Seeker Blog

Bill Aulet, MIT Sloan School, looks at ways to grow the New England energy ecosystem — along the way considering some of the non-PC, real-world issues.

…While there clearly used to be a shortage of private equity capital for energy ventures (and rightly so because of their highly cyclic nature), that problem has gone away. Money is now gushing in. By my simple calculations, the amount of money available to energy ventures from dedicated private-equity funds quadrupled from 2005 to 2006, soaring from approximately $5B to $20B. I believe this is even understated. The point is that the money is flowing in at an amazing rate. But where is it going? Energy as a sector is almost as non-specific as technology or transportation. We have to peel back the label and take a closer look.

The lion’s share of the money that is dedicated to energy is earmarked for renewable or alternative energy. Renewable or alternative energy is a fantastic thing and it is necessary, but wholly insufficient, to deal with the energy problem. The biggest part of the energy riddle that needs to be solved resides—and will continue to reside for the next 50 years—with the hydrocarbon side. How do we find more to meet the booming demand? And, how do we find ways, through technology, process, and/or business-model innovation, to reduce the environmental impact of hydrocarbon usage? Renewables is a rounding error when compared to the 80 to 90 percent of the demand that hydrocarbons (i.e., oil, gas, coal—ah!, there it is the four-letter word of energy) fill and will continue to fill for the foreseeable future.

We should and must invest in renewables and alternative energy for the future and there will be some big wins there relative to investing. But with all the new money and attention rushing into this small part of the sector, we are majoring in minors. The major focus should be how do we deal with the continued need for hydrocarbons and how do we make this cleaner energy. Just to put this in perspective, the world would be dramatically better off from an energy-supply standpoint if we could find a way to improve recovery rates at oil and gas wells by 1 percent than if we built a million new wind turbines. If we could find a way to reduce CO2 emissions from automobiles by 1 percent it would be, from a quantitative and practical point of view, thousands of times more positively impactful than increasing solar energy production by a hundred times.

For the investor, this line of thought would seem to make sense as well. One of the top funds of any kind in the U.S. last year was First Reserve Corporation, and while they do not release their results, we know they did very well. One gauge is that they were the top fee producer on Wall Street last year. They also just raised an additional $7.8 billion to continue to do what they do best—investing in the basic energy industry with a focus on making the good old hydrocarbons industry more effective and efficient. These days the herd mentality of private-equity investors, in my humble opinion, has them putting too much money into renewable/alternative energies and not enough into fixing the core business of energy, the hydrocarbons. There will be a correction but until such time, I think this is a fundamental problem with overall energy investing.

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In the comments, Bill Aulet responds to some of the criticism:

I am pleased to see the discussion and would like to just clarify a few points:

1. Please do not construe my comments as an indication that I am not for renewable energy. This is not true. I am very much for renewable/alternative energy. As I mention in the initial entry, I believe it to be necessary but not sufficient. I wish the problem could be solved by simply replacing CO2 emitting energy sources with non-emitting ones, but I don’t see how it is possible. I am glad some people are trying to do it and I hope they succeed but I think we also need to be realistic in the meantime and not depend on such a scientific miracle. It is simply numbers. We need renewables to help fill the gap but it will not be enough by any reasonable forecast by itself to meet the increasing demand which is forecasted to double by 2050, and it could be sooner.

2. This is a demand/supply problem unless we want to stop economic growth — and even if we wanted to in the US, the real growth is coming from China and India. We can’t nor do we want to tell China/India not to develop their economy which means increased demand for energy. We want to provide them solutions that are less environmentally impactful and still economic.

3. Clearly solving the energy challenge involves solving the adverse effects on our environment that hydrocarbons have been having (this is clearly happening simply by measuring CO2 in the atmosphere). But since hydrocarbons make up approximately 86% of the energy usage today and will be the biggest part for the foreseeable future, making clean energy of hydrocarbons will more than likely have more effect than almost anything else in our lifetime. Again, it is just math and common sense. We need to come up with new ideas to promote clean energy on all fronts (a colleague pointed out that the extra money it costs to buy a Prius would be better spent from an environmental standpoint to payoff an owner of an old polluting car to take it off the road, and I have to admit he had a very logical point).

4. The other important consideration in this equation which makes things even more complicated is the national security dimension which is relevant — even if we all disagree on the magnitude.

5. Lastly, as Jay points out so well above, this is not an either/or scenario, but we need all the types of energy to be moving forward — renewables, hydrocarbons, nuclear, and others. My point is that while renewables are great and some investors will (and it will be a good thing!) make a lot of money on some alternative energy investments (again Jay is right on here with the scale involved, it can be a small fraction of the overall energy industry and still be a huge win), at the macro level too much of the investment dollars are chasing only one, albeit an important one, part of the pie while the others parts are not getting enough attention today. I also have confidence in the markets and think this will correct itself in the future but not sure when. In summary, there is no single solution and we need to spread out our investments in a rational manner.

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