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?

Rational non-adoption of PV

On Monday, Matt Hunter of CNBC asked provocatively “Does the Solar Industry Have a PR Problem?” The story was based on a fall study done by students at the SJSU Sbona Honors Program, and as someone who helped mentor the students, I was proud to see it published.

However, the conclusions reported by CNBC were different than those of the March webinar that discussed the report. To quote from Hunter’s report:

Jim Nelson, CEO of solar manufacturer Solar3D, says that, true to the perception, solar technology is not quite ready for prime time.

The problem, says Nelson, is that solar is generally still not price competitive with fossil fuels for energy generation, says Nelson. Paradoxically, government efforts to subsidize the purchase of solar panels actually slow down the adoption of innovation that should ultimately make renewable energy more affordable.

By encouraging consumers to buy immature and inferior solar technology right now, government subsidies risk locking people into solar systems that are inefficient, expensive, and may or may not ultimately pay off to the consumer. “They’re encouraging people to use things that don’t work,” he says.

At current kilowatt-per-hour rates, solar energy costs about 4 times more than power drawn from the grid, says Nelson. (Energy Secretary Steven Chu aims to bring down the cost by 70 percent to 75 percent by 2020.)

Reduce that by another quarter, and solar becomes attractive for both residential and industrial customers. (10 cents a kilowatt hour is the average cost of electricity in the U.S.)

Hunter quoted another expert that noted the payback period for residential PV is normally 10 years or more.

The reality is that today, solar makes economic sense for some people but not for others. (As Hunter notes, some people who are affluent or “passionate about green energy” may buy it even if it doesn’t pencil out.)

There are five things that drive the economics o PV adoption:

1. cost of the system
2. subsidy for the system
3. amount of sun
4. cost of capital to finance the system
5. the price of the substitute (grid power)

The press tends to focus on the first three. However, in talking to people in industry, the real action is where electric rates are high: with PG&E’s tiered rate structure, running an air conditioner in the Central Valley is prohibitively expensive and thus even an expensive PV system looks attractive.

Certainly the “grid parity” curves on PPT decks for the past decade assumed increasing fossil fuel prices (which may be a false assumption). In places like the Central Valley — or especially Hawai‘i — the substitutes are already expensive enough to make solar cost-competitive.

As it turns out, on Monday I had a farewell lunch with one of my coworkers, Gita Mathur of the SJSU College of Business. Gita noted that her 1985 first doctorate (of two) was on GaAs photocells, and the lab efficiencies she was demonstrating 25 years ago were almost the same as those for commercial products today. In her view, the subsequent innovation was mainly in the packaging — reducing the balance of system costs (including labor) to get those cells installed and available to generate power. This is certainly the area where industry continues to make strides, and in fact the basis of the low cost (and low efficiency) thin film startups.

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.

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.

Pickens Plan peters out

The New York Times, Wall Street Journal and others have reported that T. Boone Pickens has given up (at least for now) on his plans to to build a four-gigawatt wind farm in the Texas panhandle.

The stated (and undoubtedly important) reason was that his remote wind farm needed transmission lines. At one point he hoped to borrow $2 billion to build his own transmission line, but financing in today’s credit crisis made that impossible. A line is expected to be completed in 2013.

Of course, another reason is that wind power is less competitive due to declining fossil fuel prices — in this case natural gas, which produces about 21% of US electricity.

The 81-year-old oilman was so confident (or aggressive) of his plan that he ordered 687 (some say 667) wind turbines from GE for the first phase, and now has to find something to do with them — either place them in other wind farms or “put ’em in the garage.” With $2 billion tied up in these turbines, it’s quite possible that he’ll never see the turbines used.

Of course, this is a stark reminder of the dependence of wind and solar on transmission capacity, and also (as if we needed it) their vulnerability to shifts in the prices of substitute fuels. But more generally, this is an example of the Achilles heel of both technologies — their low operating costs come due to massive up front capital costs, magnifying the risk to private sector investors who might otherwise eagerly embrace these technologies.

