“It’s a balance,” said Mayco Villafana, FPL spokesman. “If you do too much energy efficiency, a la what the conservationists are asking for, you are going to increase electric rates. You are reducing consumption but you still have to pay for existing power plants, transmission lines plus any new
construction.”

It’s a classic chicken-and-egg dilemma for the utility regulators. They’ve let the companies start charging customers for new nuclear power and natural
gas-powered generators based on the companies’ predictions that Florida needs to double it electricity capacity by 2050. But if conservation reduces demand, will existing customers be forced to pay more?

“How outrageous is that?” asked Kristin Jacobs, a Broward County commissioner and chairman of the county’s Climate Change Task Force. “We should just continue to stumble along in our wasteful excessive ways?”

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Part I: With Smart Grid Brains and Transmission Brawn…

Tom Konrad, CFA

A robust national grid will be essential to achieving high penetration for
renewable electricity at reasonable cost, and the companies that can help build
it are an essential part of a clean energy portfolio.  

Many renewable energy advocates, especially those enchanted by the gigantic
potential for solar, think that we can get by with local renewable energy. 
While it’s a pretty vision, the timing of wind and solar (the only forms of
renewable energy that have the potential to produce 100% of our electricity)
mean that this could
only be achieved with prohibitively costly investment in grid tied energy
storage.  It makes much more sense to invest in a smarter
and more robust grid before making large investments in energy storage.

Diversification of Electricity

There are two aspects of this: managing our energy usage better, which is the
province of the smart grid, and interconnecting it better, allowing us to take
advantage of the natural variations between both supply and demand in different
locations with long distance transmission.  In much the same way combining
two imperfectly correlated stocks in a portfolio reduces overall risk,
connecting two regions with high voltage transmission reduces the overall
imbalances between variable supply and variable demand that need to be met with dispatchable
generation.  

It’s much easier to balance supply and demand over a large area than it is
over a small area.  On the smallest scale, this is the reason that almost
all net zero electricity homes are grid-tied.  Although such a home has the
capacity to produce all the electricity it needs on an annual basis, the cost of
the batteries needed to store the extra electricity produced during sunny summer
months for use on long, dark winter nights would be prohibitive.  Instead,
home owners use the wires connecting them to the local grid as extremely
inexpensive virtual storage.  Long distance transmission
can serve the same function on a much larger scale at a cost of only a fraction
of the comparable real storage.

Time and Space

Transmission shifts electric supply in space, while storage shifts electric
supply in time, and smart grid technologies shift electric demand in time. 
Both Smart Grid and Transmission can therefore provide virtual storage, and both
do it at a low cost compared to real electricity storage.  

Last year saw investors finally take notice of Smart
Grid stocks, but transmission has yet to capture their attention (perhaps
because many renewable energy aficionados still cling to the dream that we can transition
to clean energy sources using just the smart grid and storage.)  While such
a transition would be physically possible, it would make no more economic sense
than putting solar panels on your roof and racks of batteries in your basement
in order to cut your connection to your electric utility.

If 2009 was the year investors woke up to the potential of the Smart Grid,
2010 may be the year they begin to see the strong grid.

Part II of this article will look at which Strong Grid stocks are the
strongest financially.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here and in the comments are for
informational purposes only and are not a solicitation to buy or sell any of
these securities. Investing involves substantial risk and you should evaluate
your own risk levels before you make any investment. Past results are not an
indication of future performance. Please take the time to read the full
disclaimer here.

As wind come out at a robust 9.9GW in 2009, Solar at maybe 600MW, etc, it looks like the zero-emissions folks will again install a majority of incremental MWs. The balance is mostly natural gas a little bit of Coal. Getting this number of 100% by 2012 and then above 100% by 2015 will be critical to achieving emissions reductions in our electricity sector. So what are the barriers:

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Big news today in the state of Massachusetts, where state officials announced a plan to pour $2.2B into energy efficiency measures, including a target of tripling the number of home energy audits, etc.  On a per capita basis, at least, it would put Massachusetts ahead of any other state in the U.S.  A terrific example, a great initiative…  Great to see!  It will make Massachusetts an even more attractive region for energy efficiency startups, tech or otherwise.

———-

On other policy topics… I haven’t spoken much about feed-in tariffs here in this column.  For one thing, the economist in me tends to favor simple tax-based solutions rather than mandates or price setting, so I’ve never seen FITs as particularly attractive intellectually.

