Will Natural Gas become a Geo-Political Tool or a Modern Weapon?

When President George W. Bush invaded Iraq on March 19, 2003, he had over 100,000 army troops mobilized to the region. It was a formidable maneuver that launched a 10+ year conflict with questionable outcomes. Today, President Obama is on the verge of another conflict in the Ukraine that involves Russia’s occupation of Crimea. Unlike Bush, however, Obama and Congress are eyeing natural gas exports as their weapon of choice to rein in Vladimir Putin from reclaiming territories along the perimeter of Russia. A geo-political tool to enable a global energy transformation or a modern weapon to settle disputes, natural gas has truly evolved.

Cleaner to burn but messy to legislate, natural gas from shale holds great promise for the US and the world. This relatively clean energy source has miraculously become the ideal bridge-fuel that society desperately needs to wean itself off its addiction to dirty coal and oil. Already there are positive signs that society is moving in the right direction. For example, utility companies no longer build new coal-fired power plants to produce electricity. Also, transcontinental transportation fleets are converting their trucks to natural gas. These and many more initiatives to replace conventional fuels have helped to reduce greenhouse gas emissions in the US to levels not seen since 1995.

The rapid expansion of wells drilled since 2006 has given engineers plenty of valuable field data to improve upon yields and safety standards. From these field trials, amazing, breakthrough technologies have emerged. However, none of these achievements could have happened without the perfect storm scenario that came together in the last few years; …where favorable property rights laws in the US made it easier to select drilling sights, …where the availability of exceptional talent in the oil industry globally was ready and able and …where the consistently high market prices for oil (above $100) was sufficient to ‘fuel’ the funding needed to keep the engines of this perfect storm humming along.

Now into its eighth year, the US natural gas bonanza is no longer a nascent business for wild cat investors. Its unprecedented success has placed it front and center on the global stage. Presently at the helm, is the US who practically overnight, has gone from being a net importer that was often subjected to the whims of OPEC, to a net exporter. For a long time, Americans have always been taught to loathe their dependence on oil-rich countries. They often accused these oligarchs of using US oil payments to wage war against the same US freedom-fighting armies that protect their regions. With this recent change of the guards, however, Americans and their leaders are finding themselves in uncharted territory. The improved situation favors the US significantly but also leaves its leaders facing a tough dilemma.

To Prohibit or To Allow Exports – a tough dilemma
While the US can boast having the cheapest natural gas on the planet and the best technology to extract it, elected leaders in Congress must deal with two opposing issues: either to prohibit the export of US natural gas so US manufacturers can create more American jobs or to allow exports to threatened US allies whose economies are constantly challenged by volatile energy prices. Already, the US’s offer to export natural gas to the Ukraine in response to Putin’s invasion of Crimea has prompted a strong reaction between both sides. Seen in this manner, one might contemplate the following question:

Could natural gas become the US enabler for global sustainable economic growth and world peace? …and if so, should it be implemented as a tool or a weapon?

There are three key benefits the US could gain from exporting its natural gas. First, the US could stabilize energy prices globally for a long time. Stable energy prices would help remove a fundamental uncertainty that concerns investors. Keeping investors happy is important since they are instrumental in relieving government coffers of additional financial burdens. A second benefit focuses on building global awareness on climate change. Just as the US has done to limit the use of their coal-fired power plants, other countries could be further encouraged to adopt similar environmentally friendly laws and best practices. Finally, for countries seeking a free trade agreement with the US, natural gas exports could earn valuable trade concessions that could lead to integrated capacity-building among government institutions, a critical component toward establishing sustainable democracies worldwide.

These lofty expectations may be too high for even the US, considering that every new encounter will introduce more complexities and unknowns. If left unchecked, however, this dominating role could awaken the Bush-era American arrogance that caused much damage among US allies in the last decade. We can only hope that US elected officials will recognize this once in a millennium opportunity and use natural gas as a tool rather than a weapon to steer the world toward a sustainable energy transformation strategy that follows a common set of internationally vetted guidelines and best practices.

To its credit, the US is quite adept at writing policies based on extensive research that can serve as effective connectors between funding sources and companies. Leaders would do well to study the success of these domestic policies and use their findings as a guide for dealing with international conflicts. One good example, I came across, is an institution called NREL (National Renewable Energy Laboratory).

NREL (National Renewable Energy Laboratory)
At a recent MIT Energy Conference in February panelists from NREL described what they do for the solar and wind energy. For these two industries, NREL devises standardized contracts (i.e. between developers and investors), catalogs best practices, creates a massive dataset for investors called SPA  and even generates a mocked up filing for rating agencies. Their work is available to anyone over the web.  No one is forced to adopt their recommendations but since they work so closely with industry, most do. US government policymakers use their data to design tax subsidy programs and special financial mechanisms (i.e. MLPs – Master Limited Partnerships and REITs – Real Estate Investment Trusts) to attract private sector investors. Since the process is allowed to work under free market conditions, successful outcomes are only a matter of time. Players who are allowed to adapt together naturally align their better interests on their own terms.

