Renewables will face stiff competition from shale gas, analyst says

Jack W. Plunkett doesn’t pull punches when asked his opinion on the state of the industries he covers, and that’s made him a go-to expert source in the US when it comes to a wide range of economic sectors, including energy.
Renewables will face stiff competition from shale gas, analyst says

A short and woefully incomplete list of those who have turned to Plunkett for his insights include the financial cable station CNBC, The Wall Street Journal, USA Today, Investor’s Business Daily, and Inc. Magazine.

In addition, his almanacs on the Energy, Biotech and Genetics, and the E-Commerce and Internet industries have been well read -- and frequently returned to as resources -- by reporters and industry insiders alike.

His latest book is called “The Next Boom: What you absolutely, positively have to know about the world between now and 2025.”

But if Plunkett was only a good talker or simply made a good show of himself on television, what he had to say wouldn’t be so valuable.

That it is, in fact, valuable is testament to the client list fostered by the CEO of the Houston (Texas)-based Plunkett Research Ltd.; a client list that includes scores of leading corporations, educational institutions and government agencies.

Renewable Energy Magazine caught up with Plunkett shortly after Standard & Poor’s downgrade of the United State’s credit rating, the ensuing shakeup of global financial markets and in the midst of the ongoing but apparently successful ouster of Muammar al-Gaddafi in Libya.

In the interview that follows, Plunkett talks about renewable energy’s present and future, his contention that the industry needs – and will see – a wave of consolidation among its players, and his suspicion that the trending interest in shale oil in the US and around the world may well lead to a direct challenge to solar, wind and other renewables for market share.

This has been a volatile year in many respects; we witnessed massive earthquakes and tsunamis and wild gyrations of the financial markets. How has all this impacted the renewable energy sector in your view?

Well, it hasn’t been easy on it, that’s for sure. As you know, to a large extent the growth of interest in renewable energy as a business sector, as well as the installation of facilities, had been relying on government incentives and government subsidies. That hasn’t changed.

Now, eventually, renewables are going to stand on their own feet as economies of scale and high production kick in, but right now it takes a lot of government help, and the fact that governments, in general, are under so much pressure to reduce costs, watch debt, etc., it’s been tough on the industry.

There are some exceptions to that of course, but overall, that’s how it has been. Among the dramatic exceptions has been the nation of Japan, where the nuclear meltdown has put an intense new government focus on renewables, and as a result we’re likely to see a lot more government money floating toward renewables, rather than away from them.

And then there’s Germany where – I don’t think the smoke has necessarily cleared yet – but where we are also seeing a push to back away from nuclear power. You hear Germany is going to shut down its nuclear plants, then it isn’t, then it is… and I think ultimately what we are going to see is a renewed push for gas-fired electric plants there – which is timely, given the amount of shale gas that Europe is sitting on that hasn’t been tapped yet.

At the same time, Germany has cut back on some of its market support for electricity generated by renewables, and I think we may see some of that market support come back.

Another important negative influence on the industry is the recession and the financial industry problems that we are going through. That’s made it hard to get conventional financing in general. So where a wind farm or a solar installation might have had some pretty good contracts lined up and some technology in place or land in place, when they’ve gone to the market to get that part of the money that has to come from private funds, it’s been hard to raise.

OK, so let’s say you’re a company that is or wants to be involved in the renewables sector; how do you make the case that now is the time to dive in and develop a new wind or solar or geothermal facility?

The question is, what are governments going to do? Let’s look at the US, as an example. The question is whether the US federal government – or any of the state governments, for that matter -- is committed enough to renewables to come up with unique funding programs. Offering deeper guarantees, for instance, might do the trick… but there are so many pieces that have to fall into place that kind of start with the government and end up with certain amounts of private financing, and I think those pieces are kind of jumbled right now.

And then there are a lot of projects on hold because of environmental considerations. Are we going to hurt the desert tortoise or not when we install a giant solar farm in California? Does the public want to fully back the development of offshore wind or not? Right now, there’s a whole lot of not-in-my-backyard going on in regard to wind.

My point is one thing that would help get the industry moving forward is more support on the environmental side; perhaps there could be clearer regulations that take a lot of the questions out of the front end, in the planning and design phases… because it is difficult, as a financing entity, to get on board and say, “OK, I’ll give you some seed money now and more will be available later” when you think the project might not be able to go forward due to an environmental concern.

