Will the Clean Energy Economy Become the Next Internet?

By Lara Crigger

From biofuels to peak oil, from wind power to solar "picks and shovels," we've been talking quite a bit about alternative and renewable energy on Hard Assets Investor lately. That's why we decided to get the lowdown on the latest developments in clean energy from Alt Energy Stocks' Tom Konrad, Ph.D., CFA.

As a writer, consultant and financial analyst, Tom Konrad is one of the investment community's best-known experts in renewable energy and energy efficiency. He's a prolific writer, both for Alt Energy Stocks and elsewhere, and armed with a Ph.D. in mathematics, Konrad brings his signature academic perspective to the often hype-filled alt-energy space.

Recently, Hard Assets Investor associate editor Lara Crigger spoke with Konrad about clean energy, including the similarities between clean tech and the Internet, Exxon's leap into biofuels, and the smart- grid free lunch.

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): Last week, BusinessWeek discussed whether the clean-energy economy could become the "next Internet." What's your take?

Tom Konrad, financial analyst, Alt Energy Stocks (Konrad): I think the resemblance to the Internet is somewhat superficial. I mean, certainly clean energy will dominate investment headlines for quite awhile. But clean tech investment tends to be extremely capital intensive. Internet investment is very capital-light; you can start up a company in a garage. You just can't do that with clean tech.

So I think the properties of the clean energy boom are going to be much different. It will be slower. The real drivers of clean tech are very long-term economic drivers, whereas the driver of the Internet was technology, a cheaper way to do things.

But clean energy, generally speaking, is driven by several things: rising fossil fuel prices, climate change and its political reactions, and the realization that as fossil fuel prices rise, clean energy will someday be a cheaper way to do things. Because there are several drivers, the boom should be longer and more sustained.

Crigger: So we won't see a few wild years followed by a huge bubble burst, like with Internet.

Konrad: I don't think so. Certainly, we could see another stock price burst. In the recent bust, clean tech stocks took a bigger hit than others, mainly because they have high betas. Investor attitudes come and go, and we'll see busts along the way. But I think the proportion of speculation and investor enthusiasm compared to reality was higher for the Internet than it is for clean energy, so the relative volatility will be lower.

At the same time, there's a lot of hype. In fact, there may be more of that in clean tech, because it's hard to put together something real.

Crigger: Speaking of hype, are there certain sectors or technologies that investors should be wary of?

Konrad: They should be wary of anything that's really exciting. Personally, I tend to push the least exciting ones, like energy efficiency. Only maybe 1% of the companies in energy efficiency are hype, because it's just so boring.

If you were a hypemonger, you'd do solar. Solar's got a great story, but everybody knows it. And when everybody knows it, that's when you have to watch out.

I think algae is another one to be wary of, especially now. It's the flavor of the moment, but it's a very immature technology. I wrote an article recently about advanced biofuels, in which I detailed each of the three public algae companies, and they really have no particular distinction or advantage over the private ones. Why should these three out of dozens survive? Why should any of them survive?

Crigger: What about Exxon's recent announcement of a $600 million deal to develop algae biofuel? Will this be the trigger that sets off the algae industry?

Konrad: Well, it's a step along the way. Long term, I have a lot of faith in algae. It's the one biofuel feedstock that has the potential to displace a large fraction of our liquid fuel needs. But we're talking 10 years, most likely, before anything is commercially available. That's beyond the range of a stock market investor.

It's one of these things that, because the story is good, people are all excited about it. But there isn't anything that's going to save us from the drivers of climate change. Peak oil is going to happen. And algae is not going to displace oil, because it's going to be very expensive. Look, there's no free lunch. It's all going to be hard work.

Crigger: Does the price of oil have to rise dramatically before something like algae-derived biofuels can take off?

Konrad: With algae, a lot of it is technology. It's going to be a function of two things. The price of algae will drop, but it's pretty capital intensive, so it's always going to be expensive.

I come back to the energy return on investment, or, how much energy are you putting in to get some out? And for most renewable - wind, solar, etc. - you only get 3 to 5 times as much energy out as you put in. Now historically, with oil, that's been as high as 100. But these days, it's dropping into the single digits. So as those two numbers come to be about the same, then you'll tend to reach price parity too.

