Green Car Tech: Workhorses Trump Thoroughbreds?

Fisker Karma at 2013 DC Auto Show

Yesterday I made my annual trek to the Washington Auto Show, which hosts a media day before opening to the public.  Between the show's focus on policy--a natural draw inside the Beltway--and the opportunity to connect with OEM contacts, it's always worthwhile.  Besides, the cars never look the same on a screen or printed page as they do in person.  Yet despite all of that, this year's show left me with what I regard as a healthy form of disappointment: Unlike past years, which provided my first opportunities to see--and sometimes drive--cutting-edge cleantech cars like the Chevy Volt and Nissan Leaf, I saw ample signs of evolutionary change but no new revolutions in the offing. 

A few data points to support that conclusion: First, the Fisker Karma, undeniably sleek and reminiscent of my favorite Hot Wheels® car of long ago, was arguably the most exotic car there.  It sat unattended and largely ignored.  More significantly, the 2013 Green Car Technology Award announced at the show by Green Car Journal went to Mazda's "SkyACTIV" suite of technologies.  These include improvements in engines, transmissions and chassis that Mazda plans to roll out across its fleet, along with the North American launch of a clean diesel version of its Mazda6 sedan later this year.  Among the other finalists were Ford's stop-start and EcoBoost technologies, Fisker's "EVer" plug-in hybrid powertrain, and Fiat's Multi-Air gasoline engine efficiency package.  Half the candidate technologies related to EVs and hybrids, while the other half focused on making conventional cars incrementally more efficient--in the process raising the bar that EVs and hybrids must vault.   

Yesterday's policy day also provided a chance to meet with the team from Robert Bosch, LLC, which among its many business lines supplies under-the-hood gear for clean diesels and efficient gasoline cars, as well as hybrids.  Our conversation focused on clean diesel, which remains the least-appreciated big-bang fuel efficiency option in the US, despite its wide adoption in Europe, where diesels enjoy about a 50% share in "take rate", reflecting consumers' choices when more than one fuel option is available in a given model.  Diesel take rates range from 30-60+% here, too, but with only 20 diesel models available in the US last year--many of them German luxury models--overall diesel penetration in new cars was just under 1%.  That could start to change this year. Bosch's Andreas Sambel, Director of Diesel Marketing and Business Excellence, indicated 22 new models slated for 2013 introduction, with the total increasing to 54 models by 2017. 

We also discussed future improvements in diesel passenger car technology.  Bosch sees ample opportunities to maintain diesel's edge over steadily improving gasoline-engine efficiency.  Possible enhancements include engine downsizing, higher injection pressures (already 29,000 psi), the addition of stop-start, and combustion improvement via something called "digital rate shaping"--my jargon takeaway of the day.  I was surprised to hear that diesel-hybrid models are already available in Europe, since conventional wisdom holds that doubling down on two expensive efficiency strategies can't be cost-effective.  Mr.Sambel offered the view that hybrids are becoming a distinct market segment, and that fuel choice within that segment will appeal to some buyers.  I'll have to watch for further signs of this intriguing development.  I certainly concur with his take that there is unlikely to be a one-size-fits-all solution.  Don't expect an imminent winner among the proliferating powertrain and fuel choices available to motorists, including biofuels and CNG/LNG.

This year's DC Auto Show includes a wide selection of nicely sculpted steel and glass, but at least from a "green car" perspective the technologies that made such a big splash a few years ago are becoming a bit mundane.  That's just as well.  EVs still haven't taken off, yet, with only 53,000 sold in the US last year out of a much-recovered 14.4 million car total, despite lavish tax incentives.  However, with oil prices stubbornly high and US gasoline prices on the verge of setting new records for this time of year, the evolutionary improvements in fuel economy that were honored and displayed at the DC Convention Center will find plenty of takers.  For the near-term they'll contribute far more to saving oil and reducing emissions than a few more EVs could.

Politics and The Global Cleantech Shakeout

For all the enthusiastic comparisons of the cleantech sector to infotech or microelectronics that we've encountered in the last decade, one rarely employed analogy is turning out to be more apt than the rest: Cleantech seems just as capable as dot-coms and chip makers of undergoing an industry shakeout and consolidation at the same time it experiences growth rates that most other industries would envy.  US and European solar firms continue to fall by the wayside, and this week saw the sale by the world's leading wind turbine manufacturer, Vestas, of one of its Danish plants to a China-based competitor.  Because the cleantech industry has been driven mainly by policy rather than market forces, and has thus been deeply intertwined with politics, the global shakeout now underway will continue to have political repercussions.  Should Europe's monetary problems unleash a new financial crisis, then both the cleantech shakeout and its political fallout could expand.

The strained comparisons this week between the failures of Solyndra and Konarka, a much smaller solar panel maker, likely won't be the last example of this that we'll see this year.  Although I can understand the temptation to link these two situations, the contrast between an award-winning company that took more than eight years to go bankrupt in an economic and competitive environment vastly different than the one in which it was launched, and a business that was already doomed on the day that its half-billion dollar federal loan was inked should have dissuaded anyone from raising this issue.  The analogy looks even worse when you realize that Solyndra was only able to undertake the massive expansion that drove it into bankruptcy as a result of serious deficiencies in the DOE's due diligence process, which failed to spot the crashing price of polysilicon, the previous spike in which had underpinned Solyndra's business model.

