Once upon a time in a land not far away from our memory, we experienced an extended period of economic growth. We actually manufactured things here in the US instead of importing them from China. We built homes by the subdivision instead of tucked them into some odd-ball sized inner city space. We needed mobility so we built the interstate highway system. We sent men to the moon and imagined entirely new ways to communicate with each other. I’m describing, of course, the post WWII America that gave rise to the baby boomers and the technology revolution they created.
We needed energy to run that America and we built power plants that were fueled with coal because we had plenty of it and it was cheap. Yes it polluted the air and over time we got progressively more serious about cleaning it up with new rules and better technology.
And then the world turned upside down with oil embargos, energy crisis after crisis, the Fuel Use act which prevented using natural gas and then the Natural Gas Policy act which encouraged it, the Energy Policy act which allowed wholesale power competition and then the emergence of renewable energy from wind and solar since Three Mile island scared us off from building more nuclear plants and inflation and regulatory delays made them prohibitively expensive.
We went from being optimistic and growth focused to pessimistic and constraints focused.
Fast forward a decade and we’ve reached a middle ground where we’d like to manufacture things in America AGAIN to create jobs, but we’re worried about global warming (or climate change or climate disruption depending upon how Al Gore explains the latest meltdown of his Inconvenient Truth) so today we focus on optimization and venture capital is being thrown at smart grid and its assorted technology disciples to conquer this middle kingdom.
Coal has not gone away but we don’t build as much of it anymore. Nuclear power has not gone away and we plan to build one new nuke in the South if the Japanese will build the containment vessel, the Chinese will let us into their AE queue, and the NRC will stick with the plan approved instead of changing it constantly whenever some group gets nervous.
Living in a scenario driven by optimization around green goals is a wonderful place to be if you can get there. But the costs are high because the technologies are new. Wind and solar are plentiful but intermittent and need back-up and besides the wind blows in places far removed from the markets we need to serve and the transmission lines are not always adequate to the task. And then there is still the Chinese quest for market share buying every commodity they can for domestic use, building export capacity to drive down prices just enough to discourage US manufacturing competitiveness in wind turbines, solar panels and many other products which as an intended consequence reduces industrial demand enough to discourage building the kind of baseload power plants with cheap domestic coal we used to build.
The question is are we getting the energy future wrong?
- Lower Average Energy Costs with Baseload. If we want to manufacture more things here at home and create jobs we will need steady or lower energy costs. The kind of energy costs we got from building baseload generation in a market environment where the incremental costs of new capacity brought down the average costs for all.
- Improve Efficiency through Competitive Market Forces. We’ve learned that wholesale competition for power generation is great at driving out the excess costs and driving up the capacity factors and efficiency of the plants. In a study we did of divested old power plants in the last decade we found that the improvements in the way the divested coal plants were operated produced enough efficiency gains to power 25 million typical American homes for a year. Similar improvements were found in the divested nuclear plants.
- Create Competitive Market Conditions for Manufacturing and Job Growth. There is much the US can do to restore its competitive market position and create jobs—driving up taxes and the costs of doing business are not among them. When we get serious about growth again we can get our groove back. The recession has officially ended but the pain continues, but America seems ready for changes in tax laws, investment policy and a focus on growth and job creation to create those competitive conditions.
There is nothing wrong with adding renewable energy, smart grid, efficiency and other technologies and strategies to our energy mix. But they are not sufficient to get the job done without tax and investment policies and certainty in our regulatory conditions to attract investment, restore economic growth and create jobs.
Our policy should focus on bringing down the average cost of doing business and that includes lower average energy costs. The only way to achieve that is through economic growth to increase energy demand with the baseload energy and competitive market policies (not un-sustainable dependence upon subsidies) to achieve it.
The place to start is creating a ferociously attractive market in off-peak energy use to jump start manufacturing and production again and then sustain that with the baseload resource to live into our long term economic growth strategy of getting our groove back.
The oil rig explosion and resulting spill in the Gulf of Mexico is a mess no one needs, and if it turns out it could have been prevented no one should tolerate. A worse disaster, however, would be allowing this incident to derail America’s economic recovery and its energy future.
The events of the oil spill are moving too fast to yet make sense of what happened while action is being focused to stop the leak and clean up the mess. What we read in the press is part speculation, part rant and part reporting.
