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Friday, July 30, 2010

Green jobs: supply and demand

In a year of anti-incumbent sentiment, the Democrat candidates for governor and senate here are planning on emphasizing their environmental policy and green jobs. The lead story in Friday’s Mercury was about the gubernatorial candidate;
Brown puts focus on green
was the five column headline above the fold. (The online headline was more boring.) The point of the story was that Jerry Brown wants Bay Area voters to know that unlike his GOP opponent, he supports California’s controversial anti-global warming policy:
Brown said the new law would create hundreds of thousands of clean-energy jobs, reclaiming from China leadership of the cleantech economy.
Also on Friday, the local ABC TV station ran a story about the party’s senate candidate touting green jobs:
Sen. Barbara Boxer, D-Calif., is talking up the benefits of stimulus spending. Friday, she was in San Jose at a job training center talking about green tech jobs, saying California is the hub of the clean energy economy for the entire country.

At the Center for Employment Training in San Jose, Boxer watched as students practiced mounting solar panels and solar power irrigation devices.

She told the students they are training for the jobs of the future.

"If we keep focused and we make sure that we don't go backwards we will see these workers here working all over the state putting those roofs on schools on office buildings and on homes," Boxer said.

The CET received $3 million from a stimulus grant. Students are confident their training will pay off.
The story was surprisingly intelligent and balanced for local television, perhaps because reporter Mark Matthews had 2:30 to make his point. The story quoted both blue collar workers hoping to get green jobs, those that have despaired, and Boxer’s GOP opponent as disagreeing with job training subsidies.

The argument for such training is straightforward. It would be nice to rely on the market to identify training needs and supply that that need, but perhaps there would be a lag in responding to that demand — or perhaps in times of tight budgets, firms and non-profits are underinvesting in worker training.

Still, by training workers for a specific industry, the federal government is either reducing the costs for companies in that industry, or shifting demand to the trained workers from whoever the firms were planning on hiring instead. (It’s also possible that by reducing the cost of acquiring new workers, that the government is slightly increasing the demand for such workers.)

However, as one of the TV interviews suggests, some of the workers may be trained for jobs that don’t exist. For example, last year California community colleges were training workers for solar installer jobs just as other installers were laying off workers. This is both a problem with the government picking job training based on environmental policy rather than proven demand, and — more generally — a problem of producing a supply of specialized workers in advance of demand. (In California in the 1960s and 1970s, there were some really bad times to start a 4-year degree in aerospace engineering.)

The linkage of Brown’s policy lever to local jobs was more tenuous than for the direct training model. Opponents of AB 32 say that the measure increases costs (and thus reduces money for workers), particularly with small firms.

The original argument for AB32 was that California needs to take the lead among Americans in reducing carbon emissions to do our part to reduce global warming. However, since the recession, AB32 proponents (like Brown) now say requiring more CO2-efficient technologies will lead to California jobs in creating and delivering such green technologies.

The problem is that the most aggressive and admired demand-side RE stimulation — the model for the global industry — has been Germany. Now, the general consensus is that manufacturing of solar panels is fleeing to China — just like everything else — and that both German buyers and sellers of panels will shift to panels made in China.

That’s the inherent problem with buyer subsidies: they cause people to buy things, but not necessarily things made locally. (Under WTO rules, subsidies for locally-made products are verboten.) So buyer subsidies — or mandates — will shift demand but not necessarily stimulate local employment.

This is not an argument to do nothing, but it is a reminder that the effects of government stimulus (or mandates) may be less than predicted and thus less cost-effective than proponents originally claimed.

Monday, July 26, 2010

San Diego's biofuels effort

One of the two proposals to win the maximum $4 million grant from the Green Innovation Challenge was the San Diego Biofuels Initiatives, a partnership headquartered at UCSD. While I was in San Diego earlier this month, I was fortunate to meet with Prof. Stephen Mayfield of UCSD, one of the prime movers behind the initiative as well as development of San Diego’s nascent biofuel industry.

