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November 11, 2016

President-Elect Trump: A Gift?

by John Fullerton

Imagine if you can, Donald Trump has arrived as a gift, to illuminate for us the American “shadow” at this pivotal moment in history. The Swiss Psychiatrist C.G. Jung refers to “the shadow” as the dark side of one’s self. The shadow, Jung wrote in 1963, “is that hidden, repressed, for the most part inferior and guilt-laden” aspect of our personality hiding out in the unconscious. Failure to recognize our shadow leaves us exposed to the destructive possession by our disowned shadow.

Are we prepared to see the message of the shadow, illuminating our ongoing collective cultural flaws—more prevalent and tolerated than we would like to admit—from narcissism and misogyny to racism and bigotry? Are we prepared to face the fact that our extractive neoliberal economic ideology has utterly failed us, including trade policies that Trump has shined a light on? Will we now address the lost dignity and fear among a majority of hard-working Americans while wealth soars among a small percentage of Americans to grotesque levels? Do we finally acknowledge the corruption of the special-interest-owned polity controlled by the donor and ruling classes who operate under different rules from the rest of us? The shadow points to lost trust in our institutions for good reason, from government to Wall Street to big business to mainstream media. Do we now see that wealth and winning at all cost is not success, that we lack urgency in dealing with the crisis in American education, or in our mental health crisis? (Yes, Trump appears mentally unstable.) Finally, and perhaps most dangerous in the long run, the shadow points to our lack of moral responsibility to deal with climate change with an urgency that is far beyond anything Obama has proposed.

Trump is of course a dangerous conman. The opportunist wants to “make America great again,” invoking a sense of loss among the vulnerable and cruelly seducing with false promises. But more deeply, is this call to recover our greatness not the shadow pointing to our inflated pride in the idea of American Exceptionalism? Is it not time we honor the greater and higher ideals America was founded upon – life, liberty, and the pursuit of happiness – and the timeless and universal values of humility, grace, gratitude, and loving membership within the beautiful and diverse humanity we share with one another, and with all life itself?

A prescient article on the collapse of American Oligarchy, written by Capital Institute’s Science Advisor Dr. Sally Goerner in April, is well worth a revisit on this new “morning in America.” And her timely analysis of the psychological underpinnings of Trump when he won the Republican nomination has now become essential reading if we are to understand why “this neo-fascist upsurge is a classic consequence of the breakdown of the bonds of love, strength, and intelligence that hold a society together and why rebuilding these bonds is critical to our survival.”

It’s been a slippery slope to our current predicament in my adult lifetime. I experienced this slide first hand on Wall Street beginning in the early 1980s, where our terminal, finance-driven neoliberal ideology first manifested, and then metastasized throughout society. So blame me. Turns out we were more clever than smart.

On one level, waking up on 11-9 felt worse than when I experienced 9-11 first hand. I have had very difficult conversations with my children, one of whom had to field questions from her second graders about whether “grandma would be deported.” It’s all incomprehensible, terrifying, and as my daughter said, it’s an embarrassment.

And yet…

The “great change” we must usher in was not happening before. It was not going to happen under Hillary Clinton. The mere fact that the Clintons have amassed a $200mm fortune since the former President left office, without creating any economic enterprise, is beyond unseemly. With hindsight, it was a mistake of the Democratic Party to allow her to run, despite her unmatched experience and the appeal of the first woman to reach the White House. The self-important Party hacks were simply “not serious” about the real systemic change that awaits, and which is required. And that decision now has very real consequences. They could be catastrophic. Or maybe not? The stock market recovered quickly, predictions are a fool’s errand when the future is truly unknowable. Maybe this is just the jolt we need to seriously begin to question who we are as a nation…what values we stand for… And what responsibility the elite-in politics, business and finance, and in the media-has to the health of the greater whole.

Will we devolve into a second civil war? Will we destroy our last chance to deal with climate change responsibly? It’s unknowable today.

Or perhaps we will usher in a positive 21st century American Revolution and inspire the world again. Such a revolution will be built on a new story to replace the growth-at-all-costs, extreme neoliberalism that we have most certainly outgrown, and is conflict with our understanding of how complex systems behave. This new story of the Integral Age entails a fundamental and profound shift to holistic thinking across all domains, with dynamic networks replacing failed command and control institutions. It demands clarifying means and ends in our economics and aligning them with the universal principles that define all other systems that survive over time, and the emergence of a regenerative society that is most certainly underway. Not overseen by Trump of course, but in the opportunity he will afford us, difficult as it is, to stare at our shadow over the coming four years, a mere blip in the course of history.

Peace!

John Fullerton is the founder and president of Capital Institute, a collaborative working to illuminate how our economy and financial system can operate to promote a more just, regenerative, and thus sustainable way of living on this earth. He is the author of “Regenerative Capitalism: How Universal Principles and Patterns Will Shape the New Economy.” Through the work of Capital Institute, regular public speaking engagements, and university lectures, John has become a recognized thought leader, exploring the future of Capitalism. John is also a recognized “impact investment” practitioner as the principal of Level 3 Capital Advisors, LLC.

November 09, 2016

What Trump's Victory Means For The Bioeconomy

Jim Lane

In Washington, Donald Trump captured the US Presidency in an upset victory that confounded pollsters and political pundits even as it delighted supporters of his maverick candidacy based on themes of immigration and trade reform coupled with a message that government policies of the past generation had failed for too many Americans.

An unexpected series of wins across US Midwestern states – capturing Iowa, Pennsylvania, Wisconsin and Ohio which had gone for Obama in 2012 – provided a comfortable margin of victory in the Electoral College and the popular vote.

5 Themes

Some immediate themes emerge for the global bioeconomy as the US turns now from its lengthy election process to the transition period between Administrations.

1. Trade rebalancing is front and center on the agenda. That’s not entirely bad for the bieconomy and for US-based manufacturing. Over at the Renewable Fuels Association, CEO Bob Dinneen noted:

“A core principle of the Trump campaign has been putting America first and more aggressively pursuing fair trade agreements that recognize the value of American products.”

2. Climate action is likely to be scaled back sharply. The President-elect is opposed to the Paris Climate Agreement — we’ll have to see how that translates into meeting obligations imposed by that deal. At the very least, leadership on climate activities is likely to pass to others, and a shift back towards policies that favor US domestic production of coal, oil and natural gas is likely.

3. First-gen biofuels less impacted. Owing to fitting in to Trump’s themes of economic nationalism, manufacturing revival and domestic energy security, a Bush-era emphasis on the energy security aspects of shifting from imported fuels to biofuels is likely to remain in favor. Trump himself strongly backed the Renewable Fuel Standard, almost alone among front-runners for the Republican nomination, and Iowa Governor Terry Branstad, and Bruce Rastetter, the president of Summit Ag Group, had been appointed to Donald Trump’s agricultural advisory panel in August. Eric Branstad, the governor’s son. led anti-Cruz forces in the state a year ago and was chairman of the successful Trump campaign in Iowa.

RFA CEO Bob Dinneen added:

“The president-elect repeatedly expressed strong support for ethanol, generally, and the Renewable Fuel Standard (RFS), specifically, on the campaign trail. He understands the importance of clean, domestic energy resources and the economic power of value-added agriculture. We are confident Mr. Trump will continue to support the expanded production and use of fuel ethanol. Moreover, the president-elect is committed to removing regulatory barriers that impede growth. We look forward to working with a Trump administration to remove unnecessary volatility restrictions that have discouraged market acceptance of higher level ethanol blends like E15 and created unreasonable administrative burdens on gasoline marketers willing to offer these fuels to consumers. FWe are eager to work with the new Administration on myriad trade challenges currently facing the U.S. ethanol industry.”

Adam Monroe, President Americas for Novozymes (NVZMY) said:

“During the campaign, the President-elect expressed support for biotechnology generally and bioenergy and agriculture specifically, all core to America’s economy and keeping our country on the leading edge of innovation and discovery. At Novozymes, we’re looking forward to supporting those ambitions.

“President-elect Trump understands the need for good policy to help foster American innovation. It’s incumbent on the private sector to imagine and build cutting-edge solutions to solve society’s challenges – but we count on the President-elect to encourage that kind of groundbreaking innovation with smart, consistently-administered policy, fueling our economy and creating products used across the world.”

4. Reduced emphasis on government spending and a reduction in the government’s role in the economy can be expected to impact applied government R&D programs. However, the incoming Administration has not run on an anti-R&D program, but rather an anti-regulatory program and we can expect more action at this stage in rolling back EPA’s influenace rather than in wholesale slashing of government research.

5. A Farm Bill is due in 2018 and spending and priorities until then will largely continue along the lines established in the 2014 Farm Bill. Pro-domestic energy forces in the Midwest largely supported the Trump candidacy, and there’s no evidence yet that there will be wholesale changes in US domestic agricultural policies. A focus on renegotiating or exiting NAFTA will have impact on agricultural prices.

Looking at the result for meaning

1. A mirror of 2008. At the Digest, we see this election in many ways as a mirror of 2008 — a candidate campaigning on “change you can believe in” and pointing to “inconvenient truths” in trade and immigration – but aimed at reversing Obama’s policies rather than Bush’s. We may well see, as a result, an unwinding of portions, or the whole of, the US health care reform authorized under the Affordable Care Act — and changes in foreign policy. Supporters of the President-elect may well find that change is harder to deliver than it is to vote for — we’ll see whether this President grapples more effectively to deliver on his ambitions and permanently embed change into the US way of life.

2. Too many left behind? Most experts believe that the shift towards global free trade is, on the average, better for all. Also, that the shift towards an advanced economy based around the innovation center of Silicon Valley, the policy center of Washington and the financial center of New York is, on average, better for all.

But experts also agree that trade deals and seismic shifts in the economy create winners and losers. The average economic result, for example, of NAFTA may well be positive. But it creates a have/have-not equation in sophisticated economies, and we have seen a concentration of wealth and power in recent years — and a decline in the prosperity of the middle class. It is not controversial to say that people are left behind as economies and countries evolve, and in the US it appears that voters feel too many have been left behind. There simply are not as many affluent Americans who are for “more of the same” as there used to be, as wealth concentrates into the hands of fewer and fewer.

The discussion of how to spread the wealth of any nation is one that parties grapple with — should it be through unleashing more opportunity for those left behind, or through redistributive tax and spending policies. Last night, the US public spoke on that one.

Jim Lane is editor and publisher  of Biofuels Digest where  this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

November 01, 2016

What The US Election Will Mean For The Global Solar Industry

by Paula Mints
 

The endless and endlessly not amusing US presidential election is thankfully wrapping up in November and there is a lot at stake for solar – globally. This is because the market for solar components and systems is global. Even the smallest installer buys imports. Even the smallest component manufacturer has the potential to ship product into any global market. A hiccup in one market (China, for example) reverberates throughout the entire global market for solar components and systems.

A hiccup in the US market for solar deployment would affect business plans and forecasts for all participants and observers – globally.

Currently the US market for commercial installations is stable. The US market for residential installations is currently less stable. Manufacturers, developers, scientists, engineers, teach-ers, insurance firms, law firms, consultants and others from around the world look to do business in the relatively stable climate for solar deployment in the US.

The following presents US solar market growth in the aggregate from 2006 through 2016.

 Aggregate US Solar PV Market Growth, 2006-2016
US Solar market growth 2006-16
In this US presidential election, one presidential candidate has tweeted that climate change is a hoax "invented by the Chinese to make U.S. manufacturers noncompetitive."

The other presidential candidate will make the climate a key part of her agenda and will follow through on many of President Obama’s mandates concerning it.

Like it or not, the 2016 presidential election is crucial to solar – and wind and other renewable electricity generating technologies – momentum in the US and elsewhere. Here are a few of the reasons why:

The Supreme Court

The Supreme Court should have nine justices, thus ensuring no tie decisions. Currently there are eight justices on the US Supreme Court, which opens the possibility of a tie instead of a majority decision. A tie is a stalemate that allows decisions rendered by lower courts to stand. The Clean Power Plan is currently being legislated in at least 24 states. The new president will appoint (or attempt to appoint) at least one justice, maybe two, to the court. As justices serve for life or until retirement the direction of the US will be affected for decades by whatever happens with the US Supreme Court. Should the Republicans lose control of the House or senate, or, should numbers tighten in the House, the current historic refusal to give President Obama’s nominee Merrick Garland a hearing would pass into painful US history, the stalemate would be broken and congress would (potentially) finally do its job. This means that the current congressional election is almost as important as the presidential election in that both affect the future of the Supreme Court.

The Clean Power Plan

Secretary Clinton has said that she will uphold the CPP. Mr. Trump has promised to repeal it. Despite filing lawsuits states are making plans to install and integrate renewables. Even if the CPP is repealed some of these plans will go forward (in California for example) though some will be scaled back and many will be scrapped.

Florida Constitutional Amendment

This is specific to Florida and so this one is on the voters. Should this constitutional amend-ment succeed look for something similar to pop up on ballots in other states. Deceptive language used for a constitutional amendment that is on the ballot in Florida backed by its biggest utilities claims to promote solar when it would actually allow utilities to raise fees on solar customers. If approved it would take effect immediately and an already underperforming market would be unlikely to become a highly performing one.

The DoE

The president appoints the Secretary of Energy. The Secretary of Energy is the head of the DoE and determines its direction. A climate change denier as head of the DoE would be disastrous for the solar budget and the budget for renewable energy technologies develop-ment and deployment.

NREL

A budget squeeze at the DoE would affect NREL’s funding and perhaps defund it altogether.

The ITC

The ITC was a bipartisan agreement – not all conservatives and republicans are climate change deniers. It would take an act of congress to overturn the ITC and this is unlikely.

The Environmental Protection Agency, EPA

Mr. Trump would like to eliminate the EPA (and other consumer and climate protections). Secretary Clinton holds Obama’s view on the EPA’s direction.

Paris Climate Change Agreement

The Paris Climate Change Agreement commits countries to take action to slow the rise in global temperatures and to offer voluntary plans in this regard. The Paris Agreement relies on nations to behave in their own and the climate’s best interest and to act as though the agreement were binding – which it is not. Secretary Clinton will not only uphold the Paris Climate Agreement, she will act on it. Mr. Trump has loudly and proudly said that he will pull out of the agreement.

The US Oil, Gas and Coal Industries

A big winner if Trump is elected but likely to not suffer terribly under a Clinton administration.

Paula Mints is founder of SPV Market Research, a classic solar market research practice focused on gathering data through primary research and providing analyses of the global solar industry.  You can find her on Twitter @PaulaMints1 and read her blog here.

This article was originally published in the October31st issue of  SolarFlare, a bimonthly executive report on the solar industry, and is republished with permission.

October 06, 2016

Clean Energy Finance Experts United Against Trump

by Tom Konrad, Ph.D., CFA

This website, AltEnergyStocks.com, endorsed Barack Obama for President in 2008 and 2012.  In those two elections, we based our endorsements on a point-by-point analysis each candidates' energy policies, favoring the candidate who expressed the strongest support for policies to transition our economy away from its dependence on fossil fuels.

This year, the comparison is so stark a point-by-point comparison hardly seems worth the exercise. Here are a few quotes from the candidates' websites that drive the difference home:

On Climate Change

Trump: "I think it's ridiculous, we've got bigger problems right now."
Clinton: "I won’t let anyone take us backward, deny our economy the benefits of harnessing a clean energy future, or force our children to endure the catastrophe that would result from unchecked climate change."

Energy

Trump: Accuses Obama of attacking coal, natural gas, and oil industries. Will "save the coal industry" and rescind Obama's Climate Action Plan.
Clinton: Says she will:

  • Generate enough renewable energy to power every home in America,
  • Cut energy waste in American homes, schools, hospitals and offices, and
  • Reduce American oil consumption through cleaner fuels and more efficient vehicles

on "day one".

In short, the contrast is stark.  Clinton makes promoting clean energy and reducing waste a high priority whileTrump wants to revive coal, natural gas, and oil extraction.

Trustworthiness

Much criticism of both candidates revolves around their personalities.  As an investment manager, I'm used to making high stakes decisions about the future actions of a class of people not known for their morals or honesty: CEOs and other high level company management.  I deal with this credibility gap by looking at manager's incentives, especially their ownership and recent purchases of company stock.  A manager with plans to swindle shareholders will not be a net buyer stock on the open market, which is why I put so much emphasis on insider buying in my stock selection process.

When it comes to selecting a President, it's possible to take a similar approach.  Do we see signs that a candidate is interested in personal enrichment at the expense of the American people? 

The questions about Clinton center around her concealing information (private email server, etc.) and donations to the Clintons' charity.  At worst, this seems to imply to me that she is willing to stoop to underhanded methods for personal power and influence.  The Clintons can't spend charitable money (beyond some publicly disclosed perks and salaries) on themselves, although the charity clearly increases their public profiles and influence.  Why does Hillary Clinton want personal power?  To do what she's been trying to do all along: Use it to make the world a better place, at least as she sees it, and perhaps ensure a place for herself in history.

Trump, in contrast, seems mostly motivated by personal wealth and fame.  Helping people (other than himself and his family) has never been something he even claimed to be interested in before this election.  As with any other CEO, I'm a lot less interested in what he says he is going to do than where I think his incentives are.  In Trump's case, that is almost certainly the pursuit of additional wealth and fame, and I see no evidence that he is likely to treat the American people any better than the many contractors who worked on his projects and never got paid.  Trump is proud that he was able to use the tax code to avoid paying tax.  Taking advantage of the tax code is something we all do, but few of us are proud of it.  The fact that Trump is proud, perhaps even enjoys taking advantage of the tax code, tells us that he is likely to take every opportunity to make sure as much money goes into his own pocket as possible.

The choice seems simple: Do we want a President who wants to make the world a better place and be remembered in the history books, or do we want a president who wants to get richer and increase his personal fame right now.

The Clean Energy Finance Experts

Perhaps you see it differently than I do, so I thought I'd share the opinions of some other financial and clean energy experts.  I sent a note to AltEnergyStocks.com's regular contributors asking for their opinions.  Some prefer to stay out of politics, but most expressed horror at the prospect of a Trump presidency, even those who have doubts about Clinton.

Here's what they had to say, in order of brevity:

Sean Kidney, CEO, Climate Bonds Initiative

"Electing Trump would be akin to climate suicide."

"If Trump gets elected there goes US climate change policy and US clean energy policy. I'm for Hillary 100% and happy to say so in any way available. The alternative is akin to climate change suicide."

Joe McCabe, P.E., Renewable Energy Champion

"As a registered Republican, I can't support [Trump]."

"As a registered Republican I cannot endorse this candidate who my party has put forward. Donald has repeatedly indicated that climate change is a "hoax", both on Twitter and in media interviews. He does not possess the minimum requirements for the position of President of the United States. Hillary Clinton gets my vote this time."

Garvin Jabusch, Chief Investment Officer at Green Alpha Advisors

"There really is only one choice this November"

"Hilary Clinton for President. In the critical climate and economic growth topic of renewable energy, the contrast between Clinton and the GOP nominee could not be more stark.

"Trump has called climate change a hoax, vowed to revitalize coal, promised to break the US' commitment to the Paris Climate Accords and, perhaps most tellingly, has selected North Dakota Congressman Kevin Cramer as his energy adviser and probable Secretary of Energy. Representative Cramer is an oil and gas industry lapdog and a proud climate skeptic.

"Clinton, meanwhile, has made actual energy expert Trevor Houser her energy advisor (Houser is co-author of Economic Risks of Climate Change: An American Prospectus). Clinton has a policy goal of deriving enough electricity from solar PV to power every home in America within 10 years of her inauguration. She says that's about half a billion panels or approximately 150 gigawatts' worth, which is more than three time the capacity the US has installed, ever, up till now. Clinton has said  'someone is going to become the clean energy superpower of the 21st century. It's going to be China, or it's going to be us.'

"If you care about having a shot at avoiding the worst outcomes of climate change, there really is only one choice this November. "

Debra Fiakas, CFA, Managing Director of Crystal Equity Research

"Trump is willing to swindle... our country... with a hollow promise of ‘return to greatness.’"

"While I am not necessarily a fan of Hillary Clinton, the choice in this election is clear.  Despite her weak understanding of truth, her persistent lack of good judgment and sometimes sloppy execution, I will be voting for Clinton.
 
"About ten years ago I heard Donald Trump described as a “preening egotist with a muskrat on his head.”  At the time I thought it was a bit harsh and expressed this view to my daughter.  Her response was “he is grotesque.”  As I look back on Trump’s conduct over the past months, it is clear that egotist and grotesque are quite appropriate descriptions.   A vote for Donald Trump is a vote for an opportunist and a bully who has artfully used bigotry to garner support from those who truly do feel left out of the election process.  They are left out for good reason  -  their ideas are contrary to our democratic ideals and otherwise foolish economically.    
 
"Reports that Trump expressed intentions to move forward with a reality TV program from the White House are more than likely true.  Trump is willing to swindle the most vulnerable people in our country  -  unemployed, poor, uneducated and emotionally unstable  -  with a hollow promise of ‘return to greatness’ just for the sake of an elaborate brand building scheme.  It is shameful.  What is even more shameful is that so many people in this country have been willing to support him just for the sake of gaining power.
 
"Three paragraphs and not one word about the environment or energy!  So sad that this election has put the most critical problems before us on the back burner while we debate the history of weight gain and loss by a Miss Universe contest winner from a two decades ago.  Most likely those who want to see change in the stewardship of the environment will need to take the more costly and time consuming approach of working with each state government."

AltEnergyStocks.com Endorses Clinton

For many of my colleagues, and doubtless many readers, this election seems to be about choosing the lesser of two evils.  That said, it's pretty clear which candidate is playing the role of Satan, and which is just the black sheep in-law. 

For myself, the decision is even easier than that.  I believe that Hillary Clinton has the skills and motivation to be a good or even great President.  She may not be totally honest or have perfect judgement as Debra Fiakas says, but she does know our imperfect political system from many angles and has shown herself willing to reach across the aisle for the greater good.  In my opinion, her goals for the country are (in stark contrast to her opponent) mostly the right ones, and I hope her long political experience will help her be much more effective at accomplishing those goals in spite of a highly dysfunctional Congress.

Tom Konrad, Ph.D., CFA
Editor, AltEnergyStocks.com

DISCLOSURE: It's also worth noting that our holdings of clean energy stocks will perform better under a Clinton presidency than under Trump.  I would not be surprised if a Trump presidency sent the whole stock market downwards, and not just clean energy stocks. Coal companies might benefit, if that's your sort of thing.

October 02, 2016

What Obama Did To Coal Investors, What The Next President Might, And How Investors Can Survive

by Tom Konrad Ph.D., CFA

Investing in the past is a good way to lose money.  Just ask anyone who has been investing in coal stocks since Obama we re-elected.
Obama bump.png

A glance at the chart above shows that the VanEck Vectors Coal ETF (KOL) is down about 50% over the last four years, even while the broad market (as represented by the SPDR S&P 500 ETF (SPY)) has gained almost 50%.  But even if we knew this was going to happen, should investors have rushed into the energy sectors most loved by liberals: That is, Wind, Solar, or Clean Energy Stocks in general?

Hindsight says "Yes, No, and No," which is hardly a comforting response to a an investor looking to understand what might happen over the next four years.  Wind stocks were up 90%, as shown by the First Trust ISE Global Wind Energy ETF (FAN).  Solar stocks were volatile, and ended basically flat, significantly lagging the market as a whole, as embodied in The Guggenheim Solar ETF (TAN).  Finally, the PowerShares Clean Energy (PBW), a widely held basket of clean energy stocks.

What Obama Did

Shortly after the election in 2012, a reporter with USA Today called to ask me why wind and solar stocks had not taken off.  As you can read in his article, I told him that essentially, one presidential election would not transform the economy.  I predicted legislation promoting alternative energy or attacking coal was off the table- an easy prediction to make, given Republican control of Congress.  I also predicted that Obama would continue doing "Pretty much what he [had] been doing for the" previous three years: doing what he can through rule-making.  Which is what he did. 

What many may find surprising is that Obama's rule-making was only a minor factor in the recent decline of coal stocks.  His administration's most important energy policy, the Clean Power Plan remains tied up at the Supreme Court.  True, coal advocates like the Institute for Energy Research (IER) will point at two other regulations, the Mercury and Air Toxics Standards (MATS) and the Cross State Air Pollution Rule (CSAPR.)

What Obama Didn't Do

The coal industry is like a coddled child sent out into the world: It's not flexible or tough enough for a real-world job, it's bankrupt from credit card debt, and it still has not learned to clean up its room.

The coal industry's problems with MATS and CSAPR hint at the underlying cause of the industry's troubles.  The industry is like a coddled child sent out into the world: It's not flexible or tough enough for a real-world job, it's bankrupt from credit card debt, and it still has not learned to clean up its room.

Take these points in reverse order.  MATS, CSAPR, and even the Clean Power Plan are regulations telling coal plants to be a little less dirty than they are, but not nearly as clean as any of their power generation siblings: natural gas, nuclear, wind and solar.  Like any wayward child, coal promised to clean up its room... remember "Clean Coal?"

Fantasies like Clean Coal and hiring a professional housekeeper to keep a child's room tidy might have been affordable before technology innovation in natural gas drilling, solar, and wind started cutting into the price of power. 

But even without affordable clean coal, MATS is not causing the wholesale closure of coal plants, according to the nonpartisan Energy Information Administration.

EIA coal closures MATS

Technology has recently been sending the price of power in the opposite direction: down.  Ten years ago, coal power could legitimately call itself a source of cheap (if not clean) power.  Now, technology innovation have left coal choking on its own fumes, while clean coal (a.k.a. IGCC) and nuclear as simply too expensive to compete without subsidies, as shown by in this 2015 analysis by financial advisory firm Lazard.

Lazard LCOE.png

Lazard found that, without subsidies, the cheapest sources of power were:

  1. Energy efficiency, at $0 to $50 per MWh
  2. Wind, at $32 to $77 $ per MWh
  3. Utility scale solar, at $43 to $70 per MWh and
  4. Combined Cycle Gas, at $52 to $78 per MWh

Coal was far behind, with the cheapest coal costing almost as much as the most expensive wind, solar, and combined cycle gas at $65 per MWh.  The cheapest nuclear and clean coal (IGCC) were far behind, at $97 and $96. 

Keep in mind that these are unsubsidized numbers.  If the Obama Administration declared a war on coal, it's the invisible hand of economics that won all the battles.  And that is why new capacity additions are overwhelmingly wind, solar, and natural gas:

http://www.altenergystocks.com/archives/smi-gen-capacity%5B1%5D.JPG
Source: GTM Research / SEIA U.S. Solar Market Insight, Q2 2016

Adding to the poor economics of coal power, the coal mining industry racked up debt like an irresponsible teenager with a credit card at the worst possible time.  Arch Coal borrowed heavily to fund acquisitions in 2011, Peabody borrowed to fund acquisitions in Australia.  And these are just two in a string of bankruptcies that have left nearly every big coal firm in bankruptcy or emerging from it.  They also play back into the theme of coal not cleaning up its own room: Coal producer bankruptcies are shifting the costs of cleaning up mines to the states.

Baseload: An Unwanted Suitor

Coal advocates like to point out that "the sun does not always shine and the wind does not always blow." They then go on to call solar and wind power "unreliable" and claim that the grid cannot operate without backup power always at the ready. Coal and nuclear power plants are what is called "baseload" power: they run at a near constant level.  That's not the same as being reliable: Reliable people show up when they say and do what they say they are going to do. 

A person who is always there, never goes away even when you want a little privacy, and is always doing things for you even when you don't want anything is more likely to be called an unwanted suitor than "reliable."

We're actually pretty good at predicting the weather, especially over large areas and a few days or hours in advance.  While wind and solar power on the electric grid does vary over time, it's usually there in approximately the quantity we expect.  It would be a great complement to say that a large coal or nuclear power plant was "as reliable as the sun coming up in the morning."  The "Equivalent Forced Outage Rate- Demand" (EFORd), a measure of how often a power plant is out when it's needed, is about 4% for nuclear, 7.5% for coal, and 10% for gas plants [pdf, 2008-2012 data].  So coal power is there most the time (even producing power at 3am when everyone is asleep and it may not be needed.)  Yet even this unwanted suitor fails to show up about one time in 13 when he's really needed.

Solar arrays and wind turbines also go down unexpectedly, but the small size (relative to coal) of solar arrays and individual wind turbines means that they don't all go out at once.  A single 250 MW coal plant produces approximately the same amount of energy as 400 typical 1.5MW wind turbines, or 100,000 to 200,000 home solar arrays.  Some of these will be down at any time, but they won't all go down at once, especially if they are scattered over a wide area.

In this sense, solar and wind are far more reliable than coal.  It's true that solar and wind need to be supplemented with more flexible generation, energy storage, or flexible demand response in order to match the patterns of electricity demand.  But baseload power also needs flexible power resources to match the normal fluctuations of demand, and to stand by at the ready for that one time in 13 when you're hoping it will be there, but it isn't.

What The Next President Can't Do

The heated rhetoric from fossil fuel advocates and environmentalists alike served to hide the very real economic problems coal power has had in adapting to the new reality of falling technology costs for solar and wind and falling fuel prices for natural gas generation. 

The continued decline in the cost of wind and solar generation guarantee that these technologies will continue to be the leading forms of new power on the electric grid.  In turn, their variability will make it more expensive to run baseload power stations such as coal and nuclear, making them even less economic than they already are.

The free market is much more powerful than any president.

Donald Trump has repeatedly promised to 'save' the coal industry.  If elected, he is certain to be even less effective at reviving coal than Obama was at killing it.  The free market is much more powerful than any president, and coal simply cannot compete in a free market. 

If Hillary Clinton is elected, she will almost certainly be accused of putting more coal miners out of work as she tries to promote renewable energy, but she will not deserve the blame or the credit any more than Trump or Obama.

The true blame and credit for the changes in the way we produce and use electricity fall squarely on technological progress and market economics.

How Investors Can Survive and Even Thrive in the Future of Energy

Investors who observed the gridlock in Washington, D.C.four years ago, and rightly concluded that Obama would be ineffective at reigning in fossil fuels were correct.  Nevertheless, they have lost most of the money.

Would they have done better if they had plowed their money into solar and wind?  Not if they bought a solar ETF like TAN or a clean energy ETF like PBW.

Conservative investors (in the financial sense of the word: risk-averse) investors had an additional problem.  The future of energy may lie in solar, wind, and other energy technology, but technology companies are not conservative investments.  The technological innovation driving the rapid price declines for wind and solar is a problem for incumbent companies as well.  Today's leading solar manufacturer is tomorrow's has-been, a fact I pointed out in 2009. In the same article, I also said my top pick at the time was a company that few people would think of as "green:" a Toronto-listed bus manufacturer called New Flyer (NFYEF.)  At the time, New Flyer was trading at C$9 and paid a C$0.62 (7%) annual dividend.  Today, seven years later, the stock trades at C$43, the dividend has been maintained and recently increased, and my readers and I still own it.

In 2012, I could not give the USA Today reporter a similar conservative income pick in what I told him was my favorite energy sector at the time, energy efficiency: Such stocks did not exist.  That changed in early 2013 with the IPO of Hannon Armstrong Sustainable Infrastructure (HASI.)  After interviewing the CEO of Hannon Armstrong, I said, "I can't help but be enthusiastic about the company," which was then trading at $11.75, slightly below the IPO price.  HASI was about to start paying an annual dividend which I estimated would exceed 15 cents a quarter (5%). The company quickly increased its dividend to $0.22 a quarter that December, than to $0.26 in 2014, and $0.30 last year.  I expect it to increase the quarterly dividend to at least 34 cents this year, or 5.9% at the current price.  Did I mention the stock price has doubled?

How do I find conservative income stocks that double or quintuple in a handful of years, while solar and coal investors are losing their shirts?  Not just by understanding the technology.  Anyone who understood solar technology in 2009 would have rightly predicted the enormous growth of the industry - from 2% of new generation capacity in 2010, to 64% in the first quarter of 2016.  But if they had taken that prediction, ignored my warning and bought the Guggenheim Solar ETF (TAN), they would have lost 77% of their money, despite Obama's attepts to promote the solar industry.  Even coal investors would have done better with the VanEck Vectors Coal ETF (KOL): It "only" fell 64% over the same period.

It takes knowledge of economics, technology, and the whole energy system to successfully navigate the Future of Energy.  Knowing who is going to win the election in November might help on the margin, but neither Trump nor Clinton can roll back the progress of technology nor battle with Adam Smith's Invisible Hand of the market.

Disclosure: Long NFYEF, HASI

Tom Konrad Ph.D., CFA is a freelance writer and portfolio manager specializing in income stocks positioned to benefit from ongoing changes in the energy economy.

June 30, 2016

How Economics Finally Brought Community Solar to IREA

by Joseph McCabe, PE

My uber-conservative utility, Intermountain Rural Electric Association (IREA) has been against solar since before I moved into the service territory in 2007.  IREA's long-serving general manager, Stanley Lewandowski Jr., would include climate change denial leaflets in the envelope along with the monthly electric bills.

Now he is gone, and attitudes seem to be changing towards solar. With a new general manager, a couple of forward thinking board of directors and a handful of active IREA owners/members the solar landscape has changed and now includes a large solar project.

Currently IREA has 550 MW of installed electrical generating capacity, about 270 miles of transmission lines and many more of distribution.  Residential users account for about 65% of electricity demand. Like most rural electrical utilities, there are few customers per mile. At the end of 2014 there were 354 solar electric systems, end of 2015 had 1,087 and currently there are 1,250 totaling 7.1 MW out of 152,300 total customers. IREA’s perspective has been that net metering is a subsidy paid for by other ratepayers. Unfortunately, in a mis-guided attempt to recoup this perceived subsidy, since the beginning of the year IREA has placed a load factor adjustment (LFA) on all new customers including new PV.  I expect that many people will soon be clamoring as to their unfair bottom line monthly bills compared to their neighbors.

LFA is a penalty charged for periodic high demand. The LFA discourages both customer sited PV and electric vehicle (EV) charging.  It also presents further confusion to the typical energy consumer, a tower of babble. The new, much higher LFA rate is triggered if the average demand over the billing period divided by the peak demand over the same period exceeds 10% for residential service.  If triggered a peak demand charge is added to the bill. The typical load factor for an average residential IREA customer is about 20%. But EV charging and PV generators will almost certainly send customers into lower than 10% LFA; EVs because of higher peak demand and PV because of lower average demand. One more intelligent solution would be to incentivize EV charging at night, when IREA’s electricity supply from Xcel Energy’s (XEL) Comanche III coal plant output and wind power produce the cheapest electricity.

For the 8 years I have been an IREA member/owner I have been going to the microphone at the annual membership meetings and been a pebble in the shoe of my representative to try and implement community solar gardens (CSG, also known as community solar or shared solar). In parallel, I was helping the state of Colorado pass the first ever CSG legislation (House Bill 10-1342, Levy), and before that I invented and implemented the first large scale utility owned CSG located in Sacramento starting in 2005. It almost feels like the efforts of a few people are helping to change the attitudes of our utility towards cost effective solar.

The economics of CSG are supported by the Public Utility Regulatory Policies Act (PURPA) which encourages the development of renewable energy projects by requiring utilities to purchase energy and capacity from qualifying facilities if at or below avoided costs. In 2015 juwi, headquartered in Boulder Colorado, was able to propose a solar project at IREA’s avoided costs. IREA announced the groundbreaking has begun by juwi on the 13 MW CSG named Victory Solar. This is close to Denver in Adams County. It is unique in that it is 15.9 megawatt DC but 13 MW AC, a 1.3% DC overrating which should save on the overall project economics.  This project has a long-term power purchase agreement with an IREA purchase option in a few years.  IREA upgraded an underutilized substation for the interconnection at a cost of  $1.4M. The asset utilization for this project, the out of pocket expense for IREA, is fantastically low compared to ownership of other generation. Solar is now cost effective at this scale. Currently IREA is planning a portion or all of this project to be a CSG. I am excited to be able to charge my EV with solar electric power from my utility by the end of the year.

IREA obtained special approval from Xcel Energy to generate 15 MW of solar electricity in violation of their All-Requirements contract. Smaller utilities often have such All-Requirements contracts with larger utilities or with transmission organizations like Tristate. Recently, FERC has ruled against Tristate for imposing similar all-requirements on Delta Montrose Electric Association (DMEA). This is a major national tipping point for smaller utilities like IREA and DMEA to enable more distributed generation from renewable energy.
 
The next steps for the active IREA members are to correct the LFA to encourage EV and customer sited PV and to get an additional 2 MW CSG on disturbed or contaminated land in IREA territory. Electric Muni’s, Co-operatives and Associations are perfectly suited to reap the benefits of distributed generation, create local jobs, and revitalize land for local projects. A great example of such a project is located south of Boulder adjacent to the superfund Marshal Landfill site. EPA helped envision and spearhead this Community Energy Collective (First Solar FSLR has a 27% interest in CEC) project.

This large CSG by IREA is a watershed event, where like many conservative local utilities, IREA has been waiting for solar to be cost effective for their needs. That day has come, and will be showing up at many more utilities who are more focused on their customers than on stockholders. CSG’s are also well suited for rural utilities who have fewer customers per mile, justifying distributed energy from solar as opposed to central station generation from fossil fuels.

Disclosure: Joseph McCabe is a Xcel Energy stockholder.

Joseph McCabe is an international solar industry expert with over 20 years in the business. He is a Solar Energy Society Fellow, a Professional Engineer, and is a recognized expert in developing new business models for the industry including Community Solar Gardens and Utility Owned Inverters. McCabe has a Masters Degree in Nuclear and Energy Engineering and a Masters Degree of Business Administration.

Joe is a Contributing Editor to Alt Energy Stocks and can be reached at energy [no space] ideas at gmail dotcom.  Please contact Joe for permission to reprint.

Related article: Comparing Community Solar Subscriptions And Yieldcos

May 11, 2016

The Worst Waste

Jim Lane

Peter Brown of FFA Fuels, promotes his company these days with the pithy slogan, “Fuels from the Worst Waste Around.”

Which of course raises the legitimate question, what is the worst waste, and can we find a use for it?

Discussions of worst waste will usually focus on the obvious — say, landfill — or the odious — say, medical or nuclear waste. Toxicity and longevity are typical concerns, and that’s one of the reasons why nuclear energy remains controversial to this day.

No Waste in Nature

As LanzaTech’s Jennifer Holmgren observed in a recent article by Peter Forbes in Aeon:

“Carbon is precious. This means we must learn to recycle it. If you can extend its life by reusing it in a fuel, you will keep that equivalent amount of fossil fuel in the ground. There should be no waste. There is no waste in nature.’

Which introduces a new idea into the discussion of waste.

By wasting carbon as skyfill, says Holmgren — blasting it into the atmosphere after one use, instead of seeking to recycle — we condemn ourselves to extracting fresh supplies of carbon from their subterranean repositories.

It’s a one-and-done approach to carbon that has poured hundreds of millions of tons of CO2 into our atmosphere, and according to a scientific plurality, triggered a greenhouse climate effect that threatens our way of life.

One and done

Let’s apply the one-and-done habit to something different, but equally pervasive: housing. We all need energy and we all need shelter.

One and done housing, absurd? Not entirely. Roman troops used to build a wooden fort after every day of marching on the imperial frontiers, and abandon their lodgings in the morning as they set off for their next day’s destination. One and done, that was the legion’s way.

Today, if we threw away a house after every use, we’d run out of building materials in practically no time at all, landfills would be overflowing with waste, and the economy would be wrecked trying to handle all the new construction.

Yet, that’s our energy system, in a nutshell, aside from the small amount of production coming from renewables. We extract carbon from the ground, combust it, and release carbon into the atmosphere as skyfill. One and done.

Because it’s invisible — and, more importantly, because it’s up there instead of all around us — we tolerate skyfill. “For they have sown the wind, and they shall reap the whirlwind” as the prophet Hosea observed almost 3,000 years ago.

In almost no other major aspect of our lives do we tolerate one-and-done — we wash the clothes and dishes, lock and insure the house, clean the carpet and floors, polish the shoes, mulch the lawn clippings, serve leftovers, maintain the car, and have second dates and even move on to marriages with the objects of our desire. It is our nature to conserve resources.

But with plastics, and fuels, we have become invading Roman soldiers, one and done. Wham-bam-thank-you-ma’am.

Cheaper at the pump

We are told that the reason that this economic system endures, of energy use and carbon spewing, is that it is the most economic of all. That is to say, one-and-done, carbon-extraction, petroleum-based fuels are cheaper at the pump than alternatives.

To the extent that it is always more economically efficient to withdraw money from the bank than to earn a living and add value within the economy, that’s true.

So, why not simply squander the resources of a nation in an orgy of ATM withdrawals? Why not just live on our national savings, in all things and not just energy, until the savings run out? Is it not more economically efficient, is it not cheaper to do so, until the resource runs out and there’s hell to pay?

Sure it is.

But what’s the point of building a civilization on sand, even if it is valuable tar sand?

Resources that are not replenished will fall away eventually, and societies that have lost the habit of sustainable production will fall away even quicker than the resources beneath their feet. The orgy of life on the credit card is a fictitious life with a ruinous end — even if what is being spent on the credit card is carbon and not money. The money in the bank must eventually be replenished, or not used.

In Christian theology, of course, we’re spending not our own resources but the Almighty’s, as God pointed out via Leviticus 25: “the land is mine, for ye are strangers and sojourners with me.”

So, the worst waste?

Is the worst waste actually the most toxic and odious waste, like nuclear?

Or, rather, the one that tempts us to base our civilization on an energy version of a Ponzi scheme?

So, what’s the remedy to wanton waste and skyfill? Technologies that pick up waste carbon — preferably at the point of emission, before the carbon is dissipated into the atmosphere and ruinously expensive to recover. Waste carbon-gulping technologies from the likes of LanzaTech, Liquid Light, and algae project developers such as Sapphire Energy, Cellana and Heliae.

Carbon price and climate change cost

But here’s the problem. Skyfill is priced at ruinously low levels by markets.

Skyfill is dangerous to our economy and way of life, yet rescuers of industrial gases are expected to acquire unprocessed gas at costs between zero and $30 per ton. I have seen many thrillers but I have never seen the rescued parties charge for the privilege of saving them.

The Brookings Institute last year estimated that global GDP would be reduced by as much as 20 percent using business-as-usual approaches to carbon. That’s $15 trillion per year in today’s dollars. It’s worth trillions to prevent that. Yet, markets are aghast at the prospect of pitiful carbon prices.

Let’s think differently

We might start here: the duty to take reasonable care. That was something I learned as a young law student, sent to study up on negligence and the case of Donoghue v Stevenson.

In that decision, Lord Atkin wrote:

“You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law, is my neighbour? The answer seems to be – persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.”

The reasonable person thus makes an appearance.

He is distinct from the “average man” or “the man in the street” and distinct, then, from the market itself. In the realm of negligence, we are bound by the duty to take care, even though in the realm of markets that is not always the case.

The power to ruin

In a market, I might trade you shares of a stock I think is overpriced, regardless of the ruin it might bring to you. So long as I do not have access to inside information, it means nothing to markets that you are exposed to loss. I have no market duty to take reasonable care to protect you from economic harm when I unload my shares to you.

In a market, an organization might take on a risky investment because it understands that it is “too big to fail” and that gains will be privatized but losses socialized, through bail-outs. That’s moral hazard.

Moral hazard — what’s that again?

It’s been defined as “a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.”

Is that not a perfectly good way to look at the carbon debacle — as a case in moral hazard? Since most of us, the average of us, know that excessive use of carbon is a risky event that other parties (for example, fish, or future generations) and not us, will pay the price for.

So, we are using the concept of markets to govern behaviors that might better be governed by the concept of the duty of care, and the higher standard expected of the reasonable person. The ‘average man’ of the markets might risk moral hazard, but the reasonable person cannot.

Of the reasonable person, Percy Henry Winfield wrote:

“He will not anticipate folly in all its forms but he never puts out of consideration the teachings of experience and so will guard against negligence of others when experience shows such negligence to be common. He is a reasonable man but not a perfect citizen, nor a “paragon of circumspection.”

We have wasted the concept of the reasonable person, and the duty to take care — when it comes to the hazards posed by carbon. We have left carbon to the market, when we have taken so many things outside of the market that you could hardly write them all down.

We have made public drunkenness an offense despite the fair market transaction that took place between the buyer and seller of the alcohol that produced the condition. It is wrong to impose drunkenness or loutish behavior on society, despite the fact that the transaction that produced the condition was legal and took place at an agreed market price. The publican gets money, the customer gets a beverage, but society gets an intolerable disturbance.

The worst waste, then — perhaps we might well discover it to be a “great and ready remedy for a great societal ill, that we have refused to use”.

Why? A misplaced faith in the power of markets.

Markets are filled with items for sale that shouldn’t be. Sex, drugs, slaves, laundered currency, odious weapons, and stolen goods — to name a few. But they are black markets, because they are banned trades. Not because markets do not function but because they fail to afford the reasonable protection to society that the reasonable person has a duty to provide. Black markets fill our sewers with their unintended consequences and their moral hazard.

There’s no need to ban the trade in carbon, any more than banning the trade in alcohol. But unreasonable use, that is something to look at which markets never will.

Carbon use ought to be measured according to the standard of the reasonable person, rather than the person of the market whose only defense of the sale is that there was a buyer at the price.

We might find that the reasonable person takes better account of the problem of skyfill and sees a duty to take care by reducing carbon spewing through re-use. We might also find that pricing energy only because of the work that it does is like tolerating the drunken man howling at the top of his lungs in the middle of the night, on the theory that he should be freely allowed to enjoy his legally-bought goods in his own way.

His right to a good time, after paying a market price, is not the only priority for a society made up of reasonable people who would like to get some sleep.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

May 10, 2016

Chinese Green Subsidies: When Lifting All Boats Becomes Bailing Them Out

Doug Young

Bottom line: Strong response to Tesla’s latest EV in China and a major new solar plant plan from SolarReserve reflect Beijing’s strong promotion of new energy, which is also creating big waste by attracting unqualified companies to the sector.

