Obama and Energy

In this posting we explore Barack Obama’s positions on energy as of mid July 2008.

“Well, I don't believe that climate change is just an issue that's convenient to bring up during a campaign. I believe it's one of the greatest moral challenges of our generation. ... And I didn't just give a speech about it in front of some environmental audience in California. I went to Detroit, I stood in front of a group of automakers, and I told them that when I am president, there will be no more excuses — we will help them retool their factories, but they will have to make cars that use less oil.”

— Barack Obama, Speech in Des Moines, IA, October 14, 2007

Key Climate Change Positions

1) Cap and trade system

- By 2050 target carbon levels 80% below 1990 levels.

- Pollution credits to be auctioned off, revenue generated is to be used for funding energy R&D and transition costs (including helping retrain workers)

2) $150 billion over 10 years to promote clean energy development

- Development of next generation of biofuels and infrastructure

- Accelerate commercialization of plug-in hybrids

- Investment in clean coal plants

- Commercialization US technologies around the world

3) $10 billion a year to create VC fund to commercialize technologies from the lab

4) Require 25% Federal RPS

5) Support development of next generation biofuels targeting 2 billion gallons of cellulosic ethanol by 2013 and requiring 60 billions gallons of renewable fuel by 2030

6) Double fuel economy standards in 18 years

7) Maintain gasoline tax

Analysis of positions

Business

Obama’s cap and trade proposal is similar to McCain’s and has similar pros and cons. It will require large up front investment by companies to reduce their emissions and promote the development of industries to meet the new needs for reduce carbon. The principal difference with McCain is that Obama’s plan involves the auctioning off of carbon credits. Companies that emit large amounts of carbon will have to buy more credits, immediately internalizing the costs of emissions. There will certainly be economic disruptions as a good which was previously free (air into which emissions could be released) will suddenly be a cost to the company. The transition has to be smoothed out for most companies to avoid unnecessary shocks - here the European experience may be instructive.

Auctioning off the credits will create one-time windfall revenue for the government. Depending on the price of the credits, this revenue could be (and likely will be) very significant. The process to allocate this money fairly and efficiently has to be set up prior to the auction itself.

Technology

Allocating most of the windfall revenue from the sale of credits to funding R&D in universities, labs and pilot scale plants is definitely the best use of the money. There are a large number of technologies which are technically feasible but which aren’t economically viable yet. Getting these technologies down the cost curve should be a priority use of these funds.

Creating a government run VC fund is a novel idea but one which is not necessarily going to work. VC funds, even those that invest in renewable energies, base their investing and management decisions on maximizing return to their investors. A government run fund has to be set up with enough separation that it doesn’t feel pressure to invest in projects that are favored by certain Governors or Senators. There is a similar model existing today - OPIC overseas private investment corp. is a government "VC" fund that help fund US start ups. They have been fairly successful and evaluate investments like a VC.

Policy

Obama clearly believes that the federal government has to raise the bar on renewable standards, hence proposing 25% Federal RPS and a doubling of mileage standards (albeit in 18 years). Biofuel requirements will also be much higher.

The auto makers will squeal but given enough time, mileage standards can double. Small cars today now have very high fuel efficiency, the average is pulled down by large cars and SUVs. The auto makers will have to make decisions about how to improve large vehicle performance and decide how many of these they will sell.

RPS will be a harder target. 25% will only be feasible if the other two dimensions, technology and economics, make dramatic progress. We will need a huge build out of wind and solar farms across the Plains states and the transmission capacity to get that energy to the coastal cities. (also we need to figure out energy storage, as wind and solar -which are intermittent- make a larger percentage of the total we will need to figure out how to make the grid adapt) This has to be done in a way that does not increase the cost of electricity for the average household. The same is true for a very high proportion of gasoline coming from renewables.

