The Quest: Energy, Security, and the Remaking of the Modern World

by Daniel Yergin

  China also used its renewables push to promote the cleantech industry, which it had identified as a key growth industry for the twenty-first century. “We will accelerate the development of a low-carbon economy and green economy so as to gain an advantageous position in the international industrial competition,” said China’s Premier Wen Jiabao. As low-cost manufacturers, and bolstered by strong national and local government support, including attractive financing from state-owned banks, Chinese companies have come to dominate the solar panel market and have made significant inroads into the wind-turbine industry. One reason for the latter was China’s decision to insist that 50 percent, and then 70 percent, of the components for domestic wind installations had to be made in China. Although the requirement ended in 2009, this policy gave Chinese wind-turbine suppliers time to expand the scale and sophistication of their operations and building on China’s comparative advantage in manufacturing costs, to be more competitive with foreign companies at home and abroad.29

  Yet even with China’s strong support for its renewables industry, the country’s push to boost renewables faces challenges. Hydropower has by far the largest share of any of the renewables, and will likely continue to have such. Though wind and solar are growing at a much faster rate than hydropower, they may together account for just 5 percent of China’s total electricity generation in 2020. Even as China’s renewable generating capacity rapidly expands, so too does its fossil fuel capacity, for China must rapidly expand its electricity capacity to meet a 10 percent annual growth in power demand. This puts a premium on projects that can supply a large amount of power—which still points to coal. It also explains why China is putting a lot of funding into research on clean coal.30

  The commitment to renewables will grow stronger. But it will be in the framework of what Chinese government planners call an “emerging energy policy” that encourages not just renewables but more broadly any fuel that is not coal or oil, including nuclear and natural gas. The 12th Five Year Plan, adopted in 2011, emphasizes this policy. Of the seven Strategic Emerging Sectors identified by the plan, three are energy focused: energy conservation and environmental protection; new energy; and new energy vehicles. As it is, however, in a few short years China has become both the biggest market for wind in the world and the largest manufacturer and exporter of solar cells.

  “NO AREA’S MORE RIPE”

  With the Obama administration, the push for renewable energy became the top energy priority. The administration responded to the financial crisis and ensuing recession with a massive economic stimulus program, a significant part of which was aimed at renewables and cleantech. Other countries rushed to support their own faltering economies through fiscal stimulus—or government spending—and that also included building up their renewable energy sectors.

  In the United States, the energy stimulus was sometimes described as the largest energy bill ever passed. Renewable energy became a significant theme of the recovery. The promise of green jobs and cleantech jobs was a major component in the promotion of the stimulus package. Even more than Jimmy Carter, Obama focused on transforming America’s energy system. “We need to encourage American innovation,” Obama told Congress in his 2010 State of the Union Address. “And no area’s more ripe for such innovation than energy.”31

  The scale of renewable energy can be measured in terms of dollars. Total global investment in renewable energy capacity reached $150 billion in 2009, about four times what it had been just four years earlier. Renewables are currently only about three percent of the world’s total installed electric capacity. But they accounted for almost 50 percent of the new capacity added in 2007–9. In short, renewables are becoming a substantial business. But it did take longer than might have been imagined since the first time renewables were born.32

  “The world right now in terms of renewables is about where I expected it to be in 1985,” somewhat ruefully said Denis Hayes, who created the first Earth Day on a shoestring in 1970 and then became the director of the Solar Energy Research Institute. “We weren’t in error about what it would take to get there, but in error about the political process that we counted on to facilitate it.”33

  Yet, one must add, it has also taken decades for the technologies to develop and mature. Moreover, the questions about scale and cost are still being answered.

  Still, when it comes to renewables, the time chasm has been closed. No longer is there a great ideological divide over renewables. It is a business, it is popular, and it is international. And solar energy has come back to the White House. It first came back in a small way, and quietly, in 2003, with the installation of solar cells on a little building on the White House grounds called the Pony Shed. In 2010 the Obama administration announced that solar panels and a solar water heater would be reinstalled on the roof of the White House residence—from where Jimmy Carter’s solar hot water heater had been removed in 1986.34

  If a transition to renewables is really made on a large scale, it will rival the importance of the world’s transition to reliance on oil in the twentieth century, whether seen from a geopolitical or economic or environmental perspective. However, it will likely be a long road. Historically, energy transitions have occurred over many decades.

  Thus even with rapid growth, renewables in 2030 are likely to still be far from being a dominant energy resource. Their actual role and market share will be determined by the interplay of policy, economics, and innovation. There is not a single scenario for the future of renewables. Rather it is a narrative of very different technologies, each with its own story and its own distinctive prospects. And its own challenges.

  28

  SCIENCE EXPERIMENT

  Certain streets are iconic onto themselves. Merely mentioning their name tells a story and evokes an entire culture: Wall Street. Pennsylvania Avenue. The Champs-Élysées. Whitehall. And, of course, Rodeo Drive.

