Will Innovation Transform Energy?

Something big is going on throughout the energy business. It’s a great bubbling of innovation in every part of the industry. This bubbling is the brew of many different ingredients-from the impact of high prices and geopolitical uncertainty to the growing focus on “clean tech” and climate change. Will Innovation Transform Energy?

Though invisible to the consumer, an enormous amount of technological advance is embedded in every gallon of gasoline. Less than 30 years ago, the absolute “deep water” frontier for drilling was 600 feet of water.

Today, companies are working in what is called ultra-deep water, drilling through as much as 12,000 feet of ocean. Explorers can now use a new technology called WAZ-wide azimuth seismic-to “see” deep resources previously not visible through salt barriers thousands of feet below the seabed.

Companies are integrating a wide variety of information

technology capabilities to turn the “digital oilfield of the future” into the digital oilfield of the present, increasing efficiency and output. The large-scale conversion of natural gas into high-quality, diesel-like fuel is getting closer.

What is very visible today in the public’s eye is the innovation in renewables of every sort. Renewables received much attention in the 1970s and early 1980s, but faded away in the face of falling fuel prices and ample supplies. Their rebirth is partly the result of market forces. But it is also driven by continuing technology improvements and by mandates and subsidies from federal and state governments in the United States and the European Union, and by similar programs in countries like India, China and a growing number of other nations.

This year will certainly see the incentives and mandates expanded in the United States, as is already evident with the higher target for ethanol in the State of the Union speech.

The effects of the surge in alternatives are being felt in unexpected ways. Growth in renewables is going so fast that it is straining capacity in people, materials and supplies. If you want to order turbines and blades for windmills or silicon for solar photovoltaic cells today, you may have trouble finding supply. Livestock raisers and dairy farmers in the United States-along with Mexicans for whom tortillas are a staple are complaining about the sharp rise in the price of corn being fueled by rapid growth in corn-based ethanol production.

Renewables may be called “alternatives,” but they already constitute a considerable business. The one is that is well on the way to becoming conventional is wind power, which has gone through a considerable evolution over the last two decades. Along the way, costs have declined by a factor of ten.

Last year’s worldwide investment in wind and solar is estimated at over $40 billion. Yet, while the prospects for renewables are very large, they also need to be seen in context. In this case, the context is the huge scale of the overall system and the long lead times that are needed to develop any form of energy.

Moreover, these sources eventually have to establish themselves as economically competitive in the marketplace on a large scale. Even with all the advances, they are still a very small part of the overall energy mix. In the United States, wind is 1 percent of total electric generating capacity. But wind and the other renewables will continue to grow.

Underpinning the “great bubbling” is the rapidly growing spending on energy innovation.

A decade ago, I chaired a task force on energy research and development for the U.S. Department of Energy. That was a time of low interest in energy; and, not surprisingly, interest in the subject of our task force was also relatively low. After all, in the aftermath of the First Gulf War, there was little concern about the availability of future supplies. Climate change was hardly on the horizon as an issue. It’s a very different situation today. The reasons are multiple.

Prices and worry about supplies and energy security are important. So is the prospect of the vast growth in energy demand in Asia, which will change the global energy balance. Also looming large are environmental worries and the growing quest to reduce carbon emissions because of climate-change concerns.

All these factors mean that energy is now a major focus for technology investment. Governments and companies continue to be big players, and they are stepping up their investment. Research-and-development spending by the U.S. Department of Energy was $1.8 billion last year and is currently expected to grow by at least 25 percent in 2007-and could be even more with the new Congress.

And now there are new players: venture capitalists. The funding sources that brought immense innovation in information technology and life sciences-and created Silicon Valley along the way-are now honing in on the energy industry. To be sure, some prominent venture firms are standing back, saying that venture capital does not fit the longer time horizon and larger capital requirements of the energy business. But many others see this as their next frontier.

“Clean tech” is the new rubric under which much of this money is flowing, and the flows are increasing significantly. In North America, venture-capital investment in energy reached $2.1 billion in 2006-four times what it was in 2004, according to the Cleantech Venture Network. Venture capital is not merely a source of money; it is also a source of focused, results-driven discipline. This also means a wide diversity of ideas and technologies will be explored.

Inevitably, many of the new initiatives will end up being venture’s version of dry wells. That’s the character of research and development- and venture investing. The kind of surge we’re seeing today comes not only with hope but also with hype. This will remind some of the Internet boom. That boom left many deflated hopes and even more deflated valuations. But it also initiated a transformation of the way the world works.

And, by contrast, in the Internet boom there was often no clear idea of how to make money. It was about “firstmover advantage” and “land grabs.” This time, the opportunity is clear and can be measured against costs and prices in the marketplace.

The innovation frontier in energy is very broad. The systematic application of biology to energy is new, and could end up having a big impact. Ethanol is already being called a “firstgeneration” biofuel, and there is a growing debate as to the biology driven “second-generation” fuels.

Another area that will receive much greater focus is energy efficiency. This is building on a more solid foundation than may be recognized. It’s often said that the United States has made little progress on energy conservation or energy efficiency. In fact, the United States, along with countries like Japan, is twice as energy efficient as it was in the 1970s.

Much technological effort will go into the effort to double once again. This push is not limited to the United States. German Chancellor Angela Merkel has made energy efficiency the centerpiece of her agenda as chairman of the G-8 nations and president of the European Union.

This “great bubbling” represents what is the broadest drive ever for energy innovation. It has the potential over a period of 10 or 15 years to work major transformations in how energy is produced, transported and consumed. But it is not a sure thing.

Two ingredients will likely be required if it is to have this effect. One is consistency-maintaining the level of financial commitment and stability over the cycles. And that gets to the second ingredient: Prices, and what people expect of them, will also be an important part of this brewing future. One way or the other, they will likely add much spice over the coming years.

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