Hopes and dreams for the Department of Energy

The Senate last week unanimously confirmed MIT physicist Ernest Moniz as the new Secretary of Energy. As an MIT alumnus, I’m proud — but as an organizational scholar and (part-time) energy economist, I'm somewhat apprehensive.

A cabinet secretary is not just a domain expert, but a politician and an administrator. Sometimes capable politicians with domain expertise get appointed to the cabinet (John Kerry, Donald Rumsfeld) and other times they are mediocre politicians with little particular expertise (typically at Agriculture, Labor or Transportation).

College professors tend to be long on domain expertise and short on political or administrative abilities. Academic administrative experience tends to be a poor predictor of success in managing a federal bureaucracy. Harold Brown left the presidency of Caltech to become Jimmy Carter’s defense secretary, and probably was more helped by his Johnson-era DoD experience than anything he learned at Caltech.

Moniz is the second academic physicist appointed by the president to a job that once seemed crucial to his intended legacy. The first, Nobelist Steven Chu of UC Berkeley, was appointed at a time of seemingly unlimited resources to spend on research and fledgling cleantech companies.

Secretary Chu was obviously very smart, and his passion was in funding research, which he was able to do. However the climate changed after the Democrats lost the House in 2010, and after the bankruptcy of five DoE-funded startups (A123, Abound Solar, Beacon Power, Ener1 and Solyndra). At that point, any secretary trying to implement the president’s policy goals would be facing strong headwinds.

Even so, I’d be hard pressed to call Chu a success as an administrator and leader. Apparently I was not the only one who was unimpressed. An energy industry publication, Power magazine, was harsh in its assessment:

I believe it is fair to say that Chu was a failure at DOE, but nobody noticed. That’s not necessarily a harsh indictment. There have been, in my estimation, no successes at DOE. And that’s because it is an impossible job, created under circumstances that dooms the incumbent to failure. The Department of Energy is, to be honest, a fraudulent entity. It has almost nothing to do with energy, although Chu and his boss, President Obama, tried to transform it into an institution that somehow has relevance to the way Americans make, use, and pay for energy. Both failed…

As the National Journal reported upon Chu’s resignation, his lack of political skills were a mixed blessing: at first Congress enjoyed dealing with a non-politician, but when the going got tough, Chu was hobbled in his ability to represent (or lead) his agency.

I know little about Moniz other than his online biography. He was the founder of the greatly respected MIT Energy Initiative, which includes both science and also MIT’s decades-long experience with science policy. Before that, he was an undersecretary in Clinton’s DoE. His official home page lists a 2002 article on energy policy from Physics Today. Other than its embrace of “all of the above,” it’s about what you’d expect given his resume.

In the end, however, I think the past decade demonstrates that the emphasis on physics in energy policy is vastly overrated. Anyone with a college degree (except maybe a lawyer) can be taught about the four laws of thermodynamics and how to break down the 100 quads of energy produced and used in the U.S. every year.

However, energy is not a scientific problem, and only somewhat a business and systems problem. Fundamentally, it’s an economic problem: we have many sources of energy and for many uses (e.g. grid-connected electricity) the sources are completely fungible. The challenge facing the DoE and the government is simple: how do we most cost-effectively deliver the energy needed by American society to enable economic growth? Yes, R&D for new technologies will change that picture over time, but even with cool new technologies, the final resolution is an economic — what can we afford — rather than technical one.

Rise and fall of the world’s biggest solar company

In 2011, Suntech Power Holdings was the world’s biggest solar panel producer, shipping more than 2 gigawatts of panels. As Wayne Ma of the Wall Street Journal reported today:

Suntech is now in Chinese bankruptcy court, and [founder Zhengrong] Shi isn't allowed to leave China without court approval, as is customary with non-Chinese executives involved in bankruptcy proceedings

The article is a must-read for anyone who follows the solar industry.

One reason is the dramatic turnaround of the personal fortunes of Shi, a Chinese-born Australian citizen. With his holdings in Suntech, Shi was on the Forbes list of billionaires (with a net worth of $2+ billion) in 2006 and 2008. The WSJ says his holdings were worth $4 billion in 2007 but “around $31 million” today. The pictures also show a man dramatically aged in the past five years.

The failure of Suntech has been assumed to be due to falling solar prices, but this is a pressure that all Chinese producers are facing. It was highly leverage, borrowing heavily to grow capacity and volume after the financial markets collapsed in 2008.