One of NREL’s key objectives is to help these two young industries adopt to a structured and comprehensive outline that can fit easily into the most current legal, financial, and policymaking world that currently govern US multinationals. The process allows for give and take from all sides, which leaves some wiggle room for new ideas and progress. This overlay is the ledge where young creative and nimble companies can push the envelope for new ideas and pathways. At the conference, we got a glimpse of what awaits NRELs future considerations.

There is Energi, a risk management company based in Massachusetts that sells insurance on the expected realized energy savings for a renewable project. In Energi’s world, if a project fails to meet an agreed benchmark of savings after an allotted time, investors are made whole according to their insurance policy. Essentially Energi found a way to treat money saved as money earned. Other companies that profit from realized savings include Opower, which gets paid by a home resident’s utility company for kilowatts of energy saved and First Fuel, which uses big data and data analytics to help office building developers lower their energy bills. On the pure concept play there is TeraCool, a young startup currently soliciting investors to build a first-of-its-kind data center at a Singapore LNG port. The data center would be air cooled from the flow of unloaded liquid natural gas. The company does not generate any revenue for its clients but instead seeks to be paid from the estimated annual energy savings it claims to generate to the tune of $70 million dollars.

As seen with the example from NREL, the US is quite capable of managing multi-sector projects to achieve game-changing results.  However, it remains to be seen if US leaders will be equally successful managing multi-country agendas with the same level of confidence. Obama and Congress will soon find out that natural gas may be the catalyst of choice, but it is still highly flammable.

© 2014 Tom Kadala

Will Sustainability become the Feared Equalizer?

Why is the price of oil still hovering around $100 per barrel, if global demand has fallen and the supply of alternative energy sources, including shale and renewables, are increasing? Could it be that commodity traders are reacting to a new series of less visible market forces? 

We know that whenever Iran talks up their nuclear energy aspirations or Israel fires missiles into Syria, oil prices tend to rise or as of late, not drop by much. There is also US Congress’ lack of a comprehensive long term energy policy that has kept a tight rein on infrastructure investments such as charging stations for electric vehicles. However, as I discovered recently, there is yet another force at play, one that is far more complex than society is prepared to confront today and which will surely cause the price of oil and similar fossil fuels to double, if not triple in price, in the coming decades. This invisible force is referred to as sustainability.

What exactly is sustainability? In simple terms, sustainability is about replacing a resource so it can be used again and again. Terms like ‘recycling’ trash or producing ‘renewable energy’ are commonly associated with the practice of sustainability or the act of sustaining an activity in perpetuity with minimal environmental damage. Perhaps the best example of sustainability are e-books because they never wear out from one user to another and can be reproduced millions of times from one stored copy. Nevertheless, sustainability is more than just a repeatable process. It is also a culture, an attitude, a way of thinking that inspires inherent behavioral changes on socially-acceptable consumption practices.

MIT’s Sustainability Summit
At MIT’s Sustainability Summit last month, I came away with a deeper appreciation for what sustainability can mean to different people, especially how it can motivate them to change their habits and the habits of others, and yet, I could not help feel discouraged by the global indifference and the immense size of the problem. What set me over the edge was a powerful video called, ‘The Art & Science of Chasing Ice’ produced by James Balog on how our north and south polar ice caps are melting away from the amount of black soot dispersed into the atmosphere from our factories and automobiles. If this visual does not do if for you then perhaps a TED video by Charles Moore on the Great Pacific Garbage Patch may bring it home. The visuals are truly stunning, rude awakenings of what a planet with 7 billion individuals are capable of doing wrong.

With the UN’s projected 9.1 billion people by 2050, one can be absolutely certain that issues of sustainability will be front and center in the daily livelihood of every individual and entity. Why? …for the simple reason that our planet resources are limited and our current lifestyles and diverse cultures have yet to align and adapt to a sustainably-friendly behavior.

After attending the MIT Summit, I concluded that the efforts to align sustainable priorities are not only a discombobulated entanglement of disparate, self-appointed initiatives but also an odd assortment of potentially conflicting outcomes. To get an idea,  take a look at two opposing car ownership attitudes by city dwellers.  While the new normal has shifted favorably to shared auto usage among urbanites in developed countries (i.e. US – zipcar.com), in emerging countries (i.e. Brazil, China), new consumers expect to own their own car as soon as they move into a city!

Walmart vs WholeFoods
Another similar example of conflicting outcomes was visible at The Atlantic Magazine press conference in Washington DC on December 4, 2012. A forum of experts showcased the sustainability policies of two retail food companies, Walmart and WholeFoods.  While both companies work closely with their suppliers to recycle waste and introduce biodegradable packaging, Walmart’s Beth Keck, Senior Director of Sustainability, explained that Walmart provides their tight-fisted consumers with environmentally friendly products and chooses not to educate them on how they should change their consumption attitudes toward a more wholesome sustainable lifestyle.

In curious contrast, WholeFoods’ counterpart, Kathy Loftus, Global Leader, Sustainable Engineering & Energy Management, stated that with one-tenth the number of retail outlets as Walmart, WholeFoods is deeply committed to educating its employees and the communities they serve. The company teaches sustainability as a shared problem that begins with each and every consumer. WholeFoods believes that the improved knowledge on how one’s food is handled and prepared can help consumers make better choices and therefore lead healthier lives that will result in fewer medical issues. The money saved from fewer doctor’s visits and drugs, for instance, could justify WholeFood’s higher prices, …which explains in part why Walmart with its cadre of low-priced, branded, processed food suppliers has avoided engaging directly with their consumers.