Past shakeouts have left other industries in excellent shape, despite the pain they entailed.  Numerous US automakers went out of business during the Great Depression, which was also a period of great innovation that set up the survivors to become a pillar of the US economy for the next half-century.  It's premature to write the epitaph of US cleantech, which could yet emerge much stronger.  At the same time, have we ever experienced such a shakeout in an industry so dominated by government subsidies and industrial policy, against the backdrop of globalized competition with similarly supported industries in Europe and Asia?  The ultimate outcome looks highly uncertain.

In the long run, the administration's investments in cleantech will either look farsighted and courageous or tragically mistaken, rooted in a "green jobs" fallacy that emerged as an expedient Plan B after successive failures to legislate a price on CO2 and other greenhouse gas emissions.  Of course this year's election won't take place with the benefit of history's verdict.  Its energy aspects are likely to be dominated by the behavior of oil and gasoline prices and a potential string of further high-profile cleantech bankruptcies, if the economy remains weak.  (The list of DOE loan guarantee recipients doesn't lack for candidates.) Is it due to defects in our system or merely human nature that such events seem destined to overshadow the positive energy visions that both sides will present to voters?

Five Stars for Robert Rapier's "Power Plays"

It's a pleasure to have the opportunity to recommend a new book by a fellow energy blogger, especially when the blogger in question has the kind of deep, hands-on industry experience that makes Robert Rapier's work so authoritative.  Robert has been communicating about a variety of energy-related topics for years, first at his own "R-Squared Energy" site, where I encountered him in about 2006, and lately at Consumer Energy Report and at The Energy Collective. You should not assume from the book's title, "Power Plays: Energy Options in the Age of Peak Oil" or the image on its cover that it is just another in a long line of recent bestsellers proclaiming an imminent and permanent global oil crisis.  Robert's description of the risks of peak oil is nuanced and balanced, as is his assessment of the many other timely subjects included in the book.  The chapter on "Investing in Cleantech" is worth the price of the entire book for would-be inventors and investors, as well as for those setting or administering government renewable energy policies and programs. 

In some respects this is the hardest kind of book for me to review.  It covers much of the same territory as my own writing, drawing on similar educational and career experiences, so I'm hardly representative of its intended or ideal audience.  It is also very close to the book that I've long been tempted to write, myself, after well over a thousand blog posts on the same set of topics and issues.  With those caveats, I enjoyed reading "Power Plays", mainly because despite superficial similarities, our perspectives are still different enough that I found it thought-provoking.  I even picked up a few new facts.  And I should make it very clear that although the book certainly reflects the large body of writing Robert has produced over the last half-dozen years or so, it does not read like a collection of recycled blog posts.  It is also as up-to-date as any project like this could be, including assessments of the Keystone XL pipeline controversy, the Fukushima nuclear disaster, and other recent events.

"Power Plays" is structured as an overview of the complex set of energy sources and applications in use today, including their intimate connection to domestic and geopolitics.  (The book includes a sobering, non-partisan analysis of the efforts of eight US presidents to promote energy independence.)  It is also based on an explicit point of view about the need to reduce our dependence on fossil fuels and to attempt to mitigate human influence on climate change, while being exceptionally realistic about our available options and likely success.  Robert has definite ideas on energy policies that would be useful, particularly in guiding our long transition away from oil.  I don't agree with all of them, but they're well-reasoned and well-articulated. 

The book is also very sound on the facts.  I didn't spot any notable errors, with the possible exception of a brief explanation of why hybrid cars are more efficient than conventional cars--in my understanding this derives from the optimization of engine output and the recycling of energy otherwise lost in braking, rather than from inherent differences in energy conversion efficiencies between electric and combustion motors.  Otherwise, aside from the natural differences of interpretation one would expect, Robert delivers 250 pages of straight talk about energy.

One word of warning along those lines: If you come to this book as a firm and uncritical advocate of any particular energy technology to the exclusion of most others, you should prepare either to have your feathers ruffled or find yourself questioning some of your beliefs.  That is particularly true for renewable energy and biofuels, which constitute Robert's current main focus as Chief Technology Officer of a forestry and renewable energy company.  On the other hand, if you'd like to learn more about why fuels like corn ethanol are less-than-ideal substitutes for oil, and why cellulosic biofuel is more challenging to produce and scale up than the promoters of many start-up companies would like you to think, this is a great place to start.  And in addition to the obligatory assessment of vehicle electrification and electric trains, his chapter on oil-free transportation features a serious discussion of bicycling and walking, something it might never have occurred to me to include.  All of this is handled with rigor, ample references, and a leavening of tables and graphs that shouldn't overwhelm those who are more comfortable with words than numbers or data.

I highly recommended "Power Plays" for my readers.  It is available in print and e-book formats from Barnes & Noble and Amazon, where it has garnered exclusively five-star ratings at this point.  I intend to post my own five-star review there when time permits. 

A Cleantech Trade War with China?

