Saturday, October 18, 2008

A Business Plan for achieving Energy Independence

As an entrepreneur I am always looking at the world through my experiences and how I would approach different problems. And sometimes I even attempt to look at some pretty big problems, and wonder "how would an entrepreneur solve this problem?"

So, I spent a few minutes to analyze where we are in ENERGY, and put together a basic Three (3) Point Plan on where I see a potential Business Plan for our country.

If we assume the three major forces behind achieving Energy Independence are:

1) Cost of Energy
2) National Security
3) Environment

- then we can start putting together a plan to achieve these goals.

So lets look at the Cost of Energy first - and see where there is potential for innovation.

Here are the breakdown of costs for Energy:

OIL = 4.0 cents to 6.0 cents per kilowatt hour for oil.
NUCLEAR = 1.1 cents and 3.3 cents per kilowatt hour for nuclear electricity.
COAL = 3.7 cents to 4.8 cents per kilowatt hour for energy produced by coal.
NATURAL GAS = 3.5 cents to 4.8 cents per kilowatt hour for natural gas
SOLAR = 20.2 cents to 30.8 cents per kilowatt hour for solar.
WIND = 5.5 cents and 7.7 cents per kilowatt hour for wind.

Before we get into the details, I want to make clear that energy is complex... for example, take these two graphs.

Here is a graph showing what People pay for energy around the country

This map shows where our existing Nuclear Power Plants are in the U.S.

(footnote.... ) Notice if you overlap these maps, you can see how "Cost of Energy" and "Residential Average Price" are not directly correlated. There is a high concentration of nuclear power (cheapest energy) in areas where our residential costs are the highest. Also, if you notice Alaska has one of the highest residential costs for energy, even though they supply a lot of oil to the U.S. So you can see that we also may have some other factors at play that we need to consider in the long run (regulation, taxes, etc) - but for now, I am going to stay focused on the simple economics of cost, and how we put forth a plan to shift our energy sources to meet our goals.

So now, we understand that there are other factors involved that we may need to address - lets focus on some basic principles we can set forth now - and shift momentum in the right direction.

1. First, we need to look at why Solar, Wind and others are expensive. (My research shows its mostly due to the equipment (panels, etc) and the inconsistency of the source). So I would invest in innovation focused on building more efficient and cost effective equipment to capture, store and transport these high-cost energy sources. This may take 20 years, but I think in the long term using solar and wind may be the ultimate energy source in 2050.

2. Second, we look at the low cost alternates like Nuclear, Natural Gas and Coal. Each one of these have pros and cons (environmental effects, safety, etc). In my research, there needs to be investment in making these sources clean, safe and ensure proper transport and protection. There are costs that need to be considered as well (It can cost $15 Billion to build a nuclear power plant and ten years to build). I think a logical approach to leveraging these technologies is to focus our efforts on Natural Gas and Coal for the short-term, and begin to build Nuclear Power Plants in areas where we need economic boost with the goal to double our Nuclear capacity from 20% of our energy use to 40%. This costs us about 100B in subsidies in the past, and I think we can easily justify the investment today.

3., Third, we need to look increasing our domestic production of oil immediately and reducing our exports of oil. This is not a long term solution for reducing our addiction to oil, but I believe it is the right direction for transitioning into a energy independent nation. I would offer subsidies to oil companies that commit to ramping up domestic production BUT also include in their expansion plans to also build the ability for new facilities to offer alternative energy. This way, we are encouraging a more diverse long term plan, and accelerating our independence at the same time.

The second goal is National Security. It is clear from the political side of the argument, we believe our leverage in the Middle East for keeping the peace is to reduce the amount of Oil we purchase from the region. If this assumption is true, then we need to have a plan to reduce our imports from these sources.

First, let me break down the Energy trend (political and economic) so there is a clear backdrop to my plan. Here are some basic facts you may or may not know - so its important we are on the same page. (Source: Department of Energy and Energy Information Administration)

Canada 18%
Saudi Arabia 13%
Venezuela 10%

Mexico 10%
Nigeria 6%
Iraq 5%
Angola 5%
Russia 4%
Algeria 3%

So, as of today we are importing about 30% of our oil from countries or regions that negatively effect our national security.

So how do we reduce our dependence on these suppliers?

1) Increase imports from other nations. Start to work closely with Canada and Mexico (our neighbors) on increasing production and increasing our supply from these friendly nations. I believe if we structure a new plan based on Energy in North America, we can increase our imports from Canada and Mexico by 10% over the next 10 years, and meanwhile reduce our imports from the Middle East by 10% (eliminating the need to import from Venezuela for example) .

2) Increase domestic production. Although it may take longer to increase domestic production and may not help in reducing our addiction to oil, it is a path of transition that will allow us to break free of the Middle East. We currently product 5M Barrels a day and import 10M Barrels a day. If we can ramp our domestic production to 10M Barrels a day in 10 years, we can completely eliminate our need to import oil from Saudi Arabia and Iraq (Assuming we also have an aggressive alternative energy plan beginning to produce).

The third aspect to a plan is the Environment. When looking at all the sources of energy, it is clear which ones are considered bad for the environment and which ones are clean. Clearly, we need some major advances in technology to help us clean coal and make nuclear safe. But the bottom line, is that technology takes time - and although the Environment is a major concern for all of us - we need to be realistic on the timeline. It will not be possible to have 100% clean energy in the next 30-50 years. However, I do believe if we follow a plan to transition toward clean energy, we will reduce carbon emissions, and we will have a net-positive effect on the environment.

One issue I think we need to understand as well, is that the US is NOT the only country on the planet earth, and we don't control the environmental laws in countries like Russia and China which surely will continue to use oil, coal (dirty) and other fuels and have a much larger footprint on the atmosphere than we will. So, truly the ONLY way to make major moves in protecting the environment is for the US to invest in new / clean technologies and offer competitive products to these countries so that the obvious choice is to adopt. Only the Market can drive environmental protections that we believe are responsible for the Earth. We can't enforce our laws, but we can change the market dynamics and strive to become the largest exporter of energy in the 21st Century.

Overall, the more I researched the market, and understood the problem, and the potential for technology - I have become increasingly more optimistic about our ability to become Energy independent and diversify our energy to make for a cleaner world.

It is not a perfect solution (there never is a perfect solution) - we all need to embrace the reality that we need to sacrifice and work hard - but like any startup you put in the long hours, the sweat equity and against all odds build something great - and one day - your hard work is rewarded 100 times over....


Jeff Douglas said...

Great article! Clear, simple (even for me!) and to the point.

Louis Rosas-Guyon III said...

Incidentally, the issue of source inconsistency with solar and wind is easily solved by increasing scale. A solar panel on your house may suffer from poor light conditions but dolar panels on every building in Florida would work well. The obvious problem is the exorbitant cost to reach the optimal scale.

You should also consider including Infrastructure in your plan. Our current electrical grid is fractured, outdated and horribly inefficient. I don't have the exact figure, but I remember the grid alone accounts for 30% energy loss! If we could improve the efficiency of the electrical grid we would enjoy substantial savings.

Also, we should invest in a true nationwide grid that allows for the seamless transfer of power based on demand. Eventually we can look into self-healing grids that automatically redirect power to auxillary lines to end blackouts.

Great article! I enjoy reading your work.