solar project, the largest solar installation in the world.

Upon announcing the nearly $2 billion deal, Greg Abel, Mid-American’s Chairman and President, explained that the transaction “demonstrates that solar energy is a commercially viable technology without the support of governmental loan guarantees.”  Amen.  But innovation shouldn’t stop there, as it currently takes two years for a modern solar panel to generate as much electricity as it took for it to be manufactured.  Thus, there is still plenty of room to improve solar technology through future innovation, which happens to stimulate growth, create jobs, etc.  Government ought to contribute to that process.

Further, innovation in the wind industry shows how wrong the anti-cleantech crowd really is.  While federal spending on energy R&D dropped by 75% over the past three decades, the productivity of wind turbines increased by a factor of over 300.  To put this in context, the current industry standard for an onshore wind turbine is 2.3 MW – capable of powering over 1,600 American homes.   This was just a pipe dream 30 years ago, even 10 years ago.   Yet, within the next few years, the traditional gearbox, which is used to operate the turbine, will become obsolete due to recent innovations in direct drive technology.   Imagine what a little more government muscle could do.

So the Solyndra debacle should not distort the big picture – cleantech is a very young industry and more companies will struggle.  But many others will succeed.

Most importantly, cleantech stands on its own even without government subsidies.  Yet it needs continued support from the government for the very same reasons that the fossil fuel and nuclear industries continue to receive subsidies – because our economy relies on affordable energy; and future innovation will continue to drive down these costs, which, in turn, creates much sought-after growth for the American economy.

And, for the record, the Kiwi subsidize their energy sectors too.

This is the first time since EfficiencyLaw.com went live in early October 2009 that I am going to publish an article not directly related to the energy industry, but I feel the topic is too important not to discuss.  I am fired up because I have too many personable, talented and bright friends who are still unemployed.

Every day, I hear the pundits talk in the abstract that America needs to create more jobs, but few people are actually offering advice to individuals on how to go about getting one.  This past Tuesday, I spoke on a career panel for energy and environmental law students at my alma mater, George Washington University Law School.  I went completely off my prepared script on Tuesday night, but here is what I recall saying to the group of students:

Cast a Wide, Wide, Wide Net

The best advice that I received in law school was, “as a student, anyone is willing to talk to you.”  I took that advice to heart and reached out to a diverse array of professionals in my field – from attorneys, to businessmen, to journalists, to investors, to engineers.

I made sure that I was sincere about the context I used in reaching out to them – something along the lines of, “I would like to get your suggestions on how to pursue a career in this field.”   I never asked for a job and I made sure that my desire to be employed did not take away from the flow of the conversation nor my ability to stay in the moment while we were talking.

At least nine out of ten times, I walked away from a meeting or phone call with an extra contact that I was told I should talk to.  People like to help, particularly when it involves a mutual interest in which both parties share a passion.

After a while, I found that I had cast a very wide net – and many of the contacts I originally reached out to, or were introduced to, as a student remain good friends today.  In fact, I am meeting one of these contacts and his new girlfriend later tonight when they come in from out of town.

Speaking of out of town – do not focus only on your own town or even your region.  You might have heard that the world is flat – I hate that phrase, but the point stands that we are all interconnected, so who you meet in San Francisco or New York might very well end up being the person who helps you in finding employment in Washington, D.C.

And don’t be shy to ask friends if they know anyone in your chosen industry.  Friends are always a great way to get started.

Read – Seriously.

You can never digest too much information about your industry, particularly if you keep a log of the important trends, statistics, etc. that you encounter along the way.

It’s overwhelming how many sources are out there – and when you’re networking, you can ask your contacts which periodicals they use to stay informed.   That will add even more sources to your already long list of websites to track.

Fortunately, like so many other things, Google has a solution for this – Google Reader.  No other tool would allow me to efficiently review all the sources I want to cover each morning in order to understand what is happening that day in my industry.

Each website page has an RSS feed – and if it doesn’t, there are other websites that can help you make one.  So I read through sources ranging from the WSJ to Greentech Media to various local business journals from around the world to the Rolling Stones website (hoping Mick and Keith make up so they can finally go back on tour!) – all in the same format on one screen with the click of a space bar.

Frequent Rejection is a Big – and Expected – Part of the Process

It is cliché to tell stories about Michael Jordan getting cut from his Junior Varsity high school basketball team or the dozens of venture capital firms that said no to Larry Page and Sergey Brin before Google finally received financial backing.  Even once you land a job, you will be shocked at the flat out rejection that great and seemingly clear opportunities face by sophisticated firms and companies every day.

Rejection is just a part of the journey, so ask for feedback whenever you can and just keep moving forward with the benefit of the experience and lessons learned.  As I told the students on Tuesday night, you WILL find a job.   And, as a former boss once said to me, “all you need is one.”