While we wait to see whether the next big move in oil prices--and hence gasoline prices--is up or down from today's level of around $125 per barrel, two stories in today's Wall St. Journal highlight some of the challenges facing manufacturers of equipment used to produce renewable energy. One concerns the intention of the US administration to seek the World Trade Organization's assistance in easing China's restrictions on its exports of rare earth materials used in a wide range of devices, including wind turbines, hybrid and electric vehicles, and some solar panels. The other is an op-ed offering a solution to the looming trade war over solar panel and wind turbine tower exports from China, modeled on the 1996 Information Technology Agreement that lowered trade barriers in that industry. The two stories are related, reflecting major unintended consequences of the ways we have approached our transition away from fossil fuels and toward lower-emission sources of energy.

Trade wars are risky things, because you never know where they will lead. The classic example of this is the Smoot-Hawley tariff of 1930. It and the responses to it by other countries helped deepen and extend the Great Depression, and I have never seen any analysis of them that concluded they were a good idea. A major trade dispute now over renewable energy hardware and the ingredients needed to produce it looks doubly unwelcome, because none of the parties comes to it with clean hands. Much of China's output of rare earths is being consumed by China-based manufacturers producing permanent magnet wind generators, electric vehicle motors, compact fluorescent lights, and solar equipment, much of which is exported to global markets that owe their very existence to government interference in the form of manufacturing, deployment and consumer tax credits; government loans and loan guarantees; feed-in tariffs; and fuel economy and lighting efficiency standards. There's hardly a single aspect of the global cleantech industry that is the result of unaided market forces.

The US complaint about solar imports is a good example. I wouldn't be surprised if the US government can make a strong case that the Chinese solar firms in question benefited from government assistance in ways that constitute unfair competition under established rules of international trade. Yet the same US government has provided substantial assistance to US solar manufacturers in the form of direct R&D support and federal loans and loan guarantees, as well as indirect help in the form of solar investment tax credits, cash grants, and project loans and loan guarantees that helped create and sustain a domestic market for them. All of these were necessary, because despite the significant cost reductions these incentives facilitated, the output of solar panels is still substantially more expensive than electricity from conventional generation. If we win this round with China, do we open the door to a whole series of WTO complaints against us by others who could claim harm from our own renewable energy policies?

From my perspective, these trade issues are a symptom of the larger problem of global overcapacity in wind and solar equipment manufacturing that has been created by the complex interaction of a mare's nest of national and local incentives and support for the production and deployment of these technologies, amplified by the disruption caused by the global financial crisis and recession of a couple of years ago and the ongoing financial crisis in Europe. A vast industry was created out of nothing and handed a market through a set of policies that could not sufficiently fine-tune development to prevent the emergence of a boom-bust cycle, and that now appears to be unsustainable itself in light of developed-country deficits and debts.

Trade disputes are one possible mechanism for attempting to rationalize this overcapacity, but in my view they constitute a much less productive approach than the one suggested by Professor Slaughter, who if I understand his proposal correctly is urging the rationalization of the government subsidies that have caused this situation in the first place. My biggest concern about his advice is his choice of the UN climate negotiating process as the best body to pursue such an initiative. That might be an appropriate venue, but its recent history doesn't inspire much confidence that it is up to the task.

Cleantech Firms Paying the Price for Subsidies

In observing the recent struggles of various segments of the global cleantech industry, including renewable energy and advanced energy technology firms, a pattern is emerging. Today's Wall St. Journal reports "Wind Power Firms on Edge," as the US wind industry hunkers down pending the renewal or expiration of a key subsidy at the end of 2012. A maker of electric-vehicle batteries that received a federal grant to build a factory in Indiana is reorganizing via bankruptcy, wiping out the equity of its original investors. Meanwhile, the US International Trade Commission may be on the verge of imposing retroactive tariffs on imported Chinese solar power equipment. Each of these stories has unique features, but what they share in common is the consequences of renewable energy policies around the world that promoted overcapacity in manufacturing and fierce competition in deployment, effectively setting up some of their past beneficiaries for failure or at least a period of very low margins. Depending on your perspective, this is either an indictment of such subsidies or collateral damage on our way to a brighter future.

One blogger from an advanced battery trade association noted that "Ener1 Is No Solyndra", and I tend to agree. As I've noted previously, the decision to award Solyndra a $535 million federal loan was ill-advised, not just because of competition from other solar manufacturers, but because at the time the government approved the loan the failure of Solyndra's business model was essentially already predetermined. Solyndra didn't contribute much to the global overcapacity in solar modules and panels, because its technology was never competitive. By contrast, Ener1's problems appear more fundamental. Like much of the global wind industry and solar industry, it was induced to invest in new capacity, the market for which depended almost entirely on subsidies and regulations that governments might not be able to sustain as these technologies scaled up, and that has gotten significantly ahead of demand.

The best examples of that are probably the various solar feed-in tariff (FIT) subsidies in Europe, which until recently were so generous that they not only supported the intended growth of an indigenous solar industry to capitalize on them, but also gave rise to an entirely unintended new export-oriented solar industry in Asia that had essentially no local market when it started, yet has since gone on to dominate global solar manufacturing and eat the lunch of the European solar makers and developers who got fat off the earlier stages of the FITs.

