Electricity 2.0

What's Next for Clean Energy

This past weekend, I attended the Aspen Institute's Clean Energy Roundtable, an annual gathering of business, political and policy leaders working in clean energy. Inspired by the many insights and ideas presented, here are my thoughts on the state of clean energy today and what lies ahead. 

First the good news.  Prices of key clean energy technologies are plummeting, bringing many technologies such as distributed solar and energy storage closer and closer to mass deployment.  The cost of solar panels today is about 20% below that of a year ago.  And it should continue dropping for the forseeable future. In other words, the performance/price ratio is improving exponentially, like computer chips if not quite as fast and for different reasons, cost economies for the most part as opposed to breakthrough technologies.  The main driver of the plummeting costs is volume and successful efforts by the Chinese government to vertically integrate the Chinese solar industry--that now supplies over half of the world's solar panels.  (In advanced thin films, costs per watt are also coming down.)  Even more dramatic price drops are occurring in battery storage across a range of chemistries with prices halving in the the last year.  Plummeting prices that translate to rising performance are good news for developers, electric car-makers and the global industry at large.

The story is more complicated, however, in the United States where we are in what might be described as the best and worst of times.  This past year saw torrid growth in solar deployment in the US with solar capacity doubling; Wind installations also grew and wind is now a very competitive source of power.  Solar--already competitive with subsidies and in some markets--will be very competitive in several years.  That is the good news.  The bad news is that solar generation still supplies only .2% of US electricity and, what's more, growth has been driven by the 1603 provision in the tax law that allows tax credits to be redeemed for cash.  This provision expires on December 31 this year. Since the financial crisis, tax credits deals to build everything from affordable housing to energy have exceeded the pool of capital from investors seeking to shelter profits.  That means tax credits absent the 1603 provision can be worthless.  With extension of Section 1603 uncertain , the solar industry may face significant challenges beginning this winter.

Similarly, on the wind side, the end of the 1603 credit would take a toll and the production tax credit for wind, itself, expires at the end of next year. While companies are scrambling to start projects before these deadlines pass, afterwards activity may fall of the proverbial cliff.  In short, while global fundamentals for clean energy remain strong, the sector remains quite sensitive to government subsidy.  In the US with subsidy likely to to change and-especially with gas prices likely to stay low as more shale gas comes onstream, we may see more clean energy activity shift overseas.  (One potential fix to this problem: moving clean energy off "subsidies" and giving them equal access to the master limited partnership tax break that extractive industries like oil and gas enjoy.)  Cheap American shale gas could nicely complement intermittent, renewable energy, but effortst to bring the technologies together have lagged.

Indeed, despite intense focus by Silicon Valley and the support of the US government, the US is not catching up with Europe or China on clean energy and in many measures, we are falling further behind.  A few years ago, Germany adopted an export promotion plan that included factories as exports.  It exported gas turbine and solar panel factories to China which is how China has so rapidly come to dominate many areas of clean manufacturing.  The Germans have done well selling machine tools to the Chinese while creating demand (and green power) at home through an aggressive feed in tariff  The US, however, except for a few bright spots like Applied Materials that makes equipment to manufacture panels, First Solar, a thin film manufacturer, here and there innovators like Sun Edison and Tesla--and a few large companies such as GE and IBM, has yet to find its way.

Why?  Unlike Germany that has deep credentials in improving manufacturing incrementally, we have excelled through innovating and creating new industries. For example, France Telecom deployed the minitel years  before America  went online but US companies ultimately came to dominate online technology once we created the open Internet platform that allowed yankee entreprenurship to flourish.  Yet despite developing scores of breakthrough energy technologies in our national labs and robust funding of clean energy companies, as I have written before, clean tech innovators have run up against the brick wall of a regulatory system that funnels purchasing decisions to regulated utilities.  The latter are dis-incented by law to invest in new technologies.  Meanwhile, in many states, the consumer remains locked out of the action entirely behind the Iron Curtain of the electricity meter. The sector is still attracting capital but time is running out to upgrade the regulatory structure to what I have described as Electricity 2.0 to create large, gatekeeper-free platforms that reward innovation and investment.

If there is one strong positive on the clean energy front, it is that the consumer has been given a small seat at the table, notably through the introduction this year of the first two electric cars, the Chevy Volt and Nissan Leaf, and in the form of the proliferation of direct generation of electricity, primarily from solar.  The electric car is a technology that can engage the consumer on the ultimate playing field of new, more,  better.  However, if the the cars fail to thrill, clean tech will experience a potentially huge setback.  For that reason making electric cars and charging infrastructure work has to be a key priority for the industry.

More broadly, the once almighty American Consumer who has not only driven domestic growth in recent decades by controlling a huge chunk of GDP but also funded the development of the Pacific rim, has been the missing force in the clean energy sector.  Consumers are prohibited from directly buying clean energy by law in many states in contrast to communications or the Internet where consumer demand drives rapid product life cycles and profits at a speed in synch with venture capital.

Indeed, the write once, make money everywhere, model of the Internet is providing stiff competition for capital to clean tech where local regulations and the gate-keeping role of utilities can sap the energies of even the best funded, most visionary entrepreneurs.

Nonetheless, my final takeaway was that while challenges abound, clean energy remains one of the largest, most important and potentially, most transformative projects of the 21st Century.   Our job is to engage the consumer, sweep away barriers and play to America's strengths in innovation, entrepreneurship and out-of-the box thinking  in the face of obstacles.

