Why Silicon Valley will never become Green Energy Valley

Where is the renewable energy equivalent of Amazon, Google or Facebook?

Why Silicon Valley will never become Green Energy Valley

By Andrew McKillop

Despite spending hundreds of billions of venture capital on developing "Green Energy", Silicon Valley never produced any companies or technologies that managed to achieve a breakthrough in energy. That was left to the son of a Greek goat herder who worked in the dirty old fossil-fuel sector that attracted no interest from the likes of Bill Gates. Analyst Andrew McKillop explains why the Silicon Valley model does not work in the energy sector.

Recently Google pulled the plug from its 'Renewable Energy Cheaper Than Coal' project (image: The Times of India)

In an invited column published by Bloomberg on October 26th, the former chief technology officer at Microsoft Corporation, Nathan Myhrvold laid out what looks very like a mea culpa. Myhrvold describes how Silicon Valley venture capitalists and entrepreneurs flocked into green and clean Low Carbon energy as the next Big Thing, with sadly unsuccessful results.

Let’s hear what Myhrvold has to say. ‘Some of the best venture capitalists in the business’, he writes, ‘including my friends Bill Joy and Vinod Khosla, detached from their computing roots and focused on energy startups. The result was a staggering surge of capital into clean-energy technologies. Worldwide, from 2006 to 2010, about $535 billion in venture capital, private equity and initial public offerings as well as debt restructurings, mergers and acquisitions flowed into 4,236 clean-tech businesses, according to a recent analysis by GlobalData.’

So what happened to this $535 billion? Basically, it went up in smoke. ‘Venture-capital investing is inherently high-risk’, says Myhrvold, ‘so it shouldn’t surprise or bother anyone that many of these startups failed – some rather spectacularly. Solyndra LLC, the solar- cell company, for example, went bankrupt even after receiving a $535 million in loan guarantees from the U.S. Energy Department. But similar failures happened during the dot-com bubble.’ However, he adds, ‘What is worrying is that almost a decade of energy investing hasn't produced any home runs – no green-energy equivalents of eBay, Amazon, Google or Facebook. The modest, incremental advances we have seen don't perceptibly move the needle on the energy problem.’ (emphasis added).

In other words, the Silicon Valley entrepeneurs found out the hard way that shifting electrons along thin copper wires and around 5 square centimetre chipboards is unlike substituting and supplying energy able to match the world’s present total of about 85,000 million barrels oil equivalent of fossil energy produced and consumed each year. The biggest names, starting with the biggest possible like Bill Gates, Bill Joy, Vinod Khosla, Peter Thiel and Steve Jobs, were able to do something that is not at all Silicon Valley-friendly: lose money, even some of their own money, and often a lot of it.

National priority

What went wrong? As Myhrvold was forced to concede, consumer IT is based on producing and selling new market-friendly but high priced, high tech, power consuming consumer electronic goods able to use existing and paid-for infrastructures and electric power supplies (the latter mostly depending on coal). In theory (but not practice), these consumer gadgets are developed by a flurry of venture capital bets on a myriad of small start-ups struggling against each other – but transferring this model, supposing it is the real way Silicon Valley works, to the energy sector was difficult, if not impossible.

Silicon Valley start-ups are traditionally exposed to extreme high mortality rates. The fact that mortality rates in Green Energy are also extreme is shrugged off by Myhrvold as “par for the course” but bodes ill

What is worrying is that almost a decade of energy investing hasn't produced any home runs - no green-energy equivalents of eBay, Amazon, Google or Facebook

for green energy, which like conventional energy is expensive, long-term, depends on costly infrastructures, and is completely basic to human well-being and economic progress - unlike the ability for consumers to send voicemails. Energy sector industrial and infrastructure development is a real national priority; consumer electronics is not.

Spectacular examples of Silicon Valley-type failed ventures go on rising, for example the September collapse of Solyndra LLC, mentioned by Myhrvold in his column, with its fallout reaching right up to the White House. For Myhrvold this may seem no different from the wave of dotcom-telecom crashes at the turn of the century, but for others they are yet more proof that Silicon Valley-type investing in green energy is the completely wrong model.