Will the term ‘sustainability’ just become another commonly used marketing term such as ‘green’, ‘organic’, and ‘hormone-free’ that companies can push at will to meet their own corporate business agendas?  …maybe not this time.

A Key Driver – Shareholders
Fortunately the investment community is making meaningful strides with shareholders and CEOs. According to Sustainalytics, a Boston-based firm, companies are eager to disclose their annual ESG scores (Environmental Social and Governance), a metric used to measure best practices.  A total of 3,600 corporations globally have signed on since 1992, but as Annie White, their Research Products Manager noted, they have only scratched the surface with over 40,000 public companies still remaining.

Driving the increasing interest for ESG scores are concerned shareholders who fear that unmanaged risks or ‘blind spots’ could unexpectedly pull a global company down to its knees as has happened with BP’s Gulf oil spill of 2006, Foxconn’s child labor practice that affected Apple earlier this year and the five garment factories for European and American branded clothing that collapsed in Bangladesh this month. With good reason, shareholders are concerned that similar disasters will become more commonplace and that reactionary foreign government retaliation could put them out of business.

According to Katie Grace, a Program Manager involved with the ‘Initiative for Responsible Investing’ at the Harvard Kennedy School, local governments do not have to wait for a catastrophe to legislate changes but rather can take a proactive role by setting project specific policies. Regionally, for example, they can rezone areas to attract private sector investments. They can also set standards such as LEED, which is used for certifying eco-buildings. For social projects, governments can issue ‘green bonds’ or payment guarantees for investment funds (i.e. Social Impact Bonds).  Some mayors like Philadelphia’s Michael Nutter have adopted these proactive recommendations with their sustainability efforts and are starting to see positive results.

The City of Philadelphia
Katherine Gajewski, Philadelphia’s Sustainability Director, a new position also held at over 115 municipalities across the US, spoke of her challenges working within an entrenched bureaucracy of over 22,000 public employees, most of whom are reluctant to change. Her reprieve has been her frequent conference calls with her 115 peers who openly share their best and worst practices. Their collective list of ideas has grown as the group continues to innovate together, while making most of their ideas up as they go along.

Some interesting cases that have already crossed Gajewski’s desk might surprise you. For example, an Enterprise Car Rental operation in an industrial section of Philadelphia was paying $400 per month for their water bill but was costing the City millions of dollars to purify their share of dirty runoff from their car lots. Eventually, the situation was rectified but not until Gajewski ran the numbers to show the disproportionality between what Enterprise was paying for their office water usage and the cost to clean up its runoff.

Just how many other industrial installations are out there in a typical city like Philadelphia where a company unwittingly gets away with paying a small fee to use a common service but whose operations account for a substantial cost of clean up? …probably a lot!

Gajewski’s job as a Sustainability Director requires more people skills than know-how. She must craft alignments of interest among internal groups to achieve meaningful consensus. Perhaps most important, her role as director and facilitator is to refrain from becoming too preachy and be willing to dole out credit to each participant. Easier said than done, Gajewksi knows that sustainability is a shared task that succeeds when everyone is on board.

As more Sustainability Directors like Gajewski identify similar imbalances in their respective cities, the idea of charging the same consumer for both usage and their share of the cost of cleanup will become more widely accepted. …and herein lies the reason why fossil fuel prices will continue to rise for years to come.


Below is a summary of Best Practices that were shared during MIT’s Sustainability Summit.

Best Practices

  1. At a university-run, trash audit, MIT students sieved through a months worth of the university’s garbage to discover that of the 2.5 tons of trash collected, 500 pounds was food waste while the remaining 90% could be recycled! The visual impact of over $11.4 billion of trash that could be recycled in the US alone inspired one student to launch a 30-day waste challenge on https://www.facebook.com/30DayWasteChallenge where Facebook friends could commit to ‘be inconvenienced by their trash’ by carrying the trash they personally generate throughout their day for a 30-day period.
  2. Offering consumers a list of prices for the same product but packaged with different levels of biodegradable materials would help bring to light the importance of recycling.
  3. Wirelessly integrating a soda vending machine with a recycle bin located nearby could encourage consumers to recycle their containers.  Consumers would pay, say two dollars and fifty cents, for a soda and receive a one-dollar refund on their university credit card once the soda can was disposed of in the appropriate recycle bin within the allotted time.
  4. ‘Rewire’ individuals at opportune times so their behavioral changes continue well after a recycling program or contest. For example, students can be impacted for behavioral change during a time of transition such as the beginning of a semester.  Recycling contest rules would be established at the start of the semester and monitored throughout the year.
  5. The crop of graduating students who enter the workforce concerned about sustainability issues will inspire a new set of hiring qualifications. Already companies like WholeFoods have changed their hiring criteria to reflect their corporate goals for sustainability.
  6. Teaching children in lower school to become advocates for a sustainable future is the most effective use of funds for behavioral change. Not only will these youngsters represent the future of our planet but their unbound audacity to correct adults who forget to recycle would deliver a priceless message with an impactful and lasting effect.
  7. A practical solution launched this year in California involves a utility tax on a consumer’s bill that is merely collected by the utility company and paid directly into a Global Educational Fund for educational initiatives. The tax removes the utility’s burden of financing similar programs for its sector and uses the utilities billing capacity as a pass-through.
  8. WholeFoods spends time in Washington DC convincing lawmakers that refrigeration codes need upgrading.  Currently stores are allowed to have open refrigeration, which according to a WholeFoods spokesperson, Kathy Loftus, spends considerably more energy than if the same refrigerator had a door.  Another sustainable tip from WholeFoods is the wider use of ships to transport goods rather than trucks. According to Loftus, ships have a lesser impact on the environment than trucks.

