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Sunday, May 19, 2013

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.

Saturday, May 4, 2013

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.