Monday, September 28, 2009

Wake-Up Call

In his column in Sunday's New York Times, Tom Friedman highlighted the growth of renewable energy in China and proposed that it represented "The New Sputnik"--referring to the wake-up call this country received when the Soviet Union orbited the world's first satellite in 1957. As is so often the case when Mr. Friedman turns his attention to energy, I find his argument here to be made up of equal parts important insight and facile over-simplification. There is no doubt in my mind that the nascent renewable energy industry represents a new cornerstone for the global economy in the 21st century, and a tremendous business opportunity in the bargain. It is also a key element of any practical strategy to address the causes of climate change. At the same time, however, we must remain clear-headed about its characteristics and limitations, if we are to avoid falling into industrial-policy traps of the kind illustrated in last Friday's posting on solar power in Germany, or the creation of a green-energy equity bubble along the lines of last decade's Tech Boom/Bust.

At the core of these limitations is one so basic--and seemingly so obvious--that it constantly surprises me to hear smart people tangling themselves up in its allure. Perhaps that's because many of the venture capital folks funding new energy start-ups cut their teeth on the technology of the information/telecommunications revolution. Unfortunately, green energy is not the next Internet, at least not in the sense of a wave of technology that changes everything it touches and enables the creation of a vast array of new products and services that would have been impossible without it, and even inconceivable before its arrival. That's because however novel its means of producing it, the output of renewable energy technologies is something that is really quite mature: energy in its various forms, and mainly electricity. A "green electron" is physically and functionally indistinguishable from one generated from coal, gas, fission, or any other energy source. Nor is there an energy analog to Moore's Law, the empirical relationship describing the remarkable improvements in computing power that have put the data processing power of the entire Apollo space program into your laptop.

For developed countries, the green energy proposition is focused on replacing the energy already being supplied from other sources, including coal, oil, and natural gas. This will certainly have environmental benefits, including making our energy consumption more sustainable in the long run by linking it to the perpetual energy flows around us, rather than depleting sources of fossil fuels. However, the fact that this substitution is occurring on a still-modest scale, and only as a result of substantial subsidies and incentives from all levels of government, serves as a reminder that this is hardly a case of a better/faster/cheaper innovation sweeping its inefficient predecessors out of the way. If anything, rushing headlong to implement renewable energy before it has become fully competitive with our traditional energy sources risks embedding higher energy costs into the value chains of most of the goods and services produced across the entire economy. Governments may shift the point where that burden falls, but they can't wish it away.

The proposition for developing countries is decidedly different, and that's what Mr. Friedman has grasped with the determination of a Gila monster. There's not enough coal, oil or gas in the world to enable China and India to match the per-capita income of, say, Spain, and the climate change and local air-quality consequences of their trying to get there the old way are almost unthinkable. For them renewables, along with nuclear power, represent a necessary step in their development path. It shouldn't surprise anyone to see powerful renewable energy firms emerging in these countries in much the same way that powerful railroad and oil companies emerged during our own development. Some of them will become formidable global competitors.

Mr. Friedman sees a Sputnik moment in this, though I'm a little surprised that someone who made his name explaining globalization to the US public would choose to frame it in terms of a nationalistic competition between China and the US. I'd see it as more of a key signpost for business. Globally, wind power installations have been growing at a compound average rate of 28% since 2000, and solar has been running at about the same pace. That means that the industrial capacity to supply wind turbines and solar panels has been growing at similar rates in the background. The 27,051 MW of new wind capacity installed last year represented global sales of around $60 billion worth of hardware, ignoring the associated infrastructure. Until renewables, the US energy industry hadn't seen growth rates like this since the days of rural electrification and the take-off of the motor car in the 'teens and 1920s. Still, we can't lose sight of the fact that the driver here is not market economics or engineering superiority but a bewildering array of regulations and incentives in the form of renewables mandates, tax credits, feed-in tariffs and the like, with cap & trade waiting in the wings.

In the years ahead, the growth of renewable energy and related technologies will create huge opportunities. Someone is going to make a lot of money in these new green industries, though they also come with the potential for others to lose fortunes, as rapid technology change turns many of yesterday's brightest innovations into dead ends. The history of the high-tech industry is rife with example of this. While I agree with Mr. Friedman that the US runs the risk of being left behind if we don't embrace renewable energy, that embrace must take into account the fundamental differences in relative development levels between us and China. For the present, the real bonanza in clean energy appears to lie on the side of building it and selling it into government-supported markets, rather than implementing it wholesale here, if that means scrapping trillions of dollars worth of infrastructure, plant and equipment with decades of remaining useful life.

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