R-Squared Energy Blog

Pure Energy

Don’t Weep for the Trees

While I have no intention of changing the general theme of this blog, I will spend some essays in the future providing more details behind my new job in Hawaii. I did this on occasion with my previous job at Accsys, but the focus of the blog remained on energy, sustainability, and the environment.

As explained in the previous essay, my new role involves development of an integrated bioenergy platform. We believe this to be a different way of looking at the problem of turning biomass into energy, and then ultimately supplying that energy to customers. We are not tying ourselves to a specific technology platform; we are using different platforms as suited for specific local needs. We are also as concerned about the sustainability of the biomass as we are the sustainability of the processes we will utilize.

Since moving to Hawaii, I have been asked to give talks at the local high school here about energy and sustainability. During one recent talk I was explaining some of the things we are thinking about as a company, specifically for alternative energy in Hawaii. One of the students said “I heard you were going to cut down all the trees.” At that moment, I realized that her view of forestry was much the same as my own view of forestry growing up in Weyerhaeuser country in Oklahoma. I viewed foresters as people who cut down trees, and I associated them with clear cutting.

My views have changed a lot since then, because I have met a lot of foresters and have a better understanding of what they do. Foresters are people who manage forests. With a managed forest, sometimes that means you harvest the trees like you would harvest any other crop. But managing a forest entails replacing what you cut down (thinning is an important exception).

That makes sense when you think about why people went into forestry in the first place: They love trees (and not in the same way that a polar bear loves humans) and they love the outdoors. They are very conscious of the important role trees play in the environment, and as such they are generally very good stewards of the trees and land they manage.

As indicated in my recent interview with Katie Fehrenbacher, sustainable forestry is a critical component of our platform. We have a forestry company called Forest Solutions, and our ultimate goal is to manage all of the forest assets that we will use in our platform.

So why do we like woody biomass? Why not switchgrass? Sugarcane? Crop residues? Various sources of biomass have their strengths and weaknesses. Very high on the list for a sustainable model is to take care of the soil. One of the questions I sometimes pose is “What would the soil condition be after 500 years in a particular service?” If the answer is not approximately as good or better than the present, then it doesn’t meet the sort of criteria that I am looking for (of course taking into consideration that the soil doesn’t have to be utilized for the same purpose for the entire duration).

There are many potential pitfalls when considering biomass. Some sources are heavy users of nutrients, and as such the fertilization requirements can be high – especially when they are on short rotation. This can imply high fossil fuel inputs and a high risk for soil depletion. Some crops are heavy users of water. Sugarcane ethanol has been judged to be potentially sustainable for Brazil, but it may be a different story in areas that require irrigation.

Trees are different. During the first 10 years or so of their lives, trees can accumulate biomass at the rate of 7-10 bone dry tons per acre per year. You may see some switchgrass yields that are claimed to be that high, but those were almost certainly with fertilizer and plenty of water. But even if the yields were the same, the difference is that you have many harvests of the switchgrass over 10 years to get the same yield as one harvest of trees. Each harvest comes at the cost of energy and labor inputs.

But there is an even more compelling reason to utilize trees. Unlike most of the short-rotation crops that are frequently discussed as feedstock for fuel production, trees can actually improve the quality and health of the soil.

While this is not news to our foresters, it was something that I had not given much thought to until recently. I was taking a tour of a new energy lab being built here on the Big Island, and someone pointed out a plot of land behind the lab and said “We tested the fertility of that soil, and it is much higher than that of the surrounding soil.” I asked why, and was told that there used to be a stand of trees there.

What happens is that trees can bring up nutrients from the subsoil and concentrate them in the leaves and bark. This ends up falling back to the soil and adding to the organic material in the soil. Depending on the specific trees you use, managed forests can provide fuel while improving soil quality. You could also envision rotating trees with other crops to rebuild fertility.

A good example of the potential of trees can be found on the Hamakua Coast of Hawaii. For years the coast was planted in sugarcane. While the area gets plenty of water, it is also very hilly. The sugarcane operations led to a large amount of soil erosion. People who were around during that time said that the normally blue water would be brown for long stretches as soil ran off into the ocean.

