Friday, August 1, 2008

The Counterindicators

Amory Lovins doesn't think there's a business case for nuclear power. In his conversation with Charlie Rose two weeks ago, he laid down some numbers and explained why he thought markets were taking us in other directions. One piece of evidence he offered was a reminder about the flow of private capital:

Take last year, 2007. Renewables other than big hydro got 71 billion dollars of private capital invested. Nuclear, as usual, got zero. It's only bought by central planners with a draw on the public purse.

It surprised me to hear that, but it does makes sense. Investing in nuclear generation would be terrifying. If, at any moment during the 15-25 year investment horizon, something even marginally significant went wrong at any nuke plant anywhere in the world, people would freak out, hate nuclear power, and elected lawmakers' political survival would depend on their ability to quickly and decisively eliminate the possibility of any future hiccup, ever, even if that would mean outlawing nuclear power generation outright.

That's a little over the top, but you know what I mean: pervasive fear about meltdowns, terrorism, and the management of nuclear waste makes it difficult for me to imagine a rational capitalist investing in nuclear generation.

Anyway, I brought the Lovins quote up with John Moore, CEO of Acorn Energy, and John wondered if private capital invested might be a "counterindicator."

A venture investor himself, he worries that private capital has a tendency to chase sexy science projects and neglect essential, foundational infrastructure. And, given an energy infrastructure that, at this point in history, needs a whole lot of work, he doesn't think many of those science projects are going to come to meaningful fruition until we stabilize the infrastructure. Creating that stability, in John's opinion, very well might involve building more nuclear capacity.

Even if "private" players aren't investing in nuclear, John noted, institutional players like Constellation Energy are, and the capital they have thrown and will continue to throw at nuclear generation is far from insignificant.

That's certainly worth considering. Constellation is a very big fish, and the fact that much of their money is moving in a direction quite different from the private capital Dr. Lovins cites does mean that someone's behavior is counterindicative of the shape of the future.

And that makes me wonder. What choices does Constellation* have when they decide in which directions to deploy their money? What motivates them to invest in nuclear instead of other things? How are those choices and motivations different from the choices and motivations shaping "private" investors'? And are the market forces that influence Constellation's investment decisions the kinds of market forces that we should embrace?

An unattached individual seeking to maximize return on investment has a choice of many different bets on our energy future. He can weigh lots of options, some competing, some complementary. He can look at history. He can listen to people predicting the future. He can think long term. He can make his decisions based on today's market realities.

Constellation, on the other hand, might not have so much choice (or, at least, they might not think they do). They're already deeply invested in coal and nuclear. And, because of that, if the coal-fired market stays healthy, and the nuclear market starts growing again, they'll be thrilled, for their old investments will continue to perform. If, however, coal-fired demand sags as renewables come on line and a nuclear renaissance doesn't materialize, then those old investments will fizzle.

So, if faced with a market reality that encourages investment in electricity sources other than nuclear and coal, what will Constellation and its peers do? Might they try to change (subvert, manipulate, distort) that market reality? Might they forgo big opportunities because pursuing new strategies would mean abandoning old strategies that once made lots of capitalist sense? Might they choose to pursue suboptimally profitable investments now in order to keep those past investments alive? Might they invest in nuclear power generation even though, as Dr. Lovins says, there exists no pure business case to do so?

And, if they do, will they succeed? Can they control the market forever, or will the invisible hand eventually win the day?

John makes an important point about shiny object science projects and the need to invest first in infrastructure and only then in the sexy stuff.

Dr. Lovins, however, makes an important point (also in the Charlie Rose interview) about corporate socialists in free marketeers' clothing and the fact that we have to be careful with big institutions and their motivations.

Much love to you, John, but I'm leaning toward Lovins on this one. Better, in my opinion, to trust capital markets, protect the world from institutional distortion artists with vested interests in maintaining the status quo, and rely on smart investors like you to herd more private dollars into fundamental infrastructure.

*Note: I don't mean to single Constellation Energy out. They just happened to be the company John and I discussed.


Jefferson Parke said...

This is a fascinating topic, Jake.

I think I'm a bit naive on this subject but what sort of improvements are needed to our energy infrastructure? Policy improvements to reduce pseudo-monopolistic practices? Physical improvements to support increased capacity? Is there any room for private investors to invest in infrastructure? Perhaps in a company that's building smarter power station software?

I tend toward the same suspicions regarding large organizations investing heavily in the status quo. It's the safest bet when you have enormous influence. Eventually they are forced to change or become upended by new markets and technologies. Let's ask what we can do to speed things along in the energy arena.

Shu Jierui said...

Hey man, linked over to your blog from Courtney's, really interesting read. What are you up to these days? I think last time I saw you you'd just returned from peony farming in Africa~ Be well my friend.

Jake de Grazia said...

Hey Jeff.

What sorts of improvements are needed to our energy infrastructure, eh?

Two improvements that seem to me like they could be useful:

1. I think it'd be great if we had an electricity distribution system that offered time of use pricing to everyone everywhere. Doing that right involves reexamining policy, building and distributing hardware (smart meters), and pretty serious real-time information management.

2. I think our electric grid should be capable of accepting electrons from and offering (time of use adjusted) market prices to households and businesses that are generating more electrons than they're using (generating them with solar panels or by cogenerating electricity and heat or by any other means really). This gets a complicated, like well out of my energy industry knowledge league complicated. And, again, making it happen would require government cooperation, utility cooperation, and the hardware and software that let's the system run.

There's plenty more, but I'll leave it at that for now.

As for private investment in infrastructure, sure, anyone can invest in infrastructure. I mean you and I would probably have a hard time finding takers if we each wanted to throw USD 3k each into building new transmission lines, but maybe we could buy stock in a technology company that makes substation monitors that help regulate heavy electron traffic and thus make the substations less susceptible to overloads and fires and explosions, etc.

I think your last sentence is an important one. We should all be asking what we can do to speed these changes. Maybe our only recourse at the moment is to pester our elected officials. Maybe (if we live in the right places) we can get smart meters installed in our houses and start participating. Maybe we can invest that USD 3k. And maybe it's valuable to spread the conversation, to make sure more people are looking out for corporate socialists in free marketeers' clothing.

Tough comment, but thanks for posting. I hope I didn't further confuse at least.

Talk soon.


Jake de Grazia said...

Hey Jeremy.

I've been back in the US for about 8 months now, and, among other things, I'm blogging about private vs. institutional investment in electricity generation.

I'll email the further update, provided, of course, that Facebook is telling me the truth about your address.

Hope all's well.