However, there were also unique problems of self-dealing and fraud. The WSJ focused on the investments of Suntech and Shi in Global Solar Fund, which financed European sales of Suntech panels. The story is complicated, but apparently the GSF manager posted fraudulent security for a €554 million Chinese government loan. When GSF got in trouble, the fraud was discovered, and Suntech (an NYSE-listed firm) was forced to report the GSF liabilities on its books and found itself unable to refinance more than $500 million in corporate bonds.

A second questionable deal was that Shi founded a polysilicon producer, Asia Silicon, and provided the unproven startup with both financing and more than $1 billion in purchase contracts. Suntech's failure to disclose its dealings and Shi’s conflict of interest are the subject of a class action shareholder lawsuit filed in San Francisco last year — a lawsuit that’s curiously been ignored by the US media.

After a 2005 IPO and a peak price of near $90, Suntech shares closed Friday at $.61 after trading under $5 for the past 18 months. For Shi, his dreams of creating an enduring industrial empire have been destroyed, as has his personal fortune.

Magnifying rather than quelling range anxiety

In the ongoing search for electric car nirvana, the Tesla Motor Company has enjoyed an unusually charmed existence. Perhaps it’s the Silicon Valley mystique, perhaps it’s the Midas touch attributed to its co-founder Elon Musk — who became a centimillionaire from selling PayPal to eBay, and then used his funds to start a car company, a rocket company and a solar company.

After discontinuing its $100k niche toy, the Tesla Roadster, the future of the company depends on producing and selling its $60-100k Model S sedan in volume. The latter effort was dealt a major blow Sunday when the NY Times reported the very real problems in an actual test drive:

Stalled Out on Tesla’s Electric Highway By JOHN M. BRODER

Washington — Having established a fast-charging foothold in California for its electric cars, Tesla Motors has brought its formula east, opening two ultrafast charging stations in December that would, in theory, allow a speedy electric-car road trip between here and Boston.

But as I discovered on a recent test drive of the company’s high-performance Model S sedan, theory can be trumped by reality, especially when Northeast temperatures plunge.

The problem was that — after several close calls — the car ran out of power shy of the next charging station, requiring a complex and time-consuming flatbed tow. Perhaps it was the effect of cold upon the battery life, perhaps it was the power consumed by the heater, perhaps it was bugs in the software or hardware.

Still, there’s no reason to think that the problems didn’t actually happen. In response, one would presume that Tesla would both improve its products and add additional charging stations to enable long-distance recharging.

Instead, the notoriously thin-skinned Musk tried to smear the messenger, both on a CNBC interview and on his twitter account:

@elonmusk: NYTimes article about Tesla range in cold is fake. Vehicle logs tell true story that he didn't actually charge to max & took a long detour.

In responses to major media outlets, the NYT stood by its story:

The Times's February 10 article recounting a reporter's test drive in a Tesla Model S was completely factual, describing the trip in detail exactly as it occurred. Any suggestion that the account was "fake" is, of course, flatly untrue.

Our reporter followed the instructions he was given in multiple conversations with Tesla personnel. He described the entire drive in the story; there was no unreported detour. And he was never told to plug the car in overnight in cold weather, despite repeated contact with Tesla.

Apparently the attack was an effort to prop up the stock price, which fell 4% in response to the NYT story. (That’s about $175 million in market cap — more than any of us mere mortals will ever see in a lifetime).

Despite the stress on the company and its stock, this is a textbook example of how not to handle a PR crisis. But it appears that within a NASDAQ-traded public company, no one can tell the emperor of Tesla to put his clothes on, or to listen to professional advice. As The Atlantic summarized its media report: “Elon Musk's Crusade Against The New York Times Isn't Helping Tesla.” The WSJ wonders whether this sort of concerted effort to intimidate reviewers will discourage coverage in the future.

Of course, this happened the same week that Musk — an expert in all things everywhere — was offering advice on Boeing 787 batteries. As Seeking Alpha dryly put it:

Tesla has burned through $1.25B in free cash flows in order to develop the company, and we expect that terrifying test-drives of electric vehicles from Tesla Motors will continue. We find it amusing that Elon Musk is willing to help out Boeing's Dreamliner due to the battery issue. We would like to remind Elon Musk and his team that they need to first fix their problems with their products before trying to be a superhero with the products of other companies.

Cruising range is an inherent limitation of the current generation of electric cars, and thus “range anxiety” will be a major obstacle to adoption. Musk has done himself — and the industry — no favors by helping to call attention to the article, rather than (as his employees apparently were trying to do) work with the reviewer to understand and correct the problems.

