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Sunday, January 30, 2011

Solynda losing raison d'etre

Solyndra had a terrible 2010: it cancelled its IPO, announced plans to close a factory and cancelled its ambitious hiring goals. Many analysts started asking whether the government would ever get back the $535m in Federally guaranteed loans — over and above the $1b in private capital.

Solyndra was once the poster child for green jobs in the Bay Area, with its factory rising only a few miles from the old GM (later Nummi) plant. Instead, it’s looking like California’s answer to Evergreen Solar — except that Evergreen IPO’d early enough to bail out its VCs.

Will 2011 be any better? Not according to Dana Hull of the Merc, who normally offers an optimistic bent on local cleantech companies. Today’s story on the website says “Fremont's high-flying Solyndra hits a rough patch.” However, as lead business story in the dead tree Sunday paper, the headline is more blunt: “Cloudy future.”

Looking at the story, this is one of those balanced stories where the reporter strained mightily to suggest a possible happy ending. The company has money (for now), a top flight team, and has completed some successful installations. It’s still hoping to make a dent in its niche, commercial rooftops.

As for any PV maker, the challenge is the price: if the commodity PV panels aren’t cheap enough, no one will buy them. This is particularly true for most thin film producers, that hoped their lower manufacturing cost would give them an advantage against the established crystalline silicon.

The problem is, crystalline silicon prices continue to fall — driven by an explosion of capacity and scale economies achieved by Chinese makers. Except for First Solar, thin film makers have been unable to keep up.

The prognosis in Hull’s article is grim:
Many low-cost Chinese manufacturers, which benefit from massive government support, are manufacturing at costs in the $1.10 to $1.20 a watt range. Thin-film leader First Solar, based in Tempe, Ariz., manufactures at 75 cents a watt and aims to be at 53 cents a watt by 2014. Solyndra says its current manufacturing costs are about $3 per watt..

"Our manufacturing cost per watt is coming down every quarter," Harrison said. "By the end of 2012 we should be at the $1.30 to $1.40 per watt range, or $2 a watt if you include installation."

But even if Solyndra hits that goal, analysts such as Jeff Bencik of Kaufman Brothers warn that competitors are similarly racing to drive down their costs -- and have a head start.

"It's a moving hurdle," Bencik said. "It will be really difficult for Solyndra to match (other manufacturers' costs) at this point. I'm not saying they can't do it, but I haven't seen it."
Evergreen took a dramatic step — moving production offshore — but did so too late to save the company. Solyndra is fighting the same commoditization, low cost producers and laws of economics.

So if this article is the hometown paper putting the best face on things, I guess we should expect a major (but unsuccessful) reorg in 2011, and a liquidation or other forced exit within 18 months.

Thursday, January 27, 2011

Natural gas: the cleanest practical alternative

The bad news for adoption of renewable energy generation is that natural gas is increasingly cheap and requires relatively small capital investments.

The good news is that natural gas is increasingly cheap and requires relatively small capital investments.

A great discussion of the latter perspective can be found in the fall newsletter of the MIT Energy Institute. In summarizes “The Future of Natural Gas,” a report summarizing a two-year MITEI study.

Some excerpts of the newsletter article:
“Much has been said about natural gas as a bridge to a low-carbon future, with little underlying analysis to back up this contention. The analysis in this study provides the confirmation—natural gas truly is a bridge to a low-carbon future,” said MITEI Director Ernest J. Moniz in introducing the report.

Moniz further noted, “In the very long run, very tight carbon constraints will likely phase out natural gas power generation in favor of zero-carbon or extremely low-carbon energy sources such as renewables, nuclear power, or natural gas and coal with carbon capture and storage. For the next several decades, however, natural gas will play a crucial role in enabling very substantial reductions in carbon emissions.”
To cut to the quick, the best way to reduce carbon emissions is to find a way to retire the dirtiest coal-powered electric plants, and the only way to do that in the near term is to replace them with natural gas. The MIT researchers assume the switch will be complete by 2050.

The price of natural gas has been quite volatile over the past 40 years, so let’s hope for the sake of the economy — and the environment — that it remains cheap enough to enable such widespread adoption.

California has already gone down this path, with (according to 2008 EIA statistics) natural gas accounting for a majority (57.7%) of the state’s electricity generation. For the rest of the country, coal accounts for the plurality (48.2%). Unlike our current fiscal fiasco, this is one case where California remains a model for the rest of the country.