  And then there is Sand Hill Road, which slides down the western edge of Stanford University in Palo Alto, California. On one side of the road is Stanford’s Linear Accelerator, used for advanced nuclear experiments. On the other, partly hidden by leafy trees, is a series of mostly three- or four-story buildings that discreetly descend the hillside.

  The name Sand Hill may not be as widely resonant as those other streets, but to those who do know it, Sand Hill Road is synonymous with Silicon Valley and the innovation and technology that are changing the world. For it is on Sand Hill Road that are headquartered many VCs—venture capitalists—that are the ignition switch for new business formation, formerly mainly for Silicon Valley but now for the whole world. Continue down along Sand Hill and up on University Avenue and you will find scores more of the VCs. Whatever their size, they generally raise a series of investment funds from pension funds, university endowments, foundations, and high-net-worth families, and then disburse that money to people starting up companies. The ultimate objective is to deliver to their investors within five or six years—or sooner—a return that is a multiple on their original commitment.

  The VCs made their names, and the returns for their investors, primarily in tech; that is, information technology, computers, software, communications—and biotech. But in recent years many of these firms have decided that the next frontier for venture capital investing is not necessarily in those categories, although they will certainly continue to do all of the above and often with great enthusiasm. The new frontier is “cleantech.”

  THE GREAT BUBBLING

  These VCs are hardly alone. Today there is a “great bubbling” in the broth of energy innovation as has never occurred before. And it is happening all across the energy spectrum—conventional energy, renewables, alternatives, efficiency. Indeed, the energy industry has never seen such a focus on innovation and technological change. But who will be the agents of change? Where will the breakthroughs come from? Who will push them from the lab into the marketplace? And how many of them will actually make that transition?

  Energy has always been a busin
ess of science and technology. That is certainly true of many of the established energy companies. The oil and gas industry is dominated by swaths of engineers, many of whom have master’s degrees and Ph.D.s. But the technological advances within the overall energy industry, as significant as they are, have largely been focused on traditional fuels—oil, natural gas, coal, and nuclear power. These advances are part of a process of continual improvement, pushing out technological frontiers. Sometimes they can be breakthroughs that can dramatically change the supply outlook.

  The traditional energy companies are also involved in developing alternatives. Though largely forgotten, the major oil companies were early on among the main players in the development of photovoltaics in the United States. Today some of them are major players in wind. But their main alternative focus is on advanced biofuels, which could flow through pipelines and pumps and into automobile engines and thus be relatively compatible with existing infrastructure.

  Venture capitalists maybe looking for these kinds of innovations. But they are also seeking what Professor Clay Christensen of Harvard Business School calls “disruptive technologies” that change the game. The great ambition is to find, fund, develop—and then exit—the “Googles” of energy, although they would be happy with a decent though something less than Google-type return on their investment. They are largely not trying to create new technologies themselves so much as to find, finance, and guide the innovators with the ideas and the start-ups that embody new technology and channel them into the marketplace.1

  NOT MERELY “GOOD SCIENCE”

  But from where do the new technologies themselves come? Energy change is most likely to be developed from basic science and research and development, and will be the work of scientists and engineers—and creative and persevering and sometimes stubborn and iconoclastic innovators.

  The private sector was a major player in basic R&D in the postwar decades. Until the 1980s, large corporate labs—Bell Labs, Westinghouse, RCA, and General Electric—were committed to basic research. Young physicists often saw jobs at these labs as being even better for basic research than a university faculty. “Bell Labs management supplied us with funding, shielded us from extraneous bureaucracy, and urged us not to be satisfied doing merely good science,” recalled U.S. Energy Secretary Steven Chu, who spent nine years at Bell Labs.2

  Out of the 16,000 people at Bell Labs in its heyday, a little over a thousand did basic science research—“doing something just because you wanted to understand it better,” said John Tully, professor of chemistry at Yale, who spent 25 years at Bell Labs. “One of the key things was excitement. It was really contagious.” The process was made much easier because “funding was automatic. You didn’t have to put out a lot of paper as you do when a grant is running down and you have to apply for a new grant.”

  However, with the breakup of the original AT&T in the 1980s and the increasing pressure of quarterly performance from the investment community, the “headlights” for corporate research have been foreshortened. Basic research was seen as less relevant to the pressing near-term needs of most companies. Or, as former Undersecretary of Energy Raymond Orbach put it, the “patience scale was diminished” in the private sector. Over time, most of the big corporate labs disappeared. Bell Labs was progressively slimmed down. “You had to justify your work over shorter time periods,” said Tully. In 2008 Bell Labs’ new owner, Alcatel-Lucent, said it was going out of the basic research business altogether.3

  With the decline in corporate research, the basic science and R&D endeavor has increasingly been driven by what has over the last 70 years been the largest engine of scientific advance, and the biggest funder—the U.S. government.