What is likely to happen is that the government will set the bar very high (similar to getting to the moon in a decade) and then scientists and entrepreneurs will try to meet this demand. If there is significant progress within 5 years, then it is likely that the target can be easily reached and surpassed. If not, then we will fall short but still have significantly changed our energy patterns.

McCain on Energy

We’re back! We are restarting our blogging after a break. This election cycle, both major party candidates are talking about energy and we can expect vigorous debate about this area through the Fall.

Consequently, the primary focus of these next blogs will be on analyzing the positions of the presidential candidates through our 3 dimensions (business, technology, politics). We will ask our friends to contribute to specific topics and we will update our discussion as the campaigns release new information. First up is John McCain.

"In recent days I have set before the American people an energy plan, the Lexington Project -- named for the town where Americans asserted their independence once before. And let it begin today with this commitment: In a world of hostile and unstable suppliers of oil, this nation will achieve strategic independence by 2025." – John McCain, June 2008

Key climate change positions

1) Develop a cap and trade system on GHG emissions:

• GHG targets: for 2012, reduce emissions to 2005 levels – for 2020, reduce to 1990 levels
• All commercial businesses would have to take part, small business would be exempt
• Create a strategic carbon reserve to be used as a source of credit during times of economic distress

2) Increase federal support for research and development, focusing on: Carbon capture and sequestration, nuclear power, battery development and support for commercialization of technologies

3) Engage with the United Nations and the international community to coordinate climate change related initiatives

4) $300 million prize to inventor of battery which “leapfrogs” commercially available hybrids – Announced June 23

5) Support for offshore oil drilling – Announced late June

Analysis of positions

All of McCain’s policy proposals would help create a US energy policy that is more sustainable (i.e. reduced oil consumption, reduced foreign oil imports, reduced greenhouse gas emissions) than the present one. All policies have pros and cons and below we will analyze these through the 3 lenses.

Business

Cap and trade will require large up front investments in all industries to install carbon absorbers and cleaners in burners. Some companies and indeed some industries will choose to leave the United States and set up in countries without carbon restrictions. The policy will also lead to the creation of a new industry to reduce carbon emissions – companies that will measure carbon emissions, verify reductions levels, manufactures of cleaner burning material, energy consultants, etc.

Technology

A $300 million dollar prize, though a significant amount of money, is unlikely to significantly affect the development of new batteries. Technology developments in the energy industry have been a result of a number of independent actors working separately but in related clusters - There is no one single “inventor”. For example, A123 is a successful Boston-area company which was based on technology from MIT labs and later raised funding from VCs. Consequently, a successful policy must incentive all of the follow people: Research labs at major universities, graduate and post-graduate students in these labs, entrepreneurs to launch the company, venture capitalists to invest in them, customers to buy the product.

Federal support of research and development is key. The primary focus of federal dollars should be DoE-related labs and major research universities. Ideally, this support should be coordinated with the private sector to maximize effect. (such as BP partnering with DoE and universities to develop the Energy Biosciences Institute at Berkeley)

Politics

The cap and trade system is good politics, as it will reduce overall emissions and does not have the perception of being anti-consumer like a carbon tax (because it directly will lead to increased prices). However, a carbon tax is more fair (a fixed price per ton of carbon charged to all polluters) and easier to implement (setting the initial carbon allocation per company in a cap and trade system is tricky to not reward big polluters).

The battery prize is also good politics because it is an easy policy to explain and it brings to mind positive memories of teams of young students who create a company in their garage.

Offshore drilling is more complicated from a policy and politics perspective. Offshore drilling is more relevant in California and states that border the Gulf of Mexico. The high price of gas in the summer of 2008 has led many people to support measures which reduce or appear to reduce the price, and accept potential environmental problems. So politically, it may be a net winner. From a policy perspective, (i.e. will this result in reduced imports of oil?), this is probably negative. Allowing companies to drill doesn’t mean they actually could - today a significant percentage of oil fields that are available for drilling are not being used for this. Additionally, even if oil companies decided to drill, it will take many years (perhaps decades) to bring oil on stream.