Energy One Year Later

In the year between President Obama's Energy speech at Andrews Airforce Base at the end of March, 2010 and his speech yesterday at Georgetown, much has changed in energy.  Unfortunately, with the exception of the promise of fracked gas, it has not been for the better.

A year ago, there was a real prospect of comprehensive legislation that would have rewritten the rules for energy for decades, setting the US on a path to ramp up renewable technologies and revamp or retire fossil fuels.  That legislation did not move last year, and a new Republican House has totally different priorities for energy, making the politics of legislation this year far more difficult.

With respect to energy itself, two key elements of the President's plan last year were increased offshore drilling and nuclear power.  Only three weeks after his Andrews Airforce Base Speech, however, the BP Deepwater Horizon rig blew up.  The explosion highlighted the risks of deepwater drilling and brought it abruptly to a halt.  The future of nuclear power is far more uncertain in light of the ongoing Fujushima meltdowns, the full extent of which are still unknown.  Finally, a political tsunami, set off by soaring food prices, is roiling the Mid-East, driving oil prices upwards.  The result is that there is a crying need for action on energy policy at the very moment when figuring out what policies to adopt remains more uncertain than ever.

Yesterday, the President called for a one third reduction in oil imports over the next decade, a reopening of offshore drilling, more nuclear energy and also a clean energy standard (that would include nuclear) in lieu of last year's renewable-only standard.  As the New York Times makes clear today, calls for energy independence, despite their long history, going back to President Nixon that give them a Groundhog's day quality, have yielded results.  For example, the US has eliminated oil from its electricity portfolio (oil once supplied 15% of electricity) and even cut imports 10% in the last four years.  Oil from Canadian tar sands is now a reality, ethanol is a real business and other biofuels--unlinked to the food chain--are on the horizon.  It would be wrong to say that efforts to grow energy independent never work.  The goal of cutting imports by one third is if anything, modest.

However, the US still exports $400 billion per year on oil or over 2% of GDP.  Solar energy supplys only about 1/10 of 1% of our electricity--though it supplies 10 or more percent in parts of the EU.  And electric cars--promising as they are--have yet to gain real market share.  In short, policy is not working nearly fast enough.

The Presidnent set the right overall goal of energy security.  Here, however, are my suggestions on the policies needed to translate the overall goal to reality.

First, while a few countries have faced up to the significance of the Fukushima disaster, there has been an odd suspension of judgment in the United States.  In fact, Fukushima is a truly cataclysmic disaster that means that nuclear energy cannot be relied on to solve the world's climate problem or future energy needs.  Nuclar energy, already very expensive and unfinancable privately, will grow much more expensive and uncompetitive.  It will continue to supply a share of the world's electricity, but is not a growth industry.  The US despite what some say--probably won't build any new plants.  It is time to disabuse ourselves of the idea
that nuclear power is the answer to our problems.

Second, the two main problems with oil imports are one, prices are manipulated by a cartel and two, many imports come from unfriendly countries.  We can't solve the second over night but could solve the first.  Given our huge role in the Mid-East and involvement on both sides of the battles underway--supporting rebels, for example, in Libya but incumbents in Saudi Arabia--we need to simply dissolve the cartel.  Let the cartel continue with Iran and Venezuela members but it is inexcusable that Iraq, Saudi Arabia and other countries we sustain are members.  We can and should break it. 

Third, we should reform our electricity regulatory regime to promote, not block innovation as NDN has proposed through our work on Electricity 2.0.  Simply put, Congress needs to pass legislation analagous to the Telecom Act of 1996 to rewrite the rules for electricity to create large, open, national business platforms that play to our strength in innovation, allow energy efficiency and renewable electricity to flourish, and democratize energy.  A renewable electricity standard should be part of this effort.

Fourth, as Secretary Chu and others have suggested, we need to dramatically increase our investments in new technology, particularly in the area of fast charge batteries and biofuels to create the basic science and technology to underly wholesale change in energy.  However, a far larger share of this money should go through universities and to small businesses than has been the case to accelerate technology transfer.

The bottom line is that we can achieve energy independence as the President proposed yesterday at Georgeown but only after we get the policy right, look truly forward and create the right rules of the road to drive real innovation.


News from the Future

There are times when news is light.  There are times when it is off the charts.  Over the last few weeks, we have seen populist uprisings sweep the Middle East and China, an earthquake and tsunami level Japan, multiple nuclear meltdowns and over the last few days, the entrance of the US into the Libyan conflict, eight years to the day after President Bush launched Operation Iraqi Freedom.  At first this avalanche of news might seem to have no common theme. In fact, however, as a presentation at the recent Cleantech conference by Kleiner Perkins partner, John Denniston explores, there is a central reaon:  stress on the world's ecological balance that is now having immense political as well as economic effects.

While many causes have no doubt contributed to the unrest roiling the Middle East--and China, including technology and envy of Western freedoms, a key factor, Deniston convincingly shows, is soaring food prices.  As NDN's Jake Berliner noted at the time, the spark that ignited the Tunisian and Egyptian uprising was announcements of higher food prices by the government.  And food prices have played a role in the Libyan and Bahrain uprisings as well.  Less well known is the cause of soaring crop rices that sparked riots in Indonesia, Africa and many places crowded out of the news cycle.  That cause is the highest level of extreme weather events ever recorded, according to data maintained by the insurer, Zurich Re which tracks weather for insurance reasons, leading to crop failures in the Ukraine, India and elsewhere.