A series of new reports is showing how Beijing’s strong support for new energy technologies is benefiting both domestic and foreign companies, as China tries to become a global leader in this emerging area. But the reports also spotlight the dangers that come with such aggressive support, which often leads to abuse of subsidies and other preferential policies that can lead to big waste and market distortions.

One of the reports centers on US new energy car superstar Tesla (Nasdaq: TSLA), and quotes an executive saying that China has become the second largest market for its newest and first relatively affordable electric vehicle (EV). The second report comes from the solar energy sector, and has US solar plant developer SolarReserve LLC in a major new partnership to build more than $2 billion worth of solar farms in China.

While both of those developments look positive, and reflect big government incentives on offer, the third news item highlights the darker side of Beijing’s largess. That story comes from leading financial news magazine Caixin, whose investigative report shows how many of China’s smaller automakers have become addicted to grants and other subsidies for new energy car development and rely on such money for their profits.

Let’s begin with the Tesla story, which comes as the company tries to gain some traction in China after a poor start 2 years ago. Following positive reviews and strong initial orders for its new Model 3, costing just $35,000, Tesla’s Asia chief Ren Yuxiang is saying in an interview that China has become the second largest market for pre-orders for the new car, presumably after only the US. (English article; Chinese article)

Ren didn’t give any figures, but Tesla previously said it had received 400,000 pre-orders for the Model 3, which won’t be available in China until sometime next year. One Chinese media report also points out that Tesla has said it is exploring setting up a manufacturing plant in China, and that local reports have indicated that plant would be in the city of Suzhou not far from Shanghai.

New Solar Power Plants

Next there’s the solar plant news, which comes in a report that says SolarReserve and local partner coal producer Shenhua (HKEx: 1088) will jointly spend up to 15 billion yuan ($2.3 billion) to develop solar farms in China. (English article) Projects developed by the pair could have up to 1,000 megawatts of capacity, which is quite a large amount.

We’ve seen many similar initiatives to build solar power plants in China in response to Beijing incentives and directives, but this is one of the largest I can recall involving a foreign company. That’s significant because many Chinese builders have little experience in the sector, and may be taking their action more to please the central government than to earn actual profits. By comparison, this new partnership should be far more commercially focused, giving it better chances of success.

Finally there’s the Caixin investigative report, which saw a reporter review many companies’ latest financial statements and uncover how reliant some smaller automakers have become on Beijing incentives to develop new energy cars. (Chinese article) The report points out that many of the companies would be loss-making if they didn’t have the government support.

I’ve never heard of any of the companies named in the report, which reflects the fact that China’s auto industry is highly fragmented with dozens of small players that would never survive in a more mature market. Many of these companies probably should have closed or merged by now due to stiff competition. But they have discovered that Beijing’s largess can prolong their lives for a few more years, as they develop new energy cars that will probably never make it to market.

Doug Young has lived and worked in China for 20 years, much of that as a journalist, writing about publicly listed Chinese companies. He currently lives in Shanghai where, in addition to his role as editor of Young’s China Business Blog, he teaches financial journalism at Fudan University, one of China’s top journalism programs.. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

May 09, 2016

Right About Tesla, Wrong About Yingli

Doug Young 

Bottom line: Beijing should promote cutting-edge companies like Tesla that can help advance its new energy agenda, while abandoning ones like Yingli that use old technology to make cheap copycat products.

Two green energy stories were in the headlines last week, spotlighting China’s drive to become a global leader in the new technology and also the right and wrong ways to achieve that aim. An item involving US electric vehicle (EV) powerhouse Tesla (Nasdaq: TSLA) represented the right approach, with reports that the company might near a deal with Beijing to build a manufacturing plant in China. Meantime, former solar panel heavyweight Yingli (NYSE: YGE) was in the wrong approach column, announcing that its ill-conceived model of using old technology and cheap prices to do business had pushed it to the brink of insolvency, despite ongoing local efforts to rescue the company.

Beijing should take note of these 2 examples and do more to promote companies like Tesla that can develop cutting-edge technology for use in widely-respected products that the market wants. At the same time, it should abandon copycats like Yingli that don’t innovate and can only compete by offering cheap products using old technology.

In keeping with that approach, the government should finally pull the plug on companies like YIngli by letting them fail, while at the same time giving even bigger support to innovators like Tesla. Such a policy may cause some short-term pain due to plant closures, layoffs and lost investment for the copycats. But it will ultimately leave China with a field of healthier, more potent companies that can help it achieve its goal of becoming a global new energy leader.

China has made development of green industries a top priority over the last decade, with the aim of developing cutting-edge technologies that can be used both at home and exported abroad. That drive has gained added urgency in recent years as the nation grapples with worsening pollution, the result of years of breakneck growth with only minor attention to environmental protection.

One of Beijing’s earliest focus areas was the solar panel sector, whose products create pollution-free electricity using sunlight. Thanks to a wide range of incentives including tax reductions, cheap loans and low-cost land rights, the nation quickly built up a manufacturing complex that now produces more than half of the world’s solar panels.

Lack of Experience

But many companies that entered the field had little or no experience in the area, and instead relied mostly on cheap, older technology to produce low-end panels that were most attractive for their low prices. One of the biggest players to use that model was Yingli, whose cheap and relatively low-tech panels allowed it to quickly grow into the world’s largest solar panel maker.

But that strategy has sputtered due to a prolonged industry downturn created by too much capacity, and Yingli announced a year ago that it was running into serious financial difficulties. The company is now struggling to pay off its debt, and last week said there was “substantial doubt as to its ability to continue as a going concern” as it posted a loss of about 5.8 billion ($900 million) yuan last year. (company announcement)

While Yingli’s situation looked dire, things were much better for Tesla, which has previously said it would consider manufacturing its popular cutting-edge electric cars in China if given the right incentives. Tesla’s story was in the headlines late last week when its Asia chief Ren Yuxiang met with Xin Guobin, a vice minister from the Ministry of Industry and Information Technology (MIIT), which oversees the new energy auto sector. (Chinese article)

Both sides were eager to publicize the meeting, releasing photos of the men sitting together, heating up talk that the pair were closing in on a deal to build Tesla’s first manufacturing facility outside its home US market. Tesla’s ride into China hasn’t been easy mostly due to infrastructure and marketing issues, but its actual cars have been well received for their strong performance and cutting-edge technology. The company took a major step towards making its high-end products more affordable for average car buyers with the release last month of its latest car, the Model 3, which retails for a relatively affordable $35,000 before tax incentives.

Beijing should be commended for working hard to bring Tesla’s technology and manufacturing to China, which could ultimately help to promote similar development of China’s own domestic sector. At the same time, the government finally appears to be losing patience with Yingli after some quiet attempts to revive the company, and should work to conduct an orderly wind-down for this failed low-tech template for development in the fast-moving and fiercely competitive solar energy sector.

Doug Young has lived and worked in China for 20 years, much of that as a journalist, writing about publicly listed Chinese companies. He currently lives in Shanghai where, in addition to his role as editor of Young’s China Business Blog, he teaches financial journalism at Fudan University, one of China’s top journalism programs.. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

April 25, 2016

Net Metering Is the Solar Industry’s Junk Food

Shoppers who bring reusable bags to the grocery store buy more junk food.

This example is part of a growing body of behavioral psychology research showing that when we feel good about ourselves for doing one thing right, we give ourselves permission to be careless in other areas.

The solar installation industry seems to be falling into the "reusable shopping bag" trap. Solar itself is the reusable shopping bag. The junk food is net metering.

Net metering is a simple, intuitive way to pay for solar generation at retail rates. But it puts solar companies on a collision course with regulators trying to protect non-solar customers from cost-shifting. Solutions to this conflict exist and have the potential to unlock an even brighter future for the solar industry.  

Net metering pays owners of distributed solar for their excess power generation at the same price they would pay for power from the grid. When solar is a small fraction of the generation on the grid, this is a great deal for utilities and other ratepayers: solar generation occurs during the day, when electricity demand is typically higher and wholesale prices are also high. This is crucial on hot summer days when air conditioners drive up peak loads.

Net metering becomes less attractive for utilities as solar penetration increases. Hawaii and California are seeing this already.

Because electricity transmission is hard to build and storage is expensive relative to electricity generation, supply must be locally and instantaneously matched with demand. When lots of generation comes from variable, price-insensitive resources like solar, the grid suffers from too much of a good thing. In the middle of the day, solar production starts to meet and eventually surpasses daytime peak demand, and the value of electricity falls. Low prices during the day mean that more flexible forms of generation need to make profits when solar production is low, increasing prices and the value of electricity at night and on cloudy days.

This process puts utilities and regulators in a bind. The conflict can hurt both sides of the utility-customer relationship.

The Nevada Public Utilities Commission’s decision to end net metering for both old and existing customers may seem like a victory for the utility, but it is a Pyrrhic victory at best. 

When only a small fraction of the electricity on the grid comes from solar (low penetration) in any part of the grid, net metering is a subsidy to the utility, not the net-metered customer. But rather than replacing net metering with something that would encourage distributed solar where it would be most useful, Nevada has driven solar installers from the state. 

The decision did the greatest damage to solar customers who had the rules changed on them retroactively, and many of them will now never recover their solar investments. It also hurt other ratepayers who might have wanted to go solar in the future, and robbed all ratepayers of the benefits of any such installations to the grid. They are also robbing the planet of an opportunity to cost-effectively reduce carbon emissions.

The retroactive removal of net metering is also increasing uncertainty among large-scale energy developers, who reasonably wonder if something similar could happen to them.

How the conflict over net metering can be an opportunity

Must solar companies’ gain be a utility loss? Hardly. The key is to learn from the principles of stakeholder capitalism and turn the seeming tradeoff into an opportunity.

Speaking at the 2016 Conscious Investors Summit, R. Edward Freeman, the academic director at the Institute for Business in Society of the Darden School and the University of Virginia, made the point that tradeoffs are a managerial failure.

Freeman explains that when you treat employees and managers like jackasses, with carrots and sticks, they start acting like jackasses. When you treat them like human beings who crave a sense of purpose, they work with passion and deliver creative solutions to seemingly intractable problems. 

The solar/utility conflict is far from intractable, but for now, both sides are acting like jackasses. Utilities deride net metering as a subsidy from customers who can’t install solar to those who can, while the Solar Energy Industries Association publishes principles stating that customers should always have net metering as an option.

Both sides should stop acting like jackasses and seize the opportunity instead to focus on the tradeoff.  

A solution already exists. This is the value-of-solar tariff, where solar customers are paid for the value of the electricity they produce at the specific time and place they put it on the grid.

Under a value-of-solar tariff, non-solar customers cannot subsidize solar customers (a common utility claim about net metering). By definition, under a value-of-solar tariff, solar customers are paid only for the value they bring to the grid. They won’t be subsidized by other ratepayers simply because they are only paid for the value they create.

Untapped potential

Not only can a value-of-solar tariff resolve the conflict between solar and non-solar customers, but it can also unlock opportunities for solar which are currently being squandered under net metering. 

Under net metering, the incentive is to install solar so that it produces the maximum possible amount of electricity. This means pointing the panels south, at latitude tilt. Under a value-of-solar tariff, the incentive is to produce as much value for the grid as possible, which often means pointing panels west or southwest, in order to help service peak air-conditioning loads on hot days, which usually occur in the afternoon. Such decisions depend on both the local climate and on the local loads on the grid.

They also depend on getting the value of solar right. This is where we need creativity from all parties working together.

The paradox of doing good

Few people expect much creativity from utilities -- although there are notable exceptions, especially when it is the regulator driving change.

The solar industry is another matter. Almost all solar companies portray themselves as working for the good of the planet, and most of those genuinely believe that is what they are doing.

That’s where the reusable bags conundrum comes in. The mental accounting that allows a shopper to offset junk food indulgence with shopping bag virtue also seems to be affecting the solar industry as a whole.

If the solar industry were a person, it would be thinking: “I’m doing something great for the planet, so I don’t need to worry about all the non-solar ratepayers my actions might hurt. As long as the greater good is being served, it’s not my problem.”

It’s a pity that solar companies, which are doing so much good for the planet by displacing fossil fuels, are falling into the same trap as shoppers who displace plastic bags with reusable, but then poison themselves with junk food.

More solar companies need to stop substituting doing good for being good, and start living up to their true ideals. Solar has the potential to help all users of electricity, not just those who can install it themselves. A value-of-solar tariff can unlock that potential, as long as we have the creativity and courage to take everyone’s interests into account.

Getting a value-of-solar tariff right will be tricky, but creativity in the pursuit of a greater good is precisely what stakeholder companies excel at.

If all parties work toward a well-calibrated tariff, everyone will have the incentives they need to get the most out of future solar installations. Solar companies will get more business deploying solar where it does the most good. Regulators will see that all ratepayers are treated fairly. Utilities will find that new solar is connected to the grid where it makes it easier, not harder, to balance supply and demand.

Some people will still want to install solar even where the new supply is difficult to integrate, but a value-of-solar tariff will give them the incentive to install it with electronics and storage that makes the new supply easier to manage, or the price will be low enough that it will make sense for the utility to make the changes needed to handle it.

This kind of dynamic tariff is also likely to catalyze demand management, energy storage, and other industries we have not even thought of -- all of which will add jobs, create value, and help unlock the potential of solar.

Perhaps the solar industry and utilities can both have their cake -- and eat it together.

March 20, 2016

McKinsey Report Hits The G(reen) Spot

by Sean Kidney and the Climate Bonds Team

Working on climate change involves reading a lot of reports. A lot. My general view nowadays is “Enough already! Can you we just do now and stop theorizing?”

But sometimes you come across a report and you find yourself sitting up in your seat and shouting “Yes Yes Yes” like that scene with Meg Ryan in the movie When Harry met Sally.

It usually means the report is saying what you’d like to say, but much better; and so it is with the McKinsey Center for Business and Environment’s new report on Financing change: How to mobilize private sector financing for sustainable infrastructure.

The report:

  • Draws the link between country climate change plans submitted to the UN Climate Change Conference and infrastructure needs. Tick.
  • Then explains that global demand for new infrastructure to 2030 could amount to $90 trillion – as compared to the value of the world’s existing infrastructure at $50 trillion. Wow!
  • Infrastructure spending has to scale up from $3 trillion a year now to $6 trillion a year.
  • More than 60% of this funding gap is for infrastructure in emerging markets, like China, Brazil, India and Mexico.
  • Explains that public sector capital will not be enough and we need to mobilize private capital. Yep.
  • That means attention has to be given to “enabling environments” that ensure capital will flow from institutional investors like insurance and pension funds.

They posit five major barriers:
  • Lack of transparent and “bankable” pipelines: Even in the G-20, only half the countries publish infrastructure pipelines.
At Climate Bonds we think this is by far the most urgent issue, because a clear pipeline will drive home to governments the extent to which they need private capital and make them more receptive to proposals for that “enabling environment”.

  • High development and transaction costs.
That’s a tough one; but it’s interesting to see how in India the government has been tackling this with fast-track approvals, cutting red tape and the like. A long way to go, but hopeful.

  • Lack of viable funding models: Up to 70 percent of water provided by utilities in sub-Saharan Africa is leaked, unmetered, or stolen; therefore not enough revenue is generated to maintain or expand the system.
We’d add urban rail transport as another example, where too many governments insist on trying to recover the cost of investment from operating revenues. Doesn’t work. But what does work is Hong Kong’s system of massive property development on top of subway stations that allows the capital cost of the subway to be paid for with property profits. Go MTR!
  • Inadequate risk-adjusted returns: Investors may be willing to take on sustainable infrastructure but want higher returns to compensate them for the perceived risks.
This has always been the issue with infra development; and governments in many many countries have successfully found ways to structure investments with long-term contracts, regulatory support, and even revenue guarantees (often used for motorways) to attract the right kind of capital.

  • Unfavorable and uncertain regulations and policies: Basel III and Solvency II regulations could have the effect of reducing investment in infrastructure at the global level; uncertain tax policies can do the same at the national level. The fact that sustainable-infrastructure projects typically have higher up-front capital costs makes them even more sensitive to the cost and availability of capital.
That’s the key challenge of the green investment path we need to take: capital costs are much higher (20-30%) than the dirty brown path we usually take. But against that are health benefits (like less toxic air in Beijing, Delhi, Mexico City and Sao Paulo); lower operating costs with clean energy and rail maintenance (vs roads); and 100 year assets that, once capital costs are paid off in 20-30 years, keep working for a lifetime afterwards. Oh, and we help fix climate change; mustn’t forget that.

McKinsey’s prescriptions:

  • Scale up investment in sustainable project preparation and pipeline development. Governments and development banks should focus investment on project-preparation facilities and technical assistance to increase the “bankability” of project pipelines (meaning those that have an attractive economic profile). This is the highest-risk phase of the project life cycle; it is critical to get right; and it is subject to significant rent-seeking conduct. Given a chronic shortage in many developing countries of the right developer equity/expertise, this is an arena in which the right financing facilities could have disproportionate returns.
Agree 100%

  • Use development capital to finance sustainability premiums. Encourage development banks and bilateral-aid organizations to provide financing for the incremental up-front capital spending required to make traditional infrastructure projects sustainable, in economic, social, and environmental terms. Attract private-sector financing by demonstrating that risk-adjusted returns can be competitive with those of traditional infrastructure, even if the policy settings and prices do not fully reflect the total benefits of greater sustainability.
  • Improve the capital markets for sustainable infrastructure by encouraging the use of guarantees. Increase development-bank guarantee programs for sustainable infrastructure by expanding access to guarantees.
In fact, policy risk is usually cited as the number one risk for investors. Selective guarantees that address policy risks hold the potential to be fiscally efficient compared to the blunderbuss full guarantees too often used in the past.
  • Encourage the use of sustainability criteria in procurement. Governments should strengthen sustainability criteria in both public-procurement processes and public-private partnerships.
  • Increase syndication of loans that finance sustainable infrastructure projects. Encourage development banks to expand loan syndication and create a larger secondary market for sustainable infrastructure-related securities.
This would increase institutional investor familiarity with the asset class, reduce transaction costs, and allow the recycling of development capital.
  • Adapt financial instruments to channel investment to sustainable infrastructure and enhance liquidity. “Yieldcos” or “green bonds” have characteristics similar to traditional investment instruments, but with an emphasis on sustainability. Increasing use of these instruments could unlock investment from previously restricted investors, lower transaction costs, and reduce barriers to entry.

Green bonds? Nice idea.

I like their concluding remarks as well:

If capital markets were perfect or could respond instantaneously, then it is possible that some of the actions proposed in this report would be redundant.

However, in the real world, there is ample evidence of pervasive imperfections in the capital markets, partly due to policy and regulatory rules (for example, which result in risk mispricing or excess capital weighting for specific asset classes) and partly due to institutional conduct and agency factors.

Given their limited direct exposure to infrastructure risk, institutional investors are naturally cautious about increasing their exposure to this asset class. That is why a muscular set of nudges and risk-sharing instruments are required: they can shift perceptions and get capital to flow.

And finally

There are many challenges to changing the design, construction, financing, and operation of infrastructure.

There are no simple solutions. What there should be is a sense of urgency.

In the next 15 years the world is set to build more infrastructure than the value of all the infrastructure that exists today. That will dramatically remake the global landscape and profoundly shape the trajectory of efforts to deal with climate change for decades.

We can secure a better future, but only if we act quickly—and wisely

Thank you Aaron, Mike, Melissa and the legendary Jeremy Oppenheimer for a fantastic report highlighting practical solutions to scale green infrastructure investment!

----------------------

Financing change: How to mobilize private sector financing for sustainable infrastructure, by Aaron Bielenberg, Mike Kerlin, Jeremy Oppenheim, Melissa Roberts, McKinsey Center for Business and Environment, January 2016.

To find out about Climate Bonds Initiative work in this area read about our Green Infrastructure Investment Coalition, being developed with the Principles for Responsible Investment, the International Cooperative Insurers Federation and the UNEP Inquiry.

Also check out our public sector guide for scaling green bonds markets, which looks at how governments can leverage the green bond market to meet, their green infrastructure investment needs.

——— The Climate Bonds Team includes Sean Kidney, Tess Olsen-Rong, Beate Sonerud, and Justine Leigh-Bell.   The Climate Bonds Initiative is an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

February 24, 2016

The War On Net Metering

by Paula Mints

Net metering and interconnection are rights afforded distributed generation (DG) residential and commercial solar system owners through the U.S. Energy Policy Act of 2005. The act required publically owned utilities to offer net metering and left the various policies up to the states to enact.

In 2004, before that energy policy was enacted, 39 states had net metering and interconnection standards and policies. At the beginning of 2016, 43 U.S. states and three territories had net metering policies, and four states had policies similar to net metering that the Database of State Incentives for Renewables & Efficiency refers to as “statewide distributed generation compensation rules other than net metering.”

In the U.S., the availability of net metering was a key driver in the adoption of residential and small commercial solar. Net metering allows DG system owners (or lessees) to receive a credit for the electricity their solar systems generate. In the early days of net metering the electricity generated by the owner’s solar system was purchased monthly by the utility with, typically, the excess credited and rolled over to the following period or granted to the utility at the end of the year. Utilities paid for the net excess or credited the electricity generated by net metered solar systems at avoided cost, a market average or in some cases, at the retail rate.

The concept of avoided cost is essentially a comparison point used by utilities (in this context) to arrive at reference price point for buying electricity from another source. The Public Utility Regulatory Policies Act of 1978, affectionately known as PURPA, defined avoided cost in general as the cost of generating power from another source. In 2005, the Energy Policy Act amended PURPA and, as previously noted, obligated publically owned utilities to offer net metering. In terms of DG residential and commercial solar, avoided cost comes into play in terms of how utilities pay for a system’s net excess electricity. Not only is there no standard for the state-by-state definition of avoided cost in the context of net metering, there is no standard as to how net excess electricity will be compensated.

Some states use a definition of avoided cost based on short run marginal cost — diminishing marginal returns — and some states use a definition based on long run marginal cost — returns to scale. Basically, avoided cost is a reference point derived by some means to set a price for power. In the case of DG residential and commercial solar the method by which avoided cost is calculated is very important — it is also important in setting power purchace agreement rates.

In the early days of net metering, it was not typical for customers to be paid for the net excess generated by their solar systems at retail rates or favorable market rates. In many cases, utilities owned the net excess electricity generated by net metered systems while the owners of these systems had no right to the excess electricity. In the early days of net metering customers were solely looking to save money — the potential of making money at the DG system level is fairly recent.

Net Metering in the Spotlight

From 2005 through 2015, the residential application in the U.S. grew at a compound annual rate of 53 percent. Though net metering is only one driver of this growth, it certainly makes the economic case for the homeowners, particularly when net excess electricity is credited at retail rates. Figure 1 offers residential solar growth in the U.S. from 2005 through 2015.

residential DG growth
Figure 1: US Residential Application Growth, 2005-2015

Utilities did not expect solar industry growth to accelerate so significantly, and there is no doubt that they see this growth in terms of revenue decay.

Currently, and it must be stressed that there is no clear trend in terms of outcomes, the following changes to net metering are being sought on a case by case basis:

  • Additional or increased fees for net metered systems: Depending on the fee, this change can dissuade potential buyers/lessees, and high fees can upend the economic benefit for buyers/lessees
  • A switch to time-of-use rates: Higher prices for electricity during peak times and lower payment for net excess during off peak times can upend the economic benefit for buyers/lessees
  • Lowering the reimbursement for net excess to avoided cost: Danger of undervaluing net excess and upending the economic benefit for buyers/lessees
  • Changing the rules for reimbursement for net excess: A blast from the past that could (in the worst case) result in the net excess being granted to the utility
  • Making all of the above retroactive: So many dangers, so little time to list them

The utility argument for altering how net excess is compensated and for adding additional fees is economic. Utilities argue that ratepayers with solar systems (leased or owned) are renting less electricity from the utility and thus not paying their fair share for overall maintenance. The argument continues that the costs are unfairly shifted to ratepayers without solar systems on their roofs.

Establishing a fair fee for solar customers over and above the base fee all ratepayers pay is not simple. The addition of fees for solar customers should not be overly punitive or appear as a referendum against DG solar. After all, ratepayers without solar systems benefit from the clean energy generated by ratepayers with solar systems. Also, the electricity future likely includes more self-consumption and more microgrids as well as a new operating and revenue model for utilities. Fighting this change is futile.

The argument over who owns the net excess electricity generated by a DG solar system is simple. The electricity is fed into a common grid, all electricity customers use it and the generator of the electricity owns the net excess and deserves to be paid a market rate for it.

At the core of the utility’s argument, and often unmentioned, is a reduction in its revenues.

A Comparative Trip Down Memory Lane

Four states have been front-and-center currently in the net metering landscape: Arizona, California, Hawaii and Nevada. These states offer examples of the way things could play out as the net metering argument spreads from state to state. Reference years provided as examples are 2006, 2009, 2013 and 2016.

Arizona, Abandon all Hope Ye in APS Territory

In 2006, Salt River Project (SRP) purchased net excess at an average monthly market price minus a price adjustment, while Arizona Public Service (APS) and Tucson Electric Power (TEP) credited net excess at retail rate and granted the electricity to the utility at the end of the calendar year. There were no specific fees for solar system owners/lessees.

In 2016 things are very different; the state net metering policy credits net excess at retail rate with net excess paid at avoided cost. APS ratepayers, whether they leased or bought their systems, pay a $0.70/kWp monthly charge. For many, the changes in net excess compensation along with the additional fees for ratepayers in APS territory could swing the economic argument away from leasing or owning a solar system.

AZ net metering
Table 1: Arizona Net Metering Overview, 2006, 2009, 2013 and 2016

California: Walking the Fine Line of Compromise

California’s solar system owners came through a recent high profile fight over net metering relatively unscathed, though the result is not perfect. The net metering landscape has changed from no fees to a one-time interconnection fee and non-by-passable monthly charges for all electricity consumed from the grid. Though the charges are relatively modest, system owners beware; charges always go up and almost never go away. Ratepayers with solar systems will also be forced into time-of-use billing and will be credited or paid for net excess at the rate equal to the 12-month spot market price. To this last, spot market prices are not always favorable and in an oversupply situation can be downright penurious.

CA Net metering
Table 2: California Net Metering Overview, 2006, 2009, 2013 and 2016

Hawaii: Not an Island Paradise for Solar

In October 2015, for all those applying for interconnection/net metering after Oct. 12, 2015, the Hawaii Public Utilities Commission voted to end net metering, offing instead three options: grid-supply, self-supply and time-of-use tariff. This decision effectively put the brakes on Hawaii’s strong market for DG residential and small commercial solar.

HI net metering
Table 3: Hawaii Net Metering Overview, 2006, 2009, 2013 and 2016

Nevada: Et tu, Brute?

Nevada’s recent net metering decision slammed the door shut on the state’s DG solar installation industry, outraged current solar customers and set a precedent that — if not overturned by legislation or lawsuit — will be considered in states across the country. Specifically, by making the new rules essentially retroactive the decision of Nevada’s Public Utilities Commission (PUC) could cause potential DG solar system owners/lessees to think once, twice and maybe delay adoption.

Nevada’s PUC increased the monthly fee paid by net metered solar customers from $12.75 to $17.90 and will credit net excess at avoided cost. Existing solar customers will be phased into the new rates in three years for the monthly fees and over 12 years for the lower net excess rates.

HI net metering
Table 4: Nevada Net Metering Overview, 2006, 2009, 2013 and 2016

The Trend is That the Fight is On — As Usual

Net metering serves the market function of setting a price for kWhs of electricity. A DG solar system (homeowner or small business) generates electricity and the owner/lessee of the system sells the electricity that it does not need (the net excess) to the utility. The electricity that is generated is used by all ratepayers. The value proposition is clear. Reasonably the sellers want to profit from the electricity they sell or at least receive a credit on their electricity bill that fairly values their net excess generation.

Unreasonably, utilities would prefer not to pay a fair market price for the net excess.

Changes to net metering programs are being considered all across the U.S., and there will be wins, losses and new fees. Trends to be very concerned about include the switch back to crediting net excess at avoided cost instead of at retail rates and to higher fees for net metered solar customers. The most disastrous potential trend is to make changes to net metering retroactive thus encouraging potential customers to reconsider. This last trend must be fought vigorously. The U.S. solar industry is up to the fight.

Paula Mints is founder of SPV Market Research, a classic solar market research practice focused on gathering data through primary research and providing analyses of the global solar industry.  You can find her on Twitter @PaulaMints1 and read her blog here.
This article was originally published on RenewableEnergyWorld.com, and is republished with permission.

October 21, 2015

Is The Big Win For The Liberals In Canada Also A Big Win For Renewables?

Jim Lane

Canadian-election-1a

Liberals sweep to victory in Canada; Trudeau to become Prime Minister, pledging sharp increases in infrastructure investment and a renewed focus on clean technology.

In Canada, the Liberal party, under the leadership of 43-year old Justin Trudeau, swept to victory in the Canadian federal elections. As of 6am Eastern time, the Liberals have won 184 seats — 14 seats more than needed to form a majority government. Prime Minister Stephen Harper’s Conservative Party won in 99 ridings, a loss of 60 seats, while the New Democratic Party has reeled in 44 seats, a loss of 51. The Bloc Quebecois have won 10 seats, a gain of 8 (though party leader Gilles Duceppe was defeated in his own riding), and the Green Party retained its single seat.

Just after midnight Eastern time, the Conservative Party announced that Harper had resigned as party leader.

How it happened

Canadian-election-2The Liberals swept every one of Atlantic Canada’s 32 seats in early voting, and racked up another 80 seats in Ontario; in Québec, voters rolled back much of the NDP’s 2011 “Orange Wave”, and gave the Liberals 40 seats (up from 7 in 2011).

Strong results in the western provinces of Saskatchewan and Alberta for the Conservatives could not offset the losses they racked up in Eastern Canada.

The new Government

Incoming Prime Minister Trudeau has pledged that his government will run a short series of budget deficits aimed at boosting infrastructure spending.

Renewable agencies that stand to benefit?

The primary agency for renewables development in Canada is Sustainable Development Technology Canada, and its SD Tech Fund. In August, we reported: “the SD Tech Fund and the SD Natural Gas Fund are now open for applications through October 14, 2015. The SDTC portfolio is currently composed of 269 clean technology projects with a total value of $2.5 billion, of which over $1.8 billion is leveraged primarily from the private-sector.”

Leah Lawrence, President and CEO, Sustainable Development Technology Canada, said at the time, “Cleantech represents that double bottom line, bringing together environmental goals and economic activity in a way that generates jobs and opportunity across Canada. And what an opportunity it represents for Canada: recent reports peg the Canadian cleantech market at $12 billion.”

Another agency that is “on the biubble” and may benefit from a stronger focus on renewables is BioFuelNet Canada, whose network benefits from a $25 million grant over 5 years (2012 to 2017) through the federal Network of Centres of Excellence program.

BioFuelNet Canada is an integrated community of academic researchers, industry partners and government representatives who engage in collaborative initiatives to accelerate the development of sustainable advanced biofuels. BFN’s research is funded through a mix of government and private contributions, and is structured around the themes of feedstock, conversion, utilization, and social, economic and environmental sustainability.

At the same time, Bioindustrial Innovation Canada may stand to benefit from increased attention, after the group recently completed phase 1 of a project to assess the economic viability of the agricultural biomass to cellulosic sugar value chain in Canada. We reported in July that “the Cellulosic Sugar Production Project is designed to evaluate, develop and physically validate agricultural biomass to sugars and co-products conversion technologies for commercial scale-up application.” The agency had received $7 million in 2014 from the Harper Government, aiming to add value to the agriculture sector and respond to global demand for environmentally-friendly bioproducts.

A new direction for Natural Resources Canada?

In December 2014 we reported, “Natural Resources Canada failed to spend $298.6 million that was budgeted for biofuels, green energy, energy efficiency and technology plans last year, yet somehow spent more than $438 million on programs for oil and gas research and market development, including research on how to clean up spills. Of the total, $113 million went unspent on biodiesel programs because of “poor production economics and uncertainty around blending mandates and incentive programs in the U.S.,” said the Natural Resources Canada Performance Report.”

The Liberal platform on renewables

The Trudeau government is pledged to “Make “critical investments” in the clean energy industry, and “support clean energy and energy-efficiency projects to “help reduce climate change causing gases, and to add high-paying, cutting edge jobs”. Specifically, the incoming government is pledged to “quadrupling Canada’s production of renewable energy from sources such as solar and wind, by 2017” — and to investments in “renewable energy production such as solar, wind, geothermal and biomass”.

The extent to which a Trudeau government will focus on transport and alternative fuels — as opposed to power generation — is as yet unclear. But the incoming government’s pledge to introduce a cap-and-trade system for greenhouse gas emissions suggests that transport may be on the table — especially in that the party platform states that a Canadian cap-and-trade system must “cover all industries with no exceptions.”

The Liberal Party of Canada also supports Canada’s 5% renewable fuels standard for gasoline and 2% mandate for diesel.

Forestry and Agriculture

The incoming government is pledged to investments of up to $200 million each year to support clean technology in the forestry, agriculture and energy sectors — and specifically $100 million for the development of clean technology companies.

At a conference in Vancouver in June, incoming Prime Minister Trudeau said, “the environment and the economy go together like paddles and canoes. If you don’t take care of both, you’re never going to get to where you’re going.”

The Bottom Line

Last night, Canadians voted for a change of direction in government, and renewable energy policy is very much a focal point in that effort. Details will be forthcoming regarding the extent to which the new government will focus on electric power vs. the transportation sector — but the news of the change in control in Ottawa is bound to be exciting for those who have been calling for a more robust Canadian policy on greenhouse gas emissions and clean technology.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

May 24, 2015

Warren Buffett: Closet Tree-Hugging Billionaire

By Jeff Siegel

Is Warren Buffett sending mixed messages on green energy?

That's what the folks over at Bloomberg Business have suggested. But nothing could be further from the truth. After all, Buffett's making a fortune in the alternative energy space.

Yet here's what was reported in Bloomberg this week:

Warren Buffett highlights how his Berkshire Hathaway Inc. utilities make massive investments in renewable energy. Meanwhile, in Nevada, the company is fighting a plan that would encourage more residents to use green power.

Berkshire’s NV Energy, the state’s dominant utility, opposes the proposal to increase a cap on the amount of energy that can be generated with solar panels by residents who sell power back to the grid in a practice known as net metering.

While the billionaire’s famed holding company has reaped tax credits from investing in wind farms and solar arrays, net metering is often seen by utilities as a threat. Buffett wants his managers to protect competitive advantages, said Jeff Matthews, an investor and author of books about Berkshire.

“It always comes down to money,” he said.

Well, Duh!

Of course it always comes down to money!

You think you'd see billion-dollar growth in the solar space if it were only being facilitated by overzealous tree-huggers and wealthy eccentrics?

Not a chance!

The rapid growth in renewables — particularly in solar and wind — is the result of entrepreneurship, capitalism, and the basic fundamentals of supply and demand.

It blows my mind that folks are calling out Warren Buffett for lobbying against a proposal to increase the net metering cap. Buffett isn't in the alternative energy game because he likes to hug trees. He's in the alternative energy game because he's an incredibly smart investor.

Anyone who honestly believes there's no money to be made in the renewable energy space should go find a typewriter company to invest in. I've been screaming this from the rooftops for a decade now, and many of those who have listened — and invested accordingly — have made small fortunes.

Sipping Mai Tais in Kauai

Look, Buffett doesn't really have much skin in the residential solar space. Most of his renewable energy scratch comes from utility-scale development. So having to shell out more to individual homeowners who send solar-generated electrons to the grid isn't going to help Berkshire's NV Energy.

Of course, this actually illustrates a pretty interesting point.

When you step back and look at the big picture of renewable energy, it's really only the super wealthy that can even afford investing in these giant utility-scale renewable energy projects. And these deals are not for the risk-averse.

You can, however, invest in the public companies that build or invest in these projects. I'm talking about companies like First Solar (NASDAQ: FSLR) and SunPower (NASDAQ: SPWR), not to mention the financiers and developers.

Some of my favorites here include:

  • Brookfield Renewable Energy Partners (NYSE: BEP)
  • Pattern Energy Group (NASDAQ: PEGI)
  • Hannon Armstrong (NYSE: HASI)

The latter, by the way, is a company I told you about back in 2013, when it was trading around $11 a share. Today, it trades around $20, plus it boasts a nice little 5% dividend.

hasi chart

While I'll be the first to admit that I am, without a doubt, an unapologetic environmentalist, I sure as hell don't invest in renewable energy companies unless they're going to make me money. And HASI is among many that have helped me turn my passion for sustainability into an opportunity to create significant wealth.

No, my swagger doesn't even come close to that of Warren Buffett's. And truth be told, if I boasted just 0.5% of his net worth, I'd be sitting in my hammock in Kauai right now, sipping a Mai Tai and reading the newspaper.

But one thing's for certain...

Without the renewable energy space, many of my readers would have much thinner wallets right now. So yes, even if you couldn't care less about the toxicity of our air or the rapid erosion of our once-healthy soil, make no mistake — investing in renewable energy has more to do with profits than it has to do with tree-hugging.

And if you don't believe me, ask yourself why Warren Buffett owns more than $15 billion worth of wind and solar assets. That's billion — with a “B.”

It ain't rocket science, folks!

To a new way of life and a new generation of wealth...

 signature

Jeff Siegel is Editor of Energy and Capital, where this article was first published.

May 13, 2015

US Crawls Closer to Energy Policy

by Debra Fiakas CFA

Last week President Obama signed into law the Energy Efficiency Improvement Act of 2015.  The law is intended to reduce energy requirements in commercial buildings, manufacturing facilities and residential structures.  The law improves building codes, provides assistance to manufactures to achieve energy efficiency and paves the way for conservation activities by federal agencies.  It is the closest thing the United States has to an energy policy…..so far.


It took years to get this small piece of energy policy through Congress.  Indeed, at one point in its convoluted travels through the House of Representatives and Senate, several of the bill's Republican sponsors actually filibustered against it.  First, there was some sort of crazed attempt to protect the Keystone XL pipeline.  Then, additional delays resulted from attempts to add amendments that would enable exports of natural gas and others that would have reduced the U.S. Environmental Protection Agency authority to regulate future power plants.

The legislation was widely supported by the utility industry.  Both the Natural Resources Defense Council and the U.S. Chamber of Commerce were early advocates.  Such support bodes well for the success of the legislation.

Part of the reason the bill was well received is the voluntary and market-driven character.  Title I of the law providers for voluntary approach to reducing energy use in commercial buildings.  Title III of the act requires federally-leased building without Energy Star labels to benchmark and disclose energy usage data.

Senators Portman and Shaheen, who had sponsored the Energy Efficiency bill have also put forth the Energy Savings and Industrial Competitiveness Act.  It was sent to a congressional committee in early March 2015.  It would establish a national strategy for energy efficiency with a model building code.  It would also promote energy-efficient supply chains for companies with the federal government agencies leading the way and support energy efficiency in schools.  The legislation is projected to create 192,000 jobs and save $16 billion annually in energy use as well as reduce carbon dioxide emissions by 95 million tons within the next fifteen years.

For investors the legislation may not seem important.  However, an unexpected consequence of this law might be in creating a standards-based approach to energy efficiency.  With all business aiming at the same target, it creates some production and marketing efficiencies.  I expect more innovators to be encouraged to invest in products and processes that might otherwise have been thought uneconomic.  Interestingly, the legislation does not rely on penalties or punishments.  It simply promotes market forces and competition.  I also expect this to lubricate interest in bringing efficiency products to the market. 

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

July 30, 2014

New Tariffs Likely To Raise US Solar Prices

Jennifer Runyon

The US Department of Commerce announced preliminary findings in the new trade case against Chinese and Taiwanese PV products.

On Friday evening the U.S. Department of Commerce (DOC) announced its preliminary findings in the antidumping duty (AD) investigations of imports of some crystalline silicon PV products from China and Taiwan. Most solar products entering the U.S. market from China and Taiwan will now face import duties.

According to a fact sheet released by the DOC, the AD law “provides U.S. businesses and workers with a transparent and internationally accepted mechanism to seek relief from the market-distorting effects caused by injurious dumping of imports into the United States. The DOC believes that this creates  “an opportunity [for U.S. businesses] to compete on a level playing field.”

The DOC has prelimarily determined that “certain crystalline silicon photovoltaic products from China and Taiwan have been sold in the United States at dumping margins ranging from 26.33 to 58.87 percent, and 27.59 to 44.18 percent, respectively and will be collecting tariffs on the following manufacturers in the following amounts. The tariffs will be collected immediately, although final determinations will not be made until December.

From China:

  • Trina Solar (TSL) – 26.33 percent
  • Rensola (SOL) and Jinko (JKS) – 58.87 percent
  • Suntech (STP) – 42.33 percent
  • Another 42 unspecified manufactures – 42.33 percent
  • China-wide entity (those who didn’t respond to the DOC’s questionnaire) -165.04 percent

From Taiwan:

  • Gintech – 27.69 percent
  • Motech – 44.18 percent
  • All others 35.89 percent

The ruling is inclusive of many pieces of the solar manufacturing puzzle.  According to the DOC fact sheet it includes the following:

Crystalline silicon photovoltaic cells, and modules, laminates and/or panels consisting of crystalline silicon photovoltaic cells, whether or not partially or fully assembled into other products, including building integrated materials.

For purposes of this investigation, subject merchandise also includes modules, laminates and/or panels assembled in the subject country consisting of crystalline silicon photovoltaic cells that are completed or partially manufactured within a customs territory other than that subject country, using ingots that are manufactured in the subject country, wafers that are manufactured in the subject country, or cells where the manufacturing process begins in the subject country and is completed in a non-subject country.

Subject merchandise includes crystalline silicon photovoltaic cells of thickness equal to or greater than 20 micrometers, having a p/n junction formed by any means, whether or not the cell has undergone other processing, including, but not limited to, cleaning etching, coating, and/or addition of materials (including, but not limited to, metallization and conductor patterns) to collect and forward the electricity that is generated by the cell.

Thin-film PV will not face tariffs.  Also excluded are any products that are covered by the existing antidumping and countervailing duties as well as PV cells not exceeding 10,000 mm2 in surface area that are integrated into consumer goods who function to power that consumer good (like a solar-powered calculator).

The DOC estimates that in 2013, the value of solar PV products imported from China and Taiwan was $1.5 billion and $656 million, respectively.

U.S. Industry Reacts

SolarWorld (SRWRF), the solar petitioner in the case against China and Taiwan, commended the DOC’s determination.

“We and our workers are very gratified to hear that the U.S. government once again has moved to block foreign government interference in our economy and clear the way for the domestic production industry to be able to compete on a level playing field,” said Mukesh Dulani, president of SolarWorld Industries America Inc.  “We should not have to compete with dumped imports or the Chinese government.  Today’s actions should help the U.S. solar manufacturing industry to expand and innovate.”

Jigar Shah, president of the Coalition for Affordable Solar Energy (CASE) released a statement calling the determination “another unnecessary obstacle” that he said will “hinder the deployment of clean energy by raising the prices of solar products.”

He said: “Due to these tariffs, previously viable projects will go unbuilt, American workers will go unhired and consumers that could have saved money through solar energy may not be able to benefit.”   

CASE maintains that America’s solar manufacturers are strong and are providing jobs for 29,000 U.S. workers.  In addition almost 100,000 Americans are employed downstream in the system installation, sales, distribution and project development sectors.

The coalition collected the following statements from some of its members:

Ron Corio, President of Array Technologies, based in Albuquerque, NM and representing over 100 jobs said: “As a U.S. solar manufacturing company, we’re very disappointed in today’s anti-dumping determination. By increasing the price of solar power through tariffs, SolarWorld is shrinking the market for our products here in the United States and punishing successful U.S. solar businesses. Our company is proof that American solar manufacturing jobs will decrease under these special trade protections.”

John Morrison, COO of Strata Solar, based in Chapel Hill, NC and representing over 1,000 jobs said: “Due to their scale, the utility and large commercial solar sectors are particularly sensitive to the uncertainty and price increases caused by these tariffs. Until this dispute is resolved, our industry will build fewer projects and install less solar. It’s time to end the litigation, negotiate a solution and put more Americans back to work.”

Ocean Yuan, Founder and CEO of Grape Solar, based in Eugene, OR said: “My company assembles and sells complete solar energy kits directly to customers and in major retail stores across the country. The number one reason customers cite when switching to solar energy is cost savings, but these misguided tariffs are inflating prices. A negotiated solution to this dispute will ensure the continued growth of our industry and small businesses like mine.”

Chinese Industry Reacts

In an interview with Bloomberg news, Sebastian Liu, director of Investor Relations at Jinko Solar said that top Chinese manufacturers would elect to pay the 2012 duties without using cells from Taiwan or a third-country. Jennifer Liang, a Taipei-based analyst from KGI Securities Co told Bloomberg that the duties would hurt producers from Taiwan the most.

Taiwanese solar stocks including Motech, Gintech, E-Ton Solar and Neo Solar dropped in reaction to the news, said Bloomberg.

Organizations Urge a Settlement

CASE’s Shah believes that SolarWorld should work with the U.S. solar industry to end litigation “in favor of a win-win solution like the Solar Energy Industries Association (SEIA) settlement proposal.”

He said that CASE members represent the industry majority and that they “demand a solution that ends uncertainty in the marketplace by preventing further trade litigation and that allows solar power to compete cost-effectively with traditional energy sources, thus enabling the market’s further growth.”

Rhone Resch, president and CEO of SEIA echoed Shah. “Enough is enough. The Department of Commerce continues to rely on an overly broad scope definition for subject imports from China, adversely impacting both American consumers and the vast majority of the U.S. solar industry,” Resch said. “We strongly urge the U.S. and Chinese governments to ‘freeze the playing field’ and focus all efforts on finding a negotiated solution. This continued, unnecessary litigation has already done serious damage, with even more likely to result as the investigations proceed.”

Resch believes that a “win-win” solution is still achievable. “As the old saying goes, ‘where there’s a will, there’s a way.’ Today, the parties are finally engaged and all sides seem committed to finding a negotiated solution. I am encouraging my U.S. and Chinese industry colleagues to roll-up our sleeves, work together, and find a deal that’s good for everyone,” he said.

