The clean technology revolution is upon us, but investors and entrepreneurs should exercise caution when placing their bets. Here are some contrarian considerations that could well be vindicated in the coming years, and if they are, subsidies will dry up, the legislative and regulatory environment will shift dramatically, and entire industries that were built on today’s conventional wisdom will no longer exist.
Most of the investments made in energy today, for example, rest on the assumption that energy is scarce – but in reality energy is not scarce, what is scarce is energy that conventional wisdom defines as “clean energy.” This definition, in turn, has recently become far, far more restrictive, insofar as any energy production that causes CO2 emissions is no longer considered clean. But there are a growing number of climatologists, such as Dr. Richard Pielke, Sr. at the University of Colorado, who believe changes in land use – tropical deforestation in particular – have a role in climate change that current models greatly underestimate. What if the greater cause of droughts, extreme weather, and global warming were found to be the result of land use change? Would we still be burning rainforests in the tropics, and depleting aquifers on the high plains of North America to grow biofuel crops?
In the influential book “Hubbert’s Peak: The Impending World Oil Shortage,” author Kenneth Deffeyes argues we are running out of oil and that a catastrophic collapse in oil supplies is inevitable. This point of view totally ignores the feasibility of extracting usable oil from the so called “heavy oil” reserves, as well as recovering oil from coal. At $70 per barrel, these technologies are viable today – and every time the price of oil rises, these technologies become more feasible. Oil from the Athabasca tar sands, for example, is recoverable at a price of $45 per barrel. Similar costs apply to the massive reserves in Venezuela’s Orinoco basin.
According to WorldEnergy.org, the world reserves of light crude oil, as of 2006, were roughly equal to the amount of oil that has been extracted so far, that is, about 800 billion barrels of light crude has been used so far, and about 1,000 billion barrels of conventional oil reserves remain – and this is the low number, some estimates go as high as 1,600 billion barrels remaining of conventional oil reserves. But recoverable reserves of heavy oil add another 2,400 billion barrels to that total. This means that at current rates of consumption, we have at least another 100 years of oil. Add technologies for coal-to-liquid conversions, and we have another 200 years of oil. Add the ultra-efficient innovations that high energy prices inevitably spawn, and the world economy can easily rely on fossil fuels for several generations to come.
Based on these facts, it becomes clear that the “shortage” of energy in the world is a political invention, more than anything else based on environmental concerns. But here is the environmental choice between fossil fuel and biofuel: We can dig up the entire Athabasca tar sands region, as well as the entire Orinoco basin, and if we do this, we will disrupt a combined area equivalent to 75,000 square miles. So for a 70 year supply of oil for the entire world economy at today’s rates of consumption, we would disrupt 75,000 square miles. But if we turn to biofuel instead, at an average yield per square mile of 5,000 barrels per year, to get the same amount of oil we would have to use up 5.8 million square miles of land, which is twice as big as all remaining tropical rainforests, or put another way, about 60% of all farmland on earth. Not only is this impossible, but this is far more disruptive to the environment.
There are other sources of biofuel besides crops, to be sure, but they are not yet commercially viable, and they have their own sets of problems. Cellulosic extraction of ethanol, for example, promises to use crop residue instead of crops as a feedstock for ethanol. The problem with this, however, is that crop residue is supposed to be plowed back into the fields to ensure a healthy organic content in the soil for crops in years to come. If these considerations are taken into account, the amount of feedstock for biofuels shrinks dramatically. Taking these restrictions into account, cellulosic feedstocks for biofuel may yield significant supplemental sources of fuel, but they will not replace crude oil. There is a 3rd generation technology for biofuel, also not yet commercialized, that promises to grow biofuel in tanks, where a feedstock such as algae is fed water, light and CO2, and out comes biofuel. Pioneering companies in this area are LS9 and Amyris, both based in the San Francisco Bay Area. These 3rd generation biofuel technologies, while potentially hazardous and not nearly commercially viable today, nonetheless bear watching.
When examining energy alternatives, it is important to realize that most of them are themselves potentially very disruptive to the environment in their own right, particularly if you scale these up to actually compete with conventional energy. Currently 80% of the energy consumed in the world comes from fossil fuel, 10% comes from biomass (i.e., the cooking fires from gathering wood throughout the undeveloped tropics), about 6.5% comes from nuclear power and 3% comes from hydroelectric power. Only one-half of one percent comes from alternative energy, and 80% of that comes from geothermal power. So power from wind, tides and currents, and solar sources, right now, only produce two-tenths of one percent of the world’s energy. What if half the energy production in the developed world, say 200 quadrillion BTUs per year, were to come from these alternative sources, as certain prominent activists would have us pledge to do within the next generation
This would equate to about 6,600 gigawatt-years of electric power, which could take the form of 3,000 very large nuclear power stations, each station consisting of three 750 megawatt reactors. Depending on your opinion of nuclear power, this may or may not sound horrendous. But imagine if this were accomplished with windmills? The biggest windmills we’ve got can generate five megawatts at full output. Over time they will yield about half that, since even in excellent locations the wind doesn’t blow constantly. So for each of your 9,000 nuclear reactors that put out 750 megawatts each, you instead will require 300 of the biggest windmills ever built – a total of 2.7 million. How much concrete will each of these 2.7 million windmills require? How much skyline will their 300 foot rotors consume?
The point is most alternative energy requires massive allocations of land and capital. How long will the global environmental lobby, more powerful than ever, turn a blind eye to the destruction of our rainforests for biofuel, and the disruption of every windy hill or tidal estuary on earth for another windmill or marine current turbine? This is a lobby that has choked off every ambitious land development or new oil refinery for the last 30 years – but they will tolerate us covering the earth with windmills and the seabed with underwater turbines? Wait until there is one good volcanic eruption – something that will cool the earth for decades – or one credible refutation of the theory that industrial CO2 is more significant than land use changes in causing global warming. When either of these things occur, and they probably will, regulations and subsidies for biofuel, along with wind and tidal generators, will melt away, wiping out vast sectors of these industries.
On the other hand, solar power – photovoltaics in particular – may be relatively undervalued by investors. In 2006, total world production of photovoltaics was only about 3.0 gigawatts, and the thin-film technologies only represented about 5% of that total. With the shortages of polysilicon easing, and thin film and concentrator technologies beginning to mature, estimates of world photovoltaic production are probably grossly understated. Earlier this year in Oregon, Applied Materials Corp. broke ground on a single plant that they expect will output 500 megawatts per year. That is 15% of production in the entire world last year! Manufacturing on this scale is being built everywhere, and the global output of photovoltaics may very well increase by 200-300 percent per year for many years to come. And photovoltaics, unlike biofuel or wind and tidal sources of energy, is not vulnerable to changes in political sentiment or scientific consensus.
The clean technology revolution is in many ways similar to the internet boom – a great deal of financial opportunity, with a lot of new entrants who are placing huge bets. The clean technology revolution also promises to be even more transformative than the internet boom, which is saying a lot. But unlike the internet boom which simply underwent a financial correction, along with that risk, many clean technologies are far more dependent on public policy priorities. Investors and entrepreneurs should remember that seismic shifts in sentiment could happen any day, and hedge accordingly.
Editor’s Note: An edited version of this post was posted on AlwaysOn on September 10th, 2007. This post was originally published in the Summer 2007 edition of AlwaysOn magazine.