Fletcher Forum: At COP22 this year in Marrakech, John Kerry mentioned at his press conference that the business case for clean energy will continue despite the new administration’s discouragement. In light of momentum of both financial and technological instruments to support this new innovation, what is the role of research and development (R&D)? How can academic and institutions communicate with the economists and businessmen when political will is a big challenge?
Hal Harvey: R&D tends to be a political stepchild, not a favorite one. Most Democrats prefer action and policies to drive real-world change. They tend to think of R&D as an excuse for no action. It was especially so during the Clinton administration. They didn’t do much at all on clean energy other than mentioning it was part of the future initiatives. Republicans feel that it is okay for the government to do theoretical and curiosity-driven fundamental research as as opposed to applied research because the latter reeks of industrial policy.
So, you have this bizarre phenomenon in the real world that federal R&D has been a spectacular gamechanger with great return on investment but lacking a political home. That being said, nobody is against R&D. We all want America to be great, we have great researchers and inventors but a $2 billion annual investment in the clean energy industry is pathetic.
Chinese research labs have shown that clean energy is a strategy technology for China and a boutique technology for the US. One of the things that I find astonishing is that electrons tend to come in Republican and Democratic flavors depending on what generated them. Why solar and wind are Democratic electrons, and coal and natural gas are Republican, I cannot fathom. It’s just silliness in the extreme. It’s starting to breakdown because of the economics of the whole thing. You could say it’s because Jimmy Carter set up a solar panel on the White House roof and Ronald Reagan tore it off when he moved in. You could say it’s when George W. Bush assumed office, Al Gore became the spokesperson for clean energy. Al Gore was the democratic lead in America who took up the climate issue. It’s an absolutely silly schism.
Every single technology has assets and liabilities. You have to consider their characteristics, deployability, scalability, costs, side effects for national security and all these other factors, and then optimize against those factors. Such discipline should be practiced by every political leader.
FF: California has been leading the way on clean energy followed by Massachusetts at a close second. Do you think that there is room for these bi-coastal trends to grow into the middle of the country?
HH: Yes, Illinois just passed a very strong clean energy law and this is a Republican governor negotiating with a Democratic legislature. The friction between those bodies is intense. They can’t agree on a budget but they were able to pass this!
Ohio’s Republican governor just vetoed a Republican law that would have cut clean energy. The state of Texas has more wind than any other state, much of it under the guidance of Governor Rick Perry, our new energy Secretary. Oklahoma has fantastic wind resources and although the government is fiercely resisting its development, they sooner or later are going to have to develop it to create more jobs and profits. The Governor of Wyoming just announced a 3000 MW wind farm along with a new transmission line that takes out electricity to markets where it’s needed. So, economics and environmental amenability are going to melt political resistance.
FF: Regarding infrastructure, we’re familiar with the developing world and its low grid access. Here in the US, populations are concentrated on the coasts, with sparser population and lower grid connections in the middle states. How can we build our domestic energy infrastructure? Are there R&D initiatives that separate the customer-utility approach for clean energy, or do we need more of an entrepreneurial approach?
HH: I think transmission lines in the US will get built on a more expedited basis now that wind and solar are cheaper than any other alternative. For example, Wyoming would like to export wind and Las Vegas would like to reduce its utility bills. The economic pressures are going to grow.
Second, we’re going to retire most of the coal in the US over the next 15 to 20 years, freeing up a lot of transmission access.
Third, there are technologies that boost the capacity of transmission lines.
Finally, there are market structures that can optimize these transmission lines. So, transmission is a problem but it’s not an insurmountable one.
In the developing world, I think they are just going to obviate transmission for the most of the 2 billion people who don’t have access to electricity. It’s hard to build transmission lines. Once they are built, it’s easy to steal from them. It requires a lot of upfront capital and stable utility, access to financial resources, and a reliable billing system. You can see why it’s not going anywhere. The utilities are broke, electricity is stolen, people don’t pay bills, and on top of that utilities have to send free power to irrigation pumps. There are a lot of villages in India where there are two distribution lines – one for the pumps and one for everything else. You should just run two meters and charge different rates. But, utility companies only want to run the pumps for so many hours, so they fire up just one for the rest of the day. They can’t control stealing by turning it off for 22 hours of the day. These things do have a weird logic. But it is becoming cost-effective and easy to create a village energy system using a variety of sources.
FF: MIT published a report on how venture capital is the wrong investment model for clean energy innovation. What is your perspective on that? Can you elaborate on how this may be more complex than it sounds?
HH: How the venture capital model works is that you make a bunch of investments where a lot of them return zero but a for a few you get it right and they return like crazy. The so-called “J-curve” of money going out and rolling back in lasts about five years. However, with energy technology, you need more patience and capital. You have lower return expectations, but you also have fewer failures. So, it’s almost a more traditional kind of investment where you should have a 10-year horizon. You should be looking for 12% to 15% returns. Another important thing is the need to have a strategic partner very early on. Someone who knows about manufacturability, has credibility, knowledge of markets, brand recognition and so on. It has started to happen with automobiles. Ford just announced it’s spending $1 billion on an Artificial Intelligence company. It might not be a stable model but working with these big companies on good innovation is a great idea.
Also, there is space for sovereign wealth and pension funds that have a long term horizon, and 10% to 12% return rate. The problem there is building the right vehicle for them to invest in but they would definitely like to be in this space.
But, I think there’s some interesting thinking going on about changing the investment model for clean energy.
This article was originally published on the Fletcher Forum on February 28, 2017, and can be found here.