Debating 4 Dirty Myths on Clean Energy

As the US Presidential Election is now behind us and 2013 is beginning, it is critical that our country begin to focus on solving problems. As one of this generation’s most pressing problems is related to energy and sustainability, my sincere hope is that the debate on this topic leads us forward in a way that benefits our economy, environment, and security. Good debate, based on facts and reality, will lead us to a better place. Poor debate, based on fiction and myths, will lead us nowhere. And going nowhere on one of the most important challenges of this generation is unacceptable.

The challenge is that before and during an election, there are many myths promulgated as reality.  If this continues unabated, this muddles the debate and leads to inaction or poor decisions. The objective of this short article is to highlight some consistent topics that are often confused, or what I call myths that are purported to be realities.  By working with facts and good logic, we will improve the quality of debate and the resulting decision-making. 

Debate 1: How is the Problem Defined?

Myth:  Climate change is not real, thus “clean” energy is not needed
Reality:  This is the wrong response to the wrong question; a broader framework is needed

There are some that still debate climate change, whether it is real and – if so – the potential impact.  But to start with climate change as the central question misses the mark.  The future of energy and sustainability is about solving the question of “how do we meet the needs of growing worldwide energy demand in an economical, environmentally-acceptable, and secure manner.” Climate change is just one piece of the environment portion of this statement, albeit an important one.  Different people might value different aspects of these criteria differently but the debate should start with a framework that is broader than just climate change.  To solely address the climate change aspect of the issue assumes that there is the only aspect of the question at hand.  This is simply not true.

I would be remiss to not comment on climate change at all. There is not 100% assurance that rising carbon dioxide levels cause global warming.  Nor is there 100% assurance on what will happen if it does.  That is a fact.  I would also note that you cannot state with 100% certainty that you will continue breathing five minutes after reading this, although the probability that you will is likely high. 

So climate change, like many things, is a probabilistic question.  And the probability that climate change is real, and the impact will be non-trivial is quite high for several reasons.  First, the argument is logical.  Carbon dioxide in the atmosphere does trap heat, the levels of carbon dioxide have increased measurably, and the increase can clearly be linked to industrial development.  Second, analysis from the vast majority of the world’s leading scientific organizations, such as the National Academy of Science in the US and the Royal Society in the UK, are consistent in their assessment that climate change poses a real risk.  Finally, the main sources of opposition always seem to be those that have the most to lose economically and thus their objectives can be questioned.  I would note that the numbers of persuasive deniers are dwindling. 

Perhaps most interesting was a Koch Brothers funded study at the University of California at Berkeley.   The study, backed by the Koch Brothers, who are known to fund studies skeptical of climate change, ended up reversing course and printing their view under an op-ed entitled, “The Conversion of a Climate Change Skeptic.” It’s getting lonely being a climate change skeptic and will only get lonelier in the future.


Debate 2: How Should Government be Involved?

Myth:  The government should stop subsidizing clean energy and let the ”free market” work
Reality:  The government is deeply involved in all forms of energy; there is no free market in energy 

People that make this comment – and there are many – are either woefully naïve or intentionally deceitful.  Let me start by saying I am a huge advocate of free markets and small government.  I strongly believe that in areas of the economy where price signals are relatively accurate this is by far the best way to allocate capital.   

So what is the problem?  Free markets work well when pricing is accurate, and in energy, it is not.  Fossil fuel prices are subsidized to a massive extent through tax breaks, insurance guarantees, direct subsidies and the like.  The environmental impacts of various fossil fuels are not accounted for in many cases.  This is not just carbon dioxide, but other emissions such as mercury, nitrogen oxides and sulfur dioxides.  And there are other costs, such as maintaining US military presence in various parts of the oil-producing world, that are not accounted for at all in the price we pay.  So the comment that renewables are only cost effective with subsidies is a hollow critique. 

So subsidies and government intervention are part of the energy industry.  But all of these subsidies are legislation massively favor renewables correct?  The answer is a resounding no and was probably the most disappointing non-response from President Obama in Debate #1.  While the data can be cut in many ways, the subsidies to fossil and nuclear industries are a multiple of renewables.  See “The Real Deal on US Subsidies: Fossil’s $72b, Renewable Energy’s $12b” by Greentech Media for some sources and analysis. As a former coal analyst, I find the shock by some at the amount of subsidies to the renewable industry entertaining given what has gone to such industries as coal.  See Time Magazine’s 2006 report, “A Magic Way to Make Billions” detailing the synfuel credit given to coal as an example.   

I had a reporter once ask me, “If this is true, then why are people often shocked to hear such statistics?”  I believe there are two reasons.  One, the incumbent energy industry has gotten subsidies for so long, and often in such a non-transparent manner, that they are no longer felt or noticed.  Second, perhaps more importantly, the renewable industry has marketed their subsidies very poorly.  Perhaps they should take a lesson from the gasoline industry when credit cards were first introduced.  At first, there was a surcharge for using a card and usage was stagnant and customers were irritated.  Then marketing changed the message and had cash users pay a discount, which, in effect, was the same thing, but people felt a lot better about it.   Perhaps renewables should be marketed as a discount to the full price of traditional power versus a premium to the false price we see.   Difficult in practice for sure – but the marketing of these so-called subsidies could be much better. 