For more discussion about U.S. trade relations, play the video below.

Timeline for Next Steps

Final determination of the AD investigation is expected on December 15, 2014. If that final determination is affirmative then the International Trade Commission will issue its final determination on January 29, 2015 and the order will be issued on February 5, 2015.

Jennifer Runyon is chief editor of RenewableEnergyWorld.com and Renewable Energy World magazine, coordinating, writing and/or editing columns, features, news stories and blogs for the publications. She also serves as conference chair of Renewable Energy World Conference and Expo, North America. She holds a Master's Degree in English Education from Boston University and a BA in English from the University of Virginia.

This article was originally published on RenewableEnergyWorld.com, and is republished with permission. 

July 28, 2014

The Utility Death Spiral: Beyond The Rhetoric

by Lynne Kiesling

Unless you follow the electricity industry you may not be aware of the past year’s discussion of the impending “utility death spiral”, ably summarized in this Clean Energy Group post:

There have been several reports out recently predicting that solar + storage systems will soon reach cost parity with grid-purchased electricity, thus presenting the first serious challenge to the centralized utility model. Customers, the theory goes, will soon be able to cut the cord that has bound them to traditional utilities, opting instead to self-generate using cheap PV, with batteries to regulate the intermittent output and carry them through cloudy spells. The plummeting cost of solar panels, plus the imminent increased production and decreased cost of electric vehicle batteries that can be used in stationary applications, have combined to create a technological perfect storm. As grid power costs rise and self-generation costs fall, a tipping point will arrive – within a decade, some analysts are predicting – at which time, it will become economically advantageous for millions of Americans to generate their own power. The “death spiral” for utilities occurs because the more people self-generate, the more utilities will be forced to seek rate increases on a shrinking rate base… thus driving even more customers off the grid.

A January 2013 analysis from the Edison Electric Institute, Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business, precipitated this conversation. Focusing on the financial market implications for regulated utilities of distributed resources (DER) and technology-enabled demand-side management (an archaic term that I dislike intensely), or DSM, the report notes that:

The financial risks created by disruptive challenges include declining utility revenues, increasing costs, and lower profitability potential, particularly over the long term. As DER and DSM programs continue to capture “market share,” for example, utility revenues will be reduced. Adding the higher costs to integrate DER, increasing subsidies for DSM and direct metering of DER will result in the potential for a squeeze on profitability and, thus, credit metrics. While the regulatory process is expected to allow for recovery of lost revenues in future rate cases, tariff structures in most states call for non-DER customers to pay for (or absorb) lost revenues. As DER penetration increases, this is a cost recovery structure that will lead to political pressure to undo these cross subsidies and may result in utility stranded cost exposure.

I think the apocalyptic “death spiral” rhetoric is overblown and exaggerated, but this is a worthwhile, and perhaps overdue, conversation to have. As it has unfolded over the past year, though, I do think that some of the more essential questions on the topic are not being asked. Over the next few weeks I’m going to explore some of those questions, as I dive into a related new research project.

The theoretical argument for the possibility of death spiral is straightforward. The vertically-integrated, regulated distribution utility is a regulatory creation, intended to enable a financially sustainable business model for providing reliable basic electricity service to the largest possible number of customers for the least feasible cost, taking account of the economies of scale and scope resulting from the electro-mechanical generation and wires technologies implemented in the early 20th century. From a theoretical/benevolent social planner perspective, the objective is, given a market demand for a specific good/service, to minimize the total cost of providing that good/service subject to a zero economic profit constraint for the firm; this will lead to highest feasible output and total surplus combination (and lowest deadweight loss) consistent with the financial sustainability of the firm.

The regulatory mechanism for implementing this model to achieve this objective is to erect a legal entry barrier into the market for that specific good/service, and to assure the regulated monopolist cost recovery, including its opportunity cost of capital, otherwise known as rate-of-return regulation. In return, the regulated monopolist commits to serve all customers reliably through its vertically-integrated generation, transmission, distribution, and retail functions. The monopolist’s costs and opportunity cost of capital determine its revenue requirement, out of which we can derive flat, averaged retail prices that forecasts suggest will enable the monopolist to earn that amount of revenue.

That’s the regulatory model + business model that has existed with little substantive evolution since the early 20th century, and it did achieve the social policy objectives of the 20th century — widespread electrification and low, stable prices, which have enabled follow-on economic growth and well-distributed increased living standards. It’s a regulatory+business model, though, that is premised on a few things:

  1. Defining a market by defining the characteristics of the product/service sold in that market, in this case electricity with a particular physical (volts, amps, hertz) definition and a particular reliability level (paraphrasing Fred Kahn …)
  2. The economies of scale (those big central generators and big wires) and economies of scope (lower total cost when producing two or more products compared to producing those products separately) that exist due to large-scale electro-mechanical technologies
  3. The architectural implications of connecting large-scale electro-mechanical technologies together in a network via a set of centralized control nodes — technology -> architecture -> market environment, and in this case large-scale electro-mechanical technologies -> distributed wires network with centralized control points rather than distributed control points throughout the network, including the edge of the network (paraphrasing Larry Lessig …)
  4. The financial implications of having invested so many resources in long-lived physical assets to create that network and its control nodes — if demand is growing at a stable rate, and regulators can assure cost recovery, then the regulated monopolist can arrange financing for investments at attractive interest rates, as long as this arrangement is likely to be stable for the 30-to-40-year life of the assets

As long as those conditions are stable, regulatory cost recovery will sustain this business model. And that’s precisely the effect of smart grid technologies, distributed generation technologies, microgrid technologies — they violate one or more of those four premises, and can make it not just feasible, but actually beneficial for customers to change their behavior in ways that reduce the regulation-supported revenue of the regulated monopolist.

Digital technologies that enable greater consumer control and more choice of products and services break down the regulatory market boundaries that are required to regulate product quality. Generation innovations, from the combined-cycle gas turbine of the 1980s to small-scale Stirling engines, reduce the economies of scale that have driven the regulation of and investment in the industry for over a century. Wires networks with centralized control built to capitalize on those large-scale technologies may have less value in an environment with smaller-scale generation and digital, automated detection, response, and control. But those generation and wires assets are long-lived, and in a cost-recovery-based business model, have to be paid for even if they become the destruction in creative destruction. We saw that happen in the restructuring that occurred in the 1990s, with the liberalization of wholesale power markets and the unbundling of generation from the vertically-integrated monopolists in those states; part of the political bargain in restructuring was to compensate them for the “stranded costs” associated with having made those investments based on a regulatory commitment that they would receive cost recovery on them.

Thus the death spiral rhetoric, and the concern that the existing utility business model will not survive. But if my framing of the situation is accurate, then what we should be examining in more detail is the regulatory model, since the utility business model is itself a regulatory creation. This relationship between digital innovation (encompassing smart grid, distributed resources, and microgrids) and regulation is what I’m exploring. How should the regulatory model and the associated utility business model change in light of digital innovation?

Lynne Kiesling is a Distinguished Senior Lecturer in the Department of Economics at Northwestern University. Her economic specialty is industrial organization, regulatory policy and market design in the electricity industry.  In particular, she examines the interaction of market design and innovation in the development of retail markets, products and services and the economics of “smart grid” technologies. She also teaches undergraduate courses in principles of economics, energy economics, environmental economics, and history of economic thought, and she writes about economics as the editor/owner at the website Knowledge Problem, where this post first appeared.

June 17, 2014

The EPA's Carbon Rule: Likely Stockmarket Winners

By Harris Roen

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Greenhouse gas emissions by economic sector
  A seismic shift in the power generation landscape is starting to sink in. It has been two weeks since the EPA announced its new proposed carbon rules, one of the flagship efforts of the Obama Administration to address climate change. This shift is meant to move the country in the direction of inevitable changes coming to the energy economy. It is important for investors to know which companies and sectors stand to benefit from the new rule.

What the rule says

The basics of the proposed rule are this: States need to come up with ways to reduce power plant emissions. The goal is to allow flexibility to States so that they can implement innovative strategies to reduce the “pollution-to-power ratio” of fossil-fuel fired power plants. The EPA believes that by doing so, U.S. power plants should emit 30% less carbon in 2030 than they did in 2005.

The EPA is framing the effort with four “building blocks” in order to reach carbon reduction goals. These are:

1. Improved operations at power plants.
This means building more efficient plants, or retrofitting existing ones.
2. Substituting high carbon generating plants with lower carbon generation.
In effect, replace coal-fired plants with natural gas.
3. Substituting fossil fuel plants with low and zero carbon generation.
A call to enhanced deployment of renewables.
4. Increase demand side efficiency.
Lower the energy use of homeowners, businesses, etc.

 
All four of these building blocks have strong implications for alternative energy investors. They are listed below in order of relevance to the companies we track here at the Roen Financial Report.
 

Substituting fossil fuel plants with low and zero carbon generation

This building block is at the heart of the mission of the Roen Financial Report, moving beyond fossil fuels and into the realm of renewables. These two very different companies are among my top picks to benefit in this category.

SolarCity Corp (SCTY) is an innovative, full service solar installation company that has had more digital ink spilled about it than most any other alternative energy company (including my own analysis). SolarCity takes the residential and commercial customers through design, installation and financing of solar systems. In addition to solar installs, SolarCity does home energy evaluation, energy efficiency upgrades, electric vehicle charging and energy storage. Growth has been outstanding for this company, and though it is a speculative investment, I have no doubt it will become profitable in the new two to three years.

Trina Solar Limited (ADR) (TSL) is a China-based integrated photovoltaic module manufacturer. It has a large production capacity and a global distribution network covering Europe, North America and Asia. Its sales have picked up since 2012, and Trina has posted positive earnings in its three most recent quarters. Trina Solar recently closed on $150 million of convertible senior notes and over $90 million of American Depositary shares. I see the fact that the company is looking to western capital and away from Chinese government loans as a positive sign.
 

Increase demand side efficiency

Efficiency is one of our favorite investment themes. This is low hanging fruit – it benefits end homes and businesses by saving money, it benefits utilities by reducing the need to build more capacity, and it benefits the environment. The three companies below are well positioned leaders in this category

EnerNOC, Inc (ENOC) helps commercial and industrial users reduce electricity use during peak demand, which can significantly reduce a company’s energy consumption. EnerNOC’s services include demand response, energy efficiency, energy procurement, emissions tracking and trading support. This Boston-based company recently won an auction for over $185 million in capacity payment in the PJM Interconnection capacity market for 2017/2018, which should bode well for its bottom line. ENOC is up 41% for the year, and over 220% from its lows in 2012.

Tetra Tech, Inc (TTEK) is a diversified company that provides environmental services, energy efficiency consulting, carbon management and other services. This large California-based company works on projects world-wide and brings in almost $2 billion in revenues annually. TTEK has been a component of the Paradigm Portfolio since its inception. We consider Tetra Tech to be trading below fair value at current levels in the mid-$20 range.

Ameresco Inc (AMRC) is a small Massachusetts-based company that provides a variety of measures to improve the efficiency of major building systems. These include heating, ventilation, air conditioning and lighting. Ameresco also installs small-scale renewable energy plants. AMRC had a solid vote of confidence by management, as CEO George P. Sakellaris recently purchased 85,000 shares in a month worth over half a million dollars. This positive insider trading activity brings his direct ownership to over $18 million.
 

Substituting high carbon generating plants with lower carbon generation

The case is now clearer than ever that coal will be phased out in favor of natural gas. Though substituting one fossil fuel for another may not be the ultimate solution to solving our climate problems, it is undoubtedly a critical short-term step to addressing base-load needs while reducing carbon emissions. Three companies have been selected which stand to benefit from this trend.

NextEra Energy, Inc (NEE) is a large, profitable Florida-based power company that generates more than half its power from natural gas. NextEra is in the process of completing a major development cycle where it is modernizing older, less-efficient fossil generation facilities and building more efficient, cleaner natural gas-fueled plants. For example, its Port Everglades plant was demolished in 2013 to be replaced with plant that should have half the emissions. Also, NextEra is developing a new natural gas pipeline to Florida targeted for completion in 2017. In addition, NEE generates 8,000 megawatts of electricity from renewable resources.

As a utility NextEra offers steady stock price growth with an attractive yield. With over 4.5 million customer accounts, NextEra Energy is well over the industry average in assets and earnings growth. We consider NEE to be above fair value at current levels, but it remains a good long-term investment.

Sempra Energy (SRE) Sempra Energy is a holding company that owns two southern California utilities, as well as energy assets in other parts of the United States, Mexico, and South America. This San Diego based company has over 17,000 employees and provides products and services to more than 31 million consumers worldwide. Sempra has a strong portfolio of natural gas pipelines, storage and generation facilities. As with NextEra, Sempra also has an array of solar and wind facilities that it manages. Sempra has had steady sales and strong earnings, but has a relatively high PE. It is deemed to be just above fair value, so is a good buy in the $85-$90 price range.

GreenHunter Energy, Inc (GRH) provides water management solutions for shale gas focusing on serving companies in the Marcellus, Eagle Ford and Bakken shale plays. Its services are essential to address environmental issues concerning hydraulic fracturing, or fracking, utilized in shale gas production. Though this microcap penny stock had a sketchy beginning, it has enjoyed a recent jump in its stock price due to increasing revenues leading to decreasing losses. Its earnings are still negative, though, so we consider this micro-cap to be a speculative investment.
 

Improved operations at power plants

Though many people may not consider it a renewable energy company, General Electric (GE) is a key player in many aspects of the energy industry. As a leader in power plant design and turbine development, GE will surely benefit from planned power plant retrofits and reconfigurations.

Sales and earnings for GE have been flat since the beginning of the decade, but it has had climbing dividends every year since 2010. Though we see GE as overvalued at current levels, this company can be a stable large-cap component of a balance portfolio. We estimate fair value to be in the low 20’s, so accumulate on the dips.
 

Summary

The Obama administration made a bold move to address climate change by issuing these carbon rules through the EPA. While the proposed regulations are still in a draft phase, there is no doubt that the changes already occurring in the utility business will continue. Savvy investors well positioned in the proper companies and industries will be sure to benefit from this continued energy transformation.

DISCLOSURE

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is also possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

June 26, 2013

Obama's Climate Plan

James Montgomery

Yesterday President Obama spoke at Georgetown University about his plans to broadly address climate change. Ahead of his actual talk, the White House released the gist of what he would propose.
  • The EPA, working with states, industry, and other stakeholders, will establish new carbon pollution standards. "Tough new rules" will be established similar to those that exist for toxins like mercury and arsenic. These new rules, as anticipated, will target existing power plants as well as new ones.

  • The federal government will make available up to $8 billion in loan guarantees for "advanced fossil energy" and efficiency projects — broadly defining upgrades that improve power system efficiency, CO2 capture, and plant availability; examples include "clean coal," synthetic gas, better high-temperature materials, and improved turbine designs.

  • The Department of the Interior (DOI) will be pressed to permit enough renewables projects (e.g. wind and solar) on public lands by 2020 to power 6 million homes. The DOI also will designate the first-ever hydropower project for priority permitting, and establish a new goal of 100 MW of renewables on federally assisted housing by 2020 (while maintaining a commitment to deploy renewables on military installations).

    The DOI has already been moving forward on the renewables-on-public-lands front. Last summer it broadly designated 285,000 acres of public land for solar development in six Western states, potentially home to more than 23 GW of development — enough to power 7 million American homes. And three weeks ago it approved three renewable energy projects in the southwest U.S.: the 350-megawatt Midland Solar Energy Project and the 70-MW New York Canyon Geothermal Project in Nevada, and the 100-MW Quartzsite concentrated solar energy (CSP) project in Arizona, collectively representing up to 520 MW, enough to power nearly 200,000 homes.

    (Note, however, that these household-serving numbers aren't so easily interpreted — it's unclear whether it represents the delivery from peak generation of solar and/or wind combined (or either), or whether and how that's in combination with whatever other generation is required to join them. Obama's pre-released statement doesn't clarify if or how other energy sources will be incorporated into that directive.)

Other directives on Obama's agenda include making commercial, industrial, and multifamily buildings at least 20 percent more efficient by 2020; and reducing carbon pollution by at least 3 billion metric tons cumulatively by 2030 — more than half the annual carbon pollution from the U.S. energy sector — through efficiency standards for appliances & federal buildings.

That's one-third of Obama's Climate Action Plan. Another part is more related to infrastructure than energy, and deals with mitigation rather than prevention: directing agencies to better support local climate-resilient investments, strengthen communities against future extreme weather and climate impacts (using Hurricane Sandy's impact as a touchstone), create sustainable and resilient hospitals, better educate farmers, ranchers, and landowners in "agricultural productivity," and launch a National Drought Resilience Partnership to minimize vulnerability to catastrophic fire.

Yet another thrust of Obama's plan looks beyond our borders: committing to expanding new and existing international initiatives, including bilateral initiatives with China, India, and other major emitting countries; a call for an end to U.S. government support for public financing of new coal-fired powers plants overseas (with a few exceptions for efficiency in poor countries, and facilities with carbon capture and sequestration); and expanding government and local community planning and response capacities.

We'll be updating this story throughout the days ahead with analysis of the President's plan, and most importantly what happens next — how it will eventually translate into action and legislation, and what might that journey entail.

Jim Montgomery is Associate Editor for RenewableEnergyWorld.com, covering the solar and wind beats. He previously was news editor for Solid State Technology and Photovoltaics World, and has covered semiconductor manufacturing and related industries, renewable energy and industrial lasers since 2003. His work has earned both internal awards and an Azbee Award from the American Society of Business Press Editors. Jim has 15 years of experience in producing websites and e-Newsletters in various technology.

This article was first published on RenewableEnergyWorld.com, and is reprinted with permission.

June 08, 2013

China Trys to Cork EU Solar Tariffs With Wine Probe

Doug Young

China is quickly learning how to play the game of tit-for-tat trade wars, with news that Beijing has launched a new anti-dumping probe against wines imported from the European Union. Anyone who has followed recent China-EU trade relations will know, of course, that announcement of this new probe by the Commerce Ministry comes the same day that the EU formally announced anti-dumping tariffs against imported Chinese solar panels.

While I certainly don’t condone this kind of trade war rhetoric, I have to say that China’s decision to target Europe’s wine industry looks like a very smart selection for this kind of probe. For starters, wine is one of Europe’s most famous products and is one of its biggest exports. At the same time, Chinese consumers are quickly discovering a fondness for imported wines, with European varieties fetching some of the highest prices.

All that said, let’s have a look at the actual news that saw the EU formally impose an 11.8 percent anti-dumping tariff on Chinese solar cells to take effect on Thursday. (English article) The tariffs were widely anticipated following a months-long investigation, and were actually quite a bit lower than most people had expected. But the rate could rise to 47.6 percent in August if China and the EU don’t reach a negotiated settlement in the matter before then.

Chinese solar panel makers were predictably dismayed, with Trina (NYSE: TSL) issuing a statement expressing its disappointment. (company statement) Yingli (NYSE: YGE) said it hopes the 2 sides will be able to negotiate a settlement, which is what some individual EU leaders have been pushing for to avoid a trade war. (company statement)

In addition to its usual angry statements of denial and condemnation, China this time has also responded by launching its own investigation into wines imported from the EU. (English article; Chinese article) This latest probe is similar to one that China previously launched against US makers of polysilicon, the main raw material used to make solar cells. China opened that investigation last year after the US imposed similar punitive tariffs on Chinese solar cells.

Media are pointing out that by targeting wine, China is looking to punish southern EU members like France and Italy that are big wine producers and were strong backers of the solar anti-dumping tariffs. At the same time, any Chinese anti-dumping tariffs on EU wines would have less impact on northern European nations, most notably Germany, which opposes the punitive tariffs on Chinese solar cells.

Personally speaking, I think this move targeting wine looks quite shrewd and is probably even justified. Europe is famous for providing extensive subsidies to its farmers, and the wine industry is one of the biggest recipients of the kind of state support that China gives to its solar panel makers. China’s growing thirst for wine means that anti-dumping tariffs against EU products could also have a major impact on some its major winemakers.

Of course the timing of China’s probe looks quite questionable, and anyone who doesn’t believe this particular investigation is linked to the solar trade war would be quite naive. The Chinese probe also looks dubious because most wines imported from Europe are already subject to relatively high taxes and are more expensive than domestic brands. That means any claims that EU subsidies are hurting the Chinese wine industry are most likely untrue.

I’m not a fan of trade wars, and I honestly don’t think this move by China will do much to help create a better atmosphere of trust if the 2 sides really want to mediate a solution. But at the same time, at least China’s wine probe may put some added pressure on the EU to try a bit harder to negotiate an acceptable solution to prevent the solar trade war from escalating.

Bottom line: China’s launch of an anti-dumping probe against EU wines will boost hostilities, but could also add pressure for the 2 sides to resolve their ongoing solar dispute.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

May 21, 2013

The Farm Bill: 5-Minute Guide to the Energy Title

  Jim Lane
5 min clock.jpg
Only 5 min BigStock Photo

What’s in that Durn-tootin’ US Farm Bill, anyhow?

For the harried taxpayer, some relief. For energy security and rural economic development, targeted investments that now head to the legislative floor.

Here are the need-to-knows.

In Washington, the House and Senate Agricultural committees have now passed their respective versions of the proposed 2013 farm bill, which would take effect for fiscal 2014 through fiscal 2018.

Both bills have energy titles — meaning that, should they find passage, as expected this summer, in the House and Senate, the measures in the Energy title will come up for negotiation in the House-Senate conference, but not the existence of the title itself. In today’s Digest, we look at the two different versions of the Energy title — what’s getting funding, what’s not — and how much, and how.

Weighing the bills

The Senate’s bill weighs in at 1150 pages, no ounces — the House Bill at a comparatively light 576 pages.

The Overall Farm Bill

The Senate version reduces spending by $18B over the previous Farm Bill ($24.4B if the sequestration provisions are repealed by Congress, which itself slashed $6.4B), to $955B over a 10 year period between 2014 and 2023.

The Energy Title

Overall spending on the Energy Title is increased by $780M (2014-2023) under the proposed Senate version.

By section, the changes are

Biorefinery Assistance — $216M
REAP — $240M
Biomass R&D — $130M
BCAP — $174M
Other programs — $20M

Timeline to passage

House Ranking Minority Member Collin Peterson said, “With today’s action, I’m optimistic the farm bill will continue through regular order and be brought to the House floor in June. If we can stay on track, I think we should be able to conference with the Senate in July and have a new five-year farm bill in place before the August recess.”

The Details

Definitions

The House Bill does not add language to include renewable chemicals under the provisions of an Energy title — the Senate does.

Biobased Markets Program

Both the Senate and House include a biobased markets program. The House voted $2 million in discretionary funding (e.g. subject to annual appropriations). The Senate expanded the program’s scope to include assembled products, expands outreach and educational efforts, a study on market impact — and adds $3 million in mandatory funding from the Commodity Credit Corporation in addition to the $2M in discretionary funding offered by both the House and Senate.

Biorefinery Assistance

The House offered $75M per year here in discretionary funding, while the Senate offered $100M in for 2014 in mandatory funding and $58M in each of 2015 and 2016. The Senate also broadened the language to include renewable chemicals and biobased materials.

Repowering Assistance Program

The House authorized $10M for the program per year in discretionary funds, while the Senate did not vote funding.

Bioenergy Program for Advanced Biofuels

The Senate Bill authorizes $20M annually in discretionary funds, while the House authorizes $50M per year, also discretionary.

Biodiesel fuel education program

The Senate version keeps this program intact, but changes it from discretionary to mandatory funding. The House version doubles discretionary funding to $2M per year.

Rural Energy for America Program (REAP)

Both the Senate and House versions ask the Secretary to develop a three-tiered application process (for projects costing up to $80K, 80-2200K, and over 200K) and structure the comprehensiveness of the information required according to the cost of the program. The House version authorizes $45M per year in discretionary funding. The Senate offers $20M in annual discretionary funds, and $68M in mandatory funds via the Commodity Credit Corporation.

Biomass Research and Development

The Senate version offers $30M in annual discretionary funding, and $26M in mandatory annual funds. The House version authorizes $20M in annual discretionary funding.

Feedstock Flexibility Program

Both the Senate and House voted to extend this little-known, no-cost program through 2018. It’s purpose:

For each of the 2013 through 2018 crops, the Secretary shall purchase eligible commodities from eligible entities and sell such commodities to bioenergy producers for the purpose of producing bioenergy in a manner that ensures that section 7272 of this title is operated at no cost to the Federal Government by avoiding forfeitures to the Commodity Credit Corporation.

Biomass Crop Assistance Program

The House version eliminates the prohibition on animal, food or yard waste, and algae — and strikes the authorization to “assist agricultural and forest land owners and operators with collection, harvest, storage, and transportation of eligible material for use in a biomass conversion facility.” The House also increases funding from $20M to $75M per year, but changes this from mandatory to discretionary funding.

The Senate version adds a prohibition on funding “invasive species” and restricts use of lands enrolled in the conservation reserve program or is native sod — and generally prohibits food crops. The Senate version also sets a maximum BCAP term of 5 years for annuals or perennial crops and 15 years for woods.

Towards collection and harvesting, a maximum of $20 per ton for up to four year, on a matching dollar basis.

The Senate authorizes $38.6M per year in mandatory funding.

Forest Biomass for Energy program

The Senate voted to repeal the program, while the House version simply ignores and thereby effectively kills by de-funding.

Community wood energy program

The Senate voted to keep this program at $5M per year in discretionary funding, while the House version votes to reduce annual funding to $2M.

The Senate also creates a new category of ‘biomass consumer cooperative’ —”a consumer membership organization the purpose of which is to provide members with services or discounts relating to the purchase of biomass heating products or biomass heating systems.’’ and offers grants of up to $50K towards the establishment of expansion of such cooperatives.

The Bottom Line

It’s not a visionary Farm Bill for Energy — more about fine-tuning and maintaining provisions that were originally introduced in 2002 and 2008. But there’s a lot more meat on the bone, so to speak, with $780M in increased funding over a 10-year period.

On the other hand, it’s not a hugely expensive program when seen in the context of the federal budget — representing an addition expenditure of $0.26 per capita, per year.

There isn’t all that much for a House-Senate conference to bicker about — primarily, the status of renewable chemicals on the downstream side, and the inclusion of various new types of crops on the upstream side.

And there are funding differences that need to be ironed out – in particular, the balance between mandatory funding and discretionary embraced in the Senate version – while the House generally opts for a discretionary approach, especially for high ticket items.

There’s language in the BCAP program that will need to be settled out.

The Digest continues to point to opportunities for the creative use of Conservation Reserve program land — sensitive to and subject to hunting and environmental uses — for bioenergy projects, and thereby highlights the prohibition on BCAP funds being used for CRP lands, as envisioned in the Senate version of the bill (but not the House bill). We hope the House and Senate come to a creative mutual approach on this provision.

Read More:

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

May 19, 2013

Does Buying Green Stocks Do Any Good?

Tom Konrad CFA

Volt owners are almost universally happy with their cars, despite the fact that very few will recoup the extra costs of the car in gas savings.   Even though the financial savings are small compared to the large up front payment for the vehicle, the emotional payback more than compensates.

As someone who helps people invest in green stocks, I can tell you from first hand experience that investor enthusiasm has everything to do with recent financial returns, and not much to do with the good we’re doing.

In 2007, when practically any stock which could be labeled green was going stratospheric, my phone was ringing off the hook.  Then came the crash in 2008, with green stocks falling more than the market as a whole.  Worse, they failed to participate in the market recovery since then.  Green investors are a dedicated lot.  Many of my clients worried that the slump might never end, but none left.  But the calls from new clients became very few and far between.

Finally, in late 2012, green stocks began to rally.  The leading clean energy ETF, PBW, is up 40% from its November low.  The leading solar ETF, TAN, is up 65% from its low.

The phone is ringing again.

Why the Difference?

To judge by the comments from Volt owners, their enthusiasm has a lot to do with the regular thrill they get driving by a gas station without stopping.  Whenever they drive, they are reminded that they’re doing good for the environment.  This makes them feel good, and that feeling keeps them feeling good about their cars, even without positive financial returns.

A green stock portfolio is different.  Few investors make the emotional connection between their green stocks and the success of green companies.

Too Cerebral

Green money managers, in general, are not much help.  I asked my panel of thirteen green money managers, ranging from investment advisors to hedge fund managers how buying green stocks helps green companies.  Here is a sample of their responses:

Investment advisor Jan Schalkwijk, CFA at JPS Global Investments:

In theory, higher demand for green stocks –  to which small investors would contribute by purchasing green stocks, mutual funds, and ETFs – should decrease the cost of capital for these companies, thus improving their ability to expand. Additionally, to the extent that the purchase is funded by a redemption of a non-green stock, this should increase the cost of capital for that company; thus reducing its scope for expansion. However, I don’t think small investors have enough clout to make this theory pan out in reality. It really requires big buy-in from large investors to make a dent.

Solar hedge fund manager Shawn Kravetz at Esplanade Capital:

[T]he small investor is in effect providing capital to the green company and depriving capital of other alternatives.  While the green company has already raised the actual capital, the market purchase fuels demand for that sliver of ownership and in essence rewards the green company, making it easier and lower cost for them to raise more capital in the future and thereby spread their greenness.  One investor does not move the needle per se, but the sum of multiple such investors indeed does.

That’s all true, but it does not exactly get the heart racing.  Schalkwijk, Kravetz and I are immersed in the stock market on a daily basis.  To us, moving the price of a stock a smidgen is very real, we do it and see its effects regularly.  To the average small investor, however, this logic must seem hopelessly abstract.

Your Money, Direct to Clean Energy Projects
Fortunately, it’s not the whole story.

With the arguments for investing in green stocks so intellectual, it’s no surprise that even the most environmentally minded prospective investors are more interested in last month’s returns.

On Monday, I spoke to John Fullerton is the Founder and President of Capital Institute.  The Capital Institute’s mission is to transform finance to effect a more sustainable economy.  Its focus is on large institutional investors such as pension funds and endowments, but he agreed to speak with me about my personal focus: small investors.

In general, Fullerton thinks that the focus on trading in the stock market makes it very difficult for the sustainable investor to affect change.  But he sees some exceptions.  In particular, Master Limited Partnerships (MLPs) and REITs return their cash flows to investors, so they need to conduct secondary offerings (sell shares) whenever they make new investments.  Investors in these vehicles are buying the future cash flows derived from the expansion of the enterprise, not just speculating on a future stock price.

At the moment, the MLP structure is limited to depleting resources such as fossil fuels and their transport, and so are not likely to be of interest to green investors.  However, the MLP Parity Act, which was designed to correct this imbalance, has been re-introduced in the Senate with bipartisan support.  If the act passes, small investors will have the opportunity to invest in publicly traded MLPs which will directly use the money to fund solar, wind, geothermal, and other clean energy projects.

For now, there are two publicly traded REITs investing in clean energy projects.  The larger of the two is Hannon Armstrong Sustainable Infrastructure (NYSE:HASI), which went public last month and is investing the proceeds in eight clean energy projects that it had lined up in preparation for the IPO.  Since Hannon Armstrong is a leading financier of clean energy projects, investors can be confident that secondary offerings to fund other projects are not too far in the future.  By buying and holding HASI, they increase the amount of money the company can raise for new projects with a fixed amount of stock.  The profits from those projects will then be returned to the investors as dividends.

With the second clean energy focused REIT, Power REIT (NYSE:PW), the connection between the small investor and the clean energy project they are financing is even more direct.  Power REIT has just signed a term sheet for the acquisition of 100 acres of California land underlying approximately 20MW of to-be-constructed solar projects for $1.6 million.  PW will fund that purchase with a combination of debt and equity.

The equity will be raised by the company selling stock through a broker on the New York Stock Exchange under PW’s existing At Market Issuance Sales Agreement.  In other words, if you buy the stock today, there is a good chance that the money won’t go to another investor; it will go straight to Power REIT to fund a solar farm.  Even new investors who buy from other investors are directly helping by keeping the price up and ensuring that for every share PW sells as much money as possible helps finance the solar farm.  Profits from the solar farm will then flow back to Power REIT and be returned to investors as dividends.

Venture Capital

Many small investors wanting to make an impact envy the venture capitalists (VCs) who can fund a start-up green technology company with a better battery or a more efficient wind turbines design.

They should not be jealous.  VCs take their cues from the stock market, not the other way around.  Without the stock market and the ability to sell a company to ordinary investors in an IPO, the only ways for venture capitalists to get a returns on their investments would be to sell them to other companies, or wait for the start up to generate enough profits to pay them back itself.

Many VC-backed companies are sold to other firms, but this is a second choice option, mostly used when stock market valuations are low.  Waiting for a start-up to pay back its initial investors is simply not an option of VCs: the returns take too long.   They prefer the money sooner, in five to ten years at most, so they can move on and fund the next promising start-up.

Because VCs count on IPOs for their best returns, they’re much more likely to fund start-ups in sectors with high valuations.  When  solar stocks are in the stratosphere, VCs fund solar start ups.  When Smart Grid stocks are all the rage, VCs will be looking for the next great smart grid technology.

It’s not only First Solar’s (NASD:FSLR) management and shareholders who are paying attention to FSLR’s share price.  It’s VCs, and all the entrepreneurs hoping to get those VCs to fund the next breakthrough solar technology.

We’re Invested in More Ways Than One

In addition to pointing out that buying a green company helps its stock price, Shawn Kravetz made another point:

[W]hen people own stocks they tend to patronize and talk about those companies.  This vested interest and evangelism, when aggregated, does move the needle.

Fullerton makes a similar point in a recent blog post.  He argues that we should understand investment in the context of a holistic decision-making process that seeks to harmonize (not trade off) financial, social, and ecological objectives.

Both are saying that it’s too simple to just look at the effect our investment are having on companies, we also have to consider the effect our investments have on us.  People whose retirement depends on the continued profits of a coal companies are much more likely to give those companies a sympathetic ear when they complain that regulations to limit mercury emissions (or any other environmental harm) are too expensive and will undermine their profits.

If we invest in companies that stand to lose from the shift to a sustainable economy, the vested interests we are fighting are our own.  Much better to invest ourselves, both financially and emotionally, in companies that will benefit from the changes we know must be made to protect our planet and our children.

Conclusion

Even the smallest investors’ green investments make a difference.  This is most direct when they buy the shares of companies  in the process of raising money for green investments.  Yet they also makes a difference to a company’s ability to reward valuable employees with shares or options, and to the prospects of start-ups in similar industries.   Higher prices for green stocks mean more green companies having successful IPOs, and more green start-ups secure funding.

Perhaps most important are the effects owning a slice of a green company has on the investor.  It is much easier to make the right decisions for the planet and our future when we know the stocks we own will benefit from those decisions as well.

When green investors understand the very real changes their investments are having on the world, perhaps they’ll love their portfolios as well, like Volt owners love their cars.

Disclosure: HASI, PW

This article was first published on the author's Forbes.com blog, Green Stocks on May 8th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

March 20, 2013

A 10-Minute Guide to Obama’s New Energy Policy

Jim Lane
 
bigstock-vector-stopwatch-10-min.jpg
Stopwatch photo via BigStock

A major push from Obama on energy.
From DOE: “Liquid fuels demand can be sufficiently reduced so that biomass can meet all liquid fuel needs.”
What’s up? What is an Energy Security Trust, anyway? The Digest’s 10-Minute Guide tells all.

In an address at the Argonne National Laboratories on Friday, President Obama said:
“You see, after years of talking about it, we’re finally poised to take control of our energy future.  We produce more oil than we have in 15 years.  We import less oil than we have in 20 years…But the only way we’re going to break this cycle of spiking gas prices for good is to shift our cars and trucks off of oil for good.  That’s why, in my State of the Union Address, I called on Congress to set up an Energy Security Trust to fund research into new technologies that will hobama-argonne[1].jpgelp us reach that goal.

“I’m proposing that we take some of our oil and gas revenues from public lands and put it towards research that will benefit the public, so that we can support American ingenuity without adding a dime to our deficit…devising new ways to fuel our cars and trucks with new sources of clean energy – like advanced biofuels and natural gas – so drivers can one day go coast-to-coast without using a drop of oil.

“And in the meantime, let’s keep moving forward on an all-of-the-above energy strategy.  A strategy where we produce more oil and gas here at home, but also more biofuels and fuel-efficient vehicles; more solar power and wind power. We can do this.”
A companion study released the the Department of Energy was, in its way, more ambitious and more specific: “TEF does not project that all liquid fuels will be eliminated from the future transportation sector, but rather that demand can be sufficiently reduced so that biomass can meet all liquid fuel needs.”

The Energy Security Trust. Is it a new idea?

No. In his 2013 State of the Union address, President Obama called on Congress to create an Energy Security Trust Fund, which would free American families and business from painful spikes in gas prices. The President’s plan builds on an idea that has bipartisan support from experts including retired admirals and generals and leading CEOs, and it focuses on one goal: shifting America’s cars and trucks off oil entirely.
TEF-petroleum[1].png

How does it work?

Over 10 years, the Energy Security Trust will provide $2 billion for critical, cutting-edge research focused on developing cost-effective transportation alternatives. The investments will support research into a range of technologies – things like advanced vehicles that run on electricity, homegrown biofuels, and domestically produced natural gas. It will also help fund a small number of real-world experiments that try different transportation techniques in cities and towns around the country using advanced vehicles at scale.

Does it involve new taxes?

No. The funding will be provided by revenues from federal oil and gas development, and will not add any additional costs to the federal budget.

President Obama’s complete remarks are where?

They’re here.

Does the White House’s have a short take on the Energy Security Trust?

Yep. Here you are.

What is the Transport Energy Futures (TEF) study?

It’s a new study from the U.S. Department of Energy, the National Renewable Energy Laboratory, and Argonne National Laboratory that finds the United States has the potential to reduce petroleum use and greenhouse gas (GHG) emissions in the transportation sector by more than 80% by 2050 – and proposes pathways towards that goal.

What is the strategy?

• Stopping Growth in Transportation Sector Energy Use
• Using More Biofuels
• Expanding Electric and Hydrogen Technologies

What’s the overall 15-point Obama Energy Strategy, again?

1. Challenges Americans to double renewable electricity generation again by 2020.
2. Directs the Interior Department to make energy project permitting more robust.
3. Commits to safer production and cleaner electricity from natural gas.
4. Supports a responsible nuclear waste strategy.
5. Sets a goal to cut net oil imports in half by the end of the decade.
6. Commits to partnering with the private sector to adopt natural gas and other alternative fuels in the Nation’s trucking fleet.
7. Establishes a new goal to double American energy productivity by 2030.
8. Challenges States to Cut Energy Waste and Support Energy Efficiency and Modernize the Grid.
9. Commits to build on the success of existing partnerships with the public and private sector to use energy wisely.
10. Calls for sustained investments in technologies that promote maximum productivity of energy use and reduce waste.
11. Leads efforts through the Clean Energy Ministerial and other fora to promote energy efficiency and the development and deployment of clean energy.
12. Works through the G20 and other fora toward the global phase out of inefficient fossil fuel subsidies.
13. Promotes safe and responsible oil and natural gas development.
14. Updates our international capabilities to strengthen energy security.
15. Supports American nuclear exports.

Where’s the Fact Sheet on that?

Right here.

Why the transport sector, specifically?

The transportation sector accounts for 71% of total U.S. petroleum consumption and 33% of U.S. total carbon emissions.

What are the 9 Interconnected reports that make up the overall TEF study?

1. Deployment pathways issues including the development of, transition to, and challenges of advanced technology
2. Non-cost barriers to advanced vehicles such as range anxiety, refueling availability, technology reliability, and consumer familiarity.
3. Opportunities to improve non-light-duty vehicle efficiency for medium- and heavy-duty trucks, off-road vehicles and equipment, aircraft, marine vessels, and railways
4. Opportunities for switching modes of transporting freight, such as moving freight from trucks to rail and ships.
5. Infrastructure expansion required for deployment of low-GHG fuels, including electricity, biofuels, hydrogen, and natural gas
6. Balance of biomass resource demand and supply, including allocations for various transportation fuels, electric generation, and other applications.
7. Opportunities to save energy and abate GHG emissions through community development and built environment strategies
8. Trip reduction through mass transit, tele-working, tele-shopping, carpooling, and improvement of vehicle performance through efficient driving
9. Freight demand patterns, including trends in operational needs and projections of future use levels.

TEF-energy-savings[1].png

How much biofuels use does the TEF study anticipate?

Up to 100 percent of fuel needs, if the US hits its 2050 fuel efficiency, hydrogen fuel, and electrification goals as well. Even at the EIA baseline projected fuel demand in 2050, biofuels could supply as much as 50 percent of the jet fuel market, and 30 percent of the gasoline and diesel markets if EERE biofuel technology goals are met. Getting to the point where biomass could provide 100 percent of vehicle liquid fuels requires reducing the need for fuel through the efficiency and demand management measures described above, including deployment of electricity or hydrogen fuel alternatives.

Will this require an avalanche of infrastructure?

Some. “While new fuel types require new infrastructure, the share of infrastructure cost within total fuel costs is very small (1.5-3 percent), and these costs can be made up for in fuel cost savings of more efficient advanced vehicles.”

Where can I start to dig deeper into the overall plan and the TEF study?

You can start here at the TEF home page.

Who was responsible for TEF?

TEF is a collaboration between EERE, the National Renewable Energy Laboratory (NREL), and Argonne National Laboratory (ANL). The project benefitted from the input provided by a steering committee that included some of the nation’s foremost experts on transportation energy from the Environmental Protection Agency (EPA), the U.S. Department of Transportation (DOT), academic researchers, and industry associations.

What is NEPA and what is happening there?

NEPA is the National Environmental Policy Act of 1970, a product of the Nixon Administration.

Er, Nixon? What’s new there?

The President’s strategy includes requiring federal agencies, under NEPA’s authority, to include climate change impact in reviewing proposed projects. For example — leases to drill for coal, or export coal to China, or construct oil pipelines like the Keystone XL pipeline, could be reviewed not only for air pollution and water fouling, but for overall greenhouse gas impact.

Are the changes in NEPA reviews ho-hum, or a big deal?

Big deal. Brendan Cummings, senior counsel for the Center for Biological Diversity told Bloomberg that the result will be “a major shakeup in how agencies conduct NEPA” reviews.

Does the President have this authority under NEPA?

Generally, yes. NEPA grants a right of Federal review of proposed projects for environmental impact — and climate change certainly falls broadly within that category. The devil is going to be in the details — after all, how much specific contribution to a problem like climate change be attributed to a single project?

Is a NEPA review capable of derailing a project?

No. A NEPA review is, at the end of the day, aimed at producing a thorough vetting process, rather than a specific outcome. Projects go through NEPA reviews — there is a robust commentary opportunity — but regulators, in the end, make decisions on permits. NEPA does establish a forum for introducing or reviewing data that will be used in a regulator’s decision — or, in lawsuits that may be filed to reverse a ruling.

Overall, is there going to be opposition from the right on the Energy Security Trust?

Forbes’ Houston-based energy columnist Christopher Helman writes: “This is a terrible idea — and a backdoor to the imposition of a nationwide carbon tax — that congress should not allow to pass.

“There is absolutely no reason why we need a dedicated Energy Security Trust to fund the national labs, or to fund any kind of alternative energy research. If congress wants to fund research it can pass a bill to fund research…Isn’t congressional appropriation how the federal government is supposed to pay for such stuff?

“Then consider that the Department of Energy has in recent years built up an insanely terrible record of wasting taxpayer money by directing funds to private companies, many of which have simply gone belly up (but not before paying lavish bonuses to executives).

Why is there opposition from the left?

Here’s some flavor. “This approach will only encourage more dirty energy production…[and] doesn’t create any additional cost for using fossil fuels, thus creating no incentive for firms to divert resources into safer, cleaner and more renewable sources of energy,” Tyson Slocum, director of Public Citizen’s energy program, told bizjournals.com.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

March 06, 2013

Obama's New Energy and EPA Appointments

Jim Lane
 
Ernest J. Moniz
Ernest J. Moniz is the nominee for US Secretary of Energy

In Washington, President Barack Obama nominated MIT professor Ernest J. Moniz as US Secretary of Energy, replacing Steven Chu, and nominated Gina McCarthy as EPA Administrator.

Moniz is currently serving as the Cecil and Ida Green Professor of Physics and Engineering Systems, as well as the director of the MIT Energy Initiative (MITEI) and the Laboratory for Energy and the Environment. He was formerly undersecretary of Energy and associate director of the White House office of science and technology policy under President Bill Clinton — and is a prominent academic voice in support of an “all-of-the-above” energy policy.

“President Obama has made an excellent choice in his selection of Professor Moniz as Energy Secretary,” said MIT President L. Rafael Reif. “His leadership of MITEI has been in the best tradition of the Institute — MIT students and faculty focusing their expertise and creativity on solving major societal challenges, a history of working with industry on high-impact solutions, and a culture of interdisciplinary research.” Reif continued, “We have been fortunate that Professor Moniz has put his enthusiasm, deep understanding of energy, and commitment to a clean energy future to work for MIT and the Energy Initiative — and we are certain he will do the same for the American people.”

According to MIT, more than two-thirds of the research projects supported through MITEI have been in renewable energy, energy efficiency, carbon management, and enabling tools such as biotechnology, nanotechnology and advanced modeling. The largest single area of funded research is in solar energy, with more than 100 research projects in this area alone.

 
mccarthy[1].jpgGina McCarthy is Obama's nominee for new EPA Administrator
Over at EPA, McCarthy has been serving as Assistant Administrator for EPA’s Office of Air and Radiation. Prior to her confirmation, McCarthy served as the Commissioner of the Connecticut Department of Environmental Protection. In her 25 year career, she has worked at both the state and local levels on critical environmental issues and helped coordinate policies on economic growth, energy, transportation and the environment.

“Today’s selection of Ernie Moniz for Secretary of Energy and Gina McCarthy as Administrator of EPA bodes well for the future of US energy and environmental policy,” said Mike McAdams, president of the Advanced Biofuels Association. “Dr. Moniz has an extraordinary understanding of the energy sector and is a globally respected leader in the space.  Ms. McCarthy over the last four years has demonstrated her ability to lead regulatory efforts on a number of areas including Advanced Biofuels.  The Advanced Biofuels Association applauds their individual contributions to our country and applauds and supports their nominations.”