Or consider the US wind industry, including the imported equipment that still supplies around half of the US wind turbine value chain, according to the main US wind trade association. If the 2.2¢ per kilowatt-hour (kWh) Production Tax Credit (PTC) is renewed, and if wind generation grows from the current level of 115 billion kWh per year to 141 billion kWh by 2021, in line with the latest Department of Energy forecast, then over the next 10 years the wind industry would collect up to $30 B, with much of that locked in for projects that have already started up, less the amount generated by projects that opted for the expired Treasury cash grants in lieu of the PTC to the tune of $7.9 B from 2009-11. Yet based on these figures, wind would supply just 3.2% of US electricity in 2021. The industry now seems to be arguing that it needs just one more renewal of the PTC in order to become competitive. As of 2012, this benefit has been in place on an on-again, off-again basis for twenty years.

Although the theory that underpins such subsidies doubtless has some validity--that governments can help new technologies to develop quicker than markets alone would support, create markets for them by stimulating demand, and thereby move them down their learning curves to earlier competitiveness with conventional technologies--in practice such policies also have the serious shortcomings we are seeing. Because they do not operate in Soviet-style centrally planned economies, none of these governments can tell manufacturers precisely how much production capacity to build, or how much they will sell when it comes on-stream. In the absence of such powers--which in any case proved to be over-rated--companies and their investors are at the mercy of the boom-and-bust cycles such policies generate, with the normal, self-correcting mechanisms of industry consolidation dampened by continued intervention. Nor do the policies now in place seem very successful at creating industries that can survive without them. If you doubt that, ask the US wind industry for their forecast of new installations next year if the two-decade-old PTC is not renewed. According to the Journal, it would be somewhere between 0% and 30% of 2011's 6,810 MW, which was itself a third below the 2009 peak of 10,000 MW, despite the late-2010 extension of the cash grants to cover last year's projects.

The appropriate response to all of this depends on one's politics and the firmness of one's belief that these technologies are essential tools for combating climate change. Falling between the extremes of "just say no" and "look the other way" is the view that governments at least have an obligation to learn from the past and avoid the temptation to yield to demands that they leave existing subsidies in place until their beneficiaries decide they are done with them. If wind tax credits are extended, it should be at a level that recognizes the narrowing competitive gap with conventional energy and phases them out on a schedule. Electric vehicle subsidies should also be reassessed so that we don't find ourselves still providing upper-income taxpayers with incentives of $7,500 per car, even after sales have taken off and sticker prices fallen significantly. And solar subsidies ought to be fundamentally rethought to make it less attractive to install solar panels in regions with low sunlight, such as New York and New Jersey, than in those with abundant sun. And we shouldn't do that just for the benefit of taxpayers and in response to trillion-dollar budget deficits, but in the interest of producing healthy, globally competitive companies in these industries.

How Many More Solyndras?

Another firm that received a loan guarantee from the Department of Energy has just filed for bankruptcy. Beacon Power had drawn down $39.1 million of the $43 million authorized by the DOE for the construction of its 20 MW energy storage facility in Stephenstown, NY, but was still operating at a loss and unable to find additional backing. As was the case for Solyndra, the DOE's "loan guarantee" actually took the form of a direct loan from the Federal Financing Bank, an arm of the US Treasury, rather than from a commercial bank or other private-sector lender. If two data points can indicate a pattern, the one here reflects poorly on venture capital decisions made solely by government officials lacking any stake in the eventual outcome of the investment. Real venture capitalists make bad bets, too, but with an entirely different degree of accountability.

The Beacon failure is especially disheartening, because it involves the application of energy storage to grid services, which many believe is crucial for integrating large increments of intermittent renewable energy--mainly wind and solar power--into our electricity supply. In particular, Beacon's use of flywheels, rapidly rotating disks capable of storing and releasing large amounts of energy quickly, looked like a promising alternative to chemical batteries. I've long been intrigued by this technology, which is also being applied to race cars. Beacon's problems appear to be both technical and financial, with two of the company's flywheels having failed catastrophically since startup due to manufacturing defects, and the business model generating insufficient revenue to support the company's obligations.

Unlike Solyndra, the DOE's investment in Beacon Power might not turn out to be a complete loss, though I don't share the confidence of the DOE's spokesman that the "valuable collateral asset" will enable the government to recover the entire sum it lent Beacon. With an operating facility and ongoing revenues, it's possible that the firm's liabilities could be reorganized in such a way than it could emerge from bankruptcy as a viable entity. However, if its reported second-quarter revenue of $525,000 is indicative, it's very hard to see that either the business or the underlying assets could be worth more than a fraction of the $39 million federal loan liability, let alone their $72 million book value. "Haircuts" seem to be in vogue, and I'm guessing that Uncle Sam will take one on Beacon, in order to realize any value at all from the deal.

