GreenGold: 2011

Wednesday, December 14, 2011

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

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 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 both incorrect and both are 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.

Wednesday, November 9, 2011

Feeling Blue About Green? Reasons for Cleantech Optimism...

There are so many easy reasons to be a pessimist today: the world financial crisis, the discord and dysfunction in Washington, and the almost certain doom that many scientists claim we are facing from global warming. With the first high profile cleantech company failures, the euphoria of the cleantech bubble has burst creating pessimism about the future of cleantech as a whole.

I say, hogwash! History says we have many reasons to be optimistic. Just because things look bad today doesn’t mean the world is coming to an end! We humans have a hard time stepping back and getting a perspective on things that span long periods of time and it’s easy to get lost in the fear and distress of the day. But as a cleantech venture capitalist, I am almost required to be optimistic. How else could I make high-risk investments in early stage companies?

With renewable energy representing only 8% of consumption in the U.S., no doubt there is work to do. But I prefer to look at the cup as 8% full. Consumption of renewable energy has been growing rapidly in the U.S. -- at an average rate of 7% the past several years. At that pace, renewable energy consumption would double less than every 11 years.

Pessimists will point to forecasts such as those from the Energy Information Administration that project significantly slower growth. The most recent of those very projections just three short years ago forecast consumption for 2010 that now, by EIA’s own numbers, are known to be about 17% low! The problem with forecasts of these types is that they systematically fail to account for future disruptive technologies or significant changes to market conditions.

In 2001 it seemed like the days of the dot com were gone as the markets crashed and company after company went out of business. Yet, the greatest value creation on the Web occurred after the dot bomb. I don't believe we are doomed; I believe that technology innovation will enable disruptive changes in our energy production and consumption and I believe the greatest value creation for cleantech companies lies ahead.

So, to cheer you up, here are just a handful of examples in which past forecasts of doom were way off and whose combined legacy says, " Don't underestimate the power of human innovation and spirit!"...

We Never Had to Import Liquefied Natural Gas

Just a bit over six years ago our nation was facing an extraordinary natural gas crisis. As utilities had shifted to gas-fired plants in the ‘90s to reduce consumption of coal, consumption of natural gas boomed. As the cleanest and lowest CO2 burning fossil fuel, natural gas was (and is) being used as a critical bridge from coal and oil to renewable energy sources. Yet natural gas production was on the wane because proven reserves couldn’t keep up.

In 2003, Alan Greenspan sounded the alarm to Congress about the potential impact on natural gas prices (which were already on the rise) if significant action to increase imports wasn’t taken. The problem, though, was that natural gas can only be transported by pipeline or by container and only in a liquid form, but the reserves were mostly overseas. So, in 2005 there were plans for as many as 55 Liquefied Natural Gas (LNG)-importing facilities. Only six were built, and most sit idle today. Disruptive horizontal drilling and fracking technology opened up enormous reserves of previously unreachable natural gas in shale. Production skyrocketed and prices dropped by over 60%. Current estimates place U.S. reserves at 100 years or more…without additional technology.

Disruptive Lighting

In the 1960s, Light Emitting Diodes began to come to market for niche applications. The concept that they would someday disrupt the world of lighting seemed far-fetched. They were dim, extremely expensive and incapable of generating pleasing white light. My, how the world has changed in just a few decades! The brightness of LEDs has increased more than five orders of magnitude while, at the same time, their cost per lumen (a measure of brightness) has dropped by about four orders of magnitude. And, to boot, pleasing warm and bright white light is now the norm. What seemed impossible just a short time ago is now more than possible – it is changing the way the world thinks about lighting, and the exponential improvement in LEDs shows no sign of slowing down.

The Population Bomb Didn’t Explode

In the 1960s predictions of world starvation by the 1980s were rampant in books like the best-selling The Population Bomb by Paul R. Ehrlich or theorists like Thomas Malthus. After all, back then world population was going to double every 30 years or so, meaning we should have had over 11 billion people in the world today! Yet, world population just reached 7 billion.