Brooke Coleman, Executive Director of the Advanced Ethanol Council (AEC), applauded President Obama’s nomination of Gina McCarthy as Administrator of the Environmental Protection Agency (EPA).

“Gina McCarthy is the perfect choice. Her reputation as a doer with a deep understanding of the mechanics of critical air and energy regulations is well-earned. She has been very engaged on the development of the cellulosic biofuels industry and the administration of the Renewable Fuel Standard (RFS). She clearly knows how to get things done inside and outside of the agency, and the advanced ethanol industry looks forward to working with Gina McCarthy and her team.”

Bob Dinneen, President and CEO of the Renewable Fuels Association, today welcomed President Obama’s nominations of Gina McCarthy as Administrator of the Environmental Protection Agency (EPA) and Ernest Moniz as the next Secretary of Energy (DoE).

“Gina McCarthy is a very solid choice for EPA. She is knowledgeable, willing to listen, and straight-forward. She knows the EPA inside and out and has typically approached challenges with a common-sense determination to resolve them in a timely manner. As a Bostonian, I have to say I like her accent too.

“RFA and the ethanol producers we represent look forward to meeting with Secretary-designee Moniz to update him on the state of the U.S. ethanol industry, our track record of success in fostering greater energy independence, and the exciting results of ongoing investment in next generation biofuels.”

There are ever more way to earn RINs — although, suffice to say, it would have been more exciting if there had been go-to major projects that were immediate beneficiaries. Disclosure: None.
Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

February 13, 2013

The POTUS and his SOTUS: RT@moreofthesame TL;DR

Jim Lane

The President’s State of the Union speech.

What was new? (Not much). What was feasible amongst DC gridlock? (Not much)

What about energy? (moreofthesame) Where was the Farm Bill? (AWOL).

SOTU 2013.png

In case you were watching wrestling, President Obama gave the State of the Union speech last night.

Big vision, small vision – practical, impractical – partisan, bipartisan. Cable news chattered away all night on those topics — but the speech had the feeling of a long retweet.

Amongst the Twitterati, he’s the POTUS, giving the SOTUS, and in a Twitterverse dominated by 140-character thinking, the SOTUS is, these days, suffering from a case of TL; DR —  Too Long, Didn’t Read. And the tweets focus, instead, on Michelle Obama’s bangs-embracing hairstyle.

The SOTUS contained 18 references to energy — more than enough for the Digest to take a close look at what was said, what was not — and the likelihood of all (or any) of the President’s energy agenda finding its way into the law books or the departmental budgets.

The “You knew it wasn’t a compelling response, when…” Award.

This year’s formal Republican response featured Florida Senator Marco Rubio — and I kid you not that the Associated Press, in its coverage, highlighted a manufactured controversy over the way that Rubio paused to take a drink of water.

Most Premature Response Award

Why wait for a chance for rebuttal when you can go for a “Pre-buttal”? The Institute for Energy Research sent around a pre-buttal “reading list to address claims the President may make.” Priceless.

18 references to energy – is that a lot? The Soundbite Scorecard

Here’s the State of the Union “mentions of energy” scorecard, dating back to President Bush’s “Addicted to oil” speech in 2006.

Obama era

2013: 18 energy mentions, 0 biofuels
2012: 23 energy mentions, 0 biofuels, 1 for “alternative transport fuels”
2011 10 energy mentions, 1 biofuels
2010 15 energy mentions, 1 biofuels
2009 14 energy mentions, 1 biofuels

Bush era

2008 5 energy mentions, 0 biofuels
2007 3 energy mentions, 1 biodiesel 1 ethanol
2006 8 energy mentions, 2 ethanol (the “Addicted to Oil” speech)

The Policy That Dare Not Speak its Name

If you guessed “biofuels,” you get another spin.

In fact, it was “Farm.” Not one mention in the State of the Union. No farm bill, no farmers, no farm exports, no farm jobs. Pretty rough go for a sector that is desperately in need of a renewed Farm Bill — and for one of the most vibrant export sectors of the economy.

What Exactly did the President say about Energy?

After years of talking about it, we are finally poised to control our own energy future. We produce more oil at home than we have in 15 years. We have doubled the distance our cars will go on a gallon of gas, and the amount of renewable energy we generate from sources like wind and solar – with tens of thousands of good, American jobs to show for it. We produce more natural gas than ever before – and nearly everyone’s energy bill is lower because of it. And over the last four years, our emissions of the dangerous carbon pollution that threatens our planet have actually fallen.

But for the sake of our children and our future, we must do more to combat climate change. Yes, it’s true that no single event makes a trend. But the fact is, the 12 hottest years on record have all come in the last 15. Heat waves, droughts, wildfires, and floods – all are now more frequent and intense. We can choose to believe that Superstorm Sandy, and the most severe drought in decades, and the worst wildfires some states have ever seen were all just a freak coincidence. Or we can choose to believe in the overwhelming judgment of science – and act before it’s too late.

The good news is, we can make meaningful progress on this issue while driving strong economic growth. I urge this Congress to pursue a bipartisan, market-based solution to climate change, like the one John McCain and Joe Lieberman worked on together a few years ago. But if Congress won’t act soon to protect future generations, I will. I will direct my Cabinet to come up with executive actions we can take, now and in the future, to reduce pollution, prepare our communities for the consequences of climate change, and speed the transition to more sustainable sources of energy.

Four years ago, other countries dominated the clean energy market and the jobs that came with it. We’ve begun to change that. Last year, wind energy added nearly half of all new power capacity in America. So let’s generate even more. Solar energy gets cheaper by the year – so let’s drive costs down even further. As long as countries like China keep going all-in on clean energy, so must we.

In the meantime, the natural gas boom has led to cleaner power and greater energy independence. That’s why my Administration will keep cutting red tape and speeding up new oil and gas permits.

But I also want to work with this Congress to encourage the research and technology that helps natural gas burn even cleaner and protects our air and water. 

Indeed, much of our new-found energy is drawn from lands and waters that we, the public, own together. So tonight, I propose we use some of our oil and gas revenues to fund an Energy Security Trust that will drive new research and technology to shift our cars and trucks off oil for good. If a non-partisan coalition of CEOs and retired generals and admirals can get behind this idea, then so can we. Let’s take their advice and free our families and businesses from the painful spikes in gas prices we’ve put up with for far too long.

I’m also issuing a new goal for America: let’s cut in half the energy wasted by our homes and businesses over the next twenty years. The states with the best ideas to create jobs and lower energy bills by constructing more efficient buildings will receive federal support to help make it happen.

Is it true — the United States, which famously failed to sign the Kyoto Treaty, is cutting emissions?

Yep — credit renewables, and credit replacement of coal with natural gas. Is this ironic or what? There’s a good chance that the US will meet the 2017 Kyoto targets it did not accept, while the EU, which has been pressing hard on all fronts since 2005 to meet them, will miss.

What is a “market-based solution to climate change, like the one John McCain and Joe Lieberman worked on together a few years ago”?

That’s cap-and-trade.

And the chances of cap-and-trade passing in this Congress?

Um, I’ll take “Zero Chance” for $500, Alex.

What is an Energy Security Trust?

Well, that’s (sort of) defined here, in “The President’s Plan for a Strong Middle Class & a Strong America”.

“The Energy Security Trust proposal, which is funded by revenue from oil and gas development on federal lands and offshore…will support research into a range of cost-effective technologies — like advanced vehicles that run on electricity, homegrown biofuels, and vehicles that run on domestically-produced natural gas.”

Is there an actual bill in the Congress for this?

Not lately.

What else is the President proposing for energy?

Doubling wind and solar, increasing fuel economy standards to 54.5 mpg by 2025, directing cabinet officers to find executive actions that can be taken to tackle climate change, renewing the renewable energy Production Tax Credit, and Race for the Top Awards that will help states adopt energy efficiency policies.

Anything new in there?

Not much.

Will the Production Tax Credit include biofuels?

We’ll see. Hasn’t been a priority for the Congress in the past.

Industry reaction to the POTUS SOTU (in 140 characters or less)?

Fuels America: [Obama is 4] cutting our dependence on oil, fighting climate change, creating jobs. The RFS [is] crucial in encouraging investment in oil alternatives.

RFA: Biofuels can provide the eco-boost the U.S. economy needs.  Ethanol is a high octane engine driving economic growth and job creation, especially in rural America.

Growth Energy: The biofuels industry is already working for the American people, [providing] consumers with a choice and savings at the pump, reducing our dependence on foreign oil

NRDC: We can’t power a 21st-Century economy with the fossil fuels of the past. We [need] energy-efficient cars, workplaces and homes, clean power plants, renewable energy

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

December 13, 2012

US Should Approve A123's Sale

Doug Young

320px-A123_Systems_cell_family_high_rez[1].jpg
A123 Systems battery cell products (Source: A123)
In writing this blog, I generally try to keep my own views muted and focus instead on the latest news and what it means for the companies involved. But I'm making one of my occasional exceptions to that rule today to say that the US really should go ahead and approve the sale of bankrupt battery maker A123 Systems (OTC:AONEQ) to a Chinese company, since this deal seems to have few if any national security implications and blocking it would send a bad signal about Washington's commitment to fair trade.

Rather than bow to opponents of the deal, who appear to have their own agenda that's unrelated to national security, the US should follow the lead of Canada, which last week approved another controversial sale of energy exploration company Nexen (Toronto: NXY) to Chinese oil major CNOOC (HKEx: 883; NYSE: CEO). (previous post) Approval of that sale took a lot of courage from the administration of Canadian Prime Minister Stephen Harper, and now the US Obama administration should show similar determination to let the A123 purchase go forward.

Let's look at the latest reports on A123, which is making headlines that are far bigger than the deal would otherwise get due to the fact that the buyer of the company is Chinese auto parts seller Wanxiang Group. According to the reports, a US bankruptcy judge has formally approved Wanxiang's bid for most of of the assets of A123, which makes batteries used in alternate energy vehicles. (English article)

The judge in the case was unusually frank in his comments after approving the deal, saying he was concerned that another potential bidder, Johnson Controls (NYSE:JCI), might be working behind the scenes to kill the sale by asking Washington to block it on national security and other grounds. The deal is sensitive for 2 reasons. One of those is actually related to national security, since A123 sells some of its batteries to the US Defense Department. The other reason is more political, since A123 previously received a $250 million US government grant to develop lithium ion batteries.

Wanxiang has addressed the defense-related concerns by only bidding for the portion of A123's business that does not include the Defense Department contracts. As to the $250 million government grant, this point looks like a non-issue to me. Governments frequently subsidize companies that ultimately fail, and the reason for providing such subsidies is often because such companies can't get similar funding from commercial sources.

The fact that a Chinese buyer is acquiring the failed company's assets is irrelevant, and is simply the result of an auction driven by market forces. If Johnson Controls really wanted A123, it should have submitted a more competitive bid rather than trying to use this kind of tactic to get a bargain.

The US has already sent negative signals in its use of the national security excuse with its recent decision to block construction of a wind farm in the state of Oregon being built by a Chinese company, and its blocking of Chinese telecoms equipment makers from selling into the US. Both of those moves did seem to have real implications for national security, but this latest deal doesn't seem to meet that standard. Accordingly, Washington should stand aside and let the deal proceed, showing it will let commercial forces run the market except for in a handful of cases that truly do pose a risk to national security.

Bottom line: The US should approve the sale of bankrupt battery maker A123 to a Chinese buyer, to demonstrate it is committed to fair trade when national security isn't at risk.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters, writing about publicly listed Chinese companies. He currently lives in Shanghai where he teaches financial journalism at a leading local university. He also writes daily on his blog, Young’s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also the author of an upcoming book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China .

December 08, 2012

350.org's Smart New Campaign

Garvin Jabusch

Many parallels exist between the college campus divestiture campaigns of the 1980s and today. Both were/are seeking to apply intense student and community pressure to persuade boards of trustees to get endowment monies out of investments in businesses or locations perceived as undesirable. In the '80s it was South Africa and Apartheid that students objected to. Back then, one could almost conceive of college students versus a beleaguered South African government as something of a fair fistfight between entities with comparable chances of winning popular opinion and thus investment dollars to their side. And indeed the students did ultimately prevail, redirecting investment capital away from South Africa, thus driving government capitulation on Apartheid, a historical bright spot that is now giving inspiration and belief in the power of action to a new generation.

Brune Do the Math
Sierra Club Executive director Michael Brune speaks at Bill Mckibben's "Do the Math" 350.org tour in Durham, N.C., November 19, 2012 (Image source: Appalachian Voices, photo by Kevin Sewell).

But this time is different. This time the enemy, the target of proposed divestiture, is not a group of entrenched old men clinging to their racist past, but instead the wealthiest and most profitable industry in human history, fossil fuels. The fossil fuels industry and its several parts and cronies, big oil, big coal, natural gas, and some large financial institutions, will not retire as quietly into the night. Indeed, they began firing the first shots in this war decades ago when they first perceived that renewables could one day disrupt their extremely efficient and profitable businesses. Media disinformation about climate and renewables, influencing elections, lobbying, buying fossil fuels favorable policy; these are just some of the ways they've been pre-fighting the war of divestiture for decades.

Further, the fossil fuels industry along with its allies on Wall Street has actually been waging a divestment campaign on renewables stocks, particularly over the last two years. Using major media outlets to decry renewable energies and label them "pipe dreams," and "untenable" "job killers"(they’re actually the reverse), and using tactics such as misrepresenting renewable energy companies' earnings on-air, they have been mounting an economy-wide renewables divestiture campaign under the guise of normal financial coverage and popular opinion. This push to dictate conventional wisdom and thus discourage anyone from wanting to invest in renewables is also given legitimacy via biased bank research reports. Finally, renewable stocks are beaten down to their penny-stock graves by concentrated short selling attacks where multiple banks and other institutions join in selling as many shares of the target company as they can -- whether or not they actually have the shares to sell -- to drive the price down to where no reasonable lay investor can still imagine there is any value.

They have been working hard and long, and largely successfully, to maintain their status quo. This time, it’ll take more than a few campus shanty towns and disrupted trustee board meetings to earn change.

So to me it seems like 350.org's divestiture campaign to get money out of fossil fuels stocks is brilliant in that it is the first time we're fighting fire directly with fire. We need to understand that this time around we're bringing the fistfight to an armored division, and that we're bringing it maybe two decades late. But, finally, rather than just protesting, we're sending - or trying to send- the only message oil bosses understand: that there now may be a threat to their equity share prices, public opinion, and, soon, even short term revenues. We’re finally getting onto their turf.

So, just maybe, speaking their language will get them to understand that we must and will transform our energy society into one that can thrive on a finite earth, and also that the builders and inventors of the tech and systems that will get us there stand to earn enormous profits. Joining in this new wave of innovation, in other words, is the way forward for these behemoths of the past if they want to maintain their relevance in the final scheme of things. Impacting their share price is a good way to start attracting their attention.

Finally, let's recall that in the U.S., support of ending Apartheid became a non-partisan issue -- college students now have the opportunity show big oil that this isn't a republican or democrat issue; renewables aren't just supported by liberals, but by all people who are hopeful for our future and feel a responsibility to right the course of the planet's economies.

So please, charge on with the divestment campaign, we'll even be here to help, but remember that unlike last time, our adversary is resourceful and unfathomably rich, so there will certainly be some blowback along the way. If we can advance by baby steps -- divestiture of a college or two here and there -- I would hail that as a tremendous start and a victory, then, rebel like, we can leverage those early gains, combined with stories about times when we were set back, into tales that inspire faith that the world's largest industry really can be challenged.

Garvin Jabusch is co-founder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog “Green Alpha's Next Economy."

November 16, 2012

How New England Can Eliminate Oil Use For Single Family Homes for Less Than We're Spending on Solar PV

Chris Williams

We can use simple, effective, and proven policies that have been used to supercharge the New England solar PV industry to incentivize renewable thermal technologies and eliminate oil use for single family homes. Here's the best part, the policies will be cheaper than solar PV, they will create more local jobs per kW installed and displace more expensive fuel. 

At Renewable Energy Vermont 2012, I delivered a presentation on how a production-based incentive for renewable thermal technologies, like the $29/MWh incentive in New Hampshire, would be cheaper than the current solar PV incentive in Vermont and could have a larger impact. The current incentive for solar PV in Vermont is $271/MWh for 25 years, but we could eliminate oil use for single family homes with a policy for renewable thermal technologies of $100/MWh guaranteed for five years. This policy would be much cheaper than the solar PV incentive and would drastically increase the adoption of biomass, air source heat pumps and ground source heat pumps. It would put a huge dent in oil consumption for single family homes, save money and create local jobs. If you're new or curious about thermal incentives, Renewable Energy World has done some great reporting on it.

As I started to run the numbers when I was creating the presentation, I was blown away by how much energy renewable thermal technologies produced, and how valuable that energy is when displacing oil, propane and electricity. Many attendees at the talk had never seen the numbers broken out in a way that easily compares apples to apples. However, as any engineer knows, converting kWs to tons to BTUs is relatively simple. When we compare these technologies in the same terms, it starts to provide a very clear picture of the results that can be achieved by investing in proven renewable energy thermal technologies. These technologies include solar thermal systems, geothermal/ground source heat pumps, air source heat pumps, and biomass.

For the purpose of this article, I'm going to compare solar thermal and ground source heat pumps to a standard solar PV project in a baseline home. I'm using these technologies because I'm the most familiar with them. However, further analysis should absolutely include air source heat pumps and biomass technology.

Background: Why look at renewable thermal technologies?

We waste a lot of money on oil for space heating. Yes, oil industry, my goal is to put you out of business. But don't worry, we'll train you to install these new technologies. In addition to building and retrofitting buildings to have tighter shells, there are only three technologies, yes three, that can eliminate on-site fossil fuel use: biomass (pellets and cord wood), air source heat pumps, and ground source heat pumps. Here are a few pieces of data on why a focus on oil usage is so important for New England.

The EIA separates the US into five energy regions.

The Northeast uses the most oil for space heating, which also happens to be an extremely expensive fuel source. Six million homes use oil for heat, and the average home uses 800 gallons of oil per year, which equals roughly 4.8 billion gallons per year.

If we assume that the average residential price is $4 per gallon or slightly higher, home oil-heat spending is roughly $20 billion dollars per year. 

These are huge industry trends, so let's break the data down into something more tangible. U.S. census data reveals the number of single family homes in each specific state, this is the "total homes" column. I then broke down the heating fuel mix for each state, provided by the EIA, and found the number of single family homes in each state that use a high-cost fuel (oil, propane). You can see that the numbers are sizable. I then took the total number of homes and divided it by the number of homes using an expensive fuel source, which you can see on the far right. This means that nine out of 10 homes in Maine are using a very expensive fuel source. In Massachusetts, 54 percent, or five in 10 homes, use these sources.   However, Massachusetts-specific data reveals that some communities use natural gas (that's green). However, there are a large number of communities where 60+ percent of single family homes use an expensive fuel source.

Solar PV is a great investment but doesn't address oil use — how can we address this problem?

The goal of this post is to show how we can use policies and incentives that have already been successfully implemented in the solar PV industry to address fossil fuel use for space heating in New England. I'll provide a basic comparison of how solar pv and renewable thermal technologies compare when looking at fuel savings for property owners, direct job creation, and the cost of the incentive.

With that said, let me be clear: solar PV is a great investment. The purpose of this post is to be a "yes...AND"conversation. Solar PV will do nothing to address direct fossil fuel use. Additionally, the solar PV industry is large enough to be a great comparison tool because many people are familiar with the economics of solar PV. Thus, using solar pv as a baseline will make it easier to communicate the value of other technologies.

I'm also looking to address a question I recieve often: If geothermal heat pumps are so great, why aren't more people using them?

How do we look at renewable energy policies?

When trying to understand renewable thermal technologies and the impact of different policies, a small number of variables seem to be critical for policy makers.

  1. Reduction in utility bills for property owners and reduction in fossil fuel use that is imported
  2. Local job creation
  3. Amount that said incentive costs for the state or utility
  4. Water quality and air quality issues
I could be missing something here, so let me know if I am. 

Let's create a baseline home for comparison purposes.
 
This is the home we'll be dealing with. If you're not into the technical part of things, please feel free to skim over this, I just want to be extremely clear with my methodology and calculations. If anything is unclear, please let me know; I'll be happy to address any questions.
  • 2,000 square feet
  • 180 degrees
  • 10 pitch roof (40 degrees) — enough space for a 5-kW system.
  • Requires 63MM BTU for heating (read average shell)
  • Existing heating system is oil furnace with AC that must be replaced within two years. Replacing the existing oil furnace and AC unit with the same technology will cost $10,000.
  • Electric rate is $.17kWh inflating at 3 percent per year
  • Oil prices are at $4.00/gallon inflating at 5 percent per year
Let's create a baseline with diferent technologies based on current installed costs, incentives and energy costs for an average home. 
 
1. Solar PV
  • $5.50 per watt times 5 kW = $27,500
  • For those of you who think this is high. Think again. Read more on residential prices in Massachusetts at The Open PV project and the MA CEC's website. Also, I have no reason to make solar PV seem high, I love the technology am a huge supporter of it. 
  • Produces 1,000 kWh per kW installed = 5,000 kWh or 5 MWh
  • Value of energy is $850
  • Local jobs created: 15 man hours per kW installed --> 75 man hours (does not include sales, support and supply chain jobs, just direct construction jobs)
  • Percent of year installed costs driven by rebates: 44 percent
  • Gross installed costs to value of energy: $32
  • Net installed cost to value of energy: $19
  • 20 Year IRR, not considering equipment lifetime or O+M: 9 percent

2. Solar Thermal

  • $110 per square foot gross installed costs
  • 80 square foot system (2 modules @ 40 square feet per module)
  • Gross installed costs = $8,800
  • Net energy production per year: 4,100 kWh (140 therms)
  • Value of energy production displacing #2 heating oil = $443 (140 therms is approximately 110 gallons of fuel oil)
  • Local Jobs Created: 20 man hours per module (this is based on anecdotalle experience not an industry study, because they don't exist) = 40 man hours.
  • Incentives in Massachusetts: ITC, Personal Tax Credit, MA CEC Cash Rebate
  • Percent of year one installed costs driven by rebates: 62 percent
  • Gross Installed Costs to value of energy: $20
  • Net installed costs to value of energy: $7.50
  • 20 Year IRR: 12 percent

3. Geothermal

  • Oil and AC replacement costs = $10,000
  • Geothermal costs = $9,000 per ton X 4 tons = $36,000
  • 4 ton = 14-kW system
  • Geothermal premium = $26,000
  • Oil heating costs = $3,000
  • Geothermal heat costs = $1,000
  • Geothermal Fuel Savings = $2,000
  • Net geothermal energy production from the ground loop = 13,500 kWh
  • Incentives: 30 percent ITC from $36,000 = $10,800
  • 90 man hours per ton = 360 man hours for the job (25 percent of installed costs is labor: $36,000 X .25 = $9,000, and $1,000 is a week's wage for 40 hours, so nine weeks work * 40 hours = 360 man hours / 4 tons)
  • Percent of year 1 installed costs driven by rebates: 41 percent
  • Gross installed costs / value of energy: $13
  • Net installed costs / value of energy: $7.6
  • 20 Year IRR: 14 percent

For those of you that love tables, I've put the data on a table as well.

  

Conclusions

There's a lot of information in the above graph, so I made a few simple graphs that display and answer some specific questions.

Installed Cost per Watt

Geothermal costs roughly $2.57 per watt, while solar thermal costs $3.96 and solar PV is around $5.50. Yes, a lot of residential solar pv projects still cost $5.50 per watt. You may be able to reduce this to $4.00 per watt on new construction, but this trend is decreasing.

Energy Production per Installed kW

Solar PV generally produces 1 kWh per year for every 1 kW installed. A geothermal system will produce 13,500 kWh net energy from the ground loop, backing out the electric use for the pumps and compressor. A 4-ton system is 14 kW, so it produces slightly less then 1 kWh of net energy for every 1 kW installed. The solar thermal system is only a 2.22-kW system, but will produce 4,100 kWh of energy in one year.

Gross Invested Cost per Dollar of Energy Output

This metric is simple. Without considering any incentives (using just gross installed costs), how many dollars need to be invested to get $1 in fuel savings? Geothermal and solar thermal are clearly the winner here when displacing fuel oil. If they were displacing propane or electric they would be higher.

Gross Installed Cost to Net Installed Cost: How much do incentives drive returns?

This metric looks at how much incentives decrease installed costs by taking the gross installed costs and dividing them by all available incentives. What we see is that in Massachusetts, solar thermal is the most heavily subsidized technology, followed by solar pv and geothermal.

Net Invested Cost per Dollar of Energy Output:

After incentives are considered, we can look at the net energy investment required to get $1 in energy savings. Solar thermal and geothermal become more equal at $7.60 and solar PV is around $19. This means that to replace oil with a geothermal project in Massachusetts, you need to invest $7 to get $1 in fuel savings in year one.

Total Man Hours Needed per Job

This is looking at the total direct construction jobs to install a project. This is not based on any reports (because they don't exist for solar thermal and geothermal), but anecdotal evidence. A typical 4-ton geothermal system will require 360 direct man hours in construction, and a solar thermal system will take 40 hours, and a solar PV project takes around 75 hours.

Direct Jobs Created per kW Installed

When we look at direct man hours per kW installed, geothermal and solar thermal create the most jobs, followed by solar PV. The reason for this has to do with the type of equipment being used. For geothermal and solar thermal technology, commodity equipment is used and repackaged in a different way. Components for these technologies aren't industry specific, except for the actual solar thermal modules and geothermal heat pump, but these are easy to manufacture and thus there are many manufacturers. For the solar PV industry, all main components are specialized: modules, inverters and racking. Thus, equipment costs tend to make up a larger percentage of the installed costs. However, this is declining as economies of scale are reached on the manufacturing side of the business.

20-Year IRR with Current Incentives and Assumptions

This graph shows what the 20-year IRR of these different projects is with our given assumptions. Yes, the IRR of solar PV is getting much lower as installed costs drop and property owners see it as low risk, but also because Massachusetts SREC prices are declining. Geothermal is around 13 percent and solar thermal is around 12 percent.

20-Year IRR of All Technologies Received SRECs

This graph is answering a question I frequently hear: If geothermal is so amazing how come more people aren't doing it? My answer is simple: If geothermal received the same REC prices as solar PV, no one would be using oil, geothermal would just be cheaper. So, if we assume that geothermal and solar thermal get paid $200/MWh for 10 years based on their output, their IRRs skyrocket to 30 percent.

 

Lessons earned and what implication does this have for policy in New England?

There are a few lessons we can learn from this analysis.

First, renewable thermal technologies can provide as good or better returns than solar PV technologies for property owners.

Second, renewable thermal technologies need more policy support, but they do not need as much support as solar PV. As you can see, a 30 percent IRR is too high. This is good for policy makers because it means that the cost of deploying renewable thermal technology will be CHEAPER than deploying solar PV. Renewable thermal technologies are cheaper and produce more valuable energy per kW installed, so more of the returns can come from displacing fuel than from a subsidy.

Third, renewable thermal technologies create more construction jobs per kW installed than solar PV.

Fourth, if we're serious about incentives for renewable thermal technologies, we must use production-based incentives. Production-based incentives maintain quality control throughout the entire process: manufacturing, design and installation. A huge lesson learned in the solar PV industry is that incentives based on installed costs have huge flaws (installing solar PV projects in the shade is one example). Those modules on the left in the photo below will still receive a rebate even though they won't produce must power.

Fifth, if any policy makers reading this happen to live in New England, my message to you is simple:  If you're bullish on the solar PV industry and believe that it's a wise investment in terms of job creation, reducing emissions and saving property owners money, you should look into renewable thermal technologies as the next area of rapid growth. If you're looking for the next technology that is going to create a huge number of jobs in your state and save a massive amount of money, you must look at renewable thermal technologies.

If you want to chat, I'd be happy to. Here's my contact information: cwilliams@heatspring.com, 800-393-2044 ex. 33.

Chris Williams is the Chief Marketing Officer for HeatSpring Learning Institute a national renewable energy training company, Chairman of the Government Relations Committee for NEGPA and an advisor to Ground Energy Support, a provider of real time geothermal heat pump monitoring technology.

This article was first published on Renewable Energy World and is reprinted with permission.

November 04, 2012

Hurricane Sandy: "It's Global Warming, Stupid"

Garvin Jabusch

On today's broadcast of the news show Democracy Now hosted by Amy Goodman, Cynthia Rosenzweig, co-chair of the New York City Panel on Climate Change, went out of her way to begin her comments on Hurricane Sandy and the effects of global warming to issue a disclaimer: "but first Amy, I need to make something very clear: any one storm cannot be associated directly with climate change…we have to be very careful not to say Hurricane Sandy was caused by climate change." Unfortunately, this could easily be taken to imply that warming and Sandy may have had nothing at all to do with one another. The word "associated" is particularly misleading (as opposed to "caused") because to say a given storm and global warming aren’t associated is flat untrue. Rosenzweig said this right at the beginning of her segment, before she went on to explain about the dangers of climate change (which as a distinguished climate scientist she is qualified to do). This is the kind of overly couched, ass-covering commentary that drives me crazy. Because the fact is that global warming did, unquestionably, influence Sandy. 

Basic chemistry proves carbon dioxide traps heat, primarily infrared wavelengths. This has been known since 1859, and is clearly demonstrated in this great BBC video experiment. (If you have any doubts at all regarding the fundamental science, watch it, and even if you don’t, it’s pretty cool). Since the beginning of the fossil fuels era, the amount of carbon dioxide in the atmosphere has increased close to 43 percent, from 280 parts per million (PPM) to 400 PPM. That is a lot more carbon dioxide holding a lot more heat energy. So much energy that simple calculations reveal that between 1951 and 2011, extra carbon dioxide in the atmosphere has added energy in the amount of 210 sextillion additional joules that would not be here at the old 280 PPM levels.  (Energy or heat wise, a joule is a little less than a quarter of a calorie.) So we've added 210,000,000,000,000,000,000,000 extra joules of heat and counting (we're adding about 34 billion tons more per year), and that energy is in every molecule of the atmosphere. That's how it works. More energy in any system means that system is powered to be more active. If you throw a ball 43 percent harder it will fly with more force. If a gallon of gas gets you and your car 20 miles, 1.43 gallons will get you 28.6 miles. That's what warming is, extra energy rendered as heat.

Small wonder insurers have concluded that the rate of weather-related disasters has quintupled over the last three decades. Yes, there were storms back before warming, when the atmosphere was still at 280 PPM, but they had a lot less energy to work with. There can be no question that the additional energy in the molecules of the atmosphere comprising Sandy influenced her strength. On the contrary, physics indicates that it's impossible for all that energy not to have influence, as if somehow Sandy existed in a 280 PMM atmosphere, as if she grew in a bubble shielded from reality. She didn’t, we don’t. It is worth observing that with energy in the atmosphere at its highest in the era of human recordkeeping, Sandy came ashore with record rainfall and record storm surges.  (Spoiler: as additional carbon dioxide traps still more additional energy in the atmosphere, more extreme weather event records will be set. Soon.) Sandy may well have existed in a 280 PPM world, but there is no way she would have been the same storm with the same energy; implying that all things might have been equal in a pre-warming world and present day is misleading and just wrong.

However well intentioned, comments like Dr. Rosenzweig’s provide the kind of exclamation that gets repeated without context ad nauseum by proponents of climate disinformation. Don’t be surprised if disinformer-in-chief Senator James Inhofe even quotes her on the floor of the Senate to make his case for "drill baby drill." (Don't laugh, Inhofe has applied this tactic using the words of 350.org’s Bill McKibben, Grist’s David Roberts and others; see this year’s Senate Hearing on Climate Change, starting at 1:40 in this video.)

Fortunately, not all media communication on warming is so timid. Enter Mike Bloomberg. His approach to business and government has been empirically rational and evidence based. If data tell him something unequivocally, that's what he seems to believe. His endorsement of President Obama in next week's election was made on the same basis, "I want our president to place scientific evidence and risk management above electoral politics." So for him and his organization it made sense for the post-Sandy cover of their flagship magazine Bloomberg Business Week to read "It's Global Warming, Stupid," above an image of a Sandy-flooded New York City. This is evidence based, real, non-misleading climate communication, from a man not afraid of backlash. Kudos, Mayor Bloomberg. Your unwillingness to temper science in the face of monetarily or ideologically motivated pressure shows us a real way forward.

But still there remains the other end of the communications spectrum. In her effort to be fair and balanced, and qualified as she is, Dr. Rosenzweig seems not to realize that her language plays into the hands of climate change deniers funded by and existing for the benefit of the fossil fuels industry. Many news viewers and listeners don’t get past the first 30 seconds of a segment, so unfortunately all some people heard was an expert say, “we have to be very careful not to say Hurricane Sandy was caused by climate change.” As a result, more people, not less, arguably think climate science must be debatable. It’s not.

We’ve been so conditioned by climate deniers’ chimera of false fairness and by fear of being labeled ‘extremist’ that now even climate scientists are making arguments that seem to encourage doubt. Dr. Rosenzweig, plainly speaking the truth is not extremism. Fear to do so is.

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog "Green Alpha's Next Economy."

October 04, 2012

Obama Versus Romney: Everything You Need to Know About Where the Candidates Stand on Energy Policy

By Daniel J. Weiss and Jackie Weidman, Center for American Progress

Clean energy is an important part of the economy of Colorado, which is the location of the first presidential debate on October 3rd.

Colorado’s robust wind industry and 70,000 jobs in green goods and services could suffer if the Production Tax Credit for wind isn’t extended by the end of 2012. The presidential candidates differ on this, as well as other energy issues. Hopefully the Denver debate, scheduled to focus on the economy, will also address energy policies so vital to Colorado and the nation.

The United States is in the midst of significant changes in our energy outlook. We are producing and burning more natural gas for electricity, while reducing coal use. Domestic oil production is at a 15-year high while oil imports are at a 15-year low. Renewable electricity doubled over the past four years, while worldwide carbon pollution and the impacts of climate change grow. The next president will face these and other serious challenges posed by a changing energy world.

President Barack Obama’s first term featured the adoption of essential toxic and carbon pollution reduction measures to protect public health. In addition, he modernized fuel-economy standards for the first time in two decades, which also helped the auto industry; invested in energy efficiency and renewable electricity; and created tens of thousands of jobs.

Gov. Mitt Romney’s energy agenda couldn’t be more different. He would undo new safeguards from mercury, carcinogens, soot, and smog from industrial sources. He opposes the improved fuel-economy standards, and would continue and expand tax breaks for big oil companies, while openly disparaging clean energy and investments in wind power.

In short, there are stark differences between the two presidential candidates that must be discussed on October 3 so Americans have a clear view of the energy path each candidate would lead us down.

Below is a more detailed direct comparison of their positions on the most visible energy challenges facing the nation. Following this chart is documentation on the candidates’ positions:

1-large-obama-versus-romney-everything-you-need-to-know-about-where-the-candidates-stand-on-energy-policy[1].jpg

Oil and gas production

Obama:

  • Oil imports lowest since 1997; dropped by 15 percent during term to 42 percent; vowed to cut current oil imports in half by 2020. [[Energy Information Administration, 6/12]
  • Domestic oil production is the highest in 15 years. The United States has more drilling rigs at work than the rest of the world combined. [Center for American Progress Action Fund,9/13/12; Energy Information Administration, 9/11/12]
  • Crude oil production from federal lands and waters was higher in 2009, 2010 and 2011 than in any of the last three years of the Bush administration. [EIA, 3/14/12]
  • Raised worker and environmental safety standards for drilling in the Gulf of Mexico following the Deepwater Horizon oil disaster, strengthening well design, testing, control equipment, and workplace safety. The Gulf Coast region was not hurt economically by a temporary moratorium, which has the same unemployment as two years ago and had rising personal income in 2011. [White House, 3/30/12, NOLA, 4/15/12]

Romney

  • Would open the Florida portion of the Gulf of Mexico, the Atlantic and Pacific Outer Continental Shelves, public lands, and the Arctic National Wildlife Refuge to new drilling. Would accelerate drilling permits, short circuiting health and environmental reviews. [MittRomney.com, 2011]
  • Defense Department concerned about Florida and Virginia drilling expansion since it could interfere with military training. [Panama City News Herald, 4/4/12]
  • Called the temporary moratorium on drilling in the Gulf following the Deepwater Horizon disaster “illegal.” [CBS News, 3/9/12]
  • See “Public lands protection”

Big Oil tax breaks

Obama:

  • Calls on Congress to end $4 billion in oil tax breaks and to invest in clean energy instead. [White House, 3/28/2012]
  • Pledged to cut subsidies for oil, coal, and natural gas internationally, along with  G20 nations. [Economist,10/1/09]

Romney:

  • Romney supports the House Republican budget, authored by his running mate, Rep. Paul Ryan (R-WI), which preserves $40 billion in tax breaks for the oil and gas industry over a decade. [CAP, 3/20/12]
  • Romney’s economic plan would give the big five oil companies–BP, Chevron, ConocoPhillips, ExxonMobil, and Shell–an additional $2.3 billion annual tax cut on top of existing tax breaks they currently receive. [CAPAF, 7/26/12]
  • Romney’s plan cuts the corporate tax rate from 35 percent to 25 percent, but does not make specific mention of oil and gas loopholes which let oil companies pay much lower effective federal rates. [MittRomney.com, 2012]
  • Asked directly in an interview about whether he is for or against subsidizing Big Oil, Romney responded: “I’m not sure precisely what big tax breaks we’re talking about.” [Fox News, 4/3/2012]

Clean energy

Obama:

  • Federal government invested billions of dollars in renewable energy projects, creating tens of thousands of jobs; doubled generation of (non-hydropower) renewable electricity to 6 percent. [EIA, 7/1/12]
  • Supports extension of the production tax credit for wind generated electricity. [White House, 5/22/12]
  • “Governor Romney calls [renewable sources of energy] ‘imaginary.’ Congressman Ryan calls them a ‘fad.’ I think they’re the future. I think they’re worth fighting for.” [Climate Progress, 8/28/12]
  • “I will not walk away from the promise of clean energy. I will not cede the wind or solar or battery industry to China or Germany because we refuse to make the same commitment here.” [State of the Union, 1/24/12]
  • Transforming the Pentagon energy use by reducing the military’s dependence on fossil fuels that cost the Pentagon up to $20 billion annually. [National Journal, 4/11/12]

Romney:

  • Opposes the extension of the production tax credit for wind energy, which could cost 37,000 jobs in the industry. [Des Moines Register, 7/30/12]
  • “In place of real energy, Obama has focused on an imaginary world where government-subsidized windmills and solar panels could power the economy. This vision has failed.” [Columbus Dispatch op-ed, 8/8/12]
  • “You can’t drive a car with a windmill on it.” [ThinkProgress, 3/6/2012]
  • Endorses the House passed budget authored by Ryan, which gives a 60 percent funding increase to coal, oil, and natural gas, while it decreases funding for research on vehicle batteries and solar projects, and loans to companies to retool to build fuel-efficient cars. [Politico, 4/17/12]

Reduce oil use and imports with efficient vehicles

Obama:

  • New modern standards require cars and light trucks to achieve an average 54.5 miles per gallon by 2025. This, combined with the first round of standards, will save 3.1 million barrels of oil per day in 2030. This is equivalent to the amount of oil we currently import from the Persian Gulf, Colombia, and Venezuela combined. [CAP, 8/28/12]
  • Invested in fuel-efficient vehicle and advanced battery research and development to spur job growth and increase international competitiveness; increased affordability and reliability of electric vehicles. [CAP, 8/28/12]
  • Proposed a “race to the top” for communities to seek federal investment in public electric vehicle recharging infrastructure. [White House, 3/30/11]

Romney:

  • “Gov. Romney opposes the extreme standards that President Obama has imposed, which will limit the choices available to American families,” said campaign spokeswoman Andrea Saul. [LA Times, 8/28/12]
  • Disparaged the first plug-in hybrid electric Chevrolet Volt as “an idea whose time has not come,” and said, “I’m not sure America was ready for the Chevy Volt.” [Michigan Live, 12/23/11, MSNBC 4/5/12]. EPA says the Volt gets at least 94 miles per gallon.
  • Advocates ending the federal loan program helping companies develop and produce efficient cars. [Orange County Register, 10/24/11]
  • Supports House passed budget authored by Ryan that would slash investment in alternatives to gasoline powered cars. [House Budget Committee, FY 2013]

Gasoline prices

Obama:

  • Commodity Futures Trading Commission should increase market oversight of  Wall Street speculators who have driven up oil prices;, increase penalties for illegal activity. Dodd-Frank Wall Street  Reform and Consumer Protection Act includes rules to limit commodities speculation by Wall Street speculators that do not affect commercial end users. [CNN, 4/17/12; Media Matters, 4/18/12]
  • Favors investments in alternatives to gasoline, including electric vehicles and public transportation. [CAP, 8/28/12; American Public Transportation Association, 2/13/12]

Romney

  • Would repeal Dodd Frank and opposes reining in Wall Street speculators, calling Obama’s move “gimmickry.” [MittRomney.com, 4/17/12]
  • Supports House passed budget authored by Ryan that would cut Commodity Futures Trading Commission funding by nearly $40 million; cuts would hinder the CFTC’s ability to police the oil and other  markets that the Commission oversees.. [House Budget Committee FY 2013; White House, 4/17/12]

Green jobs

Obama:

  • Historic level of investment in green jobs sector now with 3.1 million Americans employed according the Bureau of Labor Statistics. [AP, 3/22/12]

Romney:

  • Repeatedly called green jobs “fake,” such as calling them “illusory” in an op-ed on his energy plan. [Orange County Register, 10/24/11]
  • “[Obama] keeps talking about green jobs, where are they?” [OC Register, 10/24/11; League of Conservation Voters, 9/15/11]  The Economic Policy Institute estimates that there were nearly 1 million clean energy jobs created or saved by the Recovery Act.  [BlueGreen Alliance, 2/17/11]  

Public lands protection

Obama:

  • Approved 17 major solar energy installation projects on public lands that are generating 6,000 megawatts of power; will expedite permitting process to increase development in Western states. [Department of Energy, 7/24/12]
  • Announced he would “allow the development of clean energy on enough public land to power 3 million homes.” [White House, 1/24/12]
  • Signed a sweeping public lands bill in 2009 that designated 2 million acres of wilderness and created three national parks. [AP, 3/31/09]
  • Used the 1906 Antiquities Act to create three national monuments – Fort Monroe, Virginia; Fort Ord, California; and Chimney Rock, Colorado. These monuments will bring tourists and economic development to these places.. [ClimateProgress, 9/20/12] ]

Romney:

  • Romney’s energy plan would give states the authority to allow drilling in National Park Service units and other public lands within state borders. The New York Times noted that “states, as a rule, tend to be interested mainly in resource development.” [NYT, 8/18/12]
  • The Romney plan significantly increases the likelihood that drilling could take place in 30 National Park units, including the Flight 93 Memorial and Everglades National Park.  [Center for American Progress, 9/12/12]
  • Romney said “I haven’t studied […] what the purpose is of” public lands. But he finds it unacceptable when conservation is “designed to satisfy, let’s say, the most extreme environmentalists, from keeping a population from developing their coal, their gold, their other resources for the benefit of the state.” [McClatchy, 2/16/12]
  • Fully embraced the House passed budget, authored by Ryan, which would sell off 3.3 millions of acres of national parks and public lands. [ThinkProgress, 3/21/12]

Climate change

Obama:

  • “My plan will continue to reduce the carbon pollution that is heating our planet – because climate change is not a hoax. More droughts and floods and wildfires are not a joke.  They’re a threat to our children’s future.” [Climate Progress, 9/6/12]
  • Finalized the first ever carbon pollution reduction rules for motor vehicles, which will cut carbon pollution from vehicles built between 2012 and 2025. The standards will slash billions of tons of carbon pollution. [White House, 8/3/2012]
  • Proposed the first carbon pollution reduction for new coal-fired power plants. [NPR, 3/27/12]
  • State Department is leading a group of countries in a program that cuts global warming pollutants like soot, methane, and hydrofluorocarbons. [NYT, 2/16/2012]

Romney:

  • Romney made fun of President Obama’s commitment to fighting global warming at the Republican National Convention when he said “I’m not in this race to slow the rise of the oceans or to heal the planet.” [Climate Progress, 9/19/12]
  • “There remains a lack of scientific consensus on the issue — on the extent of the warming, the extent of the human contribution, and the severity of the risk — and I believe we must support continued debate and investigation within the scientific community.” [NYT,9/5/2012]
  • “I oppose steps like a carbon tax or a cap-and-trade system.” [Science Debate.org, 9/4/12]
  • Says the Clean Air Act doesn’t apply to carbon emissions: “My view is that the EPA in getting into carbon and regulating carbon has gone beyond the original intent of that legislation, and I would not take it there.” Would overturn Supreme Court decision by blocking EPA from setting carbon pollution reduction standards.[Politico, 7/18/11; MittRomney.com, 2012

Protect public health from mercury, toxic air pollution

Obama:

  • Finalized historic standard that limits harmful mercury and air toxic pollution from coal-fired power plants. Proposed rules to reduce mercury and toxic air pollution from industrial boilers, incinerators, and cement manufacturing. Together, these initiatives will result in $187 billion in annual health benefits and would prevent 21,600 premature deaths, 199,000 cases of asthma, and 12,540 hospitalizations annually. [CAPAF, 9/18/12]
  • Proposed Cross-state air pollution rule that would save up to 34,000 lives, and $280 billion in economic benefits, annually; rule was struck down in 2-1 federal appeals court decision, but EPA could appeal.  [CAPAF, 9/18/12]

Romney

  • Would promptly issue an executive order that “directs all agencies to immediately initiate the elimination of Obama-era regulations that unduly burden the economy or job creation.” [MittRomney.com, 2011]
  • “Aggressively” develop all our coal sources. “Coal is America’s most abundant energy source. We have reserves that—at current rates of uses—will last for the next 200 years of electricity production in an industry that directly employs perhaps 200,000 workers.”  [MittRomney.com, 2011]
  • Against new EPA regulations of harmful mercury and air pollutants from coal: “I think the EPA has gotten completely out of control for a very simple reason. It is a tool in the hands of the president to crush the private enterprise system, to crush our ability to have energy, whether it’s oil, gas, coal, nuclear.” [The Hill, 12/5/11]
  • Romney’s campaign spokesperson falsely claimed that the mercury pollution-reduction standard “costs more than $1,500 for every one dollar reduction in mercury pollution.”  The EPA projects “that for every dollar spent to reduce pollution, Americans get $3 to $9 in health benefits in return.” [Climate Progress, 8/21/12]

Keystone XL pipeline

Obama:

  • Delayed decision to permit construction of Keystone XL pipeline in November 2011 until a new route was identified and evaluated. The original proposed pathway crossed  Nebraska’s Sandhills, the recharge zone for the Ogallala Aquifer that supplies water for nearly one-quarter of American agriculture. Nebraska’s Republican governor Dave Heineman also opposed this route.   President Obama noted that the original route could “affect the health and safety of the American people as well as the environment.” [White House, 11/10/11; NRDC, 7/11/11; Nebraska Government, 8/11/11]
  • Congress forced President Obama to decide whether to approve or deny the Keystone XL in January 2012 before a new route was selected. He denied it because a new route had not been identified or analyzed. The president said that “the rushed and arbitrary deadline insisted on by congressional Republicans prevented a full assessment of the pipeline’s impact, especially the health and safety of the American people, as well as our environment.” [White House, 1/18/12]
  • Approved the Cushing, Oklahoma to Gulf of Mexico leg of Keystone XL in March to address the over stock of oil in Cushing due to lack of transportation capacity; promised to ensure that construction and operation will proceed in an environmentally sensible way. [CAP,5/5/2012]
  • Obama will decide whether to approve TransCanada’s new proposed northern pipeline route in 2013, after the Nebraska state government and the State Department assess the environmental impacts of the new route. [U.S. Department of State, 5/4/2012]

Romney:

  • “If I’m President, we’ll build it if I have to build it myself.” [Huffington Post, 5/4/12]
  • Used his first TV ad of the general election to say he would approve Keystone XL on “day one” if elected. [The Hill, 5/18/12]

Daniel J. Weiss is a Senior Fellow with the Center for American Progress; Jackie Weidman is a Special Assistant for energy policy at the Center for American Progress.