Do things like the reduction or elimination of feed-in tariffs in Europe and elsewhere affect the mind-set of people doing renewables development over here?

I don’t think it does to a great extent, except in that a lot of the same companies are involved in projects on both sides of the pond. I think if they are negatively impacted in Europe, it makes it harder for them to allocate as many resources to the US.

One of the things that makes Europe interesting to watch is that the countries where renewable energy activities have been the most intense are now the same countries that have been hardest hit by the recession. Spain is an example of that. Certainly, the UK as well, where the financial emphasis today is on cutbacks and austerity rather than investments in sort of… “future works.”

When you mention cutbacks I immediately start to think of the debt-ceiling deal that was recently struck in Washington, a deal that has led to the formation of a “super committee” of lawmakers to determine where the deep cuts will be made to meet US budgetary goals.

Two questions: Is the renewable sector in this country going to take a hit when this process gets underway in a few weeks?

Secondly, and conversely, might this process also add a little clarity for industry in that it will know, without question, what government funds it will get and what it will have to seek elsewhere?

Those are two excellent questions. First of all, in terms of the super committee and subsidies that are about to disappear, I would put ethanol subsidies at the top of the list. But that’s probably not bad news overall because the ethanol industry in the US is getting to the point where it can stand on its own.

Then, the next question is, will the federal government be inclined to maintain or decrease loan guarantees for a wide variety energy project ranging from nuclear, solar, wind and so on? I would say the higher the risk of the government taking some loss for that support, the more likely that it is going to be cut or even eliminated.

So where do you go for funding? Do you turn to venture capitalists?

Well, venture capital has grown astronomically in green technology in general and particularly in renewable energy, but a lot of that investment is predicated on two factors:

Number one, that there be significant government support for the industry, and number two, that there be a strong market for IPOs when the companies that you are backing are ready to go public. Both of those things are in question right now.

I’m going to give you an answer that may or may not make your readers happy: I would say there has definitely been a sea change in the industry. And here I am talking about renewables in general. It is time for consolidation. It is time for looking for significant leaps in operating efficiencies, in generating efficiencies, and in not only having sort of “blue sky” technology that might come around in 10 years, but really accelerating technology to market that will increase efficiency, reduce capital costs and therefore making return on investment viable.

As an example, it is really time for those technologies that are going to make solar more efficient to get in gear. If that takes consolidation in the industry and firms getting together and sharing technology or merging to reduce overall costs – whatever it takes, that’s what we need to get.

It sounds like, overall, you’re feeling pessimistic about renewables at present…

I am somewhat pessimistic, yes, especially domestically here in the US, because the emphasis put on capital costs and operating efficiencies has shifted so much of this business to China. Even things that we thought were good technological and competitive advantages in the US have turned out to be not advantages at all, either because of changes in the market or very low-cost products coming out of China.

The biggest example of that is what just happened to Evergreen Solar. They premised their business on the statement, “We use less silicon.” That’s a great advantage when the price of silicon skyrockets, but now that it is down to nothing, you don’t have your advantage anymore.

To me – and let’s just stick to solar for moment – solar is getting down to the $1 Holy Grail. There have been dramatic advances in output per cost and $1 has always been the benchmark that everyone has been after.

The problem with $1 is it doesn’t represent our reducing the vast expenses involved in installation and ongoing maintenance. This is why I see a lot of promise in the further advancement of concentrating solar and companies like [California-based] eSolar, which has reached out and created a synergy between PV and Concentrating Solar. That’s interesting.


Well, when you think about what they’ve done, saying, “We can make PV maybe 40 percent more efficient, and use one-thousandth of the silicon material of the standard PV, and get it all on a smaller footprint, and we don’t have to build quite as mammoth a concentrating structure as pure concentrated takes…”

They are taking the best of two different technologies and putting them together -- to the point that GE Energy has just jumped on board with them in a big way.

That’s the kind of thing I was talking about earlier: A coalescing of technologies and even companies to try to find a better and more efficient way to do these things while getting the return on investment up.

I really like eSolar, with this modular, ship-it-out-on-a-train-car, and two days later you’ve got a concentrated solar plant up and running, as opposed to these mammoth engineering projects that go on and on.