The sugarcane industry was ultimately abandoned there, and the area is now planted in trees. The erosion has stopped, and the soil has started to recover. The ocean is once again blue there, and I was told today that a reef that had been damaged by soil runoff is healthy again.

So do not weep for the trees we will use. The right trees are ideal sources of biomass if they are properly managed. Besides providing fuel, they are going to perform an important function – recycling nutrients from the subsoil to the topsoil. The trees that are cut will be replanted. The forests we use will be from managed plantations, and not from rain forest or old growth forests.

That is a general overview of the first leg of the platform. There are a number of assets under management, as well as various acquisitions in progress. At some point I will provide details of these holdings and how we plan to use them.

October 21, 2009 Posted by | alternative energy, forestry, Hawaii, sustainability | 127 Comments

Lifting the Veil

Over the next six weeks, I will start to talk publicly about what we are putting together in Hawaii. There isn’t a specific strategic reason for doing so at this time, nor is it for the purpose of soliciting investors. The deal is that I have three speaking engagements between now and mid-November, and I believe it will be necessary to spell out the details and answer questions over our activities.

There have been very specific reasons for keeping a low profile. One is that we believe some of our technology pursuits are completely novel. We would rather not call attention to this until we have things nailed down a bit better. Another reason is that there will be specific competition for certain other technologies and biomass resources. Speaking publicly about those details could hamper our efforts.

But I can talk in broader terms about what we are doing, and I will do so at these speaking engagements. Further, in the next few days I will post some bits on my blog that will fill in some of the details.

My schedule between now and mid-November looks like this. This week, I have to go to Panama for a meeting. On the way back, I fly to San Francisco and will speak at the First Nations’ Futures Institute at Stanford University:

First Nations’ Futures Program

I will be on a panel session on October 27th with Stanford Professor Margot Gerritsen on the topics of energy and sustainability.

On November 11th, I will be on a panel at the Pacific Rim Summit on Industrial Biotechnology and Bioenergy in Honolulu. The topic is Specialty Crops, Renewable Feedstocks, & Sustainability.

On November 16th, I will be on the opening plenary session at a conference in Orlando on alternative energy and globalization:

The Economics of Alternative Energy Sources and Globalization: The Road Ahead

I have received some requests since coming to Hawaii about what we are working on, and I did the first interview on that over the weekend. It is still purposely vague on some technology specifics, but the other details will be laid out as needed:

Our Holistic Approach

I say this again and again, and sometimes I can feel my co-workers wince when I say it: The primary goals here are all long-term, and as such we aren’t planning to make fast money. On the other hand, we are trying to put something together that has staying power, and that can make a real net contribution.

Additional details to follow in the next post.

October 20, 2009 Posted by | alternative energy, Hawaii, sustainability | 41 Comments

“Your Passion is Energy”

Saying Goodbye Again

Today is Independence Day in the U.S., but I am spending it in the Netherlands without my family. This has become an all-too-familiar situation for me. I have spent far too many birthdays, anniversaries, and holidays in remote locations away from my family. The time has come to rectify that situation.

Most of my career has revolved around energy. But about a year and a half ago, I decided to try something slightly different. I left my job with ConocoPhillips in Aberdeen, Scotland (and I explained the details behind the decision here), said goodbye to friends and colleagues there, and boarded a plane to the Netherlands. This is where I have spent about half my time since then.

But that chapter is coming to a close. On Monday I will leave Amsterdam for the flight back to Texas. I have made this trip around 20 times in the past 18 months, but I am making the trip for the last time in my current role as Engineering Director for Accsys Technologies. This trip was my farewell tour, and I said my goodbyes to a fine engineering team.

The past year and a half has been both interesting and challenging. We are a small company, so I found myself doing more cross-functional work than at any other time in my career (e.g., writing HR policies). We were staffing up, so I also interviewed numerous people for all sorts of positions. Because our company was the first (and still only) to commercialize our technology, we encountered some unique engineering challenges.