But recent conversations with those in the project finance industry have been changing my mind… a bit.

If policymakers want to see big roll-outs of renewable energy technologies, project finance is a vital player.  No matter what incentive scheme is put into place, someone is going to have to pay for the project.  According to New Energy Finance’s figures, clean energy “asset finance”, at $92B globally, dwarfs the dollars going into venture capital, government and corporate R&D, IPOs and other public issuances, etc.  No matter how many technologies are invented and introduced to the market, unless project financiers are willing to bankroll actual steel in the ground, the new generation capacity will never be built.

As we’ve discussed on this site in the past, project finance is very different from venture capital and other investment asset categories.  Project financiers typically target returns much lower than what VCs target.  To make that work on a risk-reward basis, the investment must have absolute minimized risk.  This is why there is a big capital gap between the venture capitalists and the project financiers:  The VCs see their role as getting the company to a point where the technology has been successfully commercialized.  The project financiers will wait even further, however, until all details of implementation are completely understood and underwritable. So the VCs will fund only a new tech up through project #1, and the project financiers still see too much implementation risk at that point, and projects number 2, 3, and 4 have a hard time getting built built.

What kinds of risks do they care about?

• Input / supply risk
• Technology risk
• Demand risk
• Offtaker credit solvency risk
• Offtake price risk

To address the capital gap, various government policies are there to help juice the returns for investors.  Investment or production tax credits, 48C manufacturing tax credits, etc.  And there are also mandates out there such as renewable portfolio standards.  These certainly help and have their merits.  But they don’t really address the above risks.  And even if the returns are enhanced through the incentives and mandates, project financiers are not used to having to assess such risks in this way.

A feed-in-tariff can directly address three of the above risks.  In most applications, the FIT is a requirement for the local utility to purchase whatever power is produced by the targeted technology, at a set price (this is obviously a simplified version of a FIT).  This means that, to a project financier assessing a FIT-driven project, the demand risk is taken care of — the utility is required to buy the power.  The offtaker credit solvency risk is minimized, since most large utilities are very credit-worthy.  And the offtake price risk is obviously intended to be set.

I’ve spoken with a few project financiers who say that they are much more likely to invest in a region where there’s a FIT in place, than in a region where there are tax incentives, even if the impacts on project IRRs are comparable.  The FIT just creates a lot more certainty for the investor.

Certainly FITs aren’t a panacea.  Setting the price right is a challenge and prone to political inefficiency, for one.  The requirement for utilities to purchase power at such a high price also means that they’ll have to pass that price along to consumers or otherwise get government support to cover the difference — it’s not a big deal when the volume of FIT-driven power purchases are low in relation to the overall generation mix, but of course the idea is to dramatically drive up that volume, so it can get costly in a hurry.  And it being a politically-driven system, when things get costly there’s danger that the FIT price is reduced much sooner than expected by the market.  This crushed the solar market in Spain, and is also happening now in Germany.  It’s critical, therefore, that any FIT be designed so that if there are future FIT price reductions existing projects are grandfathered in, otherwise project financiers won’t perceive the policy as truly addressing the above risks for any given project.

But if policymakers want to see dramatically accelerated rollout of clean energy generation technologies, project financiers will have to be the ones supplying the lion’s share of the capital required.  And if project financiers are to do this, FITs are definitely worth giving serious consideration.

Here’s a link to much better thinking on the topic by the good people at NREL.

More than two weeks have passed since the devastating earthquake struck Port-au-Prince, and millions of Americans have opened their wallets, their hearts, even their homes to help. But now, as the mainstream media starts to turn its lens away from the ongoing disaster, and the long, difficult struggle to rebuild and heal a nation continues, more organizations are asking for volunteers. Nurses, doctors, clergy, carpenters, teachers and more are needed as the long process of rebuilding and healing continues. Diane Herbst has a list of new ways you can Read the full story on TreeHugger

John Petersen

In one of my first articles, “ href="http://seekingalpha.com/article/91361-battery-technology-a-different-set-of-rules">Battery
Technology: A Different Set of Rules,” a commenter suggested that I
was a bit of a Captain Buzzkill. Eighteen months later it’s clear that
a lot of readers share that uncharitable view. This morning I had an
e-mail exchange with a reader that raised the same basic issues and
reminded me that it’s been a while since I’ve discussed the fundamental
differences between energy storage and other technology related
sectors. Since the subject matter can be very important to investors
who want to make sound decisions, I’ve decided to edit the e-mail
exchange and publish it as an article.