Saturday, January 22, 2011

Imagine no fuel from food - I wonder if you can

The Wall Street Journal this morning notes that 39.4% of US corn went for ethanol in 2010, up from 7% in 2001. Corn prices are up 67% from a year ago.

US corn growers account for 39% of the world's corn production. Converting all the country’s corn to ethanol would replace 4% of US oil consumption. As a fuel, corn ethanol is distinctly inferior to gasoline: it creates more smog, is a less efficient fuel and damages car engines.

Even Al Gore has sworn off ethanol pandering to farm state voters. But this didn’t dissuade the lame duck Congress last month, when it extended the $5 billion tax subsidy by a year.

[Harris cartoon]It would be nice to think we could end the lunacy of converting fuel to food — either based on economic logic, or as other biofuels (such as cellulosic ethanol or algae-based fuels) take off.

Instead it appears the corn subsidy won’t end until the politicians can replace it with some other gift to farm state voters. Perhaps the Feds can overcome Eastern opposition to Midwestern exports of wind-generated electricity, which would certainly be popular in Iowa. (Or maybe the two parties can just move the date of the Iowa presidential primary.)

Cartoon Credit: Science Cartoons Plus by S. Harris

Thursday, January 20, 2011

Sunny and dark side of deregulation

10 years ago, the California energy crisis came to fruition. Blackouts and shortages rocked the state, made us a mockery of the country and brought down a governor.

Since that time, it’s been tough to find a balanced appraisal of this event. Leftists blamed evil corporations, rightists blame inept government while accounts that consider both perspectives are few and far between.

Economist Seth Blumsack of Penn State offers the rare exception, writing in December’s issue of IEEE Spectrum and posted to the public website this month. (The website comments are also helpful.)

Against the government, there was only partial deregulation which never engendered real competition. Against business, a few companies (notably Enron) were able to game the system for their own ill-gotten gains.

As Blumsack points out, electricty markets are not (and perhaps never will be) fully competitive. In this regard, the last mile resembles wireline telephone companies and other “natural monopolies.” Meanwhile, all energy markets are plagued by demand that is highly inelastic in the short run. (If gas prices double, over time I can buy a smaller car or move 15 miles closer to work, but I can’t do it tomorrow morning.)

Overall, the results are mixed. The partial liberalization has increased efficiency. On the other hand, increased pressures for efficiency have changed the energy grid from a cooperative effort to a zero-sum battle.

Blumsack contends that deregulation means higher cost of capital and thus higher project costs. It’s also possible that deregulated developers have more incentives to cut costs while regulated utilities — like a government entity — will quite freely spend money not their own.

Finally he points to the role of markets in promoting green energy. Markets can be used to buy anything, and most American states are using them to procure geen energy.

Saturday, January 15, 2011

A green way to fight EVs

The general public and the media hype machine seem to assume EVs are good for the planet, even though that assumption is dubious at best.

Still, I was unaware of environmentalists passing policies to reduce the use of EVs here in California — until now.

A Purdue study (forthcoming in Energy Policy reported by the LA Times) notes that the state’s aggressively tiered electricity rates — plus our electricity prices — make the state one of the most expensive (i.e. least desirable) places for a consumer to charge an EV, perhaps 35% above the national average.

Philosophically similar to a progressive income tax, California’s tiered electricity rates charge more per kWH for big users than small users. It’s designed to encourage energy efficiency (but also also sock it to the rich.)

A PHEV would increase a homeowner’s electricity consumption by 60%, thus pushing even the most efficient homeowner into a higher tier.

The study from Purdue’s Energy Center pointed to another problem: California’s average electricity price is among the highest in the country: 4.4¢ per kWH vs 8¢ for a low cost state like Indiana.

In short, the economics of the Chevy Volt don’t work, according to the Purdue press release:
The researchers determined the plug-in hybrid would be less economical than the Toyota Prius, a hybrid that does not charge its battery through a plug, or the Chevrolet Cobalt, which uses only an internal combustion engine. When oil prices are high, the Prius would be the most economical, with the advantage going to the Cobalt when oil prices are low.

