Thursday, May 7, 2009

Thursday Morning Thoughts

I have worked hundreds of trade shows, events, and other public outreach efforts. I've also spoken at dozens of conference and before trade associations as well. All pushing forward the largest obstacle to biofuels. A lack of awareness that an alternative to petroleum existed.

The common first question from some one actually driving a truck for a living was always the same. "Is it cheaper?"

To which I always answered "No, it's worth to much to sell cheaper than diesel."

The low price falacy.

Price. This being the common question and qualifier of the opportunity for any fuel. Whether it was always, everyday, consistently cheaper than petroleum. Other than on a small scale, this will never happen though. Because as we add biofuels into the on-road gas and diesel market a wonderous thing happens. It applies a further downward pressure on petroleum prices (MORE ON THIS LATER).

In fact I've had hundreds of conversations around this subject. The consistent critics who claim there is no market for anything if it is more expensive. That premise of course conflicts with everything around us. Most of all energy.

Every time you pull into your neighborhood gas station there is almost always someplace cheaper within a reasonable distance. Every time you pull into a gas station you are presented with regular, midgrade, and premium gasoline. If cheaper is a requirement to exist in the market how does premium gasoline exist? This argument always throws the "experts" and academics for a loop.

I realized the above argument off the cuff once when having lunch with a college professor who was supposedly an expert on algea and therefore biodiesel. Right from the begining he started pontificating about the fact that there was no future for biodiesel or ethanol unless it was substantially cheaper than petroleum. That without algea production we never could be cheaper than petroleum. And given that algea technology was "five years out" our market development efforts were a waste of time until algea came on line.

You should have seen the look on his face (and the smirks on the rest of the table) when I pointed out the fuel market already respected premium products.

But this price argument is made often and everywhere. Its an odd argument you see most forcefully in technology circles. That the next great paradigm shift is only "five years out" and all efforts today are a waste of time. But of course most of these technologies have been five years out since the Carter Administration.

Probably the biggest place the energy curmundgeons get away with false price examples is utility scale electrical power. In the beautiful land of the Pacific Northwest hydro electric power delivers the cheapest high quality, low carbon, power to the entire west coast. In Portland a retail consumer is paying under $.10 a kw with all taxes.

This price tag is often cited as why diversifying to "clean-tech" options is doomed to fail. Given the fact that the depreciated cost of solar and wind power cost as much as $.30 a kw. But this is false math failing to see the reality of this market.

Hydro power is a battery. We can spill water through a turbine at any time and realize that power at will. Hydropower in essence is the long establish, paid for, holy-grail of energy. Readily available, when we want it, no additional impact, and low CO2. Every drop of this cheap power is worth a thousand times the price tag.

The true price of power floats on a market. In the summer when Los Angeles and San Diego are sucking power for air conditioning this hydro electric power is worth much more on the open market than $.10 a kw. In fact its worth more than $.30 a kw. Therefore the water saved by wind and solar power is a cheap buy as it allows low carbon hydro electric on demand for no additional cost to the system. No sudden opportunity cost.

The same argument holds for areas reliant on natural gas or coal fired power plants. Every additional kilowatt flowing through the system, if operated efficiently, is that much less capacity for the power plant. That much bargaining and gaming opportunity for them to manage their cost of fuel. To save it for when the market truely recognizes its highest and best use.

Also worth mention again is the compound flaw in the low price falacy. The fact that biofuels are more expensive than the dirtier mainstays of our economy does not mean they don't make sense on a price basis.

By diversifying beyond just coal and petroleum we do something very critical. We push a downward pressure on these CO2 intensive fuels. We in turn lower their price when they are their most expensive. The few stretches of time a year that natural gas or coal fired electricity is stretched to its limits these renewables maintain a cheap addition to the power mix.

There is a word for this behavior. A commonly accepted strategy in all things but the energy debate. Diversification. The balancing of a portfolio in order to reduce volitility and therefore maintain stable, predictable and therefore a better result.

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