Sunday, July 20, 2008

Warren Buffett, Boone Pickens, and James Tisch all have substantial wind power investments

If huge financial commitments by those three folks don't tell you all you need to know about not just the viability, but the attractiveness of wind investments, then nothing will. Each of these three business and investing legends has invested billions of personal capital either directly or through their holding company conglomerates into wind power. That is not a subtle hint.

Today, billionaire investor James Tisch (Chairman of the Loews Corp. conglomerate), decided to take an even less subtle tact. He wrote an excellent oped that was published in today's Washington Post (included below) about how the development and adoption of alternative energy technologies is happening at lightning speed. Specifically he highlighted the attractive economics of wind and personal solar. Amazingly, this development and adoption is largely happening without incremental regulation, legislation or "incentive" taxation.

Can't you just picture the monkeys in Congress almost fretting about this fact? Worried that free market capitalism might actually solve three major platform issues without them signing their name to a legislative "solution"? What will they tell their constituents? I predict they will not stand for this. It undermines too much of what they have been espousing for the past several years. If this plays out as Tisch and I expect it to, the implications are that things like President W's refusal to sign the Kyoto Treaty may actually indicate that he did not cover the Earth in a man made global climate change sludge. I mean, are legislators really going to standby and allow three of their go-to policital hot button policy issues to be solved with them watching from the sidelines? I seriously doubt it. They've dreamt of regulatory and legislative "solutions" to these problems for years and now each of those issues may be stolen from them by the market? These three issues will not go quietly into the capitalistic night - not of the Nancy Pelosi's of the world have a say. She must worry about the potential removal of these three issues:
1) addressing the high cost of energy;
2) addressing our dependance on foreign oil; and
3) reducing our carbon footprint.

This has to be unbelievably frightening to the political monkeys. It is almost as if the market is saying to them, "just give us a fair legal framework to operate within, get out of our way, and we will take care of the rest." But that doesn't sate the average political ego. It does not sell in November either. Somehow they'll need to mess this up.

How can they mess it up? I'll propose three ways:
1) Interfering with the roll-out of alternatives like wind, hydro, nuclear, solar, or some other future technology by making regulatory hurdles unnecessarily burdensome.
2) Promoting one "alternative" over another. Don't promote corn ethanol, let the market promote it. If it is going to work, it will. Corn ethanol probably should fail and the unintended consequenses of its artificial elevation are that a) we are diverting precious agricultural resources from more useful efforts like, I don't know, growing food for things like eating and b) we are diverting financial and human intellectual resources from pursuing the best alternative energy efforts.
3) Disallowing competition. Let oil compete on a level playing field - the marginal barrel of oil is already incredibly expensive to extract. Let's not make it more expensive. Like it or not, we need oil and I personally prefer that we get it from "Big Oil" than from "Mother Russia". Let's not handicap our own industry as other nations subsidize their's. Outside of oil, let foreign suppliers of alternative energy or related technology present their solutions to the market. Brazilian ethanol may be a great risk diversifier for us as opposed to incremental Saudi oil.

All of these can be summed up as "don't interfere with the market mechanism by trying to create large incentives or disincentives for one 'solution' or another. This will create artificial distortions and likely prevent the best solution from rising to the top."

As I've been saying for years, the solution to high oil prices is high oil prices. I've said those will come as easy/cheap oil vanishes and the marginal barrel is in deeper water, tougher geology, or scarier places. And here we are, as forecast (Read Matt Simmons' Twilight in the Desert for an excellent primer).

Expensive oil creates an incredible incentive to look at alternatives and ramp up scale (e.g., reduce unit costs) of alternative energy technologies. Tisch describes this happening in wind right now. As noted, this will have the ancellary benefit of reducing carbon emmissions and decreasing our dependance on foreigh oil.

As alluded to above, can we please get rid of the imbosolic import tax on foreign ethanol? This is so stupid. We are "protecting" our domestic ethanol business, but corn ethanol is not a particularly productive solution. We may be the Saudi Arabia of wind, gas, and coal, but Brazil is the Saudi Arabia of sugar ethanol. Sugar ethanol is much more green than corn-based and Brazil has room to expand growing capacity without merely replacing other useful crops as corn in America has done (switchgrass, on the other hand, is another story...). Let's allow consumers, through their individual spending habits, to direct us toward the appropriate mix of these energy sources.

