A standard question fielded by many involved in the CleanTech space.
That there is quite a persistent buzz about the sector is an understatement, but what about this talk of a bubble – are we going to see something similar to the tech explosion seen in 2000 or more recently in the global housing market in general and the United States’ in particular?
There are some indicators that would say that this is the case – in the last three days three different solar thermal companies raised a total of $263 Million (eSolar, Bright Source, SkyFuel) and there are plenty of people far more intelligent than than me that have argued the case, as recently as yesterday on Platts’ blog – A Solar Energy Bubble? Or continuing prosperity? – http://www.platts.com/weblog/europower/2008/05/13/a_solar_energy_bubble_or_conti.html
Certain segments of the greater CleanTech market, silicon photo-voltaics (PV) market in the case of the article above, have seen boom and bust cycles of growth during constrained supply periods and consolidation once capacity begins to come online and outstrips demand. This isn’t unlike other technologies (think chips). The difference is strong macro-economic and environmental factors are propping up this sector which ultimately touches many industries – energy, water, transportation, construction and agriculture to name the most prevalent. There is not going to be a bursting as seen in the tech crunch of 2000 and real-estate markets in 2007/08 because of five core reasons that are all evident in articles printed in the last two days: 1) the realization of externalities 2) increasing costs of substitutes 3) consumer demand 4) smarter legislation 5) big industry and economies of scale. The aim of Clean Technologies is efficiency and sustainability – technologies that are efficient, sustainable and adoptable will succeed because they are adding real value.
Industry is slowly realizing that externalities (consequences affecting others that are not reflected in the costs of the goods involved) are going to continually be priced into the cost of goods manufactured and sold – specifically water, carbon, and pollution. Companies are great at cutting costs – something that work forces are all to familiar with; allocating a price on these previously under regarded components of production force organizations to be more efficient, frugal and consider alternative ways of getting the same product with less cost (in this case generating less bad stuff CO2 or using less good stuff H2O). How do we know that carbon is going to be priced? Because companies are factoring prices into their financial models. They are expecting that emitting CO2 in 2013 will cost them something, and that is prompting them to be careful and seeking alternatives to how they are currently getting their energy and bringing their products to market. Water is universally seen as a finite resource that has a cost – just ask the Mayor of Barcelona who recently received 2 tankers full of water for his parched city. Relevant article from yesterday?
Forbes – The Water-Industrial Complex (http://www.forbes.com/energy/2008/05/13/water-electricity-industry-biz-energy-cx_bp_0514water.html?feed=rss_business_energy)
INCREASING COST OF SUBSTITUTES
I’m not talking about substitutes for fossil fuels here which is how we have usually heard information presented. Flip the argument around with me, and look at fossil fuels being the alternatives for renewables…
we all know that the cost of oil has skyrocketed to over $125 a barrel. But coal is abundant and cheap you might say – nuclear has remarkable potential and is great cheap base load power you could argue; the economics become very rocky if you look into the future and begin to tack on externalities – carbon dioxide emission costs are making coal less economically compelling (but it makes risking some seed money on early-stage carbon capture and sequestration technologies more so). In the case of Nuclear power the burden of the pollution and carbon dioxide emissions associated with mining for uranium have not been accurately assessed if you are claiming it as a CO2 neutral power source, and the life-cycle costs of nuclear are being heavily subsidized by tax payers (here I’m referring to transportation and storage costs of waste and insurance liabilities shouldered by government).
There is no reason to be staunchly anti-nuclear nor anti-coal. Quite to the contrary, it would be fabulous if the two technologies could be used in an environmentally sustainable fashion – that day might come. But for the time being they present extremely costly externalities that are borne by the environment and the tax payer. As those become priced into the cost of production then the technologies will tend to being more efficient, less destructive and more expensive – all the while, making the exploration of true renewables more compelling. Finance guys typically are not dumb, and as long as their bonuses are hinging on success they will steer away from bad calls. They are increasingly taking the long term view and realizing that Clean Renewable Technologies that have negligible ongoing fuel costs (wind, sun, tides, waves, geothermal) are worth the capital investment of risking some money on technologies that might not work, but fuel costs are only going to get more expensive as supplies are constrained because finite resources or environmental pressures – that propels efficiency and alternatives. Relevant articles
Platts – The Barrel:OECD Oil Demand Feels the Pinch http://www.platts.com/weblog/oilblog/2008/05/oecd_oil_demand_feels_the_pinc.html
EvWorld News Wire – Hybrid Costs Being Recouped in Less Time http://www.evworld.com/news.cfm?newsid=18234
New Energy Finance – Econcern Aims to Invest $17 Billion in ‘Sustainable Energy Projects http://www.cleanedge.com/news/story.php?nID=535
I mean this in two senses, both in that green = hip and in that as the world’s population grows, we need more energy to fuel our economies – fossil fuels cannot address this demand, because of both finite resources and increasing environmental concerns. As a population of educated and wealthy people (if you are reading this blog you are wealthy – if you don’t think so…. fly to Haiti jump in car and drive in any direction for a few minutes) have realized that economic growth as we know it is not sustainable, and that Hummers and Suburban’s just aren’t cool. Driving a Prius shows you are smart, hip, and forward thinking. As we implement projects the costs of delivery will continue to go down, and large scale solar projects will become viable in developing the world – energy demands are correlated with their economies and both are growing at fantastic rates. Articles:
Just go to EcoFabulous.com… they’ll remind you daily that being green is Hip, Hot and Healthy.