Now, this might be a little off-target, but in my view, solar has sort of suffered from the same problems that have plagued nuclear power. Initially with nuclear power we didn’t have a small number of plant designs that were universally accepted and built over and over again. As a result, what we ended up with was this vast array of several different kinds of plants that were built to different standards, and it took re-engineering every time and recertification every time… and the only country that was smart enough to go around that was France.

We kind of have the same problem with solar. We’ve got traditional PV over here, thin-film over there, concentrating… and instead of focusing on one technology and making it the best that it can be, we’ve run all over the place.

America made the same mistake in the cellular mobile phone business. We didn’t concentrate on one accepted standard. Instead we had four or five different types of cellular phones that couldn’t talk to each other efficiently. So, while Europe went to one standard and Asia went to one standard, we were still operating on five and we’re still behind in cellular installation and efficiency compared to the rest of the world. We have the same problem with solar.

So what’s wrong with how we do things, compared to Europe and elsewhere?

Well, in the instances that I am talking about, with mobile phones and the nuclear installations of France, the governments involved got a committee with a single focus together and then said, “If everyone will agree to one standard, we will help fund research, we’ll help with loan guarantees for installation… in short, we’ll do whatever it takes.” If you provide a hard enough push at the top level, everybody follows. We just haven’t done that yet.

The same thing is true of internet connectivity in the United States. We are just way behind much of the developed world today, whereas if you go to South Korea, for instance, the government has said “We are going to subsidize this and encourage the installation of extremely fast internet so that everybody will have it, and make the country more highly productive.”

So now in South Korea, for the equivalent of $30 per month, every home can have sizzling hot connectivity. I think it is at about 100 megs today, and they are already talking about having 1 gig of connectivity at very low cost in the not-so-distant future.

There’s something about our system [in America] that says we are going to favor a lot of different special interests at once, and instead of creating a level of competition that is healthy, in some cases we wind up with a lower level of innovation because we are allocating resources in too many directions at once.

Now, I don’t want to sound like I am advocating a high level of industrial policy and oversight and government control, but what I am advocating is a hard look at picking the very best technologies and encouraging people to innovate and compete based on one or two technologies instead of 12.

Given what you’ve said about what needs to be done, I suspect you think that when countries announce renewable energy usage goals for 2020 or 2030, they really don’t know how they are going to get there…

I think it has an effect, but it is an extremely broad statement. Let me offer an analogy. If you and I ran an affordable housing agency in the state of Oklahoma and we went out and said, “We’re going to create affordable housing for 20 percent of the poor people in Oklahoma, but we didn’t say we were going to create units that are low maintenance, low capital cost, fireproof and easy to air condition, then everyone who has an interest in different types of housing is going to grab the money and run with it. It’s not very efficient.

Whereas if we said we really favored new steel buildings with cinderblock walls and extremely high efficient air conditioning and low use lighting, we would achieve a different outcome.

What forecast can we derive from all this?

Well, let’s look 10 years down the road. I think we are going to see a lot of consolidation among existing renewable companies. We’re going to see much stronger government support. We’re going to see a lot of year 2020 goals not met. And the result will be that the companies that are left standing will be on much firmer financial footing and they are going to make the expenditure of research and development dollars more effective because they’ll be the companies that can really drive us toward high efficiency products.

Meanwhile the competition from China is going to continue to be really, really fierce and we have to concentrate resources to compete with that.

So now, if countries don’t meet their 2020 goals, will they simply move bar and say, “OK, we’re now shooting for 2040?”

The answer is yes. The same thing is going to happen, probably, in ethanol… either the price of corn is going to go to $25 a bushel, or the bar is going to have to be moved back because the requirements for ethanol production are extremely unlikely to be met.

I guess if you mowed every vacant field in America, we might be able to meet them.

People love to talk percentages shares when they talk about energy – fossil fuels account for this much today, renewables this much – and tomorrow the percentages will look like this…

I’m so glad you brought this up. Basically our growth in terms of electricity use is at this point is very nominal. The forecast for electric use in the US is nominal. Why is that when we have significant population growth? Well, it’s because our energy intensity is improving dramatically.

A great example can be found in our appliances. A refrigerator bought in the 1940s would have been a little bit smaller than those we buy today, but they burned three times as much electricity as ours do now. Virtually every appliance that draws electricity in our homes and offices has improved dramatically, partly because of better technology and partly because of insulation and other factors. That is very much in our favor.