WSJ: “Age of Shale” Has Arrived

“On Wednesday, the Texas Rangers play in its second consecutive World Series.  The club’s success can be tied, in part, to an increased player payroll covered by its two new owners: Bob Simpson, whose shale-focused XTO Energy was acquired by Exxon Mobil in 2009 for $25 billion, and Ray Davis, a former pipeline executive.”  http://on.wsj.com/oQGga5

By 2030, US Military Investment in Renewable Energy is Expected to Reach $10 Billion Annually

The U.S. Department of Defense currently spends about $20 billion a year on energy – 75% for fuel and 25% for facilities and infrastructure… Military spending on renewable energy spiked over 300% between 2006-2009, to $1.2 billion, and is expected to exceed $10 billion a year by 2030.   http://bit.ly/qU2Kg6

SunEdison Secures $300 Million for Solar Financing

SunEdison’s $300 million three-year loan from Deutsche Bank Securities and Rabobank is the largest solar project financing deal to date.   The loan will support the construction costs of utility and rooftop solar projects across the U.S. and Canada.  http://bit.ly/qU2Kg6

Solar Jobs Increase Nearly 7% and Will Continue to Grow through 2012

The U.S. solar industry employs an estimated 100,237 solar workers (defined as workers who spend at least 50% of their time supporting solar-related activities) – up 6.8% since August 2010.  Over the next 12 months, almost 50% of solar firms expect to add jobs while only 2.6% expect to cut workers.  http://bit.ly/nm86ps

Energy Innovation

Graphene offers new opportunities for solar energy.  http://bit.ly/o2WzKf

Steve Jobs

“The Apple IIc with its 128KB of RAM, 125KB floppy drive, word processor and spreadsheet application, did everything I could imagine a computer doing, at the time. But visionaries like Mr. Jobs had no intention of settling for ‘at the time.’”  http://nyti.ms/oBdFuC

Energy Storage/Electric Vehicles

The Vehicle-to-Grid (V2G) concept takes form.  http://bit.ly/pAIMi4

Say what you will about Washington, there is still some beauty left inside the beltway.  At least, there was early this morning on the Potomac…

Raphael Rosen, co-founder of cleantech startup Carbon Lighthouse, offers his insights on growing a company in Silicon Valley during the recession.  Carbon Lighthouse’s energy efficiency blog can be found here: http://www.carbonlighthouse.com/blog/

As a cleantech entrepreneur, I’m often asked what it’s been like starting businesses the past three years.  In those three years alone we’ve gone from the heady, oil-spiking days in the spring of 2008 to the financial collapse to the ensuing recession.  Many ask how it is possible to get anything off the ground in constrained and nervous capital markets.  In light of recent collapses at Evergreen Solar and Solyndra, cheerleaders of a green revolution voice these concerns with greater urgency.

On the other hand, others leap to point out to me that Microsoft, Apple, and Google, with combined market capitalizations of $750 billion, are all products of recent recessions.  The time is now to lay the seeds that will reap fresh billions a decade later.  It must be an exciting time to do business.

They are both right.  It’s exciting.  It’s difficult.  It’s a wonderful mess.

But experiences vary widely depending upon the nature of your cleantech enterprise.  There are a dozen flavors of cleantech companies from product manufacturers (First Solar, Tesla Motors, Vestas) to vertically integrated development companies (SunEdison, Johnson Controls) to finance only companies (Cedargate, SunRun) to non-profits (GRID Alternatives).  The needs of developers and installers also differ depending upon scale: utility (FRV, Iberdola, Horizon Wind) vs. commercial (Nautilus, Recurrent, Safari) vs. residential (Recurve, Trinity Solar).  It’s hard to generalize across sub-sectors.

My primary experience is in solar and energy efficiency development.  ”Development” means financing and managing energy efficiency or renewable energy projects.  It stands in contrast to products, such as new solar panel technologies or advanced air conditioners.  Products and development each have unique upsides.  Product companies tend to be capital intensive, and heartbreak and bleeding cash flows are more common in product companies than in development ones.  At the same time, product companies have stronger intellectual property protection and can take off at huge scale (e.g. First Solar), so the rewards are also greater.

For a developer, the challenges are many: building a brand, streamlining operations, signing up customers, delivering solutions that at once are environmentally-beneficial but are still more cost effective than those of the trillion-dollar, fossil-fuel powered energy industry.

But aren’t federal incentives supposed to be helping drive a cleantech revolution?  What about stimulus money?  Isn’t there money out there to help?  I’m asked these questions on a weekly basis.