Crigger: Why is algae the only biofuel that has a chance to displace oil on a large scale? What about ethanol?

Konrad: Ethanol is limited by corn. There's an upper limit on corn ethanol because there's an upper limit on corn production. We're near it already, and once we hit it, that's it. That's all you're going to get, unless you plant more corn - which we don't have land for. Maybe there are some efficiency gains to be gotten, but the change would be marginal.

But just because it's not a significant portion of your energy doesn't mean it's not a good business. Ethanol is not a solution to the climate problem; it's never going to fix that. But it is a national security help, and a way to deal marginally with peak oil.

If the producers of corn want to sell it that way, then they'll be able to fix their image problem, because then, they'll just be like any other business. They're a chemical business. They're turning biofeedstock into a liquid fuel. It's just another commodity business.

Crigger: You've written quite glowingly about the smart grid sector. Why do you like it so much?

Konrad: I like smart grid because it's a free lunch ...

Crigger: Hey, I thought you said there weren't any free lunches.

Konrad: Yeah, yeah (laughs). But there is a free lunch, and it's energy efficiency. Because there's a free lunch whenever markets are not functioning well, and the electricity market is very dysfunctional.

Someone once described the way we deal with electricity as "going out to a restaurant every day of the month, getting a menu without any prices, and then getting a bill at the end of the month." The smart grid hopes to actually put prices on that menu, and bill you at the time. So if you think about how you'd eat if that were the case, you'd be much more reasonable about what you order, and you'd still be happy with your meal. In fact, you might be happier, since you wouldn't be surprised by a $1,000 bill at the end of the month.

So you would get as much utility out of your electricity as you were before, but there will be a lower cost, because you'll be choosier. There's the free lunch: spending less on energy because we are using our energy more intelligently.

Crigger: So as an investor, what are some smart ways to approach this "smart grid?"

Konrad: It's hard, since it's a very early sector, but I like the more established technologies, like demand response, or working to make the upstream part of our electricity distribution system more efficient. It's less sexy, but it may be something that may pay well for investors.

Crigger: Should investors examine clean energy stocks differently than they would other energy stocks, or even stocks in general?

Konrad: No, I don't think so. But you do have to remember that it's the most exciting sector out there. So there will be more startups just out to collect investors' money, who will never go anywhere. But that's true in all sectors whenever they get hot.

The other thing to remember is that no stock, no company and no technology is going to save the world. And there are a lot of promises of that. But they can't. Energy is just going to be hard work.

Comments

[A Barrel Full:]

......Ethanol is limited by corn........

What about other feedstocks? Cellulose?

Jul 27 09:19 AM

[happycajun:]

Next Internet? More likely the next Ostrich farming craze. Seriously, Konrad makes a lot of sense, the internet was all about "ideas" and things that were very capital lite - vast undeveloped markets for things not being done before (selling over the web - people actually sitting at a computer for reasons other than work, etc.) whereas the "energy" market is very mature. Efficiency is indeed the low hanging fruit - just as it was back in the '70's energy crunch. I remember crunching economics an a bunch of capital projects dealing with improved energy efficiency, every thing from adding insulation to hot or cold processes, to improved process control and waste heat recovery additions or enhancements. Alternative energy sources have MASSIVE inertia to overcome - dealing with replacing installed bases that "ain't broke" is always difficult. The "technology" in impact in energy is not the same as it was in the internet boom, short of some cold fusion type breakthrough.

Jul 27 10:35 AM

[stockferret:]

I think algae is much closer than Konrad thinks. If you look at algae with your oil colored glasses on then its just a strict matter of price. Oil is 'cheap' and algae is not. However, that isn't an accurate way of looking at things. Oil is extremely heavily subsidized right now. The profits accrue to the oil companies but most of the costs accrue to the public in terms of pollution, use of public lands, environmental disasters, instability in oil producing countries, government intervention and diplomacy on behalf of the oil companies, etc. How much does it cost us just to guarantee adequate oil supplies (Iraq, anyone?).