Whether or not one believes in man made climate change, the demonstrable global impact of last year's weather illustrates the sensitive balance of man and nature as global population continues to grow.  The spike not only in food prices but other commodities from copper to oil to rare earths illustrates the precarious and highly complex interplay in the global economy between population, available resources and the financial markets that mediate between them.  While the US and much of Europe remain in a quasi recession, developing countries such as China, India and Vietnam are booming this year, spurred on in part by the very liquidity developed countries have supplied to address the financial crisis.  While some of the high prices of commodities may have to do with so-called correlation in commodities markets, tight supplies are providing fuel to political unrest not only in the Middle East but in China and across the developing world.  Since the financial crisis began, India has added 60 million people, Indonesia, 11 million, Nigeria 20 million people, China, 15 million and even , closer to home, Mexico 5 million new people.  And, indeed, China has announced plans to shift from a one to two child policy.  Rising population is putting ever increasing strain on the world's resources. To meet the challenge of providing for a growing global population, there is only one answer: techology.  The question is--as it has been since the days of Malthus--will the technology come quickly enough to avert crisis or will the world go through major dislocation while waiting on that technology.

Turning to the second major recent event in recent weeks, the Japanese earthquake, here, one might say is an event that is outside human activity.   However, while the earthquake was exogenous, the repercussions of the disaster also reflect the fragile relationship between man and nature.  Just as the Mid-east crisis highlights our relationship with oil, the meltdown at Fukushima and resulting release of radiation testifies to risks we have undertaken to power the modern economy.  Taken together, these events as Chairman Ed Markey observed yesterday constitute a powerful rationale to rethink our relationship with energy, in particular, dramatically accelerate a shift to clean and sustainable, renewable technologies.

At the Cleantech conference, Mike DeWoskin of Deloitte and Touche parsed the 12th Chinese, 5-year plan that ironically commits China to huge investments in the same information and communications technology it has recently silenced to quash the Jasmine revolution.  Indeed, the Chinese story is central to understanding Cleantech.  Only a blip on the screen when John Doerr and John Denniston laid down the gaunlet to the technology community to reinvent energy five years ago, China has now passed the US in both wind and solar production and is not slowing down but pulling ahead.

The good news for the planet is that fantastic new technologies abound if we can find ways to put them into service.  At the Cleantech conference, Elon Musk, the driving force behind Tesla, Solar City and Spacex described Tesla's new 4 seater electric car that will have a range of 300 miles and discussed plans for its successor, an inexpensive, high volume electric car.  In what is really a milestone in space exploration, Spacex's Falcon rocket will soon begin resupplying the space station, marking a transition from government to private space travel.  The French company Veolia has built a model of innovation that involves outsourcing technology from numerous startups.  Legendary Caliornia energy advocate and scientist, Art Rosenfeld who championed low energy refrigerators explained how higher standards can actually cut costs by inspiring innovation and new assembly lines.  Green builder, John Picard who helped create the Leeds system of building described how LEEDS has gone from an idea to standard operating procedure for new buildings.   More positive news came from Kleiner's Denniston who spoke about the declining cost curve of solar that will place solar below the cost of fracked gas in some markets this year.  Numerous new energy storage (air, battery and fuel cells), solar energy, plastics to oil conversion and other technologies can reinvent energy, particularly as the cleantech industry embraces data.

While there is much to be optimistic about on the technology front, the challenges are also daunting. particulalry to US firms and the US economy. Silicon Valley is waking up to the fact that clean technology is a very different market than software and information technology.  It is huge, so that solar is already as large an industry as online advertising.  However, in many ways, energy has more in common with agriculture.  Energy is a strategic industry that produces vital but low margin commodities under the umbrella of government protection.  Hence the formidable incumbents.  The US is unlikely to match European countries or China in government subsidies of favored technology.  Rather, our shot at catching up will arise only if we play to our strength, rolling out innovation.  Rather than compete with China in subsidies we will do better to create open, scaleable platforms like the Internet where our ability to innovate can shine.

Already the lack of scaleable platforms for energy has claimed casualties such as the Google Power meter which after receiving considerable attention, did not won wide acceptance because consumers did not gain access in the recent smart grid deployment to their data.

In short, the explosion of news in recent days is in large part about how to provide for a rapidly growing population in the developing world.  In the wake of the Japanese nuclear meltdown, stocks in cleantech companies involved in renewable power rocketed by over 20%.  Wall Street recognized quickly that renewable energy may not be merely be the most attractive option to powering the future, it may be the only one.   To meet the Malthusian challenges of the 21st Century, technology wil be the answer.  But how quickly that technology comes on stream, relative to needs, will determine how much news and what kind of news we live through.

Nuclear Meltdown

The earthquake and tsunami that struck Japan on Friday is a disaster from which Japan may need years to recover.  It is a disaster, however, from which the Japanese and by extension world nuclear industry may never fully recover.  The meltdowns at up to six reactors that the Japanese are now struggling to contain are of a scale that easily rivals that of the last two major disasters, Three Mile Island and Chernobyl.  What is different is that the Japanese meltdowns are occurring a quarter century after Chernyobyl in a country, unlike the former Soviet Union that has substantial transparency.

