This is part of an occasional series looking for signposts of our energy future. It is not a forecast or a prediction, but a search for clues about the path we seem to be following to meet our energy needs. I also included a few bumps in the road.
Feel free to add your own signposts to this non-exhaustive list.
Signposts of our Energy Future
- Unconventional Gas is a 100 Year Winner! The steady growth of natural gas supply from unconventional sources like shale plays across North America is real and sustainable. That was the clear message from speakers at the IHS CERAweek conference in Houston. Jim Mulva, CEO of ConocoPhillips told the crowd on oil day that the proved reserves of natural gas from shales has grown from 30 years to more than 100 years supply with more to come. While this is not new news it does represent a significant recognition that unconventional gas is both substantial and sustainable. Even Energy Secretary Steve Chu acknowledged that natural gas was the key to America’s energy security and a major factor in achieving any reduction in greenhouse gas emissions from coal. He told the CERA crowd that he had asked the National Petroleum Council to begin a study in Spring 2010 of the Prudent Development of North American Natural Gas and Oil Resources. So What? Expanding development of America’s domestic oil and gas resources is essential to our energy security and a key factor in restoring America’s global economic competitiveness. The potential for oil & gas from unconventional sources depends upon American technology and America’s oil and gas expertise being demonstrated in play after play across North America. Will this open the door to offshore drilling? Too soon to say. Will this be good for the environment? Yes, since natural gas has one-half the emissions impact as coal. Will gas expansion hurt wind and solar development? No, since renewables require backup to offset their intermittency. Is domestic oil and gas development good for America’s economy? DUH!!!
- Economic Recovery is Slow but seems Durable. OK, the glass is half full, but after all we’ve been through we’ll take it. Key signs of green sprouts include the sharp growth in the ISM index with industrial production up 5.3% since it bottomed out in June according to Wells Fargo Economics which also said that manufacturing jobs grew in both January and February suggesting that we have now eaten up excess inventory and suppliers are beginning to restock the shelves to meet the strengthening of consumer spending which has also been stronger than expected. Well Fargo Economics predicts real GDP growth of 3.4% in Q1:2010 but still sees slower growth by midyear. So what? So the rough spots remain stubbornly high unemployment which is always a lagging indicator and the continued problems in the housing sector. Other than that, Mrs. Lincoln how did you like the play.
- Is the Stimulus working? And do we Need it? The Administration and Democrat majority in Congress claim the $862 billion in stimulus spending approved is saving jobs and doing its job of turning the economy around. But others who are tracking the progress and problems with stimulus spending tell a different story. ProPublica reports that only $195 billion of the stimulus money has been spent with another $151 billion somewhere in process. You can read their report here. But if the Government cannot spend this stimulus money when we need it, do we really need it? And if the economy is turning around on its own BEFORE we get all this stimulus money handed out could we just save the billions not yet spent and reduce the deficit?
- Renewable Energy Market Share is Growing but So are Rates. We continue to see major expansion of the market share of wind and solar power generation across America driven by the state renewable portfolio standards. But this massive growth has only raised the total installed capacity of renewables to something like 9% but not even this fast growth is sufficient to materially affect the market share of coal and certainly will not do so cost effectively. So what? Utility rates are programmed to rise dramatically as the above market cost of renewable energy is factored into rates on top of the costs for emissions reduction and smart meters. And guess what, it won’t be sufficient to meet our growth in energy demand in a recovering market. OUCH!
- Electric Demand is Returning to Historic Levels—will that mean shortages ahead? The US EIA short term forecast for U.S. Electricity Consumption assumes 5.5% growth in manufacturing output during 2010 which means an expected growth in electricity sales to the industrial sector of about 1%. EIA forecasts electricity sales to the residential sector to grow by 3.5% during 2010 assuming normal weather. Total consumption of electricity across all sectors is expected to grow by 2.0% during 2010 and by 1.5% in 2011.  So what? These are signs that we are in the build up stage of the next electric boom and bust cycle and one signpost of that stage is perceived and real constraints on power generation. States have favored renewable energy for most new power generation additions and many, many coal plants have been cancelled or deferred in the face of uncertain cap and trade regulation. The Obama team has supported one new nuclear power plant project. We have reduced our lead time for power plant construction and a return to historic demand levels for power means that the only practical choice to quickly catch up to demand will be to build natural gas combined cycle plants. Got gas?
- US is not Serious About Electric Transmission. The failure of US DOE to release the 2009 Electric Transmission Congestion Study due to Congress last September is a clear signpost that the US is not ready to face up to the need to take substantial actions to upgrade and expand the interstate transmission system essential to bring new renewable energy projects to market and enable smart grid investment to be practicable. Problems are likely political given the historic conflict between the States and Federal Government over control of transmission siting. So what? NIMBY wins! Smart grid requires broad market access to make the networks and efficiency and demand response programs scalable. Without transmission access new renewable solar in the Southwest and wind in Texas, Iowa and elsewhere cannot reach the load centers. Federal preemption of the states in building natural gas pipelines has created a common market across North America for gas that is serving us well. The fragmented state by state approach to electric transmission is holding us back and undermining our investment in smart grid and renewables.