World population growth rates are now less than half what they were in the early ‘60s and continuing to decline. Based on today’s population growth rate and the continued forecasted decline, it will take about 100 years for human population to double again.

OK, you say, but that still means having 14 billion people on the planet in a hundred years! True, but in the 1960s another reason population doom was the rage was an assumption that agricultural production couldn’t keep up with the exponential growth. Yet, dramatic agricultural technology innovation that improved crop, soil, water, nutrient, and pest management has enabled the amount of food production per capita to increase by over 30% during that timeframe in spite of a more than doubling in population! Hunger still haunts parts of the world, but the pessimistic doom predicted in the ‘60s was far from today’s reality, in which the amount of food per capita has increased. One can only imagine where our technology will be in another century.

200 Countries, 200 Years…

Pessimists will surely find reasons to pan this article… for example, concerns about fracking fluids or the disparity in food distribution around the world. A pessimist sees these as reasons to stay pessimistic. An optimist sees them as new areas where we as humans will work to improve. So, if you are still feeling depressed and pessimistic, I will leave you with one of the more profound and optimistic views on world progress that I have seen. Hans Rosling is a professor of International Health at Karolinska Institute in Stockhom and his video 200 Countries, 200 Years is a sure cure for any pessimistic day.

Tuesday, October 25, 2011

Obama Cleantech Stimulus: Bad Policy, Bad Politics and Bad for Cleantech

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.

Monday, September 26, 2011

Top 5 Things Cleantech Entrepreneurs Fail to Understand About Raising Venture Capital

After decades of venture capital investment, growth and exit, the traditional focus areas of venture capital (such as IT, web and software) have developed strong entrepreneurial ecosystems. A high percentage of start-ups in these traditional areas come to market with one or more experienced entrepreneurs, or with a strong and active network of investors/advisors who have “been there, done that.” They know what it takes to raise capital and to build a great fast-growing business. Cleantech companies, however, are much more likely to be led by first-time entrepreneurs who often struggle to create an ecosystem of experienced people around them.

As a venture capitalist, I review hundreds of business plans each year and physically meet with roughly a hundred entrepreneurs seeking capital. I have the advantage of doing this through the eyes of someone who has been on the other side of the table, having raised venture capital for my own start-up before becoming a VC. And while there are certainly numerous exceptions, there are themes I see across cleantech start-ups that are not specific to their technology or market but which nonetheless impede their ability to raise capital. Here is the top five…

Technology is necessary, but not sufficient.

Many cleantech entrepreneurs are engineers or scientists. Although not the result of a formal survey, my perception is that many more have PhDs than what you find in internet start-ups. I don’t know if it’s a symptom of having achieved such a lofty degree, but many seem to believe that their phenomenal technology and their outstanding technical skills alone should justify an investment in their company. It isn’t. Weak entrepreneurs can take the most game changing technology in the world and drive it into the ground. Conversely, outstanding ones can take a good, but not great, technology and make a world-class business out of it (anyone heard of Microsoft?). So… in scientific terms, having compelling technology is a necessary but not sufficient condition for entrepreneurial success. Human capital must always precede venture capital.

Your 50-page business plan is a waste of time.

Will someone please tell all the college business professors that the traditional business plan is a dinosaur! No VC has time to read such a tome. Nothing ever turns out completely as expected, so writing a long document as if it will prescribe the future is silly. And by the time you finish investing the time to create such a detailed document it is most assuredly out of date.

Conversely, too little time is invested into building a robust spreadsheet financial model. Not a static five-year P&L – that is almost useless. Rather, what an early stage company needs is a financial model that can be used to run “what-if” scenarios, e.g. “What if our margins are less?” “What if it takes us a year longer to get to market?” A tool like this accepts that the future is uncertain and that entrepreneurship is about taking risk. As an entrepreneur, which would you rather have, a 50-page wish or a model of your potential risks?

The thought process that goes into fleshing out the basic elements of a business plan (e.g, market, competitive advantage, go-to-market strategy, financial model, etc.) is what is paramount. Entrepreneurs that recognize this look at their business strategy and financial model as planning tools more than as fund-raising tools. And they realize that communicating the results of that thinking must be done concisely.

