Archive for September, 2008

As posted on Huffington Post and CleanTechBlog.com

An investment banker was quoted in Sunday’s Financial Times as stating that the global financial market “changed more in the past 10 days than it had in the previous 70 years.” (registration required to read the full article)

Given such a profound shattering of the status quo, I am skeptical that anyone can yet provide clear perspective or accurate clairvoyance stemming from the unprecedented meltdown still underway. Far be it from me to assume that I’m especially well-positioned to develop a superior synthesis - especially since so many of the pieces are still moving.

Even so, it is my professional responsibility - both to myself and to those I serve - to begin speculating how the current crisis may affect the realm of clean energy. I cannot claim much insight yet, but the following represents a few disparate thoughts that I offer to my colleagues across the physical and virtual worlds to advance the discourse.

Lower growth in demand. For virtually all goods and services for customers in the developed world, it is hard to escape the conclusion that demand will abate (Whether the economy falls into a severe recession or deepens into a full depression is anyone’s guess.) In turn, this means that energy demand will also see a softening. In the past year, demand has already declined measurably for gasoline, as customers have responded to higher prices by driving fewer miles and beginning to buy more efficient vehicles. Demand destruction will now be amplified by the effect of decreasing corporate and personal incomes.

Weaker dollar. In the wake of the calamities of the past few weeks, it also is hard to envision that the dollar can do anything but fall. If true, imported goods into the U.S. will become dearer (thereby further discouraging demands), though it will create new opportunities for exporters such as those developing and manufacturing clean energy products and services in the U.S. In addition, foreign direct investment in the U.S. will become more attractive.

Less debt, costlier debt. With even lending between banks at a standstill, it seems pretty clear that credit markets will be much tighter and debt will be much more expensive for a long time to come. Marginal credit risks - such as ventures in high-growth mode or projects entailing new technologies - are much less likely to be approved for loans. Even if approved, debt coverage ratios will increase. This means…

More need for equity. With less debt to fund expansion, companies and projects alike will require more equity in their balance sheets to achieve growth. Assuming an unchanged supply of equity (perhaps an optimistic assumption), higher demand will drive up the cost of equity alongside the rising cost of debt. A higher cost of capital (both debt and equity) in turn means…

Declining company/project valuations and increased investment hurdles. Higher discount rates, corresponding to an increased cost of capital, mean relatively more value associated with current results and less value ascribed to future possibilities. Certainty and stability become more prized and potentialities with limited near-term returns are punished.  Fewer transactions/projects occur, and those that do occur will happen at lower valuations.

Glut of financial professionals, illiquidity in carbon markets. As the financial institutions get swallowed up, shut down or shrink, lots of bankers and traders will be looking for work. Many of these people were likely to have worked in companies that were the leading players in the still-nascent carbon markets, so it is quite possible that those markets (and monetization of carbon reductions) will dry up.

Increased oil price volatility. With weakening economic conditions, there will be declining demand for oil from the developed economies, from which one might expect prices to generally decline. However, it is eminently possible that demand growth from the developing economies - especially the still-booming China and India - will more than take up the slack. Furthermore, the declining dollar also will put upward pressure on world oil markets, which are supplied mainly from overseas and increasingly denominated in Euros. Lastly, investment in new oil infrastructure or projects may be depressed by the adverse climate. All told, it’s hard to have much conviction about the future direction of oil prices, other than they will continue to fluctuate, perhaps even more severely than of late.

Risks to climate legislation. Though both the McCain and Obama campaigns have stated support to enact cap-and-trade legislation that would drive reductions in U.S. carbon emissions, the dramatically worsened economic conditions might cause either president-elect - and even more importantly, the new Congress - to be more wary of imposing a new set of environmental requirements that would entail a net cost to the economy. On the other hand…

Reduced appetite for laissez-faire capitalism. A wide variety of observers are clamoring that the current financial crisis is rooted in many years of lax regulatory oversight and excesses of unbridled capitalism. Whatever the merits of this logic, to the extent that such thinking takes hold of the public and political imagination, it could imply a general trend toward more interventionist policies and regulations in the energy sphere (and in other aspects of society). In the extreme…

Possibility of nationalization of energy activities in the U.S. I never thought I would write this, but the recent actions essentially to nationalize large parts of a financial industry formerly in private ownership provides a precedent for a not-too-distant U.S. government to take control of a similarly fundamental and strategically critical industry being besieged by crisis. Given the daunting challenges likely to be faced by the energy industry in decades to come, it’s not out of the question to see the same game played out in the energy sector.