I'm relieved that the administration has finally ordered an independent review of the entire loan guarantee program, though it's a little late for that to accomplish much more at this stage than bringing additional problems to light. The main 1705 loan guarantee program is out of money and unlikely to receive further appropriations, at least until after the 2012 election. Meanwhile, another energy-related stimulus beneficiary, advanced-battery maker Ener1, was just de-listed from NASDAQ last Friday. The best coda on this whole situation may come from the blog of VC David Gold, who wrote yesterday that the administration's cleantech stimulus is turning out to be "Bad Policy, Bad Politics, and Bad for Cleantech." I'll bet there are many executives at cleantech firms who now wish they had never heard of Treasury grants and DOE loan guarantees.

The Market for US Cleantech Is Out There

One of many press releases I received this week highlighted the new Clean Energy Export Principles developed by a "multi-industry coalition, which was coordinated by the National Foreign Trade Council, and U.S. government representatives." They recommend a significantly expanded and technology-neutral effort by the US government to promote exports of clean energy gear, including equipment for the smart grid, energy efficiency and energy storage. They also suggest the need to reduce trade barriers affecting such exports globally, not just to help US industry but to increase the effectiveness of efforts to mitigate climate change. I can only hope that the administration embraces these recommendations as enthusiastically as it has other aspects of its green agenda, because these principles are aimed squarely at the biggest opportunities for clean energy technology and emissions reduction, outside our borders.

It doesn't really matter whether these principles reflect the sensible recognition of trends in the global energy marketplace, or merely make a virtue of necessity at a time when government support for domestic clean energy deployment is approaching its statutory and practical limits. However the current debt ceiling crisis is resolved, the capacity for the federal government to continue providing generous incentives for cleantech deployment, either through the Treasury renewable energy cash grants that have totaled nearly $8 billion to date, or the Department of Energy Loan Guarantee program that has backed or directly funded more than $40 billion in loans for clean energy projects is likely to be far more constrained in the future.

Nor is this simply a question of money. The whole notion that we are in some kind of renewable energy deployment race with China or any other country ignores the big differences in our respective levels of economic development. If there were such a race we would be bound to lose, and not because we don't have the right policies or strict enough regulations, but because US electricity demand is growing slowly and is backed by both ample generating capacity and ample supplies of relatively cheap and low-emitting fuel. Meanwhile both electricity demand and capacity in the developing world are growing rapidly, and the indigenous generation fuel in good supply is mainly coal. That, together with the disparities in economic growth coming out of the global recession, is the underlying reason why investment in renewable energy in the developing world apparently surged past that in the developed world last year.

With cleantech supply chains already substantially globalized, the leaders in this industry must be global in scope and focus. US manufacturers of cleantech equipment shouldn't ignore the US market, but they must be realistic about it. Even with growing opportunities in the smart grid and solar power, the US will account for only a small fraction of the global market for such goods and services, as growth shifts away from the mature markets of Europe and North America. The market share that counts, for competitive strength and economies of scale, is global market share. And global sales will provide the volumes needed to drive down costs for both exports and domestic installations. There's a huge, growing market for cleantech, and it is mainly out there.

Sputnik State of the Union

Energy didn't feature as prominently in last night's State of the Union Address as it has in some years, including last year's speech. Rather than making it a primary focus area, the President seemed to mention it more as an example of his broader innovation and competitiveness agenda. That's probably a good thing, because the administration's persistence in pitting conventional energy against renewables reflects the muddle in which US energy policy remains. We're desperately worried that China is getting ahead of us in renewable energy, yet we don't seem to notice that China is hardly treating oil and gas as yesterday's energy. I suspect that from China's perspective, their focus is not especially on renewable energy or clean energy but on cheap energy, which is what their economy needs to grow. I wouldn't think we're so different in that regard.

I won't waste time dissecting the President's suggestion to strip the oil & gas industry of its tax benefits in order to fund a new or expanded clean energy innovation effort. If the administration couldn't make that happen when its party dominated both houses of Congress by large majorities, then this idea is simply dead on arrival in an era of divided government. The best way to address those subsidies, along with the much larger per-barrel subsidy for ethanol, is through the kind of tax reform that would make all US industries more competitive globally. So I was pleased to hear the President suggest simplifying the tax code and reducing the corporate income tax.

Innovation and tax reform will indeed be crucial if the US wants to be a leader in clean energy technology, not just as the favored beneficiary of today's version of our periodic debate over industrial policy--picking winners--but as one part of a more robust and competitive US manufacturing sector. However, it's myopic to compare ourselves to China on infrastructure and clean energy innovation while ignoring China's full-court press to meet its rapidly growing demand for oil and gas. China doesn't have an offshore drilling moratorium or "permitorium"; instead it has focused on offshore drilling as a primary means for expanding its domestic production and limiting its oil imports, which a few years ago eclipsed those of Japan as the world's second largest, behind our own. Chinese companies are investing in oil & gas projects, joint ventures and acquisitions all over the world, because China recognizes that oil wasn't just the dominant fuel of the 20th century; it remains a key energy source in the 21st. And for those worried about China's lead in renewable energy, exemplified by the news that its wind power capacity surpassed that of the US last year, I recommend Michael Levi's article in Foreign Policy.