What we know factually is that the oil rig exploded, the safety shut off valves which were supposed to close the spigot on the oil either did not work or were not there. We know that this oil mess is now going onshore and threatening the wildlife, environment, and economy of the Gulf Coast. We also know that this has not happened before or often despite thousands of wells and rigs in the GOM—for that we should be grateful and also encouraged.
We know that President Obama who just recently defied his base and spoke in favor of expanded offshore drilling now is covered in a sticky political and public relations mess as a result of this spill. Now there are ugly reports surfacing pointing fingers at BP and the Government for not responding fast enough to mitigate the damage and making comparisons to the Katrina response or the Exxon Valdez spill.
Congress, never wanting to waste a crisis opportunity for headline grabbing, grandstanding and scoundrel thrashing, has called a hearing on the spill for early May. Attorney General Eric Holder announced he was dispatching a team of investigators and lawyers to the scene to find someone to hang and prepare the way for the army of trial lawyers about to descend on the region.
We need leadership now to clean up this mess!
The difference between politicians and leaders is the latter keep us focused on the desired end result—on achieving the articulated goal and cheer us on to achieve it.
Imagine the power of President Kennedy saying to a disbelieving nation in 1961 that “before this decade is done we will send a man to the moon and bring him home safely. We will do these things not because they are easy, but because they are hard!”
Politicians, on the other hand, distract us with vilification and vitriol that slows down clean up of messes, discourages investment and responsible risk taking needed in our economic life to grow our country and live into its potential, and dispirit us when we most need to be lifted up. Do you think President Obama’s trip last week to New York to grandstand on Wall Street while Congress hauled the leaders of Goldman Sachs to the dock for a flogging will do anything to clean up the financial mess left over from the crisis?
Fortunately, America is strong enough to weather the crises!
The good news is it will take more—much more, than a recession, a big oil spill, or an over-reaching government to tank the American economy or our spirit. We will clean up the mess on Wall Street and in the GOM! We will learn from the experience, fix the things that went wrong with remedies that do more good than harm to the patient.
The other good news is that while our politicians are ranting and over-reaching in the here and now, the American people still believe in and are still focused on living into the American dream and thus the long term goal of the prosperous pursuit of happiness for ourselves and our posterity in markets as free and competitive as we can tolerate.
So I’m going to end this rant with some “hopey, changey” things you can believe in:
- North Dakota has 2 billion barrels of onshore unconventional oil and gas—much more than expected according to the latest report from the North Dakota Industrial Commission. Read about here and be encouraged :
- ARPA-E invests in President Kennedy’s Vision by its focus on transformational technologies and primary research not because they are easy but because they are hard. Read about it here
- Honolulu is creating a District Cooling Project using cold ocean water to displace fossil fuels for A/C saving tons of emissions and reducing the need for 14 MW of power generation all at an amazingly affordable estimated cost of $245 million without a mention in the story about federal stimulus money, earmarks or grants. Read about this project here:
So turn off your TV and quit listening to ranting politicians distracting us from our dreams and discouraging us from using our imagination and resourcefulness and go out there and do something hard for America!
There is a growing body of anecdotal evidence to suggest we may be at the crest of the smart grid wave and key players are beginning to map out an exit strategy. They are not yet running toward the exits but there is a sense that time may not necessarily be their ally so the pace is quickening.
Smart grid hype was born out of the global warming movement in the belief that improved efficiency in the use of electric power would result in easier access for clean and renewable energy from wind and solar, fewer line losses or wasted power, and better grid management. And there is some truth to these beliefs since the transmission segment of the electric power value chain has been the most neglected. It has always been tough to build transmission lines because of NIMBY problems so smart grid became a way of wrapping transmission expansion in a political correctness that might make it more acceptable. After all, getting that wind energy from West Texas, Wyoming and Iowa to the load centers that need it most requires transmission. Likewise, unleashing the solar potential of Arizona and the Mohave Desert to bring that clean energy to Los Angeles meant investing in wires as well as solar panels.
The excitement over smart grid was fed by the seduction of billions of Government, venture capital and utility investment in smart grid technology. And it has now produced deal flow sufficient to accelerate installation of smart meters, sensors, boxes and the networks needed to live into the cleantech potential it promises.
So why—-when smart grid potential is reaching its peak is this first wave of investors in smart grid looking for ways to cash in or cash out?
Signposts of the Smart Grid End Game Taking Shape?