© 2013 Tom Kadala

A Modern Day Gold Rush for a US Utility Company

On the Saturday after Hurricane Sandy had ravaged the New Jersey coast line, David Crane, the CEO of NRG, Inc. a New Jersey based Fortune 300 utility company, sat in his candle lit office waiting for a group of Japanese businessmen to arrive. On the agenda was the proposed construction of a replacement nuclear plant in Fukushima. As they entered his office, Crane noted their expression of disbelief and expected to hear more stories about the storm’s extensive damage. Instead his Japanese guests expressed how stunned they were to see transmission lines elevated on wooden poles throughout the State of New Jersey. What had caught their attention was the startling reality that the electrical infrastructure in America was truly obsolete.

Crane avoided expanding on the root causes of America’s infrastructure malaise for fear of losing their business. He chose not to tell them how complacent the US utility industry had become over the years nor how US consumers often take their reliable electricity service for granted. However, after Sandy, nothing would be the same. The status quo for both CEO and consumer would change forever creating an unprecedented opportunity for disruptive innovation.

MIT Energy Conference
At a recent two-day energy conference held at MIT, Crane in his unabashed, straight forward style, bluntly declared in front of a packed auditorium that America’s command and control utility business model was at the end of its useful life. The centralized grids used to service cities and towns would one day be replaced by independent mini-grids fueled by an assortment of readily available renewable energy sources such as wind and solar. Some in the audience acknowledged that it would only be a matter of time before technological breakthroughs would enable neighborhoods to produce their own power.

One such example of a potentially disruptive technology was presented at the conference by Abengoa Solar USA, a Spanish-based manufacturer of Concentrated Solar Power (CSP) plants. Just like the name suggests, these plants use mirrors to concentrate multiple sunlight beams toward a tower filled with a special fluid that is capable of reaching temperatures near 500℃ or 5 times hotter than the energy needed to boil water. During the day, some of the fluid’s heat energy generates power from steam turbines, while the remainder is stored for later use, (i.e. night hours or cloudy days). Between its extended energy storage capabilities and its ongoing innovative design enhancements, the Spanish company’s CSP plants are expected to compete with natural gas and coal on a price basis by 2020. …not bad for an electrical power source that requires a modest upfront capital cost (that has already dropped by 60% so far) and a near-zero operating cost extended over a 30 to 40 year lifespan!

As CSP and other similar renewable technologies continue to evolve, behemoth utility companies like NRG are preparing for a different future, one with less coal and more natural gas. At first glance, the transition has improved their public image from the 30% reduction in CO2 emissions. However, a closer look tells a different story. Utility companies converted to natural gas because they are betting that the soon-to-be, wide use of electric vehicles or EVs will breathe new life into the utility industry’s otherwise dying existence.

Just as air conditioners accounted for nearly 25% of power consumption decades ago, EVs are expected to have an even greater effect. First, large utilities like NRG will service fuel stations the same way oil companies have tended to their branded gas stations. However, unlike gasoline that can be stored for later use, electricity must be consumed at the same time it is produced. This difference will pose various peak demand challenges such as managing unpredictable recharging schedules from a disparate consumer base who at any given moment could plug-in for a boost.

Charging stations will offer a far different experience than what consumers are used to. For example, a trip to a Walmart might include self-operated charging stations located in a parking area where drivers can plug-in their vehicles before shopping. For customers in a hurry, charging stations may resemble a large dealership where leased EVs would be swapped or batteries exchanged for a freshly charged set. Perhaps a Zipcar-like self-serve business model with fully-charged EVs parked throughout a city could integrate an online reservation process with a smart phone App to offer a keyless activation experience.

Pricing models will probably resemble that of cell phones where a flat rate monthly subscription for say $89 would allow unlimited charges or exchanges at member stations. However, the success of these subscription models will depend on the size of the subscriber base. In California, for example, where local government support is strong, the number of EV owners participating in a fixed monthly rate pilot has only attracted 400 EV owners, well below the break even levels of 5,000 EVs needed to support a meaningful network of charging stations.

As the economy picks up, Crane and others believe that an increase in charging options along with green energy tax breaks will give consumers more reasons to tryout an EV. For NRG and other utility companies who are also EV advocates, the race to supply charging stations has only just begun. To get a jump on their competition, NRG’s board recently approved a $100 million investment to build out recharging stations in California where the adoption of EVs currently shows the greatest promise.