Inquiry: style="font-style: italic;">I’ve read your posts and thank you for
your insights into the topics you cover. I have to ask this however …
is there not “anything positive” you can say with regards to
lithium-ion battery companies? I mean, can’t you give credit for
anything? It seems to me that in a necessary longer term evolution of
technologies they and others DO play a critical role in getting from
proverbial A to B for all of us.

Response: I believe several
lithium-ion battery developers have the potential to become fine
companies and that the world desperately needs all of the lithium-ion,
lithium air, sodium sulfur, zinc bromine, lead acid, lead carbon,
sodium metal halide and nickel metal hydride batteries we can make. The
products are critical to an energy efficient future and so are the
companies that make them. The needs are immense beyond imagining but
companies that want to survive and thrive in the energy storage sector
need to be willing and able to say:

• We can provide batteries for Application A today and earn a
  reasonable profit;
• With luck we may be able to provide batteries for Application B
  in X years and earn a reasonable profit; and
• Until the market dynamics change, we won’t be able to provide
  batteries for Application C and earn a reasonable profit.

Any other approach is certain to set up unreasonable expectations in
the collective consciouness of the market and over the years I’ve seen
too many examples of disastrous market reactions to unsatisfied
expectations. Given my long and sometimes painful experience advising
small companies, I have a hard time remaining sanguine when companies
start the game by setting their goals too high.

Over the years I’ve had a number of friends and clients decide that
they wanted to sell products to WalMart. The negotiations were long and
brutal, but the vendors were always delighted when their products hit
the shelf because the sales volumes were immense. Within about six
months, they discovered to a man that it was almost impossible to sell
anything to WalMart and earn a reasonable profit margin. Within
eighteen months they were all out of business.

Selling batteries for electric cars and utility applications is a lot
like selling a product to WalMart. Starting negotiations from a
position where you’re saying “we understand that we won’t be able to
business with you unless we can slash our costs by at least 50% coming
out of the chute” is darned near suicidal. Small companies need to
start in markets where they can earn outsized profits while they learn
to optimize their activities. Learning to swim in the shark tank is a
good way to get eaten.

Right now the lithium-ion battery developers are promising a brave new
world of electric cars and grid-based storage. I’ve shown why electric
cars are a horrifically suboptimal use of batteries. I’ve also seen
drafts of a new report from Sandia National Laboratories that shows
most grid based applications will require even cheaper batteries than
the automotive sector requires. At last fall’s EESAT conference in
Seattle, Ali Nourai of American Electric Power explained that they’re
‘technology agnostic” as a company and their current efforts are
focused on lithium-ion batteries because they assume that sales into
the automotive market will drive lithium-ion battery prices to low
enough levels that they’ll be attractive for low-value utility
applications.

In Joseph Heller’s classic novel style="text-decoration: underline;">Catch 22 a character named
Milo Minderbinder
planned to buy eggs for a dime, sell them for a nickel and make it up
on volume. That can’t happen in the real world, regardless of what
people want to believe.

If the lithium-ion battery developers were all out telling the market
that they planned to focus on high value markets that they could serve
today and they hoped to expand into other markets as they built
experience and improved their technology, I’d be a huge booster. As
long as they’re promising things that can’t happen in the real world,
they’re either setting the market up for major disappointment or
setting themselves up for a string of losses that won’t end until a
Chapter 11 petition is filed. I can’t be a cheerleader for either of
those outcomes.

Follow-up: style="font-style: italic;">Thanks so much for your kind reply …
Very interesting conclusions is all I can say. This reminds me of none
other than solar, and look at where those stocks are this week “as we
speak” eh ? Even the “best of the breed” are subject to subsidy cuts as
was obvious just the other day, with the announcements out of Germany,
proposing to cut more than were the expectations of the market. The
only good things that can be said about it is that is causes prices to
get cheaper for the end user, and makes the industry far more
competitive in the long run I suppose, but it sure does just basically
kill positive forward guidance at a time when it sure would be nice to
have some, hmmm ?

Reply: Based on the experience
of the last 40 years most investors are optimistic about the future of
all things alternative energy. In some cases the optimism is warranted.
In others, particularly in energy storage, the optimism is dangerous.