As I look back, I am proud of what my engineering team has accomplished. They have vastly improved our process in the past two years, and we climbed a steep learning curve. We managed to increase the throughput of our plant in Arnhem by a third, while at the same time cutting our energy inputs. With all sincerity, our successes came about because I have a clever and dedicated team of engineers.

And while I believe strongly in the product that we have developed, my job involves about 50% travel. I have engineering teams based in Dallas and in the Netherlands, and I have to try to keep a presence in both locations. I knew that I could keep that up for a while, but not forever. If I continue with this schedule, I will grow old forever haunted by the lyrics to Cat’s in the Cradle.

I have been fortunate over the years to have had a number of different job opportunities present themselves. In the past six months I began to more seriously listen to inquiries. I decided if the right one came along – and it enabled me to spend more time with my family – then I would make a change. The right opportunity has come along.

Future Plans

If I had to describe my ideal job, it would be to bring sustainable energy technologies to the world. I would do a lot of technology evaluation, visiting with universities, small companies, inventors, and entrepreneurs. The goal would be to identify the renewable technologies that I feel can compete in the long-term, and then work to facilitate that future.

One of the most brilliant engineers I have ever met (who will also be a future colleague), recently introduced me to a very successful businessman who has been in the energy business for decades. Because he greatly values his privacy, I will not divulge his name nor the companies he has been involved with. Suffice to say that his vision is long-term, he is realistic, and he has a long track record of successfully building companies. When I met with him, I discussed my current job, and then we started talking about our views on the future of energy. He made a comment that I often hear when I am discussing energy: “Your passion is energy. You should follow your passion.”

After much discussion, which included meetings in Houston, Hawaii, and Hamburg – it was clear that my goals and views were very much aligned with his. We saw a similar future, but were both quite realistic about the challenges of realizing that future. The primary objective for both of us wasn’t to create wealth, but instead to see our current unsustainable way of life nudged toward something more sustainable. We are both concerned that we are leaving a mess for our children to clean up, and we believe we can build something better for them.

I have therefore decided to join forces with him, and will leave my current job on August 1st. I will continue to assist Accsys/Titan Wood with their technology on an as-needed basis, but my primary energies will be focused around the conversion of biomass into value-added products. The specific end product will depend upon the particulars of a situation. I firmly believe that biomass can work, sustainably, in specific niches. As fossil fuel prices rise, the niches will grow as long as the biomass technologies are not heavily dependent upon fossil fuel inputs. We plan to establish ourselves in some of those niches.

I have written in this blog about some of the technologies and companies that we will be involved with. (In fact, it is a long story, but one of my articles was what led to the initial contact, which occurred almost 3 years ago). Other technologies, which I have felt had great potential, I haven’t written about. I am still not yet going to write about them, as we are busy establishing ourselves in various areas and establishing dialogue with different companies. But as one of my new colleagues likes to say “We are technology agnostic.” That simply means that we are open to different technologies and won’t base our business around a single technology.

I will relocate to Hawaii with my family. I estimate that my travel will drop from the current 50% to around 10%, meaning I will get to spend much more time with my family. Based on our plans, when I do travel, I expect my travels will take me to Germany, which is familiar territory, but also to some areas I have not seen, like Southeast Asia.

Why Hawaii? Hawaii offers a unique laboratory for renewable energy. Hawaii has very good renewable resources (sun, wind, geothermal, ocean thermal, biomass, etc.), and no fossil fuel resources. Hawaii should have a small bias toward renewable energy relative to the rest of the U.S., since all fossil fuels must be shipped in for power and transport. And because of the year-round growing season, I can do a lot more experimentation there both with gardening (which I love to do) and with energy crops.

I won’t go into specific details right now about our efforts. We aren’t ready for that yet. Some parts of the business are already far along, and others are just starting. But we won’t be messing around with pie-in-the-sky technologies. That will be one of my key roles: To make sure we are focused where we need to be focused and not wasting our time working toward dead ends.