How significant is the size of NRG’s investment?  A glance at their income statement shows that a $100 million investment represents about three times what the company allocated for traditional R&D expenses in 2012. In fact, since 2010, NRG’s R&D budget has declined by nearly 20% annually (from $55m in 2010 to $36m in 2012). Was it the unsettling experience with hurricane Sandy or the lack of government energy policies that pushed Crane to the brink of innovation and reinvention? Either way, Crane has done what so many American pioneers did during the historic mid-1800‘s Gold Rush. Like them, he set his sights westward to California’s EV ‘gold’ in search of a better life for NRG.

© 2013 Tom Kadala

A Folly in US Energy Financing

Ever wonder why gas prices at the pump have held steady around the $4 per gallon mark for the past two years, despite the global economic slowdown? The last time prices reached $4 was just after Katrina. Consumers then underwent sticker shock. Lately prices have pulled back a bit but come 2013, consumers may see $5 to $6 per gallon gas as the US economy rebounds. What is keeping fuel prices so high? Aside from the traditional market forces, there are many other factors that affect fuel prices too.

Certainly the conflicts in the Middle East (i.e. Syria, Egypt, Palestine) and the nuclear threats from Iran play a part. With the slightest inkling of a possible supply interruption, fuel buyers and speculators will jump into a buying or selling frenzy. Wars, threats of war, OPEC news or lack thereof are all likely triggers to set fuel buyers on edge creating havoc for companies and consumers alike. These erratic fuel price swings do more damage to an economy by spawning uncertainty and instability.

An important stabilizer for these lopsided market forces has been improved fuel efficient engine designs that presently deliver up to 40 miles per gallon (mpg). Already some designs are boasting 100mpg with their pilot models! – (ecomotors.com).  But, even if 100mpg cars were introduced to the US market today, fuel prices would most likely continue to rise because in addition to geo-political uncertainties, there are domestic ones as well.

MIT Energy Finance Forum
At a recent energy finance forum last month organized by MIT’s student run energy club (mitenergyclub.org), CEOs, thought-leaders, and entrepreneurs representing various facets of the energy industry discussed the many opportunities and challenges created by higher energy prices. Everyone agreed that moderate price increases backed by sound government policies could help boost a stagnant economy. They go hand in hand such that one could not exist without the other. Higher fuel prices stimulate new research for alternative fuel sources, encourage design engineers to do what they do best, and create public awareness on the importance of conserving energy. On the other hand, comprehensive government policies help companies and investors align their business strategies with US national interests as well as with each other. Having both in synch attracts new investors.

So when I heard panel members at the forum blame the high cost of energy on the Obama Administration’s lack of a national energy policy, I wondered if the Secretary of Energy, Dr. Steven Chu, had lost his way.  In 2012 Chu’s Department of Energy (DOE) invested in over 180 projects with ARPA-E, a new R&D agency for basic renewable energy projects. Chu’s ‘hit or miss’ approach to unveil the ultimate breakthrough without announcing a definitive national energy strategy has overshadowed the rest of the industry. Energy-sector CEOs have had to navigate rudderless relying on politically motivated investment tax credits and subsidy schemes (i.e. Renewable Energy Certificate or RECs) to make ends meet. The following are a few examples of how some have coped with the current situation.

According to Ralph Izzo, the Chairman and CEO of PSEG, a New Jersey based utility company, DOE’s meddling with energy infrastructure projects  and the Obama administration’s lack of producing a national energy strategy have created such a high level of anxiety and uncertainty among investors, that no investor in their right mind would agree to finance the expansion or conversion of an energy plant today without insisting on a list of unfeasible assurances. In fact government subsidies and their tax credit schemes are never included in the financial proformas used to evaluate deals, since investors never know if the laws will survive the next political elections. Elections occur every four years and energy plant deals normally require a 20 year investment horizon. Izzo shared an insightful example of how the price of building a similar nuclear plant had jumped from $450m in 1989 to $10billion today. In his opinion the 20x price escalation was primarily due to the unwillingness of Congress to commit to a national energy strategy.

The uncertainties caused by the US Government’s indecisiveness is affecting not just fuel buyers but their capital investors too. Since renewable investments are so new and have yet to be securitized (packaged into tradable securities), cash-rich pension fund managers who invest for the long term have been barred from participating in non-traditional energy investments. Without more historic data from a broad range of similar investments and the availability of affordable financial tools to hedge against risks of loss, securitization of renewable energy projects has been challenging. Unfortunately, large cash reserves that would otherwise be used to finance infrastructure energy projects currently remain on the sidelines with dim chances of being deployed any time soon.

Ironically, the more the DOE offers incentives to entice private investors to invest in large energy projects, the less likely private funds will participate in a deal. This very issue became part of a fascinating panel discussion with representatives from Siemens, Bechtel, CEIFA, Zanbato, and the DOE itself. The panel suggested the presence of a greater problem where investor expectations needed to be updated in favor of equity investments over debt. They highlighted that the risk profile of an energy-related project is significantly less from that of a bridge and hence should be structured differently. To them, bridges can ‘lead to no where’, while energy sources will always be in demand somewhere on the planet.

