Alternative Energy's Alternate Reality

Alternative Energy's Alternate Reality

November 22, 2011
Originally published in Forbes

 

Creating a “green energy” economy may be the most daunting central planning task ever attempted. It entails nothing less than the reengineering of our entire energy infrastructure. And, like all central planning schemes, it is based on a roadmap that eschews real-world experience and sound economics in favor of utopian ideology driven by political connections.

Now the experiment is unraveling, having barely begun. As the parade of government-subsidized failures like Solyndra, Stirling Energy, SpectraWatt, Evergreen Solar, Beacon Power, and others mount, now is a good time to look at how all the pieces of the alternative energy puzzle are supposed to fit together—and what happens when they don’t.

Everyone acknowledges that electricity generated from wind and solar cannot be produced and delivered at prices that compete with coal or gas. However, alternative energy advocates believe that someday the cost curves will cross, and that government subsidies will accelerate that day’s arrival.

For this to come true, multiple problems have to be solved before taxpayers run out of money or patience. Along the way, the alternative energy industry has to avoid getting sidetracked into the wrong technologies, as this will delay the eagerly awaited carbon-free future.

First, technology has to be invented that can deliver unprecedented levels of efficiency in the conversion of low energy-density sources like wind and solar into electricity suitable for transmission over the grid.

Second, the prices of fossil fuels have to rise, either because reserves become depleted or through the passage of regulatory encumbrances, such as a massive carbon tax.

Third, new techniques need to be developed to store electricity produced only while the sun shines or the wind blows, allowing that stored energy to be delivered later, when it is actually needed.

Fourth, massive transmission system upgrades need to occur to transport electricity from the wind and solar farms where it is produced to the urban areas where it is consumed.

Finally, unknown problems that crop up when immature technologies are brought to market have to be identified and resolved—from the scarcity of critical materials never before consumed in large quantities to the siting of massive structures that disturb the view of influential public figures. And, of course, after decades trying to protect wildlife from oil spills and other calamities, we must avert our eyes as windmills annually massacre millions of birds, many of them supposedly protected as endangered species.

Failure to solve any of these problems can doom the whole enterprise, stranding investments. Picking winners and losers in this interconnected risk management puzzle is like playing ten games of roulette simultaneously—you can only win if every bet comes in. Yet this has not dissuaded the Department of Energy from smacking your money down. So, how is our Nobel Prize-winning high roller doing?

Conversion efficiency is, indeed, climbing—very slowly. Under unsubsidized conditions, wind and solar would be nurtured in niche markets that fossil fuels cannot satisfy. In time, improvements might expand the market beyond those niches.

But when government subsidies are used to prematurely scale up technologies that make no economic sense, these early experiments become frozen in amber. Speculative investments counting on those subsidies fail. Solyndra was one such failure. Loss-making operations at scale can only be sustained while the mandates and subsidies last. Take away that expensive government support and the businesses crash.

Meanwhile, mature technologies are not standing still. Thanks to fracking and horizontal drilling, proven reserves of gas and oil are soaring, holding fossil fuel prices in check. Even as the Obama administration throws regulatory sand into the gears to slow these developments, newly accessible oil and gas isn’t going anywhere. Sooner or later, it will be pumped out, delaying the day at which the cost curves cross.

Attempts to store enough electricity to power the grid predate current environmental fashion. The motivation has been to reduce the cost of running expensive peak-load generators. However, the storage problem has not yet been solved because the physics are very, very hard. Dozens of ideas have been tried and found wanting, including flywheels, compressed air, pumping water uphill, and mammoth ultracapacitors. And if a practical technique is ever found, its primary economic benefit will not come from enabling windmills and solar farms, but from allowing the expansion of base-load fossil fuel generators, making it possible to reduce the fleet of peak-load facilities.

Then there is the upgrade of transmission lines. Political pressure can be used to force regulated transmission companies to agree to install new high voltage lines. But imagine how long the permitting and construction process will take when company executives are as loath to make these malinvestments as NIMBY-objecting residents are to have towers erected on or even on sight of their land.

The likelihood that all of these problems will be solved simultaneously before the political winds shift is vanishingly small. As we enter an election year, it is easy to see why the venture capital community is rapidly abandoning early-stage alternative energy investments, shifting their last bets to late stage deals, hoping to cash out before the party is over.

No one knows when the final chapter in this saga will be written, but we can be sure it’ll make a fine addition to a book describing the folly of central planning.