While government intervention and regulation in the energy industry is a constant presence that does not mean that all regulation is a good thing.  I would still strongly advocate for as little as possible.  And for that which remains, I’d rather see the government try to promote consistent pricing for which all technologies can compete versus direct subsidies to certain companies. The right type of government involvement should be debated, not the false question of whether renewables should be supported.  As an example of a creative solution, see Jeffrey Leonard’s article, “To Save Energy and the Planet, Cut Energy off the Dole.”


Debate 3: Where Should Innovation be Focused?

Myth:  We need new technology, period
Reality:  We need innovation in technology, policy, business models, and financing 

There have been countless calls for new technology in energy and sustainability.  From Venture Capitalists to the US Government, billions of dollars have gone into various so-called “disruptive” technologies.  But the best technology does not always win in any industry, and especially so in energy.  I argue that a fixation on innovation in technology without corresponding innovation in policy, business models and financing is a losing recipe.  Government and investors should be aware, as it is clear that the lessons will be very expensive for those that have gotten it wrong.

Policy creates incentives, which drive behavior in energy.  “Decoupling” is a good example of innovative policy aligning incentives for the common good.  Any business typically wants its customers to use more of its product.  More use means more profits.  Unfortunately, in the utility business that means that there is an incentive to have customers use energy inefficiently and thus they will need to buy more energy.   Decoupling can be complicated in its implementation but in effect separates usage from profits.  So utilities can be incented to have efficient users of energy as their profits will remain stable, or even increase if so.   

Business model innovation is also needed.  The concept of “negawatts” is a good example of one such innovation.  Instead of building capacity, or megawatts, to align supply and demand, some businesses have formed around curtailing demand to accomplish the same goal.  The businesses that formed around this concept, such as EnerNoc, were really innovating the model of doing business versus having a business based on technology.  

Finally, innovations in financing of energy projects are needed.  Whether it is innovative ways of matching the right tenor, risk profile, return requirements to specific projects, or more creative forms of securitization of cash flows from projects, the impact of innovative financing could be immense.  Innovations in this area have the potential to be just as critical – perhaps even the most critical – to the ultimate uptake of alternative energy. 


Debate 4: Can Alternative Forms of Energy Make a Difference?

Myth:  Some of the new technologies, such as solar and wind, will never make a dent in our energy mix
Reality:  It will take time, yes, but the signs are already clear they are having an impact 

First, you have to ask yourself if change happens in the energy markets.  The answer is yes.  The United States has undergone several key transformations of our energy mix.  First our energy mix was dominated by wood, then coal, then oil, and now natural gas is gaining share.  Given the size of the energy markets, these transitions can take decades.  Wood went from about 90% share in 1850 to less than 50% by 1885 and then continued declining.  Coal went from close to 80% share in 1910 about 30% by 1950.  They can and do happen, but they take time.

But how do we know if a change will ever happen, or if we are waiting for a fantasy that will never come to fruition?  This is a better question as just because change can happen it does not mean that it will happen towards cleaner forms of energy.   One simple way is to look at the percentage of new capacity coming from these sources, as that will likely be a leading indicator of what generation will look like in future years.  Solar and wind have been very large shares of new capacity being added.  For example in the month of September 2012, wind and solar were 100% of new capacity added according to the FERC.  You can also see the share in generation increasing as well, with non-hydro renewables going from 3.1% of generation in 2008 to a forecasted 6.0% in 2013 per the Energy Information Administration.   I believe that these are clear signs that a transformation is underway and given the falling costs for sources such as solar, believe that this trend will continue.  

If this trend continues, what might this look like in several years?  Germany has installed the most solar of any country in the world so it is an interesting case study.  While the debate on solar in Germany could be a long one, what I find interesting is that recent data on Germany’s power curve shows that solar generation is clipping the peak of power during the day in a very meaningful way, nearly flattening it at times which is truly remarkable.  As most power demand occurs during the middle of the day, this is a costly period of time for utilities to ensure power and often an expensive one for customers.  It is also when the sun happens to shine the most which is good for solar generation.  Seeing a power curve flattened, especially by distributed generation that does not have to be owned by the utilities, will have huge implications for many participants in the energy markets for years to come. 

The commentary above highlights that these are complex issues.  I do not assert these issues are simple, but rather that a good debate must focus on reality and not the myths that are often promulgated.   Focusing our debates on facts and coherent logic will give us the best chance at making the right decisions on the topic of energy and ensure the best impact on our economy, environment and security.

Lead image: Myth blocks via Shutterstock

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Michael Molnar has been involved in the energy and alternative energy markets for over a decade as an investor, investment banker, and sell-side analyst. Currently he is a Partner and Director of Research at a long/short asset management company that invests in public equities. Previously, he was a Founding Partner at an investment bank that performed M&A, capital raising and project finance advisory services. He was also the lead equity analyst for the coal and alternative energy sectors at a bulge-bracket investment bank. He holds an MBA University of Chicago, MSc London School of Economics, BS Rutgers University. He also holds a CPA, CMA and is a CFA charterholder.

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