In addition to being a chaired professor in the biology department, Dr. Mayfield also is the cofounder and scientific advisor for Sapphire Energy, one of the region’s major biofuel startups. (The other major local firm is Synthetic Genomics, which has a famed genomics pioneer as a cofounder and Exxon Mobil as a major joint venture partner.).

Most importantly, Dr. Mayfield is director of the San Diego Center for Algae Biotechnology, which is the hub of the state-funded GIC project. The SD-CAB itself is a partnership of UCSD, Scripps Institute of Oceanography†, the Salk Institute and San Diego State. († Not to be confused with Scripps Clinic or Mayfield’s former employer, the Scripps Research Institute).

Three things stand out from the San Diego project and Mayfield's vision.

First, San Diego already has leading academic research, a nascent industry and strong ties between the two. The biofuels effort builds on the established biotech infrastructure — even more than solar PV builds on the semiconductor infrastructure. The local trade association, Biocom, established a subgroup to help support biofuel collaboration.

The biotech industry has deep roots in San Diego, beginning with the 1978 founding of the pioneering startup Hybritech. The biotech industry was largely a UCSD spinoff, and is responsible for the emergence of a local venture capital industry. (My own study of the parallel telecom cluster suggests that it is smaller and less durable than biotech).

The region’s efforts to become a biofuel hub are well along. At almost the same time that the state funded the worker training project, the SD-CAB got another $9 million in US Department of Energy funding for biofuel research — one of three projects funded nationwide by $24 million in Federal algae fuel research.

The second unusual point is that the project has an integrated educational strategy that combines efforts of three institutions of higher learning:
  • Biomass certificate: an AA at Miracosta College for those involved in growing biofuels
  • Biotech certificate: BS at San Diego State
  • Crop management: BS (biology) at UCSD
  • Professional master's at UCSD for entry-level researchers
and also possibly a bachelor’s degree for chemical engineers who work in biofuel refining. While UCSD is working closely with local industry, these graduates will also go to work at refineries and biofuel farms across the Southwest.

Finally, the goal of this effort is not to train some students over a two year period. It also goes beyond the necessary task of creating a curriculum and degree programs. Instead, the goal is to create a permanent educational infrastructure that supports industry needs in San Diego and elsewhere. As Mayfield told me:
We're not training 500 people, we're building a program that can train 50-100/year indefinitely, and can scale. We're building a program that can train for years.
Dr. Mayfield is quite optimistic about the pace of the science, the business and the fuel production. The DOE “National Algal Biofuels Technology Roadmap” is perhaps more cautious, listing challenges in scaling up cultivation, processing and refining.

Still, liquid fuels have the advantage of leveraging an existing distribution infrastructure to meet existing demand. The algae biofuels do not have the problems of ethanol absorbing water or being too corrosive for existing pipelines, tanks and vehicles.

Even more importantly, the algae-based biofuels avoid the problem of substituting fuel for food that our current ethanol subsidy policy engenders.

Thursday, July 22, 2010

Applied Materials curtails thin film business

Update 2:30pm. In response to a reader’s feedback, I’ve corrected the story.

The Merc this morning had a rather ambiguous story about the layoffs at Applied Materials that mark a retrenchment of its diversification from integrated circuits into PV.

GreenBeat (at VentureBeat) has a much clearer and more complete story that explains how the company is scaling back providing equipment to thin-film silicon manufacturers. (The Merc’s GMSV morning blog even acknowledges the superior VentureBeat coverage). PV-Tech also has a more precise story than the abbreviated Applied press release.

(Update: The press release itself says that Applied will no longer sell its SunFab integrated lines for manufacturing thin-film solar panels, but still plans to sell tools for thin film manufacturers. My original title “exits thin film business” was not true, but it’s hard to find what’s really happening behind the AMAT euphemisms.)