State control

National energy security, when it concerns national oil supply and nuclear power, transcends political ideologies in most countries. These key energy industries are often, directly or indirectly, under state control in almost all countries, whether “free market capitalist” or not. The reasons why things should be different for so-called “green energy” are difficult to understand. As the Silicon Valley model has shown, leaving energy investing to boutique investment houses and hedge funds chasing The New Thing that can bedazzle investors leads to projects that are much too often incompetently analysed, badly programmed and sloppily managed. Why governments should use public funds to subsidize and support projects that are born to fail is a powerful question.

Green energy conceived and treated as small-scale, niche market, high cost vanity tech is unsurprisingly incapable of changing world energy, neither “in a few years” nor in the long term. As Silicon Valley green entrepreneurs are forced to concede, the real world of energy is long-term and only occasionally subject to “paradigm shifts” equivalent to the emergence of PCs, cellphones and the Internet. The energy industry existed an awful long time before these new consumer electronic goodies fell off a cheap labour production line in China. As Silicon Valley also found, production lines in China, and in India, at least as high tech as their own, quickly moved to produce state-of-the-art wind turbines and solar photocells, easily able to beat the competition in the US, Europe and Japan.

The green energy investment model used in China and India was and is light years away from the Silicon Valley model and is today a victim of its own success. Both because of smaller amounts of capital being available, and because the national priority was to catch up and then surpass Old World

Energy sector industrial and infrastructure development is a real national priority; consumer electronics is not

competition, state control, financing, planning and programming feature everywhere, both in Chinese and Indian green energy development. Today, the success of their “state guided” green energy investment and development model is so total they are effectively subsidizing green energy development in the OECD countries, through cheap exports of high-tech green energy equipment. For solar electric power cells and films, the first 4 largest global producers are all Chinese (Suntech, JA Solar, Trina and Yingli), but they are presently forced to sell at below production costs in a now-saturated world solar cell and film market.

The Silicon Valley model, featuring a supposedly joyous free market riot of small, undercapitalized and uncontrolled start-ups frenetically competing with each other in a deliberately unregulated market system, where 80% of them typically fail within 18 months, was not welcome in either Chinese or Indian green energy plans. The total loss of investor funds, a massive waste of natural resources, piles of unsaleable finished products and above all the loss of credibility that result from this model was not seen by the emerging economy giants as a proof of freedom and innovation. As a result they won the green energy race – and Silicon Valley lost.

Greek goat herder

But this is just half the story. Much more to the point, the second half of Myhrvold’s Bloomberg article was given over to “iconizing” a rigorously non-Silicon Valley figure. This is the son of a Greek goat herder who immigrated to the US, who has plugged away in the oil and gas industry since 1946, called George Mitchell. While still far behind Bill Gates or the few other billionaires of the Valley with double-digit-billion cash piles, Mitchell has earned billions of dollars himself through improving and cost-cutting shale seam fracturing to extract tight gas, a technology that also works on coal-seam gas. Myhrvold had no problem at all identifying somebody who really did cause a “paradigm shift’ , and did “reinvent energy” - unlike the Silicon Valley billionaires, who only talk about it.

George Mitchell receives the Lifetime Achievement Award from the Gas Technology Institute, March 2011 (photo: Nick de la Torre/Houston Chronicle)

Mitchell was told it couldn’t be done but he was stubborn. He drew on attempts at getting tight gas and coal-seam gas out of the ground at low cost that stretch back as far as 1795, and even include the use of nitroglycerine in the 1860s! As we know today, fracking with water, sand and chemicals has unlocked enormous deposits of shale gas, tight gas and coalbed methane across the world. Mitchell’s work has more than doubled, even tripled the world’s known reserves of extractible natural gas. In many countries this has changed the gas resource picture from total penury to total wealth in a single decade.

