Cleantech questions from Harvard Business School

Stop raising your hand alligator.If there’s one thing you learn at Harvard Business School (HBS),  it’s how to ask a good question. It’s a real skill, and one that does not come naturally. HBS is very good at using repetition and social pressure to teach it.

Tuesday night, I led a introductory discussion at HBS entitled “Cleantech 101” and got a lot of really good questions.  Here are the 5 I liked the most, as well as my attempts to answer them:

1. What will be the impact of low natural gas prices on cleantech?

This question presupposes that natural gas prices are going to be low for a long time, so if you don’t believe that you should probably stop reading. I was asked this by a former Schlumberger engineer, so I assume he knows more about oil & gas than I do.

If gas prices do continue to hover in the $4-5/MMBTU range, the result will be a tough environment for renewable project development. Wind development, in particular, will be the hardest hit. In many markets, wind competes with natural gas combined cycle (NGCC)  plants at the margin, but the cost structure of NGCC plants are about 2/3rds fuel and 1/3rd up-front capital. Hence, at low gas prices, these NGCC plants can be extremely competitive.

I think we’re seeing this situation play out in the PPA market today, which is seeing price weakness for wind. It’s complicated by the fact that most states, besides CA, are actually on target for their RPS requirements, so REC prices won’t be robust enough to make up for the slack in the PPA market.

Demand-side cleantech should also care about low gas prices, but less so. Peaking power will still be relatively expensive, so I anticipate demand-side management will be an attractive option for years to come. On balance, if you really believe gas prices will be low for a while, but you still are interested in cleantech, I’d propose heading over to the demand-side of the energy equation.

2. Do supply-side and demand-side cleantech need each other to be successful?

This question is getting at the intermittent nature of renewable sources of power. If we have 20% wind on the grid in some states, a grid operator will go from a world wherein he flips on a switch and knows he’ll get a MW, to a world where he might get a MW. That’s a big change, and it’s largely one we’re not set up to handle.

That being said, renewable supply is still a small part of the power mix in most parts of the world (excluding early adopters of wind like Denmark). It doesn’t really need active demand management just yet. Similarly, demand-side management is economically sound in many wholesale power markets that have few renewables feeding in. It profits solely from the dynamics of electricity markets, which have an undesirable peaking behavior.

Eventually, they will need each other and become synergistic, however. I don’t see how you get 20% wind on the grid without (1) better wind forecasting, (2) energy storage, or (3) extremely active demand-side management. We will probably need all 3.

3. If there are so many opportunities in smart grid for electricity, what do you think of the smart grid for water?

I have to confess: I currently spend very little time looking at water technologies. The reason is that, at least in the U.S., water is pretty cheap. Furthermore, the water grid, unlike the power grid, doesn’t experience peaking behavior during the day, so there’s no value in demand-side management. I view the smart water grid as a nice idea, but one where no one’s really shown me an economic business case.

I’m always open to having my mind changed, though.

(Update: Check out Jeff LeBurn’s response to this below. Much better than mine!)

4. Looking at the McKinsey abatement curve, why don’t the NPV positive projects get done?

If you haven’t seen the famous McKinsey abatement curve, here it is:

The famous McKinsey carbon abatement vs. cost curve.

What you see on the x-axis is the amount of CO2e abated by a particular technology, and what you see on the y-axis is the NPV cost per ton of CO2e abated with that technology. Everything below the x-axis is NPV+, while everything above is NPV-.

What I pointed out last night, as many others have, is that everything that’s NPV+ is “efficiency” or demand-side, using technology that already exists. So, why haven’t we done this stuff?

My argument is that, while the projects are NPV+, the NPV may not be positive for a private company taking on these projects. That’s because McKinsey fails to include the corporate overhead associated with, say, running a home insulation business.

The real business opportunity, in my opinion, is applying technology to create a scalable way of picking up all this low hanging fruit.

5. Where should we be looking for jobs in cleantech? ** most important! **

Now, that’s a tough question. It completely depends on the individual, of course. The one piece of general advice I’d give is that “I want a job in cleantech” isn’t good enough. A grid-scale storage company won’t hire you because you’re “interested in cleantech”; it will hire you because you’re “interested in grid-scale storage.”

Pick one or two sectors you think are interesting. Become an expert. Talk to the best companies in the space. Develop an opinion. Try to predict the future.

Being deep here is much better than being broad. So, get deep!