Are biofuels doomed without subsidies?

A molecular biologist (turned biofuels entrepreneur) made a stark prediction Tuesday:

Famed genomics researcher J. Craig Venter, who is working to develop biofuels from photosynthetic algae, acknowledged this week that alternate fuels are “dead” unless the federal government mandates their use with a carbon policy.

Venter’s strongly worded statement came Tuesday night at the annual Stem Cell Meeting on the Mesa, after he was asked when synthetic biology might have a meaningful impact on the country’s energy production.

Without strong government intervention, Venter said, that day will never come. He works on biofuels, human health and other issues at Synthetic Genomics, the La Jolla company he co-founded. It partnered with ExxonMobil in 2009 to develop algae biofuels.

“It doesn’t matter what the scientific breakthroughs are, there’s no way to ever beat oil,” Venter said. “In fact, oil’s not even an issue right now because of all the new natural gas discoveries.

“So there’s no way economically for a new fuel made out of renewables to ever be able to compete with something an oil company can do, without sharp federal regulations and a sharp carbon policy that says, you can’t keep just taking carbon out of the ground, burning it and putting it in the atmosphere. Until we do that, there is no biofuel industry.”

Venter is no stranger to big bets (or government intervention). His Celera Genomics raced the NIH (and its Human Genome Project) to sequence the first human genome, which cost several billion dollars.

Now Venter is hoping for government intervention — implying a carbon tax on natural gas and other fossil fuels — to raise their cost enough to support synthetic biofuels.

However, the story by life sciences reporter Bradley Fikes suggests that the key problem is not subsidies (or taxes on competing technologies) — in part because taxes on oil would reduce demand and thus prices. Fikes quoted Berkeley energy economist Severin Borenstein:

Regulatory mandates to compel adoption of biofuels probably wouldn’t work, Borenstein said.

“It may work for the United States, and even that seems a political stretch, but it doesn’t really matter if it doesn’t work in the developing world,” he said. “The idea that the developing world is going to forgo cheap gasoline to use much more expensive biofuels, I think is fairly implausible for the near term.”

Science may provide answers in the long term, he said.

“I’ve come around to the view that we need to put a lot more into research and development and pursue every possibility, whether it’s biofuels or electric vehicles, in order to find something that could be cost-competitive,” Borenstein said.

The latter point suggests one of the major disconnects in the biofuels world, between the energy industry veterans who work in the market and the university molecular biologists who are used to NIH and NSF funding all their research. Is it time for biofuels to go back to being a series of university science experiments rather than being the basis of publicly-traded high-tech startups?

Candidates duck energy debate

In anticipation of the first presidential debate, I was interviewed by a representative of LA’s second largest newspaper group. Here’s how it appeared in the front page of the Los Angeles Daily News:

From oil refineries in the South Bay to millions of motorists and other consumers, federal energy policy is critical to this region.

If President Obama truly favors a so-called "all-of-the-above energy strategy" that supports a mix of traditional and newer energy sources, some asked why do his policies restrict availability of coal, oil and even natural gas?

"I'm not sure what Obama could tell me to convince me that he sees a future role for fossil fuels," said Joel West, a professor of innovation and entrepreneurship at the Keck Graduate Institute of Applied Life Sciences in Claremont. "I'd more want to put him on record in supporting these things so later on he could be held accountable for that."

By contrast, Romney has emphasized traditional energy sources by calling for more oil drilling and fewer industry regulations in general.

"I'd like Romney to recognize that there are certain cases in which renewable energy can be successful today or can soon be successful with a little bit of government support," West said. "Because otherwise he risks being perceived as another stooge for the oil companies."

Due to a work commitment, I missed the debate but was later able to review the transcript. It appears that my worst fears were realized.

This is what Obama said:

I think it's important for us to develop new sources of energy here in America,
…
On energy, Governor Romney and I, we both agree that we've got to boost American energy production, and oil and natural gas production are higher than they've been in years. But I also believe that we've got to look at the energy sources of the future, like wind and solar and biofuels, and make those investments.

And here is what Romney said:

Energy is critical, and the president pointed out correctly that production of oil and gas in the U.S. is up. But not due to his policies. In spite of his policies.

Mr. President, all of the increase in natural gas and oil has happened on private land, not on government land. On government land, your administration has cut the number of permits and licenses in half. If I'm president, I'll double them, and also get the -- the oil from offshore and Alaska. And I'll bring that pipeline in from Canada.