While it awaits for more favorable winds from Congress, the energy sector growth in the US has had to rely on internal financing along with many clever and unconventional energy financing partnerships.

Public-Private Partnerships in Energy
One way long term projects such as city metros and highways are financed is through the formation of a Public-Private Partnership or PPPs. How successful have PPP’s been with large energy projects? The truth is that not all PPPs are the same. In fact the lack of a reliable template that is easily transferable from one project to another was deemed ‘very difficult’.  Each deal had to be tailor-made from scratch to satisfy a long list of specific requirements. When compared to each other, PPP’s were no more than a name plate suggesting some form of a collaborative involvement among large players including the government.

A ‘public green bank’ operated in Connecticut under CEIFA (Clean Energy, Investment and Finance Authority) uses public funds to attract private investors into jump-starting small renewable energy projects. Directors of this new bank hope to show small success stories where their combined investments will eventually be pooled into a bond product and securitized for sale to larger players, possibly even to pension funds. Citing the Solyndra debacle, the CEIFA representative recommended that the US Government avoid large projects and instead focus on smaller ones that can be aggregated into securitized debt instruments.

A panel member from Siemens offered another PPP example involving three partners, an equipment manufacture, which in this case was Siemens, a methane gas buyer, which was Kimberly-Clark, and a client who produces methane gas (3-Rivers Solid Waste). To close the deal, Siemens had to front the equipment to the methane gas producer and agree to absorb 100% of the project risk. In turn Kimberly-Clark agreed to a floor price in the event the market of natural gas were to collapse. 3-Rivers Solid Waste leveraged tax exempt financing rates and loaded back end debt payments to Siemens during periods of maximum production. As you can see, each partner had to give up a little to make this deal work. (Additional details are listed at http://1.usa.gov/12FKdaS.)

Siemens impressed the audience further with another example of unconventional energy financing for a proposal to build 100 train coaches for Amtrak. In this deal Siemens agreed to underwrite the entire amount, if Amtrak, a US government owned entity, would agree to partially by-pass the open-bidding requirements and automatically award Siemens with one-quarter of the order. Government officials cited a possible violation to the fair bidding process, which according to the VP of Government Affairs, David McIntosh, has kept the deal tabled for now. Clearly Siemens is not happy with these and other similarly unconventional and risky arrangements, but noted that there are no better alternatives in the energy financing environment today. The Company hopes that its aggressive sales approach and patience will eventually pay off in the ‘very’ long run, while, it waits with the rest of the industry for the DOE to reassess its myopic R&D focus and introduce a comprehensive national energy strategy.

Aviation Biofuels, Leading the Way to a New Global Economy

If you are wondering what our future holds with an economy subjected to political gridlock, an overview of an emerging industry called aviation biofuels could offer some interesting insights. 

Airlines today operate on razor thin profit margins with an industry average of less than one half of one percent, largely due to soaring fuel prices that gobble up about 30% of ticket revenues. Many factors are to blame and ultimately the traveling consumer is unwilling or unable to pay the higher ticket prices airlines need to offset their mounting losses. Merger mania among top airlines has played itself out leaving fewer options on the table.  Aside from shaving off more capacity than they have already, airlines are looking elsewhere to stay in business. One area that remains unexplored is the diversification from a one fuel source model to multiple fuel sources, which would include biofuels.

At a recent Aviation Biofuels Development Conference in Washington DC organized by FC Business Intelligence based out of London, thought-leaders, investors, government officials, and private sector industry leaders spent two days evaluating the growing prospects of aviation biofuels. So nascent is this industry that not even the US Government had a handle on its realistic potential and implications. However much they differed in their respective opinions, conference participants did agree on the pressing need to stabilized jet fuel prices through the production of alternative jet fuels. Their target production for 2015 was 600 million gallons per year, which amounts to a mere fraction of the 36 billion gallons per year mandated by Congress for ground transportation fuel blending. What impressed me most between the many animated discussions was the underlying dynamics among so many capable players that for whatever their reasons had been thrust together into the uncharted territory of aviation biofuels.

By the second day, the conference reminded me of the knocking sounds of an engine running with the wrong type of fuel. Was it the engine design or the fuel mismatch that was at fault? …and then it occurred to me. It was neither.  The aviation business model, which in my example would represent the engine, was being forced to change its fuel sourcing strategy from a single fuel pathway (from ground to gas pump) to multiple fuel pathways. Both the engine in my example and the fuel type were up for a complete redesign and eventual realignment, hence the ‘knocking’ sounds.

To appreciate the tectonic impact from a transition to multiple fuel pathways, imagine for a moment what life would be like if every home in the US had its own oil well and processing plant in its ‘backyard’ that could easily produce optimal grade fuel at a price well below today’s market price. “That scenario is absolutely ridiculous!”, you might say under your breath.  …and yet, the emerging aviation biofuels industry speaks directly to this end.