On a more positive note, President Obama seemed to signal his support for moving the debate on a national renewable energy standard toward encompassing all clean energy. His remarks suggested that this would include not just nuclear power--by far our largest source of low-emission energy today--but also natural gas and clean coal. With those inclusions, the goal he suggested of generating 80% of our electricity from "clean energy sources" by 2035 could be the most achievable energy goal his administration has put forward since taking office. With coal's share of electricity generation currently at 45%, it would require increasing the contribution from nuclear, renewables and natural gas by just under half--or less with some help from efficiency and conservation. Not easy, but not impossible, either, as long as we build enough new nuclear power plants to more than replace the ones that will likely have been retired by then.

Whether or not this is truly "our generation's Sputnik moment", the speech's recurring theme exhorting us to "win the future" was perhaps a bit too reminiscent of another presidential speech centered on a different kind of "WIN". Ensuring that this initiative doesn't share the fate of that earlier one in the Ford Administration might just depend on making sure that in an environment of tightening purse strings, the government's investments in new energy are focused on making clean energy cheap enough to compete without unsustainable subsidies. In the meantime, while we're waiting for that effort to bear fruit, it's worth recalling that America's conventional energy industry is still one sector in which we don't have to catch up with anyone else, unless we deliberately set out to hamstring it.

Green Energy Competitiveness

As I was catching up on recent op-eds in the New York Times, I was intrigued by one with the snappy title, "Red China, Green China." As the author, an "executive in residence at Columbia Business School," built his case for why the US is falling behind China in clean energy technology, I was hopeful that he'd offer some sensible recommendations for resolving the problems that have made it harder for the US to compete across a whole range of industries, not just cleantech. Unfortunately, two of his three suggestions were focused on measures to ensure a market for clean technology, and the third on R&D for carbon capture and storage. These are worthy goals, but there wasn't a word about making our manufacturing sector more competitive. That blind spot seems to be shared by the Department of Energy, which according to an article in MIT's Technology Review ran out of money for clean energy manufacturing tax credits, but spent more than $3 billion funding renewable energy projects, many of which are being built with imported hardware. If we're serious about competing in a global clean technology race, we've got our priorities backwards.

I must admit that I'm generally skeptical of anything that smacks of industrial policy. Industry has a mixed record at picking technologies in which to invest to create the industries of the future, but government is often worse. For example, does it really make sense to spend taxpayer money helping companies build factories to make batteries for electric vehicles that consumers haven't yet embraced, and that may only capture a small share of the total car market, similar to today's hybrids? However, this might still prove wiser than shoveling money at the deployment of green energy technologies that either don't need much assistance, or that haven't developed sufficiently to meet the needs of the economy.

It might also help to think about our competitiveness in cleantech from the perspective of the entire economy, rather than the usual practice of looking at it in isolation. From that vantage point, the main thing the economy needs from the energy sector is cheap and reliable supplies of the kinds of energy that we use: liquid fuels for transportation, gas for heat, and electricity for nearly everything else. Reliability was licked a long time ago--except for the occasional blackout--and renewables don't bring much to the table in this regard. For several of the most popular forms, such as wind and solar power, it's their weakest suit. As for cost, the price tag on wind capacity has come down significantly over the last couple of decades, and off-peak wind power is sometimes the cheapest supply available. That's still not true for solar, however, though solar thermal and some novel forms of photovoltaic cells have the potential to get there.

It's also important to recall that while we can employ subsidies or mandates to make renewables appear more competitive locally or to require their use, whether competitive or not, that doesn't alter their impact on the global competitiveness of the US economy. If we are embedding expensive energy at the heart of our manufacturing, services, transportation and distribution networks, then that must make us less competitive--unless everyone else is doing the same thing.

We should also be asking to what extent taxpayers (or ratepayers--often the same people) should subsidize the creation of a market for renewables. After all, the market already exists, and most of it is outside the US. The world apparently added 38,343 MW of new wind generating capacity last year, and only 26% of that was installed in the US. Instead of concluding that we should pay or require companies to install more wind turbines in the US, as Mr. Usher suggests in his op-ed, wouldn't it make more sense to help US wind turbine manufacturers become more competitive in the larger global market? That seems like an obvious conclusion, especially when we consider that US manufacturers accounted for less than half of the wind turbine capacity installed here last year, according to data from the American Wind Energy Association, and that the bulk of the Treasury grants issued under the stimulus have gone to non-US firms to develop wind farms equipped mainly with non-US turbines.

Nor would shifting our focus to supporting the production, rather than installation of cleantech hardware lessen the impact of US policy on reducing global greenhouse gas emissions. A wind turbine or solar panel generates emissions-free energy in any country in which it is sited, and it might even reduce more emissions if it were installed in a location where the generation source it backs out is an inefficient coal-fired power plant with minimal pollution controls, rather than an efficient gas turbine, as is often the case here.

Effective policy requires clear thinking. If we want to promote clean energy technology for reasons of job creation and global competitiveness, then shouldn't we focus our efforts where they can have the greatest positive impact on those priorities? Manufacturing is a strong candidate for that point of maximum leverage, while deployment suffers from many drawbacks, including "leakage" and higher costs that get passed on to other sectors of the economy. Whether our best approach to bolstering cleantech manufacturing is to single it out for special treatment or to focus on corporate tax reform and other measures that would help all manufacturing is a subject for another day.