A generation after the last two disasters, there is an expectation that nuclear facilities are far safer.  And while the Chernobyl disaster was detected by radiation levels observed in Sweden before the Russians acknowledged there was a problem, the entire world is now glued on efforts to halt the Japanese meltdowns.  Years after Chernobyl the health impact is still shrouded in uncertainty.  The union of workers who cleaned up at Chernoybl estimates that 10% of its members or 60,000 people died in the cleanup alone--not counting the long term helath effects of the radiation cloud that spread across Europe.  We will probably never know the true impact of Chernyobyl.  In contrast, what happens in Japan over the next few days, months and years, will be highly visible to the entire world and that cannot be positive for the nuclear industry.

The challenge of nuclear energy is akin to the Black Swan problem identifed by Nicholas Taleb in his book of the same name.  Nuclear accidents are unlikely.  But when they occur, they can be catastrophic.  In a world of quarterly returns and every day crises, few people have time to worry about the equivalent of 25 or 50 year floods.  When they occur, however, society reacts.  In the United States, Three Mile Island effectively imposed a moratorium on nuclear power that remains largely in effect today.  It is hard to believe that something similar will not occur in Japan. And, indeed, notwithstanding positive comments by Sunday TV shows this morning about not rushing to judgment on nuclear power here in the US, it is certain that countries everywhere will carefully scrutinize any nuclear power projects going forward.

While the world's attitude toward nuclear will not be the same after Fukushima, it is equally unlikely that the world will quickly disband its nuclear power capacity.  The reason is that despite the immense cost of nuclear energy and requirement for state support--especially in light of the Fushimaya disaster, it is unlikely the private market will ever fund a nuclear reactor without government loan guarantees and assumption of liability in the future--there are no quick alternatives.  Indeed, energy--not only electricity generation--but also oil continues to be a strategic business wrapped in national security.  It is no accident that the first energy ministerial did not occur until this year (at the behest of the Energy Secretary Chu), so deeply is energy caught up in state security--and as we see in Japan, state civil preparedness. 

However, the longer term interest of the United States and, indeed, all other countries, is to remove energy from the calculus of government strategy.  The way to do that is by making it abundant, harmless and cheap. Former CIA director Jim Woolsey likes to use the example of a commodity that was once more strategic than petroleum--salt.

In the 19th Century prior to the invention of refrigeration and the advent of automobiles running on gas, salt was a key strategic commodity.  So highly prized was this compound used to preserve food, that nations fought wars over it and its supply was a matter of national importance.  However with the invention of affordable refrigeration in everyone's home, salt ceased to be a strategic commodity.  The once precious crystals are now available for free in shakers in every restuarant.  Meanwhile, virtually everyone has a way to preserve their food at home--in the form of a refrigerator.

Can we do the same with energy?  Distributed generation of electricity--of the scale that Germany has achieved with its feed in tarriff, combined with a way to store it--has the promise to wean us off centralized generation of power and the risks associated with the nculear variety.  If transportation moves toward electric sources, it has the potential to wean us off oil as well. 

It will not happen overnight.  But the disaster in Fukushimaya should remind us of the complexity not only of nuclear energy but of huge, centralized generation, cause us to question huge government subsidies of this form of power subject to catastrophic interruption--not to mention health impacts and encourage us to step up efforts to develop, a distributed, democratic, resilient, system of energy provision that makes power cheap, abundant and safe.

The Secret Sauce of Economic Growth

Over the last few decades, the field of economics has made important strides in understanding economic growth.  The secret sauce in the new growth theory is something called increasing returns.   They are not not supposed to occur in classical economics and don't occur in classic models of the broad economy.  However, they do occur in the real world.  Cities, for example, would not exist without them.  Expressed simply, increasing returns are the improvements in economic output that arise from mixing the right recipe of ingredients together, ingredients that enhance the value of one another.  They show up in cities, regional clusters and firms as economies of scale.

While we may associate economies of scale with large companies--Henry Ford's giant River Rouge plant, for example, where steel came in one end and cars out the other--in fact, you don't need a large company to get scale economies.  (Large firms exist because they simplify interaction; people within a firm don't need to negotiate a contract every time they work together.)  Economies of scale also occur among lots of small companies and players in close vicinity to one another which is what takes place in a city.  While increasing retuns don't have to create large firms, what they do create is all good: growth, new jobs and growing regions that include large and small companies alike.  The secret sauce that makes it all work are what economists call externalities--the benefits participants confer on one another. Paul Romer has used the word recipe to describe this mix.  In other words, just as tomatos, garlic and cheese enhance the value of one another in a dish, complementary skills among people working together or the spillovers in the air in places like Silicon Valley create increasing returns: the secret sauce of economic growth.

America has seen many great agglomerative clusters in its history that have helped fuel the American dream.  One such cluster arose in Detroit.  Alfred Sloan, legendary GM CEO in his classic book, My Years at General Motors (that Bill Gates used as his roadmap to building Microsoft) describes the early years when he worked at a ball bearing company and the industry grew on a platform of complementary skills and knowledge in the air about making brakes, ball bearings, tires, engines and all the other ingredients of a car. 

Detroit fell on hard times as the Superbowl Chrysler commercial featuring Eminem recently underscored but is now vying to retrieve its greatness.  But the story of Chicago's slaughter houses, New York's hat makers and financial companies, Boston's Route 128, California's Silicon Valley, Charlotte's banks and a host of other clusters are virtually synonymous with the story of American economic greatness.