- Ratepayer Tea Parties Ahead. There is a looming problem of rising utility rates brought on by the pancaking costs of state renewable portfolio standards, feed-in-tariffs and other procurement subsidies, the cost of emissions reduction especially AB 32 in California, and the rolled in costs of smart meter installation. So what? So expect ratepayers to start coming to the street with signs when their rates double or triple over the next five years as a consequence of the political aspirations of politicians and regulators who have approved all these programs. Polls show that ratepayers do not see this coming and it is likely to hit the fan BIG TIME before the economic recovery fully takes hold.
May You Live in Interesting Times
Peering into our energy future always reflects the volatility and surprises that characterize the energy business. Add that to the natural boom and bust cycles of the business and you find a frothy stew simmering and ready to boil over.
The good news is we have more choices today given the growth in unconventional natural gas that reduces our dependence on imported LNG and turns upside down the once forecast transformation of our domestic gas market into a global gas dependence on the same countries that send us oil.
The other good news is the growth in clean and renewable energy from wind and solar and the exploding global demand that is bringing China and its low cost manufacturing prowess to bear driving down the equipment costs for wind turbines and solar panels. If some of the stimulus money allocated to energy ends up in China because we bought their renewable equipment it is a good sign that the Chinese are our friends because they are committed to driving down the cost of renewable energy to grid parity prices in order to capture market share for exports.
When they do that we can end the subsidies of wind and solar and force them to compete on a level playing field with natural gas and clean coal—and let the competitive markets work!
Now that’s an energy future worth working to achieve!
“We are demanding the Obama administration suspend this program immediately and indefinitely. We are sending a letter to Secretary Geithner asking him to halt all payouts for this program until we in Congress can go back and fix this law.”
Letter signed by Senators Charles Schumer (D-NY), Bob Casey (D-PA), Sherrod Brown (D-OH) and Jon Tester (D-MT)
An embarrassing firestorm swept Capitol Hill after the results of a study by Investigative Reporting Workshop showed that 79% of the more than $2 billion in clean energy stimulus payments granted since September 2009 were actually paid to foreign firms supplying wind projects. Remember this is the change in the law sought by the wind industry because the production tax credits and investment tax credits traditionally used to subsidize wind energy proved useless in the credit squeeze in recession.
Congress tried to mask the stimulus impacts by wrapping them in a ‘Buy America’ disguise for domestic consumption but howls of foreign protest forced the Obama Administration to soft pedal those constraints to avoid a rash of unfair trade practices complaints by global suppliers.
While this is hitting the fan now, it should have come as no surprise to those who understand the global supply chain for the wind industry. As demand for clean energy has grown it has attracted additional suppliers.
Nowhere has clean energy demand grown faster than China itself and so, surprise—surprise, the Chinese have ramped up production of wind turbines and used it both to satisfy domestic needs for wind energy as well as grow exports by scaling market share around the world driving down the cost of wind turbines. As prices for Chinese equipment put pressure on manufacturers in other countries we have seen a consolidation in the industry and the growing purchase of cheaper Chinese equipment by domestic installers eager to keep their deal flow going. The result is in country after country pursuing clean energy China has become a major supplier of wind turbines, solar PV panels, and is using its capital to invest in projects.
While Senate Democrats are screaming bloody murder over US stimulus money going to foreign wind companies the very same thing is happening for solar photovoltaic projects as well—so expect a second wave of wailing on Capitol Hill.
The other reason this should be no surprise is the same thing happened in the EU where the aggressive use of feed-in-tariffs (FiT) in Spain and Germany were used to rapidly grow market share in hopes of creating jobs for local vendors and reducing the EU dependence on Russian gas. It worked for a while and Spain and Germany became world leading markets for solar energy. Then the recession hit and the cost of the FiT subsidies became an increasingly unbearable burden. Spain blinked first and cut the subsidies claiming, in part for political cover, that the lion’s share of the FiT subsidies were being suctioned up by Chinese suppliers of cheap PV panels. Spanish installers caught with an oversupply of PV panels in a market the government was no longer willing to subsidize dumped their PV panels cratering prices on the global market for a while as supply swamped demand. Germany followed reducing its FiT subsidies. 
This food fight over beneficiaries of stimulus payments is coming at a very bad time for Congressional Democrats who look increasingly feckless so finding a common enemy to hammer is the oldest of Congressional traditions. Today it happens to be Senate Democrats going after the US Treasury and US DOE over the practical implications of American stimulus payments and subsidies being pumped into a global market for clean energy technology.
The answer, however, is not a “buy American” trade war since the US benefits greatly in the long run if China drives down the global price for wind turbines and solar PV panels to grid parity (sustainability in clean energy-speak) so they can be competitively installed by domestic dealers—without the need for a stimulus payment or a FiT.
I know this is not politically correct but it is good economics.
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.