To date, McCain has not stated a position on biofuels.

Ethanol

One of the areas receiving the most coverage is ethanol. Given its prominence, we decided one of our first postings should be about this topic.

A few facts which stand out about the ethanol industry today in the US.

- There are about 7 billion gallons of ethanol produced and consumed in the US, while total gasoline consumption is around 150 billion gallons a year. (ethanol represents 5% of total)
- There are currently about 6 million Flex Fuel Vehicles (FFVs) on the road out of a total of 230 million cars on US highways (3% of total)
- There are 1,000 E85 pumps in the US, out of a total of around 200,000. (0.5% of total)
- Most of the ethanol produced is consumed as E10

So there is an order of magnitude difference in the availability of E85 fuel stations relative to the availability of ethanol. Fuel stations are the “retail outlets” of the fuel industry, without them fuel doesn’t get to market. A true ethanol (or other non-fossil based fuel) economy will not develop until that happens.

It is not a chicken or egg problem anymore, there are enough cars on the road that can run on E85. The bottlenecks are more complicated and subtle – that the FFVs are owned by users who don’t know or don’t care that they can run on E85, that the FFVs are located in parts of the country which don’t have E85 pumps (for example, today there is not a single active E85 station in Massachusetts).

Today, nearly all of the ethanol produced is mixed with gasoline, to replace MTBE, and sold at regular fuel pumps (E10). Thus, in an ironic twist, today the primary buyers of ethanol are oil companies. E10 can run in a normal car, so the billions of gallons of ethanol produced today are effectively still being used within the oil economy.

Projections are that towards the end of next year, US production of ethanol will reach 10% of total consumption. Adrian went to a biotechnology conference in Illinois a few weeks ago. His view was that there is a lot of pessimism among participants about the ability of the US economy to absorb ethanol produced beyond that 10%. The prime reason for this is that E85 infrastructure has not been set up - transporation and pumps.

So what happens the day after 10% is reached. Can a normal car run on 15% ethanol? Yes. Unadjusted cars can run on E20 and potentially up to E30. What this means is that even if the E85 infrastructure is not set up by end of next year, the excess ethanol could potentially still be put to use.

Overview of E20/E30 and E85:

None of this will ever be relevant unless we can produce enough ethanol. Corn prices are already being affect by the current production of corn ethanol, so another way has to be developed to go beyond E10/E20.

Welcome

Dear reader,

There is an ongoing discussion about energy and sustainability. One piece of this debate, to pull out an example, is whether we need to reduce the amount of oil that we use - how do we do this, what are the effects, is this good or bad for the economy, for our society?

The 3 of us have been discussing energy-related issues together for the 2 years that we have been graduate students at MIT and Harvard – during this time we have been thinking of ways we can contribute to the debate. What we bring is knowledge of what is happening in the technical, business and policy worlds related to energy – because of energy’s central position in our modern society, meaningful change will only happen when these three critical sectors are engaged simultaneously. Our blog will be a place to discuss the interaction of these 3 areas for people who have a stake or an interest in the development of the renewable energy sector. We also want to expose people to exciting developments occurring at Harvard and MIT. Lastly, we hope to create a platform to which our friends and acquaintances who are experts in these areas can contribute.

Because these three dimensions– technology, business, policy – and their interactions will define the future development of energy, we have decided to call the blog EnergyCubed.

Adrian Fay is a Research Scientist at Greg Stephanopolous’s lab at MIT. He is involved in various agricultural businesses in Argentina and the USA. Jason Fuller is a Chemical Engineering PhD Candidate in Robert Langer's lab at MIT with a focus on biotechnology. Lawrence A Walmsley is a joint degree candidate at the MIT Sloan School of Management and the Harvard Kennedy School of Government with a focus on clean energy entrepreneurship. The 3 of us organized an MIT conference on entrepreneurship in Buenos Aires, Argentina in 2006.

Best,
Adrian, Jason, Lawrence