Instead of purchasing fuel from traditional fuel brokers, airports are planning to produce their own fuel at a lower and more stable price using feedstocks and a processing facility located adjacent to the airport’s existing storage tanks. Under this arrangement, airlines would no longer be subjected to volatile energy prices caused, for example, by a political event in the Middle East. Also, by positioning biofuels production facilities in their ‘backyard’, airports can eliminate shipping and port handling costs. Once more, if airports succeed in producing their own fuel source, what would prevent industrial parks around the world to do the same?

The resounding significance from producing fuel at the point of consumption will give both companies as well as groups of companies a far greater and sustainable edge over their competitors.  Just how an energy-decentralized economy will play out in the end will be anyone’s guess.  One thing is for sure. The base of wealth and power both politically and economically will shift significantly.

Considering this new perspective, one can better understand the industry’s current frustrations. On the one hand the US Government is hesitating with its renewable energy strategies not knowing if an untested policy might eliminate entire industries (i.e. fuel transportation), reduce existing business tax revenue streams, and increase unemployment. In the meantime, the DOE (Department of Energy) continues to invest in biofuels R&D and to develop incentives for private investors willing to scale biofuel productions.

The progress in the aviation biofuels industry can be measured by the rapidly growing number of fuel-production pathways.  In fact there may be too many pathways and efforts are underway to standardize a comprehensive evaluation process. Also in play are efforts to improve efficiencies within each pathway such as increasing the energy yield per acre of feedstock. But despite all of these efforts, the price of biofuels per gallon remains well above that of most conventional fuels.

With Republicans unwilling to pay more for energy than the lowest cost fuels available, the future of biofuels remains potentially entangled in a political gridlock. However, as the real threat to the airline industry continues to grow, aviation biofuels may force opposing members of Congress to reconsider their positions.  If and when they do, the production of aviation biofuels may unintentionally trigger the decoupling of crude oil prices globally. When that day arrives, businesses will learn to compete not only on price, but also on their respective ready access to ‘backyard’ biofuels energy.


Appendix – Conference Overview
The conference organizers did an excellent job of presenting an interactive forum that offered new pathways from the traditional one-pathway strategy discussed in the article.  This section was written for readers with an advanced background in the industry.  New interconnected pathways discussed included:

Investment Strategies, presented by Baker & McKenzie (bakermckenzie.com), focused on parsing project risk into tradable financial instruments to attract diverse groups of investors. For example, project assets would be pledged to a lender using a Special Purpose Vehicle or SPV. The DOE (Department of Energy – energy.gov) spoke of Master Limited Partnerships (MLP’s) where project assets can be assigned to an LLC, tax free, and later IPO’ed to raise cash to finance newer projects.  They are also working on redefining the definition of REIT’s to include biofuels investments.  These changes will qualify more investment funds including foundations and make it easier for private sector participation.

Fuel Processing, presented by GEVO (gevo.com), compared the differences between processing techniques using biology (i.e. enzymes) or chemicals (i.e. catalyst). Their catalyst category included a clever building block platform of iso-butanol a C-4 carbon molecule that like lego pieces can combined to produce not only ethanol but also other lucrative chemicals (i.e. C-8 for gas and C-16 for diesel). As demand shifts for each chemical, the plants daily production can be calibrated to optimize profits. Another company, Byogy Renewables (byogy.com), also a chemical processing company has developed technology to extract 80% of oxygen content in biomass to produce a 100% replacement to jet fuel (no blending required). They are currently partnered with Qatar Airlines.

Feedstock, presented by Paradigm Energies (paradigmbioaviation.com), reminded us that feedstocks or the raw materials used to process biofuels represents 80% of the cost of the biofuel produced. However, in the case of corn ethanol, for example, one of its byproducts can be sold for animal feed at a price close to the corn itself, hence, creating an offset revenue.

Paradigm Energies is in the waste-to-energy business. They source municipal landfills, ‘garbage’, for feedstock and supply a clean jet fuel called syngas that can be liquefied for blending or used to produce electricity. Cities are willingly pay a ‘tipping fee’ to have their waste removed, since landfills are unsightly and expensive to manage. The overall benefits to a city from a social and economic point of view are noteworthy, while the ‘tipping fees’ offer an offset revenue similar to corn. Potentially perceived as a ‘dirty business’, operators of similar waste-to-fuel schemes are mindful of potential negative public opinion for eliminating trash removal jobs, rezoning landfill areas, and other eventualities such as a plane accident that involves the use of a blended biofuel produced from ‘garbage’.

Another company, Solena Fuels (solenafuels.com) is building waste-to-garbage plants adjacent to city refineries in the UK. Cities with a population greater than 1.5 and 2 million can produce the 700,000 tons of garbage needed to operate one of their processing plants. One of its partners, British Airways, has recently placed an order for 5 plants to meet 2% of its annual fuel consumption.

Patents presented by Boeing (boeing.com) has become big business for this conglomerate. In the interest of helping its customers buy more airplanes, Boeing is actively redesigning its engines in an effort to move away from a one fuel model. They see their role as a catalyst to accelerate commercialization of biofuels and are aggressively taking a stake in new IP’s produced. The company uses its brand and influence to advocate policies and other related matters.