Algae is carbon neutral. It is plentiful. It is local. Most importantly, the byproducts (dried algae) have value that is possibly more than the oil that is produced. There is a tipping point in the 'price' of oil(that is total price not just the per barrel price quoted in the futures market) that will be reached much sooner than 10 years from now. Once it is hit, algae as a fuel source is going to take off and never look back.

If you subscribe to the 'peak oil' theory then that tipping point will probably appear in the form of a recovering world economy that will drive oil 'prices' into the stratosphere.

Jul 27 12:17 PM

[WayneS:]

Actually, oil is about the most heavily taxed commodity there is. If the biofuel business were to take over from the oil business, the US is destined to lose a Trillion dollars a year in tax revenues. Hopefully, algae will not be taxed out of business. The "oil companies" make money from other commodities to balance out. algae needs to become multifaceted if it to make it.


On Jul 27 12:17 PM stockferret wrote:

>,Oil is extremely heavily subsidized right now.

Jul 27 02:48 PM

[rooferguy:]

Algae...”the flavor of the moment.” Ugggh. Where’s my toothbrush?

The real difference between energy and the internet is the difference between massless electrons and heavier atoms. Bits and bytes are lightweight, easy to transport and eminently scalable — businesses with gross margins of 80%+. Energy sources (oil, algae, ethanol) and equipment (solar panels, wind towers) are massive, and take time & money to scale — businesses with gross margins of 10-30%.

It takes a different level of investment and timeframe to ramp up energy investments. They’re not scalable like software and the internet. More like Starbucks than Google. Sadly, many of the VCs jumped into the energy business thinking they could make a quick killing with some new sexy silicon-less solar cell (say that 3x fast) or bio fuel — and find out that it will take years to get it to work and scale up.

As far as energy efficiency, it’s boring. Sorry — that’s the truth (ask Jimmy Carter). The U.S. thrives on the concept of more, more, more. We don’t get excited by turning down our thermostat or buying a smaller car unless the energy costs force us to do so. That’s why there’s so much interest in solar and wind and drilling for gas. If we get an electric car it will be a Tesla (more power) instead of a golf cart. Peter Huber wrote a fascinating book about this concept called “The Bottomless Well.”

Jul 27 04:26 PM

[WayneS:]

Energy efficiency IS boring. After a while you don't even know you are doing it. Just the other day, I figured I saved $75,000 over my career by carpooling. In 1953, my father built a fluorescent-only home. How much money was saved over 60+ years?
Exxon makes 5 cents a gallon for gasoline. This adds up to billions of dollars.
The average driver wastes $1000/year just by pretending their car is a video game.
Energy efficiency IS boring and someone is thanking you for your contributions to their pocketbook.

Jul 27 05:41 PM

[WayneS:]

Actually, all energy is just the movement of massless electrons.
With methane and oxygen, massless electrons are moved to produce CO2 and H2O and the potential energy is released as kinetic energy. Same with biodiesel, diesel, gasoline, kerosene, wood, alcohol.
The internet is this same exact energy, just in orderly bursts. How else can you operate a laptop on propane?

Jul 27 06:29 PM

[rooferguy:]

E=mc^2

You can't make energy by moving a massless particle. Energy is released in heat by breaking chemical bonds in a hydrocarbon - and then turning just some of that heat into mechanical energy which is then partially turned into electrical energy. The rest is wasted heat - AKA global warming.

Photons from the sun make the transition directly from light to electricity. Not too concentrated a source, but neither is photosynthesis. Much more distributed, cleaner, elegant and virtually no wasted energy (which turns into heat).

Jul 28 12:58 AM

[jerrydd:]

I'm not sure what the authors here are thinking but they are wrong on many points.
We only use 15% of the corn crop for ethanol and it is about 5% of our transport fuel now displacing 8% of imported oil. As the mash, DDG is worth $150/ton it cuts feedstock costs by a lot and since used as animal feed which is what corn is used for, doesn't cut into food price much. We could triple that without a problem.
But I explain a major real biofuel solution below.

By far the best and proven tech on biofuels is to F-T waste forest, crop, yard biomass directly into very clean diesel, gasoline.