This article was originally published on Climate Progress and was republished with permission.

July 23, 2012

Shifting the Cost of Pollution

by Debra Fiakas CFA
MATS.png

The U.S. Environmental Protection Agency has agreed to review the recently enacted MATS Rule  -  Mercury & Air Toxics Standards that went into effect at the end of 2011.  At least two dozen states and forty utility companies have filed suit against the EPA over the rule, which is intended to cap mercury and other toxic emissions as well as particulates.  The rules particularly impact power plants that use coal-fired boilers to generate electricity.  The EPA provides an interactive map to see where these plants are located.  They are predominantly in the eastern half of the country.

Existing plants have three years to comply.  Industry and power generators should find it child’s play given that the EPA has been in the business of setting emissions standards for decades and it appears industry and power generators have for the most part been compliant.  By most accounts emissions standards have been effective in cleaning up the skies over the U.S.  In the years between 1980 and 2008, sodium dioxide and nitrogen oxide emissions from industry have been cut by 57% and from power generators by 40%.  The reduction in emissions by power generators is all the more remarkable given that electricity use in the U.S. increased by 85% during the same period and the use of coal has tripled.

MATS is the EPA’s first attempt to reduce mercury emissions.  Mercury seeps into the water supply and the food chain through fish.  It can cause nervous system damage and is a particular threat for children and pregnant women.  The EPS estimated that the $9.6 billion estimated cost for compliance could be justified by an estimated $90 billion annual savings in healthcare costs.

However, the hue and cry over MATS is the most shrill in history.  At least four companies with new plants on the drawing board have joined the lawsuits:  White Stallion Energy Center, LLC; Tenaska Trailblazer Partners, LLC (owned by Tenaska, Inc. and Arch Coal (ACI:  NYSE);  the Deseret Power Electric Cooperative; and the Tri-State Generation and Transmission Association. The power industry is complaining that new plants in the cue for construction are not able to comply with MATS as the standards are written today.  Most likely, any technological impediments can be overcome with adequate investment.  I am suspicious the added expenditures would change the economics of these new plants to the point that construction financing could be in jeopardy.

Economists have a term  -  cost shifting.  Put simply it means that the costs of a good or service are moved from the person who incurred the cost to another person who is ostensibly in a better position to pay.  Health insurance is often cited as an example where the costs of healthcare are moved from the shoulders of the person who incurred the doctor bill to the insurance company.  However, this is a contractually agreed upon arrangement and the sick person has already paid the insurance company a premium to assuming the obligation.

Polluters shift costs also.  There is no doubt that there is a cost to be borne for toxic emissions.  If left unchecked, toxic emissions exact a price from everyone in the community.  The public pays for the cost of pollution with poor health and high medical bills.  Yet unlike the contractual arrangement between the insured person and the insurance company, there is no formal agreement with the public to assume the costs of pollution.  It is imposed upon them by lobbyists and lawyers who attempt to block standards that would focus responsibility for pollution on the source.

Southern Company (SO:  NYSE), an electricity generator and wholesaler, has been in the forefront of opposition to EPA standards.  Southern Company reportedly spent over $17.5 million lobbying Congress in between the years 2010 and 2012. Among other arguments, Southern supported proposals to disapprove and delay compliance schedules with MATS, as well as to delay the EPA from setting carbon pollution standards.  Southern is among a number of power generators that belong to the American Coalition for Clean Coal Electricity.

No one wants to see promising investment projects go awry.  No one likes to feel the long arm of government regulation.  Certainly no one wants to see their utility bill increase.  Nonetheless, it is time that polluters stop shifting responsibility to innocent bystanders and pass the costs of emissions to those who benefit from their businesses  -  investors and customers.    It is time to comply with regulations and begin emissions abatement.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. VNDM is included in Crystal Equity Research’s The Mothers of Invention Index.

June 13, 2012

Why We Need More Energy in the Economy But Less in the Atmosphere

Garvin Jabusch

Preface: As per my usual, this post is more or less a narrative, and is definitely not math-centric. But, still, nothing quite conveys the stark reality of a thing like its governing equation.  So, two of those found their way in here, but both are short and explained in English.

With that, let’s look at why energy is so good. And bad.

Any system in nature, including the human economy, is bound by a simple fact: it can only thrive and grow in proportion to the energy inputs it has access to. Energy equals growth. In economic terms the basic model is: 

  1. Log Y = f(log Xi)

where Y = GDP and X is energy consumption, with both variables in per capita log form (to keep apples and oranges in their places), and f showing that Y is a function of X 

Simple fact.  From a pond hosting fish, birds and frogs, to the World Wide Web, to the global economy as a whole, there’s no growth in any system without increasing energy inputs per unit of output (efficiency gains are effectively a way of getting ‘more energy’). With world energy use expected to double by 2050, keeping world economies afloat and even growing will require new energy and lots of it.  (Of course the traditional production function has many inputs besides energy, such as labor, capital and materials, but none of those can be brought to bear without energy.) The economic production function is so closely tied to energy consumption, in fact, that economists routinely use it as a proxy for economic growth. 

Because constraints that define finite natural resources like fossil fuels will by definition place a serious drag on long-term growth, only the use of renewable energies will allow continued economic growth.  Recent high prices, especially in oil, are a clear manifestation of resource constraints leading to economic drag. We need energy, but conventional resources are finite. So ultimately, renewable energy will be the only way to keep our complex economy growing.

But the human economy isn’t the only system that grows and becomes more dynamic with increased energy inputs. So does the atmosphere. Greenhouse gasses in the atmosphere trap infrared heat, preventing it from escaping back in to space. The formula is clear: 

2. Equation

Where delta-F is the change in radiative forcing, C is CO2 concentration in parts per million (ppm) and Co is CO2 in ppm before we started burning fossil fuels (reference level, 275 ppm). 

What it means is that for each additional part per million of carbon in the air, the earth holds on to a bit more energy, measured in watts, for every square meter of surface area.

So far, all those additional watts per meter as we cross 400 ppm have warmed earth up a lot. They mean that, just between 1961 and 2011, we’ve trapped more than 210 sextillion additional joules of heat that would otherwise have bounced back into space. Earth’s systems can only function within society’s tolerances for so long with these joules piling up and up.

  Neogene-MioceneGlobal

This image is a representation of Earth last time CO2 was at 400 ppm, some 15-20 million years ago. Note the greatly elevated shoreline and dearth of ice. Our map today doesn’t look like this yet because we’re still in the early days of 400 ppm this time around, and it takes a while for heat to build up under that CO2 blanket. Most of the trapped extra joules so far have gone into the ocean. If they had all gone into the air alone, we’d already be 72 degrees Fahrenheit warmer, every day, everywhere on earth, on average. An extra 210 sextillion joules (and counting) is a lot of energy.

So the earth’s natural systems grow with energy inputs too, and the resulting effects of additional energy into things like weather systems are hurricanes and tornadoes, not economic growth and money. Too many more greenhouse gasses in our air and we’ll begin to experience even more frequent extreme weather and climate events, and at some point those will begin to disrupt more than a single city or crop harvest at a time and start to threaten civilization.  

Economies and weather are similar in that they both have increasing opportunities for growth and acceleration as more energy is put into them.  So if we want to keep economies growing or even simply maintain a decent standard of living for the majority of civilization, we need way more energy, but we cannot emit too much more CO2, methane or other greenhouse gasses, or we risk literally overheating the natural world.

Fossil fuels energy into the economy equals heat energy into the atmosphere.

This observation about economic and atmospheric responses to increasing energy makes the basic case for developing all present and future economies on the basis of the truly renewable, self sustaining, free sources of energy, such as wind and sunshine. We’ll never have to pay to mine either one, and neither will ever emit atmosphere-heating byproducts (or other pollutants).

Critically, this means that policies based on renewables conceivably have the power to emancipate us economically from the real-world fact of finite resources. As oil economist Gregor Macdonald recently wrote, “only a policy recommendation that foregrounded energy as the primary lever to apply to Western economies, rather than merely including it, would now have resonance. It is the energy-intensity of America in particular that must be confronted, not only in its domestic consumption but in the global energy inputs it commands through its outsourced production. Let’s remember that oil, until it is eclipsed by coal, remains the primary energy source of the world, with a 33.56% share.” As we’ve seen, this can’t continue. 

Will we then wean ourselves from fossil fuels in a way that avoids a worldwide economic depression and/or dangerous climate change? Let’s check in on some interesting poll numbers. 55 percent of Americans now say they worry about global warming (a moderate improvement over a couple years back). But, and here it gets interesting, 72 percent believe that recent extreme weather such as our recent late spring heat wave may be global warming related.  Why the seeming disconnect?  To me, it suggests that deep inside most folks recognize that warming must in some way indeed be happening. But for lots of reasons, like fear that climate change itself or the process of adapting to mitigate it may change our way of life, we're loath to admit it out loud.  And if you belong to a tribe that as a collective is uninterested in accepting science and energy economics, changing course can feel like treason.  I can understand that.

Yet for all the stated disbelief in climate science, “92 percent of Americans think that developing sources of clean energy should be a very high (31%), high (38%), or medium (23%) priority for the president and Congress,” according to a March 2012 study conducted by the Yale and George Mason University. So clearly, for some combination of reasons, there is broad underlying support for an American transition to powering economic production with renewables.

Perhaps the psychological tipping point we need to work through then is realizing that by embracing the new achievements in technical innovation that can most directly slow warming, we are actually acting to preserve rather than change our way of life, our independence, and our standard of living. Consider the excitement at FedEx about switching to electric delivery vans. Self described Republican and ex marine CEO Fred Smith says the move will allow him to operate the vans with 75% less cost. "Not 7.5%, 75%. These are big numbers."

This is what continuing innovation has always promised: cheaper, better, more efficient economic production, all resulting in jobs and ultimately wealth. If the emerging improvement in the technologies with which we manage our economic production function help limit other dangerous threats such as warming and extreme weather, that’s fantastic, and could in some ways be seen merely as a fortunate byproduct of the new wave of technical innovation. I doubt Fred Smith cares whether you call his new efficiency innovation green or not.

Warming is real and is a threat. But let's also realize that the technologies and approaches that help us minimize the threats associated with warming are also the next phase of mankind’s innovation. Like all great innovations of the industrial revolution, the post fossil-fuels era will continue the promise of providing more economic output from less investment (efficiency gains), and ultimately make us both wealthier and more secure.

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog "Green Alpha's Next Economy."

June 03, 2012

Two Numbers: One Matters, the Other Gets All the Attention

Garvin Jabusch

This morning, in the realm of those who follow such things, the world became aware of two newsworthy numbers, 69,000 and 400.  The former number is how many jobs were added to the U.S. economy in May according to the Bureau of Labor Statistics (BLS); the latter is how many parts per million (ppm) in our atmosphere are represented by carbon. 

You can guess our opinion: 400 parts per million is a far more significant milestone than the apparent ‘bad news’ of America adding 69,000 more jobs.

The jobs number is, at best, banal ephemera. It’s a trivially short snapshot of just one indicator of the immediate state of the U.S. economy, and it’ll be subject to revision a month from now.  Yet it’s almost all the financial press, and a lot of media in general, can talk about today.  Coverage like this from the LA Times is representative: “U.S. employers created 69,000 jobs in May, the fewest in a year, and the unemployment rate ticked up. The dismal jobs figures could fan fears that the economy is sputtering.”  Google news search the term “69,000 jobs” and you’ll see about 900 articles, most containing words like “bleak.” For what it’s worth, we think adding 69,000 domestic jobs in May, while below consensus forecasts, is a hell of a lot better than the alternative of losing jobs. Which, lest we forget, until October of 2009 there were 22 consecutive months of job losses. In relative, longer-view terms, today’s report isn’t especially awful. And again, for all the histrionics it’s causing in newsrooms, the BLS jobs report has the relevance lifespan of a mosquito. 

Unemployment Chart

Monthly jobs gained or lost, Jan 2008-March 2010. Source: BLS 

Meanwhile, in news that does in fact represent progress towards a cataclysm but that has been getting far less coverage, atmospheric carbon "readings are coming in at 400 and higher all over the Arctic. They've been recorded in Alaska, GreenlandNorwayIceland and even Mongolia." 400 ppm is at or beyond what scientists consider ‘safe’ in terms of human society. In reporting of a 2009 paper in the journal Science, researchers concluded “the only time in the last 20 million years that we find evidence for carbon dioxide levels similar to the [then] modern level of 387 parts per million was 15 to 20 million years ago, when the planet was dramatically different." How different? “Global temperatures were 5 to 10 degrees Fahrenheit higher than they are today, the sea level was approximately 75 to 120 feet higher than today, there was no permanent sea ice cap in the Arctic and very little ice on Antarctica and Greenland." Having just reached 400 ppm, our world doesn’t resemble that yet, but these are the society and economy wrecking outcomes of the path we have placed ourselves upon.  With these effects being the outcome of a sustained period at 400 ppm, it’s no wonder many activists are calling for a global stabilized level of 350 ppm.  As we go on beyond 400 ppm (a fate inevitable for now, as we continue to release 90 million tons per day of carbon into the air worldwide), things get far worse. According to NASA’s leading climate scientist, James Hanson, “that level of heat-trapping gases would assure that the disintegration of the ice sheets would accelerate out of control. Sea levels would rise and destroy coastal cities. Global temperatures would become intolerable. Twenty to 50 percent of the planet’s species would be driven to extinction. Civilization would be at risk.

Fixating on the monthly BLS jobs report while ignoring climate is like staring at your car’s tachometer while ignoring the road.  You’ll know exactly how fast your engine is revving at any given moment, but you’ll be oblivious to the collapsed bridge that’s rushing up in front of you.  

Jobs, of course, underpin the economy. So if creating jobs is our primary concern, we should seek to add them where they’re growing best and take a look at coverage of a new UN study that concludes that making the economic transition from fossil fuels to a lower carbon economy will create tens of millions of jobs worldwide.  Creating tens of millions of jobs while averting the worst of catastrophic warming. These are data we can subscribe to. Tentative monthly jobs estimate? Not as much.   Hitting 400 ppm shows us – incontrovertibly – where global economies have to invest at massive scale, soon, and for a long time if not indefinitely. 69,000 new jobs shows us where we were, for a second, last May.  

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog "Green

May 23, 2012

Tariffs on Chinese Solar Are Bad for Us All

Garvin Jabusch

Trade War
Trade War photo via Bigstock

The United States Department of Commerce Thursday, and of all things at the behest of a German-owned company, SolarWorld AG (SRWRF.PK), imposed extreme tariffs on China-made solar panels and modules of between 31% and 250%, making them much less affordable for U.S. consumers. Commerce took the additional extraordinary step of making the tariffs retroactive for 90 days to prevent U.S businesses and homeowners from getting a decent price on the basis that their local dealer/installer bought panels before the date of their decision. Solar in this country just got a lot more expensive and the 100,000 domestic solar industry jobs (mostly installing and servicing) created over the last five years are now at risk. Also, oil, coal and gas suddenly can remain price competitive with solar in the U.S. for far longer than market forces would otherwise dictate. Longer term, it could make the U.S. may the last dirty, expensive, fossil-fuels based economic backwater economy in the developed world.  Jesse Pichel, Managing Director and Senior Equity Research Analyst covering Clean Technology companies at Jefferies has clearly summarized the situation:

Environmentalists and the unemployed should be equally disappointed with this decision because lower cost solar panels make solar more competitive with dirty fossil fuels. It should be clear by now that there are more U.S. jobs on the installation side of the solar business than on manufacturing. These cases have a chilling effect on business and it will linger for a long time. It’s unfortunate that SolarWorld has taken this scorched Earth approach and that they are distracting from the growth of U.S. jobs and affordable solar energy.

Slowing down solar development is undesirable in general. Remember, solar at scale represents almost limitless power at a zero cost of fuel, meaning it has the power to emancipate us from hundreds of billions spent every year of fossil fuels. I find it sad and funny that we think a few billion in tax cuts will stimulate the economy and lubricate the recovery, but we fail to see that limitless, nearly free energy would have that same effect, but at many times the scale and all while creating hundreds of thousands of new, quality jobs. So it’s not surprising that many American solar companies oppose the decision. As reported in the New York Times:

“Many solar panel installers in the United States have opposed tariffs on Chinese panels, contending that inexpensive imports have helped spur many homeowners and businesses to put solar panels on their rooftops. Opponents of the tariffs say that the United States benefits from cheap Chinese production. They point out that Chinese companies often turn to American companies to buy the factory equipment and polysilicon they need to make solar panels, and installers hire local American workers to set up and service rooftop systems.”

Let us not forget that the U.S. exports raw polysilicon to China, and that business will now be at retaliatory risk as “the Chinese industry would file a trade case at the Chinese commerce ministry against American exports of polysilicon.”  The ‘American made factory equipment’ and ‘local American workers’ also stand to suffer.

In addition, tariffs by definition are inflationary. A customer who now has to pay significantly more for his or her preferred brand of panel is experiencing inflation, but so too is the customer buying the American made panel that now is free to cost far more than it did yesterday due to the absence of tough competition. With panels of all kinds going up in price, so does the cost of electricity they produce, meaning the portion of the grid they supply will get more  expensive, making the blended grid electricity rates go up, in turn driving up the costs of every home and business that use electricity.  Inflation all around, then.   

The problem isn’t, as claimed by Commerce, that China has been dumping unfairly priced solar panels on the U.S., it’s that our domestic solar industry as a whole has not remained competitive in the face of fierce global competition. China’s panels are competitive because "[t]hey've figured out that clean-energy manufacturing will be an area of major growth and are investing vastly more than we are to support it." In the U.S., we’ve invested a fraction as much as China into solar and other clean energy sources, so naturally, we’re behind them on the cost curve. Commerce’s decision will do little to slow the growth and technological progress of solar globally; it will just mean the U.S. won’t be competing in this key piece of powering the future economies.

There are of course American firms, such as New Hampshire based GT Advanced Technologies (GTAT), who have managed to compete very well with Chinese solar without Commerce’s protectionism.  Tom Gutierrez, CEO of GT Advanced Technologies, recently had this to say on the opinion page of the Boston Globe:

I look at the time and energy invested in this investigation and wonder: Why, and what for? This is counterproductive to the primary objective of the US solar industry: Getting solar to grid parity. Tariffs, charges of dumping, possible trade tensions — these only enable high-cost manufacturing to continue, resulting in higher solar costs for US consumers. In the end, such moves negatively impact the growth of high-quality solar jobs in the United States.

Instead of carrying water for foreign-owned businesses, we should reward the traits that ensure success in the global marketplace: Business adaptability and commitment to innovation. To win in this race, it’s really about hard work and figuring out how to survive and thrive against highly-motivated competition. We need to be fostering real innovation — not rewarding inefficient businesses that seek government handouts.  GT and many other US-based companies have proven that we can compete against fierce Asian competitors and win. We just have to run better businesses.

Right. Or as I said in a previous post back in January 2011, “we should try competing instead of complaining.” And Gutierrez makes another interesting point, if these tariffs are disliked by many of the U.S. companies they’re meant to protect, who are they really for? What’s their real purpose?  It’s difficult not to notice, as Susan Wise, spokeswoman for SunRun, told Forbes, that “[i]f finalized, this decision would move us backward in the effort to make solar affordable for Americans,”. “It would make prices higher at the exact moment when solar power is starting to become competitive with fossil fuels in more markets.” [Italics mine.]

Germany’s SolarWorld AG, which brought the case to the Commerce Department, does not have the best record of defending its own industry.  In Germany, they have long lobbied to lower solar feed-in tariffs, meaning, effectively, they’ve been trying to stop receiving free money. What sane business does that?  I’m sure SolarWorld’s shareholders are stymied by the company’s anti-profit attitude.  Both efforts, to reduce subsidies in Germany and to start a solar trade war between China and the U.S., point to a company that does not have its industry’s best interests in mind. It may be worth remembering that a large part of SolarWorld AG used to be Shell Oil’s “crystalline silicon” division.  Shares of SolarWorld AG are up “as much as 18 percent” the morning after the tariff announcement, but U.S. based manufacturer First Solar (FSLR) has been off by as much as 5.8 percent this morning.

In Saudi Arabia, they must be laughing. Commerce’s handout, to let U.S. solar manufacturers run inefficient operations that produce solar modules too expensive for many domestic consumers, ensures we’ll be dependent on Saudi oil and other fossil fuels for a long time to come. Meanwhile, the Saudis are installing $109 billion worth of solar capacity to power their own domestic economy. They want to stop powering their own country with oil so they can sell every drop they can find and pump to us, which should be easy if we have a lot less solar to displace their costly crude.  Too bad we just ceded the advantage in getting Saudi’s solar business to Chinese firms. 

Commerce is expected to issue its final order making Chinese solar tariffs permanent in July or August. Let’s hope by then that they can be persuaded to allow free markets to reign.  

GAA Logo Blog (1)Disclosure: Green Alpha is long GTAT, but has no positions in other companies mentioned

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog "Green Alpha's Next Economy."

April 23, 2012

A Portfolio Risk Wall Street Ignores at Its Peril

Garvin Jabusch

At Green Alpha, we believe in investing in the scientifically objective world, and not an ideologically skewed version of it, so I’m often amazed at the attitudes and behavior of many of our colleagues in the financial services industry. For a group that’s supposed to be practicing objectively quantified decision making, finance-types can be remarkably motivated by ideology. Especially where a particular ideology is being promoted by the largest and richest industry in the history of civilization, fossil-fuels, whose representatives will stop at nothing to convince us that their product is safe, causes no warming, and will last forever.  If there’s a reference case for finance-industry climate denial, it has to be the Wall Street Journal’s piece last January wherein editors not only denied climate science but purported to be the purveyors of scientific truth (i.e., there’s no warming). The Union of Concerned Scientists dismissed the Journal’s claims outright, as did many responsible climate scientists. But, no matter, since it’s in the Journal, finance’s paper of record, many of our colleagues in investment management blithely believed the disinformation and continue to invest accordingly.  But this is both dangerous and questionable from a fiduciary point of view.  Because, yes, truly, CO2 causes warming, and potentially extreme warming. And, yes, in addition, we truly are running up against existentially threatening resource constraints.

MIT researcher Graham Turner, in “perhaps the most groundbreaking academic work of the 1970s (Smithsonian),” The Limits to Growth, famously predicted that humanity’s outpacing of global resources may catch up to us in the form of civilization-level collapse as early as 2030. And it looks like his models may be right on track. However, as Smithsonian pointed out, Turner also noted that “unlimited economic growth was possible, if governments forged policies and invested in technologies to regulate the expansion of humanity’s ecological footprint.” In our terms, the translation is that the investment industry has got to stop placing bets on the legacy-economy technologies that got us into this situation, and start investing in next economy technologies, companies and solutions. It’s simple, we have to align humanities economic interests with earth’s various capacities. In the end, they represent the same goal. 

Financial services has no business helping the fossil fuel oligarchs and their political lackeys bury the light of objective scientific reality. If this was all just about normal, thin veneer political posturing, we wouldn’t care at all. But it's about so much more than that; it’s fundamentally about whether we destroy or maintain the fundamental underpinnings of world economies and of civilization itself. And investing in the world – the world as it is, not the world we ideologically wish existed – is inestimably important for long term portfolio returns, and also, crucially, for mitigating the chances of a failing global civilization.

Believe it or not, the primary risk we at Green Alpha assign to U.S. based next economy companies is home nation political risk. Political risk…of public companies…in a free market economy. Oxymoronic. Sounds more like a corrupt authoritarian regime type problem, right?  Unfortunately, we're not that far from that in the U.S. with respect to renewables and the next economy overall. Because, in general, U.S. policy makers (on the basis of payments, often to super-PACs), prefer to defend legacy fossil fuels at the expense of renewables.  As Bill McKibben recently noted, “It’s as if the politicians are sort of pillows in front of the fossil fuel industry…And you spend all your time going after them and don’t get at the guys behind them.” And, all rhetoric to the contrary, most politicians don’t mind using taxpayer money to pick winners over losers, as observed this month via a decision by “United States Senators [who] voted to kill 37,000 American jobs [in wind energy], while giving $24 billion in tax breaks to big oil companies (story from Climate Progress).”  It’s a vicious circle: congress people give fossil-fuels companies tens of billions of taxpayer money, the companies put part of that back into congress’ super PACs, and repeat. 

I've said before that I don't believe there is any power in Washington that can trump the money and leverage imposed on our system by the entrenched interests of fossil fuels and of Wall Street. And these fossil fuel and Wall Street oligarchs of course don't only protect their interests via buying policymakers, but also, of course by spreading disinformation to the public from outlets from the Journal to the U.S. chamber of commerce. They do all this not caring that a temperature rise of 2° C, probably inevitable already, will make more likely everything from perilous food supplies to extreme weather. And at 3° on up, civilization begins to be at risk. They spread disinformation not caring that unlimited, almost free energy provided by our best renewables operating at scale will remove the billions of dollars a day drag on our economies, and emancipate us to resume real economic growth and prosperity.

Maybe if I was a fossil fuel billionaire I would feel differently. Maybe then the source of my wealth would make me willing to deliberately, cynically sacrifice the greater economy now and maybe civilization in the future. But as it is I can't afford to do that. And, even though I work in the investment management industry, I won’t fall in line to help our oligarchs disseminate lies. Because in the harsh light of day, in the reality of the world as it is, their short sighted defense of the sources of their wealth, vicious as that defense is, may ruin us all.

For us, for me, it’s important that our portfolio constituents reflect the needs of the world – economically and ecologically (to the extent that there’s a difference any more) – as it is objectively defined by our best science. It’s important that our portfolios reflect the immutable laws of physics and thermodynamics, as opposed to the ephemeral laws of human policymakers. Practical, unavoidable thermodynamic laws and physical constraints are what they are, will cause what they cause, and will wreak what havoc they will, no matter what propaganda is unleashed on us by the well funded machine of climate denialism.  As popular awareness of earth’s realities advances, more and more capital will flow to companies, ideas and approaches that help solve our most pressing problems, and next economy portfolios will benefit proportionally. Venture capitalist Vinod Khosla, for example, believes that the next economy will spawn not only the ‘next Google,’ but, in fact, tens of Google-sized firms. We have few doubts Khosla’s right, save that perhaps as a civilization we’ll be so seduced by short term money and corruption that we’ll chase those things off a cliff. If we allow ourselves to brought to heel, to comply with the wishes of the legacy economy bosses, we could suffer the same fate as previous short-sighted societies like the Maya, like Easter Islanders. 

But I don’t think we will. We live in an amazing age of limitless, almost free information (even if some fail to avail themselves of that). And as Ben Franklin said, “A nation of well informed men who have been taught to know and prize the rights which God has given them cannot be enslaved. It is in the region of ignorance that tyranny begins.”  I don’t know about God, but I believe that where people have access to real, objective information about the reality of their world, they will ultimately make the sane and rational decisions required preserve that world. Disinformation, however well funded, won’t prevail forever. America may not believe in climate change, but it is upon us whether we acknowledge it or not.  No matter what you believe in, we all as a civilization are and will be dealing with the consequences of a warming, resource constrained planet, starting, well, now. The sooner we invest in solutions, the better.

GAA logoGarvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog "Green Alpha's Next Economy."

April 16, 2012

Here comes the sun….not

Marc Gunther

 

Germany, once the world’s leading market for solar power, is pulling back its subsidies.

Q Cells (QCLSF.PK), once the world’s largest solar company, just went bankrupt.

This isn’t happy news. If the country that birthed the Green Party cannot sustain its support for solar, what does that tell the rest of us?

It should tell us that it’s time (actually way past time) to get serious about energy and climate policy.

This week, as I followed the news from Germany, I talked with a couple of energy-policy experts who I respect–Jesse Jenkins of the Breakthrough Institute and Gernot Wagner of the Environmental Defense Fund. I also watched an interview (below) with Bill Gates from the Wall Street Journal’s Eco-nomics conference. They disagree about some specifics, but they all agree that the US needs to get a lot smarter about how to drive a transition to low-carbon energy. So let’s try to see what we can learn from Germany, and the rest of Europe.

Perhaps the most obvious takeaway is that we should not place expensive bets on any one solution. That’s what the Germans did, with generous subsidies in the form of a feed-in tariff for solar. Even though the costs of solar have dropped dramatically, the subsidies were not sustainable. Remember when people said nuclear was too cheap to meter. Solar PV is too costly to subsidize on a scale that matters.

Here’s how The Guardian reported the story last month:

You can have too much of a good thing, it turns out. The German government has said it has been forced to cut subsidies for solar panels, because demand was so high it could no longer afford to support the green technology.

In other words, the Germans are cutting back on solar subsidies not because they didn’t work but because they did. The government wants to drive down solar installations to less than half of the 7.5 gigawatts (27% of the world’s total) that it installed last year.

It’s not just Germany, either. The Spanish market went from being the largest in the world, at 2.7 GW, in 2008 to installing 17 megawatts — a drop of 99 percent — after subsidies were slashed and a cap on new installations was imposed, according to ClimateWire [subscription required]. Italy, which was the world’s top market in 2011, is also talking about cutting back.

All this, mind you, is happening in Europe, where there is a broad political consensus that climate change is serious business.

Jesse Jenkins and Gernot Wagner agree that this points to the limits of a clean energy policy that relies on subsidies for deployment. That’s essentially what we have in the US, in the form of tax credits for solar and wind power, and state renewable portfolio standards that require utility companies to generate a percentage of their electricity from renewable sources. Certainly there are benefits to policies that drive deployment–they achieve immediate reductions in CO2 emissions, and they can help get infant industries, like wind and solar, off the ground.

But  by themselves, policies focused on deployment won’t drive a radical transition to a low-carbon economy, which is what we need.

Says Gernot: “Public money is not enough to finance the transition to a green economy. Spending a couple of billion here and there is not going to revolutionize the world.”

Jesse agrees: “The financial burdens of the subsidy will eventually exceed the public tolerance…We need to deploy these technologies, but we need to deploy them in a way that drives the price down as rapidly as possible. We need smarter subsidies.” The Breakthrough Institute, with Brookings and the World Resources Institute, have a report coming out this month that will recommend new approaches–essentially, ways that subsidies can be tied to cost reductions.

What’s more, subsidies can be wasteful.  If I were to install solar panels on the roof of my tree-shaded house in Bethesda, US taxpayers would pay 30% of the costs. That’s unwise and unjust, although not nearly as unwise as given many billions of dollars to oil and gas companies to help them heat up the planet.

So what should we do? Gernot, Jesse and Bill Gates all agree that  we need breakthrough innovation to head off potentially catastrophic global warming. Today’s low-carbon energy sources — wind, solar, biofuels, electric cars, batteries–are still too expensive.

Given the government’s ability to finance renewable energy is limited, more of it should be spent on R&D where it will drive innovation and less should be spent deploying mature or wasteful technologies, like corn ethanol. This requires thinking long term, as Gates explains, because the climate crisis can’t be solved right away:

People underestimate how hard it is to make these changes. That is, they look at intermittent energy sources, they don’t think about storage and transmission. They look at things that are deeply subsidized, and they forget that they are deeply subsidized. They look just at the rich world, and they don’t look at where all the energy increase is taking place, which is in middle and low-income areas. I think the problem is way harder than many observers think.

But I also think, to counterbalance that a little bit…that the potential for innovation, not innovation in the next ten years, because you have to invent in this next ten years, but innovations that will start to be rolled out in say the 20 year time-frame, means that we can be in terms of the first derivative, in terms of the rate of change, we can be pretty dramatic. And so if you took a period like 75 years, if we really fund basic research at a reasonable level, which the U.S. does not, other countries do not, if we have policies to encourage experimentation, which just take any one of the things – nuclear, carbon capture – we’re not doing a good job on that – transmission, storage. If you do the right things, there is a chance to meet very aggressive goals in a 75-year time-frame.

Two final thoughts. As Gernot argues in his book, But Will the Planet Notice? a carbon tax or a cap on carbon emissions is the single best way to drive innovation, deployment and efficiency. Gates says pretty much the same thing:

A serious carbon tax…is the most important thing to do….that’s the greatest failure in our energy policy.

How to change politics to make a carbon tax possible is a topic for another day. I’m skeptical that we will be able to do so rapidly enough to forestall serious global warming impacts, which is why I wrote about the need to research geoengineering and air capture of CO2 (they’re not the same thing) in my short ebook, Suck It Up: How capturing carbon from the air can help solve the climate crisis. In the book, I write about Gates’ finding for research into geoengineering and and his support for a startup company called Carbon Engineering.

His talk is well worth watching, If you prefer, you can download download a transcript [PDF].


Marc Gunther writer for Fortune, GreenBiz and Sustainable Business Forum co-chair, Fortune Brainstorm Green 2012 and a blogger at www.marcgunther.com.  His book, Suck It Up: How capturing carbon from the air can help solve the climate crisis, has been published as an Amazon Kindle Single. You can buy it here for $1.99.

December 20, 2011

A Cleantech VC Who is Unconvinced of Man-Made Climate Change

David Gold

Go ahead -- call me a hypocrite.  I claim to be a cleantech venture capitalist yet I tell you here and now that I am not convinced of anthropogenic (human-caused) climate change (aka global warming).  And I will audaciously tell you that my convictions on climate change in no way run contrary to my strong belief in the need for a cleantech revolution

Many supporters of clean technologies make it seem as though anthropogenic climate change is an absolute fact.  To some of them anthropogenic climate change is almost like a religion where any debate or doubt is not tolerated.  Some of them may call me a heretic just for writing this post.

At the same time, those on the other end of the spectrum are equally religious in their fervor and certainty that anthropogenic global warming is a fraud.  They are certain that human emissions of carbon dioxide and other “greenhouse” gases could never impact our climate.  And they may twist this post to use it as yet another data point against claims of global warming and added rationale to do nothing except increase fossil fuel exploration.

In both groups, it is my perception that most have read little about the topic other than the popular press.  And I find both groups equally sad in their myopic viewpoints.  If both of these camps would open their eyes, I suspect there would be much greater agreement on the need for action on clean technologies rather than the divisiveness that their polarizing views create.

There are solid scientific theories and extensive data, anchored by the UN Intergovernmental Panel on Climate Change Report, that indicate the possibility that over time man-made emissions of greenhouse gases could impact the global climate and may have already begun to do so.  To dismiss them out of hand because there is some reasonable doubt is irrational.

Similarly, to speak about anthropogenic climate change as a certainty or to claim that there is no disagreement among scientist is simply incorrect.  There are large numbers of  reputable climate scientists who remain unconvinced.  The reality is that all predictions of global warming are based on very complex climate models. We can forecast the weather a few days out with reasonable accuracy but if you try predicting next year’s summer temperature -- let alone long-term global climate conditions -- things fall apart quickly.  Long-term climate models are anything but accurate.

We know with certainty that past natural occurrences have caused significant changes to the atmosphere, resulting in climate changes.  So, there is little question about whether changes in the atmosphere can cause climate changes.  Rather, the question is whether man-made emissions are significant enough to cause a change on their own and to overcome the large natural forces on our climate that include sun spots, variations in the earth’s orbit, and volcanoes all of which have not been taken into account in forecasts of global warming.

Often there is a focus in the media on recent variations in climate as a source of evidence for anthropogenic climate change.  Variations in climate over short periods of time are highly suspect as evidence. While most scientists seem to agree that there have been increased temperatures and other climate changes over the past century or so, what cannot be said with certainty is that the increased CO2 levels caused this as opposed natural climate change events that have and continue to happen regularly to our planet.  Even the UN Intergovernmental Panel on Climate Change report, which is the backbone of support for anthropogenic climate change, found that its confidence in human contribution to such measured weather events (e.g., temperature, severe storms, sea level, etc.) could be as low as 50% for most of the events and 66% for the others (pages 23 and 52 of the Technical Summary).  

Climate change is measured over extremely long periods of time – not a few years or tens of years.  Some of the best long-term data on historic CO2 concentrations and temperatures is derived from glacial ice core data that spans back 400,000 years.  This data shows that the concentration levels of CO2 in the atmosphere today are strikingly more than 20% higher than any level measured in the past 400,000 years (See Figure 1).  The recent rapid increase corresponds well with the industrial age and temperature variations are in high correlation with CO2 concentrations. This is hard data to ignore or simply write-off.

Figure 1 – Data from Vostok Ice Core (400,000 years)


Figure 2 –Estimated CO2 and Temperature Changes over 500+ Million Years

But interestingly over longer periods, the level of CO2 today is far below the estimated levels during many times in history (Figure 2) raising the possibility that the current spike may have other natural contributors.  And the correlation between temperature and CO2 that seems so apparent in the 400,000-year ice core data becomes much less clear when looking over many millions of years.

While most scientists seem to believe that, in isolation, increased CO2 concentrations create an increased “greenhouse” effect whereby the CO2 acts like a blanket, preventing more of the heat radiated by the earth from going back into space, at what concentration level and over what time period remains a point of uncertainty and debate. In addition, how other factors that may occur with warming such as increased moisture and clouds as well as changes in absorption of CO2 into the ocean at varying temperatures will affect the warming dynamic and other climate change is much more uncertain.

The bottom line is that we won’t truly know if man has caused climate change until after it has already occurred for a very long period of time.

And that’s the rub.  The theoretical costs to the human race of global warming are high: rising ocean levels, decreased polar ice, increased severe weather and significant changes in precipitation patterns.  If they occurred to a significant degree, all could have sizeable economic and health implications.  But there is no certainty that we will ever pay such a price. More compelling is what we know with near-certainty:

  • Fossil fuels are a finite resource and they do pollute.   Reduction of pollution is always a good thing.  And with booming energy demand in China and India, fossil fuels are a resource that will become scarcer and more expensive.  You can argue about the pace, but few argue that it will happen.    Even oil rich countries such as Saudi Arabia have begun to accept this fact.
  • Increased sources of cost-effective energy and more energy-efficient consumption have and will continue to lead to increased standards of living.
  • Nations with greater diversity of energy sources have greater economic and national security.
  • The U.S. Defense Department believes that climate change will impact our national security.
  • If anthropogenic global warming is real, by the time we start paying the price for the damage we have done it will be too late to turn things back quickly.

To claim with certainty that man is causing climate change or to claim there is no risk of anthropogenic climate change are equally incorrect and equally polarizing.

While it is not certain, there is evidence that suggests that human emissions of greenhouse gases may be changing our climate in ways that could have dramatic impacts.  We can do nothing and roll the dice that everything can be OK.  Or we can take steps to diversify our energy sources away from fossil fuels and increase our energy efficiency, thereby not only reducing the risk of anthropogenic climate change but also increasing the robustness of our economy and our national defense.

Although there should be debate about the specifics of how to best advance the availability and utilization of cleaner technologies, support for cleantech innovation should be the ultimate bipartisan issue without the divisiveness created by talking about anthropogenic climate change as if it is a fact or as if it is fiction. 

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com).  This article was first published on his blog, www.greengoldblog.com.

November 20, 2011

Overcoming Hurdles to Clean Energy Commercialization

by David L. Levy

In the absence of a global framework for regulating emissions, the future of the planet largely rests on choices by private firms and investors regarding which technologies to pursue and commercialize.

Despite the mounting evidence of severe climate change, there is a funding crisis for potential solutions. The Department of Energy released data at the beginning of November showing that global emissions of CO2 rose 6% in 2010, despite the ongoing economic recession. This trajectory is higher than the worst case projections from the Intergovernmental Panel on Climate Change (IPCC) in it’s 2007 Fourth Assessement Report. The impacts are already being felt. A new IPCC report concludes that climate change is causing more extreme weather, especially heat waves, heavy precipitation, and coastal flooding (though the super-cautious IPCC hedged on hurricanes).

beaconpowerstephentown_270x272Yet November also witnessed setbacks for two key clean energy technologies. Beacon Power (BCONQ.PK), a Boston-area developer of flywheel energy storage and power management systems for the grid, filed for bankruptcy the same week that the DoE released the grim emissions data. Just a few days later, the FutureGen 2.0 project, the leading US effort to develop commercial scale Carbon Capture and Storage (CCS) technology, suffered a major setback when the Midwestern power company Ameren announced that it could not provide an old power plant for the project due to financial difficulties.

One important lesson is that public policy must be based on a clear understanding of the challenges facing the clean energy sector and the impact of regulation and programs on investment decisions and corporate business models. In the absence of a global framework for regulating emissions, the future of the planet largely rests on choices by private firms and investors regarding which technologies to pursue and commercialize. The clean energy sector, however, faces a host of risks that make investors wary. The risk is not that climate change is going away as a long-term driver; the problem is that there are large market uncertainties regarding the future of regulation and subsidies, which technologies will emerge as large-scale, low-cost, low-carbon alternatives, how consumers will respond, and how competitors will react.

Despite the woeful underfunding of clean energy research in the US, there is still a plethora of exciting technologies being developed in the laboratories of universities, government centers, and the private sector. For more mature technologies, large subsidies are flowing to commercial installations of solar and wind, perhaps too large, according to a critical New York Times article last week. While these subsidies are reducing costs by accelerating the technologies down the learning and scale curves, they tend to reinforce the dominance of early, low-cost “winners” in the marketplace, and provide little help for less mature but promising emerging technologies, such as Solyndra’s CIGS thin film glass tubes. As a result, these subsidies also tend to suck in a lot of low-cost Chinese imports rather than stimulate US production or research.

A structural problem, as Daniel Goldman wrote in an earlier Climate Inc. post, is the proverbial “valley of death” between lab research and commercial production, where “neither government, venture capital firms nor capital markets have tended to bear the risks associated with providing equity capital, which can amount to hundreds of millions of dollars, for initial deployment of capital intensive new clean energy technologies at commercial scale – described here as “first project commercialization.”  The US venture capital model evolved primarily to support the emergence of the software industry, which has relatively low capital intensity, but there is not currently an adequate private (or public) sector solution for clean energy. It’s far too early to know whether, for example, flywheel technology is better than batteries or compressed gas for power storage – and maybe there is a role for each of them, to meet different needs in different locations. But a market-based system that relies on private sector funding is failing us if it cuts off development of promising technologies before they even reach commercial scale testing.

Beacon Power has not yet closed its doors, and is trying to continue operating under bankruptcy. Since the summer, it has been testing a 20-megawatt flywheel plant in Stephentown, N.Y., which can absorb and supply power from the grid very rapidly, and is therefore valuable in frequency regulation. Another installation is planned for Pennsylvania. The more intermittent wind and solar that is connected to the grid, the greater the need for short-term storage solutions. Flywheels are able to deal with rapid fluctuations and match supply and demand more effectively and reliably than batteries, such as those from A123, or gas-fired plants (while reducing emissions from rapid cycling of gas plants). A few of the the 200 flywheels in Stephentown have experienced problems, but the system has performed well overall.

Until recently, Beacon Power has not been able to monetize the full advantages of flywheel storage. It was only on October 20th that the Federal Regulatory Energy Commission (FERC) approved a change in regulations that makes grid operators pay, not just for the amount of power in reserve, but also for its effectiveness in grid stabilization. According to Bloomberg, this could double Beacon Power’s revenue and make it easier to find financing. But the ruling, which has been in the works since February, was too late to keep Beacon solvent. If we are to rely on price and market mechanisms, we need to build them to serve the planet.

The lack of a clear regulatory framework has also hurt offshore wind power in the US. Even now that the 450 MW Cape Wind project is most likely moving ahead, the damage from more than a decade of delays and uncertainty, resulting in millions of dollars in costs and legal fees, have probably dampened investors’ enthusiasm. The latest delay stems from a court ruling that the FAA needs to take another look at aviation hazards. With further financing still required for the $2.6 billion project and the company still negotiating to sell half the power output, the future is not yet secure. Meanwhile, the European Wind Energy Association expects annual investments in the European offshore wind industry to triple to reach 10 billion Euros by 2020.