July 4, 2009 Posted by | Accsys Technologies, biomass, Hawaii, Netherlands, Titan Wood | 54 Comments

Vinod Khosla at Milken Institute: Part II

This is a continuation of the previous post covering Vinod Khosla’s (VK) recent lengthy interview Milken Institute 2009 Global Conference. The interview was conducted by Elizabeth Corcoran (EC) of Forbes and can be viewed here.

In Part I, VK discussed the role of government money, capital intensity of renewable projects, and some of his solar investments. Part II picks up at the 13:40 mark of the 75 minute interview. In this section, VK covers his strategy for cutting poor performers from his portfolio, discusses butanol, suggests that cellulosic ethanol can replace oil, says nuclear power can’t compete without subsidies, says cap and trade is inevitable, talks efficiency and smart grid, and tells us that he is often wrong.

EC (13:40): In the past 90 days we have seen something like a billion dollars being put into solar investments – whether in the form of equity or debt. Is that stupid money?

VK: The people who are putting in gobs of money, behind people chasing First Solar at billion dollar valuations – I won’t say it’s stupid but it’s not something I would do with my money. (EC: That pretty much counts as stupid). A diversity of opinion is good. I am often wrong. (EC: Sometimes you are). You only need to be correct once in a while because in our business you only lose one time your money but you can make 100 times quite easily. I don’t have to be very right.

(RR: I would like to hear that during his next congressional testimony where he is trying to drive the direction of energy policy: “I am often wrong.” But this also gets to the heart of why I often object to what he is saying. If he uses his high level of influence to help put us down the wrong path on energy policy, then what are the consequences of being wrong? They could be severe.)

EC (14:38): How many companies do you currently have in your portfolio?

VK: Our clean tech portfolio has probably about 50 companies.

EC (14:50): And how many companies – again you have been at this 5 years or so – how many companies do you cut off at this point?

VK: Interestingly the companies we have cut off…when we started, we started with a different premise. I decided, you know in most venture capital there are plenty of angels. Angels spend half a million dollars, work with a university professor, develop the idea a little further. There are very few angels in clean tech. First, the start-ups are harder, because they are very science and technology-based. If you made money in real estate, you aren’t going to put new money into a waste heat system, for example. It’s harder to understand. (RR: That’s ironic.) So we decided in 2004 that I would spend a lot of my time on what we would call science experiments. So we have cut off perhaps four or five things.

EC (15:48): Which was the biggest disappointment?

VK: Let me just finish the thought. The ones we have cut off, we cut off relatively early. So, of the 10 science experiments we did, we cut off five of them with a million dollars invested. Who cares? The problem is when you invest $50 million and cut it off. That’s the problem. We have not had any large cut-offs – I am trying to think – in our clean tech portfolio. When we have invested a lot of money, there’s one or two places – well one we wrote off; one called Altra (RR: Altra is a corn ethanol producer that is on the ropes). There’s one place we actually decided to change the plan – Cilion – and made it capital neutral, so they don’t need a lot of cash. Got rid of the debt; the company is going fine, but sort of on the slow boat.

(RR: When Cilion was formed in 2006, they announced they would have 8 plants in operation by 2008 and achieve an energy return of better than twice that of gasoline. Here in 2009 they have zero plants in operation. The formation of the company included much fanfare, such as this quote from VK: “Cilion will be able to single-handedly produce all of the ethanol that the Governor has ordered for 2010 [900 million gallons], based on current consumption.” So far, they have proven to be nothing but a money pit. So what if California had counted on that ethanol? These are the dangers of having someone unduly influencing energy policy and being “often wrong.”)

EC (16:57): How about Hawaii Bio?