Substantially all of the miracles of the information and communications
technology revolution were due to advances in the science of physics.
Researchers have found ways to use steadily smaller resource inputs to
get exponentially larger outputs. It’s been true in communications,
computing and even solar cells. As a result the idea that it’s always
possible to do more with less has been burned into our collective
psyche and the masses resist any suggestion that another result is even
possible.

The biggest problem with energy storage is that it’s all based on
chemistry, which is limited by an entirely different set of natural
laws. On any given atom there are a defined and immutable number of
sites where chemical bonds can be formed and reactions can take place.
For hydrogen atoms the number is 1; for oxygen atoms the number is 2;
for nitrogen atoms the number is 3 and for oxygen atoms the number is
4. I could continue the series but you get the idea. When you put atoms
together to make stable molecules, the number of bonds on each side
have to match. That’s why chemical compounds are express with formula
like H20 or CO2 or NH3 or
CH4. No matter what we do the ratios can’t change, the
number of atoms in a gram of material can’t change and the number of
possible chemical bonding sites in a gram of material can’t change.

Most chemical reactions used in battery chemistry are quite efficient
to start with, which means that the best researchers can do is work
around the margins to maximize the surface area where reactions can
occur. There’s a lot of talk about nanotechnology in the battery sector
but what it all boils down to is grinding materials into extremely fine
particles in order to maximize surface area. In the case of some of the
carbon compounds used in batteries, surface area has already been
optimized to the point where a single gram of material has as much
surface area as a football field. About the only advances on the
horizon that promise to significantly increase surface area are
materials like carbon nanotubes and graphene, but they’re terribly
difficult to work with and ungodly expensive. Since the materials have
been the subjects of intense research and development for the last 10
to 20 years and progress has been extraordinarily slow, I don’t expect
breakthroughs tomorrow.

The bottom line is that chemistry is grunt manufacturing that requires
immense amounts of raw material. The science is progressing every day
but you rarely see disruptive changes from companies like Dow,
Monsanto, Exxon and the like. The battery industry will be no different.

Because we’re dealing with chemistry instead of physics, current lofty
expectations of rapid disruptive change are misplaced. There will no
doubt be progress, but it will not be rapid or disruptive. The bottom
line is progress in the storage sector will mirror progress in the
chemical industry in spite of the fact that the the goal is to store
electricity.

Conclusion: I’m a huge booster
of the energy storage sector and want everybody in the industry to be
fabulously successful. The really crazy part is I don’t even think
about competition between companies because I believe every company
that brings a reliable and cost-effective product to market will have
more business than it can possibly handle. What I object to are
outsized claims of likely technical progress and cost reductions from
advances in chemistry in a resource-constrained world. Human beings
always want more than they can possibly have because that’s the nature
of the beast. Promising to satisfy human desires that are beyond the
limits of the possible is neither good business nor good public
relations.

Image from the Baltimore Sun

Some people say that the British treat their animals better than people. Apparently one out of every two families in the country has an animal. Maybe that’s why Casper the commuting cat has been tugging at the heartstrings of the nation over the past week.

Casper was a 12 year old cat in Plymouth who has been catching the bus every day for 4 years. He would wait patiently at the door, curl up on the back seat and sleep for the round-trip ride of 11 miles. Then the bus driver would let him off back at his st…Read the full story on TreeHugger

Researchers at UC Berkeley have hacked tobacco plants to grow synthetic photovoltaic cells which can then be extracted and sprayed onto any substrate to create solar cells.

How? The scientists tweaked a few g…Read the full story on TreeHugger

Photos: Stephen Messenger

After several days of meetings outlining the various threats posed by the current geopolitical and economic status quo, day four of the World Social Forum was largely dedicated to discussing the necessary solutions. Capitalism and the consumer culture it promotes were again the targets of criticism–and reiterated to be at the center of the looming crises of the 21st century. Climate chang…Read the full story on TreeHugger

Image credit:USEPA/Formaldehyde Council.

USEPA has decided that when a chemical company encounters new information about the toxicity of a chemical product, that they must make public the name of that product. It used to be that they could check a box and claim “business confidential information” or “CBI.” Pretty much every company did it and as a result there was really no way for the public to see if any new hazards had emerged. Read on for a current example of how this change in policy opens up information….Read the full story on TreeHugger