Tyner said to make the Volt more economical than either the Prius or the Cobalt, oil prices would have to rise to between $171 and $254 per barrel, depending on which electricity pricing system is being used. That's because the Volt has a higher purchase price and will cost more in electricity than gasoline over the life of the vehicle.
Even with $7,500 in Federal subsidies, the numbers just don’t pencil out:
"People who view the Volt as green will pay $10,000 more over the lifetime of the car because it's green," Tyner said. "Most consumers will look at the numbers and won't pay that."
Perhaps this explains the dismal sales of the Volt (and its competitor the Nissan Leaf).

Of course, this is a job for the controversial SmartMeter™!! With time of day metering, excessive energy consumption at night (which isn’t going to be air conditioners) could be charged at the base rate rather than the peak rate.

There’s no evidence of a CPUC ratemaking proceedings yet, but I’d bet money that our local EV company and its allies will request starting one soon.

Monday, January 10, 2011

EVs' dirty clothes

The assumption of those buying, selling and seeking subsidies for EVs is that they are somehow cleaner than existing internal consumption engine cars.

The premise has numerous largely unexamined assumptions. One is that the alternatives are a stationery target — that there’s no progress on competing technologies (e.g. hybrids, diesels, fuel cells, etc.). Another is accounting for the energy cost of creating the batteries and the pollution cost of disposing of them.

And — as with any environmental investment — there is the question of whether this is the most efficient way to spend billions or trillions to save the planet. If (hypothetically) it takes $5 trillion to replace the global transportation infrastructure to not emit carbon but only $1 trillion to sequester carbon, couldn’t that extra $4 trillion be used to cure malaria, provide safe drinking water, or other alternatives that improve the health of the planet and its residents?

However, these are second-order arguments that don’t seem to be getting traction.

A much simpler argument is: is generating (and distributing) the electricity to the new generation of EVs cleaner than currently available gasoline-powered cars?

Increasingly, evidence suggests that the answer is “no”. As I noted last May, outside of New Zealand, few countries have green enough aggregate energy generation to reduce CO2 emissions if you shift from gasoline to grid power.

If you look a little deeper, the US picture is even worse. There are two types of electricity — cheap baseload and expensive (or more variable) peak load, used when lights are on and air conditioners are running. Solar obviously is a daytime peak load source, natural gas (the cleanest fossil fuel) is expensive and used only at peak load, and who knows when wind will be available.

However, smug homeowners with their non-polluting EVs are plugging into the grid at night, when there’s no solar. According to John Petersen (writing at Renewable Energy World) those kilowatt-hours will come from baseload power — which in the US means either coal or nuclear power. His article draws on a 2008 Rand study of the lifecycle comparison of HEVs vs. PHEVs.

The Rand study says that if you use natural gas to generate electricity, a PHEV is cleaner than a HEV but if you use coal it’s dirtier. (What about CNG cars? Petersen doesn’t say). Running coal plants to charge “clean” EVs is obviously somewhat of a contradiction in strategies.
From my analysis of 2008 EIA data, coal accounted for 48.2% of US electricity consumption and nuclear 19.6%. (In California, it’s 57.7% natural gas, 15.6% nuclear but only 1.1% coal.) Of course, shifting transportation from liquid fuels to the grid would require incremental increases in electricity generation — retiring fewer coal plants or even building more of them.

The one gap in Petersen’s analysis is that hydro can be shifted to be used whenever power is needed, so that increased electricity consumption at night could be fed by hydro. Of course, that takes away from its availability at (the more valuable) daytime peak load. More seriously, US hydro is only 6.2% of consumption and pretty much capped in absolute terms.

So this comes back to the fundamental systemic innovation problem: changing our century-old transportation system to be more green is complex and expensive. If we don’t use market forces — or distort the market by favoring one approach over another — there are likely to be suboptimal choices made.

In this case, it appears that it would be better to shift the grid to renewable energy first, and then put cars on the grid, than to add EVs to the grid at a time when renewable energy is a relatively small part (<10%) of our electricity supply. The only encouraging news is that when they spend their own money, consumers are thus far resisting the EV hype machine and going with more economically efficient alternatives.

Friday, January 7, 2011

Are VCs giving up on RE? Should they?

Cross-posted to Engineering Entrepreneurship.