California’s renewable power mandate is one way to reduce that risk, by providing a relatively predictable demand for those building plants and thus committing utility cash flow to keeping such plants open. However, as with all government interventions in the marketplace, there is the risk (in this case, with ratepayer dollars) that such mandates prove to be foolishly bone-headed distortions of the market (something we can’t know until we try).

California’s 33% mandate by 2020 seems particularly risky; a figure of 20-25% after the first decade would be more realistic, giving economists and policymakers a chance to access program success. Instead, the Sacramento politicians (including our governator) want to brag about their legacy to the voters, who will forget (a decade later) about who was responsible if it all turns out badly.

Still, this demonstrates the benefit of the US system of federalism and local policy initiatives: California can try its experiments while others watch. If it’s a great idea, California ratepayers benefit and all the other states will copy it. If it’s a terrible idea — or needs fine-tuning — other states can try something different and only Californians pay the price.

Fastest growing power source is...

In this morning’s SJ Mercury-News, the syndicated “Globalist Quiz” asks a question: “Which fuel is the world’s fastest growing source of energy?”

In the answers, available at the Merc (and the Orange County Register), the authors note that

Electricity accounts for 40 percent of the world's energy consumption, with demand predicted to grow by 3.2 percent annually from 2006 to 2015.

They then break down the relative contribution of four fuels to the global electricity supply, and their annual rate of growth:

• Nuclear power: 15% share, usage up 1.3% annually from 2000-2006;
• Hydro: 16%, up 2.5%;
• Natural gas: 20%, up 2.4%; and
• Coal: 40%, up 4.9%

The article notes that the high growth of coal is mainly due to its use in power production in developing countries, adding that “China is by far the world's largest coal producer, accounting for nearly half of the world's supply.” China also burns more coal than anyone else, too.

Coal is cheap — needing only basic technology, low up front capital costs, and relatively low fuel costs — all well suited for poorer countries that need to rapidly expand electric capacity to fuel economic growth. Of course, this measure of “cheap” does not account for the cost of the pollution (in the form of particulates and sulfur dioxide) or the greenhouse gases (such as CO2) — much of which is born by countries downwind of the coal users (or the entire world).

Developed countries have been working for the past 40 years to reduce the output of particulates and other pollutants. Before and since Kyoto (1997), they have also been working to reduce their output of greenhouse gases.

However, most developing countries are decades from taking similar measures. The decision of a sovereign nation to adopt such these policies is outside the control of business (and, in many countries, even the citizenry), but it obviously will have a major impact on the global output of anthropogenic CO2, as well as pollutants with more immediate health impacts.

Is cheap oil bad news?

The NY Times today has caught up to the idea that good news for consumers (low oil prices) is bad news for the renewable energy industry. This is actually a story that’s been building for months.

Consumer are thrilled that oil prices have pulled back some 50% from their summer record highs, putting money in everyone’s pocket. Oil that was once $147/barrel is now hovering around $40, slightly up from $34/barrel in December. Local gasoline price (with high California taxes) went gone from over $4/gallon to less than $1.70/gallon before coming slightly above $2. These falling oil prices have meant falling consumer prices, down 1.0% in October and 1.7% in November — increasing consumer purchasing power.

By the same token, environmentalists have been worried that falling oil prices will lessen national interest in renewable energy and energy efficiency. I think the worries are overblown for several reason, not the least of which is the strong support for EE/RE that’s a certain outcome of the Obama administration.

Business Week attributes the current turmoils of the PV industry to falling oil prices. I’m not sure I follow the argument, given how small a role oil places in US electricity generation. Coal provides half, and together coal, nuclear and natural gas account for 88% of US electricity.

I think the other factors listed by BW are more important, specifically the excess entry of new startups fueled by VC investments (as they did with dot-coms in the 1990s, and disk drive and PC companies in the 1990s). There is also the general decline of capital spending by firms and consumers — both because cash is scarce (so long-term spending is being deferred) and due to difficulty obtaining financing. No cash, no panels, no sales.

While the nature and amount of Federal support for PV is unknown, our new president has already said he’ll spend money to improve the energy efficiency of Federal buildings. Although no public promises have been made yet, some activists predict this will include LED illumination —which would drive the new technology down the learning curve.