Eisenhower once said, “In preparing for battle I have always found that plans are useless, but planning is indispensable.” Start-up businesses are no different.

A real advisory board isn’t just a list of cool names.

Some cleantech entrepreneurs get advice along the way that they should form an advisory board: Get some people with cool experience and ask them if you can slap their names in your business plan. That’s not an advisory board – it’s just a list of cool names.

A real advisory board not only has relevant experience and business contacts but also is actively engaged in the business, albeit on a very limited basis. They meet regularly with company leaders, have provided concrete material assistance to the company and they have a specific personal interest in the company. Such personal interest can take many forms, such as a stock option, a direct investment, a future executive role, prior significant personal relationship with a founder or clear strategic interest for their current employer.

Volunteer advisors who have no economic, business or personal connection to the company are cute. They are like the parsley on your breakfast plate – they make it look nice, but add little substance and… at least for this VC… leave a bad taste in my mouth!

25% gross margins and growth to $20M in seven years aren’t exciting

At the highest level, there are three types of start-up companies. There are high-growth businesses with venture potential. There are downright bad businesses. And there are steady growth businesses, which are not “bad” businesses – they just aren’t great venture investments.

Venture capital funds are mostly 10-year partnerships. We need to target businesses that we believe can generate huge multiples (typically 10x or more) on our investment in less than that timeframe so we get both liquidity and sufficient returns to make up for those investments that aren’t as successful. That means companies that can use our capital to drive extraordinary growth, unfair competitive advantages and healthy margins yielding an exit return far beyond a simple discounted cash flow analysis on the business.

My second cousins are billionaires. They built one of the first mail-order office supply companies to a dominant leader in its industry over 40 years (you can read their story in this book). They never raised a penny of equity capital. It was a great steady growth business that made them extraordinarily wealthy. Steady growth businesses can lead to phenomenal personal wealth, but that doesn’t make them good venture capital investments.

Last, but by no means least…raising capital is a social sport.

Quick quiz: What is the single most important element of raising venture capital? Your pitch deck? Your technology? No, no… your management team’s experience, right? Wrong… it’s your relationships with potential investors. Who you know is often more important than what you know in business.

The classic fund-raising mode for most cleantech entrepreneurs is to send their business plan to lots of funds, pitch at various cleantech business plan events and then wait to see who pursues them. They let the VCs drive the process. Few look at this as the sales process that it is. Don’t spam slews of potential investors. Rather, identify the funds that should be your top targets based on the investment interest they describe on their website. Pursue them like you should a prospective customer: qualify them, identify their hot buttons and always be closing on a time-bounded next step with them. And, as all great sales people know, getting an introduction is infinitely better than a cold call.

So, does that mean that only entrepreneurs who already have VC relationships can get funded? No, but that sure as heck helps a lot! And in this day and age, if you can’t get an introduction to me or another VC, you then you aren’t a very good entrepreneur. There are almost 500,000 people who know somebody who knows me on LinkedIn and can get you an introduction. Many VCs are equally well-connected – it’s part of what we do. So, which business summary do you think I take more seriously -- the one that comes in from our website without an introduction or the one referred to me by someone I know?

And with that, you now have as a perk for reading my blog, a free roadmap for increasing your odds of raising capital from me!

Friday, May 13, 2011

If Energy Were Free and Unlimited…

As soon as gas prices rise, our nation becomes focused on energy. When they drop again, it falls off most consumers’ radar. Yet the importance of energy goes way beyond the cost of filling up your gas tank or paying your electric bill. In often-extraordinary ways, energy is interwoven into absolutely everything that we need to live or that we love to do. One of the most useful tricks I learned in engineering school is that to put any problem in perspective, it helps to ask what if things were at zero or infinity. So, to put things in perspective, let’s ask the question…

“What if energy were free and unlimited?”

· People would be able to travel at bargain-basement rates.

Yes, the cost of land vehicle transportation, which is so much of the focus in the press, would drop by 25%-35%[i]. But, in addition, airline costs would plummet as much as 50%. With this would come increased commerce and maybe even greater worldly understanding, as more people are able to travel.