And, one more thing…

I promised to include a list of blogs that I find helpful to keep up on what’s going on in cleantech. Here’s a partial list:

And, of course, this blog isn’t a bad place to find info about cleantech. And while you’re at it, leave a comment below if you have better answers to these questions than I do. Seriously.

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4 Responses to Cleantech questions from Harvard Business School

  1. QHouse05 says:

    I think that the smart water grid might actually be a good idea for investors to consider. Many of America’s fastest growing cities are sited in Sun Belt states with highly variable rainfall (e.g.) Arizona, Nevada. Water may not be a “life or death” issue at present for soccer moms and suburban dads in Phoenix and Las Vegas, but it is already a political topic in California and other states that must balance increasing residential water use with continuing demand from the agricultural sector.

    If American companies can take the lead in developing software and monitoring systems for water usage, they could potentially yield big rewards in an era of climate change and expanding drylands. Already there are almost 1.4 billion people in Asia alone that live in arid/semi-arid zones, and I’m sure that urban planners from Beirut to Beijing would be eager to manage their water resources more effectively with smarter technology.

    • Alex Taussig says:

      I appreciate your enthusiasm on the urgency of the water issue. I don’t disagree that there are big problems around water scarcity both in the U.S. and around the world.

      What I’m concerned with, however, isn’t just magnitude of the problem; it’s how a private company can make money solving the problem. Someone needs to make a quantitative argument to me that this is possible before I believe it. It may be possible, but I haven’t seen that argument yet.

  2. Jeff LeBrun says:

    Great points.

    To geek out a little and to add to number 3, I think that most water systems already have days or months of storage capacity built into the system (unlike electricity), in the form of aquifers and storage reservoirs. So while there may be peak during the famous “Superbowl flush” or when people are watering their lawns on the hottest day of the summer, this is not enough to deplete the storage capacity built into the system. Water shortages are usually coming on the annual or monthly timescales instead of daily or hourly, and storage assets like dams and aquifer storage systems may be used only 100 or so times to truly shift demand over the course of their lifetime. Fortunately, water storage is a bit cheaper & especially in locations where it is favorable.

    It’s also easier and cheaper to measure volts and amps in a highly distributed fashion than it is to measure the equivalent volume of water.

    Smarter water management systems could make economic sense at larger scales, mainly for irrigation and large industrial facilities such as power plants, were it not for the way water is treated in the legal system. Most of these facilities use water rights to draw their own water and actually do not pay a utilities. These rights are similar to property rights, but in the West, most states still have some form of a “use it or lose it” clause embedded in the law, which means that entities that save water technically lose the remainder of the water right. If it sounds backwards it’s because it is-in this day and age at least These laws were developed in the 1800’s but it’s a sticky situation to rescind somebody’s property rights once they are granted. The best way to really make money off of water rights in today’s regulatory setting is to convert a consumptive right that has lower economic value per volume of water like agriculture to one with a higher value, like a city water system.

    Within city water systems there is sufficient storage capacity built into the system to limit the value of shifting use daily use patterns to almost zero. The one exception may be the development of smarter lawn irrigation systems. Companies like Hydropoint are already doing that but even Hydropoint is more about reducing overall consumption than it is about shifting demand patterns.

    I would love to see water consumption start to resemble something closer to a free market but right now the regulatory system is not set up to accommodate that. One enabling factor may be that the technology now exists that could potentially tell a central data system how much water is currently (and is forecasted to be) “available” in any given system by combining water-level sensors that measure ground water levels and streamflow levels with climate forecasting services to create accurate forecasts, something that is being done many places on a local scale. These forecasts could be used to set a futures price for water on a local scale and people could decide whether or not to irrigate (or plant their crops) based on price signals. Environmental groups could even bid to lock up additional water in sensitive areas. The question remains as to if this system would be more economically efficient than the regulatory permit & litigation-centric system that we currently have in place.

    Although there may be a greater economic benefit to the development of such a system it’s more difficult to pinpoint who would benefit in the near term, and perhaps more importantly who would administer the network of data collection and management. Because water is treated as a right (outside of city water systems) instead of as an economic privilege that should have a price, I think that there is not yet a sufficient market foundation upon which to build “smart water” type system.

    If California wanted to be a demo project for the rest of the world on this issue and develop an efficient data management & transaction system for water I think they could do it pretty quickly. In Washington State the majority of the water rights records were still on microfilm until a couple of years ago.

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