For last week’s Green Chip Stocks, I marked the moment when public sentiment tipped away from fossil fuels and toward green energy.

The Day the World Turned from Brown to Green

Green Energy – The Belle of the Ball in 2010

By Chris Nelder
Friday, January 29th, 2010

Every once in a while, the tone of the energy market shifts in a way that seems subtle at the time, but in hindsight is a major turning point. I believe one is happening now.

January 2007 was such a moment, a time of palpable excitement around renewable energy. Solar, wind, and other renewable plays exploded that year, and First Solar (NASDAQ: FSLR) gained 866%.

July 2007 was another, when the IEA had its “come-to-Jesus moment.” The depletion of mature oil fields was finally out of the bag and in plain view, and it worked a sea-change on the debate about the future of oil. Fairy tales of endless growth gave way to a more earnest discussion about whether unconventional oil could replace conventional oil, which had flatlined since the end of 2004.

I marked Memorial Day 2008 as the moment when peak oil emerged from obscurity in the media, and the debate shifted from denial to serious inquiry. My intensive study of the subject, Profit from the Peak, had just come out and numerous media appearances followed where I explained what peak oil was about. Now, anyone who is paying attention knows what it means (or at least think they know what it means), and the topic is casually included in financial and news discussions.

But those were mere eddies compared to the wave I can feel building now. It’s as if all the political momentum–indeed the entire public dialogue about energy–has suddenly changed from Brown to Green.

In the wake of the failed Copenhagen talks, and with the potentially imminent death of cap-and-trade legislation, the world seems to have realized what I’ve been saying all along: It’s better to incentivize than penalize. Focus on generating renewable energy first, then worry about the emissions that remain.

Automobiles

Peak oil awareness has clearly motivated the auto industry to shift aggressively into electric propulsion. Toyota U.S.A. president and COO Jim Lentz said in November,  “Our model on future energy is that we will probably see peak oil some time around the end of the next decade, so whether it’s 2017 or 2020, it’s gonna be some time in that neighborhood.” GM vice-chairman Bob Lutz was even more blunt in his keynote at the LA Auto Show in December: “Going forward, the automobile industry simply can no longer rely on oil to supply 98 percent of the world’s automotive energy requirements.”

Their response has been dramatic. Toyota’s Prius and GM’s Volt are their new flagship products. BMW, to my great relief, has abandoned its hydrogen car program and is going full-throttle into electric cars. Nissan and Mitsubishi are tooled for mass production of their electrics. Better Place, the recharging infrastructure and battery swapping play, has raised $700 million and it’s not even in operation yet.

Rail

Rail is moving back onto the U.S. national agenda, with $8 billion in new grants for high speed rail announced this week as part of its $13 billion share of the federal stimulus package. Florida is expected to capture $2.5 billion of that for a high speed link from Orlando to Tampa. A $171 million Department of Transportation loan announced this week will greenlight the rebuilding of San Francisco’s Transbay Terminal as a high-speed rail depot while the project’s $400 million federal stimulus application is reviewed.

To be sure, $8 billion is a paltry beginning—perhaps 2% of the federal commitment that will be needed to really rail-ify America. The San Francisco-Los Angeles high speed line alone will cost on the order of $40 billion. The full cost of installing high speed rail and intra-city light rail across America will be somewhere in the low trillions, it will probably take us decades, and most of the interstate links will have to be federally funded.

The stimulus money for high speed rail isn’t part of some comprehensive national transportation strategy to counter the peak oil threat, because no such strategy exists. But it could be the best investment in the hastily conceived, shovel-ready jobs stimulus package, because it will give us a critically important long-term asset.

For perspective on that $13 billion, consider that Beijing is already executing its plan to build a $556 billion high speed rail system linking nearly all its provincial cities in the next five years. The Shanghai-Beijing link alone is expected to create half a million jobs. And unlike the $779 billion in the U.S. stimulus package that will not go to rail projects, Beijing’s investment will result in a permanent and absolutely vital asset.

Were the U.S. doing anything of the kind, I might never worry my weary head again about peak oil.

Wind and Grid

A study released this week by the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL) showed that as much as 30% of the eastern seaboard and the Midwest could be powered by wind, and 20% could be done by 2024…if the transmission lines existed.

NREL estimates the grid will need 20,000 new miles of backbone at a cost of around $90 billion. Building it would create around 280,000 new jobs and give us a critical long-term asset. It’s a perfect example of appropriate federal investment in national infrastructure, yet it faces NIMBY opposition everywhere. A heavier hand may be required to push it through. It’s good to see transmission reform legislation making its way through Congress now, but I pray it doesn’t blow up into a states’ rights hubbub.

Compare that to the $42 billion HVDC “supergrid” that nine European countries plan to build around the North Sea, enabling all of them to use renewable power whether it’s being generated by offshore wind in Denmark, wave power in Scotland, solar power in North Africa, or hydropower in Norway. It will form the heart of a much larger, $400 billion pan-European supergrid, a critical link in achieving the EU’s 20% by 2020 target.

