Why renewable energy investment will continue despite oil price drops…

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Gordon Brown’s trip to the Middle East was a clear example that non oil exporting states are still very much affected by OPEC’s decisions.  While OPEC nations continue to brazenly collude consumers have passed the tipping point and have made concerted efforts to cut OPEC’s impact out of the equation. Consumers have seen the impact on their economy and environment.  Politicians have now realized that we will vote for them if they highlight their green credentials, and we know that by supporting locally sourced energy we are developing local employment and business opportunities.

The reality is that it will be hard to finance projects that are purely based on predictions for increasing prices. What green investments need are the foresight of people and entities that believe that their technology will yield considerable margins even under low oil prices – in the future if not immediately.  These investors are out there; BP (formerly British Petroleum and now “Beyond Petroleum”) and Chevron have already shown a push towards becoming broader energy companies by investing in solar, geothermal and biofuel concerns.  Companies like Monsanto beginning to play in the BioFuels game. Cynics might tout that this is good for marketing, and it is – but these companies understand investment in research and development.  They have an appetite for risk, exploration is not cheap, and investing in exploration of different technologies as opposed to new oil wells has a similar cash flow profile.

As these investments begin to start paying dividends, these companies will naturally commit more and more resources to ensure their existence after oil; and they will have the benefit of an infrastructure of experience and networks as a result of their early investment.  Players like these are going to need to make ‘bets’ by financing projects heavily with equity to lead investments during tight debt cycles – but financing for risky capital intensive projects is what these players know. Pressures are beginning to wane from a cost point-of-view, and people are increasingly concerned with the economy over energy. With the promotion of concepts like those highlighted by Van Jones, these two concerns become increasingly aligned.

From a project perspective, there are opportunities that are currently competitive and being driven by forward looking micro and macro economic factors that are increasingly proximate.  Big winners are going to be those whose development times are fast enough. A friend of mine, who is confident in the future of renewables, working with a stealth 3rd generation biomass to liquid (BTL) fuels sets it out like so:

“It comes down to carefully adapt and match the opportunities to the projects and stay away from the approach of thinking that one solution fits all and everywhere. People always expect to have the one-size-fits all answer to the general energy question and think that there are economics that are universally promising and if they are not then they are not viable. Energy can only be solved in a much more global approach where solutions might considerably vary only miles apart but the big picture and overall economics contribute holistically.”

Renewables are going to become commonplace, but we need to be realistic and not measure achievements with the same lens that we judged the success or demise of technologies.  The US market in particular (though the EU market as well) is horribly overburdened by ridiculously raised expectations being touted by enamored venture investors and adopted by optimistic legislators which as my “masked friend” puts it are: “not only untrue but more importantly bluntly false.”

Pundits can argue about when we will run out of environmentally and economically exploitable oil, but the fact is oil is a finite resource.  The environmental costs have only begun to show themselves, and the cost curve for oil exploration moves obediently to increased exploration complexity. We will adapt, whether we do it now with foresight, or in the future as a response, we will develop renewable energy technologies.

It would be much less burdensome on our economy (and even stimulating) if we could begin to develop projects now that could feasibly be of a scale large enough to address the requirements of just the growth in energy demand or transportation fuel demand; we can then more realistically attempt to tackle the problem of displacing any fossil fuel shortages. Our masked pal distilled his point brilliantly by asking “What do you think is faster? Oil prices back at $150/bbl or technology maturation curves?”

Even if consumers and legislators cannot see the economic benefits of investment, renewables are here to stay – even if the environment continues to suffer from a lethargic up-take. The future of renewables will be safe in the hands of investors and companies that have long investment horizons and want to ensure their existence long after oil reserves have been squandered.

I’m sure that there are pessimists… let me hear you roar.

-Ian

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10 Comments

  1. I wouldn’t bet on the oil majors jumping into renewables with any sort of determination. According to Matt Simmons, who I know personally and trust, the majors are in liquidation mode trying to keep up with their decline curves.