Buying opportunities? Short of the U.S. stepping in, many companies and assets will be available to purchase. Savvy players with strong positions will be able to make some really good buys on the cheap. Potential case in point: the Mid-American Energy arm of Berkshire Hathaway announced that it is snapping up Constellation Energy Group, whose trading desk was essentially pushed to the brink by the lack of liquidity in the credit markets. By adding Constellation, the Warren Buffett investment vehicle is slowly but surely becoming an energy behemoth.

End of American financial hegemony. With the recent convulsions, I think it’s becoming clear that the era of undisputed U.S. preeminence is coming to a close, if not already having closed. The 21st century will belong not to the U.S. but to other powers - primarily China, but also India and (unless we move off of oil sometime soon) the OPEC economies. This means that U.S. interests cannot afford to think and behave as parochially as we have through most of our history. As I argued in a recent editorial in Cleveland’s Plain Dealer, and in a recent post on CleanTechBlog.com, many of the best opportunities for U.S. players will lie in China. The U.S. will simply be unable to afford to consider itself the only, or even the most, important market on the planet. 

In the coming weeks, as the outline of our society’s next-generation financial system becomes clearer, perhaps I will become more confident to offer more definitive speculations about the future of the clean energy world. Maybe some stronger causes for optimism will emerge. Until then, like everyone else, I too must resort to buckling up and watching events unfold further. Meanwhile, the storm rages on, and I expect more dominoes may fall.

Great blog post last week by David Roberts in the Huffington Post profiling a new country tune entitled “Drill Here, Drill Now”, written by a Nashville artist named Aaron Tippin.

For those who want to skip the music, here are the lyrics:

Hello … Is anybody out there listenin’ in Washington D.C.?
This is the suffering voice of America crying out for relief
Now I don’t know what a gallon of gas costs up on Capitol Hill
But we sure know what it costs down here in Realityville
And the damage already done has been a mighty heavy toll
And if we’re gonna fix it we gotta start right here at home

CHORUS:
Drill here, drill now
How ’bout some oil from our own soil that belongs to us anyhow
No more debatin’ we’re tired of waitin’ everybody shout out loud
Drill here, drill now

Every time a foreign tanker pulls up to our shore
They got us over a barrel while they bleed us a little more
And think how much it costs just to bring it all that way
And how many American jobs that’d make if we were drillin’ in the USA
Oh and God forbid if our oily friends should decide to cut us off
We’d be standin’ around with our britches down now listen to me ya’ll

REPEAT CHORUS

Well, the winds of change are blowin’
Yes and we recognize that need
But tractors, trucks, cars and planes can’t run on tomorrow’s dreams
So while we’re workin’ on the future we can’t ignore today
Cuz who knows how much time the alternative might take
Somethin’s gotta be done right now cuz friends it won’t be long
Before this great big country comes grinding to a halt

REPEAT CHORUS

I’m not anyone to critique music, or poetry for that matter. But in a recent post, I have previously dismembered the absurd notions offered by Mr. Tippin in his song that drilling for more oil in the U.S. is going to solve all our economic problems.

Rather than thoughtful humility and purposeful action towards real solutions for our energy challenges, the U.S. gets instead yet another example of beat-my-chest patriotism, overly proud and completely without substance.

As posted on CleanTechBlog.com

I just returned from my first trip to China, a whirlwind 10-day tour spanning the cities of Beijing, Shanghai, Guangzhou, Xiamen and Wenling. The trip involved a number of private meetings (some with senior public officials) as well as public presentations at PennWell’s China Power Oil & Gas conference and at a cleantech symposium hosted by the American Chamber of Commerce in Shanghai (AmCham Shanghai) at the annual China International Fair for Investment and Trade.