If you look at the numbers, except for carbon emissions, our future looks pretty good. The other huge thing that has happened, literally since 2005, is this surfeit of shale gas that is sitting in unbelievable quantities all over the US and in many parts of the world to the point that the mid-term outlook for gas prices in the US is about $4 -- the industry would like to see it move up to $6 or $7 and I think it will eventually – but what we are talking about is a relatively clean, extremely affordable, widespread, easy to use low technology fuel source that we didn’t have an abundant quantity of 10 years ago.

Now, I know I’m mixing conventional energy with renewable energy here, but you can’t discuss one without discussing the other.

You may remember that 10 years ago we were talking about dramatic gas shortages in the United States. At that point billions were being invested in LNG – LNG processing plants were on drawing boards and under construction, LNG ships were being planned -- and we were looking at bringing in vast quantities of LNG at a price that probably would have been about $20 from places like Qatar in the Middle East.

In effect, the whole industry has been turned upside since about 2005.

Why was 2005 the turning point?

Well, the first dramatic increase in shale production didn’t start until 1998. But the application of advanced shale gas drilling and production really started bringing a lot of gas to the market in 2005. And that’s when the investments built up around a number of fields around the US, and when we really began to realize that there was a lot of gas here that we weren’t bringing to market. It was just a matter of momentum and investment.

So suddenly while renewable energy has been trying to gain traction, shale gas has burst through the roof. If that hadn’t happened, you and I would be able to fly over the US Gulf Coast in a helicopter and we would see ships lined up waiting to offload LNG. That’s not happening. We’re now actually talking about refitting those LNG plants along the coast so they can export rather than receive gas That’s probably the single most dramatic thing that’s happened to the renewables industry.

If I understand what you are saying, instead of the traditional view, which is that fossil fuel usage will be scaled back over time and the void filled with renewables, it’s entirely likely that as certain fossil fuels are scaled back, the void will be filled by what’s essentially this “new” fossil fuel source on the market, shale gas, and renewables…

I’d say that’s a very likely outcome at this point. And that’s literally worldwide. Europe is sitting on top of massive amounts of shale and just like in the US, there is a debate over the environmental and other impacts of drilling. And some nations are capitalizing on it and going like crazy – They’re saying, “Thank God we have this!” Poland, for instance, will be an early leader when it comes to shale production.

Places like the UK and France aren’t so sure about it, and they are raising some of the same concerns that have been raised by some in the US: “Is it safe?” “Is it credible?” “Are the advantages really what we are being told they are?” That said, I’m very optimistic about shale oil.

But what about the environmental concerns?

There are great concerns, but I am probably not the right guy to ask about them because I think most of them are poorly founded. I’ve sat down personally with chemists and engineers who work in this field who explained to me what they do and what their safeguards are, and just like any other energy production or any other use of chemicals, if it is done in the field correctly, the risks are somewhere between minimal and nonexistent. If it is not done in the field correctly, then you’ve got potential problems.

So when they claim that the formations that they are fracking are way below water tables, that’s absolutely right. They are 5,000 feet to 7,000 feet underground, whereas the water table is only at about 500 feet to 2,000 feet. So the question is, “How is the casing and cementing done as the hole goes through the water table?” If they are done to industry standard, they are very safe. If you’re not, again, there would be a potential problem.

One of the things you talk about frequently is synergies between different business verticals. Could you see some kind of synergy manifesting itself that could tip the edge back to renewables?

I think nanotechnology is going to be a real boost for renewables. It’s going to take awhile, so my statement on nanotechnology, which is essentially a material science based on structures at the molecular and atomic level, is that it’s where biotech was 30 years ago.

Back in 1980 most of us couldn’t define biotechnology and had no idea what genetic engineering was or how it was going to apply to our lives. Biotech seeds weren’t introduced until 1996 and now they are being planted in 25 countries. So that’s where nanotech is today. It’s an exciting science that is about to revolutionize everything, but we are not fully aware of it yet.

I think nanotech is going to have very dramatic implications for solar cells, particularly thin-cell, and also for advanced batteries and storage. The real salvation for renewables may well be some kind of affordable mass storage device and nanotechnology may well hold the key.

For additional information:

Plunkett Research

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