The VentureBeat story argues that Applied’s losses are just a matter of a bad bet, placing too many eggs on the future of thin-film amorphous silicon. The story predicts a cascade effect for two local PV manufacturers:
This is bad news for companies like First Solar and of course NanoSolar, which have both invested heavily in thin-film technology. Applied’s decision to migrate away from amorphous panels is yet another blow, a move that could raise the alarm among investors looking for smart, more capital-efficient investments in solar.
However, I think the GMSV commentary raises the broader and more important questions:
Others bring up that Applied CEO Mike Splinter indicated a few months ago that the U.S. solar industry was losing to China, which is building cheaper solar panels, and that the company’s latest move is symbolic of a broader problem for the U.S. energy tech industry. China is now the world’s largest exporter of solar panels, the Wall Street Journal says.
This seems to be one of the well-understood but little-remarked problems with America’s so-called “green jobs” strategy.

Consistent with the Vernon product life cycle thesis, in most tech industries the early production and manufacturing are in the developed home country, and it’s only later in the maturation of the industry that the production is moved offshore. Intel took 40 years to move manufacturing out of Silicon Valley, and similarly the software industry had a good run of several decades before penny-pinching American firms discovered Bangalore.

Today, even before American startups ramp up to meet domestic demand, they are shifting production (or contracting for production) to offshore locations. This not only has implications for the production workers, but also for the startup companies themselves: if the materials and production are offshore, is their value-add strong enough to preserve a permanent source of competitive advantage?

Of course, Apple successfully moved to contract PC manufacturing more than a decade ago — a pattern extended to the iPhone and iPad — and continues to post record sales and earnings. However, Apple is one-of-a-kind in the PC and cellphone industries, so it’s hard to say this is a feasible path to profitability for many companies.

The reality is that PV companies are producing technology-intensive, capital-intensive capital goods that produce commodity electrons. Because the substitutes — conventional electricity generation — are so cheap, they face commodity price pressures far earlier than in most tech industries.

So I think the GMSV concern is warranted: even if the irradiance and cost trends assure that California and the American Southwest will be powered by solar energy in 20 years, that doesn’t mean the profits for this infrastructure buildout will accrue to American firms. (NB: The $1.45b loan guarantee for a Spanish solar thermal producer.)

Perhaps it is my college-educated, college-teaching bias, but I also don’t think having American workers install foreign-made panels is the same as having US firms creating export-oriented manufacturing jobs in renewable energy.

Wednesday, July 14, 2010

Flash: Markets work better than governmental fiat!

When Oregon’s feed-in tariffs sold out in 15 minutes, it unfortunately revived interest in a justifiably discredited approach to promoting adoption of renewable energy.

The issue came up today at the SolarTech-sponsored workshop “Accelerating PV Commercialization,” held next door to the InterSolar trade show in San Francisco. Fortunately for those in the room — if not the broader policy audience — Hal LaFlash of PG&E swatted down the idea as quickly as it came up.

Basically, there are two common ways that government force utilities to purchase of renewable energy that is not cost-competitive with conventional sources of power:
  • The feed-in tariff to set a specific price that utilities use to buy RE. This approach was pioneered by Germany and copied with disastrous results by Spain.
  • Force utilities (using regulation and penalties) to buy a certain amount of RE, and leave it up to them to figure ut how to do that most efficiently. This is the basis of the California Renewables Portfolio Standard.
As LaFlash pointed out, the latter approach works much better, because the utility has the incentive to buy the power, but at the most cost effective fashion possible. In response to PG&E’s periodic solicitations for proposals, the RE generators state how much they want for their power and the utility runs a reverse auction, picking the most efficient (cheapest) one.

(LaFlash also noted the utility is working to streamline the paperwork process for connecting projects under 20 MW, in which the transaction costs is disproportionate to the project size.)

Stimulating renewable energy generation is about buying a commodity to achieve a policy goal at the most efficient possible price. The problem with feed-in tariffs — as demonstrated by Spain, Oregon and elsewhere — is that they assume a priori analysis or some other state planner can do a better job of setting a price than the market.