Given the urgency of the situation, public policy needs to shape the market context in order to steer private investment decisions. We are not heading in the right direction, however. In the short term, the ongoing recession appears to be diverting attention from the climate issue and draining government, business, and consumers of resources. A new Ernst and Young report estimates that the recession could lead governments to cut spending on climate change by tens of billions of dollars. It’s more important than ever to focus government resources, and commercialization of carbon-reducing technologies is a critical area. But in addition to financial support, the problems facing Beacon Power, FutureGen and Cape Wind highlight the importance of reducing regulatory uncertainty.

David L. Levy is Chair of the Department of Management and Marketing at the University of Massachusetts, Boston. He founded and is currently Director of the Center for Sustainable Enterprise and Regional Competitiveness, which engages in research, education and outreach to promote a transition to a clean, sustainable, and prosperous economy. David’s research examines corporate strategic responses to climate change and the growth of the clean energy business sector. He has published widely on these topics, and co-edited a book with Peter Newell titled “The Business of Global Environmental Governance”, MIT Press, (2005).

October 31, 2011

Trick and Treat: Energy loans under review, as Hallowe’en looms

Jim Lane

The Obama Administration got tricked, and handed out some bad energy loan candy.

Turns out that the Washington press corps, and House Republicans, were asleep on the job, too. Until the money ran out, that is.



We’re not sure if there’s been any more perfect timing for an Obama Administration announcement, than the news that it will start up an investigation of the DOE loan guarantee program just as Hallowe’en weekend got underway.

Hallowe’en, is of course, the time of disguise, the celebration of the macabre, and the ghostly return of the dead to haunt you.

Not a bad description, overall, for the Solyndra loan. But there was substantial evidence that the loan guarantee process was fundamentally broken, over two years ago.

“Today,” announced White House chief of staff Bill Daley, “we are directing that an independent analysis be conducted of the current state of the Department of Energy loan portfolio, focusing on future loan monitoring and management,”  “While we continue to take steps to make sure the United States remains competitive in the 21st century energy economy, we must also ensure that we are strong stewards of taxpayer dollars.”

Today. As in the end of October 2011. But, let’s rewind the tape two years.

The signs in 2009

On Friday, Politico reported that Rep. Cliff Stearns (R-Fla.), chairman of the House Energy and Commerce oversight subcommittee, said, “In August 2009, the staff on the Department of Energy indicated that Solyndra would go prophetically bankrupt in September 2011.”

Well, it is high Washington fashion this fall, even more popular than the latest from Lagerfeld, Chanel or Dior, to trash the Solyndra loan. It looks like “Obamacare meets Watergate Junior”, to a lot of Republicans on the Hill.

The fact that the US government doubled-down, by allegedly subordinating the loan to investments by a pair of hedge funds, during a Solyndra financial reorganization, is going to cost Energy Secretary a headache when he heads to a November 17th hearing on Capitol Hioll, and possibly more.

But House Republicans and the general media missed a lot of signals themselves, that something was awry in clean energy financing and funding, way back in 2009.

In 2009, we reported:

“$32.9 billion in total funding announced, including grants and loan guarantees. Impressive! But just $17.44 billion for the private sector, the street – nearly half of that in loan guarantees rather than outright funding. The rest of it went to government (although, some went in state block grants that may, in turn, have some portion that finds its way to the street; and some of that went to the utility sector, in which there are private companies). Seems to me that government announcing a grant to government is double-counting. Call me stupid – isn’t that just an allocation?”

Why did so much energy funding get funneled to electric and clean vehicles, not energy?

We warned that an awfully high percentage of the funding was being shifted into specific industries, for reasons we could not fathom:

“Electric and “clean” vehicle technology received $2.9 billion — that’s $500 million more than the entire support for the solar, biofuels, wind, hydro, and geothermal investments which are supposed to provide the renewable molecules and electrons to power said vehicles.”

Why did coal receive more clean energy treats than biomass and biofuels?

We noted that, somehow, the coal industry had received more funding than biofuels and biomass put together – this, in a clean energy financing round:

“Of the $32 billion, $792 million has gone directly to biofuels or biomass — 2.4 percent. That’s 29 percent less than went to coal – which I thought was the energy we were supposed to be transitioning away from, rather than investing in.”

How did researchers in DOE labs end up costing the taxpayer $500,000 per year, each?

In fall 2009, we noted that a program “to support at least 50 early career researchers for five years at US academic institutions and DOE national laboratories,” received more than nuclear energy R&D, so far this year, or hydroelectric power development, or fuel cell research.”

That program received $85 million for salaries and the expenses of the organizations that do the hiring. In all, it was $1,700,000 per researcher, or $340,000 per person per year. Interestingly, the university positions were for “summer salary and expenses” only. Only some of these positions — for DOE National Labs — were full time. Full-timers received $500,000 in funding, per person per year.

At the time, we pointed out that, according to salary.com, the average salary for an assistant professor in the United States is $62,654. Leaving $438,346 for DOE national lab “expenses”. Per person. Per year. That’s a lot of beakers.

And, we pointed out that it wasn’t exactly like a honeymoon for more exotic, fashionable projects like solar. Even as Solyndra was getting the come-on, a lot of projects were getting the shut out.

How macabre did energy financing get, and when did it get that way?

In 2009, Mike Carpenter, managing director of Energy Recovery Group in Oregon advised us, “My USDA Oregon rep sent me the contact information of 30 banks, all apparently designated USDA 90% guaranty, $10M – 3 of thirty responded.   One of the three followed up – we had a deal – all I have to do is:  Show 30% cash, 27 different documents, private and personal, and the killer, a separate, exclusive method or vehicle to pay for the project, not related to the project.  As a solar project, I need to show a 5-year payoff. I called the other 27 banks just to check – the FDIC answered twice, we aren’t lending any money, we don’t have anyone smart enough to analyze a solar deal, on and on.”

We decline to fall in with the general expressions of “shock and horror” on Capitol Hill that Solyndra failed. Even if it is Hallowe’en, and “trick or treat” is in the air. Or, is that “trick, and you’ll get a treat too”?

For us, there was enough evidence on the table in 2009 that any self-respecting auditor might have issued a “substantial doubt, going concern” notice on the Administration’s financing programs way back in 2009. That the broader media didn’t pick up on what was broadly distributed in trade media two years ago, tells you just about what you need to know about the state of the Washington press corps.

When the treats run out, it’s time to soap the windows

The fact that Congress didn’t pick up on any of this, until the loan guarantee program was just about over, the funding wells were dry, and there was no more lipstick left for pigs, tells you just about what you need to know about Washington itself.

Now and through November, the Washington press corps and the House of Representatives will shine its jack-o’-lanterns on the macabre world of the DOE and the Obama Administration’s energy financing goals and achievements. They may well find a landscape of activity that reminds one more of out-takes from Thriller than a well-run financing program. There’s bound to be dirty laundry mixed in with some genuinely good loans, and well-meaning goals.

But the afore-mentioned watchdogs might do well to drop the we-are-the-champions costumery this year, and tramp the streets of Washington wearing hair shirts — or at least the latest sleepwear, to reflect what they have been up to most of the past two years.

The Bottom Line: No Great Pumpkin, and rocks again

Treats for a lot of companies and individuals.

For the long-suffering public, saddled with bad loans, and still not end in sight to the dependence on foreign loans – as it is each year in It’s the Great Pumpkin, Charlie Brown: no great pumpkin in sight, and rocks in the Hallowe’en sack, all over again.

To all of the above, we offer the traditional Hallowe’en (and theater) greeting: Boo!

Jim Lane is editor and publisher of Biofuels Digest.

October 27, 2011

Obama Cleantech Stimulus: Bad Policy, Bad Politics and Bad for Cleantech

David Gold

The Solyndra debacle is no surprise to this cleantech venture capitalist. The inherent conflict between trying to get money out of the U.S. Treasury as quickly as possible to stimulate the economy and, at the same time, have government agencies that are ill-suited at making business decisions do just that was nothing other than a recipe for disaster.

Anytime a government program is giving money to the private sector with the intent of getting the money back, the program is doomed to failure.  Bureaucracies, politics and the lack of a profit motive simply don’t allow government to succeed in business.   Anyone who was surprised that politics played a role in the loan decision for Solyndra (and almost certainly other awardees) is very naïve.

Even if, by some miracle, the government could make good business decisions void of political influence, such programs are still doomed to failure because the public and media won’t allow for even one loan or investment to fail. In venture capital we make investments that don’t succeed and we fail often.  Yet, we are still successful on the whole.  Our successes more than compensate for our failures.  The government has no ability to operate this way.  Even if a program like the DOE loan guarantee could operate with an overall effective return (which I find unlikely anyway), its first failure would sink it.  The government can give away money, but it cannot effectively invest money in individual companies.

Solyndra won’t be the last default from the DOE loan guarantee program.  The huge amounts of money that will ultimately have been wasted in the cleantech stimulus – both in terms of loans that won’t be repaid and the stimulus’ failure to create any meaningful job growth when growth was most needed - is bad for tax payers. The negative PR and the future demise of cleantech policies that otherwise may have had broader bipartisan support is bad for cleantech.

In 2009, amid the euphoria of the Obama Administration’s cleantech programs, I wrote that the Administration’s cleantech stimulus was bad policy but good politics.  I was wrong… not only was the cleantech stimulus bad policy, it was bad politics too.  While the politics by which the Administration pushed through these ill-thought programs may have been deft, the ultimate political impact is clearly bad for both the Administration and cleantech itself.

Ultimately, we may look back at Solyndra as the dagger that burst the cleantech bubble.  The hype and euphoria are officially gone.  The long, hard work that will be required to diversify our energy base and increase energy efficiency wasn’t reduced when the government sent floods of money out the door to cleantech companies, and it won’t change now that the hype of those programs is gone.  The good news is that, like the Web and every other technology bubble, the real value creation comes after the bubble has burst.

So, let’s get back to work. 


David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com).  This article was first published on his blog, www.greengoldblog.com.

October 16, 2011

Occupy Wall Street and the Next Economy: Clamoring for Solutions

Garvin Jabusch

The Occupy Wall Street movement (OWS), now in its fourth week, is getting a lot of media attention. Opinions are divided. By and large, conservatives represent the protesters as 'a mob' (a notable exception is former governor of Louisiana and current GOP presidential candidate Buddy Roemer, who said on MSNBC that "politicians need to listen to these young people, it could change America"). Meanwhile, progressives view them as a justifiable, if not inevitable, reaction to the social inequity that results from a system rigged in favor of the ultra-wealthy.

Protesters in Zuccotti PaekIn their foundation document, the Declaration of the Occupation of New York City, OWS protesters say (among other things) that they object to the monetization of the American political process, where money talks and everyone else -- the 99 percent -- walks, even if that results in policies with horrific consequences for everyone but the wealthiest 1 percent.

And, of course, that is the true state of affairs in America. These "kids" are absolutely right. The U.S. has always been to some degree subject to the overreach of its richest citizens and, from time to time, the resulting inequity has become so egregious that the less-moneyed have taken to various acts of protest to register their indignation and to work for change. And in case you weren't aware, inequity is presently at an all-time high in this country. Nobel Prize-winning economist Joseph E. Stiglitz summed it up last May, in his seminal Vanity Fair piece "Of the 1%, by the 1%, for the 1%":

The upper 1 percent of Americans are now taking in nearly a quarter of the nation's income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran. While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow.

In their Declaration, the Occupy Wall Street protestors have rightly placed the blame for all of this on "corporations" (I would amend this to "some corporations with the aid of their bought congresspersons," and I bet most of the OWSers wouldn't disagree) and included a long list of grievances against them. For me, three of the charges are especially relevant.

1. "They determine economic policy, despite the catastrophic failures their policies have produced and continue to produce,"

Corporations do determine economic policy, mostly via their nearly complete control of policymakers. Leading economists believe that "skyrocketing inequality… is the result of public policies that have concentrated and amplified the effects of the economic transformation and directed its gains exclusively toward the wealthy. Since the late 1970s, a number of important policy changes have tilted the economic playing field toward the rich." The catastrophic failures, as in 1929, speak for themselves.

2. "They have donated large sums of money to politicians, who are responsible for regulating them."

This one, of course, was immeasurably exacerbated by the Supreme Court's 5-4 ruling, in Citizens United v. Federal Election Commission, that money is speech and therefore may be used as freely, and also that corporations are people, and therefore may exercise their right of free speech (cash) without limit. Further, via super-PACs and 501(c)(4)s, donations of any size can be made and spent anonymously. (I've been thinking that Green Alpha should run for governor of Colorado to see whether our company would, in fact, be definable as a "person.")

It's not-quite-amusing to note that former House majority leader Tom DeLay was this year sentenced to three years in a Texas prison for making large corporate donations that would today be legal. Citizens United gave corporations whatever remaining leash they needed to make sure Congress stays bought. An amount like $10 million, for example, is relatively small in the world of business (on a good day that buys maybe a small condo complex?) but in Congress it's enough to ensure the votes of every policymaker you need to make sure that, say, Big Oil gets billion-dollar subsidies or that coal companies can continue to remove whole mountaintops and poison West Virginia. Which brings me to my next point.

Using the levers derived from these actions and policies,

3. "They continue to block alternate forms of energy to keep us dependent on oil."

Here again, of course the OWS Declaration is right. How else to explain that a majority of the comfortably profitable public solar companies that we follow are presently trading at valuations less than the free cash they have in the bank?

How else can we explain that the main story around energy corruption in America is focused on the relatively small amount of money loaned to solar firm Solyndra? Pure political donation-driven kabuki. Or as Jeff Goodell put it in Rolling Stone:

…we're in the middle of a concerted campaign to demonize clean-tech entrepreneurs, one that fits into the grand narrative that fossil fuel apologists and shills have been pushing for several decades now: that America as we know it and love it runs on oil, gas, and coal, and that anyone who says otherwise is a liar, a communist, or a criminal. House Republicans are already using Solyndra's failure as an excuse to slash federal loans to clean energy start-ups, as well as plotting a carnival of hearings and investigations that will keep this story in the news for months.

It comes down to what FDR said, as he battled the inequalities of the Gilded Age that brought about the Great Depression: "We had to struggle with the old enemies of peace: business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob." We're up against greed, self-interest, and a tax code that's not fair -- where you and I pay more than the largest corporations. No, not just a higher percentage, more dollars. General Electric famously paid $0.00 in taxes for 2010 after earning net income for the year of $11.6 billion. The system is so rigged, that even if GE wanted to pay its fair share, say even 5 percent, to do so (or even to lobby to close the loopholes that allow it not to pay) would put it in an actionable position for acting against the financial interests of its shareholders.

It's pretty clear that we have to both change the tax code and get private money out of politics. Only then can true and free capitalism emerge. Only then will dollars chase companies with the best ideas and products, rather than those with the best connections and the largest political donations.

OWS, in short, is right. And we agree. That's why Green Alpha Advisors practices investment management wth a transparent process. We make our reasons for our portfolio positions clear, and we don't play games with synthetic assets such as credit default swaps or with computer tricks like high-frequency trading. We only buy companies whose business models both disrupt business-as-usual and represent the next, green economy. With the exception of a small percentage of speculative positions, we focus on companies with proven, profitable businesses (as opposed to nascent green tech that we wish would do well). We still believe in buy and hold, and reject the notion that the true value of good companies changes ten percent or more each day. That is, we're doing the job that investment managers are "supposed to be doing, i.e., making sober investments in job-creating businesses and watching them grow." (Quote from Matt Taibbi's advice to OWS.)

We believe investment management can be fair, clear, and work to promote rather than stifle a global economy that works in tandem with the world's ecology. Further, we believe that next-economy finance is the only path forward that won't result in both economic and ecological collapse (to the extent that those are even different), and that as such it is also the best long-term economic bet for investors, offering the best chance for competitive returns in an increasingly resource-scarce, warming, populous, and unequal world.

At Occupy Wall Street and around the country, people are clamoring for solutions. The rise of the solutions must surely follow.

Garvin Jabusch is co-founder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog "Green Alpha's Next Economy."

October 08, 2011

The Microeconomics of Green Jobs

Tom Konrad Ph.D. CFA

Much fuss has been made about green jobs. Do they exist, and are more “brown” jobs displaced for every green one? Given all the political rhetoric, it’s not surprising that there is also considerable confusion about green jobs.

There should not be. While pinpointing the actual number of jobs created or destroyed by any particular policy will always be fraught, the underlying microeconomics are rather simple, and understanding those microeconomics can make it clear if a given policy will be a net creator or destroyer of jobs.

While there are many considerations that should be taken into account when forming policy, such as encouraging new technology which may allow future growth, and improving the health and well-being of citizens, I am going to restrict myself to the goal of promoting job creation and economic activity in this article in order to keep the discussion relatively simple. 

My conclusions should not be considered in a vacuum.  Many considerations, not just jobs, should be considered when forming policy.

 web-KLOSSNER-UCS2012calendarCOLOR.jpg
(Picture reprinted with permission from UCS / John Klossner)

Re-framing the Question

In order to avoid the rather pointless debate about the definition of a “green job” I will re-frame the question to one that I believe both sides would agree is more important (at least if they were able to put aside partisan bickering):

Does a particular green policy create more jobs than it destroys?

If a policy is both green (which I define as lowering our use of resources and/or environmental impact) and is a net creator of jobs, all parties should agree that it is a good policy. Green policies which destroy jobs, on the other hand will require further analysis as to whether the environmental and health benefits outweigh the economic losses, a question which requires putting relative value on various benefits, and cannot be resolved purely by economic reasoning.

Which Policies are Net Job Creators?

I’m aware of two mechanisms by which a policy can increase or decrease economic activity and hence number of jobs.

  1. Jobs can be created or destroyed by substituting labor for capital, energy, and/or other resources in production.
  2. If a policy increases economic efficiency, it will increase economic activity and create jobs. If it decreases economic efficiency, it will reduce economic activity and destroy jobs.

Substituting Labor for Energy or Capital

Marginal rate of Technical Substitution.

Image Source: Wikipedia

A basic tenet of microeconomics says that there is a tradeoff between capital, labor and natural resources such as energy in the production function. In particular, you can substitute capital for labor (by mechanization) or labor for capital (by using shovels and picks instead of bulldozers.) Now add energy into the mix, and you can substitute fossil energy for either capital or labor to attain the same production.

For example, a hybrid vehicle substitutes capital and resources (in the form of an electric motor and batteries) for energy (less fuel consumed to do the same work.) A bus substitutes labor (the bus driver) for capital, resources and energy (lots of cars and fuel consumed.) A green building substitutes labor (better architecture/construction) and some resources (extra insulation) for energy.

From this perspective, any policy that promotes the substitution of labor for energy will create green jobs, since you get more work and less energy consumed. Shifting people out of their cars and onto mass transit will create jobs because there will have to be drivers and people managing the transit system, where before no one was paid to drive. To the extent that the transit system can be paid for out of the reduced fuel costs and car ownership costs of the former drivers turned riders, the number of jobs created will be a pure economic gain.

Multiplier Effects

That brings us to the other major potential source of jobs from green policies: economic multiplier effects.

To the extent that green policies improve economic efficiency by overcoming economic barriers to cost effective green solutions, these policies will result in greater economic activity, and hence more jobs. The strongest critique of “green jobs” initiatives is that they simply shift economic activity from out-of-favor “brown” sectors to more politically correct green ones. Yet when a policy improves economic efficiency, it does not just shift jobs and capital around in the economy: it creates economic activity and jobs.

Not all green policies improve economic efficiency. For example, subsidies for not-yet-economic types of renewable energy such as wave power and solar installations may be justifiable on the grounds that they are helping to promote needed future technologies, but they probably come at a net cost to near-term jobs (even if they may create more jobs in the long term by allowing the creation of new types of businesses.)

On the other hand, policies to promote energy efficiency will be strong net creators of jobs, because the cost of energy efficiency is typically only a fraction of the cost of the energy saved. The very existence of opportunities to save significantly on energy bills at modest cost is proof that the energy market is inefficient. In an efficient market, all such opportunities would have already been taken.

After the energy efficiency measure has been installed, the cost savings can be used for useful economic activity, rather than wasted on unneeded fuel. This money will then spur additional activity and stimulate jobs.

Using Fossil Resources to Stimulate Growth is Like Stimulating Growth With Debt

Short term jobs (green or otherwise) should not be the only consideration when forming policy. A short term focus on jobs today can end up doing long term economic harm. For instance, if we spend too much borrowed money to create jobs today, the long term drag on the economy caused by paying back the debt will leave everyone worse off.

Economic growth fueled by the extraction of non-renewable resources is very similar to economic growth fueled by debt. When we extract these resources and use them, we increase economic activity today, but their non-renewable nature means that we lose the opportunity to extract and use them tomorrow. Hence, the economic stimulus today comes at the cost of an economic drag tomorrow, and the future economic drag will generally be larger than today’s stimulus, since improving technology should allow us to get more benefit from each unit of resource in the future.

Using renewable resources to stimulate growth does not have this problem: Tapping the wind or the sun for energy today does nothing to diminish the wind or sun tomorrow. Hence, to the extent a green job relies on renewable resources and a brown job relies on fossil resources, the green job should be preferred, even before taking the environmental benefits into account.

Policy Implications

If we only consider job creation, the focus on policy should be on creating jobs and economic activity, with a preference for green jobs, since those impose less of a cost on future economic activity than jobs based on extractive industries.

Green jobs can be created either by substituting labor for energy and capital, or by reducing energy waste so that the money previously wasted on energy can be put to more productive uses. For policy makers who wish to create green jobs, the implications are clear.

Green job programs should focus on two types of opportunities:

  1. Industries where labor can usefully be substituted for energy or capital, such as mass transit.
  2. Breaking down the barriers to energy efficiency which can stimulate economic activity by allowing money that would otherwise have been wasted.

The converse is also true: if the goal is to create jobs and stimulate economic activity, subsidies and other policies which encourage the substitution of capital and energy for labor should be ended, especially those subsidies which encourage the extraction of non-renewable resources which only create jobs today at the cost of future jobs.

The most cost effective policies for creating jobs will be those that break down the barriers to the adoption of cost-effective green technologies, especially energy efficiency. Ironically, most energy subsidies have gone into capital intensive sectors such as nuclear and extractive sectors such as oil and gas.

A very cost effective way to produce jobs would then simply be to remove subsidies from fossil fuels and nuclear energy and redirect them towards the most cost effective clean technologies.

Increased support for and promotion of public transit could do much more to reduce our dependence on imported oil than support for domestic drilling (which will only make us more dependent on imported oil in the future by using up domestic resources sooner) while also creating jobs.

Meanwhile, energy efficiency programs such as cash for caulkers can cost-effectively reduce energy bills and free up money for other sorts of consumption while also creating jobs in the depressed housing sector.

August 19, 2011

EVs, Lithium-ion Batteries and Liars Poker

John Petersen

Last week I stumbled across a link that led to a 2010 report from the National Research Council titled "Hidden Costs of Energy, Unpriced Consequences of Energy Production and Use." This free 506-page book takes a life-cycle approach – from fuel extraction to energy production, distribution, and use to disposal of waste products – and attempts to quantify the health, climate and other unpriced damages that arise from the use of various energy sources for electricity, transportation and heat. After studying the NRC's discussion of the unpriced health effects, other nonclimate damages and greenhouse gas emissions of various transportation alternatives, and thinking about what the numbers really mean, I've come to the conclusion that the electric vehicle advocates are playing liars poker with their cost and benefit numbers – emphasizing a couple areas where electric drive is superior and de-emphasizing or completely ignoring a far larger number of areas where electric drive is clearly inferior. The result, of course, is unfounded and wildly optimistic claims of superiority based on four sevens in a ten digit serial number that don't mean a thing if your goal is to evaluate the entire serial number.

The first graph from the introduction summarizes the unpriced health and other nonclimate damages arising from the use of thirteen different vehicle fueling technologies over the entire cycle life of an automobile and quantifies the unpriced mine to junkyard cost per vehicle mile traveled, including well or mine to wheels costs of manufacturing the vehicle and fueling it over its operational life.

8.19.11 Health Damages.png

The thing I found most surprising was the relative consistency of the numbers across all thirteen classes, both for today and for the future, and the fact that many advanced drive train technologies score lower than their conventional cousins because the unpriced costs of manufacturing the vehicle or processing the fuel exceed the claimed operating benefits. When you look at the realities from a cradle to grave perspective there are no clearly superior choices and the values are all clustered within ±15% of a $1.25 average. While I derive some personal satisfaction from the idea that the low cost winners are a Prius-class HEV or an internal combustion engine with a CNG fuel system, and that electric drive is just a smidgen cleaner than a diesel engine burning fuel produced from Fischer Tropsch coal liquifaction, the reality is that none of the advanced technologies are inherently better. They're just more expensive.

The game is simply not worth the candle. It’s certainly not worth the enormous expenditures of public funds that governments worldwide don't have. There’s nothing electric drive can accomplish that CNG and fuel efficiency can’t accomplish cleaner, faster and cheaper.

The second graph from the introduction summarizes the unpriced greenhouse gas damages arising from the use of the thirteen different vehicle fueling technologies over the cycle life of an automobile. While the range of variation around a current average of about 450 grams of CO2 per vehicle mile traveled is a little wider at ±25%, once again it's just not worth getting worked up over inconsequential differences that entail substantial incremental costs.

8.19.11 GHG Damages.png

One of the most intriguing take aways from these two graphs is the inescapable conclusion that the differences today are modest and as technologies mature and improve the differences will become less important, not more. By 2030, plug-ins will have no advantage over internal combustion when it comes to greenhouse gasses and be significantly worse than internal combustion when it comes to health and other nonclimate costs.

Over the years I've suffered endless abuse from commenters who decry my appalling lack of vision when it comes to lithium-ion superstars like Ener1 (HEV), A123 Systems (AONE), Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC) that are certain to drive battery performance to new highs while driving manufacturing costs to new lows and enabling a paradigm shift to electric cars from Tesla Motors (TSLA), Nissan (NSANY.PK), General Motors (GM) and a veritable host of newcomers that are positioning for future IPOs and certain to change the world. While the following graph is a little dated, it shows why the electric pipe dream can’t happen unless some genius in a garage comes up with an entirely new way to store electricity.

8.19.11 Batteries.png

Liars poker can be a fun way to fritter away the hours in Wall Street watering holes like Fraunces Tavern, but it creates enormous risk for investors who hear about four sevens but never hear about the other six characters in the serial number. I've seen this melodrama before. For the period from 2000 through 2003 fuel cell developers like Ballard Power (BLPD) and FuelCell Energy (FCEL) carried nosebleed market capitalizations based solely on dreams. From 2005 through 2007, it was the age of corn ethanol kings like Pacific Ethanol (PEIX). Lithium-ion battery developers have already taken it on the chin and there's no question in my mind that Tesla will be the next domino to fall. Its demise is every bit as predictable and certain as Ener1's was.

It's frequently said that those who do not learn from history are condemned to repeat it. There isn't much I can add.

Disclosure: None. | | Comments (12)

July 31, 2011

Aggressive New CAFE Standards; The IC Empire Strikes Back

John Petersen

Last Friday President Obama and executives from thirteen leading automakers gathered in Washington DC to announce an historic agreement to increase fleet-wide fuel economy standards for new cars and light trucks from 27.5 mpg for the 2011 model year to 54.5 mpg for the 2025 model year. While politicians frequently spin superlatives to describe mediocre results, I believe the President's claim that the accord "represents the single most important step we've ever taken as a nation to reduce our dependence on foreign oil" is a refreshing example of political understatement. After three decades of demagoguery, debate, dithering and delay, meaningful policy change has finally arrived, and not a moment too soon.

The economic impact will be immense – a staggering $1.7 trillion in fuel cost savings that will flow directly to consumers. As those savings begin to work their way through the economy and kick-start secondary fiscal multiplier effects, the boost to GDP will be closer to $7 trillion. I believe Friday's agreement will ultimately be seen as the biggest economic stimulus event in human history.

The following graph from a new White House report titled, "Driving Efficiency: Cutting Costs for Families at the Pump and Slashing Dependence on Oil" says it all.

7.31.11 Cafe Sandards.png

The most surprising aspect of this agreement isn't the aggressive goals; it's the fact that the auto industry has helped forge the goals and plans to achieve them by implementing "affordable technologies that are on the road today." The new goals are not based on the electric dreams of a Tesla Motors (TSLA). They're based on the automaker's hard-nosed evaluation of the cumulative gains that can realistically be achieved with existing ICE technologies like engine downsizing, stop-start idle elimination, turbocharging, optimized cooling, low friction, direct fuel injection and variable valve timing.

Individually the fuel economy gains from advanced ICE technologies will only be baby steps toward energy independence. Collectively they'll give American consumers passenger cars with lower well-to-wheels CO2 emissions than a 2012 Nissan (NSANY.PK) Leaf plugged into the typical wall socket. They'll change the world without a budget busting paradigm shift.

In early July The Boston Consulting Group released a new report titled "Powering Autos to 2020; The Era of the Electric Car?" that evaluated the combined potential of baby-step fuel efficiency technologies and considered their likely impact on wildly expensive and impractical proposals to convert the world's transportation infrastructure from liquid fuels to electricity. In the report BCG concluded that:
  • Conventional technologies have significant emissions-reduction potential, but OEMs will need to pull multiple levers simultaneously to meet emissions targets.
  • Advanced ICE technologies can reduce gasoline consumption by 40% at a cost to the consumer of $50 to $60 per percentage point of reduction – roughly half what BCG predicted three years ago.
  • Advanced ICE technologies are likely to become standard equipment worldwide during the next decade.
  • Electric cars will face stiff competition from ICE and will not be the preferred option for most consumers.
  • Battery costs will probably fall to about $9,600 per vehicle, but become increasingly uneconomic as the potential fuel savings per kWh of battery capacity plummets.
  • In addition to dismal economics, plug-ins will face substantial go-to-market challenges including battery durability concerns and the absence of adequate charging infrastructure.
In my view the BCG report is a must read for investors who want to profit from this fuel efficiency mega-trend and avoid heavy losses in vehicle electrification schemes that will become increasingly uneconomic over time. The fundamental flaw is simple. Today an EV with a fully charged 24 kWh battery pack can save a consumer the equivalent of 3 gallons of gas. By 2025, the savings will be closer to 1.5 gallons of gas. Even with falling battery prices the value proposition can only get more challenging with each passing year.

For the last couple years I've been cautioning investors that gee-whiz vehicle electrification technologies are transitory, a flash in the pan, and the biggest business opportunities in energy storage involve cheap, simple and effective baby-step technologies like stop-start idle elimination that will slash fuel consumption by 5% to 15% for a few hundred dollars. The BCG report and the newly announced fuel economy goals are yet another proof of that principle.

The future is all about getting more from less and has absolutely nothing to do with increasing consumption of one class of scarce natural resources in the name of conserving another.

While I can't identify the component manufacturers that will thrive from the widespread implementation of advanced ICE technologies like turbocharging, direct fuel injection and variable valve timing, picking the winners in energy storage is easy. Johnson Controls (JCI) and Exide Technologies (XIDE) will be the first beneficiaries as automakers upgrade their electrical systems to withstand the strains of stop-start idle elimination. As stop-start systems become standard equipment worldwide and the inherent limits of current AGM battery technology become obvious, more powerful energy storage solutions from emerging technology developers like Maxwell Technologies (MXWL) and Axion Power International (AXPW.OB) will ascend to prominence if not dominance.

The new fuel efficiency standards are not an omen of doom for lithium-ion battery solutions from A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) which will no doubt gain a toehold among the 6% to 13% of consumers who say they'd purchase an environment-friendly car even if they had to pay a premium over the life of the vehicle. I'm just not certain how significant that toehold will be in light of the incontrovertible reality that less than 2% of consumers actually buy environment-friendly cars.

On balance I believe that survey-based uptake forecasts will be just another example of a painful lesson I learned in the biodiesel business – that individual buying decisions speak louder than surveys and the green in a consumer's wallet always takes priority over the green in his cocktail party conversation.

For several years the mainstream media, financial press and sell-side analysts have been publishing irrationally optimistic stories and reports about the end of the ICE age and the dawn of a golden electric era. On Friday the Obama Administration and the automakers put the world on notice that IC Empire is striking back and plans to bury the now generation of electric wannabes like it has all of their predecessors.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

May 09, 2011

Foundations don’t practice what they preach

by Stephen Viederman
 
Philanthropic foundations are like old-fashioned slot machines. They have one arm and are known for their occasional payout.

Although the term “mission-related investing” found its way into the lexicon of philanthropy decades ago, the finance committees of most foundations continue to manage their endowments like investment bankers. Their portfolios give no hint that they are institutions whose purpose is the public benefit. There is a chasm between mission – grantmaking – and investment. The logic of a synergy between the two has yet to take hold.

For example, number of reports circulated in the US and the UK in the last few years laid out ways that foundations can “win the war on climate.” The focus was entirely on grantmaking. None made any reference to the various ways that assets could be used to add value to their grantmaking.

My op-ed in the Chronicle of Philanthropy, pointing out the ways that assets could help “win the war” went unanswered by the authors of the reports and by foundations. Among the 25 biggest climate funders, very few have climate investments, and only one –the Jessie Smith Noyes Foundation — is an active shareowner on climate issues.

US philanthropy is a big enterprise with over $500 billion in assets. Unfortunately share ownership is not taken seriously. Investing to avoid predictable and preventable surprises is smart investing. Voting proxies and filing resolutions is an ownership obligation rarely exercised.

What I’m calling the Bermuda Triangle of foundation investing seems to swallow up discussions of assets as an instrument of change. On one side of the triangle is the board and investment committee; the second is the investment office; and the third is the consultant. Their views on finance, formed in the same business schools, see reality – the world as it is – as an externality, and intangible. Water availability and utilization, climate change, human rights, working conditions, diversity on boards are issues not factored into their investment decisions, which are made for the short-term, as if the future did not matter. In the foundation setting, as in their day jobs, their awareness is bounded by what they have learned with few incentives to change.

Little time is spent exploring new ideas, leading to what has been called “willful blindness.” And yet these same people after work and on weekends are often very eleemosynary, devoting their time and money to organizations seeking to remedy these issues. Vocation and avocation are split, as demonstrated by the philanthropy of Bill Gates and Warren Buffet. [Note from Marc: The LA Times highlighted the issue with respect to Gates in 2007. See Dark cloud over good works of Gates Foundation.)

Within the triangle outdated views of fiduciary duty prevail. The myth that mission-related investments will underperform remains pervasive. Maximizing alpha, the old-fashioned way, takes precedence over benefit to meet the public good, and to harmonizing investments and grantmaking.  In fact, these are complementary not conflicting activities. Michael Jensen and his colleagues at the Harvard Business School are studying organizational integrity, “that group’s or organization’s word being whole and complete.” The concept incorporates morality, ethics, and legality. Their model “reveals a causal link between integrity and increased performance, in whatever way one chooses to define performance (for example, quality of life, or value-creation for all entities).”

As president of the Jessie Smith Noyes Foundation in the early 90s I worked with my board to “reduce the dissonance” between our grantmaking and our asset management. We screened our portfolio, which was state-of-the-art at the time; filed a shareowner resolution with Intel in support of our grantee, the South West Organizing Project, as well as with other companies on environmental issues; voted all our proxies; and had our own social venture capital partnership seeking to invest in companies that were providing commercial solutions to the issues we were dealing with in our grantmaking. Our performance matched or exceeded the standard benchmarks we used to measure how were doing. And during the decade our payout averaged 7 percent each year, well above the IRS requirement.

Harmonizing mission and asset management, becoming whole, is an organizing concept to improve the practice of philanthropy. Though claiming integrity, foundations often fail the wholeness test. The pessimist sees the glass mostly empty, while the optimist sees it filling. The hopeful say change must occur, and it cannot come too soon.

Stephen Viederman is the former president of the Jessie Smith Noyes Foundation and an expert on sustainable investing. Since "retiring" Mr. Viederman's vocation continues to be Grandparenting. In addition to loving and caring for his own grandchildren, Grandparenting involves his active commitment to insure that they, and all children, have options to live a full and satisfying life in an equitable, just, peaceful and environmentally sound world.

This essay was originally published by Inflection Point Capital Management, and is reprinted with permission from the author. It came to our attention through a post on Marc Gunther's blog.

Stephen welcomes comments both here and directly at s.viederman@gmail.com.

March 28, 2011

Our Energy Bubble

Tom Konrad CFA

Our energy policy looks like a bubble.  

Bubbles are a social phenomenon at least as much as they are a financial phenomenon. 

  • At the top of bubbles, participants ignore glaringly obvious risks.  In October 2007, Meredith Whitney pointed out the almost glaringly obvious fact that Citigroup was paying out more in dividends than it was earning in profits (i.e. it was being run like the US government, but without a friendly Federal Reserve to bail it out by printing money.)  She said that Citigroup would need either to raise capital, sell assets or slash its dividend -- possibly all three. That's what happens when you spend more than you earn, yet other Wall Street analysts were dismissive of "the easiest call [she] ever made" (as she called it.)
  • Critics are ostracized.  Remember how Warren Buffett was ridiculed because he did not "get" the Internet? This allows the "in" crowd to ignore warnings from those not caught up in the mania.  During the housing bubble, if you told someone you were a renter, not a homeowner, you were greeted with looks of puzzlement and/or pity.  If you went on to explain that you thought the rental yield on homes was much too low to justify valuations, people would start to look around for the men in white suits to take you away.  (I know this from personal experience.)
  • Participants enjoy financial success far beyond what their skills or efforts should reasonably justify.  That financial success imbues bubble participants with an aura of infallibility.  We tend to think "He made a lot of money in real estate/internet stocks/tulip bulbs, so he must be a smart person, and I should be doing what he is doing."   Think of all the people who grew rich (and full of themselves) flipping houses during the mid-2000's.  And then think of the even greater number of people who emulated them, only to get into the housing market in 2007, right before it started heading down.
  • "This time it's different."  The internal logic of the bubble creates its own reality.  People don't question when a single tulip bulb costs as much as a middle-class home, or when a strawberry picker earning $15,000 a year can get a loan to buy a $750,000 home.
Alan Greenspan was wrong.  It's not impossible to spot bubbles before they burst.  What's hard is going against the consensus, when everyone around you is ignoring the risk that should be obvious, causing you to question your own reasoning; when they are making money hand over fist for seemingly no effort, telling you they've found a "new truth" and ridiculing you if you don't agree, that's when you've spotted a bubble.

Energy

I introduced this article by saying bubbles are a social phenomenon.  As a social phenomenon, they don't have to be financial: The same dynamics of group behavior can also lead to bubbles that don't necessarily manifest themselves in asset prices, but they're still real, and they still bear the very real risks of financial bubbles.

I believe we're in just such a bubble now.  To me, it's glaringly obvious.  Like Meredith Whitney said about her Citigroup call, it's the easiest call I ever made:

We can't keep using traditional energy sources and expect the economy to grow forever.

In other words, our society and economy are built on an energy bubble.  Oil powers our transportation system, and coal, natural gas, and nuclear power our electrical infrastructure.  All of the signs outlined above are there.

Ignoring risks

How many nuclear disasters like the ongoing one in Japan, and the earlier ones at Chernobyl and Three Mile Island will it take us to realize that nuclear generated electricity is picking up quarters in front of a steam roller?  Yes, the risks of nuclear failures are absurdly low, but the consequences of such failures are absurdly high, and the pools of spent fuel that we still have not agreed on a permanent home for are tempting targets for any ambitious terrorist.

Why do the people who are trying to convince us that shale gas extraction is safe spend so much time talking about the economic benefits?  Isn't that a lot like someone trying to sell you a tranche of a highly rated MBS in 2007 saying "sure, it's safe, the yield is 100 bps higher than any other security with a triple-A rating from S&P?"  Shale gas fracking has only been going on commercially for five years.  Perhaps it is safe, when done properly, but why, exactly, do we expect it to always be done properly?  Before putting our faith in environmental regulators to ensure that shale gas extraction is done properly, we should consider the plight of the financial regulators overseeing mortgage backed securities in the last financial crisis.

And then there is Climate Change.  We know that burning fossil fuels emits CO2.  We know that CO2 levels are rising rapidly.  We know that we're burning a lot of fossil fuels.  We have known since the 19th century that CO2 traps heat in the atmosphere.  We know that so much Arctic sea ice is melting that countries are squabbling over newly accessible Arctic oil and natural gas reserves.  Yet the number of Americans worried about Climate Change is falling, and not a single Republican on the House Energy Committee will say that Climate Change is real

Critics are Ostracized

I don't believe that each of the 31 Republicans on the House Energy committee necessarily thinks that Climate Change isn't happening.  They are not stupid, they simply are all politicians, and if being ostracized and forced out of the "in" group is dangerous in any profession, it's dangerous in politics.  Politicians know which way the wind blows, and this level of consensus in the face of basic science is one of the surest signs of the bubble mentality.

Participants enjoy financial success beyond what their skills and effort merit. 

The US consumes about 22 percent of world oil production, so we're certainly participants in the bubble.  We have the highest living standards in history, higher than any other country.  Yet are we smarter than our grandparents, or our immigrant ancestors who came from all over the world?  Do we work harder than an Asian laborer in a factory doing 12 hour shifts seven days a week in order to send a little money back to his family?  If you resent the implications of those questions, you now have a visceral understanding of how hard it is to escape the bubble mentality when you are already caught up in it.  When you're making money or enjoying cheap energy today, it's very hard to look at the long term costs of your actions.  This is the same reason that the United States has so much trouble getting our deficit under control.  We all want the US to live within its means, but support vanishes when it comes to cutting Social Security, Medicare, or Defense Spending.

"This time it's different"

Whether you believe the oil and other fossil fuels in the ground got there over millions of years of heat and pressure on organic matter, or were put there by God during creation, there is only so much of it in the ground to extract. 

We started extracting the easiest, most accessible reserves, and now the only easy oil that's left is in the unstable Middle East.  In the rest of the world, we're left with drilling in increasingly difficult and risky situations, such as deep water (as the Deepwater Horizon oil spill and the consequences for BP's stock price demonstrated, .)  The rising price also reflects the lack of oil prospects that are cheap and easy to extract.  Yet the discussion about what to do about rising oil prices revolves around "how can we drill for more oil?" not "how can we use less oil?"  Richard Nixon promised in 1977 that "gasoline will never exceed $1.00 a gallon" and the United States has been striving for Energy Independence ever since.  It has not worked: in 2005 we imported twice as much oil as we produced.

EIA Oil Production and Imports

The progress towards energy independence we've made since 2005 is almost entirely due to reduced consumption (see chart.)  Despite over three decades of effort to increase domestic oil production, production has declined.  Nevertheless, if you listen to the popular debate, the implication is still that the secret to energy independence is trying harder.  Trying harder is not going to more than double our oil output when we've been trying harder for over three decades and we're now producing less than we did in 1970.

What to Do About It

During the 2007 Housing Bubble, the smart investors were buying credit default swaps (CDS) on mortgage backed securities.  During the Internet bubble, they were scooping up REITs yielding 15% or more. 

I'm a stock guy, and I didn't (to my regret) buy any CDS's in the last bubble, but I was one of those buying REITs in 1999 and 2000.  This time around, I'm buying Green Stocks: Renewable Energy, Energy Efficiency, Efficient and Alternative Transport companies that will be selling the services that help us shift away from traditional energy sources like oil, coal, natural gas, and nuclear.  But like most bubbles, it's a lot easier to see the Energy Bubble happening than it is to predict when it will burst.  Hence, it's important to buy the stocks of companies that can survive (or even thrive) in the current environment, yet still benefit from the end of the current Energy paradigm. 

Just buying green stocks is not going to allow our Energy Bubble to deflate safely, but it should cushion the fall for those of us who do, and we'll also have the comfort of knowing that the companies we invest in are doing just a little to build the beginnings of a post-bubble energy infrastructure.

This article was first published on Forbes.com Green Stocks blog.

DISCLOSURE: No Positions.

Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

March 17, 2011

Renewable Energy Standards: Savvy or Silly?

David Gold

State renewable energy standards have gained momentum over the past decade with 29 states having put in place various types of standard mandates and five more having implemented voluntary standards (34 total).  Now the federal government is looking to get into the game with a bi-partisan bill (S. 3813) aiming to set a minimum national standard. Renewable energy standards certainly feel good, but do they really provide the best path for achieving their goals?  The existing renewable energy standards are savvy in finding a way to reduce fossil fuel consumption and carbon emissions while simultaneously being politically palatable to a broad array of people.  But they are a bit silly in their formulation. 

            The popular momentum behind renewable energy standards, I suspect, is driven by the fact that for most consumers, there is no obvious downside.  There is no explicit tax or fee paid to the government as a result of such standards, and the actual cost to the consumer of such standards is far from black and white.   It’s easy for a person to feel good about asking the utility company to generate more electricity from renewable energy sources, and most people don’t immediately correlate that with a cost to themselves. 

But what goals are we trying to achieve with renewable energy standards?  Many would quickly respond, “Reducing global warming.”  Others would say, “Reducing our dependence on fossil fuels.”  And those who deal with risk might say, “Diversifying our energy base.”  In addition, politicians sometimes imply that such standards increase our national security.  However, given that our nation sits on huge supplies of coal and natural gas that provide about 70% of our electricity production (vs. only 5.5% from petroleum, which we mostly import), connecting renewable production of electricity to national security is a bit silly.  Case in point, the recent spike in oil prices will have little impact on the cost of electricity in most of the U.S.  



The way that virtually all the state renewable energy standards are structured is that they establish a minimum percentage of electricity generation that must come from specified renewable energy sources by certain timeframes.  An energy source that is not on the list won’t count towards the standard.  And this is where, while well-intended, current renewable energy standards fall short.  The standards almost look like a popularity contest for the technologies with the most hype or longest track records.  As you can see in the bar chart below, there are a large number of potential sources of renewable energy that would be acceptable under the standards of only a relatively small number of states.   And this would be true irrespective of whether that technology might be a more cost-effective alternative.


Summary of State Renewable Energy Standards

(From U.S. DOE)


State

Amount

Year

Organization Administering RPS

Arizona

15%

2025

Arizona Corporation Commission

California

33%

2030

California Energy Commission

Colorado

20%

2020

Colorado Public Utilities Commission

Connecticut

23%

2020

Department of Public Utility Control

D.C.