It is impossible in a brief blog post to give a detailed report on my visit, or to comment meaningfully about the profound issues confronting the whole world as a result of China’s rise and arrival to world preeminence. With this note, I will only attempt to offer some immediately apparent observations related to cleantech issues and opportunities in China that emerged for me from my visit.

POLLUTION

It is well-known that China is experiencing tremendous environmental challenges, with almost a million Chinese estimated to die each year prematurely from health issues stemming from poor environmental quality. Air visibility can sometimes be less than a mile on what would otherwise be an ordinary hazy humid summer day, though frankly, I was expecting the air pollution to be worse than it was.

On the other hand, the water situation shocked me. China’s Ministry of Environmental Protection (formerly known as the State Environmental Protection Adminstration) is said to admit that 60 percent of the country’s rivers are polluted to the extent that they can’t be used for drinking, and I have heard claims from American sources that a majority of Chinese rivers are so bad that the U.S. EPA would deem their waters to be unacceptable for industrial purposes (much less for drinking).

Even at the finest hotels, guests are warned not to drink the tap water, and bottled water is generally provided as part of the room rate. (In case any of you are eating while reading this, I won’t bring up the public toilets.) The other major surprise for me was how much worse the pollution situation was in the countryside than in the cities. Bad air, disgusting water and (especially) litter are much more starkly obvious in the poorer rural areas – a powerful indication of the positive correlation between income/wealth and environmental quality. This reinforced to me how important it is to promote, rather than retard, economic growth in China so as to facilitate environmental improvement for the sake of the Chinese and for the world.

ELECTRICITY SECTOR

Although I haven’t investigated in any detail, what I heard suggests to me that the electricity industry in China is on the verge of a financial breakdown, analogous in some ways to the California fiasco of the early 2000’s. Retail electricity prices are subsidized (heavily for large industrial customers), and allowed wholesale prices to generators are fixed.

However, coal prices are on the rise because the mining industry is sufficiently fragmented and privatized that government attempts to set the prices are ineffective. Since the vast majority of the electricity in China is produced from burning coal, the combined effect of increasing coal prices and steady electricity prices is putting a financial squeeze on many generators – so much so that in some cases generator firms are reducing output from their plants.

It is unclear how long this can go on before electricity supply inadequacy (already a problem) becomes acute. The financial health of China’s electricity sector ought to be important to the cleantech industry, because a collapse of some type might jeopardize the attainment of the government’s ambitious clean energy aspirations that have been set forth in its Renewable Energy Law.

MANUFACTURING

In some parts of the U.S. such as here in Ohio, we like to think we are a manufacturing powerhouse, but China makes us look like pikers. The ascendancy of Chinese manufacturing is nowhere near its peak. With several hundred million people still living in desperate poverty (pre-industrial conditions) in the hinterlands, the prospect of earning US $1000 per year by moving to the city to work in a factory represents a five- or 10-fold increase in income and quality of life.

In other words, unless and until fuel prices make the transportation of goods prohibitively expensive, stringent emission reduction programs become binding in China to double or triple electricity prices, and/or the yuan-dollar relationship alters dramatically, its huge labor cost advantages can only enable China to further strengthen its already dominant position in global manufacturing. That’s with the exception of certain niches of production, including items with very high shipping costs such as wind turbines, items with limited labor input due to capital-intensive production processes, and items still in low-volume early production runs.

Outside China, we will generally be relegated to being the technology innovators, the product designers and system integrators, the sellers and distributors, the installers and the service people. Rather than rue that position, let’s embrace it. Because of their production orientation, my speculation is that the Chinese are not so strong in innovation, leaving it to others to be the technology pioneers.

After being bombarded by souvenir hawkers and market barterers who make undifferentiated “me-too” offers and compete almost solely on price (or on aggressiveness or loudness), I also conclude that these Chinese will not be the leaders in identifying customer needs as they emerge and evolve, nor in delivering high-value (not price-based) solutions to meet those needs. Those games are for us to play, so let’s go after them.