Also, the energy/environment “dream team” nominated for the new administration are expected to take steps to reduce CO2 emissions. The #1 target will be those coal-fired power plants, thus increasing the price of electricity more directly than any changes to oil prices.

On the transportation side, falling gasoline prices have cut sales of hybrid vehicles in half. Hybrids are more expensive up front, and payback periods have doubled since last May’s levels. But I think there will be an opening for real economy cars — like those we had in the 1970s after the first two oil shocks — which are both cheap to operate and cheap to buy. Honda is already on this trajectory

I originally thought there wouldn’t be much impact on electric vehicle sales in the near term. EVs penetration is well under 1% — not yet the early adopters in the diffusion of innovations (Everett Moore) sense. These earliest adopters (called “innovators”) want to be the first on their block to own one, and are not motivated by cost-benefit calculations.

However, I’ve since changed my mind. Everyone’s feeling poorer, including the rich who are willing to pay a premium for an EV: their stock portfolios are down, their retirement portfolios are down, their real estate portfolios are down. Like everyone else they are deferring capital expenditures as much as possible.

With or without cheap oil, there will be a shakeout of EV manufacturers. There has already been excess entry (30+ companies thus far) and thus consolidation or shakeout is inevitable. If the Big Three survive, they will add to the competition during a period with high up front costs and limited range. The pressures will be exacerbated by the wariness of individuals and businesses to make capital purchases.

Abolishing point estimates

One of my major gripes in my classes is that students put too much reliance on point estimates. Of course, when they (or other business students) graduate, the error is propagated into business.

Saying the company will generate $3,422.13 in revenues for the first month of a new product is useless information. No one knows what will happen in the future: the economy, reception of a new product, the reaction of competitors. People make assumptions — which are only assumptions, i.e. a SWAG or maybe just a WAG. So when I see a point estimate — to four significant digits — then I know all subsequent calculations are GIGO.

Saying that we expect sales to be between $500 and $5000 is more useful. It would be nice to say there’s a 95% chance (two standard deviations) that the results will be in that range, but for most analyses, that’s GIGO.

A common solution is to offer three cases, e.g. when startups offer “best case,” “worst case” and the median or average case projections to VCs. This is certainly better than nothing, because it forces you (for example) to think about what the appropriate level of hiring or advertising spending for each one.

The formal answer to this problem is scenario planning. I was reminded of this in checking out Adam Hartung (who posted a recent comment to my blog). In a posting on his own blog last week, he discusses the importance of scenario planning. In particular, he points out that many businesses (or individuals) made assumptions about energy prices without considering other plausible scenarios:

Over the last year the price of energy was one such big theme that interested a lot of people. But most only explored one scenario ─ what if oil prices went to $200 or $250? Interesting, but not sufficient. While that scenario is worth investigating in great detail, it's also important to investigate other options ─ like oil at $150, or $100 or $65 or $35. All of those have different implications. What's important in scenario planning is to investigate them all.

I have sometimes taught scenario planning in MBA technology strategy class. Although the material doesn’t really fit with the other readings, managing high-tech companies is inherently about dealing with an uncertain future.

Since the existing materials are not very good, at some point I guess I’ll have to write my own. However, blogger/consultant Martin Börjesson has a starter list of scenario planning resources.

Interestingly, everyone (including Börjesson) who teaches scenario planning goes back to the use of scenario planning by Royal Dutch Shell. This does make some sense, beyond the fact that Shell is famous for its use of the technique. Oil companies face a highly uncertain future — in terms of the supply and demand for oil, as well as the degree of environmental regulation (or societal pressure to self-regulate). They also have to make capital investments that last for decades and are planned years in advance.

Perhaps we can interest some renewable energy firms in also doing scenario planning. When they’re going for grid parity, they need to consider what the existing energy prices will be — which might be oil at $50 a gallon or $200 a gallon.

Oddly, Shell CEO Jeroen van der Veer gave a speech in February where he made point predictions as to energy demand, the availability of conventional energy, and the cost of renewable sources. The scenario alternatives he presented (in February and earlier in January) were not about the economic or technical future, but about the policy choices made by energy-consuming nations.