VK: Hawaii Bio was a tiny investment. It was sort of like – I don’t even remember – under a million bucks. It’s actually going pretty well. They have only spent, cumulatively, a few hundred thousand dollars in their whole life. The idea there was very simple, and it’s still valid. We teamed up with the three largest landowners in Hawaii; about 640,000 acres and said when the technology comes along – and all they are doing is looking for technology; they aren’t developing any technology of their own – that land will be a strategic asset for the fuels area in Hawaii. And so we have been talking to a lot of technology providers, spending very little money. We’ll tread water until the right technology comes along.

EC (18:03): Last fall you said project finance was not an area you want to be headed into. Talk a little bit about where you see cellulosic ethanol going, and isn’t that an area where you have been involved with project finance?

VK: It depends on what you call project finance. Cellulosic technology is something I am very interested in; I actually think it’s the only thing that can replace the oil; I am fairly confident that within the next 5 years it will be cheaper unsubsidized than oil at $50, $60 a barrel.

(RR: I would like to see the math on this. It’s amazing that someone can believe this, despite there not being a single commercial-sized cellulosic ethanol plant in existence.)

EC (18:48): Let’s look at some of the numbers. You don’t like plain ethanol, right; the kind that comes from corn and soy?

VK: Right. To be fair to the corn guys, they served their purpose. I have said for years that they are a good stepping stone. This is important. I will tell you a funny story that really makes a lot of sense. About two years ago, we said that corn ethanol would be a good stepping stone; they have raised a lot of visibility; there’s a lot of pumps; cars are flex-fuel capable. It helped set up the infrastructure. The economics of corn will not work long-term relative to cellulosic. We had a company called Gevo that were not doing corn ethanol, they were doing butanol. (RR: Butanol is something that was produced commercially via the biological route before the petroleum route displaced it; I have explained the issues with bio-butanol here).

They decided to change – not their science; they have bugs that produce butanol and on to some other things – but they changed their strategy for developing the process; the plants they use – to use corn ethanol plants. They have been doing this for two years now; planning on corn ethanol plants being available at 20 cents on the dollar. (RR: And as we saw recently with the Valero purchase of Verasun’s assets, others are also interested in picking up ethanol plants for pennies on the dollar). And developing a process technology that can use them. And in fact the largest maker of corn ethanol plants in the country – or one of the largest, ICM – about three months ago signed an exclusive agreement with them to convert corn ethanol plants into higher value products. So that’s a great example of how every problem is an opportunity.

(RR: While they may be able to reuse portions of a corn ethanol plant, the distillation of the butanol is going to be much different. Distillation capacity will need to be added during any conversion of ethanol plants to butanol plants. I have looked into this already at someone’s request, and I did spend years working in a butanol plant.)

EC (20:38): From your point of view, it’s the 2nd generation ethanol (VK: Absolutely) that’s going to make the most sense. What’s had to go into that is a lot of biotech engineering, finding microorganisms that can efficiently convert. (VK: Sometimes, not always) Finding fuel stocks that will be cheap enough, whether you get them from trees or other brush or winter crops and so forth. Take us through the numbers. Where do the prices have to be in order to make that work, and what happens if oil declines in price? What happens if it gets down to $30/bbl?

VK: What I would say is that unless there’s a competitor to oil, I don’t think oil is going to $30/bbl. (EC: Even though John Doerr was in the Middle East, and people told him, “John, it’s going to $30/bbl?) I won’t speak for John. When we plan for unsubsidized market competitiveness, we plan on $50 oil. I suspect the price will be much higher, especially when economic growth resumes. And whether it’s higher in a year or five years doesn’t matter as much. Not only that, the problem isn’t oil anymore, it’s a carbon constrained world. And we are going to have legislation on that. It doesn’t matter whether the science of climate change is right or wrong. Assume for a moment that we discover over the next 10 years that climate change science is wrong, and we don’t have a climate change problem – not something I believe. We will still end up with legislation in the next five years. So, at this point it is fait accompli; it’s going to happen.

EC (22:50): Doesn’t that amount to government subsidies?

