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.

Attempts 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.

Tesla's big day

Today was a great day for Tesla Motors and its CEO Elon Musk. Both got tons of favorable publicity — opening the NASDAQ market this morning — and wads of badly needed cash as the company enjoyed a wildly successful IPO.

By any measure, the IPO was a huge success:

• The offering was expanded from 11.1 to 13.3 million shares.
• The offering price was raised from the planned $14-16 to $17/share; and
• The stock rose 40% in the first day of trading to close at $23.89, creating a market cap of about $2.2 billion

All this on a day when the Dow fell 2.6% (the NASDAQ 3.8%) as common investors panicked in the face of worsening economic news, and in a year where IPOs are few and far between. (My theory is that the stock defied the market because TSLA stock buyers were a combination of rich environmentalists that buy the cars and hot stock faddists who buy the story.)

(As with most Tesla financial news, the best reporting came from VentureBeat reporter Camille Ricketts.)

By selling almost 909,000 of his own shares, the 39-year-old Musk grossed $15 million, while his remaining shares were worth more than $650 million. Once the lockup is over, this presumably will allow him to pay some of his bills and start to resolve his long-deferred divorce settlement. After going broke, it also amounts to a personal vindication of the vision of the billionaire serial entrepreneur.

In fact, the LA Times found an Edmunds.com analyst who saw this as more of a referendum on the Tesla and Musk star power than its business or the industry at large:

"It's all the hype that's been built up, the first-day craziness," [editor John O'Dell] said of Tuesday's stock surge. "I would not take what's happening as a referendum on the EV market overall. It's unique to Tesla and Elon Musk and his reputation and persona."

Now that they’re a public company, the real scrutiny begins.

Ricketts has a list of 10 key questions for the company and its investors. Some are the obvious ones — when will Tesla stop losing so much money and how will it support the stock (and the balance sheet) when its second product is two years out. Others are less obvious, including how will Tesla balance its two strategic investors — Daimler and Toyota — who gave the company legitimacy, technology and (competing) potential exit strategies.

Others are also asking piercing questions. For example, John Gapper of the Financial Times wonders why investors are (apparently) so sanguine about having a part-time CEO of a multibillion dollar (market cap) company. Yes, Musk apparently fancies himself the greatest entrepreneur (and perhaps greatest tech CEO) of all time, but even Steve Jobs only managed to run two companies (Pixar+NeXT, Pixar+Apple) while Musk has three (Tesla, SpaceX and SolarCity).

One of the other questions Ricketts asks is how Tesla’s planned Model S sedan will compete with rival offerings from Chevy and Nissan — two well-capitalized manufacturers with better distribution. There’s also Fisker, the other major startup EV company, which used $20m of its $529m in stimulus funds to buy GM’s shuttered Delaware plant — part of its plan to help stimulate Finland’s economy.

Right now, electric vehicles are niche products: Tesla has sold 1,100 cars in two years — less than the total number of cars sold every two hours by the incumbent vehicle makers. The Model S and its rivals all hope to be the Camry (or Taurus) of electric cars, albeit at a healthy price premium (even with subsidies).

Into this niche are coming GM and Nissan right away, Fisker and Toyota soon after, and probably Ford, Honda, Chrysler, the Koreans and the Chinese by 2015. So far, the cars are 20-50% more expensive than their internal combustion counterparts. Meanwhile, the economics and green footprint of these vehicles depend on both the cost of gasoline (retail or with externalities) and how that compares to the real cost of grid power.

Meanwhile, sales are flat for the rest of the auto industry (at least in the developed world) with too many companies and factories chasing too few buyers. Even if electric cars increase their share of the market, they’re not going to grow the overall market, and that existing capacity (both manufacturing and distribution) will chase wherever the market goes.
The best case: the EV market grows rapidly and the rivals are slow to enter (unlikely) or are unable to match Tesla’s innovative products. The worst case (pick one): the market grows slowly, the prices remain high, a political shift reduces federal subsidies, or rivals (such as GM or Nissan) reach the mass market first.

I think the Tesla team should celebrate a well-deserved 4th of July weekend. After that, it’s back to work on trying to stay ahead of what will inevitably become a price-sensitive commodity business.

Toyota-Tesla: less than meets the eye

VentureBeat has analyzed the latest Tesla S-1 filing about its recent deal with Toyota, and found some interesting tidbits:

• Toyota has not yet agreed to partner with Tesla to build a car;
• Toyota made only a conditional promise to buy Tesla stock after an IPO;
• Tesla did not buy any NUMMI production equipment.