Anyway, here's Tisch's OpEd:

The Answer's in the Wind -- and Sun
By James Tisch
Updated: 07/20/2008

Bob Dylan said it best: "The answer is blowin' in the wind." While politicians and environmentalists have been busy arguing about how best to require that greenhouse gases be curtailed, the world around them has changed. The precipitous rise in oil and gas prices over the past year has made the debate on greenhouse gas emissions moot. The reduction in the output of those gases will move forward at warp speed, not because of rules, regulations and cap-and-trade decrees but because of free markets and economics.

Two factors are driving this sea change. First, the price of our traditional fuels -- oil, gas and coal -- has risen dramatically. Second, the silent and inexorable march of technology has dramatically reduced the costs of clean alternative energy sources such as wind turbines and photovoltaics, which converts sunlight into electricity. The result will be a dramatic reduction in the emission of greenhouse gases -- without politicians passing a single additional piece of legislation.

How have we come to this point? Blame it on oil prices and technology. The extraordinary increase in the price of hydrocarbons and coal has created a price umbrella under which competing technologies can flourish. Already, clean wind energy is increasing by leaps and bounds. In the past five years, more than 5 gigawatts of wind turbine capacity has been built in Texas alone; on days when the winds whistle along the plains, wind energy represents just under 10 percent of the electrical supply in the Lone Star State.

Today, wind energy is economic at about 7 cents per kilowatt hour, and that is without factoring in production tax credits. A few years ago, that cost was 15 to 20 cents. Compare the 7 cents for wind energy with the 12 cents per kilowatt hour required to build a gas-fired power plant, and you can see why there is a veritable land rush to harness wind energy.

Texas is not the only state where the gravitational pull of economics and markets is working. Across the country, the price of electricity has skyrocketed for homeowners and businesses. This steep increase is creating a wide opening for technologies such as photovoltaics. The cost of this technology has fallen over the past few decades and is about ready for prime time. That retail electricity prices are increasing by as much as 30 percent this year will only accelerate the arrival of the "liftoff" phase of photovoltaics. Also, retail electricity prices in New York may soon be headed to 30 cents per kilowatt hour. At those prices, an investment in a photovoltaic array on the rooftop of a house will pay for itself in fewer than 10 years, resulting in a greater than 10 percent return on one's capital cost. Compared to the sub-5 percent yield on municipal bonds, this return represents an extraordinary investment.

So, without a gavel coming down in a single additional legislative session, wind and the sun will become much bigger contributors to our national electricity mix. And an added benefit is that they generate absolutely no greenhouse gases.

One more fast-approaching major change will all but guarantee that curtailment of greenhouse gases becomes an issue of the past: the advent of the electric car. Improvements in battery technology mean that in the next five to 10 years, plug-in hybrid electric vehicles will finally be on our roads. Within the next two to three decades, the gasoline-fired internal combustion engine automobile will no longer be sold. Since gasoline accounts for more than a third of worldwide oil demand, the rise of plug-in hybrids represents a mega-change in terms of emissions.

Plug-in hybrids are dramatically cheaper to operate than today's cars. They will consume about 2 cents' worth of electricity to travel one mile, compared with the current 20- to 25-cent cost of driving a mile using gasoline. If consumers flock to them because of their lower operating costs, and they will, the resulting reduction in greenhouse gases will be a benefit of extraordinary proportion -- one that the Kyoto crowd thought could be achieved only through draconian regulation.

These changes will take place not only in the United States but worldwide. These technologies will be adopted simply because they are cheaper than their hydrocarbon-burning cousins. The old world of burning hydrocarbons to generate energy and power automobiles is on the way out because it is being priced out of the market. In the next few decades, it is possible that the only thing oil products will be used for is to power airplanes, heavy vehicles and ships. All that is required on the part of those wanting to reduce greenhouse gases is a little patience so these new technologies can be adopted by the market.

So there is a silver lining in the run-up of hydrocarbon prices. These elevated costs are causing a dramatic change in our energy and automobile mix that will result in significantly less greenhouse gas emissions in the next few decades. The change is already on the way based on today's technology, and it will only quicken with the technological advances that are sure to come. Without a doubt, the answer is blowin' in the wind.

The writer is chief executive of Loews Corp., which has interests in Diamond Offshore drilling; Boardwalk Pipelines, an interstate natural gas pipeline company; and HighMount Exploration and Production, which drills for natural gas.

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