- Cleantech Investors were in it for the flip. Many of these early Silicon Valley cleantech investors are not “true believers”. They saw cleantech as a profitable way of aligning the market and politicians to cash in on the global warming concerns. Just like Al Gore, these players looked for ways to make money on our fears and pain points. Seed money produced a wide range of start-ups all across the cleantech value chain leveraging the networks, software, gadgets and chips that made Silicon Valley famous. More importantly, it created a global market for the innovative technology America does best and united it with the low cost manufacturing efficiency of China and the social welfare tendencies of Europe “juiced” by the EU fear being dependent upon Russian gas. Obama became the darling of Silicon Valley because he proved willing to spend our money pursuing a policy regime that enlarged the Government’s industrial policy and social engineering—and paid off for Silicon Valley. But now it’s time to put lipstick on this pig and flip it. So Silver Spring Networks is talking about IPO? Consolidations from M&A is speeding up as smaller weaker players are acquired by stronger ones. This is happening sooner than expected but the return on investment is sufficient to do well by having “done good” before the risk erodes the value peak.
- Risks for Smart Grid Investor are Rising. The dirty little secret of smart grid is that all that investment in smart meters, networks, sensors and gadgets is meaningless unless state regulators and politicians do two things they are loathe to do—raise rates and build transmission lines. Since ratepayers are charged based upon average cost based rates they have little incentive and even less ability to influence demand on the system. Smart grid technology works by using real-time pricing so that customers, being exposed to the volatility and high costs of on-peak power change their behaviors and reduce demand. Smart grid technology taken together is well suited for this, but customers are not ready for it and politicians see it as something to consider—in the future. As a result we get all the embedding costs of adding smart meters and none of the benefits. Add to that the need to build new transmission to bring that clean wind and solar power to load centers and costs are going up—and so are rates. Not a good set of facts for investors seeking to monetize their start-up investments so it might just speed up the exit for many.
- Ratepayers are angry over rising utility rates. The cumulative cost of all this “do-gooding” is beginning to hit the utility bills just when ratepayers can least afford it. The result is pushback by ratepayers, complaints to politicians and pressure on utility regulators. But it is too late. The costs of years of procurement of cleaner, but more expensive renewable energy is coming due. The rate impacts of program after program of energy efficiency, demand response, subsidies and feed-in-tariffs paying above market costs to get cleaner energy resources built is going into rates. In California, PG&E gets pushback in Bakersfield over high utility bills and politicians run for cover. In Colorado, Xcel Energy does “good” by sponsoring Smart Grid City but when the cost go up—way up, the Colorado regulators slap it with a prudency review and threat of disallowance. In Florida, the Public Service Commission denies most of FPL and Progress Energy’s rate increases and both utilities respond by slashing capital investment and thousands of jobs. It’s getting ugly out there in ratepayer city—and the worse is still to come.
- We Told You It Would be Expensive! The age old process of CYA is setting in big time across the smart grid landscape. In Spain and Germany, the use of feed-in-tariffs to pay above market costs for solar energy imploded in the recession and the governments decided they could no longer afford the subsidies. The action in Spain pulling back on the FiT caused worldwide chaos in the solar PV panel supply chain as Spanish vendors dumped panels at less than cost to avoid being stuck with them sending PV prices around the world plummeting. The lesson: what lives on unsustainable subsidies cannot be sustained when they dry up. Now in the US there are growing concerns that utility investment in smart grid especially smart meters may turn out to be a poor one since the prospect of real-time pricing diminishing at the same pace as the rise of ratepayer squealing about rate increases. The same is true of other global warming “solutions” where in California the implementation of AB32 remedies to reduce emissions are likely not cost effective unless the market price of natural gas rises to $13.87 per mmbtu and a carbon tax of $100 per tonne is imposed according to the state agencies responsible for implementing this law. Even in California we have limits.
- Settled Science is, perhaps, Not So Settled after all. The meltdown of the Copenhagen COP15 climate change treaty process is only one of the problems plaguing the proponents of global warming solutions. The IPCC panel scandals over research manipulation has destroyed the credibility of the foundation for smart grid, AB32 like draconian measures to reduce emissions, real-time pricing and perhaps even renewable portfolio standards for clean energy by the time it runs its course. I am not cheering this on, just stating the reality that the implosion of the scientific basis underpinning all this hype on global warming and smart grid or clean energy solutions tarnishes these strategies in the face of their staggering cost. Perhaps, we do have time to find more balanced, affordable, cost-effective solutions that do not require the remaking of our global economy. And besides that, unless China, India and a few other fast growing economies agree to play by the same rules there is little reason to commit economic suicide to pursue a policy prescription that will not work to reduce emissions.
