Archive for December, 2006

Top Ten Technologies for an Alternative Energy Future

Note: These are just my favorites… if your favorite isn’t on the list, leave a comment… 

10. Combined Heat and Power

The muscle car of energy efficiency.  Combined heat and power isn’t sexy… it’s just using the “waste” heat from your powerplant for some useful purpose.  Like cooking your lunch on you car radiator, but using every bit of waste heat you can…  Combined heat and power can use 90% of the power in your fuel source for useful work.  And now you can have it in your home.

9. Solar Chimneys

They’re tall, they’re low-tech, and they’re baseload power.  They don’t pollute, and the fuel is free.  What’s not to like?

8. Molten salt thermal storage

It’s cheaper to store heat than electricity, and molten salts can store a ton of BTu’s very cheaply.  And concentrating solar power can produce a ton of heat… without pollution or fuel.

7. Light Emitting Diodes (LEDs)

More lumens per watt… now that’s energy efficiency. 

6. Vehicle to Grid

Our energy efficient cars can make the electric grid work better.

5 & 4.  Cellulosic Ethanol and Biodiesel from Algae

The two technologies that have real hope of replacing gasoline and diesel as liquid fuel for our cars…  We’ll still need massive efficiency gains and Plug-in-Hybrids to reduce our total fuel use, but even with those, corn ethanol and biodiesel from traditional oil crops just can’t produce enough volume. 

3. Time of Use pricing and Demand Side Management.

Sometimes the best ideas are the simplest.  To make the best use of wind power, we can store power until it is needed, or we can give people incentives to use it when it is available. 

Time of use pricing is also a great boon for solar, because solar energy tends to be available near times of peak demand.

Finally, time of use pricing shaves peak demand, which means that we can delay building new fossil fired generation, while renewables get cheaper by the year.

2. Terra Preta

Discovered by aboriginals in Brazil, thousands of years before Columbus, mixing carbon into unproductive soils can make them much more productive… and the carbon stays there for thousands of years.  Using charcoal dust as a fertilizer not only holds the hope of a replacement for fertilizer based on fossil fuels, but it is also an easy way to sequester carbon.

1. Compact Fluorescent Lightbulbs

Where else can you get a 1000% payback with little or no risk?

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Energy’s Place in Economic Theory

I recently started studying for the second (in a series of three) CFA® examinations (I passed the first one last June.)  The CFA charter is a credential often used by stock analysts and money managers.  In addition to an industry work requirement, there are 3 tests, which are administered once a year, covering a curriculum including Statistics, Economics, Financial Theory, Ethical standards, markets and the like.    

I expect to study about 200 hours for the exam, which is in June. By the way, if there is anyone reading this in Denver who also is studying for the Level II exam, I’d be interested in getting together to work through some of the problems and share study materials.

I just finished a reading on theories of economic growth, a chapter from Economics by Michael Parkin, which is probably one of the best basic Economics text books out there.  It’s been a long time since I took an Economics course, and so I had forgotten how economic growth theory is taught.   

I was disappointed. 

Why?  Because the role of energy use in labor productivity is almost completely ignored. (Labor productivity is simply the sum of all economic activity divided by the number of hours worked.  Since the number of hours worked is relatively easy to measure, growth in labor productivity is the key factor which needs to be understood in order to understand economic growth.)  All three theories covered attempt to explain labor productivity through the interaction of two factors: the ratio of capital to labor employed, and technological change.  As a short aside, the role of energy use is given a slight nod, because the drop in productivity growth in the United States in the 1970s is attributed to the Energy Price Shocks of ’73-4 and ’79-80, in addition to a diversion of effort for coping with environmental problems.  To me, that sounds eerily familiar.  Those are precisely the same problems I expect the world will be trying to cope with for the next decade and beyond.   It’s not that economists as a whole fail to recognize the role of energy use in keeping our economy going.  For example, the effects of the recent rise in energy prices have been widely discussed, and many pessimists (myself among them) have been surprised at how little effect rising energy prices have had on the economy.   The explanation for the lesser effect on economic growth is that our economy has become (partly as the result of the ‘70s price shocks) much more efficient, requiring less energy per unit of GDP. What bothers me is that energy is dealt with as an aside, not as one of the major factors in determining economic growth.  For most of the 20th century, we were blessed with energy supplies which we could increase at will to meet increasing demand, so supply constraints were seldom a factor in determining the growth rate.  In a sense, economist theory is like military strategy: there is too much emphasis on figuring out how to win yesterday’s battles, not tomorrow’s.  Tomorrow’s economic battles, as I see them, will be learning to cope with diminishing supplies of fossil fuels.  Economists, who are the ones who will be helping society plan those battles, should be taught the role of energy in economic growth as part of their framework of understanding, not as an aside or afterthought.  This brings to mind the other aside in the chapter: The other cause given for the slowing of productivity growth in the 1970s was due to the expansion of laws and resources devoted to protecting the environment.  This is perhaps a graver weakness of economic dogma than the minor role for energy.  Because we measure only economic growth, and do not count natural resources like clean air and water among our assets, destruction of those assets is much more likely to be overlooked or minimized by policy makers than it would be otherwise.   This concept is known as Green GDP, and is still very much a fringe theory in economics, in large part because it is fiendishly tricky to measure accurately.  Unfortunately, what isn’t measured is usually ignored, and, like the unmeasured risk of terrorists flying airplanes in to skyscrapers, is likely to come back to haunt us in time.