You just gasify biomass at 1500f into syn gas, H2-CO and water gas shift it to correct proportions. Then feed it into a F-T converter just like most of the oil companies do with stranded NG called GTL into diesel or any HC you want by changing the temp, pressure, catalyst.

The waste heat is then used to make electricity making a very eff conversion process.

This is far more eff, cost effective than ethanol, Butanol, veg oil biodiesel and well known, doable now. Sasol has been using this for decades to turn coal into fuels in S Africa .

But we need far more, more eff vehicles, plug in hybrids and EV's which can easily cut out oil use by 60% in 10 yrs if we start now.

My 80mph, 100 mile range EV sportwagon gets 250mpg equivalent and my 3wheel MC gets 600mpge. Both are inexpensive to build at about $10k for the sportwagon and $6k for a cabin on the MC using 30-100 yr old tech, just common sense, good design.

The fact Chevron bought the NiMH battery patents then stopped Toyota, others from making EV size ones shows how scared they are of EV's. The $45k RAV4EV's made before the battery ban now sell for $75k and still running strong with 130 mile range, 80 mph and 100k-140k miles on them.

We have no energy shortage, just a political problem, corporate welfare subsidizing oil $1.50-2/gal in our income taxes according to the WSJ, Economist Mag, CIA, others. This subsidizes Iran, Russia, oil dictators and terrorists too. If we make oil pay it's way with a tax then all this would solve itself, make our country rich again and our enemies poor.

To me that is the patriotic thing to do. What would you call supporting our enemies? I know what I call them.

Jul 28 08:52 AM

[jerrydd:]

Stockferret is right on oil subsidies and you WayneS are not. As I proved yesterday when you stated the same lie that Oil companies pay more taxes than the subsidies they get.

WayneS, if what you say is true how can they sell oil on for under $1.50/gal? That they pay taxes on income like other corps has no bearing on their many times larger subsidies.

The $1.50-2/gal comes from large tax breaks, depletion allowances, Persian gulf, oil war, balance of payments costs, military costs, etc.

So where is the $300B/yr oil companies pay in taxes?

If not for oil we would have none of these costs which come to 20% of our gov budget. That in oil as it should be would solve the problem as most other energy sources would be lower costs.

How many more of our soldiers die, maimed for oil? Especially when it would be so easy to do if not for the subsidies oil gets? Do you support subsidizing Iran, Russia, oil dictators terrorists and big oil?

All I want is a real free market, not supporting our enemies and corporate welfare to the richest companies on earth. Isn't that what a patriot would want? What are you?

Jul 28 08:59 AM

[simon shain...:]

Lara Crigger has missed large chunks of the alternative energy market. Alternative energy is anything that is alternative to oil. This includes nuclear and NG. Of course when we traditionally speak of alternative or renewable we rarely mean nuclear, NG or anything related to the electric grid. We mean biofuel,solar and wind, electric cars.etc.
This article only addresses biofuel as it relates to ethanol and algae. She missed the entire and massive usage of other liquids to create biofuel. these include animal fat, etc. I believe that most of the biodiesel plants that will be built in the future will use animal fat, Chamolina, Jatropha as their commodity to create biodiesel. The values of these commodities can not substantially increase, as opposed to soybeans, as their is a massive abundance of them. In fact they are giving you money to take Jatropha out of Africa and other countries.
Lastly, Natural Gas has been found in Pennsylvania and near surrounding areas in quantities so large that it can fuel all home energy needs in the entire USA for several years. This is fact, not fiction. Hundreds of trillions of BTU of NG has been proved to exist and is now accepted as reserves in the 'Marcellus Shale' in PA and the major gas development companies are heavily involved. Chesepeake and Range Resources own much of PA mineral rights. So does Hydrostatoil of Norway.
T.Boone Pickens has recently moved away from wind power( 'for the moment') and is concentrating on NG. As he has made his billions in NG he knows much about the Marcellus Shale.
As a proponent for NG and biodiesel I remind all that the NorthEast Pennsylvania Green Energy Symposium will take place in the Wachovia Center on September 13-15 in Wilkes-Barre, PA.