Statistics released Friday by the Cleantech Group say that “cleantech” VC investments in 2010 hit a record $7.8 billion, up 28% from the $6.1 billion in 2009 for North America, Europe and Chindia. The N.A. data was even more impressive, up 45% to $5.28 billion. Worldwide, solar continued to account for the largest share of the investments, up 52% from 2009 to $1.83 billion.

Although this sounds encouraging, Iris Kuo of VentureBeat had a different take. First, cleantech VC investment has been declining for the past two quarters. Instead, the capital-intensive have been going to government sources, including BrightSource, Solyndra and Tesla.

However, analysts are just beginning to realize that cleantech businesses may be fundamentally unsuitable for VC investment. A series of clues have emerged in the past 6 months.

Exhibit A was the whole debate started by VC Fred Wilson and his “two venture capital industries” thesis:
The first VC industry is investing in software based businesses. The software VC business has been fundamentally altered by the massive decrease in the cost of building and launching a software based business.…

The second VC industry is investing in cleantech, biotech and other capital intensive tech businesses that have economic models that have not been fundamentally altered. This VC industry operates largely the same way it has operated for the past twenty or thirty years.
The statistics were supported by TechCrunch data from the first 8 months of 2010: an average of $5m for web/ecommerce vs. $31m for cleantech.

Exhibit B was the decision of Kleiner Perkins to pull back from cleantech investing and go back to its roots in IT. Of all the major Silicon Valley VCs, KPCB had made the most aggressive bet on cleantech — particularly green energy. This is the firm that in 2007 made a partner out of a former presidential candidate and Nobel Prize winner.

Exhibit C are the observations of one of the most respected IT industry executives, analysts, inventor and entrepreneurs: Bob Metcalfe (MIT ’69), inventor of Ethernet and founder of 3Com. Having finished a decade as a venture general partner, last month Metcalfe said that the VC model (so far) does not fit cleantech:
Q: What did you learn from your investing in clean-tech, or as you call it, enertech?

A: I’m still in the process of learning – this is complicated stuff. But I learned that the innovation environment in the energy space is not there yet. The problems we see are a mismatch between the asset class called venture capital and the innovation opportunities in energy – it takes too much capital and it takes too much time. But I claim that’s only because the innovation environment in energy hasn’t developed, say, the way it has in pharma. Drugs take a lot of money and a long time, but there’s a lot of venture capital activity in drug discovery. That’s because the drug-discovery business has grown into being able to exploit the venture capital model. The partnerships that big pharma has with drug companies in stage one, stage two, stage three [clinical trials] allow venture capitalists to do what they do and get the returns that they need. The energy space has not quite developed, but it will.
Understanding Silicon Valley: The Anatomy of an Entrepreneurial Region (Stanford Business Books)This entire debate was anticipated by Prof. Martin Kenney of UC Davis, the editor of Understanding Silicon Valley — perhaps the leading academic expert on Silicon Valley and a longtime expert on hightech VC.

In July 2009, Kenney wrote a book chapter entitled “Venture Capital Investment in the Greentech Industries: A Provocative Essay” that will be published in the Handbook of Research on Energy Entrepreneurship. He notes a number of warning signs:
  1. investors have been pouring money into green energy without being able to get it back from IPOs;
  2. market growth may be slow, since “clean” technologies are competing with established (and cheaper or better) incumbents;
  3. the cleantech bubble investing bubble parallels the Internet bubble;
  4. thus far, the most successful cleantech businesses have been self-funded: either bootstrapped (e.g. Danish wind turbines) or internal green ventures from existing multinationals like Siemens and Sanyo.
Kenney tries to offer a positive scenario, suggesting that VCs could learn and adapt like they have in biotech. However, in the past 18 months have been signs that biotech VC may be facing similar problems (if the returns to pharma R&D are becoming less certain).

While the scale of investment in energy is enormous, the VCs have various reasons to actually favor larger deals (and often pension funds throwing money at them to invest). While VC worked great during the 1990s with relatively small investments followed by quick exits via IPO or acquisition, but both are much harder in renewable energy.

The first problem is the time scale. If (as Zider’s 1998 classic HBR article suggests) VCs seek a 10x liquidity event after 5 years (to cover their losers), then doubling the delay to 10 years cuts the IRR by more than half (and the NPV even more than that). For a 10 year exit — and ignoring the increased risk of failure — the same IRR would require a 100x return.