Who's Ahead?

A couple of months ago I conceded that I was probably overly optimistic when I periodically pointed out that our problems fell short of reprising the 1970s. While I haven't heard anyone describe our current condition as "malaise", there does seem to be little optimism in the US these days. Perhaps one reflection of the country's sour mood is the growing fashionability of proclaiming that we are falling behind in the race to develop renewable energy or clean technology, as the Secretary of Energy apparently did in a speech on Monday. Yet when I looked at several of the examples he cited, it was not at all clear that we are lagging. Much depends on how we define the competition, and I would respectfully suggest that doing that in a way that makes our situation look worse than it is might just reinforce a sense of inevitable failure and decline, rather than galvanizing us to collective action, as I'm sure Dr. Chu intended.

One of Dr. Chu's comparisons concerned China's goal to generate 10% of its electricity from renewable sources this year and 15% by 2020. That's a positive turn, considering that country's reliance on coal. However, the US has already reached that milestone, according to the figures compiled by the Energy Information Agency, a unit of the DOE. We got 10.4% of our power in 2009 from renewables, through November. I suspect it's only possible to see us as falling behind on this metric if you focus exclusively on the contribution of wind, solar and geothermal power, which together accounted for 2.2% of US net generation last year, and then compare that to China's 10% target--ignoring the 6.9% contribution of conventional hydropower here. I am fairly certain that China's government wouldn't make such an exclusion, and that they will count everything they can reasonably characterize as renewable in assessing their progress toward their goal. Of course China is still building hydropower dams, rather than dismantling them, so their inclusion might be less controversial, there.

Then there's nuclear power, another area in which Dr. Chu suggested we were falling behind. Certainly if the comparison hinges on momentum, there's no question that other countries have been building new nuclear power plants at a much faster rate, while the US has added only a handful of facilities since the 1980s. Until quite recently, building new reactors here looked politically and economically infeasible, and US nuclear operators focused instead on getting the most out of the plants they had. (It's an impressive story, by the way.) Nevertheless, although we're often quick to point to France as the world's nuclear power leader, US reactors outnumber French ones by 104 to 58, and both countries have exactly one new plant currently under construction, counting the Watts Bar-2 facility in Tennessee that would probably only get noticed by the national media if it had a problem more newsworthy than the layoffs associated with the end of the project's design phase. Even once China completes the 57 reactors it apparently has planned or under construction and passes France, the US will still lead the world in this category. New reactors now under consideration would extend that lead farther.

My purpose in pointing out these misperceptions isn't to pick on Dr. Chu, engage in jingoism, or suggest that we should be complacent about our energy situation, the challenges of which I've blogged about for more than six years. However, while I understand the benefits of a little competition to get the juices flowing, I don't think it's helpful to portray the world's largest energy producer as an incipient also-ran. Moreover, defining such a competition entirely in terms of renewable energy seems myopic at best. Despite its importance as a strategy for reducing greenhouse gas emissions, renewable energy is eclipsed by the more relevant category of low-emission "clean energy", from which we derived nearly a third of our electricity last year. Nor are we or any of our global competitors anywhere close to being able to dispense with the fossil fuels that accounted for 84% of total US energy consumption in 2008.

The US is a continental economy and a leading producer and consumer of every significant type of energy. No "energy race" in which it would be sensible for us to engage can be reduced to a simple matter of who installed the most wind turbines or solar panels last year. While we shouldn't be shocked if another country leads in some aspects of energy technology, we also shouldn't lose sight of the larger context, because energy isn't an end in itself. Even if clean technology turned out to be the computer industry of this decade--in reality and not just hype--and we didn't come in first in the cleantech race--a result I'm not prepared to concede, yet--energy remains the servant of the rest of the economy. That's where the race that matters most will be won or lost.

Cash Is King, Even at Copenhagen

Although apparently brief, the suspension of the Copenhagen climate conference after a walkout by the Group of 77 developing countries confirms that the talks are as much about money as about healing the world's climate. It's not just that the G77 wants the Kyoto limits on the emissions of developed countries enforced, while leaving their own emissions uncapped; it also wants the developed world to kick in sizable sums--much bigger than the 2.4 billion Euros per year offered by the EU--to cover the improvements in energy efficiency and renewable energy that would enable them to tackle the growth of their own emissions. There's a solid argument there, though it is not the guilt-based logic of "carbon debt" that I explored a few weeks ago.

An op-ed in the Saturday Wall St. Journal got me thinking about this issue over the weekend, before the G77 delegates walked out of the COP-15 session in Copenhagen. This commentary by a Berkeley physics professor and author of "Physics for Future Presidents" was bursting with enough ideas to stimulate a dozen blog postings, but its key insight was that even the massive cuts in US emissions proposed for mid-century would be of little or no consequence in curbing global emissions that are increasingly concentrated in the developing world. He suggests that the emissions of developing countries will count the most, and that these countries will only adopt emission cuts that provide clear economic benefits to them. In that context and under the current Kyoto-based framework, the strongest argument for imposing deep cuts on the US and EU is not the reduction of our own emissions--which would have a minimal direct impact on the expected increase in the earth's temperature--but the role of these cuts in creating a market for offsets generated by investments in emission-reduction projects in the uncapped developing world via the Clean Development Mechanism, or CDM. Unfortunately, this logic has already led to notable distortions of the intent of the CDM.