Or compare again to China, with its $217 billion investment in electric grid infrastructure from 2006 to 2010 alone.

The good news is that while building the electric infrastructure of the future isn’t cheap, it isn’t expensive either. The NREL study concluded that the avoided future cost of coal-fired power would more than offset the cost of the new grid infrastructure. We must assume that’s before even factoring in any externalized costs, or any peak-oil adjusted estimates of the future costs.

However we’ll have to move faster. NREL’s 20% scenario is based on 225,000 megawatts (MW) of new wind capacity, or 16,000 MW a year through 2024. The U.S. installed only 10,000 MW of new capacity in 2009 according to the AWEA, so we’d have to post a 60% growth rate from current levels to deploy that much.

Meanwhile, ten times that–more than 100,000 MW of offshore wind capacity alone–is currently under development in Europe.

Solar

Solar power is making progress on several different fronts.

The snowball of Chinese solar manufacturers opening plants in the U.S. rolls on, with the announcement that Suntech (NYSE: STP) is building a new plant in Arizona.

Distributed local generation is making great strides. In California, the Southern California Edision utility has launched a competitive bidding process for 225 MW of rooftop solar capacity, with a project size of 1-2 MW. Another 250 MW will be purchased from independent solar developers. Utility PG&E is expected to launch a similar 500 MW offering soon. Even better, a proposed feed-in tariff for 1 to 10 MW-sized renewable projects is in the works. The progress for bellwether California in distributed generation bodes well for the rest of the country, suggesting that transmission grid support for utility-scale solar may become less of a hurdle for the industry as a whole.

Incentive programs elsewhere in the country continue to enjoy enthusiastic receptions where the price is right. A new $4 million incentive offering for residential and small commercial solar in Massachusetts was fully subscribed in the first four hours this week, reflecting strong pent-up demand. Generous rooftop solar incentives in states like New Jersey and New York are being exhausted and replenished yearly.

Materials research in photovoltaics (PV) continues to show promise as well, in areas like cell backing materials, adhesion methods, new cell formulations and production methods, and longevity testing and hardening. PV looks well on its way to cutting costs on a Moore’s Law curve.

Building efficiency is also enjoying an explosion of subsidies and new plays. Watch this space for developments in that sector.

Brown Going Down

Meanwhile, things aren’t going too well for the fossil fuel sector, which is under attack on every side.

Oil remains precariously balanced on the narrow ledge of prices, as does natural gas to a lesser extent. The supply of both remains sufficient to keep the specter of shortage marginal pricing at bay. Inventories are reasonably high, and prices aren’t high enough to induce new drilling for high-risk or high-cost prospects. Even so, the worsening outlook for the refining sector continues to support the price of gasoline and other finished products.

Costs remain a bit too high for the comfort of marginal producers, as evidenced by an interview with Royal Dutch Shell CEO Peter Voser in London’s Financial Times this week. The company was no longer counting on growth from tar sands production, he said, and its plan to expand operations in Albert by roughly half a million barrels per day remained shelved. Conventional oil and gas drilling is their new strategic direction, simply because the costs are so much lower than for tar sands development. (This, of course, is no surprise.)

The commodities markets in general seems to be showing signs of post-traumatic stress disorder, or at the very least recency bias. The trade is overwrought on fairly inconsequential signals, and there seems to be a roughly equal balance between those expecting higher and lower prices. I’m beginning to suspect that this will be a low signal-to-noise ratio year for the commodity sector, with traders slugging it out in a narrow price range and fewer solid tradeable opportunities than the last several years offered.

Concerns over public water supply contamination from hydraulic fracking shale gas operations aren’t going away, and the EPA has set up a consumer complaint hotline. We simply don’t have enough information yet to know whether the issue is overblown or a serious enough problem to kill the practice. However, public sentiment isn’t likely to yield to science on this issue any time soon and could dampen the enthusiasm for new shale gas development.

The effort to stop mountaintop removal in coal operations isn’t going away either, and emissions control is still very much in play at the EPA.

The news is nearly all bad. The fossil fuel industry wakes up every day to a drumbeat of reports on oil spills, tanker traffic interruptions, environmental lawsuits, and so on, but their main sales pitch to the public is a weak one about jobs. Their message continues to fall hard on the consumer’s ear, which is much more attuned now to the questions on long-term supply, security, and sustainability.

The Browns are looking more the lumbering, hidebound beast every day, while a thousand alternatives sprout around them. They trumpet their investments in clean energy, but the fact remains that it still represents a small fraction of their investment in new BTUs overall.

I don’t know what to call it–the Great Eye, the hivemind, the ideasphere–but it has turned, and its attention is fixed on renewables. The Browns will find it hard to get any love this year, but the Greens will be the belle of the ball.

Until next time,

Chris

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