  THE PRIME DRIVER

  If there is one thing that venture capital is clearly not about, it is scientific experimentation. Yet those “science experiments” are essential to progress. “Experiment” is what Energy Secretary Steve Chu, at his Nobel award ceremony, called “the ultimate arbitrator”; for research and development is the foundation, crucial to everything else. For the most part, the government is today the primary generator of basic R&D in the United States, not only for energy but, with the exception of pharmaceuticals, for most everything else as well.4

  The federal government’s role in stimulating innovation, going back to the beginning of the republic, was often directly for national defense. In 1794 George Washington, unhappy with the performance of muskets, established a group of national armories, thus launching what was the first R&D initiative by the U.S. government. The objective was to replace rifles that were laboriously handmade by individual craftsmen with ones that were produced with interchangeable parts, thus greatly simplifying and speeding up the manufacturing of rifles. This innovation in interchangeable parts became known as the American system of manufacturing and was critical to America’s rise as an industrial power.5

  But it was only after World War II that the government took on a much broader responsibility for supporting basic research and the whole R&D system.

  THE PUBLIC GOOD

  Spending on R&D has generally been recognized as a government responsibility because it is a public good. Beyond what the private investor can expect, R&D provides benefits in the form of higher economic growth, improved quality of life, and national security. When receiving the Nobel Prize in economics, MIT economist Robert Solow emphasized the central importance of innovation—the transfer of technology “from laboratory to factory”—to economic growth. Energy R&D is required to meet the more specific challenges of energy supply, usage, security, environmental impact—and, increasingly, climate change. The time horizons for energy innovation are often far longer than can be sustained either by companies, under quarterly-profit pressure, or by investment funds, which aim to exit an investment within five years. For instance, it took four decades and four generations of technology to get the scrubbers right for removing SO2 from coal plants. It took 15 years of research and demonstration before coal bed methane became viable. Such long-term horizons make volatility, uncertainty, and stop-and-go in funding so disruptive and so expensive in terms of lost opportunity.6

  The U.S. Department of Energy supports a sprawling R&D enterprise that extends from national laboratories like Los Alamos and Oak Ridge and the National Renewable Energy Laboratory to university scientists, private contractors, and companies. The DOE’s 17 national laboratories alone employ over 12,000 Ph.D. scientists full time, making it the largest employer of scientists in the world. Overall the DOE is also the “ministry of science” for the physical sciences, supporting almost half of all the physical sciences research in the United States, including over time the work of 111 Nobel Prize winners.7

  The level of U.S. government spending on energy R&D has fluctuated often in rough parallel with oil prices. Funding spiked during the Carter years, around the second oil shock, and then declined in the 1980s as energy prices came down. In the aftermath of the 1991 Gulf War, worries about energy security ebbed away. Thereafter, in the 1990s, as a report on energy R&D observed at the time, the national preoccupation was “on how to cut programs to reduce the federal deficit.” Indeed, the low point for DOE R&D was in 1998, when oil prices collapsed. Spending started to go up again with the new century. But energy R&D funding has remained low when measured against the energy and security challenges and the need for innovation. The total annual energy R&D spending in 2008 was equivalent to two weeks’ spending on the Iraq War.8

  ENTER THE VENTURE CAPITALISTS

  Until four or five years ago, venture capitalists did not even know, in the words of one of its practitioners, “how to spell the word ‘energy.’” But it has certainly been playing a transformative role in capitalism and markets since the middle of the twentieth century.

  Some like to say that venture capital—putting money into start-ups, betting on entrepreneurs and innovators—goes back much further. “Queen Isabella of Spain was one of the early venture capitalists when she backed Columbus,” said W
illiam Draper III, a veteran venture capitalist. She put her faith in a management team led by Christopher Columbus. “What she did was look into Columbus’s eyes and say that this guy might really sail off to some land and bring back some jewels.” J. P. Morgan’s funding of Thomas Edison’s electricity start-up in the 1870s and 1880s certainly qualifies as proto–venture capital.

  The outlines of modern venture capital emerged just before World War II. The portfolio of one of the innovators, J. H. Whitney and Co., ranged from Minute Maid orange juice and Technicolor to the financing for the film Gone With the Wind. According to legend, a partner at J. H. Whitney came up with the initial name for this new type of investing—“private adventure capital.” But that just didn’t ring quite right; it sounded overly risk-oriented, even a little reckless. What responsible fiduciaries want to embark on an “adventure” using the moneys entrusted to them for prudent management? So later it got shortened, for simplicity and for probity, to “venture capital.”9

  GEORGES DORIOT: PROPHET OF THE “START-UP NATION”

  Yet the real birth of modern technology-focused venture capital investing can be attributed to one man, a stern but charismatic professor at Harvard Business School—Georges Doriot, otherwise known as General Doriot. The son of one of the founders of the Peugeot automobile company, Doriot emigrated from France just after World War I and enrolled at the recently established Harvard Business School. He would remain on as a professor there for 41 years.