The other problem is that the size of the investment reduces (if not eliminates) the opportunity to exit via acquisition. A 10x return via acquisition was common for $50m dot-com investments, but such exits are going to be much rarer with $500m invested; a 100x return is going to be out of the question.

If VC can’t find a way to make money off cleantech investments, then cleantech entrepreneurs are going to have a hard time bringing their businesses to scale. Without VC, new businesses will have a hard time competing with self-funded multinational incumbents — or government-funded enterprises in large centrally-planned economies.

Saturday, January 1, 2011

EVs good on MPG, HPM

A big debate recently on EVs and PHEVs has been how to measure the miles per gallon given that a) sometimes they use no gas at all; and b) electricity is an energy cost, even if it’s not a gallon of gas.

Who Killed the Electric Car?But now I think it’s time to focus on HPM (hype-per-million): misleadingly high press popularity that masks underlying revenue model problems. Electric cars seem to be heavy on the hype — by the vendors, the business press, the general press and even politicians — while sales are barely improved from the first great coming of the EV. (And this time, there’s no one to blame for poor sales but the invisible hand of basic economics.)

An AP report Friday was stark in its assessment:
GM sold 250 to 350 Chevy Volts this month, and Nissan's sales totaled fewer than 10 Leaf sedans in the past two weeks. Production for both is slowly ramping up.

It will be well into 2012 before both the Volt and Leaf are available nationwide. And if you're interested in buying one, you'll need to get behind the 50,000 people already on waiting lists.

It's still unclear just how large the market for electric cars will be once those early adopters are supplied. The base sticker price is $40,280 for the Volt and $32,780 for the Leaf, much higher than most similar-size, gas-powered cars. If those prices rise, it could make them even more of a niche product than predicted. Buyers also are worried that advertised lease deals may not last, and a federal tax rebate of $7,500 could disappear if Congress decides battery-powered cars are no longer a priority.
According to the story, Nissan can build 50,000 Leafs a year while Chevy hopes to sell 10,000 Volts in 2011 and up to 45,000 in 2012.

By comparison, Chevy sells more than 200,000 Malibu sedans a year (for a price that’s half that of the Volt.) Of course, price is everything — now more than ever. And with the new Congress, expansion or even extension of generous Federal subsidies seem less likely than ever.

Edmunds is predicting HEV/PHEV/EV will rise from 2.4% in 2009 to 4.8% in 2013, with EVs only a small fraction. Of the 14-17 million passenger vehicles sold every year in the US, that would be an increase from about 350,000 to 700,000 vehicles a year. Most of those are probably the Prius, which is selling about 400,000 units annually (worldwide).

This is consistent with the November prediction made by Daimler AG CEO:
In 10 years’ time, the overall market share of electric cars is likely to be still in the single-digit percentage range. … In principle it’s similar to President Obama—first, expectations are being raised externally and then people are surprised they don't get fulfilled. From today's perspective it's already clear [that] we won't earn high returns with electric cars in the years to come. And that's the optimistic wording.
Even the 4.8% forecast may be optimistic: selling 70,000 Leafs and Volts would be only 10% of the US market. Given Toyota is driving most of its HEV demand to the Prius, category growth is going to depend on other makers (most likely Honda and Ford) offering their own hit HEV/PHEV/EV models.

Both Honda and Ford have offered credible products, but neither has made much of a dent: even in a good month (October 2010), Honda only sold about 4,000 units in the US. Honda promised to be aggressive in pricing its HEVs and EV models, but the Fit EV (due in 2012) is priced at $30k, only about 10% below the slow-moving Leaf.

So where is the growth going to come from? Yes, $150/barrel oil would increase EV sales (even if it has no direct effect on renewable energy, which instead competes with coal and natural gas.) But that’s not really a business strategy — unless you have the geopolitical connections to arrange a third Arab Oil Embargo.

My own purchase intentions reflect this reality. At one point, I thought my next car would be the $20k Honda Fit Hybrid, until Honda decided not to sell it in the US. Instead, it’s more likely to be $15k for a Ford Fiesta (37mpg), Mazda2 (35mpg) or Honda Fit (33mpg). Ignoring the time value of money, a $15k purchase price differential (vs. a Leaf or Fit EV) buys 5,000 gallons of gas — enough to cover the fuel costs for the entire life of the car. Plus there’s no battery to put in the landfill, or coal-generated electricity to pollute the planet.