And, by the way, I like coal. I'm going to make sure we can continue to burn clean coal. People in the coal industry feel like it's getting crushed by your policies. I want to get America and North America energy independent so we can create those jobs.

And then the candidates had this exchange:

ROMNEY: [T]he Department of Energy has said the tax break for oil companies is $2.8 billion a year. And it's actually an accounting treatment, as you know, that's been in place for a hundred years. Now ...

OBAMA: It's time to end it.

ROMNEY: And in one year, you provided $90 billion in breaks to the green energy world.

Now, I like green energy as well, but that's about 50 years' worth of what oil and gas receives. And you say Exxon and Mobil. Actually, this $2.8 billion goes largely to small companies, to drilling operators and so forth.

But, you know, if we get that tax rate from 35 percent down to 25 percent, why that $2.8 billion is on the table. Of course it's on the table. That's probably not going to survive you get that rate down to 25 percent.

But don't forget, you put $90 billion, like 50 years' worth of breaks, into -- into solar and wind, to Solyndra and Fisker and Tester and Ener1. I mean, I had a friend who said you don't just pick the winners and losers, you pick the losers, all right? So this -- this is not -- this is not the kind of policy you want to have if you want to get America energy secure.

So,as predicted, Obama paid lip service to all of the above (his official energy policy) but could find nothing good to say about fossil fuels while pushing solar and wind, while Romney couldn’t find anything good to say about solar or wind while pushing fossil fuels.

Still, it was disappointing that the candidates were talking past each other, with neither willing to engage the center. The president has a consistent track record — compared to some other Democrats (e.g. Bill Clinton, let alone Joe Manchin) he’s not really interested in fossil fuels. Similarly, we would expect a Bush or a Cheney to do the oil companies’ bidding, but it seems surprising that Romney, a former blue-state governor, couldn’t find a more middle-of-the-road position on energy policy.

Train wrecks California budget?

From the Sacramento Bee

By a bare majority, the state Senate voted Friday to approve initial construction on California's $68 billion high-speed rail project, ending months of intense lobbying and uncertainty in the Legislature.
...
The bill, approved the previous day by the state Assembly, authorizes $5.8 billion to start construction in the Central Valley, including $2.6 billion in rail bond funds and $3.2 billion from the federal government.

Lawmakers tied that money to nearly $2 billion in funding to improve regional rail systems and connect them to high-speed rail. That regional focus was considered necessary to lobby hesitant senators about the project's potential significance to their districts.
…
The vote could become problematic for Brown politically. Opponents of Brown's November ballot initiative to raise taxes already are planning to use the project as an example of spending they say is wasteful. A recent Field Poll suggests the message may resonate, and some Democrats said they feared its effect.

From the New York Times

Opposition cut across party lines. Speaker after speaker noted there was no source of revenue for the train line beyond the initial $8 billion, and that it was being built in rural California, far from where the bulk of the state’s population lived. Several noted the incongruity of embarking on such a major project weeks after passing a budget that included deep cuts in spending on schools and other programs.

“This is a colossal fiscal train wreck for California,” said Senator Tony Strickland, a Republican. “Members, this bill is spending money we simply don’t have here in California.”

From Bloomberg News

If Brown signs the funding bill, the state can start construction on the first 130-mile stretch down California’s Central Valley. The initial route, connecting some of the least- populated parts of the state, has fed opposition to the effort.

The tracks are to run from Merced, about 120 miles south of Sacramento, the capital, to the San Fernando Valley, north of Los Angeles, the state’s biggest city. To connect to that population center with San Francisco, the bill authorizes $2 billion of bond funds to upgrade existing commuter and freight lines to handle high-speed traffic.

California is already the most indebted U.S. state, with $73.2 billion of general-obligation bonds outstanding and the authority to sell another $33.1 billion.

From the San Francisco Chronicle

Sen. Joe Simitian, D-Palo Alto, spoke for 15 minutes about the project's strengths and weaknesses before ultimately saying he could not support the details being weighed Friday.

"I think high-speed rail makes sense in California ... but we're not being asked to vote on a vision today, we're being asked to vote on a particular plan," he said, critiquing the cost and placement of the initial stretch of track in the Central Valley and noting that the $3.3 billion in federal funds is about 5 percent of the project's total cost.

"We will be expected to put up 20 times that amount over the course of how many years. ... Regrettably, the only conclusion I can come to today is that this is the wrong plan in the wrong place in the wrong time," Simitian added.