· The world’s growing shortage of fresh water would largely disappear.

A huge amount of energy is expended on the conveyance, pre-treatment, distribution and wastewater treatment. Energy represents 30% or more of a typical municipal water facility’s expenses.[ii] With free energy, water could affordably be produced in abundance through the highly energy-intensive processes of desalination, wastewater purification or even direct extraction of water out of the air.

· Few in the world would go hungry.

Today, energy represents roughly 30-45%[iii] of the cost of the food we put in our mouths. Farming, transporting, processing, packaging and retailing all consume tremendous amounts of energy. The price of food would drop and the availability of food would skyrocket. With free and unlimited energy, food could be grown affordably just about anywhere, given that water would be readily available and, where necessary, climate-controlled growing facilities would become inexpensive to operate.

· Economic prosperity would reign.

The correlation between energy consumption and standard of living is strong.[iv] Everything that we use consumes energy to be produced and transported. For example, energy represents roughly 50% of ocean shipping cost and 40% of aluminum production cost. Impoverished people would have more food to eat and cleaner water, their homes would become more comfortable, and the price of almost everything they buy would go down instantly, boosting their quality of life.

So, the next time you hear complaints about high gas prices for our cars, remember that energy affects much more than just the cost of your ride to work or trip to the beach. With this perspective in mind, it doesn’t take much to figure out what things would look like in the opposite scenario, where energy becomes extremely expensive and scarce as fossil fuels diminish. It isn’t a matter of whether we will move away from fossil fuel consumption; it’s a matter of over what time period and with how much economic, national security and environmental pain along the way.

The free market will most assuredly create more alternatives as energy prices rise. If we could be confident that future increases in energy prices would be gradual over a long period of time and that global warming was not a concern, there would be little reason to take any particular action. But history has already shown us that changes in fuel prices are unlikely to be gradual. And the growing industrialization of major portions of the world such as China and India mean that world energy consumption is likely to grow roughly 50% over the next 20 years.

This leaves little doubt about the direction of energy prices in a world dependent mostly on fossil fuels. From a venture capital perspective, it is this type of disruption that makes cleantech a compelling area for investment. From a policy perspective, if we are faced with high energy prices for an extended period of time or if global warming creates environmental chaos, the negative impacts could be extraordinary and would impact virtually every part of our lives. But, on the positive side, an expensive gas tank fill up would soon be the least of our concerns!

[i] Transportation:

o Fuel costs alone are roughly 45% of airline operating expenses and that doesn’t include energy costs incurred for ground support vehicles or buildings used by airlines.

o Driving a car would cost 25%-35% less per mile. (@ $3.50/gallon gas cost).

[ii] Water:

· 3% of all energy consumption used to move, treat water. 30% of municipal water agency expenses are energy.

[iii] Food:

· 17% of all energy consumption goes to creating and getting food to the grocery story. http://www.p2pays.org/ref/08/07686.pdf

· As a result, roughly $240B per year is spent in the U.S. on energy costs related to food.

· This equates to roughly $2,000 per family unit per year http://www.bls.gov/news.release/cesan.nr0.htm

· Those same family units spend roughly $6,400 per year on food.

· Thus, if energy were free, food could cost roughly 31% less. Then there is the energy cost of getting the food home, preparing it, clean dishes and disposing of waste.

[iv] World Prosperity

· Correlation to standard of living.

· Shipping costs.

· Aluminum costs.

Thursday, March 17, 2011

Renewable Energy Standards: Savvy or Silly?

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.

Number of States Accepting Various Types of Energy as “Renewable"

*Hydro: Highly limited in most states to exclude new large-scale hydro
**Waste Heat Regeneration: Two states allow Combined Heat & 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

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 above, 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.

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 other base load generation to effectively manage high percentages of renewable energy on the grid – all of which cost additional money.

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 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.

*Author's note: Two weeks after writing this post, the Obama Administration announced their desire to push for a national Clean Energy Standard which broadens beyond traditional renewable sources and includes some attributes similar to those discussed in this post.