    “[The major oil firms are] overlooking the fact that they are actually in liquidation, their production has been in decline for several years [and] no matter how much money they intend to spend, they just can’t get ahead of their [production] decline curves. And their proven reserves are shrinking very rapidly.”

    They will continue to spend money to keep reserve numbers up by investing low margin unconventional oil plays like tar sands, and what money they have left will be entirely devoted to fight production declines in operating fields. The only real investment an innovation in alternative energy will likely come from small companies and forward looking VC firms — think Silicon Valley in the 80’s.

  2. I disagree Sam… I think that forward looking VC firms will focus on low capital plays, like smart grid and things like that, which focus on demand side solutions that can demonstrate value quickly for consumers.

    When it comes to supply side investments, like new power plants and new technologies VCs will begin to realize that they don’t have the pockets or the investment horizon to invest in capital heavy investments that have ROIs of decades.

  3. I too disagree Sam,

    Although new VC’s dedicated solely to renewables are popping up everywhere, (thinking Google.org), these guys demand quick ROI’s. However, to your point Ian, I don’t see enough of a demand from the consumer side for renewables to push major energy suppliers into providing the necessary capital backing. That demand will only come if current energy costs become unfeasible. $150/bbl is a good start, but multi-billion dollar investments from large companies such as BP and Chevron (and I would argue the defense integrators) can only continue if there is an external (customer demand) and simultaneous internal (cost) push. At $65, we just don’t feel the pinch enough.

  4. Demand will come when prices are low again. Large investments have been made, R&D is happening – and for some technologies the R&D is now focused on addressing scaling issues (not on just technology prototyping).

    Demand for jobs and an independent energy economy is also a push towards stimulating investment through gov’t incentives (think gloriously under-priced land lease terms) depressed wages (due to unemployment spikes) don’t hurt either. Some smart and capable people are going to be twiddling their thumbs soon… think “Sam the Solar Man”.

  5. Anders got it right. It is very difficult to find investors who think in more than 5 years time and still accept relatively low RoI. We tried to develop sustainble oil palm plantations in Africa, high social impact and a lot of wasted land to convert, but risk is high and return will not come till first fruits bear (after 5 or 7 years). We can offer, thanks to German Renewable Energy law, 15 to 20 years assured market. Till now VCs do not line up for this kind of investment. The reason is simple, you can make more money, and with much less risk in the oil and gas and other businesses.

    Reynier

  6. Why all the concern with big business and scale-ability? Why not focus on the micro plant concept focusing on local feed stocks. Turn the waste streams into income streams as well as more employment opportunities.

    Once the concept is proven with a test site it could possibly be franchised. Just thinking out loud here.

  7. @ James

    Big business and scale-ability are critical, principally because the gap we need to fill is very large. Franchising and distributed generation are both great options depending on where you are in the value chain of a product – particularly for final distribution or the accretion of feedstocks/raw materials. Where it becomes less effective is for production (in solar PV think fabs for silicon, in bio-fuels think production of bioreactors, in solar thermal think mirrors and tubing, etc).

    Also, big businesses are big clients. Think Walmart – if they make the commitment to buy a certain kind of solid state light bulb for all their stores… then the company that makes the bulb can justify the capital expenditure for increasing its capacity, which in turn drives the unit price down for consumers like you and me, and allows McDonalds to consider the same commitment…. repeat.

  8. Last point on this… i don’t know why it comes in so late – if it is a priority for our country to be independent, then we should invest in alternative fuels while we still have equipment with combustion engines. The US military uses 18Million gallons of fuel…. a day (someone correct me if I’m off by a couple million). If the Dept of Defense makes a commitment to replace a percentage of conventional JP-8 with synthetic biodiesel every year then you have a big time consumer making a serious commitment. That is the type of demand that the US can harness to scale CleanTech – they should be leaders not followers on this.