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Social ETFs and Clean Energy ETFs

Forbes ETFZone had an article today by Wil McClachy about socially conscious ETFs, with some comparison between iShare’s two social index ETFs, KLD and DSI, contrasted with PowerShares Cleantech and Clean Energy ETFs, PZD, and PBW.   This ties in well with my entry Green ETFs- How to Choose from last month by expanding the field to consider general social investing as well as just clean/alternative energy.  

I also discuss the new Clean Energy Index fund, CELS, in that blog entry; it is scheduled to launch next month.

Holding a broad portfolio is well worth doing, because the basic principle of diversification implies that most investors would be crazy to focus the entire stock portion of their portfolio into such a volatile sector as energy, let alone clean energy.  Even though I’m a strong believer in peak oil, and I feel that the peak may even have already passed, and economic recession in any large part of the world could lead to a fall in oil prices, which would hurt the biofuels sector.  In addition, there is a lot more to energy than just oil prices, and while peak gas and peak uranium may be near at hand, I don’t think anyone is arguing that we’re going to see peak coal soon. 

I agree with McClachy’s point that the extra expense of the Social index ETFs may not justify the additional expense (0.5% vs 0.1% for SPY)… the extra .4% might be better used (and better targeted) by a donation to your favorite charitable cause, but for many investors, it is deeply troubling to own firms that treat the environment, society, or their workers badly, and a donation to charity does not serve as sufficient absolution.  When working with clients, I try to find out the approach that suits them best; it is often a little of both.   Even though choosing SPY and a donation to charity might be the best financial move, it’s more important to do what makes you able to sleep at night, especially when we are talking about fractions of one percent. 

On the other hand, fractions of a percent should not be minimized.  If you had $100,000 to invest in either SPY or KLD, and choose to put the money in SPY, while keeping half of the savings in your account, and to donate the other half to a charity every year, and SPY were to increase 8% every year for 30 years, you would have donated over $25 thousand to charity in the interim, while and end up with over $57 thousand extra in your account after that time.

This is the real advantage of investments in alternative energy: the chance to have your cake and eat it, too.  Both rising energy prices due to peak oil/gas/uranium and the actions our governments take to combat global warming should increase the returns for alternative energy.  To some extent, this is already recognized by the investment community, and already priced in.  However, I feel that the effects of both have been grossly underestimated by most market participants, despite the recent surge of interest.  Over the long term, the seriousness of the situation we are in will become clear, and that will allow ethical investors in alternative to also be successful investors.  When it comes to social investing, I feel there is often a trade-off between loss of diversification and increased cost.  With investment in alternative energy, the trade-off is between increased risk and increased returns.   The increased risks of alternative energy arise from the small size and speculative nature of many (although not all) of the companies involved, and the concentration of ones’ assets in a sector.  But managing risk is what portfolio theory and asset selection are about; as is making wise trade-offs between risk and return.  To me, the case for alternative energy is compelling, the only real question is how much exposure (and volatility) the particular investor is prepared for, emotionally and financially.

 Another Social/Clean Energy ETF article: ETF Guide.

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A Solar Business Model that Makes Sense

Joel Makower wrote today about Wal-Mart’s RFP (Request for Proposals) for solar panels on their roofs.  This got me thinking about two things:

  1. I’ve sure been writing a lot about Wal-Mart’s sustainability push recently. (see July 30, Dec 3 entries) 
  2. Third party ownership in photovoltaics seems to be the wave of the future.