That’s what markets do best: set prices. We call it the supply and demand, or capitalism. Despite the delusions of the economically illiterate, that battle was fought and won decades ago. So here it’s California providing a model for how governments can use market forces to achieve environmental goals.

According to Harvard economist Greg Mankiw, the Federal government is apparently in the process of ignoring (or intentionally unlearning) this lesson when it comes to sulfur dioxide emissions and acid rate.

Friday, July 9, 2010

End to most carpool cheating stickers

On Wednesday, the Governator signed AB 1500, which extends HOV lane privileges for a small number of California EV owners. However, the vast majority of the 85,000 sticker owners — owners of Prius and other hybrids — will be losing their carpool heating privileges on January 1.

John Voelcker of Green Car Reports spells out all the nuances and implications of the plan, which is aimed at handing out the perks to the Nissan Leaf and other expected EV/PHEV models — and keeping the perk for the RAV4 EV and other existing EV and CNG alternatives.

The policy decision makes all the sense in the world. The yellow stickers were always intended to be temporary incentives. The hybrids offer a marginal improvement over gasoline vehicles, particularly with the increasing fuel efficiency of affordable non-hybrid cars like the Ford Fiesta, Honda Fit and Toyota Yaris.

The stickers provided a subsidy (with a market value of up to $1500/car) to fuel adoption of expensive hybrids by the affluent and upper middle class. Given their popularity — particularly in the urban areas where the HOV lanes are found — they’ve already served their purpose. Meanwhile, the 80,000+ (by one estimate) empty slots and lanes can be used to encourage adoption of a new round of lower emission vehicles.

Thursday, July 8, 2010

Estimating the cost-benefits of solar energy

The key question of renewable energy is cost-effectively producing commodity electrons. One of the most pressing questions for SolarTech, Silicon Valley’s solar energy trade association, is accurately estimating the financial returns of rooftop PV and other RE systems.

In the Spring 2010, SolarTech commissioned a consulting team of finance students from the Sbona Honors Program to look at the most commonly used tools for calculating solar returns. (I supervised a second team on local permitting, and initiated the cooperation between SolarTech and the SHP for both teams.)

The actual report is available on the SolarTech website and was announced Wednesday in a SolarTech press release, timed to next week’s InterSolar conference in San Francisco. Because it is a building block of the SJSU-SolarTech cooperation, I wrote more about the background and goals of the study in our new Solar Workforce blog.

The short answer: the students think the best alternative (of the four) is the NREL’s Solar Advisor Model. The caveat is that study was mainly on features and usability, and there still needs to be an audit (by subject experts) of the accuracy of the calculated results.

Still, this is a great example of how business schools (and undergraduate students) can be relevant to the emerging renewable energy industry. It also offers some insight to us in business schools how to bring the industry’s real business problems into the classroom.

Friday, July 2, 2010

Governator's $19 million green legacy

On May 26, Governor Schwarzenegger announced that the state Employment Development Department would award up to $20 million in grants as part of his Green Innovation Challenge:
The intent of the grant funding is to encourage industry leaders to find innovative methods designed to meet the needs of businesses to not only fill immediate employment needs, but also for the development of a partnership and infrastructure flexible enough to support employment growth for up to 10 years.

Successful applicants will have business-led partnerships, which may include entities in higher education, workforce development, economic development, employee and scientific associations, along with venture capital entities or other organizations important to making the technology successful in the short and long term.
Applicants had 20 days to file a 10 page proposal in one of five areas: renewable energy, energy efficiency, alternative/renewable vehicle (and fuels), energy storage and water efficiency.