…
But it was the location, demanded by the federal government, of the first phase of construction that proved the most controversial. Critics have derided it as a "train to nowhere," and many farmers in the Central Valley are angry about plans to seize some farmland and homes to make way for the bullet train.

"We are getting an upgraded Amtrak line in the Central Valley for $6 billion," said Simitian. "And oh, by the way, it's in a low ridership area ... a million potential riders as opposed to 28 million in the north and southern ends of the state."

Cartoon by Monte Wolverton, L.A. Daily News

Jerry Brown's white elephant legacy

From the San Jose Mercury News, June 10, 2012, p. A18:

Editorial
Enough. Stop rail fantasy in its tracks

There is a fine line between visionary and delusional. California's high-speed rail project whizzed across that line long ago and now is chugging toward the monorail station at Fantasyland.

The latest end-run tactic by the train's chief engineer, Gov. Jerry Brown, would have California's Legislature suspend its tough environmental laws so the state could put this pet project on the -- pardon the pun -- fast track.

Never mind that every independent analysis of the project has been highly critical of it.

Never mind that the High-Speed Rail Authority's own peer review group said it was terribly flawed.

Never mind that the nonpartisan Legislative Analyst's Office said even the new, new, new and improved incarnation still is not nearly "strong enough" and relies on "highly speculative" funding sources. For the uninitiated, that is bureaucratese for "not a snowball's chance in hell of finding the money to pay for it."
...
Nope, none of that matters. Casey Jones is at the controls of his legacy project, so reason and fiscal prudence must sit this one out.

We say all this despite having supported high pseed rail when it was on the ballot in 2008. Rail is important to America's future, and we knew the first steps towards any visionary plan face hurdles and may require leaps of faith.

But back then nobody foresaw the economic plunge that still leaves California mired in budget deficits. We lost faith in the original board and its planning and construction team. Then last year, an updated plan with wildly higher costs for a smaller system sent us leaping to the sidetrack. (Oopsie, did we say $45 billion? We meant $98 billion. No, no, wait, $68 billion. Well, you know, around there somewhere. Did we say San Diego and Sacramento would be included in those numbers? Drat, our bad, they aren't.)

How could anyone believe a word of what comes from the High-Speed Rail Authority? As to Brown's legacy, he still has to get us tax plan approved in the fall. If voters perceived high-speed rail as a waste of money, they will be more dubious of taxes.

From the San Jose Mercury News, June 10, 2012, p. A19:

Brown risks legacy on bullet train
By Daniel Borenstein

As Gov. Jerry Brown barrels ahead with high-speed trains, he could find that his quest for a legacy derails the November tax measure he desperately needs to repair the state budget.

For his entire political career, Brown has lived in the shadows of his visionary father, Pat, the governor from 1959-67 who brought us the State Water Project and the master plan for California higher education.

The younger Brown has always been a big thinker in search of his own legacy. But, after his first gubernatorial tenure, from 1975-83, he was best remembered as Gov. Moonbeam, the ideas guy who could never deliver, and for his appointment of Rose Bird to the state Supreme Court, which backfired when voters recalled the chief justice and two of her Brown-appointed colleagues in 1986.

We were told during the 2010 gubernatorial election that Brown, then 72, had politically and personally matured, that he was more down to earth, that he had learned from his intervening years in local government as mayor of Oakland.
…
But he undermines the frugality image by continuing to champion a financially indefensible plan to link the major metropolitan areas of the state with high-speed rail. In his search for his own legacy he risks voter support for his tax measure.

Brown should exercise caution. While he strives to be remembered like his late father for the capital projects he leaves behind, defeat of the tax measure could so badly undermine his financial recovery plans and lead to the gutting of the state's public education system that his legacy might instead resemble that of his former chief of staff, Gray Davis.

Whether voters in November see the connection -- and contradiction -- between Brown's demand for more taxes and his reckless exuberance for spending billions on high-speed rail remains to be seen. A recent USC Dornsife/Los Angeles Times poll of registered voters suggests that's a very real risk.
…
When voters four years ago authorized issuing up to $9 billion in bonds for high-speed rail, they made it subject to legislative approval. Now, Brown and Democratic leaders in the Legislature are trying to fast-track approval of nearly $3 billion of those bonds to kick-start the project -- even though they have no idea where most of the money for the system will come from.

It's a risky gambit. The governor is seeking legislative approval for high-speed rail bonds roughly four months before voters cast ballots on his tax measure. Does he really want to anger them just when he needs them the most?