Wal-Mart is asking suppliers to build, own, and maintain the PV systems, and sell the electricity to WalMart, allowing them to avoid the large up-front cost, and having to branch out from what they are good at: selling products to consumers.  I say that this is the model of the future for the same reason I like CitizenRE’s model: a business focused on installing and maintaining systems will be able to do it much more cheaply and efficiently than a building owner, who may not know anything about solar.  In the residential space, there is the added advantage that the federal tax credit is not capped at $2000, and the ability to take advantage of accelerated depreciation.

Update: 5/7/07 Wal-Mart has completed the RFP. According to the press release the winning bidders are SunEdison (as I predicted below), BP Solar, and PowerLight. Thanks to Marc Gunther for tipping me off to this.

Separate ownership is nothing new on the utility scale: electricity generation is often built and operated by a third party, who receives payment for electricity produced.  For instance, the new solar farm to be built by SunEdison for Xcel Energy in Colorado’s San Luis Valley.

Speaking of SunEdison, I will be very surprised if they do not bid on  the Wal-Mart RFP.   I heard their CEO Jiggar Shah talk about their model at Solar 2006, and he wasn’t talking about installing solar one residential rooftop at a time.  I admit I was somewhat skeptical at the time… I thought solar installations would take much longer to ramp up than he was saying.  I’ve changed my mind since then.

Solar power is still a business totally reliant on government policy.  If the customer had to pay the current $6-$9 a watt of installed DC power, the only locations where it would make sense would be off-grid, but with companies able to capture a combination of rebates and tax credits worth up to 80-90% of that price in states with good incentives (the same states, incidentally, in which Wal-Mart is issuing its RFP: California, Colorado, Connecticut, Hawaii, and New Jersey) it’s a whole different ball game.  And, with the Democrats taking power in Washington and many states, the outlook for renewable energy incentives is definitely bullish.

 What does this mean for the investor?  Buying solar electricity will have a negligible effect on Wal-Mart’s bottom line, except if they manage to use the publicity to brighten their public image, which could have some indirect benefits for the bottom line.  However, so long as federal and state support for solar remain strong or increase, it’s good news for PV manufacturers and suppliers.  But don’t just buy anything on the list: do your homework, and look for companies that already have a working technology, and are ready to rapidly increase volumes within 1-2 years.

Update 1/18/07:  It turns out that there is a company in South Africa called NuRa using this same model.  When it comes down to it, people want electricity, not solar panels.

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The Danger of Impatience

This week’s Peak Oil Review has an excellent commentary by Debbie Cook, Mayor ProTem of the City of Huntington Beach.  She uses her impatience with an unripe avocado as a metaphor for her (and our) impatience waiting for the signs of peak oil to become clear to the world as a whole.

I like her metaphor because it is also a good way to think about the stock market.  John Maynard Keynes once commented, “Markets can remain irrational longer than you can remain solvent.”  As Robert Shiller points out in his excellent book, Irrational Exuberence, part of the reason that the late ’90s dot-com bubble got so high was that many people who had initially been skeptical were worn down by the continued rise of the market.  Emotionally, it is extremely difficult to go on, day after day, year after year, remembering that valuations are based on so much hype and hot air, when everyone around you is making money hand over fist from that very same hype and hot air.

I started managing money in 1999, and so I only had to endure that emotional strain of being out of sync with the world for about a year before the market peaked, and the reality of the market began to confirm my convictions.  However, I became skeptical about the housing market in 2001, and actively bearish in 2003.  Because of this, when I moved to Tucson in 2003, I chose to rent a house rather than buy one,  and I continued to rent when I moved to Denver in the spring of 2005. 

Renting is a lot less fun than buying, and when house prices are going up 15% a year, the gains you might have made by owning add to the emotional burden.  In retrospect, while I was right not to buy dot-coms in 1999, I was “wrong” to choose to rent in Tucson from 2003 to 2005.  The Tucson market rose considerably during that period, and while the rent I was paying was considerably less than I was earning with the investments I would have had to sell to buy and maintain a house (no, I would not have used a mortgage), the capital gains on the house would have been a nice windfall.

What lesson was there to be learned from my Tucson renting experience?  The wrong lesson would be that you should always buy a house.  House prices in Denver have been basically flat since I moved here (data from Zillow), and rental prices are currently about 5% of house prices.   Considering that many money market accounts are now paying over 5%, and taxes, HOA fees, and maintenance costs are added when you own a home, renting is a better financial deal.  In addition, my time renting has given me the opportunity to learn what part of the city I want to live in, and the current glut of inventory means that when I buy, I will be in a much stronger bargaining position than I would have been a year and a half ago.

The right lesson to be learned from my Tucson renting experience is the lesson of the avocado: patience.  Opinion does not change, oil does not peak, and markets don’t move when you want them to… they do it in their own time.  As Richard Russell says, “The market always does what it is supposed to, but never when.”  