Shale and coal-seam gas are literally new paradigm. The only way to make these resources disappear from view is to claim they are dangerously high CO2 emitters, should be eschewed “for the health of the planet” like coal and oil, and producing them can cause household water taps to spew flames, under carefully staged and filmed conditions. In his mea culpa, Nathan Myhrvold is forced to say that gas fracking – which interested no Silicon Valley “entrepreneurs” until it was far too late for them to swoop in on the technology – has unlocked such vast new resources of relatively clean, easy to transport energy that the long-running story of energy security has changed. Admittedly, the Silicon Valley people were not alone in their failure to grasp what was going on – the large oil companies did not understand either, but have massively corrected this oversight since.

Shale gas can be produced over huge swaths of the planet, not only Russia, Qatar, Iran, Norway, Algeria and other conventional gas producers and suppliers, who like the early big names of Silicon Valley are able to profit from near-monopoly conditions. Shale and coal-seam gas is not under the control of desert dictators, stuck in the Arctic, or submerged miles beneath the seabed. To be sure, several countries in Europe have banned the development of shale and coal-seam gas, supposedly through “climate concern”, but looking deeper we find the probable real reason is the high-priced long-term LNG and pipeline gas supply contracts, and hugely expensive gas development projects their national oil and energy corporations have engaged in in gas producer countries. Their last ditch attempt to prevent change will almost certainly disappear in the near-term future.

Public-private

The driving factor for change in energy is very simple: cost. Shale and coal-seam gas is cheap, so it will be developed. Offshore windfarms and nuclear power are high cost, and should be avoided whenever other, cheaper and lower risk alternatives exist. Energy saving, and especially electricity saving in the developed countries are for example very low cost, and should be targeted.

Rigorous and transparent cost-benefit criteria should apply across the energy sector, and especially in the so-called “mature democracies”, supposedly wedded to the principle of free market competition and

The storyline is "trust us - give us more money and time"

the exclusion of the state, but not when it concerns vital and strategic industries, like oil and nuclear power, or saving bankrupt banks and insurance companies, because they are critical to the economy. Under rational resource and economic criteria, policy and programming in the critical energy sector has no need to exclude the state, and in fact needs the state as an arbiter and source of financial, scientific and technical, industrial, and regulatory support. The energy sector, due to its strategic, high cost and long-term significance is a classic sector for public-private ventures, making for a political coloration that should be at least as mixed as our future energy mix colours - black, brown, green and blue.

Silicon Valley’s defenders continue pretending that an exclusively private venture capitalist risk-taking model in green energy can deliver clean, reasonable priced and secure energy. The storyline is “trust us – give us more money and time”. This investment model, exactly the same which has produced the most intense and dangerous global economic and financial crisis since 1945, is basically an elitist flight from reality, featuring a clique of influential and rich business players who “sincerely believe” they deserve huge government subsidies – while proclaiming their proud support of private venture capitalism. All too often, investor and government cash flowing to such ventures is frittered away on elitist pet themes, with little or no regulation, oversight or obligation to perform. As we know from the real history of Silicon Valley, the end result is monopoly market power and the huge personal cash piles of a few IT Barons of the Valley: their losses are externalized and their profits are privatized.

 

Postscript: Myhrvold wants to get rid of subsidies for renewables Nathan Myhrvold on 27 November followed up with another Bloomberg column in which he decries subsidies for wind and solar power. They're a waste of money, he says. 'The smarter strategy would be to boost spending on R&D toward a new generation of renewable-energy technologies that can compete in the market place without subsidies.' Where would Myhrvold get the cash needed to pay for the upstream R&D in green energy? From government of course, in which case the green energy policy and strategy of countries such as the US would only replicate the model that has been operated for more than 10 years in China and India. Microsoft Corporation's former chief technology officer confirms therefore that the Silicon Valley-type green energy financial plays has been a lost decade.

 

About the author Andrew MacKillop is a an independent energy analyst and project advisor who has written on energy topics for over 35 years. He worked for the European Commission's Directorate-General of Energy as a policy expert in the 1980s. He can be reached at xtran9@gmail.com.