20%

2020

DC Public Service Commission

Delaware

20%

2019

Delaware Energy Office

Hawaii

20%

2020

Hawaii Strategic Industries Division

Iowa

105 MW


Iowa Utilities Board

Illinois

25%

2025

Illinois Department of Commerce

Massachusetts

15%

2020

Massachusetts Division of Energy Resources

Maryland

20%

2022

Maryland Public Service Commission

Maine

40%

2017

Maine Public Utilities Commission

Michigan

10%

2015

Michigan Public Service Commission

Minnesota

25%

2025

Minnesota Department of Commerce

Missouri

15%

2021

Missouri Public Service Commission

Montana

15%

2015

Montana Public Service Commission

New Hampshire

23.8%

2025

New Hampshire Office of Energy and Planning

New Jersey

22.5%

2021

New Jersey Board of Public Utilities

New Mexico

20%

2020

New Mexico Public Regulation Commission

Nevada

20%

2015

Public Utilities Commission of Nevada

New York

24%

2013

New York Public Service Commission

North Carolina

12.5%

2021

North Carolina Utilities Commission

North Dakota*

10%

2015

North Dakota Public Service Commission

Oregon

25%

2025

Oregon Energy Office

Pennsylvania

8%

2020

Pennsylvania Public Utility Commission

Rhode Island

16%

2019

Rhode Island Public Utilities Commission

South Dakota*

10%

2015

South Dakota Public Utility Commission

Texas

5,880 MW

2015

Public Utility Commission of Texas

Utah*

20%

2025

Utah Department of Environmental Quality

Vermont*

10%

2013

Vermont Department of Public Service

Virginia*

12%

2022

Virginia Department of Mines, Minterals, and Energy

Washington

15%

2020

Washington Secretary of State

Wisconsin

10%

2015

Public Service Commission of Wisconsin


*Five states, North Dakota, South Dakota, Utah, Virginia, and Vermont, have set voluntary goals for adopting renewable energy instead of portfolio standards with binding targets.

           

Opponents of renewable energy standards argue that the standards will inevitably increase the cost of electricity, thereby hurting our economy and lowering our standard of living.  There is merit to this thesis in the near-term, given that most of what the various standards define as renewable energy sources cost more to produce electricity  than the fossil fuel alternatives.  In addition, most renewable sources are intermittent and may not be available during peak load times, thereby requiring investment in energy storage, increased demand load management capabilities or dispatchable generation to effectively manage high percentages of renewable energy on the grid – all of which cost additional money. 


Number of States Accepting Various Types of Energy as “Renewable”


https://lh5.googleusercontent.com/-QCf4e7ZyYjM/TYJcY9RTSLI/AAAAAAAAAEg/Xe9Eq_IP2SE/s1600/Renewable+Energy+Standard+By+State.jpg

*Hydro:  Highly limited in most states to exclude new large-scale hydro
**Waste Heat Regeneration: Two states allow Combined Heat and Power systems only

***Nuclear is somewhat addressed in S.3813 where it is eliminated from the denominator in calculating the percentage of renewable energy generated.

Data compiled from various sources on state renewable energy standards


Opponents also argue that the free market should be allowed to pick the most cost-effective energy sources.  If one does not believe that any of the three aforementioned goals are critically needed, then such a pure free market approach would make sense.  But the free market can fall short when there are externalities that have significant negative impacts on individuals or on the nation as a whole.  If such externalities are not reflected in the economic incentives that drive company decisions, the free market will generally ignore the negative consequences. (For a related discussion, see my post “Cleantech Economics 101”.)  Numerous historic examples exist such as acid rain, asbestos and lead paint.  And our electrical infrastructure is more than just another industry; it is infrastructure as critical to our economic commerce as roads, airports and railroads – infrastructure that is used by every business and every consumer every single minute of every day.  Thus, for those of us who do believe that the goals are very important, the basis for renewable energy standards is sound. 

However, the restrictive and prescriptive nature of the established renewable energy standards serve to bolster opponents because they eliminate the ability of the utility company to utilize the most cost-effective alternatives.  Going back to the goals of these standards, it must be asked why any specific technology should be named.  If the goal is to reduce carbon emissions, reduce fossil fuel consumption and/or diversify our sources of electricity production, then shouldn’t any technology that achieves this goal be acceptable?  Why should waste heat regeneration into electricity, gasification, and many other technologies that may ultimately be better solutions be excluded in so many states?  Why would demand management (energy efficiency) not be an acceptable means in most states for achieving at least the first two goals? 

And even in the light of the earthquake disaster in Japan, why shouldn’t nuclear as an option? It clearly achieves those three goals and, unlike most of the other options, can be used as base load. It would be easy to run from nuclear in light of the Japanese nuclear crisis that was caused by a record setting earthquake.  But we should not forget that there is rarely a free lunch.  Nuclear still has proven to be much less deadly than our most common form of electrical generation (i.e., coal plants), which releases more radiation than nuclear plants.  In the end, I suspect that far fewer people will die as a result of radiation exposure in Japan than from the direct effect of the earthquake and tsunami themselves.

Beyond outright cost, one of the biggest challenges with most renewable energy is that it is intermittent and cannot provide base load.  The world needs options for base load to bridge from where we are today to the (hopefully) disruptive break through in energy technologies of the future.   Part of the reason we don’t have even safer nuclear power is the lack of significant demand for new nuclear power.  This is as much an inhibitor of innovation of newer and potentially much safer designs (such as Thorium reactors and liquid metal cooled reactors which have the potential of fail safe designs, much lower half life of waste materials and low proliferation risks) as would be the lack of demand for solar or wind on those industries.  All current renewable energy sources have negative environmental impacts and risk – none is perfect (more on this in a future post).  Given that a perfect solution is likely out of our reach for the foreseeable future, our goal should be to strive for overall improvement in our energy base.  To that end, utilities should have the flexibility to implement various energy production methods that achieve the goals as well as technologies that reduce energy consumption.

Allowing greater flexibility would decrease the near-term costs to businesses and consumers by allowing utility companies to choose the most cost effective solutions that meet the goals.  In addition, it would further broaden the net of political support for such standards.  One way this flexibility could be achieved would be by allowing utilities and businesses a clear path to obtain approval from their public utilities commission for new technologies under renewable energy standards.  Any technology that achieves the goals of carbon emissions reduction, fossil fuel consumption reduction, and energy source diversification should be allowed.  Renewable energy standards shouldn’t be about supporting a specific technology or industry.  They should be about reducing the risk of global warming and increasing the robustness of our electric infrastructure in the most economical way possible.

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com).  This article was first published on his blog, www.greengoldblog.com.

December 02, 2010

Election Does Not Spell Cleantech Doom


With the recent “shellacking” (as President Obama referred to the election results) of the Democratically controlled Congress, much of the buzz in the cleantech space has been doom and gloom.  Is cleantech doomed to a new dark age?  I do not believe so.

Energy policy is one area where there is an overlap of goals between the parties.  Members of both parties largely agree that energy is critical to our economic and national security.  And most Republicans do not dismiss out of hand the risks of global warming.

I suspect that energy policy will be a topic where this Congress will get something done especially with the President’s to work across party lines.  It won’t be exactly what the president wants and it won’t be exactly what the Republicans want.  It will be an old-fashion compromise that may actually result in some policies and that will have greater long-term impact on cleantech than most of the short-term handout programs that were put in place under the largelyineffective cleantech stimulus bill.

So, where can the Democrats and Republicans potentially agree when it comes to cleantech?

1)   Energy efficiency.  Republicans and Democrats have demonstrated their ability to find common ground here.  George Bush signed the law from a Democratic Congress that will end the life of the incandescent bulb and that increases the fuel efficiency standards for vehicles by 40% by 2020.  Democrats like tax credits for installing energy efficiency improvements, and Republicans like reducing taxes.  Reads like a match made in heaven.

2)   Renewable energy standards.  Many states have put in place such standards with support of both parties.  Some Republicans in Congress havepreviously voiced their support.  If the definition of “renewable” were expanded to include nuclear as an acceptable alternative, I suspect there would be broad support in Congress.  A renewable energy standard is exactly the kind of long-term macro-economic policy needed to drive change and create more sustainable demand for renewable energy and energy efficiency.  Utilities putting big dollars into development of renewable energy power sources and energy efficiency will drive much more industry growth and relieve issues around debt financing to a much greater degree than the government’s ineffectual efforts to play banker.  And if the definition of “renewable” were expanded to include nuclear, then I suspect the base of support would broaden even more.  Given that most renewable energy sources can’t serve as base load, it would be the right environmental and national security move to include nuclear in the energy mix.


3)   R&D.  Republicans have long been supporters of government R&D.  Although there will be an issue around funding offsets for the R&D, I believe there will be broad consensus on the need to invest in our energy future. What will happen, I suspect, is that the focus of this R&D will shift more to early stage disruptive technologies rather than the late-stage grants and government loans which are already proving to be failures. Even the Administration has internally begun to question the effectiveness of these programs.    If the scope of cleantech R&D is expanded to include clean coal technologies and next-generation nuclear, I believe the support base will broaden even more.  The most effective way to ramp up disruptive R&D funding is likely through the new ARPA-E and possibly to the few federal labs that do not have their roots in our nuclear weapons programs (e.g. the National Renewable Energy Laboratory).  By funding ARPA-E, most of the research would take place in our universities and private companies where the potential for real product development and technology transfer is much greater than in our defense oriented federal labs.  The biggest challenge will be finding the funds given the need to reduce the deficit.  One possible solution would be to take the funds already appropriated to later stage projects/loans that have yet to be awarded and redirect them to disruptive R&D.  Another would be a…

4)   Gas Tax.  Cap and trade is likely dead.  And given that such a program would have been a largely ineffectual mess (see my previous post, Cap and Trade: Right Debate, Wrong Solution) that is not necessarily bad.  As I pointed out, the area where there is the greatest overlap between environmental, national security and economic objectives is with gas/diesel, which most cap and trade proposals largely wouldn’t have touched.  The co-chairs of President Obama’s bi-partisan tax commission recently included a gas tax as a piece of its budget solution and two key Senators (one Republican, one Democrat) recently recently wrote the commission encouraging them to consider even bigger increases.  A heftier tax phased in over time may be possible by using the concept of a “tax and dividend”, whereby a tax is levied to increase its price and much or all of the revenue is distributed back to consumers. If the money raised from this tax is largely given right back to the consumers in the form a rebate, then it’s not a tax increase but rather a tax incentive to reduce consumption of gasoline/diesel.  Increasing the cost of gasoline/diesel to drive market demand for alternative fuels and energy efficient vehicles can help Republicans and Democrats achieve their desire of enhancing our national and economic security while reducing carbon emissions.

5)   Government Procurement.  The government is a large consumer of many items.  One of the best ways to accelerate market adoption is by creating a market for the product/service.  For example, the Federal government’s decision to require all new buildings to be LEED certified is accelerating a shift in the building industry to green buildings.  The government purchases a large amount of energy for buildings, vehicles, airplanes and ships.  Policies that drive increased purchases of domestic energy sources based on non-fossil fuels can provide a significant lift to multiple cleantech industries.  The Department of Defense understands the critical nature of this issue, especially around liquid fuels.  The Pentagon’s concern provides the nexus of an opportunity for collaboration between Democrats and Republicans on government procurement policies.

Even if you believe we will see a stalemate in Washington on cleantech, the global macro-economic trends will not change.  Consumption of fossil fuels is accelerating as the world, especially heavily populated China and India, dramatically increase the number of automobiles, power plants and factories.  It is a certainty that the price of these commodities will, on average, increase over time.  The next spike in oil prices, I suspect, won’t be too many years away and, worst case, whatever lull in cleantech enthusiasm that may occur will be quickly washed away.

The essence of any government policy with the goal of accelerating cleantech is simply an effort to narrow the time between today and the inevitable day when fossil fuels become expensive enough that various renewable energy and energy efficiency solutions become compelling without any government involvement.  If you’ve read my previous posts, you know that I do not believe that we will achieve our cleantech goals through massive grant or loan programs to the private sector.  Policies that target the underlying macroeconomic environment will ultimately have a much greater impact than handout programs.  Many of the policies that lie in the zone of potential cooperation between Democrats and Republicans such as gas tax, national renewable energy standards, and federal procurement policies can help drive steady long-term demand for renewable energy and energy efficiency. I am optimistic that these are areas where real progress can be made.  

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com).  This article was first published on his blog, www.greengoldblog.com.

October 25, 2010

Why America Must Focus On Domestic Energy Solutions Instead of Imports

John Petersen

On September 17th, the White House released a report titled, 100 Recovery Act Projects That Are Changing America. Since the report included eight companies that were awarded a total of $1.1 billion in ARRA battery manufacturing and vehicle electrification grants in August 2009, I created the following table to summarize the first tier job creation impact.

10.25.10 Jobs.png

As I pondered over the relatively high cost per first tier manufacturing job, I decided it might be better to look at the overall value chain including second tier job creation impacts (new jobs in companies that make equipment for the ARRA funded factories) and the third tier job creation impacts (new jobs in companies that will sell raw materials and components to the ARRA funded factories). That process brought me back to the following table from a June 2010 report on the advanced battery sector from Goldman Sachs.

10.25.10 Value Chain.png

While the Goldman table is by no means definitive, it clearly shows that a substantial share of the initial funding will be used to buy imported equipment and a substantial share of the future material and component inputs will likewise be bought from foreign manufacturers. It's enough to make you wonder whether ARRA wasn't more effective at creating offshore jobs than domestic jobs.

While bloggers like me frequently note that current energy policies are merely substituting one dependence on imports for another dependence on imports, we usually focus on the reliability and stability of global supply chains rather than a fundamental economic issue that strikes me as far more important – stimulating domestic production as opposed to stimulating foreign production.

Most of us understand the concept of fiscal multipliers where $1 million in spending on a new factory turns into several million dollars of GDP as one company's capital investment becomes revenue to a contractor who then pays his employees who then buy goods from businesses that then pay their suppliers etc, etc. Most of us also understand that fiscal multipliers are stronger contributors to GDP when the second and third tier impacts create domestic jobs instead of overseas jobs. Frankly I have a hard time getting excited about energy policies that don't focus first and foremost on converting spending on imports into spending on domestic products.

The following chart comes from an Energy Perspectives Overview that the Energy Information Administration published as part of its Annual Energy Outlook 2009. It shows that the US was self-sufficient in energy until the 1950s when consumption began to outpace production. By 2009, net imported energy accounted for 24 percent of all energy consumed. The bulk of those imports, or roughly $200 billion per year, are imported crude oil.

10.25.10 Consumption.png

When I consider the massive annual outlay for imported oil, the first question that comes to mind is "Why aren't we doing more to shift consumption from imported oil that impoverishes the nation to domestic natural gas that would enrich the nation several times over through the fiscal multiplier effect?" While my calculus skills aren't strong enough to nail the analysis down to hard numbers, it doesn't take a lot of math to recognize that every dollar of energy consumption that we can shift from imported oil to domestic natural gas will reduce the import drain by a dollar and increase domestic economic activity by several dollars. While advocates argue that cost of shifting transportation from oil to natural gas is a compelling value proposition in its own right, by the time we account for fiscal multiplier differentials between imported oil and domestic natural gas there's simply no contest.

America's strengths are legion and it became a prominent global power by playing from its strengths instead of its weaknesses. The two strongest players on America's energy team are domestic natural gas production and the minimization of waste through energy efficiency. Truly smart energy policy must merge with the broader issue of truly smart economic policy by keeping energy spending at home instead of sending it overseas.

Disclosure: None

April 03, 2010

Cap and Trade: Right Debate, Wrong Solution

David Gold

         As we have seen in just the past few years, fossil fuel prices can vary dramatically over very short periods of time.  Creating greater certainty regarding steady increases in fossil fuel prices over the coming decade would have an enormous impact on private sector investments in both alternative energy and energy efficiency.  Cap and trade is the right debate to be having because it focuses the discussion on how to change the fundamental economics of fossil-based energy.  But ultimately cap and trade is the wrong solution; superior means exist to achieve the results we need not only for the environment but also for national security and our economy.  A better solution is a strategically targeted “ceiling” tax on carbon combined with a tax dividend.          Cap and trade sounds good on the surface. Seemingly it would allow the market the freedom to choose among implementing technologies that reduce greenhouse gas emissions, paying to use existing technologies that emit greenhouse gases, or paying for offsets from another entity.  But cap and trade is inherently flawed in its complexity and the slow rate at which it can propel change.  The potential for loopholes  and corruption, both through the specifics of how the law is implemented and the trading markets that will be created, are enormous.  If you have read my blog previously, you may be surprised to hear me come out against a seemingly market-based solution like cap and trade.  Many assume that because cap and trade worked for acid rain, it will work for greenhouse gases.  But for markets to work well there needs to be transparency around both price and what actually is being purchased.  As the graphics shown help illustrate, the complexity of greenhouse gases are enormous compared to the simplicity of sulfur emissions from coal plants. The challenges around accurate and transparent accounting of how much carbon is emitted or “re-sequestered” through an offset is fairly daunting.  There have already been significant challenges around carbon offsets with the European cap and trade efforts.  So far in Europe, the impact on greenhouse gas emissions has been much less than desired (for additional reading see the upcoming book by Roger Pielke).   Because of these factors, not only does cap and trade create risk of corruption because of the challenges around defining exactly what has been emitted or how much an offset has recaptured, but its ability to actually achieve the desired reduction in greenhouse gases also falls into question.

         Efforts to implement a cap and trade system that would be truly comprehensive would treat all long-lived greenhouse gases as equal. To make any meaningful difference, the price of carbon must be set high enough to move the meter significantly on the cost of fossil fuels.  Many experts estimate that price to be as much as ten times the current price in Europe.  As a result, if a cap and trade system is actually going to result in a meaningful reduction in greenhouse gas it will have an enormous impact on the economy given the scope of activities that generate greenhouse gases.  In addition, the sheer process of requiring businesses to account for their emissions would lead to significant wasteful administrative costs beyond the cost of the carbon emissions themselves.  Such a requirement would, however, create a great jobs program for accountants, attorneys and even investment bankers who would get paid to navigate the complicated mess that would result.  This reality is why many cap and trade proposals end up being limited to areas of highly concentrated emissions that are easy to track.  This effectively means focusing on power plants, which represent about 39% of the impact-weighted greenhouse gas emissions (of which 85% is from coal-fired plants).  And most proposals generally leave transportation -- which produces about 33% of the impact-weighted U.S. greenhouse gases – largely unaffected.

         “So what?” you say.  Let’s focus on reducing the 39% that is largely from coal-fired plants, right?  From an environmental perspective it does not matter where we reduce emissions – just that they are reduced.  But from an economic and national security standpoint it matters significantly.  The U.S. is home to roughly 25% of the world’s coal and supplies virtually all the coal Americans consume.  Meanwhile, the U.S. imports the majority of petroleum that we consume.  Reducing consumption of coal will not strengthen our national security, and the most immediate effect on our economy will be negative.  Even if one doesn’t believe those are important factors (hard for me to fathom but I know some feel that way), I suspect that everyone would agree that the political ability to implement something that moves the meter is critical.  A policy that appeals to the left and right of the political spectrum holds the best promise.

       Tax and dividend, whereby a tax is placed on carbon and some, if not all, of the proceeds are distributed back to those who paid the tax, is a concept that has begun to receive discussion as a potential alternate solution.  Such a system taxes based on consumption but the dividends are paid out without respect to specific consumption.  So, the motivation to move to alternative fuels or implement energy efficiency remains because the dividend will still be received even if tax payment is reduced.  Yet, the sting of the tax is reduced by receipt of the dividend.  Tax and dividend eliminates many of the problems associated with the complexity and lack of transparency with cap and trade and it largely leverages systems already in place to tax things like gasoline, coal, etc.  However, it still is flawed in that it treats all carbon as being equal.  Again, while all emitted CO2 is equal from an environmental standpoint, it is not from an economic or national security standpoint.  In addition, the greater the scope of the tax, the more interest groups it will upset and the less likely it is that it can ever pass Congress to become law. 

         The better solution, both from an efficacy and political standpoint, than cap and trade or tax and divided is a strategically placed “ceiling” tax on carbon combined with a tax dividend.  Our greatest opportunity lies at the nexus where greenhouse gases are reduced, national security is strengthened and our economy is at least not harmed.  As a result, the first element of the solution should focus on petroleum consumption, which is predominantly consumed in vehicles and the first strategic place for a “ceiling” tax is on CO2 emissions from fossil-based transportation fuels used in automobiles and trucks.  This is effectively a gas tax, except it would apply to gasoline, diesel and any future form of fossil-based fuel sold for ground transportation and would be based on the amount of non-renewable CO2 emitted upon combustion.  In addition, the tax rate would be determined by the difference between the price the retailer/vendor pays for the fuel and a pre-determined fixed maximum charge to the consumer (individuals and businesses alike).  If the ambient price of the fuel commodity increases, the tax that is charged would decrease.  Thus, it creates a “ceiling” on the tax where there is an ambient price at which the tax would no longer be charged.  Implementing the tax in this manner accomplishes several objectives:
  • It creates clarity, certainty and stability around the price that alternatives will need to compete with.
  • It sends a clear political message that this tax is not forever; it has a built-in mechanism to end when the ambient market price catches up with the artificial price created by the tax.
  • It puts a limit on the pain inflicted at the pump.  If fuel prices spike, the tax will diminish and even go to zero if the maximum charge to consumers is exceeded.
Now, what to do with the revenue?  We must ensure that the negative impact on our economy is minimized as much possible.  In addition, we have to be realistic and create something that can fly politically.  As a result, the tax revenue should be sent right back to the consumers who paid it.  For individuals, the amount received could be based on the size of the family to reflect the likely increased transportation needs.  Economically speaking, the dollars received by each family will be much more meaningful to a low-income family.  Yet, the payment is not based on income – something for Democrats and Republicans to celebrate.  For businesses, we must endeavor to avoid making specific businesses non-competitive. If a business has a transportation intensive business, the cost increase could be substantial.  So, distribution to companies could be based on their fuel consumption for transportation over a multi-year period prior to enactment of the tax.  That way, transportation-intensive companies will receive a much larger share than those that use little transportation directly in their business. What about the impact on the oil industry?  No doubt that such a tax would have an impact on oil consumption and therefore production.  It may even be politically required to dividend some of the tax proceeds back to the oil industry.   After all, democracy is the art of the possible.  This would likely mean a smaller oil industry to the extent that the industry doesn’t redirect its efforts to other profitable business efforts (e.g., geothermal, solar, etc.).  However, with a tax on transportation fuels, there would be a clear economic upside to the change.  The clarity provided with respect to future prices of gasoline and diesel would provide significant impetus and support for private sector investments in renewables as well as vehicle energy efficiency.  In addition, such clarity would spur significant economic growth in the automotive industry as consumers become eager to find energy efficient or alternative energy vehicles. One need only look at what happened with the sales of hybrid vehicles when gas prices spiked a few years ago. The auto industry would see a boom as consumers looked to switch to vehicles that consume less fossil fuels. President Obama’s desired goal is a 17% reduction by 2020 from 2005 emission levels.  If the tax is set at a high enough level, studies indicate it would drive significant change in buying decisions and driving behavior of consumers.  A key to the success of the tax is that it creates long-term certainty with consumers regarding the likely price of gasoline and diesel.  A Congressional Budget Office Study found that a 10% long-term increase in fuel prices would result in roughly a 4% reduction in fuel consumption (through a combination of reduced driving as well as purchase of different vehicles).
If the ceiling tax were set based on a target price of $5 per gallon retail price for gasoline, this would create long term visibility into a price increase and would imply we could see a reduction in fuel consumption (and corresponding emissions) of 40%-50% representing a 13%-17% reduction in overall greenhouse gas emissions.  The U.S. consumes more than 6x the gasoline per capital than Europe and one reason is that gasoline costs 2-3x as much at the pump than the U.S.  What the CBO study did not take into account (given the challenge of doing so) is what happens to petroleum consumption when alternative fuel vehicles then become cost-competitive.  I would suggest that the accelerated innovation that would occur in such vehicles once businesses knew they would be competing with a $5/gallon price would drive even greater reductions in greenhouse gas emissions and petroleum consumption well beyond 17% in 10 years. Clearly, such reductions are much less meaningful from an environmental perspective if carbon emissions elsewhere were to increase.  Given that electric vehicles are a probable future for some vehicles, we must address the emissions created by electricity production.  Otherwise, we will simply push CO2 creation from the tailpipe to the smokestack.  But rather than a complex loophole- and scandal-fraught cap and trade system, a strategically placed ceiling tax on CO2 emissions and corresponding dividend should also be used in the utility industry.  The challenge here is that just like cap and trade, in order to have a meaningful impact regarding the business decisions made on utility plants, the price of carbon must be set fairly high.  Because electricity costs impact every person and business in the nation, a carbon tax applied to power plants significant enough to be meaningful would have a broad-based negative impact on the economy.  Everything would become more expensive. Instead of a blanket tax, the ceiling tax on CO2 from electricity production should be much more strategic.  First, the tax placed on existing plants should be fairly modest and intended primarily to generate tax revenue that would be utilized specifically to provide funding to the coal industry for clean coal and sequestration technologies.  That is not only the politically correct move; it is economically smart given our vast coal resources.  A tax of just $2 per million metric tons of carbon would generate roughly $5 billion a year in tax revenue (U.S. utilities generate roughly 2,400 million metric tons per year).  Yet, it would add an average of about one tenth of a cent to the cost of every kilowatt-hour (U.S. total electricity production is roughly 4,100 billion kilowatt hours per year) or roughly a .01% increase in retail price.   Second, the tax on new plants built after a couple-year grace period for those already being constructed, should be set at a much higher level that ramps up over time to a capped amount. An initial tax rate of roughly $30 per metric ton would equate into a cost increase of about 3 cents per kilowatt-hour for the worst offending coal-powered electricity generation.  However, the specific amount of the tax should also vary based on the price of the underlying commodity (e.g., coal or natural gas).  That way, if there were a spike in a commodity price (like with natural gas a few years ago), the tax is automatically reduced or eliminated, thereby eliminating excessive spikes in electricity prices.
To make a carbon tax on utilities achieve the desired goal of driving a change in decisions regarding which type of plants to build, it is critical that utilities are not allowed to work the tax into their rate base - they must eat the tax cost or implement new plants that emit less or no CO2.  In addition, when plants reach a set timeframe after the end of their depreciation period, they would begin to be subject to the higher tax on new plants.  The incentive must be squarely placed on utilities to implement low carbon or no carbon means – all of which they can work into their rate base.  That means implementing renewable, nuclear, sequestration and likely some additional natural gas.  Given that the incremental plants will, by and large, create more expensive electricity than the base coal plants, utilities will have increased incentives to promote energy efficiency and implement the smart grid.   Until technology innovation allows otherwise, most incremental electricity load above the current base will likely cost more to deliver.  Such a tax, if set high enough on new plants, would likely create something akin to a cap on any increases in carbon emissions by utilities. As aging plants are replaced or retrofitted, reductions in emissions would begin.   In 10 years, if the vast majority of new electricity production beyond what was currently being built has been low- or no carbon and if just 15% of aging coal plants are replaced with low or no-carbon emitting alternatives, we would see a reduction from 2005 utility emissions of 3%-6% on top of the at least 13%-17% reductions from action on transportation fuels but without a severe negative impact on the economy.  And the clean coal and sequestration technologies developed from the R&D generated through the taxes would hopefully enable an acceleration in reductions as they are able to be implemented in the following years.


 In making decisions about how to reduce green house gas emissions, as a nation we cannot and should not focus solely on the issue of global warming while ignoring the equally important goals of maintaining our national security and economic strength.  We must implement a system that changes the economics of energy in a way that supports all of these goals.  Not only will cap and trade be unable to achieve these three goals, but without an extremely high price on carbon that likely cripples our economy it won’t even have a significant impact on the single goal of reducing green house gas emissions.  A system that does not focus first on our consumption of petroleum has little chance of strengthening our economy or national security.  In addition, to be successful, we must create greater clarity over long-term fuel price that the alternatives must compete with in order to provide the impetus for private sector investment in energy efficiency and alternative energy.  Cap and trade cannot give this clarity and the government cannot simply buy our way out of this problem.  We must have the innovation, creativity and financial power of the private sector motivated to making the scale of change that is required.  A strategically targeted ceiling tax on carbon with focused use of the dividends could create the log term clarity needed in the market and will motivate the private sector to dramatically increase investment in the type of innovation and change that is the source of ours (and the world’s) prosperity.

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com).  This article was first published on his blog, www.greengoldblog.com.

October 18, 2009

What A Portfolio Approach To Climate Policy Means for Your Stock Portfolio

Portfolio theory can lend insights into which carbon abatement strategies policymakers should pursue.  If policymakers listen, what will it mean for green investors?

Good Info, Not Enough Analysis

I've now read most of my review copy of Investment Opportunities for a Low Carbon World.  The quality of the information is generally excellent, as Charles has described in his reviews of the Wind and Solar and Efficiency and Geothermal chapters.  As a resource on the state of Cleantech industries, it's generally excellent.  As an investing resource, however, it leaves something to be desired.  Each chapter is written by a different expert in a particular field, which means that the information is up to date, and comprehensive, but this approach means that there is little attempt to compare the potential of the different investment opportunities presented.  What is the point of in-depth research into carbon abatement technologies if we do not then take the next logical step and emphasize the technologies with the greatest potential for carbon abatement and investment returns?

A Portfolio Approach

The most useful attempt at investment decision-making is buried in the otherwise uninspiring last part of the book. A summary of a 2007 report from the London Accord, A Portfolio Approach to Climate Change Investment and Policy is buried among self-promoting chapters from companies such as Nissan (NSANY)and BP (BP) promoting their (real) investments in clean technology,   The report uses a Monte Carlo implementation of Modern Portfolio Theory to determine low-risk mixes (portfolios) of carbon-mitigation strategies, and was written by Professor Michael Mainelli of Z/Yen Group, and James Palmer.

While intended primarily for policy decision-makers, A Portfolio Approach attempts to determine which portfolio of carbon reduction technologies is likely to produce a desired level of climate change at the lowest cost (or highest investment returns) at the lowest risk of failing to achieve the reduction goal.  Phrased this way, it is easy to see why portfolio theory is an appropriate tool, since it is designed to minimize systematic (overall) risk even when all individual strategies in the portfolio have significant risks of achieving the expected returns and carbon reductions.

Data

The data on various carbon reduction strategies came mainly from the 2007 IPCC Working Group report, "Mitigation of Climate Change."  This report is not complete, omitting some technologies with significant CO2 reduction potential, in particular solar thermal collectors such as solar hot water heaters and larger installations for process heat in industrial processes.  "Solar," as referred to in the report, refers solely to solar Photovoltaic and Concentrating Solar Power (CSP.)

One decision I found questionable was to ignore the carbon reduction potential of investments with "negative abatement costs on the basis that these investments should be undertaken under any business-as-usual scenario, and are not strictly investment measures as a response to climate change." (p5/22)  This is circular logic.  For an investment with negative cot to exist, there must be a market failure.  Almost by definition, in a well functioning market, all investments with negative cost will have already been made.  Simply saying that these investments "should" be made assumes that these market failures will correct themselves without any effort on the part of policymakers.  Why should energy market failures correct themselves in the future if they have not already?  

In the authors' defense, they run one scenario (#3) in which investments with negative abatement costs are allowed, and they state "Further examination of negative abatement proposals seems in order, as it should be important to understand why these investments fail to be made under current financial conditions.  Neglected negative abatement may justify regulatory intervention by policymakers, e.g. imposing minimum building or transportation efficiency requirements." (pp.17/22 and 18/22)  

From the hedging in this statement, and the fact that they spend less time discussing scenario 3 than either of their other two, I conclude that something prevents the authors from giving market failures the attention they are due.  I find this an extremely common failing among financial practitioners, and believe it is an unfortunate and common consequence of in-depth training in financial modeling.  Most financial models contain an assumption of market efficiency, and do not produce meaningful results in cases of large and persistent market inefficiencies.  Without tools to model market inefficiencies, practitioners are prone to ignore them, convincing themselves that the inefficiencies are unimportant or will cure themselves.  Most of the critiques of "Green Jobs" programs are based on this fallacy.

Put another way, if you have a hammer (a modeling technique which assumes market efficiency, such as modern portfolio theory), you tend to see all problems as if they are nails (efficient markets.)

Results

Since the authors only look at scenarios 1 and 2 (those which ignore negative cost investments) in depth, these are the scenarios I will focus on.  I believe the results of these scenarios are still relevant answers to the question, "After negative cost investments in energy efficiency have been made, which positive cost investments should we pursue?"  Even if all the necessary carbon reductions could be achieved with negative cost investments, it would most likely be unwise to pursue such an approach to mitigate climate change: like all investments, there is no assurance that the expected reductions/returns will be achieved.  Pursuing a wide variety of carbon-reduction strategies provides the greatest chance that some such strategies will achieve the expected reductions, and others will exceed expectations, thus making up for any investments in the mitigation portfolio which do not achieve the expected reductions.

The chart below shows a series of "frontier portfolios": That is, portfolios of carbon abatement investments which achieve specified levels of carbon abatement at minimal cost.  The vertical axis is gigatons (Gt) of equivalent CO2 emissions (CO2e) reduced annually, and the horizontal axis is the annual investment needed to achieve this level of reduction.

 abatement cost.GIF

There are diminishing returns for carbon abatement, with the cost of incremental abatement increasing significantly above 15 Gt CO2e per year, and no practical increase in abatement beyond 20 15 Gt CO2e and $400B expenditure per year.  

For comparison, to stabilize the atmospheric concentration of CO2 at 350 ppm, a goal which, according to Joe Romm, will require 8 Gt CO2e (approximately portfolio 2) of reduction by 2030, and another 10 Gt CO2e (for a total of 18 Gt CO2e, or portfolio 4) by 2060.  abatement portfolios.bmpSince the model does not include negative cost investments in energy efficiency or solar thermal collectors, it is likely that these levels of abatement could be achieved at considerably lower cost by incorporating these opportunities.

The pie charts in the first column show the fraction of carbon abatement expected from each investment in the selected frontier portfolios, while the second column shows the cost of each investment.  The two columns differ because different investments produce different levels of abatement per dollar of investment.  For instance, the cost wedge for Biofuels in portfolios 3 and 4 are much larger than the corresponding abatement wedges.  This indicates that abatement with biofuels is more expensive on a per-ton basis than for the other investments in those portfolios.

I will focus on portfolios 2, 3, and 4, since those are the portfolios which deliver the necessary levels of abatement, which we will need to ramp up to over the coming years and decades.

Forestry

The most striking thing about these portfolios is that Forestry dominates CO2 abatement, as well as cost in portfolios 2 and 3.  The more aggressive portfolio 4 has three relatively large cost wedges: Building Efficiency, Forestry, and Biofuels.

Unfortunately, according to the report's authors, the carbon abatement from Forestry is very uncertain.  To make matters worse, the methodology used in the report is extremely sensitive to the expected returns (or abatement, in this case) of particular investment classes.  Small errors in the expected returns can lead to frontier portfolios which are dominated by a single investment class, in this case Forestry.  The report notes that "forestry abatement potential is highly uncertain." (p.8/22)  While we can conclude that forestry is likely to be a significant part of our carbon abatement strategy, there is a good chance that forestry will not dominate the mix as it does in the model.

For stock market investors who want to allocate part of their portfolio to forestry, I recently wrote about investing in forestry stocks and forestry exchange traded funds (ETFs). While I was focusing on the potential for forestry to benefit from biofuels and bio-electricity in the article, any marginal demand for forestry services (including carbon sequestration) should benefit this sector.

Hydropower

Hydropower is also a significant investment in these portfolios.  Much of this investment will probably take place in the developing world, but there are also significant opportunities for upgrades to facilities at existing dams in the developed world.  I looked at the potential for hydropower stock market investments last year.

Biofuels

Biofuels also contribute significantly to all the portfolios, especially in the higher abatement scenarios, although the costs are high relative to other investments.  I don't believe that this is very realistic if we are also going to have large contributions to carbon abatement from forestry.  My guess here is that the authors did not take into account the negative interactions between forestry and biofuels, where an increase in one will drive up the costs of the other because of competing land and water use.  Land used for forestry cannot also be used for biofuels, and vice versa.

Wind

We see significant contributions from wind in portfolios 3 and 4, and the costs and potential for wind are much better understood than for many of the other scenarios.  Better yet for stock market investors, investments in wind are simple, with two wind energy ETFs allowing a simple investment in the sector.  Of the two, I have a slight preference for FAN (you can see my reasoning here.)

Efficiency, in all its Forms

Finally, port folio 4 shows considerable investment in Building Efficiency and Industrial Efficiency (which we usually refer to as just Energy Efficiency), while portfolio 2 has a good slice of Transport efficiency (what we usually call Clean Transportation.)  Keep in mind that these slices are only investments that do not have "negative cost," that is they do not cost less than new investments in conventional generation.  Since efficiency dominates investments with negative cost, the total investments in all forms of efficiency are likely to be many times what we see in these graphs.  While there is not yet an energy efficiency ETF available, there is one focused on clean transportation, the Global Progressive Transport ETF (PTRP).  I also have a few stock picks in clean transport.

For industrial and building efficiency, there is no ETF, but here are five of my favorite efficiency stocks, and you can find a much larger list of energy efficiency stocks here.  It's also important to note that smart grid stocks will fall into this category as well, at least for the purposes of the report.   Here are five of my favorite smart grid stocks.

Geothermal

Geothermal also has a small slice of portfolios 2 and 4.  This is significant given the small current size of the industry: even these small slices imply rapid growth for an underappreciated sector.  I mentioned three geothermal stocks to consider here, but I have since sold my stake in Raser Technologies (RZ), and will probably not repurchase it.  Our Twitter followers saw that first.  Charles did a good run-down of the public geothermal stocks in June.   

Other Thoughts

It's also worth looking at what is not in the efficient portfolios, but since this entry is already quite a thesis, I'll save that for later.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

September 24, 2009

Climate Change & Corporate Disclosure: Should Investors Care?

Charles Morand

On Monday morning, I received an e-copy of a new research note by BofA Merrill Lynch arguing that disclosure by publicly-listed companies on the issue of climate change was becoming increasingly "important". The note claimed: "[w]e believe smart investors and companies [...] will recognize the edge they can gain by understanding low carbon trends." I couldn't agree more with that statement.

It was no coincidence that on that same day the Carbon Disclosure Project (CDP), a non-profit UK-based organization that surveys public companies each year on the state of their climate change awareness, was releasing its latest report at event organized by BofA/ML in NYC.

I am fairly familiar with the CDP, having worked on one of the reports in 2006. In a nutshell, the CDP sends companies a questionnaire covering various topics such as greenhouse gas (GHG) emissions, programs to manage the identified risks of climate change, etc. (you can view a copy of the latest questionnaire here). The responses are then aggregated and made into a publicly-available report.

The CDP purportedly sends the questionnaire on behalf of institutional investors who are asked to sign on to the initiative but have no other obligation. The CDP currently claims to represent 475 institutional investors worth a collective $55 trillion. Not bad!

Putting Your Money Where Your Signature Is?

Despite their best efforts, initiatives like the CDP or the US-based CERES are mostly inconsequential when it comes to where investment dollars ultimately flow. Investors are asked to sign on but are not required to take any further action, such as committing a percentage of assets under management to low-carbon technologies or avoiding investments in companies with poor disclosure or that deny the existence of climate change altogether.

Case in point, the latest Global Trends in Sustainable Energy Investment report found that, in 2008, worldwide investments in "sustainable energy" totaled $155 billion. That's about 0.28% of the $55 trillion in assets under management represented by CDP signatories. A mere 1% commitment annually, or $550 billion for 2008, would substantially accelerate the de-carbonization of our energy supply, probably shrinking the time lines;we're currently looking at in several industries to years rather than decades.  

And that's ok. By-and-large, investors are investors and activists are activists. In certain cases, investors can be activists, either from the left side of the political spectrum with socially-responsible funds or from the right side with products like the Congressional Effect Fund. But overall, most sensible people want investors to be investors.

That's because the function that investors serve by being investors rather than activists is a critical one in a capitalist system - they force discipline and performance on firms and their management teams. By having to compete for capital with other firms in other sectors, clean energy companies have an incentive to crank out better technologies at a lower cost, and that process will have positive implications for all of society in the long run.

The problem with the CDP is that it's really an activist organization parading as an investor group. If the Sierra Club were to go around and ask Fortune 500 companies if they wanted to be hailed as environmental leaders in a glossy new report with absolutely no strings attached, I bet you anything they would get 475 signatures in a matter of days. And so it goes for CDP signatories - institutional investors the world over get to claim that climate change keeps them up at night while not having to deploy a single dime or alter their asset allocation strategies.

Approaching Climate Change Like An Investor

Someone approaching climate change like an investor - that is, as a potential source of investment outperformance (long) or underperformance (short or avoided) - isn't likely to care for activist campaigns aimed at forcing large corporates to disclose information on the matter; in fact, they may prefer less public disclosure to more.

That is because one of the greatest asset an investor can have is an informational advantage. In the case of climate change, those of us who believe that it's real and who think they can put money to work on that basis have a pretty good idea where to look and what to look for - we don't need the SEC to mandate disclosure. Those who think it's one giant hoax couldn't care less - they don't need the SEC to get involved, either. Yet this is where such campaigns are going, according to the BofA/ML report.

I like to think of climate change as an investment theme in terms of three main areas: (1) Physical, (2) Business, and (3) Regulatory. All three areas present investment risks and opportunities.

Opportunity Risk
Physical DESCRIPTION: Companies that stand to gain  from strengthening or repairing the physical infrastructure because of an increased incidence of extreme weather events or a changing climate. Examples include electric grid service companies such as CVTech Group (CVTPF.PK), Quanta Services Inc (PWR) and MasTec Inc. (MTZ)


TIMELINE
: Medium-term   
DESCRIPTION: Companies that stand to be negatively impacted by more frequent and more powerful extreme weather events, or by a changing climate. Examples include ski resort operators, sea-side resort operators and property & casualty insurers.  




TIMELINE
: Long-term
Business DESCRIPTION: Companies that provide technologies and solutions to help reduce the carbon footprint of various industries, be it power generation, transportation or the real estate industry. Renewable energy and energy efficiency are two obvious examples.




TIMELINE
: Immediate     
DESCRIPTION: Companies that make products that increase humanity's carbon footprint and that could fall out of favor with consumers on that basis. Examples include car makers with a large strategic and product focus on SUVs and other needlessly large vehicles.




TIMELINE
: Medium-term
Regulatory DESCRIPTION: Firms that have direct positive exposure to the regulatory the responses to climate change enacted by governments. Examples include firms that operate exchanges or auction/trading platforms for carbon emission credits such as Climate Exchange PLC (CXCHY.PK)  and World Energy (XWES).


TIMELINE
: Near-term
DESCRIPTION: Companies that are in the  regulatory line of fire for carbon emissions. Coal-intensive power utilities are a good example, as are other energy-intensive industries that might have a limited ability to pass costs on to consumers because of high demand elasticity or fierce competition.



TIMELINE
: Near-term 

This categorization provides a high-level framework for thinking about what may be in store for investors as far as climate change goes. However, with the exception of Business/Opportunity and Regulatory/Opportunity, the investment case is not necessarily clear-cut and requires some thinking.

For instance, oil would seem like a perfect candidate for the Business/Risk category were it not for another major and more powerful price driver: peak oil. As for Regulatory/Risk, the European experience thus far has shown how open a cap-and-trade system is to political manipulation, and firms there have been able to withstand the regulatory shock more because of achievements on the lobbying side than on the operational side. That is why I have stressed in the past that understanding emissions trading was more about understanding the rules and the politics than about understanding the commodity.

Nevertheless, these trends are worth following for people who: 1) like investing and 2) think that climate change is not the greatest hoax ever perpetrated on the American people. For instance, CVTech Group (CVTPF.PK), a small Canadian electrical network services company, reported that in fiscal 2008 around 58% of its annual revenue increase (C$23.0 MM) was due unscheduled electricity infrastructure repairs as a result of hurricanes in Texas, Louisiana, North Carolina and South Carolina. In the annual report, management noted: "Since 2005, an increase in the occurrence of hurricanes has resulted in growing demand for our services in these states."

Conclusion

I have nothing against the concept of activist organizations going after corporations with various demands, be they influenced by left- or right-wing thinking; after all, we live in a free, open society and it's everyone's right to do so within the confines of the law.

What I don't like quite as much is hypocrisy and greenwashing. As far as I go, if an institutional investor truly believes that climate change can be a worthwhile investment theme, they should put a couple of analysts on it and figure out how to put money to work. If they don't believe that it is, then they should just go on doing what they do best: manage money.

What they shouldn't do is pretend to see an investment risk or opportunity where they really don't just to appease a handful of vocal stakeholders. Lobbying to get the SEC to force disclosure on climate change is nothing more than window dressing; investors who think this is real already know where to look and what to look for and - surprise, surprise - it's not rocket science!

DISCLOSURE: None

August 01, 2009

Windpower: Focusing the Criticism Away from NIMBYism and Aesthetics

Market-oriented policy analysts have not been shy about cataloguing the problems surrounding windpower development. But in the enthusiasm to oppose the government interventions accompanying wind generation, market-based analysts sometimes have strayed beyond principled defense of markets and unwittingly offered support to anti-market NIMBYism and other meddlesome sentiments. Policy analysts examining wind power issues should consider more carefully which issues ought to be pursued through the policy process.

Two Images

Wind power has two images. In one view, wind power is glamorous, hi-tech, future oriented and almost sexy. Advertisements for products from automobiles to watches to banking services casually feature tall, slowly spinning wind turbines in the background, hoping to suggest that the advertised product, too, is glamorous, hi-tech, and future oriented, and maybe a bit sexy.

A second view shows wind power in a much less favorable light: the product of misguided environmentalism twisted into government-funded corporate welfare. No hi-tech glamour in this view. Instead, destruction and waste becomes emblematic of a windpower industry, which has blighted farm and ranch lands with industrial towers and power lines, killed bats and birds, raised the cost of electricity, and squandered tax dollars.