Markets are the economic manifestation of investors’ optimism or pessimism.  In the housing market, pessimism is beginning to set in.  In the oil market, we have a way to go.

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Conversation with a wind skeptic

I’ve been having a long conversation with a wind skeptic who responded to my Gust Ceiling entry.    While the rest of us are thinking about ways to overcome the intermittentcy problem with wind, this Rucio is dismissing it out of hand because of that problem. 

 See the comments for our conversation.  We RE enthusiasts need people like this Rucio/Eric Rosenbloom to make sure that we’re not the ones in la-la land.  To paraphrase Paul Newman, if you look around and can’t tell who the lunatic fringe is, you’re it.

I’d like to point out that I jumped to a couple of conclusions myself, which he points out… I left these comments in, even though they do not make me look great.  They are there because I want people who are trying to make up their mind to know that I have not just invented myself a straw man in order to look good.

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The Gust Ceiling: How much wind is too much?

On Dec 13, the Midwest Wind Integration Study, (see article) which was required by the Minnesota legislature in 2005 to evaluate reliability and other impacts of higher levels of wind generation and carried out independently by EnerNex Corporation and WindLogics, found that the total integration cost for up to 25% wind energy delivered to all Minnesota customers is less than one-half cent ($0.0045 cents) per kWh of wind generation.  Great news, but it’s a little bit anticlimactic (as well as “anti-climatic change”) compared to the announcement on Dec 5 that Denmark plans to increase wind powerfrom 20% today to over 50% by 2025.  (All penetration rates are given as percentage of power supplied, as opposed to nameplate capacity, a measure which would make wind penetration rates seem even higher.)

That’s not to say this report is a total yawn.  First, Europe has a much more robust electric grid than the US (as the Northeast found out in 2003), and the fact that the study was sanctioned by a government body, rather than a renewable energy or environmental group gives it added weight.  Finally, by using extensive simulation, they came up with some relatively hard numbers on what it would cost to reach various levels of penetration.

 The study concludes that the total integration operating cost for up to 25%wind energy delivered to Minnesota customers is less than $4.50 per MWh of wind generation, or less than 1/2 of 1 cent per kWh.  Put another way, this is less than 10% of the average cost per kWh of wind energy.

As I alluded to before, when talking about Europe, we need to be careful when we generalize from one utility grid to another as to the costs of integration: Europe’s grid is not the same as America’s, and Colorado’s grid is not the same as Minnesota’s.  Costs for integrating wind into Colorado’s grid are likely to be higher than in Minnesota, because we are behind the rest of the country in terms of how robust and well integrated our grid is to the rest of the country.  Because of the limitations of out grid, all of the major wind farms now in Colorado or under construction have had to be scaled back.

 Nevertheless, the study is great ground for hope.  Colorado desperately needs to upgrade our transmission anyway, and the Minnesota study only takes advantage of one of the many possibile strategies that helps firm up the capacity factor of wind: geographical diversification: “the wind is always blowing somewhere.”

Other strategies not considered:

  • Time of use pricing, which can be used to shift demand to times when the wind is blowing.
  • Plug in Hybrids, which can be programmed to be charged when power is cheap, or even supply peaking capacity to the grid.
  • Energy storage, such as the Wind-to-Hydrogen project recently unveiled at NREL’s Wind Technology Center (in partnership with Xcel Energy.)  One interesting aspect of this project that did not make most of the articles on the center is that they are experimenting with directly connecting the wind turbine to the electrolyzer, without the intermediate step of a transformer which has to be used to convert the wild AC power from a wind turbine the regulated AC power used by the grid. 

In short, I see 25% as a good start, but given that wind power has already shown itself to be cheap, safe for the environment (despite claims to the contrary, wind kills far fewer birds than coal; just ask the Audobon society), and is proving much easier to integrate into the grid than skeptics imagine, we need to start thinking like Denmark, and aim for numbers much higher than 25%.  It will take creative thinking, and serious investment not only in wind farms, but also in our grid, and even behavioral changes on the part of consumers. 

The small sacrifices we will need to make in terms of our behavior to get large penetrations of wind onto the grid, such as checking our time of use meter before we start the dishwasher or dryer, are much smaller, in my mind, than the giant sacrifices we are currently making to coal fired generation in terms of the effects of pollution and global warming on ourselves and our children.  We just don’t see the current sacrifices, because we have become used to the death from a thousand cuts in the form of mercury and other pollutants, and the incremental year on year warming of our planet, lost in the noise of large local and seasonal variations.

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