CAPITAL

It is abundantly clear to any observer on the street that China is awash in money. In Beijing and Shanghai, designer consumer goods and high-end automobiles are not ubiquitous, but they are evident. In Xiamen, I saw an Audi A8L – a $120,000 vehicle in the U.S. – with police lights on top of the roof. Nice cop car! Does your town have a municipal budget that would support a fleet including one?

I met venture capitalists looking for deals in China, as well as a bevy of consultants who facilitate technology transfer and commercialization into China. However, I didn’t see much evidence of interest in foreign investment by Chinese parties. For the cleantech revolution to be amped up, we need to make the case that this Chinese capital is well-served being deployed outside China – not only for good financial returns, but to generate more future opportunities for Chinese domestic investment.

INEFFICIENCIES

Centrally planned economies (e.g., the former Soviet Union) are legendary for begetting ridiculous systemic inefficiencies. The Chinese economy is quite a bit different. The central government indeed establishes absolute policies, but only at a very general level, providing minimal specific guidance and instead allowing individual actors almost complete autonomy to comply within the bounds of what’s permitted. But the inefficiencies are nevertheless astounding.

I speculate that the inefficiencies are driven more by the explosive growth of the economy, which averaged a mind-boggling 9.9 percent per year for the 30-year period since 1978 and which propels businesses and individuals to act quickly, with much replication and little reflection or innovation.

A vivid illustration of this is the abundance of highly inefficient mini air conditioning units, rather than more efficient central air conditioning systems, in relatively new high-rise buildings. That’s presumably because they’re cheap and quick and easy to replicate. The resulting inefficiencies also reach into the social realm: schedules are set late, remain fluid and dynamic up until the event, and tardiness is common. The Chinese way of doing things thus requires some acclimation for those of us accustomed to considerable structure and discipline.

URBAN MOBILITY

Reflecting the economic explosion, people are constantly trying to get somewhere. Even though the big cities (especially Shanghai and Beijing) have reasonably well-developed public transportation systems, including modern subway systems, and even though the per capita level of car ownership in China is only less than 10 percent of what it is in the U.S. - reflecting the amazing fact that private auto ownership was forbidden in China until the mid-1990’s – traffic is truly chaotic in urban areas.

It is said that there used to be bicycles everywhere in China, and while many still remain (often abiding by well-designed separated bicycle lanes), many bicycles appear to have been replaced and superseded by electric scooters that are clean and silent. (And by the way, the silence isn’t always a good thing, as any aimless and unattentive walker is under a constant threat of being steamrolled by an aggressively driven scooter stealthily zooming in from behind.

It appears to me that “rules of the road” is an oxymoronic concept in China, as vehicles undertake passes in the most imprudent circumstances and drive on the left or on the right almost on discretion. Of note, traffic lights are world-class: many have timers indicating the number of seconds remaining for a green light or red light. Taxis are about as ubiquitous as two-wheeled vehicles and are unbelievably cheap – an hour ride of perhaps 30 miles might cost the equivalent of US $20. But you’ll never complain about a Manhattan cab ride again. As a consequence, drivers and pedestrians alike must be vigilant to protect their lives. And it is a good thing for all concerned that foreigners are not allowed to drive. When you rent a car in China, you also get a Chinese driver who is well-accustomed to seeing driving behaviors evidenced in the U.S. only at race tracks and demolition derbies.

AIR SERVICE

Air travel in the U.S. has nothing on China. I was impressed with the very new and modern airport terminals in all of the cities I visited. The primary domestic airlines (Air China, China Southern, etc.) have thoroughly modern Boeing and Airbus fleets. No Soviet-era Tupolevs here anymore, no reason to worry about making it alive to your destination. Fares are reasonable, and they still serve meals (though Chinese airline food is no better than the U.S. airline food of days past).

LANGUAGE

I am no linguistic expert. I struggle with English, and my high school experience in studying French convinced me that I do not possess the language gene. But since it doesn’t use an alphabet and is incredibly reliant on verbal communication and imperceptible shifts of tone, Chinese (Mandarin) is a whole ‘nother level of challenge. I am not raising this issue as an interesting or amusing tangent, but rather because the language barrier (and overcoming it more satisfactorily) will be truly fundamental in determining the future success of Chinese-American relations.