However, research has also shown that clusters do not have to be geographic. Standards, it turns out, allow the secret sauce of increasing returns to work across wider distances by allowing providers of complementary products to find one another.  A classic example is the introduction of common standards in the garment business led to its expansion outside of New York's garment district.  More recently, the Internet led to an entire wave of economic growth. 

Thus the second great growth story in American economic history is national growth that took place based on standards across our unsurpassed national networks, first our rail and Interstate Highway systems, but more recently, our communications network.  Networks with open standards allow actors not only across America but across the world, to interact with one another and increase the value of one another's output and knowledge.

The key to networks creating the secret sauce of increasing returns is open standards that let a smart phone and person in New York talk to a server in California.  The Internet has obviously fueled grown in the last decade.  Which brings me to clean energy.

Energy is an industry with storied clusters of its own.  The oil patch in Texas and Lousiana--that grew up around American oil--in time became far bigger than our oil alone supported.  Long after Spindletop pumped its last barrel, leaving a salt dome that is now used for storage behind, US oil companies helped develop oil in Arabia, Nigeria, Venezuela, Mexico and, indeed, all over the world.  Recently, US engineers unlocked the mystery of shale gas which promises to be a game changer in energy for years to come.

However, while US companies are still leaders in extracting oil, imported oil has grown fantastically expensive for a simple reason: the formation of OPEC. Our oil import bill last year was $337 billion, about $3,000 per household.  The way GDP is calculated this comes right off the top, lowering our GDP by 2.23%. Oil is still a good business for the US (though it comes with geopolitical and environmental costs), but our need to import two thirds of it has created a massive drain on wealth.  To see just how large it is, imagine how good Americans would feel if every household received a $3,000 per year raise in perpetuity?

The question is how do we transition to cleaner forms of energy that do not lie abroad? 

History suggests if we are serious about doing clean energy we need to generate some increasing returns. Right now the biggest clusters of clean energy activity are not in the United States.  They are in Germany, Japan and China.  But it is not too late for us to get a healthy share of the pie.  Silicon Valley has obviously been active in clean technology.  Clearly, there is an emerging clean tech cluster in California.  The beginnings of an electric vehicle cluster are evident as well, with Tesla assembling the Tesla sports car in Menlo Park and, in partnership with Toyota, preparing to build a family car at the repurposed NUMMi plant in Fremont.  Because electric cars are very similar to gasoline ones, automakers are building them at or near where they make existing cars.  GM is building the Volt in Detroit and Nissan the Leaf in Smyrna Tennessee.  A123 is building batteries in Michigan.  GE builds turbines in Michigan as well. Hard hit Michigan could be a center for clean manufacturing.  To get these clusters into gear, however, we need to generate more local American demand.

The second way to apply the secret sauce of economic growth to clean energy is across our networks.  NIST in
conjunction with DOE, FERC and others is sensibly working on open standards for the Smart Grid that can facilitate network effects and externalites across the communications portion of the grid.  It is vital that these standards stay open.  However, perhaps the greatest network of them all, with repect to clean energy, the electricity network, itself, is still far too balkanized, proprietary and byzantine.  Clean energy is being held back in the United States by a blizzard of complex regulations that block hookup to the network as well as open use of the network to connect complementary players and even producers and consumers. The Green Lane  proposal I unveiled last week--a proposal to create an open access lane across the electricity with plug and play connectivity to provide easy on and off ramps--is one way to unleash the network effects (or secret sauce) that the electricity network ought to be providing.

The best part of opening up the electricity network is that it will lead to the formation of geographic clusters in Michigan and elsewhere building turbines, solar panels, as demand ramps up for clean power and related products.

The American economy is in recovery.  But it is recovering slowly.  To unleash real growth and wealth creation, it is time to apply some secret sauce in the form of network effects and increasing returns to refuel the American Dream.

Why We Need a Green Lane on the Grid

Last week, cold temperatures in Texas besides disrupting Superbowl preparations, led to power outages.  Rolling blackouts across the South focused attention on our troubled grid with some trying to blame the problems in Texas on wind power that now provides more power in Texas than nuclear energy.  In reality, howevever, the problem was that several coal plants would not kick over in the cold and heating strained natural gas supplies.  Wind power actually came to the rescue. 

Texas and rolling blackouts in Washington DC and New York following recent storms show that our grid is in need of an upgrade.  But they also show that the solution to our problems do not lie in the past.  They lie in the future.  We need to increase resilience and flexibility on the grid using 21st Century technologies and being mindful of 21st Century economics.

How do we get more clean, resilient power online and then get it where it is needed?  Later today, I am going to be unveiling a new policy idea called the Green Lane.  It is a simple proposal to give producers of clean energy--wherever they may be, simple, universal access to a new Green Lane to get that power anywhere it is needed.  Would this require massive new investment?  No.  The good news, while the whole network does need more capacity, initially it would merely require minor regulatory reform to switch on a Green Lane to give clean, green power an easy on ramp to the network and then get that power where it is needed.