VK: No it doesn’t. If you dump your wastewater into the river, is it a government subsidy if they require you to clean it up? In fact the nuclear industry is the one that’s subsidized. They say we’ll take your toxic waste, the government takes responsibility and subsidizes them. There is not a chance that you [nuclear] can compete in the market unsubsidized. Even if it had the toxic waste subsidy where they took waste off, you still couldn’t compete at market interest rates. There’s not a viable nuclear plant at 15% IRR or 15% debt, which is what the solar guys contend with. It’s only because of 5% loan guarantees from the federal government that keeps nuclear in business.

EC (24:30): Come back to the tax on carbon, though, because there will be a tax. Right? (VK: Yeah). What do you predict that legislation is going to be?

VK: I suspect…look it’s hard to predict politics…I suspect it won’t happen this year it will happen next year. Many people are pushing to have it before Copenhagen this year. I hope we do. There is a 50/50 chance the House can pass a bill by summer. The Senate will take longer, and it will get stuck in the Senate. Anyway, my expectation is that next year we will have a carbon cap and trade.

EC (25:30): Do we know enough about how to make cap and trade work? Isn’t that market just an opportunity for fraudsters to come in?

VK: Any market will have fraudsters to begin with. (RR: He went into an explanation of events that have led to stock market regulations). Will it take 10 years to get a system in place where there is not too much fraud? Yes. (RR: And during those 10 years another administration can come in and dismantle the whole thing).

EC (27:20): So you are willing to put up with an ill-defined, highly-regulated system to have cap and trade?

VK: We have to have cap and trade. We don’t have a choice. (RR: VK compares the need for homeowner’s insurance to the risk that climate change is catastrophic). If we buy home insurance, why shouldn’t we buy planet insurance? (RR: VK discusses the risks that climate change will lead to 100 million deaths; also suggests that the growth rate in China is exaggerated by neglecting “off the books” environmental damage).

EC (29:48): What is a cap and trade system going to do in the United States if we enact it without China?

VK: I suspect China will be part of it in some way. (RR: Discusses targets for developing countries, but doesn’t really answer the question of how China will be compelled to participate. He then referred people to this paper on his website that further explains his ideas.).

EC (33:50): Talk about efficiency. We are hearing a lot about the smart grid; a lot of smart grid technology involving more efficient use of power; we are hearing a lot about Silver Spring which is a company that I think you passed on. Why not? That seems like it would fit your strategy; great, low-cost investment; big bang for the buck.

VK: Silver Spring is a good company. (EC: Why did you pass?) I wouldn’t say I passed, what I would say is that what Silver Spring is doing is not what we are investing in. By that I mean we don’t invest at the valuations at which Silver Spring was raising money. It’s a different domain. (RR: EC explains that Silver Spring is doing smart metering). Efficiency is absolutely in our sweet spot. We are reinventing lighting. We are reinventing motors. We are reinventing air conditioners that haven’t been reinvented for 75 years. Every air conditioner still has a compressor; we are trying to do one without a compressor. We are reinventing batteries, pumps; anything that consumes energy, we are interested in improving.

A smart grid is a good thing to do. I would say that it’s very fashionable among environmentalists. (RR: VK says to remind him to rant later about environmentalists, whom he said cause half the damage). But efficiency is important, smart grid is important, but if I was asked, the money that was allocated to the smart grid in the stimulus package – is that the best use of that money? Absolutely not. (RR: VK says he would rather have a smart grid so wind energy in North Dakota can get to New York; then goes into the differences between a smart grid and a transmission grid.) An area of less than 100 miles by 100 miles in Nevada – and there are plenty of those – could replace 100% of U.S. electricity with solar. (RR: I have done calculations consistent with that sort of estimate, but there are some big caveats like intermittency). Why don’t we have it? Because we don’t have a grid.

EC (39:00): Let’s get to those electric cars. You don’t like the Prius.

(RR: This takes us just past the halfway mark of the interview. I will pick up the second half and conclude it in Part III).

May 1, 2009 Posted by | Altra, butanol, cellulose, cellulosic ethanol, Cilion, climate change, global warming, Hawaii, nuclear energy, Vinod Khosla | 75 Comments