As the work of Maturana and Varela shows compellingly, humans live in language. That is, they make assessments of the world and create new possibilities only through language. Without sharing a language, it is simply not possible to come to agreement on the current situation or to invent directions for beneficial action.

In my time in China, I experienced a deficit of good translators – more properly termed, interpreters – who were strong in both Mandarin and English, and who were also knowledgeable enough about the subject matter to convey the fully nuanced intentions of the speaker. To illustrate, I would hear a Chinese speaker utter 60 seconds of Mandarin, and the English translation would hesitantly be passed on, usually some banal statement like: “China uses a lot of energy.” Come on, I know in his minute of talking he must have said something more insightful and detailed that that! If we’re going to enable massive/rapid cleantech transfer into and adoption within China, there’s going to have to be an order of magnitude expansion of cleantech-knowledgeable people who also possess high degrees of English-Mandarin fluency.

As Mark Twain once was alleged to have said (though in actuality the maxim was coined by the French philosopher Blaise Pascal), “I have made this letter longer than usual, only because I have not had time to make it shorter.” I apologize for my rambling incoherence. I’m still digesting what I observed from my first visit to China, with an aim toward developing and executing an approach to work more systematically with/in China on cleantech opportunities. The above is merely the first transcription of my emerging thoughts. I don’t know what it all means yet, but I do know that there’s something pretty important in here somewhere.

One final anecdote to wrap up: During my trip, I had the pleasure of being able to connect personally with U.S. Assistant Secretary of Commerce David Bohigan, as he happened coincidentally to be leading a group of U.S. business people on a clean energy trade mission to China and India. As Mr. Bohigan noted to me, the relationship with China and the need for clean energy will be the two most dominant forces shaping the U.S. economy in the 21st century.

So at least one bit of clarity has so far pierced the fog in my mind. It is incumbent upon the U.S. cleantech community to engage meaningfully with/in China, as it is there that the largest opportunities both for wealth creation and for environmental improvement lie.

As posted on CleanTechBlog.com

Before I was introduced to EnLink Geoenergy Services in 2000, I had never heard of geothermal heat pumps (GHPs), even though I had been in the energy industry for almost 15 years by then, and even though GHP systems had been in successful operational service for more than 50 years.

The GHP concept is pretty straightforward: use conventional heat exchanger technologies to utilize the soil underneath the surface as a heat sink in summer and to exploit the soil’s absorbed warmth in the winter. Thermodynamically, this is much more efficient than using the hot summer air as a heat sink when in air conditioning mode. As a result, the use of GHP systems can reduce a building’s energy consumption associated with space heating and cooling by up to 70 percent relative to traditional HVAC systems.

Given that buildings are responsible for a large portion of the economy’s overall energy requirements, and that heating/cooling requirements represent one of the largest energy loads for a building, GHP systems thus represent a technology that could potentially take an enormous bite out of current energy demands.

GHP systems are not new and unproven: hundreds of thousands of systems are installed across the U.S., some dating back to the late 1940’s. Way back in 1993, the U.S. Environmental Protection Agency released a report called “Space Conditioning: The Next Frontier,” which declared that GHP systems “are the most energy-efficient, environmentally clean and cost-effective space conditioning systems available” – a statement that’s probably still accurate in most cases.

Even with all of this substantiation, GHP still represents only a very tiny segment (no more than 1 percent) of the U.S. HVAC industry.

Why should such a promising technology area be so overlooked?

There are several reasons why GHP systems are not widely adopted yet. Certainly there are economic factors at play. Simple GHP systems have historically had higher up-front costs than conventional HVAC systems (particularly cheap, inefficient ones), and this up-front cost premium is no doubt an important decision factor in many instances.

We all know that customers often make irrational economic decisions, selecting the lowest first-cost option for capital purchases even when other options offer superior life-cycle economics.

In the context of heating and cooling options, such short-term thinking is likely to come back to haunt customers. Rising energy prices and climate change concerns should increasingly drive more customers to undertake more thoughtful analysis when making HVAC decisions.