Our current system, as I have writen before, was not built with on ramps.  Rather, the dominant model is large, centralized generation as befits a network that was built on the 20th Century premise of huge economies of scale.  However, the dominant new forms of electricity generation have changed.  Gas fired plants, wind turbines and solar are less about a single, central generation point than about collecting energy where it exists and then getting it where it is needed.  Today a better model for the electricity network is our highway system that allows anyone open acess to move goods where they are needed.   But today, a host of barriers block new generators from finding an on ramp to the network.  Many new projects require millions of dollars in legal fees and rate filing applications to get access to the grid.  This is not how its supposed to work.  Indeed, progressive areas of the country such as the PJM Interconnection have adopted plug and play standards to hook up power.  But we are a long distance from plug and play standards for the entire network.  What's more, once the power is online, currently there is no easy way for consumers--be they large companies like Wal-Mart and Google or environmentally concious households and communites to get clean power.

The idea of a Green Lane is simple.  Create a single standard to allow plug and play hookup to the network on either end--to upload clean power and download it without having to negotiate complex agreements that are an insurmountable barrier to most people.

Tune in later today at 2:00PM today to learn more about the Green Lane.  Click here to RSVP

Winning the Future

The vision President Obama laid out last night--future forward and focused on winning the
clean energy race through innnovation, freeing business to compete and investing in research
and education--was spot on.  So was the parallel he drew to Sputnik.  For the United States is not necessarily ahead in clean technology.  Although we have developed some of the most exciting clean technologies on the horizon--in thin film solar, phosphate technology battery storage and algae-baed biofuels--by many measures we are behind.  China leads us in manufacturing solar panels and wind turbines, Germany is ahead of us in solar deployment and Denmark is way ahead in integrating wind.  None of these leads occurred as dramatically as the Soviets launching a satellite into space.  But they are no less indicative of the challenge we face.  In short, clean technology is not like computer technology where we initially led and then other countries worked their way up the value chain, eventually moving the jobs--making phones and computers--overseas.  In the case of clean technology, we are starting out behind  If we are to lead the world in these critical future technologies, it is vital that we raise our game in order to leapfrog the competition. The proposal the President laid out last night can help us get there.  But only if we collectively succeed in carrying it out.

Part of how we can lead the clean energy economy is to create a level playing field for new sources of energy.  The President's proposal to place clean energy on an even footing with fossil fuel energy is the right way to proceed.  To be clear, it is neither rare nor wrong that the US has historicaly subsidized oil and gas exploration.  Energy like food is a strategic commodiity.  Virtually all countries subsidize it--developed countries on the producer side and developing countries like China with subsidies for consumption--to lower gasoline prices for consumers.  During the 19th and 20th centuries, those subsidies served us well.

What is wrong, however, is subsidizing one form of energy--oil and gas--at the expense of new clean technologies.  We need to put clean technologies on an even playing field lest they lose out to incumbent fuel sources, especially those we purchase from abroad.  All one needs to do to see what our foreign oil bill is costing is to look at the gleaming new cities that have sprung up in the Gulf states--and look at our decaying roads and bridges by comparison. 

Second, as the President said, we need to invest in R&D.  However, we are fortunate to already have a great deal of technology under development in our labs.  The challenge in the US context is to move technology beyond the development stage to commercialization.  Because energy is capital intensive and business models live or die based on the price of oil which is set by a cartel, making capital available to startups to help them bridge the "valley of death" together with guarantees on large projects is critical here.  If there was one problem with the ARRA bill, it tended to give out large amounts of money to huge companies.  We would get a lot more value from giving many small grants out to entrepreneurs and startups.

Third, as we did after Sputnik, we need to mobilize our country to improve math and science education.  Math and science are neglected at even the best public schools in the US.  We need a full court press to raise our mathematical and scientific literacy.

Fourth, we need to rethink energy regulation.  Much of the entire clean energy project resolves around the electricity sector.  Yet the electricity sector is still dominated by regulated monopolies that under the US rate of return system are strongly disincented from investing in technology at all. 

On Monday of this week, I moderated a discussion on energy regulation at the Clean Economy Network Summit with about 40 clean energy leaders and government energy officials.  What emerged from our discussion was that American utilities--the dominant players in the industry--receive no reward for taking risk.  Whereas in Italy, utilities have already put smart meters in 100% of homes--because the savings make good business sense--in the US, even subsidies in ARRA have not overcome resistance created by the system from implementing this new technology.  Current rules forbid utilties from taking risk and block entrepreneurs from implementing clean, smart energy solutions that would be profitable today.  With better rules in place, we would already be seeing the Googles and Ebays of cleantech emerge.  But rules today forbid companies from sharing power in an industrial park.  They forbid a Wal-mart from sharing energy efficiency with a Sam's club across the street.  Even critical government facilities must buy their power through a meter from a local utility.   We need a complete overhaul of the regulatory framework if we are to meet the President's challenge.  That is why NPI's Electricity 2.0 Initiative will soon be unveiling our proposal for the Green Lane--a lane on the electricity highway to which every clean producer will have an open on ramp-- that will allow clean electrons to go from any point to any point on the US network--without running into a host of barriers and redtape.

All of these changes will take government action--not to prescribe the energy future--but rather to free entrepreneurs and American businesses--to combine ideas, capital and knowhow to build and win the clean energy future.  The bi-partisan cooperation evident in mixed seating during last night's speech is a good sign that such cooperation and progress are possible.

This coming Monday, January 31, Senator Bingaman, a long time leader on energy issues and Chairman of the Senate Energy Natural Resources Committee will join us at NDN and the New Policy Institute to discuss his vision for the energy future and thoughts on legislation this coming year.  Joining him will be former Alaskan governor Tony Knowles and other enery and technology leaders as we discuss a roadmap to the clean energy future.