Some excerpts of the story:

…the newly revised S-1 states very clearly:

“In May 2010, Tesla and Toyota announced their intention to cooperate on the development of electric vehicles. This may involve the production of vehicles or powertrain components. However, we have not yet entered into any agreements, including any purchase orders, with Toyota for such arrangements and we may never do so.”

This is surprising, considering that Musk is already enthusiastically talking about not just one joint Tesla-Toyota vehicle — due out in the next four to five years, he says — but multiple tandem projects using Tesla’s powertrain technology and Toyota’s components.

and

For now, all that is tying the major Japanese automaker to the venture-backed startup is an agreement to buy a $50 million stake in the latter if and when it goes public.… [However,] if Tesla doesn’t have a successful IPO by Dec. 31 of this year, Toyota is no longer obligated to the buy these shares. This puts even more pressure on the company to make it to an IPO at all costs.

The conclusion of reporter Camille Ricketts:

Tesla and [CEO Elon] Musk have a history of making announcements that sound sweeter than they really are upon closer inspection. Last July, when the company declared profitability — with a margin of just $1 million — a number of reports said the claim was all smoke and mirrors. And when Tesla first filed to go public at the end of January, it conveniently provided financial reports only through the end of 2009’s third quarter, omitting the fourth quarter’s dismal sales. That data has since been included, but there’s a trend here.

Update 9pm: If that’s not enough, Venture Beat reporter Owen Thomas also reports Thursday that due to personal liquidity problems — tied in part to his inability to stay married — Musk has been broke for more than six months. Musk once used his personal fortune to keep the company afloat for the first five years, but now it appears he no longer cover a negative cash flow exceeding $100 million/year. Thomas concludes that even with government loans, the Model S is unlikely to begin production unless Tesla completes a successful IPO in the next seven months.

(Most of the divorce story is already several weeks old, having been covered by Edmunds, Divorce Saloon and Musk’s ex-wife herself May 6 and May 8.)

The upshot of both stories suggests that Toyota seems to be first in line to acquire Tesla and its technology if it runs out of cash, but has no financial obligation to bail it out if it doesn’t like the terms.

Runaway Bride

Thursday night, Palo Alto-based Tesla Motors announced that its long-promised Model S electric sedan would be built using a portion of the closed NUMMI plant here in Fremont. The announcement came with a $50 million investment from Toyota.

Given the 25-year NUMMI joint venture between Toyota and GM had established infrastructure, and its April 1 closing was a source of great embarrassment to Toyota, this seems like a no-brainer. However, apparently it only dates to an April meeting between the Toyota CEO Akio Toyoda and Tesla CEO Elon Musk, who made the joint announcement Thursday.

When I heard this, however, it reminded me of all the previous places that Tesla had promised to build a factory:

• Albuquerque: promised 2007, abandoned 2008
• San José: a greenfield site, promised 2008, abandoned January 2009
• Palo Alto: a former HP factory, promised August 2009 — and apparently still on

This reminded me of the Julia Roberts movie “Runaway Bride,” about a woman who kept planning weddings but then abandoning them at the last minute.

Most recently, the company had been negotiating with Long Beach (the former Douglas Aircraft plant for making DC-9s) and Downey (a former NASA site) in the LA area:

"It's gonna be a tough decision, because I think frankly both Long Beach and Downey would be great locations," Musk said.

Downey officials had approved nearly $9 million in incentives to attract the factory. The facility had been once listed in Tesla’s proposal for a $465 million “advanced technology” federal loan. Needless to say, city officials were upset:

"We are shocked, upset and betrayed. We can see why the public is so upset with corporate America," said Downey City Councilman Mario Guerra, adding that Tesla had told the city it would sign the lease for the Downey plant on Friday.

According to proponents, the Fremont plant will create 1,000 jobs. The company has cumulative losses exceeding $200 million on sales of about 1,000 cars and total revenues around $100 million. For such a tiny car company — selling a niche product — it has been tremendously successful getting publicity and promises of subsidies from local governments.

Or as a Downey city official put it:

“I couldn’t be more disappointed. I feel like I was stabbed in the back,” Councilman Mario Guerra said yesterday. “We were promised all along that we weren’t being used and this is what happens.”

“Elon Musk personally gave me his word that we weren’t being used,” Guerra continued. “Somebody is a very good poker player and I guess that’s how you become a billionaire.”

Tesla had also been promised as the salvation of the American auto industry, which has lost 100,000s of jobs in the past three years. Now, with the strategic investment by Toyota, there is an increased possibility that its exit strategy will be to become a subsidiary of Japan’s (and the world’s) largest auto company.

EVs: An expensive way to pollute the planet

I've always wondered about the green bonafides of electric vehicles: not because of the batteries, but because of the greenness of the electricity that it pulls off the grid to charge those batteries.