EvWorld News Wire – Challenge X Survey Discovers Fuel Efficiency is Fashion Forward http://www.evworld.com/news.cfm?newsid=1822
Seeking Alpha (returns) – Clorox: When Green Works as an Investment http://seekingalpha.com/article/77386-clorox-when-green-works-as-an-investment-opportunit
EvWorld News Wire – Study Finds Link Between Air Pollution and Blood Clots in Veins http://www.evworld.com/news.cfm?newsid=18229
Stockhouse – Algeria Eyes Solar Energy – http://www.stockhouse.com/News/FinancialNewsDetailFeeds.aspx?n=10768937
In case you have been sleeping for the last year, corn based ethanol doesn’t make economic or environmental sense. Smart legislation facilitates inventions and investment without looking at specific technology – it should stimulate efficiency and solutions and shoulder some of the risk that keeps projects from moving further. Take the classic project finance issue of a technology in the ‘dead zone’ – a technology that started as a concept and is proven at a small scale thanks to angel and venture financing will not make a difference until it is deployed on a large scale. The problem is that there are operational risks associated with scaling up something that works in a lab or in a small contained test and the sums of money required to make the initial investment can be staggering – but once it is proven on the large scale and kinks are worked out banks and other debt finance options will present themselves. Also, if there are certain incentives being expected, that may or may not be renewed in the future, the financial viability of a project is put into jeopardy. Well planned and stable legislation stimulates these “First of Kind” projects so that financial gurus can accurately forecast returns. Good legislation lays a good framework for success, streamlines projects and reduces bureaucracy (think rail facilitating coal).
Ethanol was an example where bad legislation created a false market, and stimulated the hyper-growth of industry that should not be there (at least not to the levels witnessed). Legislators are beginning to recognize what works and doesn’t – they realize that policies have repercussions. Both sides of the political spectrum need to work together to ensure energy security and environmental issues are being treated with the respect they deserve. They’ll do it, if not, the world’s citizens will elect people that do.
Renewable Energy World – Bipartisan Companion for Extension of Renewable Energy Tax Credits Introduced http://www.renewableenergyworld.com/rea/news/story?id=52433
GreenTechMedia – Winning the Greentech Vote http://www.greentechmedia.com/articles/winning-the-greentech-vote-818.html
BIG INDUSTRY AND ECONOMIES OF SCALE
Big organizations are slow and bureaucratic, but once they start moving in a direction they begin to gain momentum and reduce costs through economies of scale. Sure you should ensure your car has correct tire pressure, you will save some gas and a few grams of CO2 – but if UPS commits to using fuel efficient trucks, then you start seeing real impact. Wal-mart installing LED lighting in all of its stores around the world will justify GE’s investment in a large efficient LED plant, which will make our LED lights cheaper (and better). Exxon has a good understanding of what its clients need, and has tremendous delivery system to get production to consumers. Once these companies start making changes, smaller companies that provide them with services will be able to ramp up production and costs will go down and efficiencies will go up. They are doing it.
Clean Edge News – Rockefeller Family Puts Pressure on ExxonMobile to Pursue Renewables http://www.cleanedge.com/news/story.php?nID=5327
Green Car Congress – UPS Orders 200 Hybrid and 300 CNG Vehicles from Daimler http://www.greencarcongress.com/2008/05/ups-orders-200.html
Green Car Congress – DuPont and Genecor Form Cellulosic Ethanol Joint Venture http://www.greencarcongress.com/2008/05/dupont-and-gene.html
Renewable Energy World – SunPower Reaches 23.4% Cell Efficiency http://www.renewableenergyworld.com/rea/news/story?id=52470&src=rss
Renewable Energy World – Wind Energy Could Provide 20% of US Electricity by 2030 http://www.renewableenergyworld.com/rea/news/story?id=52471&src=rss
So… if you are still reading, these things are happening – all concurrently. A bubble is unsustainable because the underlying economics don’t work. Pull out two or three of these five aspects, and the economics still work. CleanTech is getting lots of attention these days, and it should – our health, wealth, and welfare depend on it. Some technologies will surely fail, yet others will address the critical issues that we need them to – once they do they will be successful, and so will their investors, employees and clients.