Tuesday, May 12, 2009

The Energy-Water-Technology Triangle - Part III

Developing Clean Technologies -- the Motivation 
Means, motive, opportunity. Sherlock Holmes used them to deduce a suspect's guilt or innocence. If we were use them in a similar way to evaluate the development of clean technologies, we'd find that everyone has the opportunity, and a number of folks are developing the means. But we'd see that motivation is a problem -- it's a sad statement about the human condition, but we don't seem to do much until we find ourselves in crisis.

So, what's the motivation for investing in the development of technologies that'll be friendly to the environment and still produce enough energy to keep things humming along? I count three. One is government mandate (do it or else). Another is entrepreneurship (there’s good money to be had). The third is a combination of the two; I'll get to that in a moment. Unfortunately, creating clean technology and clean energy just for the sake of preserving a viable planet doesn't seem to motivate enough people to get the job done -- we've been talking about a sustainable environment for decades but haven't made a worthwhile effort.

In the "money to be had" category of motivation, there are numerous examples of incentives in which money was the key motivator. For example, the U.S. wouldn’t have jumped into the pursuit of wind technology if it weren't for the production tax credit; a $7,500 tax deduction boosted the adoption of plug-in hybrid vehicles, and the driving factor behind investment in wind, solar, biomethane, etc. is the fact that 24 states and the District of Columbia have renewable portfolio standardsCalifornia's rooftop initiative and financial entrepreneurs propelled the rise of solar. The fact is, many of the solutions to dealing with climate change exist but, for the most part, U.S. government policies are running a few lengths behind -- plus, it isn't government's role to pick technologies to develop because government tends to be short-sighted, focusing more on legislation than on promoting the creation of smart solutions that'll thrive because the marketplace wants them.

As a result, the U.S. CleanTech industry gave us bioethanol, which has advantages and disadvantages.  The latter far outweigh the former -- the production of bioethanol using corn requires 29 percent more fossil energy than the ethanol fuel produced, it's highly corrosive and consumes 20 or more times as much water for every mile traveled than the production of gasoline. When scaling up to the 2.7 trillion miles that U.S. passenger vehicles travel a year, water could well become a limiting factor. 
An increase in the production of bioethanol reduces the volume of of available food -- we might be fueling hunger more efficiently that we would our cars and trucks. All I can say about ethanol as fuel is, "No way."

In the "do it or else" category, government mandates will force companies to change their ways. Yale law professor Daniel Esty thinks this "top-down" approach will take us where we want to go -- private business will create clean-tech solutions but only if government applies pressure, such as price caps or penalties that, directly or indirectly, force companies to pay for the carbon dioxide they emit, and those penalties would be high enough to encourage firms to find inexpensive, green solutions.

In contrast, Vinod Khosla is a venture capitalist who believes government mandates produce uneconomical solutions that, due to high costs, aren’t widely adopted. He favors the idea of entrepreneurs using private capital (in some cases with some short-term government assistance) to provide solutions cheap enough to use in the most desolate backwater sites in the nation -- and even in developing countries, which is necessary because climate change is a global problem. Minimal government regulation would be required.

According to Peter Adriaens, an engineering professor at the University of Michigan, Esty's and Khosla's views are less in opposition as they appear. "The policy argument and the entrepreneurship argument are extensions of one another," he said. "The perspective is also colored by the fact that Esty has written extensively about -- and has worked on -- greening the supply chain and climate change, whereas Khosla -- his brilliance notwithstanding -- is an IT person who has recently moved into the Cleantech space and is still trying to figure out how to make money there."
(and that China and Europe have strong policy mandates, and thus market opportunities).
Policy mandates and entrepreneurial ventures do, indeed, drive CleanTech investment and the adoption of scalable technology. But the investment required to develop cheap, clean technologies is huge -- orders of magnitude larger than that of IT innovations, and the time from the beginning of development to implementation is considerable because working out the bugs takes time and money, both of which are in short supply.

Policy makers and investors aren't considering the whole picture. “Cheap” doesn’t have to an operative word in developing CleanTech solutions. Over time, new technology has a tendency – as do other products – to become indistinguishable from others that eventually develop to solve the same problems. When that happens, consumers select technology on price alone, a happenstance that drives prices down. Profits will follow.

"Technology adoption cycles start with small market slices at high margins," Adriaens said. "Early adopter markets are less price sensitive. We can achieve the results Khosla is looking for once the technology becomes commoditized, standards are adopted, and policies -- taxes, for example -- foster wider adoption of a suite of solutions. In the IT space, you can compare this with policy decisions by companies to only support PCs or Blackberrys or their equivalents (i.e., not Mac or iPhone) -- and this becomes the de facto business standard, which increases adoption, drives down prices and promotes competition. 
"I firmly believe in the bottom up approach for investment in entrepreneurial solutions," Adriaens said, "however, the entrepreneur's business environment is dictated -- at least for renewable energy -- by policy and price signals.  The market success of an entrepreneur's solution will always be dependent on competition, based on cost and complexity, with current alternative solutions." 

The third method of motivation that I mentioned is a combination of top-down and bottom-up approaches -- call it the middle-method -- in which both government and corporations become major investors in entrepreneurial ventures, and entrepreneurs are subject to deadlines and possible penalties, as corporations are. In confronting the energy-water-technology crisis, everyone should have the means, motive and opportunity; everyone should be accountable.

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