  9. As the theories of most economists are based on ‘history’ , you can clearly see that all stimulus packages across the globe have failed, and even the initial one in US has lost all focus with economists trying to plug whatever hole appears.

    Aggressive tax relief, means that none of the states will be collecting revenues..so, lets see..ummm..Almost every state now needs ‘a bailout’ because of depleted funds – so where does that leave the treasury? Quite the catch 22 with the sting in the tail. Things can be made to sound pretty nice for the American to swallow, but reality is really a bitter pill. Technically engineered speeches are nice, but upon inspection the holes in promises become so obvious.

    Citigroup could be back for more, and the big 3..well, they’ll definitely be back soon.

    I offered to regenerate the US economy, by providing a NEW clean energy solution that provides more energy than the COMBINED energy yield of ALL known renewable energy methods, at a fraction of the current costs with the added bonus that it systematically reduces oil dependance.

    Communications to the Fed,state depts,governors etc all get zero response…so, talk about being ‘asleep at the switch’ – they all are. As in many cases preceding disasters, governments are warned- nobody listens. So, the fallouts across 2009 will be massive. Neither Obama, or the finest economics team on this globe can fix a thing. Any stimulus that lacks the core component of return on that stimulus, only adds to DEFICIT.

    Talks in the senate may continue..Its unfortunate that politicians merely gab,and are good at fingerpointing..but not one, has a SOLUTION.

    There’s a big difference between ideas,plans, and ‘iron solution’.

    I offer :

    1- Millions of jobs across various sectors

    2- Regeneration of the stock markets

    3- Affordable abundant electricity

    4- Systematic reduction of oil dependance.

    To produce more than 1000x the power of all known alternate energy sources may seem impossible sounding..but it IS possible…and to do it at a fraction of your current costs, might seem even more unbelievable..but its possible.

    Stock markets only revive on solidity,and unwavering confidence. I can provide a catalyst for US to start manufacturing, from the ground up again, with the offshoot spinoffs being millions of jobs, throughout every sector of your society. If I told you its possible to produce 1000x the energy yield of wind/solar energy more cost effectively, and more environmentally friendly what would you do? Laugh? Thats the response of a moron, thats stuck in the realm of only what is known,and too dumb to have any lateral thought beyond that.

    T Boone Pickens – is on a mission that will fail..I tried writing him..perhaps he thinks he’s too witty, or perhaps his people in charge of comms don’t READ. Warren Buffett, is just another billionaire, but he can lose his fortune too, if the status quo of this economic situation does not change.

    Energy – underpins EVERY economy. The highest sophistication,s nothing without power.

    When the US fed, or its state departments actually respond to important communication, then perhaps things can change – until then, the globe will continue its freefall.

    If you know a senator that has a mind, and is also blessed with ears, then notify him or her. Politicians are now more intent on being ‘celebrities’- they seem to forget they are public servants – so, they cannot be reached.

    PE Obama promised to ‘listen’, so lets test that.

    You stepped up to the plate, now it’s time to bat.

    Listening, is infinitely more affordable than the cost of not listening.

    Here is an open challenge to the world’s finest economists and the biggest political team on the globe – I say, your biggest stimulus plans will all fail, because no degree of liquidity injection, can stem the root cause of this financial crisis,which is actually ‘mass unemployment’.

    To Mr Geithner – I sent you a communication before you even joined PE Obama’s team.

    To the transition team – I also sent communications…so, the ball is now in your court. You have been told, but listening is really up to you. You can watch the US collapse totally, or have the presence of mind to ‘listen’, and perhaps if you do, you might learn something about expansive clean power generation capability.

    Solutions do appear, but wax is a difficult thing to dissolve. Politicians do tend to have lots of that..if there were earwax shares on the stock market, I’d say those would always remain high.

    I apologise for any errors in my note..no spellcheck:)

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