Jul 28 09:19 AM

[jerrydd:]

Now back to investing in Alt energy.

Other that PV and other equipment makers I just don't see where one can profitably over the long tern invest. Why is RE is a small company to personal level business. As it's spread out by it's nature and by far most profitable in small scale, big investors in things like solar, wind farms make 1/2 what a home owner/small businesses would from energy sales/savings and they don't have the land, transmission line costs that double the investment costs.

Biomass must be made within 10 miles or gathering costs are to much. So best with small units preferably movable that are shared between farms or other biomass sources.

Solar CSP and wind are far cheaper in small sizes competing with coal once in real mass production and solar/CSP happens when power is needed most. If on site where the energy is needed for heat too then far more cost effective. A home unit is only a 5hp steam/heat engine, 200sq' trough collector, 3kw alt that will supply must homes with power, heat with much to spare.

Since these come well under the cost of a new coal plant at $4/kw I see little profit from big wind, solar, nuke, fossil fuels other than NG being able to compete in 10 yrs.

Money talks and this is where most energy will come from. I see many retiring by putting up much more than they need and living off the sales undercutting utilities, big oil, big coal,big RE, etc.

The only reason we haven't went this way is subsidized oil, coal and that era is quickly coming to an end.

Beware because the world is change fast and much misinformation from people who just don't understand what's really going on from their ivory towers.

Jul 28 09:26 AM

[searcher:]

In answer to the question, an alert trader certainly has ample reasons for such an expectation.

Jul 28 11:48 AM

[WayneS:]

Energy cannot be created nor destroyed (Law of Conservation).
The energy is stored and released by acting on these shared massless electrons. There is always waste (entropy). I was just saying it doesn't matter whether it's methane or coal, it's the same chemical or physical reaction.


On Jul 28 12:58 AM rooferguy wrote:

> E=mc^2
>
> You can't make energy by moving a massless particle. Energy is released
> in heat by breaking chemical bonds in a hydrocarbon - and then turning
> just some of that heat into mechanical energy which is then partially
> turned into electrical energy. The rest is wasted heat - AKA global
> warming.
>
> Photons from the sun make the transition directly from light to electricity.
> Not too concentrated a source, but neither is photosynthesis. Much
> more distributed, cleaner, elegant and virtually no wasted energy
> (which turns into heat).

Jul 28 02:33 PM

[WayneS:]

"So where is the $300B/yr oil companies pay in taxes?"
in 2008:
XOM paid $42 billion in operating taxes
XOM paid $37 billion in income tax
Chevron paid $20 billion in operating taxes
Chevron paid $12 billion in income taxes

There are 500 more oil companies to list.

We paid $35 billion in sales taxes through Exxon and they only represent 3% of the market.

The oil business is big business, but just a business. We are the users of these products. We are the polluters. Just passing the buck doesn't make it so.

Jul 28 03:14 PM

[WayneS:]

Just some trivia.
We eat hydrocarbons that are broken down and the energy is saved in little batteries called "ATP." These batteries are transported to where they are needed, using energy sent to our heart. Muscles, etc use the energy stored in these batteries and the drained batteries have to be transported back to be recharged. There is gaseous, liquid and solid wastes produced. Except for heat, all the other wastes are considered hazardous.

Jul 28 06:21 PM

[WayneS:]

Trivia continued (I got sidetracked and forgot to put in the punchline)

God must be an engineer. He put a waste disposal system right in the middle of a recreation zone.

Jul 29 12:36 PM

[Diegojames:]

Honda makes the CNG car and it is available right now for $25,000.00 as a CIVIC. They do not make a "algae car". There is a lithium battery and a diesel hybrid in europe but no algae car. Infact there will be a microturbine diesel and electric with ultracapcitors before there is a "algae car".
Where is the Honda and the Mini with a electric motor on each wheel??? It is all coming so start school and get a physics degree and have the government pay for it.

Aug 03 08:50 PM

[danno:]

Would love to hear someone pontificate who knows more than Konrad or Perry. That shouldn't be too hard. I guess when you pitch to the daytrader crowd, you don't have to be very good because they're not very interested in investing; they're traders.

Aug 24 12:15 AM