The high-octane idea that inexplicably struggles, the mid-grade idea that rocks.
Here, we look at the critical success factors that provide tail-winds for some technologies and head-winds for others.
Sometimes we all look at classes of technologies and alternative energy types — solar, renewable diesel, wind, geothermal, cellulosic ethanol, drop-in fuels and more — and wonder, as we look back at the development history: Why did this one succeed? Why did that one struggle?
It’s mystifying, for example, to friends of the forest products industry that wood pellet power technologies — the burning of biomass to generate low-value renewable electricity — has grown so much and finds capital with comparative ease, when the production of higher-value fuels and chemicals from the same feedstock have so much trouble getting financing and the green-light. Shouldn’t higher-value products come first, not last? Sometimes, as with algae, that’s the case — other times, as with pellets, it is not.
To explain a conundrum, we need a hypothesis. So here’s one: the 4 equilibriums of the renewable revolution, relating to product acceptance, deployment, infrastructure and control of distribution.
Where Acc equals the product acceptance, Abu is the feedstock abundance, Sta is the policy stability with respect to carbon price or mandate, Dep is the rate of deployment, Inf is the required cost of infrastructure change, Val is the value of the new product relative to the incumbent, and Con is the extent to which competing incumbents control distribution.
We’ve seen technologies such as wind and solar become wildly popular even before they were very economically feasible — leading to extravagant support mechanisms such as solar feed-in tariffs, and power purchase agreements in the early days that locked in, at times, up to 100% price premiums for selected technologies. Whereas, others have trouble getting any love at all. Some renewable energy technologies, such as ethanol, have negative public perceptions in many quarters despite carrying a huge load of carbon reduction and reaching competitive costs with the incumbent.
One observer from California writes: “ethanol, biodiesel and renewable diesel biofuels have created about 80% of the carbon reduction achieved by AB32 in California, only about 5% of cap-and-trade funds are currently being discussed for biofuels (and they are including biomethane and other projects in the 5% allocation).”
We think it comes down to scarcity of the feedstock, which reflects in higher prices when two competitors vie to get a hold of the same feedstock. Or, worse, a massive case of public sour grapes expressed in vicious PR when one group simply can’t compete with the price the other can afford to pay.
When feedstock is so abundant is simply being wasted — as with sunshine, wind, MSW, or waste cooking oils & greases back in the old days — technologies can get mighty popular, creating economic opportunity for some and an easy path to sustainability for the society as a whole. In other cases, the feedstock is produced in such abundance that prices are depressed, and renewables can provide a “floor price” and a welcome additional. Accordingly, we see “abundance” as the required equilibrium companion of “social acceptance”.
We’ve seen it time and again. Projects with huge capex get financed, while low-cost projects languish. Projects that have little hope of competing with an incumbent on price get built, while projects that are far more competitive on price are left by the side of the road. Projects with low technical readiness get advanced, while “off-the-shelf” technologies are ignored. Are the forces of incompetence or corruption at work? Many make that claim.
On 140 acres of unused land on Nellis Air Force Base, Nev., 70,000 solar panels are part of a solar photovoltaic array that will generate 15 megawatts of solar power for the base. (U.S. Air Force photo/Airman 1st Class Nadine Y. Barclay)
But we think of it as a function of carbon policy stability. The problem with low-carbon projects is that the benefit, a lower-carbon society better equipped against climate change, accrues to the public rather than to the project investors, who receive only a market price for their troubles. The purpose of the carbon price, or the low-carbon mandate — however structured — is to transfer some of that public benefit into the price the investor receives for the product.
Price volatility is a form of risk, and everyone knows it, especially if you bought a house at the height of the real estate boom, say in 2006, and tried to sell it in the pit of the housing depression, say in 2009-10. Volatility in carbon policy, because it is expressly designed to impact market prices, adds to market volatility where it was designed to reduce or eliminate it. The risk of upside-down economics — building a project under one carbon policy regime but deploying it under another (less favorable) — crushes investor enthusiasm, and has the same impact on innovation as a price crash in the market.
Accordingly, we see a direct correlation, an equilibrium, between the rate of change in carbon policy and the rate of change in deployment. The more stable the policy, the more deployment relative to the projected impact of that policy when designed as expressed in projects built. So, power purchase agreements, which lock in the carbon benefit for power projects in the form of a stable price premium — these create deployment, and how. Projects that have to cross their fingers and wish hard that a tax credit will be extended, or a mandate will be sustained and not scuttled — these ones have a tough sled.
Some technologies produce drop-in molecules and electrons — major power projects are drop in, and a large number of fuels, chemicals and biomaterials offer drop-in molecules that fit right in to the existing infrastructure, more or less. Generally, because they have very low infrastructure change requirements, they are easily adopted based on very small price change opportunities. We often hear that “renewables will win the ties”, expressing the idea that so long as drop-in renewables come at the same price as the incumbent, their “carbon attribute” will be a tie-breaker. Sometimes that actually proves to be the case.
But many molecules are novel, and have associated infrastructure changes — and do are distributed energy power projects, such as selling your rooftop solar back to the grid. It has been said many times that people love innovation, but hate change — and no more so than in the renewable revolution. Where there are required changes in engines, fueling or charging stations, terminals, rail or marine transport, feedstock transport and so on — there’s going to be resistance, often fatal.
For those technologies, there has to be a value change commensurate with the infrastructure change. It’s not just that the product is attractive, or has a value. In this case, renewables do not win the ties, until they overcome that value barrier. That can come in the form of performance or in price — the more valuable the performance enhancement, the less pressure there is to meet a market price.
If it’s a molecule that offers ”same as” functionality (e.g., burnt as a fuel), and has infrastructure changes, the price opportunity must be substantial to overcome consumer or distributor indifference. We see a lot of technologies that offer 25% or more price reductions, over time, become attractive to consumers — rooftop solar, natgas conversions, and the like.
Accordingly, most people articulate, in one way or another, that there must be an equilibrium between the change in value and the change in infrastructure required to capture that value. As we pointed out earlier this week in The Digest, we wouldn’t be going back to the Moon today, based on Saturn V infrastructure, even if the Moon turned out to be made of solid gold.
Control of the means of distribution
Incumbents have many powers — economies of scale, brand acceptance, resources for creating fear, uncertainty and doubt — but among their most powerful weapons is control of the means of distribution. It has proven even more powerful than control of the means of production — to lean on the Marxist meme — when it comes to fending off renewables.
If private oil & has companies owned the nation’s electrical grid and power utilities, and public and private-but-regulated utilities owned the nations’ fueling infrastructure — we’d live in a different world when it comes to writing about which technology is getting deployed by whom.
Control of distribution does not, by itself, cancel out any of the other equilibriums — a stable carbon policy, for example, will impact deployment. But a change int he control of a distribution channel, away from incumbents, can unleash competitive forces, it’s almost axiomatic. And we’ve seen that in the E15 market, where almost all distribution to date has been with independent brands, not oilco brands. And independent brands tend to price E85 ethanol much lower than oilco brands and terminal operations, which tend to market E85 at uncompetitive prices.
So, we see that final equilibrium between the change in control of distribution and the change in the rate of deployment.
The Bottom Line
Four critical factors that seek an equilibrium — in the interplay of them, we believe that the story of which little piggy is getting to market, and which little piggy is staying home , which is getting jam and bread, which is getting none, and which is crying wee wee wee all the way to town.