Most simply considered, the “payback” from the energy savings relative to the incremental additional outlay for a GHP system is often reasonable – less than five years for many buildings in many locations. If more sophisticated financial approaches such as a discounted cash flow analysis over the life of the system are conducted. and all future costs the customer is likely to face (including maintenance and replacement costs, likely price increases for electricity and heating fuels, and the economic impact of probable greenhouse gas policies) are considered, the financial case for GHP over conventional HVAC becomes even more compelling.

A more fundamental challenge than economics for the GHP sector is that very few decision-makers have ever heard of GHP systems, and therefore don’t even know to consider them when evaluating HVAC alternatives.

This is the case even in California, which prides itself on energy efficiency innovation and progressivism. Look in all of the issuances from the California Energy Commission, the California Air Resources Board and the California Public Utilities Commission – all of whom are desperately looking for good energy efficiency approaches as critical answers for meeting the ambitious carbon emission reduction requirements of AB 32 – and you’ll find hardly a mention of GHP systems as an attractive approach for building HVAC.

Although there are not just one but rather two relevant trade associations – the Geothermal Heat Pump Consortium and the International Ground Source Heat Pump Association – the GHP industry has clearly been ineffective in promoting the compelling benefits of GHP systems to the masses of building owners and professionals. In general, the architect and engineering community has been especially remiss in failing to learn more about an attractive heating/cooling alternative for their clients, and one would think that continuing this neglect would not serve their profession’s long-term interests well.

The unfortunate result from all of these forces at work is that GHP systems are rarely even considered (much less selected) when an HVAC decision must be made for a new building being constructed or an old building being renovated.

At long last, the rise of GHP systems may finally be beginning in earnest. Last month, the New York Times published a prominent article on the GHP sector, in which a number of sources in the U.S. GHP marketplace are cited to highlight the industry’s rapid growth. For instance, Climate Master (the largest U.S. manufacturer of in-building heat pumps for GHP systems) reported that revenues increased by 200 percent between 2005 and 2007.

As the article reports, the bottlenecks to continued increases in GHP adoption include equipment and component supply, and probably more importantly, a lack of adequate capability around the country to install GHP systems, particularly the underground component of the system entailing a series of plastic pipes buried underground.

Leveraging drilling techniques and other mechanical equipment long used in the oil/gas sector, my long-time client EnLink has consistently focused solely on developing new technologies and approaches to improve the economics and speed of installing the underground “loop field” for GHP systems.

With such innovation, it will become more feasible to expand a base of experienced GHP installation capabilities to scale across the U.S. As this occurs, the costs and time required for GHP installation will become lower (and less variable) for building owners and professionals in more regions of the country, at which point GHP systems will become increasingly compelling as the preferred HVAC approach.

Although they have long provided subsidies and incentives for other renewable and efficiency technologies to accelerate their adoption, the Feds so far have ignored GHP for similar treatment, though this may be changing. Three bills are currently under consideration in Washington, most notably the Geothermal Heat Pump Development Act (S. 2314) sponsored by Senator Ken Salazar (D-CO), which would make GHP systems eligible for tax credits already afforded to other clean energy technologies.

The GHP market is a sector rapidly in the making. Perhaps GHP systems won’t long remain the forgotten one in the cleantech universe.

As posted on CleanTechBlog.com

The August 16 edition of The Economist contains an interesting article summarizing many of the advancements being made by various companies to improve the good-old internal combustion engine.

For instance, Daimler is working on an engine design called the DiesOtto, which attempts to forge a cross between a diesel and a gasoline engine, with the aim of providing the torque and economy of the former along with the flexibility and horsepower of the latter.

Meanwhile, Fiat is experimenting with a sophisticated valve-control approach called Multiair that they believe will reduce fuel consumption by 20 percent.

And it’s not just the big automakers at work. The article profiles Antonov Automotive Technologies in its efforts to develop a new-fangled supercharger, and Ricardo in its pursuit of an engine that can switch between two-stroke and four-stroke operation.

It’s worth noting that none of the companies mentioned in the article are based in the U.S. Will the American automakers be left behind in the innovation race again? Is General Motors putting all of its eggs in the basket of the plug-in hybrid Chevy Volt? And where are Ford and Chrysler in this game?