The second view dominates among policy analysts with a libertarian or conservative policy bent. Market-oriented policy shops have produced several critiques of wind power: the Cato Institute, Heritage Foundation, Competitive Enterprise Institute, Reason magazine, the Heartland Institute. Each has issued policy papers or published editorials or articles about wind power. The details vary, but the overwhelming verdict is negative: wind is more costly than conventional power even with subsidies, it wastes land, the turbines are ugly, the power output is unreliable and requires fossil-fuel backup generation, it produces the most power when it is least needed, the spinning blades are dangerous to both wildlife and human health, and construction damages the local environment.

In addition, wind power development often requires substantial investment in electric transmission lines, which consumes more land and adds to the expense. The Texas Public Policy Foundation has produced a fairly comprehensive critique of wind power development that touches on all of these points and a few more (see links below).

Business versus Policy Issues

The first view contributes to a few policy problems — the hi-tech glamour of wind power gains it unearned public support and therefore special political favor. As one wind energy association analyst has said, windpower “polls extremely well” and has support of both Republicans and Democrats.

But the second, negative view also contributes to policy problems when the analysis goes beyond issues of appropriate public policy and gets involved in a seemingly indiscriminate piling on of negatives. Renewable power policy in the United States has involved the government in heavy-handed subsidies, which is wasting taxpayer monies, distorting investment into electric generation and raising consumer costs. But these points represent about the limit of the market-based objections to windpower development. Most of the technology and resource-use concerns listed above are, for the most part, nobody’s business but the business owners. When analysts encourage negative attention to decisions that naturally fall within a business’s scope of actions, they end up encouraging further unconstrained expansion of public policy.

Let’s sort through that catalogue of complaints about windpower one at a time:

Wind power is more costly than conventional power generation. This claim is not always true, but probably true in many cases and for most of the time. But so what? It may cost more to make a Ferrari than it costs to make a Subaru, but so long as the consumer is free to choose which price it wishes to pay, no real policy issue emerges. Sure, many states mandate that consumers purchase a certain amount of renewable power, but the objection here is to the government picking winners in the marketplace. The mandate would be just as objectionable in principle if renewables were cheaper than conventional generation, so let’s leave cost out of it.

Wind power development often requires substantial investment in electric transmission lines. Wind power development can require investment in electric transmission lines to get the power from the wind farm to the frequently-distant major power consuming regions. (Of course this is not too different for other forms of power generation, only in those cases the fuel frequently moves by pipeline or railroad before being converted to power.) Transmission remains a government-regulated business, even in regions and states with restructured markets, which makes it a public policy concern.

For years the rules governing transmission investment were intimately tied to the needs of the monopoly electric utility. As independent power generation became important to the industry, the rules governing transmission investment had to change too. Accommodations for renewable power are of a similar nature. If policies in fact unduly favor renewable generators, then market-based policy analysts may have a complaint. But development of the transmission grid can be useful in reducing the generator market power that is a legacy of years of government-protected monopolies. It is at least possible that most of the value of transmission investment to support renewable power will come from the encouragement of competition and the resulting more efficient operation of the grid. Consumers should favor such transmission development.

Windpower development is land-intensive. This claim is true in some respects, but greatly exaggerated. It is certainly the case that windpower projects blanket thousands and thousands of acres, but such production is consistent with many other uses of the land – excepting a rather small footprint for the turbine itself and associated facilities. And, again, so what? Agriculture also uses a lot of land, but that is no reason to oppose farming. Landowners are generally considered capable of deciding how much, if any, land they wish to devote to various opportunities. Public policy involvement in these private decisions should be limited, not encouraged.

Wind power output is unreliable. Three parties should be concerned with the variability of windpower output: the company selling the wind power, the company buying the wind power, and the transmission network operator providing responsible for reliable operation of the power grid.

Other power market participants using the grid have a secondary interest, but this interest should be limited to ensuring each power transaction pays an appropriate share of the costs of operating a reliable transmission grid. There are important and difficult issues here, but for the most part they are technical grid operation and market design issues only passingly related to public policy. The various regional power markets are working out the issues, and progress will probably be faster if Congress doesn’t get too interested. Market-oriented policy analysts ought not to encourage politicians to think wind power variability is a public policy issue that politicians need to address.

Wind power requires fossil-fuel backup generation.  In a point related to the variability of wind, it is sometimes claimed that each new megawatt of wind power capacity requires the support of a new megawatt of fossil-fuel generation.  There is, maybe, a grain of truth here, but as stated the point is greatly exaggerated.  First, to an extent every generation unit supplying the grid has to be supported by backup generation in the case that the unit under produces or fails altogether.  Reliable grid operation requires the presence of units kept in reserve.  But not every single unit supplying the market is matched by a unit kept in reserve – since independently operated generators are unlikely to fail at the same time, the system just needs a few units in reserve at any one time.  For this reason, most regional transmission grids have already had sufficient reserve capacity available to accommodate the level of wind power that has been added. 

Wind power presents some new challenges – unexpected output variations across wind farms in the same area will be correlated rather than independent.  But this is a technical issue to be handled by the parties involved, and the main technical issue is assigning wind power developers an appropriate share of the costs of the necessary reserves.

Wind power produces the most power when the power is least needed. On average this claim is true for most existing installed wind power capacity. For example, in West Texas, where the boom in windpower investment is most pronounced, wind speed and wind power output is higher during Spring and Fall than it is in Summer, but the demand for electricity is highest during the Summer. In addition, windpower output tends to be higher overnight, while demand tends to be highest on late summer afternoons. (On the other hand, coastal and off-shore wind power developments tend to produce more power during the day and less power at night.)

An issue related to these last two items concerns references to wind power’s capacity factor. A generator’s capacity factor is calculated by dividing the unit’s power output over a period of time by the amount of power that would have been generated by the unit operating at maximum output. It is frequently noted that wind power generators will have capacity factors that range between 20 and 40 percent, while coal, natural gas, and nuclear power plants tend to have capacity factors that range from 70 up to 95 percent. But capacity factors have substantially different meanings for wind power and the other forms of generation. And once again, the policy significance is limited. If the “capacity factor” of a Subaru plant is higher (or lower) than that of a Ferrari plant, then … so what?

Wind turbines are dangerous to both wildlife and human health. Obviously coming into contact with fast-spinning blades can be dangerous – to humans as well as to birds and bats. Turbines sometimes fail in dramatic and hazardous fashion, as easily findable YouTube videos will show. But producing and burning coal is probably more hazardous to humans, birds and bats as well, and even natural gas is not without risks to animals. Any balanced analysis would at least seek to put the risks of wind power in appropriate context.

It also seems somewhat disingenuous when a think tank usually given to complaining that the endangered species act or similar policies interfere with private property rights starts holding up injured birds in the attempt to discourage private rights to develop property, simply because government subsidies are involved.

Windpower construction damages the local environment. If wind power development is damaging your property, first try negotiation with the developer and if that doesn’t work, then existing property law provides various opportunities for you to pursue a remedy. To the extent that wind power development is damaging other people’s property, they should pursue their rights. It usually is not a public policy concern.

Wind power turbines are ugly. Of course, no policy analysis calls turbines ugly as a serious policy argument; the name-calling just tries to detract a bit from wind power’s glamorous image. But making the claim in the context of a policy argument tends to align the analyst with a NIMBY crowd. If the development of someone’s property is going to spoil a historic view or other community value, the market-based approach would be for members of the community to negotiate purchase of an easement.

My main point is that much of the litany of negative factors surrounding wind power is of limited relevance to a policy analysis grounded in a political philosophy of limited government. Yes, the government intervention into the economy in support of favored kinds of power production is objectionable. But it is just the intervention that is the problem, not the way that the businesses and property of other persons are being developed.

Of course it isn’t just wind power that benefits from intervention, other resources and technologies also see various government supports. It turns out that tallying up subsidies for different resources gets surprisingly complicated, but it is clear that renewable power is the recipient of substantial government support at the moment, particularly on a per-MWh generated basis. Defenders of wind power would also point out that it produces no direct air emissions when producing power, and therefore should be encouraged relative to fossil-fueled generators that do emit pollution. The claim has some validity, but as I have suggested elsewhere, the current set of subsidies for wind is a very inefficient way of pursing those policy goals.

A Suggestion to the Free-Market Community

Now that I have made my main point, let me suggest a principled way to violate it and bring some of these factors back into policy analysis. As any market-oriented person who engages in policy debates has realized, not everyone shares their viewpoint on the role of markets and the value of limited government. In such cases an appeal to principles will not be persuasive. Winning policy arguments appeal to more pragmatic considerations. Cost-benefit analysis is the standard approach.

A serious cost-benefit analysis of public policies supporting wind power would have reason to examine the costs of windpower and the value of its output. For such an analysis, some, but not all, of the negative factors surrounding wind become relevant. Even here a market-based analysts should exercise care to keep issues that should be primarily matters of private choice out of the policy discussion, lest politicians and other less-discriminating analysts become encouraged to further intervene in the market.

For the most part, these market-oriented policy papers and essays are not pursuing a balanced assessment of costs and benefits, just trying to make a case against windpower interventions. I support making a principled case against intervention; I urge policy analysts to refrain from arguments which miss the mark and thus may inadvertently give support to interventionists.

Michael Giberson is an instructor and research associate at the Center for Energy Commerce at Texas Tech University's Rawls College of Business, blogs on energy economics (including wind power) and other topics at Knowledge Problem.  This article was first published on Master Resource.

Appendix: Market Think Tank Critiques of Windpower

Most of these are fairly short commentaries; Drew Thornley’s study for the Texas Public Policy Foundation is probably the most thorough).

Cato Institute: Jerry Taylor, “Picken’s Plan to Rig the Market,” 2008; Robert L. Bradley, Jr., “Eco-dilemmas of Renewable Energy,” 1997.

Competitive Enterprise Institute: Steven J. Milloy, “The Wind Cries ‘Bailout’,” 2008; Neil Hrab, Baptists, Bootleggers and Wind Power, 2004.

Heartland Institute: Cheryl K. Chumley, “Questions Plague Efforts to Grow Wind Power Use,” 2008.

Heritage Foundation: Ernest Istook, “Hot air about wind power,” 2008.

Reason magazine: Ron Bailey, “Wind Breaks,” 2002.

Texas Public Policy Foundation: Drew Thornley, “Texas Wind Energy: Past, Present, and Future,” 2008.

July 12, 2009

Green Jobs: Debunking the Debunkers

Tom Konrad, Ph.D., CFA

Energy markets are neither free nor efficient, so traditional economic arguments against regulation and other government interventions do not apply. 

In response to my recent article digging into green jobs, a reader sent me a copy of a March paper by Andrew Morriss et al at University of Illinois that attempts to debunk green jobs myths.  While I see major flaws in most green jobs papers I read, many of the myths cited by this paper are irrelevant to what I consider the most important questions:

  1. Can government intervention to clean up the energy sector create jobs and boost the economy?
  2. What interventions are likely to be the most effective or harmful?

Other "myths" are simply not myths; the flaw arises because the debunkers are economists, and approach the subject from the perspective of economics.  The problem is that the energy market is neither free nor efficient, so the traditional economic assumptions about how supply and demand regulate price simply do not apply.  I'll deal with the myths in the order they are presented by Morriss et al.

Define "Green Job"

From the paper:

Myth 1: Everyone understands what a “green job” is.

Fact 1: No standard definition of a “green job” exists.

My Thoughts:  The hundreds of billions of dollars to be committed are designed to promote cleaner energy.  Who cares how green jobs are defined?  The important question is Question #1 above: Regardless if the jobs are defined as "green" or not, will more jobs be created by promotion of cleaner energy, or by some alternative sort of spending.  My last article answered this question in favor of clean energy.

Productivity of Green Jobs

From the paper:

Myth 2: Creating green jobs will boost productive employment.

Fact 2: Green jobs estimates in these oft-quoted studies include huge numbers of clerical, bureaucratic, and administrative positions that do not produce goods and services for consumption.

My Thoughts:  If cleaning up the energy economy simply creates a shift to the less efficient use of labor, then it is not worthwhile.  

However, labor efficiency is the wrong metric.  Higher labor efficiency can nearly always be achieved with greater use of capital or energy.  For instance, driving to work is statistically more labor-efficient than taking light rail.  If I take light rail, then the pro-rated labor needed to run the rail system goes into the cost of getting me to work.  If I were to drive, my labor in guiding the vehicle would not be counted in work statistics, because I am not paid for my efforts (even though I'm probably not enjoying myself much.)  Nor is the capital investment in my car included in the calculation, (although the road I drive on probably is) because it is a private, not business or government expenditure.

Green spending is likely to be more energy-efficient than other spending: reducing energy use one of the main goals.  Capital spending may go up or down, and labor usage may increase, as labor is substituted for fossil energy.  The goal should be to find those sectors which most effectively substitute spending on labor (a renewable resource of which we currently have more than we are using) for spending on fossil energy (a nonrenewable resource which causes harm to the environment.)

As I previously discussed, spending on energy efficiency programs such as weatherization  are ideally suited to substitute labor for energy.  Weatherization gets the largest share of the energy spending from the stimulus bill.

Modeling 

Myth 3: Green jobs forecasts are reliable.

Fact 3: The green jobs studies made estimates using poor economic models based on dubious assumptions.

The forecasts for green employment in these studies optimistically predict an employment boom that will take us to prosperity in a new green world. The forecasts, which are sometimes amazingly detailed, are unreliable because they are based on: a) Questionable estimates by interest groups of tiny base numbers in employment, b) Extrapolation of growth rates from those small base numbers, that does not take into consideration that growth rates eventually slow, plateau and even decline, and c) A biased and highly selective optimism about which technologies will improve. Moreover, the estimates use a technique (input-output analysis) that is inappropriate to the conditions of technological change presumed by the green jobs literature itself. This yields seemingly precise estimates that give the illusion of scientific reliability to numbers that are actually based on faulty assumptions.

My Thoughts: As often with the arguments against greenery, the critics equate greenery with exciting new (and expensive) technologies such as solar PV.  Some of the proponents fall into this trap as well.  And everyone should be uncomfortable with relying on attributing any level of accuracy to a study even though it claims to be precise.  Precision is impossible in economic forcasting.

In fact, the majority of the spending will be going to old, proven technology with a long track record.  Building weatherization and mass transit have been around and evolving for over a century, and these two alone get well over half of the spending.  Cofiring of biomass is also a proven and very cost effective technology.  All of these will reduce, not increase the overall cost of energy, without waiting for technology improvements.

No, we won't get the number of jobs we expect, but for the purpose of decision-making, we only need to be confident that we'll get more jobs than if we had not acted.

"Free" Markets

Myth 4: Green jobs promote employment growth.

Fact 4: By promoting more jobs instead of more productivity, the green jobs described in the literature actually encourage low-paying jobs in less desirable conditions. Economic growth cannot be ordered by Congress or by the United Nations (UN). Government interference in the economy – such as restricting successful technologies in favor of speculative technologies favored by special interests – will generate stagnation.

Myth 6: Government mandates are a substitute for free markets.

Fact 6: Companies react more swiftly and efficiently to the demands of their customers/markets, than to cumbersome government mandates.

My Thoughts: The government already interferes on a massive scale in energy, to support the fossil fuel industries.  Electric and gas utilities are either government regulated (IOUs), government-run (munis), or government-sponsored non-profit cooperatives (REAs.)  Unless you live in Lubbock, your electric utility is a monopoly. Our transportation infrastructure is government-built and maintained (or government-sponsored, in the case of toll roads.)  Rules, taxes , and incentives specifically targeted at fossil fuels are legion.  

Deriding "government interference" in an industry with so much government involvement already is ludicrous.  Nothing can happen in the energy industry without "government interference."   The trick is to make sure that any change is change for the better.  "Hands off" is not an option.

Yes, green spending produces a higher proportion of low skilled jobs than would spending on capital intensive fossil fuels.  But green spending creates more jobs at every skill level than spending on fossil fuels, making workers at every level of skill better off.

A typical instance of the authors' blind faith in markets appears in the section titled "Markets vs. Mandates." "The implication of the necessity of a mandate is that profit-seeking building owners are too foolish to make investments in energy saving despite the alleged short-term paybacks."   Yet this is precisely what happens, if not because building owners are foolish.  It happens because renters, not building owners derive the benefits from the efficiency investments, and because many building owners lack the skills and information necessary to make informed decisions.  

Instances of profit-seeking building owners not making efficiency improvements abound.  When the building owner does not pay the utility bill (as with most rentals), there is no incentive to make such improvements at all.  Even in owner-occupied buildings, how many building owners know what improvements will be cost effective, or make it a priority to find out?  Without adequate information, no improvements will be made.

Anti-Trade

Myth 5: The world economy can be remade by reducing trade and relying on local production and reduced consumption without dramatically decreasing our standard of living.

Fact 5: History shows that individual nations cannot produce everything its citizens need or desire. People and countries have talents that allow specialization in products and services that make them ever more efficient, lower-cost producers, thereby enriching all people .

To the extent that we're not just exporting the manufacture of energy-intensive goods to other counties, I agree with this caveat.  However, to the extent that transport requires large amounts of energy, some of the arguments for re-localization make sense, or where the production of the good (such as oil) is controlled by non-market forces (Russia, Venezuela, OPEC, etc.) free trade (which is rooted in the assumption that markets operate efficiently) does not make sense.

If we could actually create an increase in domestic oil, the conservative proponents of domestic drilling (whom I think of as the "Local Oil" movement) would have a point, despite the fact that they use the same anti-trade rhetoric.  Unfortunately, since total production of domestic oil is capped by our already-diminished reserves, the Local Oil movement is simply asking for more domestic oil today, at the cost of less domestic oil for our children.  In contrast, today's local farmers can avoid taking food from their children by using sustainable farming practices.

Free trade makes sense in free (or at least reasonably efficient) markets where total supply is not limited.  Inefficient markets may rob us of the benefits of free trade.  When the total supply of a commodity is finite, as with fossil fuels, we can never have true "free trade," because one set of participants has no voice in the transaction.  Future generations have no say about what they give up in future consumption when we consume a finite resource today.

Pie-in-the-Sky

Myth 7: Wishing for technological progress is sufficient.

Fact 7: Some technologies preferred by the green jobs studies are not capable of efficiently reaching the scale necessary to meet today’s demands.

Absolutely true. We can't decarbonize the economy this decade.  We need to start now with the established, cost-effective technologies we have today, such as energy efficiency, electricity transmission, wind power, geothermal, and mass transit which are capable of scaling and bring both jobs and economic benefits today.  As new technologies such as solar become cost effective, we will have the infrastructure in place to allow them to scale.

The gigantic scale of the job is a reason to start as soon as possible, not to delay.

July 06, 2009

Not all Green Jobs were Created Equal

The stimulus package and the climate bill recently passed by the US House and now being considered in the Senate will create jobs while delivering a boost to our economy.  A "green" stimulus swill create  approximately three times as many jobs as the same amount of spending in traditional energy industries.  But clean energy is too diverse to consider a single industry.  What are the differential jobs creation effects of different types of clean energy and are the most effective sectors getting the most money?

Tom Konrad, Ph.D., CFA

In my next Greener Money column for Smart Energy Living Magazine, I look into the economic behind Presidential and green claims that the stimulus package and the Climate bill just passed by the House can both create economic growth while cleaning up the economy.  I found most of the rhetoric coming from the greens to be disappointing. For the most part, it touts the numbers of "Green Jobs" which will be created, without looking at the cost.  For instance, while the report from the American Solar Energy Society does a good job defining "green job" and counting them, it does not look at what would have happened if we put our resources elsewhere.

Probably the most incredible claim I heard from on the green side came from Jigar Shah, who told me via email that spending on solar photovoltaics produces "more jobs per federal dollar invested" than other green technologies.  He did not respond to two requests for his source.  I found this claim hard to believe, because solar manufacturing is very capital intensive, and manufacturing jobs are likely to be high-skill and highly paid.  The labor-intensive installation is unlikely to completely make up for capital intensive (and often overseas) manufacturing.  Clean energy investments which are not capital intensive, such as weatherizing homes, are likely to produce more jobs because 1) less money is spent on equipment and more on labor, and 2) the workers are typically paid less.

The Cost of Creating a Job

The best national report I read was Green Prosperity, which was sponsored by Green for All and NRDC, and written by the economists Robert Pollin, Jeanette Wicks-Lim, and Heidi Garrett-Peltier at the Political Economy Research Institute at the University of Massachusetts, Amherst (PERI).  This report used data from the US Commerce Department Input-Output tables and IMPLAN to look at the potential for job creation from each $1M of spending in various industries, some of which is presented below in table 3 from the report:

TABLE 3. BREAKDOWN OF JOB CREATION BY FORMAL EDUCATIONAL CREDENTIAL LEVELS

  1) Clean Energy Investments 2) Fossil Fuel Investments 3)Difference (col 1-2)
Jobs per $1M 16.7 5.3 11.4 
  % of category   100%   100%
College degree jobs 
  • $24.50 avg wage
3.9  1.5   2.4
  23.3%   28.3%
Some college jobs
  • $14.60 avg wage
4.8 1.6 3.2
  28.7%   30.2%
High School or less jobs
  • $12.00 avg wage
8.0 2.2 5.8
  47.9%   41.5%
High school or less jobs with decent earning potential
  • $15.00 avg wage
4.8 0.7

4.1

28.7% 13.2%

Note that while clean energy spending creates more high paying jobs than fossil fuels, clean energy is even better at creating jobs for low skilled workers: Everyone stands to gain, but those who have the most trouble finding jobs have the most to gain.

Comparing Clean Energy Industries

Un fortunately, even this report does not detail the differences Jigar Shah was alluding to: the difference in job creation between clean energy investments.  Where can we best deploy our stimulus dollars for the greatest effect?  I contacted the authors of the study, and Heidi Garrett-Peltier was able to provide the following job creation numbers for industry sectors they considered in their research:

Sector Percent of spending in Green Program

Jobs per $1M spending

Weatherization

40%

17.1

Transit/Rail

20%

20.8

Smart Grid

10%

13.3

Wind

10%

13.8

Solar

10%

14.1

Biomass

10%

15.5

"Green Program"

100%

16.7

Fossil Fuel -

5.3

Here, "Green Program" is a weighted average of the six energy industries, with the weights approximating the anticipated spending contained in the stimulus package and the climate bill.  They did not look at the credential level job creation benefits of the clean energy sectors individually.

I find it very encouraging that the two best job-creation sectors (Transit/Rail and Weatherization) are also the sectors which get the lion's share of investment; this is why the Green Program as a whole produces more jobs per million dollars spent than any of the sectors besides these two.

Will the Jobs Last?

All this discussion is about a stimulus to the economy, in order to jump start it and get it going again.  The Green Prosperity Report considered only jobs created by the direct effects of the spending, and the indirect effects of increased spending by people whose earnings increased due to higher earnings.  These new jobs are only likely to last as long as the spending continues, after that, the hope is that the economy will have begun producing jobs again without federal stimulus.

Nevertheless, there will be ongoing effects that will help the economy long after stimulus spending has ended, and the impressive job creation numbers above do not consider these effects, which "dominate the job creation figures" according to Howard Geller, the Executive Director of the Southwest Energy Efficiency Project (SWEEP), and co-author of a study on job creation from energy efficiency measures in Colorado.  Weatherization was just one type of energy efficiency measure the SWEEP study looked at, although the other sectors above were not considered because of SWEEP's focus on energy efficiency.

He says, "I don’t think renewables are going to have nearly as much impact [as efficiency].  Using the same input/output model, you won’t get nearly the job creation from the energy bill savings.  It’s the cost effectiveness of EE that leads to the savings and long term job creation."  So, to the extent that measures are cost effective, they will produce ongoing savings and job creation.  Of the spending sectors listed above, Biomass is likely to be the most cost effective of the energy generation technologies (Wind, Solar, and Biomass), if the money is used for biomass co-firing in existing coal plants, and both Wind and stand-alone Biomass will be more cost effective than Solar (see my article What Does Clean Energy Cost?.)  Only Biomass co-firing is likely to be able to compete with weatherization for long term job creation effects among these three.

The ongoing job creation effects of smart grid are unknown, since no one has done it before.  However, giving people better information about their energy usage has been shown to reduce their consumption as much as 15%, so there should be some long term effects.  

For transit spending, the benefits depend on if the transit improvements will be effective enough to allow people to reduce their car ownership:  According to the Green Prosperity study, the marginal cost per mile of travel on transit is about the same as the marginal cost of auto travel, but large gains are available from any reductions in car ownership.

Conclusion

Green investments will be good for both the economy and the environment.  Nevertheless, any additional federal spending will use borrowed fund that have to be repaid.  Hence, we should focus on spending in sectors with both large job creation potential, and long term impacts.  Clean energy as a whole has excellent job creation potential and long term impacts, but some sectors are better than others.  Although the climate bill which passed the house is not everything we might want, it's nice to know that most of the spending is going to the right places.

March 16, 2009

The Ontario Feed-in Tariff For Alternative Energy

Last month, I wrote about how Ontario, North America's 6th largest jurisdiction by population, had tabled a Green Energy Act to boost the alternative energy industry's growth in the province. In that post, I mentioned that officials would soon release the rules for a feed-in tariff (FIT) system. FITs, which pay fixed rates for renewable power, are all but absent in North America, although they are popular incentive in Europe. Germany's FIT is largely responsible for that country's dominance in solar PV today despite mediocre sun conditions. 

Ontario released the draft rules and proposed prices for its FIT a few hours ago. Proposed prices are as follows:

Fuel Type Size Tranches C$/kWh US$/kWh (x0.79)
Biomass* Any size 12.2 9.6
Biogas* ≤ 5 MW 14.7 11.6
> 5 MW 10.4 8.2
Waterpower* ≤ 50 MW 12.9 10.2
≤ 2 MW (community-based or aboriginal) 13.4 10.6
Landfill gas* ≤ 5 MW 11.1 8.8
> 5 MW 10.3 8.1
Solar PV ≤ 10 kW (rooftop) 80.2 63.4
10 - 100 kW (rooftop) 71.3 56.3
100 - 150 kW (rooftop) 63.5 50.2
> 500 kW (rooftop) 53.9 42.6
≤ 10 MW (ground mounted) 44.3 35.0
Wind Any size onshore 13.5 10.7
Any size offshore 19.0 15.0
Community-based or aboriginal (≤ 10 MW) 14.4 11.4
* 35% premium during weekday on-peak hours (11am to 7pm) and 10% discount during off-speak hours

The suggested pricing levels are relatively high and, as discussed in my original article on this topic, should benefit the clean energy independent power producers active in the province. Of special interest is the fact that Ontario is proposing to implement a tariff for offshore wind, and could thus be the first Great Lakes jurisdiction to see significant offshore installations go up (that is, if they get the tariff right!). The solar PV tariffs are based on the tiered German approach and should trigger significant installations if credit doesn't prove to be a problem for households and businesses.      

To be continued...

March 15, 2009

What the ARRA Means for Clean Energy: One State's Example

Last week, several branches of the Colorado state government organized a symposium on "How Colorado Electric/Gas Utilities and Their Customers Can Benefit from the American Recovery and Reinvestment Act (ARRA)."  I attended, with an ear to how the likely implementation would affect Clean Energy Stocks.

Overall, Colorado seems to be taking a very organized approach to a monumental task.  According to Colorado Public Utilities Commission (PUC) Chairman Ron Binz, who officiated at the conference, they intend to organize proposals into an overall thematic plan for spending stimulus money.  In addition, they are working to eliminate barriers to regulated utilities participating.  In particular, the PUC "will allow expedited review of applications filed to request financial incentives including ratemaking treatment."

The symposium was four hours long with no breaks.  For readers seeking some specific information, here is a link to my notes.  What follows are my thoughts on what it may mean for different clean energy sectors.

Solar Stocks and Wind Stocks 

Solar seems unlikely to be a big winner from the ARRA.  This makes sense because the point of the bill was to stimulate jobs.  Solar, especially Solar Photovoltaic (PV) panels, are very capital intensive investments, meaning that few jobs would be created per dollar spent.  Solar PV has long been the poster-boy for green energy, yet its high-tech capital-intensive nature means PV installations create fewer jobs per dollar invested than most other clean energy technologies, and many fewer than the most effective, energy efficiency.

Sitting next to me was a representative of a major solar project developer whom I've known for a couple years.  After the panel on electric generation, he commented to me "that was a total waste of time."

The prospects for wind seem slightly more hopeful, according to Brian Greenman, principal at Greenman Financial Advisors.  Brian is another member of the Denver the renewable energy community whom I've known for several years.  His firm has established a niche been providing a wide variety of financial services to wind project developers across the Great Plains.  He says that there is a real chance that the Department of Energy loan guarantee program may begin guaranteeing loans; something which has not occurred for clean energy deals since it was established in the 2005 EPAct.  The major hold-up has been uncertainty about the potentially enormous size of the subsidy cost.  Now, new money has been appropriated, and once new rules are established, this subsidy cost is likely to either be regularized, or eliminated entirely.  The main roadblock stopping wind projects right now is the inability to obtain financing, a problem which should resolve more quickly with a functional federal loan guarantee program allowing wind projects to borrow up to 80% of the capital needed at rates of less than 0.5% above US treasury bills.  Large solar projects may also be able to qualify for such guarantees, but this is a bigger deal for wind because of the much larger program size.

The bad news is that these loan guarantees are unlikely to be available until the last quarter of the year, even with expedited rule-making. 

Smart Grid 

Of the utilities with existing Smart Grid efforts, all seemed interested in accelerating roll-out.  Black Hills Corporation (BKH) has an AMI-roll out using meters from Elster, currently going on in Pueblo, which they hope to use ARRA money to accelerate, and to expand to more rural areas where it might not otherwise be economic for them.  The Poudre Valley Rural Electric Association has a program focused on commercial customers using a Landis + Gyr solution. Xcel Energy (XEL) has an extensive Smart Grid pilot program in Boulder Colorado, with seven partners.  The City of Fort Collins has an ongoing Fort ZED project with a wide variety of partners.

These expansions should be good news for the equipment providers, but a look at the partners brings up one of the perennial headaches of investors interested in the smart grid: nearly all the companies listed above or in the partnerships are privately held.  While there are publicly traded smart grid companies, the wide variety of solutions and companies offering them make it difficult for a public investor be confident that the companies he owns will be the ones which do well long term.  The best solution I have come up with is to own a little bit of all the smart grid companies I find, with a focus on the lower-tech solutions such as Demand Response, and established metering companies which I consider likely to acquire smaller private players.  Charles provided a list of four smart grid stocks in December, while I took a look at three more (Itron (ITRI), Echelon (ELON), and EnerNOC(ENOC)) in November.  To these, I'd add General Electric(GE) and Telvent (TLVT). I don't know of any projects by these companies in Colorado, but if the trends here are any guide, companies which already have existing projects with utilities can reasonably expect those projects to accelerate.

One other trend of note was that the utilities were generally much more interested in the potential of the smart grid to make their distribution systems more efficient.  For example Xcel's representative said that their goals, in order of priority, were improved utility efficiencies, improved asset operations, asset life extension, recapacitating existing infrastructure, and (lastly) new assets and services.  All of these except the last are upstream improvements which are unlikely to be seen by the customer.  While smart grid applications which allow residential users to understand our own power consumption may be more exciting to us, these are unlikely to be the first applications which the utilities choose to roll out in a big way.

Energy Efficiency

Energy Efficiency stocks are likely to be big winners, simply because of the amount of money in the stimulus directed towards building retrofits, both for low income and federal buildings.  If anything, however, energy efficiency can be more difficult to invest in than Smart Grid, because good efficiency measures tend to have more to do with system integration than with products.  That said, there are a few products which seem likely to get a boost.  First and foremost is insulation, which will be used extensively in weatherizing homes and businesses.  Owens Corning (OC) gives the best exposure to this sector, since major competitors Johns-Manville is owned by Berkshire Hathaway (BRKA), and CertainTeed is owned by Paris-traded Saint-Gobain, a more broadly diversified building products group.

Other energy efficiency products which are likely to see a boost from ARRA funds are ground source heat pumps, which will be likely to feature in multifamily residential and commercial building retrofits.  I profiled heat pump companies Waterfurnace Renewable Energy (WFIFF.PK) and  LSB Industries (LXU) in December, in anticipation of the stimulus package.  LED lighting company Cree, Inc is also well placed to take advantage of energy efficient building retrofits.  Other companies which may benefit are small innovators which have efficiency improvements targeted towards specific applications.  One such is AltEnergyStocks.com sponsor Power Efficiency Corp (PEFF.OB), which sells controllers which improve motor efficiency in variable-load applications such as escalators and rock crushers.  

Geothermal Stocks

Despite Geothermal Power's small contribution to overall electricity generation, both Xcel Energy and Tri-State Generation and Transmission mentioned geothermal power as something they were looking to pursue with ARRA funds.  If these plans come to fruition, likely beneficiaries are the industry leader Ormat (ORA), a vertically integrated geothermal company, which I consider attractively priced around $25, and Raser Technologies (RZ).  Raser could be particularly well positioned to benefit from the stimulus because they focus on building and commissioning geothermal plants much faster than industry incumbents such as Ormat by using off-the shelf turbines from United Technologies Corp. (UTX), allowing them to get projects up and running much faster than their competitors.  This should be a particular advantage when competing for stimulus dollars because of the emphasis on speed in the ARRA, which requires projects to be completed by 2012.

Electric Transmission

The Western Area Power Administration (WAPA), a federal agency, was given both new funding and authority to plan and build new electric transmission in its territory to deliver power from renewable sources.  They have already begun the planning process, and their representative was enthusiastic about the process.  These projects will likely be in partnership with private companies, and so several of the transmission companies we listed in anticipation of the stimulus package are likely to benefit.

Batteries and Energy Storage

Although batteries were not mentioned directly in this utility-oriented symposium, two speakers mentioned that they would be interested in using plug-in hybrid electric vehicles as part of a smart grid pilot project.  Both Xcel and Tri-State mentioned that they had specific Compressed Air Energy Storage (CAES) projects they would look to fund through the stimulus package.  CAES is the second most cost effective way to store electricity on a large scale (the first being Thermal Energy Storage in conjunction with Concentrating Solar Power), but I do not know of any public companies focused on this technology.

Finally, the symposium did not focus on transportation infrastructure, and so I have not mentioned rail and transit companies which may also benefit.  See our Clean Transportation archives for some of our ideas in these sectors.

Tom Konrad, Ph.D.

DISCLOSURE: Tom Konrad is long ITRI, ELON, ENOC, GE, TLVT, WFIFF, LXU, ORA, RZ and PEFF.  PEFF is also an advertiser on AltEnergyStocks.com.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

 

January 21, 2009

Alt Energy & Obama's Inaugural Address

Most people have probably seen and/or listened to Barack Obama's inaugural speech by now. In the second presidential debate, Obama ranked energy as his top priority (the choices offered by the moderator were: healthcare, entitlement reform and energy). As I pointed out earlier this week, the President picked an inner energy and environment circle that is heavily tilted in one direction: combating climate change and promoting alternative energy.

We were thus very interested to see if Obama would place a strong focus on energy issues in his inaugural speech given the precarious economic environment. After all, that is probably not where he stood to score the most points.  



We were not disappointed. Here are all energy-related quotes in the speech:

"each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet."

"We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together." (Emphasis ours)

"We will harness the sun and the winds and the soil to fuel our cars and run our factories."

"With old friends and former foes, we'll work tirelessly to lessen the nuclear threat, and roll back the specter of a warming planet." (Emphasis ours)

"And to those nations like ours that enjoy relative plenty, we say we can no longer afford indifference to the suffering outside our borders, nor can we consume the world's resources without regard to effect. For the world has changed, and we must change with it."

We've already discussed this topic at length so I won't be delving into the meaning of every quote. Suffices to say that the President made all the right noises as far as alt energy investors are concerned, and he managed to do it five times in the space of 20 minutes.

You can find a full transcript of the inaugural address here.

January 18, 2009

What's In Store For Alternative Energy With Obama's Cabinet?

As the Obama inauguration nears and his cabinet picks are made public, the impact of his presidency on the alternative energy sector is becoming more tangible. During the campaign, we heard plenty on Barack Obama's views on environmental regulation, climate change and alternative energy. But what about the people who will be advising him day-to-day on these matters, and who will be ambassadors both inside and out of the country for the administration's policies?

One thing is for certain: Obama's picks so far for positions with influence on energy and environmental matters mark a clear break from the Bush administration. I was doing some reading on the matter and put together the table below, along with certain stock categories that could see some upside as a result of these individuals' influence on the incoming administration's policy agenda.

Name Position Responsibilities On The Record Stocks
Rahm Emanuel Chief of Staff Top administrator in the White House. Controls the flow of people and information in and out of the President's inner circle. Strong proponent of natural gas-powered cars; History of voting for clean energy initiatives and against measures favorable to the oil & gas industry Clean Energy Fuels (CLNE); Alternative energy ETFs and MFs
Hillary Clinton Secretary of State Strong foreign policy responsibilities. As far as the environment and energy goes, will be largely responsible for communicating and defending the administration's policies abroad. Get tough with OPEC; Wants "gas price manipulation" investigated; Favors cap-and-trade Emissions trading stocks  
Ken Salazar Secretary of the Interior Responsible for policies related to land management in the US. Tighten controls over oil royalties; Expand the use of renewable energy on public lands; Modernize the interstate electric grid; Cautious on oil shales and off-shore drilling Electric grid stocks; Wind power ETFs
Lisa Jackson Head of the EPA Responsibility for enforcing various pollution laws and regulations, and for setting pollution standards. Commitment to making decisions based on science rather than politics; Unveiled New Jersey's carbon emissions reduction strategy; Commitment to fighting pollution and climate change  Emissions trading stocks
Nancy Sutley Chair of the White House Council on Environmental Quality Main advisor to the White House on environmental policy. Oversaw a program to retrofit buildings in L.A. to increase energy efficiency; Views the roles of cities as important in fighting climate change Building retrofit stocks
Carol Browner Energy Coordinator This is a position that does not yet exist. Its main function will be to advise the President on climate policy. Record of enacting pollution standards Emissions trading stocks
Stephen Chu Secretary of Energy Broadly responsible for the domestic energy file. Strong belief in the urgency of fighting climate change; Proponent of energy efficiency; Very cautious on coal                          Emissions trading stocks; Energy efficiency stocks

To be sure, not all of these individuals will have the same degree of influence on the President, and past opinions or actions may not be an indication of future ones. Nevertheless, two main things emerge from this table, in my view.

First, few if any of these individuals have a history of cozying up to the fossil fuel industry, whether oil & gas or coal. This is markedly different from what people got used to under the Bush administration and while I wouldn't say this is grounds for shorting O&G or coal stocks, these industries should not expect energy policy to be as favorable as it has been over the past eight years.

Second, in most cases, these individuals have openly stated that they view climate change as a significant problem that should be addressed. It is therefore nearly certain that greenhouse gases will be regulated at the federal level.

Obama made his views on alternative energy and climate policy known a long time ago. His appointments confirm that he intends on carrying through with his promises. While I continue to believe that the White House won't seek to have tight climate regulations enacted as long as the economy remains soft, such regulations, likely in the form of a cap-and-trade system, will almost certainly be brought forward before this presidential term is over. 

November 07, 2008

What I Didn't Say About Obama and New Energy

I was interviewed for a story on NPR's Morning Edition which aired Thursday.  Tamara Keith asked me what Obama's election meant for Alternative Energy, and I felt many of my points were downed out by the others she interviewed.  Here's what she didn't put in the story:

  • Obama mentioned three challenges ahead in his acceptance speech.  He said, "We know the challenges that tomorrow will bring are the greatest of our lifetime: two wars, a planet in peril, the worst financial crisis in a century."  Of these three challenges, two were thrust upon him, but he chose to tackle climate change.
  • When choosing which Alternatives Energy to support, Obama is likely to consider if they 1) will be cost effective, 2) will create jobs, 3) are necessary for transformation, and 4) promote citizen involvement.
  • The sectors which best fit the above criteria are Energy Efficiency (Cost effective, Jobs, Citizen involvement) and Transmission and Smart Grid (Cost effective, necessary for transformation.)
  • Obama has the skills needed to get people thinking about energy, and overcome the behavioral and attitude barriers which cripple efforts to promote energy efficiency.

At the same time, AltEnergyStocks.com Editor Charles Morand was doing a live interview on the CBC Radio Noon show at practically the same time.  Here is his article about EarthFirst Canada (EF.TO, ERFTF.PK), which was the subject of the interview.

Tom Konrad

January 27, 2008

The Presidential Candidates on Clean Energy

Politicians will always have an influence on the stock market, through regulation, tax policy, incentives and more.  This truism is only more certain in energy policy, where electricity markets and transport are highly regulated, and the next administration is widely expected to enact some sort of carbon regulation, if not a tax.  

Last night, I heard the head of the Colorado Governor's Energy Office speak on what the state administration is doing on energy policy.  Our current governor, Bill Ritter, ran on a three part platform: working to fix Colorado's healthcare, transportation, and energy policies.  Last year, the administration mostly focused on energy, and although healthcare and transportation will get more attention this year, there are already several energy bills on the legislative slate.  This is because "Nobody is certain what to do about transportation or health care, but we do know what to do about Energy."   This scenario may also be familiar to residents of California.

Since we do know what to do about energy, do the remaining US presidential candidates?  From the news coverage, I have to admit I'm far from certain.  My impression has been that most of the Democrats and John McCain among the Republicans have been talking a good game, but repeated mentions of potentially problematic technologies and policies such as "Clean Coal," Biofuels, Carbon Cap'N Trade, Nuclear power, and even Coal to Liquids, leave me wondering if even the best of intentions might lead to bungled energy policy.

If I Were President...

There is no doubt that energy policy is complex.  Nevertheless, energy policy much more tractable than solving our nation's healthcare crisis, the looming unfunded costs of entitlements such as Medicare and Social Security, or even what to do about the mess in Iraq.  In short, I feel I know why Al Gore isn't running for President again.  

It is true that many of the candidates have health care plans as well as energy plans. but until some other unsuccessful presidential candidate reinvents himself (or herself) by trudging around the nation with a slideshow about healthcare, I doubt our next President will be able to do more than apply a band-aid to any of these problems.  (I sincerely hope to be wrong on this.)

In contrast, Energy policy, while complex, provides clear opportunities for improvement.  

  1. Improved energy efficiency provides winners all around
  2. Strengthening our national grid is essential to large-scale renewable energy development.  
  3. If a Carbon cap is chosen over a carbon tax, it needs to be carefully designed to avoid rewarding polluters without significantly reducing pollution.  
  4. The entire life-cycle of transport fuels needs to be considered to ensure they don't do more harm than good.  
  5. All externalities of transport solutions need to be considered to avoid unintended consequences, such as higher fuel economy encouraging driving and hence contributing to congestion and accidents.  We need better transportation systems and smart growth more than we need better cars.  
  6. "Clean Coal" and ...
  7. Nuclear are likely to be much more expensive when true costs are taken into account than cleaner options with less active lobbyists. 

Admittedly, several of my above points are controversial, but they're less controversial than turning off life support on a brain-dead Florida woman.  And they're orders of magnitude more important. 

Grading the Candidates

I'm doing this exercise partly for my own benefit; I don't know how the candidates are stack up against each other, and I still have a caucus to participate in.  What follows are my grades of the remaining candidates on each of the seven above criteria.  Keep in mind that I give candidates low grades on "Clean Coal" and Nuclear if they support subsidies for these technologies.   I assume that the candidates who are not currently talking about energy policy will not attempt to do anything about energy policy.  

Democrats:

All of the democrats have put real effort into their proposed energy policies, but only Obama considers it one of his highest priorities.  Links are to sources other than the candidates policy statements.

  Hillary Clinton John Edwards Barak Obama
Energy Efficiency B A B
Transmission/Grid C C B
Carbon Regulation B B B
Transport fuels C F B
Smart Growth C D B
"Clean Coal" D F C
Nuclear C B C

Republicans

Rudy Giuliani and Mike Huckabee seem to consider energy independence (a chimera) more important than reducing carbon emissions.  Ron Paul shifts the subject to property rights, while Mitt Romney waffles about whether climate change is caused by human action.  Given this backdrop, I cannot take any of their energy policies seriously.

While John McCain also emphasizes energy security, he puts priority on combating climate change.  If you are a Republican who cares about this issue, he is the only one likely to take any meaningful action.

Energy Efficiency C Smart Growth F
Transmission and Smart Grid B "Clean Coal" D
Carbon Regulation C Nuclear D
Transport Fuels C    

Conclusions

I'm surprised to find that Barak Obama is the best candidate for the Clean Energy voter.  I started this project remembering the furor he aroused with his support of Coal-to-Liquids technology, but his subsequent "clarification" that he was only interested in low-carbon coal to liquids seems to have taught him a lesson about transport fuels, and that early misstep may have led to a more comprehensive look at the tricky issues of transport fuels.  This may be why he now takes the lifecycle costs of transport fuels seriously, while they aren't really on other candidates' radar.

Obama is also the only candidate who explicitly calls energy one of his highest priorities.  I can't say I'm in love with any of the candidates (note the almost total lack of "A" grades.)   John Edwards earned the sole "A" because he panders towards interest groups.  On energy efficiency, he managed to hit one of my hot-button issues squarely, but then he went and blew it by pandering to the ethanol and "Clean Coal" lobbies.  

A major part of Clinton's platform involves forcing oil companies to invest in renewable energy, an idea that does not fit into my rating schema.  I think this is a bad idea, because reluctant investors are unlikely to make intelligent investments.  Even without Clinton's paln, oil companies that understand peak oil will invest in alternatives, and oil companies that do not will decline along with their reserves.  

With my discomfort with Obama's initial endorsement of Coal-to-Liquids, and Edwards' habit of pandering to every interest group at the expense of his own coherence, I used to lean towards Hillary.  I'm now convinced that Barak has the best grasp of the issues involved. 

Republican Clean Energy voters have a much easier choice: only John McCain is willing to confront Climate Change.




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