The answer is yes.  There is money, and it is helpful.  But not in the way most people understand. Some federal funding goes directly to product companies to help them scale their technologies, like the DOE’s loan guarantees to Solyndra.  But much of the federal legislation aimed at cleantech goes to subsidizing the cost of solar, wind, and other projects.  The Treasury Grant for Renewable Energy (Section 1603) is a huge boon for solar developers because the government is writing a check to help cover the project cost.  (The grant program also has many flaws – the constraints of depreciation, a $/Watt incentive instead of a $/kWh incentive, shifting timelines – but that’s for a larger discussion).

From a policy perspective it makes sense to invest in cleantech markets (i.e. projects) not cleantech companies (i.e. the developers making sure those projects happen).  Create the market and let the best businesses meet it.  But even when the project economics work, that doesn’t mean people will want it.  Property owners and large scale utilities aren’t always excited about armies of cleantech entrepreneurs tinkering with – and in some cases, overhauling – their existing facilities.

The developer’s task is going door-to-door changing minds about the needs of the planet by backing up proposals with sound economic solutions.  Grants to build out one’s development operation are rare and poorly advertised, and there are also few eager customers waiting.  But there is a market.  Injected with further potential by federal policy.

Yet, for the market to endure, policy must remain stable.  Policy instability is a constant challenge that transforms most developers into an itinerant lot, while sparking fear in product manufacturers wondering what will become of their end market.

Policy is least stable – and most frustrating – at the state level.  I’ve raced from New York City to Albany and Hartford just to hand-deliver incentive applications before the funding ran out.  After their funding was exhausted, we had to quit doing business in those states because the economics no longer worked.  Just last month, California raided the gas energy efficiency funds in order to plug its black hole of a deficit.  That didn’t kill Carbon Lighthouse projects because we often find solutions that are so cost-effective that they are incentive independent, but it hampered the efforts of many other cleantech companies.

So what will the future hold?  No one knows.  Least of all the state governments whose cleantech programs keep popping into and out of existence like so many whack-a-moles facing the budget bludgeon.  The future also looks different depending upon where you sit in the assembly of cleantech companies.  As renewable energy sources become cheaper and traditional energy fuels became more costly, utility scale projects will become competitive with grid energy faster than residential scale solutions.  However, dynamic market pricing could upend all of that.  In terms of policy, a vast majority remain concerned about the environment and humankind’s impact upon it, but whether that translates into clear and enduring prices on carbon remains to be seen.

One of the most exciting parts of being a cleantech entrepreneur is watching this frenetic industry whirl in unpredictable ways.  And, in the end, we will either voluntarily change the way we use energy today or be compelled to do so by mother nature in 20 or 50 years.  Why not save her the trouble?

Investment in the cleantech industry is premised on the basic assumption that climate change is really occurring, which necessitates a market for new technologies that generate electricity while emitting low levels of greenhouse gases.

As I touched on in my previous post, even if climate change is not your shot of bourbon, perhaps resource constraints may be a more compelling concern.  In other words, even if you don’t think that climate change is really occurring or GHG emissions simply do not concern you, resource scarcity should be reason enough for you to support diversifying the U.S. energy supply.

Today’s price of natural gas is relatively low – $4/MMbtu (compared with historic prices of $9/MMBtu).  While it’s true that natural gas is an abundant resource in the United States, $4 gas is not.

The price of natural gas will rise in the foreseeable future because:

• Fuel-switching at power plants.  Generators are increasingly feedstock from coal to natural gas due to a number of factors, particularly new regulations by the U.S. Environmental Protection Agency (EPA) and consumer demand for less polluting sources of electricity (natural gas is half as polluting as coal);

• Increased scrutiny of fracking.  Hydraulic fracturing – commonly referred to as “fracking” – is the process of injecting chemicals into the ground to extract gas from subterranean shale reserves.  Federal and state regulators are taking a closer look at fracking, while shareholders of gas companies have made headlines during recent proxy seasons for asking the companies they own to be more transparent in reporting the chemicals and processes associated with extracting shale; and

• Long-term impacts on supply and demand.  Although it is a number of years off, the U.S. will increase the level of domestic resources exported abroad in the form of liquefied natural gas (LNG).  This will drive domestic natural gas prices up, as they equalize with gas prices in Europe and Asia.  Also, the use of clean natural gas (CNG) will increase in the United States, particularly among fleets.

It typically takes 10 to 15 years for new energy technologies to achieve commercial scale.  The price of natural gas will rise well above $4 over the next decade for the reasons outlined above, or other factors, including supply constraints resulting from international conflict or natural disaster.  With that kind of lead time, investors who do not see the need for investment in energy resources outside of conventional fossil fuels or shale gas are embracing a short-sighted approach at the expense of their bottom line.