We look forward to seeing you at this event and to working with the NDN community and others as together we create a policy environment that will enable America to win the future.

Green Jobs and the Chinese Exchange Rate

On the eve of Chinese President Hu's visit today with President Obama, The New York Times ran a revealing story on the decision of America's third largest solar panel manufacturer, Massachusetts-based Evergreen Solar to shutter its US production despite receiving $43 million in aid from Massachusetts.  The company is shifting production to a gleaming new facility in Wuhan province in China largely funded by the Chinese government.  As part of the deal, Evergreen has partnered with a local state-run Chinese authority.  Chalk up another win to China's highly effective business development policy.

Coming on the heels of the decision of venture-backed Solyndra to close one of its two US plants, despite receiving $535 million in stimulus loan guarantees and a publicized visit from President Obama, Evergreen's move showcases the difficulty of manufacturing solar equipment in the US.  At a time when the China price on panels is $1.90/watt and falling, Evergreen's CEO, Michael El-Hillow explains that it cost him $2 to make them in the US.  Until we can change that logic, notwithstanding a modest revival in manufacturing overall, the US is not going to create many clean manufacturing jobs. 

So why is it so difficult to compete in green manufacturing with China which also recently passed the US in the manufacture of wind turbines?  The problem is not low wages as making solar panels and many of the high tech goods China is now beginning to dominate is highly automated. 

As candidly discussed by Evergreen's CEO, the deciding factors for him were cheap financing from the Chinese government together with the low cost of manufacture in China in dollar terms due to the exchange rate.  US solar panel makers have trouble finding money at all to build plants.  When they can find it at all, they must pay double digit rates.  Perversely, in quasi Communist China, capital is cheap and plentiful.  Meanwhile, anything built in China has a cost advantage when prices are transferred into dollars.

It turns out these two things are related.  The persistent trade surpluses that China has run with the US for the last decade have the effect, due to the arithmetic of trade, of flooding the US with Chinese goods but also flooding China with US dollars.  The financial crisis has not changed this dynamic one bit.  China has recycled much of the two trillion in dollars it has taken in from unbalanced trade in to the US economy by storing the money in US government bonds, in effect funding our government deficits.  But the gusher of dollars leaves lots of money left over to fund solar plants and gleaming new infrastructure projects.  Indeed, the surplus explains a good deal of the paradox of how China is able to fund massive new infrastructure projects while the US cannot, though the US is still, for the time being, the richer country. 

Today, President Obama is asking President Hu to open markets, raise the Chinese exchange rate and increase Chinese domestic consumption.  These are all worthwhile objectives, similar to the agenda the US pressed with Japan two decades ago.  In the case of Japan, a slow approach ultimately worked.

However, in the case of China, a slow approach is no longer adequate.  By the time, China accedes to any of these US requests, it may have nipped the next generation of US manufacturing in the bud and totally dominate key future industries. We are not dealing with established industries as we were in the 1990s but with new ones where the US is already behind.  Moreover, in the case of Japan, its currency traded freely and trade issues centered on informal barriers.  In the case of China, the currency peg and trade imbalance are there for all to see.

For the last sixty years, the US led the free trade agenda in the world and prospered thereby.  But it is critical to remember that a key ingredient of free trade is free movement of capital and money.  Unbalanced trade due to exchange rate manipulation is not free trade at all.  Indeed, it can be compared to a hidden tarriff exercised by the country that is preventing its exchange rate from reaching equilibrium levels.  Free trade properly includes not only that in goods, but in capital and currencies as well.  Indeed, exchange rate manipulation, then known as Beggar Thy Neighbor policy, was as detrimental to the world economy in the 1930s as the better known Smoot Hawley tarriff and was one of the reasons for the creation of the Bretton Woods institutions after World War II to prevent disastrous exchange rate competition.

The US is pressing the right agenda.  But it must press harder.  A more muscular approach should include not just asking the Chinese to free up their exchange rate but using our leverage as a huge buyer of goods to ensure they do as part of a broader, balanced trade relationship.

Absent a change in the corrosive dynamic of the US China trade imbalance, the US is likely to lose more high tech jobs.  The Chinese people will suffer too as higher standards of living are delayed.  But the entire global economy may suffer as well if we do not avert the instability this corrosive dynamic is engendering.

After the Midterms

Yesterday, Americans voted to return leadership of the House to Republicans, put many more Republican governors in statehouses and trim the Democratic majority in the Senate. While a huge recession undoubtedly contributed to yesterday's results, there is no question that they reflect voter unhappiness with how the Democrats handled the last two years.

What did the Democrats do wrong?  Critically, they did not focus on the economy, the one issue that people cared about most.  Instead, after passing the ARRA act, they pursued a strategy of using the financial crisis to move other priorities.  Indeed, the tea party which provided most of the energy behind the Republican resurgence came into its own in the summer of '09 when it organized rallies at Town Hall meetings to lobby Congressman against Obamacare.  And polls turned sharply agains the President and the Democrats after the Senate passed Health care legislation on Christmas eve.  The problem with healthcare legislation was it did not deal with the economy and, it went against the preferences of a majority of the public.  Expect Republicans to continue to use this issue against the Democrats for some time.

