The MIT Energy Conference: Markets and Innovation
Some thoughts on MIT’s Energy Conference last month:
1. Government and our Energy Future
Possibly one of the most important takeaways from the conference was the sense that the US federal government recognizes the threats of climate change (and other environmental damage) on America’s future. The DOE has been hard at work jump-starting programs to transition the structure of our energy economy onto a more sustainable path. I think that most economists would argue that the government is not so good at selecting and directing the technologies that America needs, as much as providing the regulatory grounding and financial assistance to companies that can innovate and meet demands for clean energy. But let’s start with this problem first, of clean energy demand.
One of the kick off discussions was a panel with clean tech financiers, Mohr Davidow Ventures, Credit Suisse, NGP Energy Technology Partners, and Steve Isakowitz the CFO of DOE. An observation on the clean tech industry pointed to the very difficult problem of clean tech to cross the “Valley of Death”, the crucial period between productization and scaling up to production. Building manufacturing plants and corresponding sales and marketing infrastructure is not cheap. Especially when one considers the traditional structure of VC in rapid growth companies, this is a challenge. There is no Moore’s Law for solar photo-voltaics, and capital requirements of producing all this stuff are relatively high. Therefore, a particular role of government may be in “market-making”, putting in policies to ensure that markets will be there for innovators just breaking out into the Valley of Death.
In my opinion governments at US federal and state levels are engaged in a variety of second-best policy to encourage market viability of clean energy tech. Required portfolio standards, for example, that mandate specific mixes of energy sources (eg 20% wind, 15% solar, etc) are heavy handed policies that probably aren’t choosing sources for least cost and best reliability. A more economically desirable alternative would be to require a price on carbon and other pollutants that would leave decisions of energy mix up to the market to figure out. The government could let the market decide the appropriate price of pollution (cap-and-trade), or enact penalties on pollution emitters (i.e. tax). Either way, the government shouldn’t be in the business of choosing technologies and then protecting the markets for them.
Perhaps a more benign role for government is in providing subsidies for clean energy innovation. This seemed to be one of the proud strategies of Steve, CFO of DOE. With programs like ARPA-E (tasked with finding and funding promising innovation, in a DARPA-like manner), the DOE can accelerate bringing new tech to the market that can help brin us closer to a de-carbonized energy economy. One caveat, however, is to note the scale of such funding (only $151 million in 2009) is small compared to the overall problem and probably is much less effective without a price on carbon as a wider incentive.
2. Incumbents in the Background…Keepin’ It Real
Remarks by John Rowe, CEO of Exelon, emphasized the practicality of the market at the level of power utilities and their customers. Raising electricity rates are a good way to piss off customers. So regardless of whether we are pursuing clean energy or not, keeping customers satisfied with their levels of service while minimizing their prices is an obvious priority.
John Rowe supports nuclear energy as an alternative to dirty fossil fuels, and especially with it’s historically cheap cost (at the kWh level). Yes, nuclear has its own pollution issues, but when it comes to carbon emissions it’s pretty damn clean. But there’s a caveat, at least in the short term foreseeable future. Gas prices are extremely low at roughly $5/mmbtu on the spot market, and therefore gas burning power plants are the cheaper alternative compared with nuclear. That, of course, is only if you ignore the environmental cost of burning natural gas.
So, for at least a while, we will continue down the path of fossil fuel dependency. From Mr. Rowe’s point of view, markets are king, and if we don’t reflect the environmental, health, and other costs into the price of electricity we aren’t likely to see carbon reduction. Nevertheless, he does acknowledge that the environmental impact of dirty energy is real. It’s just a matter of how we deal with it in a way that’s realistic for businesses and customers that will decide how we change our energy profile.
3. Emerging Technologies
One can’t attend an MIT event without admiring some of the awesome technologies coming out of the place. We had some of the more predictable players represented – electric vehicle manufacturer Fisker and natural gas ala Chesepeake Energy. But some of the incumbents in the good old oil, coal, and auto industries were missing. Not that they had much reason to come anyway. It wouldn’t have been an interesting conference if it were just more of the same..
Some of the cooler companies represented, however, included ARPA-E grant winners like Agrivida and FastCAP. There cool stuff. Agrivida is working on some plant cellulose digestion mechanisms to produce ethanol. FastCAP has some ultra-capacitor technology that could totally change the way electric vehicles and hybrid vehicles are made. Basically, both companies are to do things cheaper (like way cheaper) to reduce or save energy compared to what we got now. I got a chance to talk to these guys mano a mano at one of our events for the Energy and Environment Professional Interest Council at Harvard Kennedy School. When talking with these guys, one gets image that America’s ethanol-producing cornfields and its car industry will be massively transformed. If you’re interested, I recommend checking them out at Agrivida and FastCAP. Don’t be surprised to see them in your car or your utility grid sometime soon!