There has to be a better way. As Dr. Muller notes, "A dollar spent in China can reduce CO2 much more than a dollar spent in the US." Yet US voters won't countenance providing that dollar out of guilt, nor will they acquiesce to a scheme that makes China and other developing countries more competitive at their expense. Paradoxically, even domestic measures such as European feed-in tariffs and the proposed federal Renewable Electricity Standard embedded in the Waxman-Markey climate bill could create such an outcome, if Chinese and Indian green technology firms come to dominate developed country green energy markets. There are already indications of this happening in the German solar market.

Instead of the technology transfer we've been talking about for more than a decade, what may be needed is a new mechanism that actually creates markets in the developing world for clean energy hardware and know-how produced in the developed world, so that these projects create jobs and wealth in the US and EU, rather than threatening them. I'm not sure precisely what form such a deal might take, but at a minimum it should incorporate both open access to developing country markets and uniform legal protection for the physical and intellectual property of the developed-country companies making these investments.

The best thing that could come out of today's disruption at Copenhagen would be the cancellation of the big heads-of-state photo-ops planned for the final days of the conference and a determination to put the delegates back to work crafting a new agreement that creates the right recipe for focusing the lion's share of climate investments on the rapidly growing emissions of the third world, rather than on the shrinking emissions of the EU and the plateaued GHG output of the US. That would be something worthy of bringing the world's leaders together to sign.

Lessons from the First Energy Crisis

Periodically, it's good to reflect on what we learned from the energy crisis of the 1970s and assess the continued relevance of these lessons for our current situation. While some of the insights gained during that turbulent decade have held up well, the world has also changed in important ways, and hanging onto outdated assumptions and solutions won't help us cope with the steady rise of energy prices. Because high oil prices have come on more gradually than in the dual supply shocks of three decades ago, there's not even a consensus on whether today's conditions qualify as an energy crisis. If not, it wouldn't take much to propel us into one.

The energy problems that began with the Arab Oil Embargo in October 1973 and peaked after the Iranian Revolution in 1979 were resolved through a combination of responses, including energy efficiency improvements, fuel switching, diversification of suppliers, and a wave of non-OPEC oil production from places like the North Slope and North Sea. However, despite large public and private investments at the time, the contribution of alternative energy sources to bringing oil prices back to earth was essentially nil.

Some of these strategies look as useful today as they did then, while others are either unavailable or were essentially one-time plays. For example, in 1973 US refineries produced 2.8 million barrels per day (bpd) of residual fuel, much of which was consumed in power plants. Since then, refinery upgrades have turned most of that output into additional gasoline and diesel fuel, while a combination of coal, natural gas and nuclear power assumed oil's place in electricity generation. With current resid production running below 700,000 bpd, and most of that used as marine fuel or road asphalt, that trick can't easily be repeated. Nor is there a groundswell of new crude oil production waiting in the wings. As a result of federal and state drilling bans and limits on access to foreign reserves, combined with rising drilling costs and shortages of key personnel, it's unlikely that we could swamp today's high prices with higher volumes.

The good news lies elsewhere. Efficiency and conservation still offer tremendous scope opportunities, and diversification of supply looks as useful now as it did then, though we need to update our definition of supply to encompass a wider array of liquid fuels and sources. Efficient, low-cost ethanol from Brazil and the Caribbean looks like a helpful counterweight to obstreperous or unreliable oil suppliers. In fact, the current geographical distribution of our energy imports is in need of rebalancing, as political risk in Venezuela--one of our supply anchors for two decades--increases, and production from Mexico's largest oil field, Cantarell, falters. Brazil may be able to help there, too, as its output expands.

That brings us to alternative energy, a.k.a. "cleantech." Despite skepticism about how rapidly it can scale up to displace meaningful quantities of traditional energy--an issue I think has been under-appreciated within the growing cleantech community--alternatives are in a much better position to contribute now than they were in the '70s. What we really need is clear policy guidance on where these alternatives would best fit in a shifting energy diet: covering incremental energy demand, displacing coal and its high greenhouse gas emissions, backing out imported oil, or substituting for nuclear power that might otherwise be expanding at the same time. Whether this is done explicitly, or implicitly through an emissions cap & trade mechanism or "renewable energy standards" that allocate a share of a specific market to renewables, we should understand that alternatives are decades away from being able to substitute for all of these other energy sources at once. Setting priorities will help us maximize the benefits from renewable energy and other alternatives.

Because the roots of our current energy circumstances are different from those of the 1970s' energy crisis, we shouldn't expect the solutions to be identical. Some of the old winning strategies still work, while others face new constraints, the largest of these being the need to reduce greenhouse gas emissions. As daunting as all this sounds, I'm optimistic about the end result, given adequate supplies of stamina, focus and innovation.