Sure, some people make themselves feel better by buying electricity from green sources — but then that reduces the supply of renewable energy available for others to buy. Meanwhile, if California (and other regions) is straining to achieve even 20% RE share, the marginal effect of increasing electricity demand will be to increase fossil fuel consumption from peak sources. It’s easy to ramp up electricity generation from peak natural gas (or coal) plants, but nearly impossible to quickly increase baseline generation of carbon-free sources like RE or nuclear power.

Even if you go for average — rather than marginal — CO2 emissions from grid power, the federal Energy Information Administration predicts that fossil fuels will account for 65%of electric power generation in the US even in 2035.

Now, a veteran British auto journalist has attempted to calculate the lifecycle CO2 cost of electric vehicles. Building on a team of consultants working over a three year period, the report, “The Emperor’s New Car,”was authored by Clive Matthew-Wilson of the auto review site Dog & Lemon Guide.

As Matthew-Wilson writes:

Claims that electric cars are ‘emissions-free’ are simply a lie; they merely transfer the pollution from the road to the power station. Not only will electric cars not reduce emissions, they may actually increase emissions, because burning coal to make electricity to power an electric car creates more pollution than if you simply powered the same vehicle using petrol.

Renewable energy sources may be growing fast, but they’re still a tiny percentage of the world’s electricity supply and they’ll stay that way for the foreseeable future, because renewable energy sources tend to be far more expensive than fossil fuels.

The study contrasted the Tesla Roadster with the Lotus Elise (petrol-fueled) car that it’s built from. It concluded that the Tesla produced less CO2 emissions if used in New Zealand (where grid power is primarily hydro) but more emissions in the US, UK, China and Australia.

The report also concludes that the EVs are likely to be produced mainly at Chinese factories with far less environmentally friendly production and energy generation than those of the developed world.

Such errors are hardly accidental. As the Toronto Globe & Mail summarized the report:

The report says car makers, not environmentalists, are prematurely pushing electric cars. Car makers want electric cars because of the enormous subsidies they will generate.

This is hardly the final word on the subject, and it would be naïve to think this will end the hype and exaggeration. However, one can hope it will engender more accurate estimates among environmentalists and policymakers as to actual ways of reducing CO2 emissions.

Instead of cutting edge, technologically risky and expensive EVs, the report concludes that the best way to reduce CO2 emissions in populated areas is by using a proven (100-year-old) technology: mass transit.

Here in Silicon Valley, we’re heading in the other direction. In Santa Clara County, we have a mediocre bus network and a limited light rail system. Meanwhile, the three-county commuter rail (Caltrain) is about to disappear as cash-strapped local governments end their subsidies. Meanwhile, Googlers and other members of the Silicon Valley elite buy Teslas rather than depend on mass transit.

To me, it seems like stimulating EV usage before we have a large supply of RE is putting the cart before the horse. In 2009, both RE and EV manufacturers won generous Federal subsidies, but if the government some day decided to adhere to a budget, the data suggests subsidizing RE now and EVs later.

Which way is the wind blowing?

The most controversial wind project in the US, the 400+ megawatt Cape Wind planned off Cape Cod, was approved by the Federal government Wednesday. Many considered this a surprising development, because of the adamant opposition of the Kennedy family — and other affluent members of the Massachusetts economic and political elite — who objected to the impact on their views of the Nantucket Sound.

As with solar energy in the Mojave Desert, this controversy found unlikely adversaries between pro-RE environmentalists and anti-development environmentalists. The Obama Administration, represented by Interior Secretary Ken Salazar, came down (mostly) on the side of renewable energy.

The NY Times captured the tension of this conflict in its own backyard:

Friends and foes have squared off over the impact it would have on nature, local traditions, property values and electricity bills; on the profits to be pocketed by a private developer; and even the urgency of easing the nation’s dependence on fossil fuels, a priority of the Obama administration.

Opponents argued that Cape Wind would create an industrial eyesore in a pristine area; supporters countered that it was worth sacrificing aesthetics for the longer-term goal of producing clean, renewable energy.

Developers say that Cape Wind will provide 75 percent of the power for Cape Cod, Nantucket and Martha’s Vineyard — the equivalent of that produced by a medium-size coal-fired plant. It would also reduce carbon dioxide emissions by the equivalent of taking 175,000 cars off the road, officials said, and provide 1,000 construction jobs.

The project has also made for some strange bedfellows. Cape Wind is backed by both Greenpeace and the United States Chamber of Commerce.

It has been opposed perhaps most prominently by members of the Kennedy family. Senator Kennedy was a longtime sailor on Nantucket Sound and fought the project up until he died.