High Voltage at the UN

As the annual demand for energy increases due to expanding economies and growing populations, the UN is leading the charge to pull 1.5 billion people out of poverty by providing them access to electricity by 2030. Will it work?

Eager energy suppliers who sense a new global market trend are lining up fast at the UN entrance gates, but only to learn that the rules of the game are also changing.  Government subsidies for renewable projects including the lucrative feed-in-tariffs are drying up.  New solutions are in order including the unthinkable, namely, Public-Private Partnerships or PPP’s, where diplomats and CEO’s collaborate as legally bound partners.

PPP’s are popular with large infrastructure projects such as major highways or public transportation systems.  In exchange for access to capital and management expertise from the private sector. governments use PPP’s to shield private investors from unduly investment risks.  It is no surprise then that a group of CEO’s of utility companies, energy equipment suppliers, UN dignitaries and the World Bank recently convened at the UN to share their experiences and best practices using PPP’s to finance electricity producing projects.  Some examples of the ‘best practices’ given, demonstrated a wide variety of objectives.

For example, AEP’s (American Electric Power) renewable energy sustainability project for the Galapagos Islands located off the coast of Ecuador, focused on structuring partnerships that eventually transfer ownership to the government.  Kansai Electric from Japan traded land and permits with Tuvalu’s local government for a PV Power Plant to be operated by trained local workers.  Kansai Electric’s main objective was to transfer sufficient technology to encourage local production of their solar panels.  The Mexican government’s CFE managed to push construction risk on to the private sector by luring them with guaranteed purchase agreements to be financed using long term loans backed by 20-year PPA’s (Power Purchase Agreements).  Finally Brazil’s Belo Monte’s mega-hydro project, which recently received approval for construction, is leaning on its government to soothe local tensions from indigenous tribes who are at risk of losing their lands.

It was agreed that diplomats and CEO’s view the PPP value proposition very differently.  While diplomats seek reduction of poverty for billions, CEO’s focus on shareholder value.  Their differences are closely monitored by the World Bank whose mission is to attract the right kind of investors for projects that will render the best long term capacity-building results for generating electricity.  On paper and at their first meeting held at the UN on June 2, 2011, the UN’s PPP made an impression among a room full of key players from both sides.  Even if partnerships do not emerge right away, one can be certain that the ground work for a high voltage future at the UN was cast.

Brazil Eyes Ethanol Producers

With sugar prices on the rise, Brazil is importing ethanol to meet its domestic consumption.  This market anomaly has prompted their equipment manufacturers to convince other countries to produce ethanol.  For what purpose? …to secure ethanol imports or to launch a global competitive strategy?

In a move to promote ‘Made in Brazil’ beyond its shores, Brazil is aggressively selling its ethanol production equipment and know-how to other countries including the Dominican Republic.  What Brazilian firms have to offer is significant — over 40 years of experience in an industry that has earned the attention of politicians and investors alike.  Their advice demonstrates the depth of an Olympic-level champion that through trial and error has optimized production to extraordinary levels of efficiency.  Why then is Brazil exporting their expertise and why would anyone be interested in competing with the absolute lowest cost producer?

What is good for ethanol is also good for Brazil.  By getting more governments to write laws that require increasing blending levels of gasoline with ethanol, Brazil believes that the demand for ethanol will continue to rise — followed by a similar increase in the demand for ethanol-producing equipment.  Hence, Brazilian cooperatives such as APLA, Brasil are aggressively showcasing their goods outside of Brazil to countries that have ethanol-blending quotas.  For some of these countries like the Dominican Republic, a base-line efficient ethanol plant that produces about 500,000 liters of ethanol/day and costs around USD$125m would be, in their minds, a good place to start.  That’s a tidy sum for any country, since the price does not include feedstock production and infrastructure expenses.  Brazil appears confident that buyers will emerge.  Some countries already have, despite two glaring issues. First, buyers of Brazilian equipment to produce ethanol will unlikely ever compete on price and capacity with Brazilian made ethanol, and second, Brazil’s profit margins for exported ethanol will always be maximized due to the presence of higher cost producers.

This global strategy encourages Brazil to share its expertise and populate a list of other ethanol producing countries.  As stated in a recent facilitated debate in Santo Domingo between Brazilian and Dominican experts, Brazilians are eager to help any one who buys their equipment.  Their goodwill package includes debt financing for up to 80% of the value of the equipment, consulting, and installation. If this offer is such a good deal, why then are some potential buyers hesitating?  Even at a minimum 20% equity stake, the success of the operation depends heavily on a steady stream of quality feedstock from multiple land owners,  a strong political will to issue permits, and the ability to overcome plant construction and operating delays.

If Brazil stands to benefit from having more producers of ethanol, why wouldn’t they be open to becoming equity investors of these projects as a sign of confidence?  Surely, a buy-back clause overtime would make their investment whole, once the operation is up and running.  It would also provide a higher comfort zone locally, while potentially opening the floodgates for private investor interest elsewhere.  Presently, Brazil’s enthusiasm to promote ethanol production frowns upon partnership interest.  During the debate, their intentions were made clear.  They just want to export their equipment and know-how and assume that their buyers can deal with the other details. Are they right?