Second, the Administration generally did not take ownership of policy.  Leaving the policy up to Congress highlighted the sausagemaking element always present in making law and it was process (ie proposals to deem and pass) as much as substance that soured many people on the Administration's agenda.  Energy legislation--central to the Administration's vision of a clean economy, languished in various Senate committees. (Of note, the financial services bill where the Treasuty did take leadership moved successfully.)

Thus, pre-occupied with non economic issues and ceding policy leadership to Congress, the Democrats failed to articulate a plan to solve the one problem that people are rightly focused on in the midst of 10% unemployment, how to right America's economic ship and recover what was once considered an American birthright, rising incomes and prosperity.

While yesterday's losses were steep, they do not spell the end of the Obama presidency.  In 1994, the Democrats lost both houses of Congress yet those elections are remembered primarily as a footnote in the Clinton Administration's successful tenure and prelude to the prosperity that followed.  How then should the Administration react to what happened?  Here are some ideas.

First polarization at this point in history works for Republicans and against Democrats, not the other way around.  The last thing the Administrations should allow is the return of old wedge and hot button issues.  The Administration though it may be tempted to double down on left leaning priorities should recognize that it will be judged on problem solving. Polarization will not only reduce the likelihood of victories, it will also lower business confidence which may slow economic recovery.  While it should stick to principles it should also go the extra mile in reaching out to the other side.  The flip side of this is that the other side may resist working together.  However, the Democrats must try.

Second, though Republicans may find it in their political interest to be a party of no, they will be hard pressed to vote against policies they support.  Thus, where there is common ground, the Administration needs to find it.  Cutting taxes on small business, lowering tarrifs, making government smarter, and eliminating red tape to make America more competitive are potential areas of common ground.  Once more, Democrats win through accomplishments.

With respect to accelerating the emergence of clean energy as a job creating machine, streamlining regulations and opening up energy markets to new participants, ideas and capital can prove popular with Democrats and Republicans alike.  Our Electricity 2.0 initiative is focused on tapping the billions in private capital now off limits to the electricity network--the network at the center of the electrity regulation--due to its 20th Century regulatory architecture.  There are currently a number of financing proposals as well to tap private capital for clean energy and infrastructure projects without imposing a fiscal burden on the federal government.

Finally, Democrats should remember that part of being the party closest to the people--besides trying to enact policies that benefit everyone--is reflecting the preferences of the majority of the people.   Big D Democrat has a lot in common--or should--with small d democrat.  Politically and philosophically, the Democrats win when they represent the people, not elites or special interests. 

Yesterday may have been a good day for Republicans and a bad one for Democrats.  What's important, though is that the parties make tomorrow a better day forAmericans.  They can if they work together.   For the Obama Administration reaching out to the other side should be a policy and political imperative.


A Telecom Act for Energy? The Case for a Big Bang

Earlier this year, NDN launched our Electricity 2.0 Initiative with the goal of jumpstarting interest in opening up the electricity network to new capital, ideas and participants. Our reason: Despite over $5 billion in cleantech investment last year and attention from the President to America's largest technology companies on down, the US is still losing the clean energy race.  Our commitment: reform the rules governing electricity to open up the electricy network, lest no renewable revolution occur in the United States.

Over the summer, support for our idea grew.  This summer Chairman Ed Markey--an energy pioneer who also oversaw the Telecom Act in the 1990s and understands the parallels with energy today--hosted an event on Electricity 2.0 at the capital.  Now in recent weeks, driven by the legislative and budgetary environment and a growing recognition that the US is falling behind in the clean energy race, support for Electricity 2.0 has approached a groundswell.  Department of Energy Undersecretary, Kristina Johnson speaking at the CTIA conference earlier in the emonth endorsed our call for America to upgrade to Electricity 2.0 if we are to experience a clean technology and renewable revolution.  This week, two longtime leaders on clean energy issues Ken Berlin and Bracken Hendricks endorsed the idea of a a Telecom Act for Energy. 

Why?  As we have been arguing and the Hendricks and Berlin explore in their article, we cannot ignore the financial and regulatory barriers blocking innovation in the electricity sector. Indeed, as I have argued, we cannot reasonably expect regulated monopolies--as created by current law governing the electricity sector--to lead a revolution.  And as Berlin and Hencricks explore, financial and other barriers are preventing needed investments n clean technology. 

The problem is straightorward.  Regulated utilities receive a fixed rate of return on all investment, be it paper clips or coal plants.  They receive no incremental reward for investing in new, riskier but potentially transformative technologies and may even be penalized if those technologies reduce usage.  At the same time, their cost of waiting is low.  Companies in a competitive environment have no choice but to innovate lest they fall behind as, indeed, we see wireless companies doing today as they invest billions in new network infrastructure.  In a monopolistic context,  by contrast, there is almost no penalty to standing pat.  Not surprisingly, R&D in the electricity sector is virtually nil.  Nor can one blame the utilities for their behavior which is entirely rational.  It is the system that drives behavior.   

With cap and trade tabled for the forseeable future and the federal budget in the red, we need to explore ways to unlock private capital and investment.  The key to putting private capital, people and ideas to work on clean energy is to remove barriers to financing create rules of the road that reward innovation.  In short, the time for a Big Bang or Telecom Act for Energy is now!

It bears mention by the way that the Telecom Act was passed under a Democratic President and Republican Congress with strong bipartisan cooperation.  That cooperation paved the way for an economic tsunami that viewed fifteen years later allowed US firms to dominate the Internet revolution creating millions of jobs in the US while empowering billions of people globally.

Stay tuned.

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