Market won't drive clean energy transition

Geoff Styles blogs a recent Science article explaining why the transition to cleaner fuels will take a long time.

Here's a clear and concise explanation from the top science journal in the country on why the transition to alternative energy won't--and can't--be quick, cheap or easy...

That's a crucial point for anyone who sees this energy transition driven not just by concerns about energy security and greenhouse gas emissions, but by notions of clean energy as the next big wealth-creating global trend, akin to the computer revolution. A kilowatt-hour or BTU does the same work, regardless of its source, so unless it can be produced for significantly less than from conventional sources, greener energy offers no productivity gains of the kind that have fueled the global infotech transformation.

Density and intermittency are both large disadvantages that many renewable energy sources must overcome... and even without these disadvantages, the article explains, the transition to current fossil fuels took half a century.

Pursuing renewable energy is a worthwhile goal (neither Geoff nor the author disagree), as is chasing energy efficiency, which is perhaps our most attractive short-term option to balance energy demand and supply. But I also agree that it's prudent to disregard the optimistic claims of those who believe things along the lines of "replacing oil will be the greatest commercial opportunity of our generation." It won't.

One more green tech fund

From Dealbook:

The race to cash in on the environmental technology wave just got a little more crowded on Monday with the founding of the New World Capital Group, a private equity firm focused on investing in companies in the nascent “green tech” sector.

Led by Carter Bales, an industry heavyweight who founded the environmental practice at McKinsey in the 1980s, and assisted by four partners including Bradley Abelow, former head of operations at Goldman Sachs and later chief of staff to Gov. Jon S. Corzine of New Jersey, New World is hoping to fill what they believe is a huge funding gap in the green industry by providing growth capital to more established, middle-market companies.

Mr. Bales estimates that there is only $3 billion in private equity capital pledged to help green-focused companies — those in the fields of clean energy, energy efficiency, environmental services, waste management, water, and sustainable and biodegradable materials. That represents just 1 percent of an industry that Mr. Bales believes is worth around $300 billion, growing at a rate of 8 to 10 percent a year.

My impression is the opposite – namely that there is much more money chasing good opportunities in the green tech sector than there are opportunities that offer attractive risk-adjusted returns. Sure, there will still be new home runs, but the sector is so hot that it’s been picked over several times by both financial investors and strategic players (e.g. the big oil companies), so I don’t know how much value can be created by looking for as yet undiscovered diamonds in the rough, unless you believe you are so much better at it than anyone else.

But then again I'm an advisor, so what would I know about taking principal risk?

Is green technology like vaccine technology?

India's former intransigence on GHG emissions has unfortunately quickly reasserted itself after a brief hiatus.

Then just yesterday, India’s prime minister ratcheted up the rhetoric again, reiterating the need for developed countries to provide developing countries with the wherewithal to clean up their economies—essentially for free. From the FT:

“Climate friendly and environmentally sound technologies should be viewed as global public good,” [Prime Minister Manmohan] Singh told the United Nations-sponsored Delhi High Level Conference on Climate Change: Technology Development and Transfer. “Such an approach has been adopted successfully in the case of pharmaceutical technologies for the benefit of HIV/Aids victims in developing countries. The moral case of a similar approach for protecting our planet and its life support systems is equally compelling.”

Chinese officials quickly echoed the call, saying that access to advanced technologies was “crucial” to the outcome of the Copenhagen climate summit. That repeated call for unfettered access to clean technology is the one thing that unsettles big companies (such as General Electric, Siemens, and the like) which are otherwise thrilled about the business prospects of a world dedicated to rebuilding its entire energy infrastructure.

The comparison of green technology to pharmaceutical technology is a brilliant one for developing countries – if I were them I'd ride it for all it’s worth.

Win-win for the U.S. and China on cleantech

Speaking of win-win, a new McKinsey article asserts that the U.S./China cleantech race doesn't need to be a zero-sum game. Green Sheet picks out the areas of potentially fruitful collaboration:

1. Electric Cars: Each country will have private companies battling to create the best electric car. However, the countries can help each other, and those private companies by:

* Setting coordinated product and safety standards across the two markets
* Funding the rollout of infrastructure
* Sponsoring joint R&D initiatives in select areas (such as new materials for car parts)
* Ensuring that trade policies support rather than hinder the development of a global supply chain for the sector
* Providing consumers with financial incentives to buy the new models.

2. Carbon capture and sequestion: Working together on clean coal projects would speed the development by doubling resources. Together the governments can "fund demonstration plants...set standards and drive down costs."

3. Concentrated solar power: CSP uses mirrored solar panels which reflect heat that create steam that power a turbine. Without a joint effort between China and the US, Woetzel says CSP might not even have a future. Again, he says, "Setting common standards, coinvesting in pilot projects and R&D, and undertaking other joint initiatives are the way to get this started."

It is an attractive idea, and, as Green Sheet points out, small-scale research collaboration is already underway. But for me IP seems like a massive barrier to larger co-investments. McKinsey believes it is manageable:

Even the thorniest—IP protection—is manageable. Because companies from many nations would contribute to making these three big technologies a success, IP agreements should be international. On that front, China will need to improve its ability to enforce global IP rules.

... but that simple-sounding last sentence is a world away from actual operating practice in China today, which will likely take a long time to change, and a longer time to develop the kind of IP track record that makes Western companies and governments comfortable.