So the pendulum is swinging back and a sense of balance, proportionate response, and re-examination of the facts and science is likely to save us from our own political folly—this time. Cleantech investments will produce a rush of new products that the natural process of consolidation and flip will combine into better solutions. Subsidies and stimulus will give way to economic rationalism once again. The aftermath of the recession will have purged our economy of its unrealistic leverage and our next few rounds of elections in the US and EU body politic will purge incumbents and relieve the pressure of excessive spending—we hope.
Investors in cleantech and otherwise will do what they do best—harvest profits and move on to the next big thing. And their investment in smart grid may yet be realized—not thru stimulus or subsidies but by leveraging the convergence of information technology, communications, entertainment, security and, yes—energy management to create the next generation of ‘must have’ and oh so cool products we will gladly spend money to acquire and use. Look around you, it is already at work.
Check out the latest AT&T ad for its iPhone which touts—almost in passing—the iPhone App for “did we turn off the light at home before we left?” It’s here today. Or consider the new Comcast ad for Xfinity, the next generation of bundled services with 100 mbps bandwidth for streaming TV combined with VOIP, cable TV and a menu of thousands of movies and soon apps to meet your every need.
Smart grid investment will pay off in the long run but not because we bankrupted ourselves to install them—-but because —in the nick of time—we didn’t!
The ARRA stimulus bill targeted $36.7 billion in spending for energy investments, with solar, wind, and the smart grid as the major focus for spending while biofuels, energy storage and carbon capture and sequestration projects saw targeted financing. This Federal money certainly stimulated the venture capital sector that saw it as a once in a lifetime cleantech binge.
Analysts said there were 356 deals in 2009 including 110 Series A and seed round start up deals, compared to 350 deals in 2008 and 222 deals in 2007 with a 2009 total capital invested of $4.85 billion down from $7.6 billion in 2008—the record year. Venture capitalists continue to bet heavily on cleantech and renewable energy with solar power investment of $1.4 billion in 84 deals according to GTM Research continuing its four year lead in the category. Biofuels saw $976 million in investment perhaps responding to the big bet made in the sector by XOM. 
The sleeper in the race was water with 33 deals totaling $130 million. Water and energy have always been integrally linked but the best way to profit in the water business is to provide the technology, advanced process services and equipment to increase supply, reduce waste and improve the efficient and cost effective treatment of water.
The Great Cleantech Flip Ahead?
The market also saw an uptick in capital investment from outside the United States and that combined with the stimulus and VC spending binge suggests rising demand for cleantech opportunities might mean a rush of IPOs in 2010 to cash in big time before the inevitable consolidation process eats some of the best opportunities. Timing seems right for increased deal activity in 2010 because Federal stimulus money is drying up and prospects for more gravy out of Washington are greatly diminished over worries about the deficit.
The VC trade press says investors are looking for opportunities in smart grid infrastructure perhaps hoping to pick up products and capabilities that can “tuck under” to make more complete and thus valuable solutions. The bigger fish are also looking opportunistically to eat the smaller fish in the consolidation process. Any anyone who did NOT get ‘stimulated’ or got VC capital infusion and now is threatened by those that did turning them into ‘fish food’ in the consolidation process now underway.
Global Competition is Good
The other factor at work is that as the markets improve we need for more deal flow to put capital to work, consolidate market share, and position for the next boom. This is a global competition with the US, EU and China as healthy rivals for this investment.
Fish Stew with Sour Wine in EU
The EU today is the weakest of the three global rivals with problems in Euro zone in Greece, Spain and others. Germany and France are working to address the economic problem but it is a distraction, adds uncertainty, and will require bailouts to prevent more damage. UK investors seem more attracted to the US markets than Europe leaving the problem to Germany with France along for the ride. Renewable energy in EU took big hits with the failure of feed-in-tariffs in Spain and then Germany two of the largest markets causing equipment prices to tumble worldwide as vendors dumped excess solar panels and China slurped up FiT subsidies from existing contracts.
China Demand for Growth is High but Sustainable Growth Means Coming to America.
Strange as it seems from the political sparring between the Obama Administration and China over issues like arms sales to Taiwan and chicken parts, Iran nukes and North Korea sanctions issues, these two rivals seem linked at the hip even if the lips are bantering. Rivalry results in tiffs like this but the core relationship between the US and China is too interdependent for either to do something stupid.