President Obama himself on Tuesday toured the Siemens factory in Iowa where the turbines would be made. (No mention whether Iowa’s pivotal role as a swing state played any role in the factory location or the presidential visit.) The administration expects a string of future offshore wind farms up and down the East Coast, as part of a plan to raise wind to 4% of electricity generated in 2030.

In my memory, renewable energy was last in ascendancy in the 1970s and early 1980s around the time of the two Arab oil embargoes. Of the influential politicians of the day, Jimmy Carter probably would have sided with green energy (and energy independence) over Kennedy views — particularly when Sen. Kennedy began his very public nomination challenge leading up to the 1980 election.

I suspect that another Carter primary rival in 1976 and 1980 — Edmund G. Brown Jr. — would have come down another way. Then at the peak of his “Small is Beautiful” (ala EF Schumacher) infatuation, Jerry Brown was then about building less things, using less, spending less and consuming less.

What about today? In his adamant support for AB32 — the California precursor to national cap-and-trade legislation — Brown today is clearly about consuming less energy. While his campaign website brags about tax credits in the 1970s that brought windmills to California (mainly in the Altamont Pass,Tehachapis, and near Palm Springs), it doesn’t say how he’d come down on an RE vs. environmental preservation issue.

Our current Governator has strongly favored RE over environmental protection, implying that favoring the latter is something only a “girly man” who do. Given their moderate records on green energy, I suspect both of Brown’s GOP rivals — Meg Whitman and Steve Poizner — would also come down in favor of renewable energy (ala the Chamber of Commerce), particularly if there’s little government money involved.

But what would Jerry Brown do? I guess it depends on which way the wind is blowing. For the Obama administration, it appears that making progress on long-term renewable energy goals is more important than satisfying a small number of avid supporters in its base. This is good news for the wind turbine industry, and renewable energy advocates more broadly.

Three cheeers: Facebook favors EE over RE

The Merc Sunday carried an AP story (also in Business Week) about how Greenpeace is upset at Internet companies for not using clean power on their datacenters. The BBC had a version of the story last month.

The Green peace criticism is particularly harsh for Facebook for building a datacenter in Prineville, Oregon, because the local utility uses coal instead of the hydro power commonly found elsewhere in the Pacific Northwest.

Datacenters are certainly important: the AP reports an EPA estimate that in 2006 they accounted for 61 billion kilowatt hours, or 1.5% of the nation’s grid power.

The charge is somewhat spurious: in the short term, having company X buy more RE means that there is less RE available to sell to company Y (or consumer Z). In the long term, it’s possible that greater demand for RE will push up the supply of RE, but in the near term the supply of RE — particularly hydro, solar and wind — seems to be growing as fast as is possible.

(Of course, firms like Google etc. that add their own onsite generating capacity are certainly increasing the supply of RE and reducing the demand for grid power overall).

Instead, Facebook is choosing approach both reduced costs and power purchased from the grid. By building its datacenter in a location with good natural cooling, it hopes to dramatically reduce its AC bill.

As the AP reported:

In most data centers, cooling the servers takes nearly as much electricity as running the servers themselves. Facebook hopes its new cooling system will take only 15 percent as much power as the computers. Facebook is also shooting for a gold rating from the green building standard known as LEED.

The climate is important. Even in summer, nights are cool. The center can take in outside air for free. When temperatures rise, a high-tech swamp cooler blows dry air over water, and the evaporation lowers temperatures. In winter, hot air from the servers is blown into office space.

In other words, by emphasizing energy efficiency, Facebook will pull less power from the grid (from any source), leaving that power (both RE and non-RE) available for other sources. In the long term, that will do more to provide a net reduction in CO2 emissions than any effort to shift some uses to RE.

As Matthew Humphries of geek.com concluded:

I don’t think any of the tech companies are dismissing renewable energy and trying to save power. The fact is, energy is expensive so any way it can be saved is thought about and implemented. Datacenters are starting to ditch air conditioning in favor of natural airflow through buildings, for example.

Hydropower, solar, and wind are all being used if they are accessible to a datacenter, and Google has also started experimenting with wave power and creating floating datacenters. Some datacenters route their waste heat to act as heating or a power source for other buildings. There’s also the introduction of Bloom Energy, which relies on natural gas, but uses significantly less fuel to generate energy. It’s a power source of the future, but is already in use at a number of technology campuses.

Greenpeace are right to highlight the need to focus on renewable energy, but I believe this is one area where the companies running these centers will jump to renewable and clean energy wherever possible because it is cheaper and more reliable going forward.

EE is decidedly unsexy, but every kilowatt-hour saved is one less kWH that has to be generated. Efforts by datacenters to reduce energy consumption — whether from servers, networking equipment, A/C or anything else — are a win-win proposition for the operators, the grid and the environment.