On June 29 — less than six weeks after the announcement — the state announced six winners totaling $19 million, of which three are from the Bay Area. The winners were:
  • SolarTech Workforce Innovations Collaborative (Sunnyvale): $4 million for renewable energy, with an emphasis on PV and solar thermal
  • Northern Rural Training and Employment Consortium (Chico): $3.5 million for renewable energy in covering 11 counties
  • San Jose/Evergreen Community College: $2 million to train workers to build new energy efficient home
  • San Diego Biofuels Initiative: $4 million for biofuels based both on crops and algae
  • San Mateo Community College: $3 million for EV/hybrid maintenance at three community colleges in the SF and LA areas
  • Los Angeles Valley College: $2.5 million to both survey existing water usage and develop best practices for water efficiency
Each of the teams has two months to convert their brief proposal into an implementation plan.

While the requirements of the CFP emphasized a role for community colleges, four of the six approved proposals also include university partners. All four are using campuses of the 23-campus California State University system: Chico State (NoRTEC), San José State (SolarTech), CSU East Bay (San José energy efficiency) and San Diego State (San Diego Biofuels). More significantly, UCSD and its San Diego Center for Algae Biotechnology is playing a leading role in the biofuels project. (I visited with the SD-CAB director on Thursday and hope to post more later).

If the other universities are like us, a major goal is to create a permanent, self-sustaining change in the curriculum that extends beyond the grant period. The San José State portion of the SolarTech project involves both the business and engineering schools, and (we hope) can serve as a model for other CSU campuses. We’ve started a blog to post news about our own efforts, the SolarTech-led project, and the overall Green Innovation Challenge. Look there for further updates.

Thursday, July 1, 2010

Efficient vs. inefficient green jobs

At the EconLog blog this morning, Economist David Henderson noted his response to arguments for government subsidies of green jobs. While I don’t agree with all his points, he does bring things back to the core problem often ignored in cleantech policy: as in any other government (or private) policy, more efficient policies should be chosen over less efficient ones.

The arguments were in a monograph called The Economic Benefits of Investing in Clean Energy, available free from its two sponsors: the Center for American Progress (a progressive think tank) and the Political Economic Research Institute, a research project focusing on progressive issues headquartered at the University of Massachusetts Amherst.

In turn, Henderson — who has a part-time appointment at the Hoover Institution — published his review in the Summer 2010 issue of Regulation magazine, from Cato, the leading libertarian think thank. While CAP and Cato might agree on free speech or military spending, when it comes to government regulation and domestic spending, they are continents apart.

Henderson begins provocatively enough:
Suppose that you want to build a house, and you solicit two builders for estimates. Builder A's eight employees can build the house in three months for $300,000. Builder B's four employees can build the same house in the same time for just $150,000. Which builder would you choose?

This is not a trick question. You would choose Builder B, right? But Robert Pollin, James Heintz, and Heidi Garrett-Peltier would select Builder A if they employ the same reasoning they exhibit in their recent monograph The Economic Benefits of Investing in Clean Energy.
In other words, if spending $10 billion on green jobs is good, $20 billion is better. If this weren’t OPM (other people’s money), no one would ever think that way: it would be “how can we best increase consumer welfare by spending $10 billion” or even “what policy will create the most jobs at the lowest cost?”

Really, Henderson could just cite the Frédéric Bastiat and broken window fallacy — which describes much of the waste in government spending today. Maybe Henderson assumes his readers know the story, but the principle is inviolate: money spent fixing broken windows is money not spent on something that would otherwise be a higher priority.

Small is Beautiful: Economics as if People MatteredAttempts to abolish the laws of economics have (so far) failed, whether by Marx, Galbraith or EF Schumacher. The price system in free markets sends signals to consumers to make the optimal allocation of their resources, and no better system for decentralized coordination has yet been found. Thus, the efficient use of resources should be just as much a priority in creating “green” jobs as with ordinary jobs.

Every so often, when hiking in a national park or visiting the old downtown of a small city, I find a road, bridge or building built by the Civilian Conservation Corps. Whatever the original cost, the fact that these facilities are in use 70 years later suggests that the expenditure had a productive use, amortized over a long period of time.