China needs American markets to export its goods and sustain its growth. It buys US dollars and increasingly invests capital in US assets and businesses to further diversify its portfolio and reap the benefits from the most stable world economy returning to growth. Besides, China needs something only America can provide—technology and brainpower to deploy it.
The US needs China to finance our deficit and recovery by continuing to buy dollars and increasingly invest in American business to allow the US Government to dig out of its deficit hole. The US also needs China to drive down the cost of goods sold and especially to drive down the cost of renewable energy equipment such as solar panels and wind turbines to grid parity prices with natural gas. Unless this happens, renewable energy is not sustainable or affordable long term.
If the global rivalry is managed and healthy both China and the US can win big time. If they permit other issues to distract them from their strategic relationship both lose potentially big time.
The US is the World’s Best Hope for Recovery
Like it or not, the US is still the world’s most influential superpower even when its economy is weak. We likely will survive the Obama Administration stumbles with a big debt but that can be fixed over time with a robust recovery. That must be our single minded focus—putting Americans back to work and leveraging their ingenuity to drive markets, technology, innovation and growth around the world.
Grid lock in Washington DC is a wonderful thing.
It constrains the worst aspirations of both political parties. Recent elections in the US have humbled the Democrats, but the Republicans make a huge mistake if they see the Democrats stumble as their gain. Voters are surly and have a ‘pox on both your houses’ attitude that will require human political sacrifice to purge. And November 2010 is shaping up to be a time of wholesale political sacrifices threatening all incumbents. This sends our beltway bandits running for cover, but voters smell blood and will not be denied. There are risks in electing a new Congressional majority of people with little elected office experience, but the genius of America has always been our ability to reinvent ourselves when we needed it most. America is in the early stages of that process of renewal which will play out in 2012 in the next presidential election.
The Return of Prudence in Energy Costs Looms
Meanwhile we have market and economics work to do. On the energy front we have seen explosive growth of clean and renewable energy from wind and solar. We have been over stimulated in smart grid investment—ahead of its full potential—so we are likely to see a consolidation of players, firming of interoperability standards, and then a pause while the political issues that will determine the next wave are decided. The issues are mixed for the energy markets.
Renewable portfolio standards have created incentives for wind and solar growth but rising utility rates to pay higher than market costs for renewables are starting to hit the fan and ratepayers do not like it. In addition, we lack the electric transmission capacity to bring all this new renewable energy to market and we lack the political will to speed up the environmental review and transmission construction to make it work. NIMBY could crater the renewable energy market in the US over transmission line siting and construction.
COP15 meltdown and the collapse of credibility for climate science research have stalled emissions reductions advances. We do not know if this is temporary or fatal. The market for carbon credits is sinking like a rock in both EU and US with emissions allowances now selling for as little as $2 per tonne. At those prices there is no incentive to invest in more expensive solutions—just pay the penalty and let the government worry about it.
Smart meters are being installed as an accelerated pace but largely sit unused and un-useful without the changes in policy like real-time pricing or dynamic pricing as it is now being called to give customers the incentives to make smart energy decisions. Utilities face a tsunami of meter data heading their way with limited capability to do anything with it. Customers really don’t want all that information and as long as we continue to have rates based upon average prices and regulatory lag in rate cases—we just keep on living our lives.
So all of this geopolitics, venture capital investment, and policy hassle is going to converge in a giant pause as we await the next election and torment our politicians. Ratepayers will increasingly complain more loudly about rising utility bills and regulators will rediscover “prudence” looking for a way to slow down rate increases and save their skin.
Meanwhile, investors who want to cash out have two choices: sell out to now to strategic buyers looking for good deals and get your money out of cleantech, renewable energy and smart grid while the getting is good. Or, if you feel lucky, wait for a good window in an improving economy and try the IPO route to cash in big time.
The problem with the latter strategy is that window of opportunity may not arrive in time and the global competition is going to keep moving. Sit and wait to cash out and you may miss the next big wave after cleantech or the hassles over rates and policy may hurt your flip.
My prediction: Prepare for the big fish food feast ahead where flip, consolidation, and a new focus on riding the next wave will be on the menu. What is that next wave? Well, think about it, you really don’t need any of this cleantech, smart grid or renewable hassle if you control the communications networks to make all of that as well as streaming TV, home area networks and the more fun side of life work faster, better, cheaper do you. Now we’ll pay big money for entertainment and faster, wireless communications on new iPad toys. Energy—its a big hassle.
Can I get the sports package with that? To go, please.