Ray Rothrock

Energy: Innovation Is Essential – But It Is Not Sufficient

In Energy on December 8, 2010 at 9:25 am

I’ve seen many recent newspaper articles and whole sections on fossil fuel energy and that we have plenty of it.  Even the December cover story in the Atlantic, and numerous editorials from lots of credible references are hailing that the United States has plenty of fossil fuels.  The most recent proof is all the shale gas discovered in the United States and in places not previously expected.   This 100 plus year supply with prices south of $4 per and falling, just proves the point.  Other evidence is that over $50 billion of investment from Big Oil has gone into oil shale in recent quarters.  This is not trivial and certainly sends a clear signal that Big Oil’s view of shale gas is significant in the energy picture.  Hurray!

Does this mean we abandon all attempts to find better energy sources to power our insatiable demand for electricity and fuel for our cars?  Of course not.  But, unfortunately in the world – regardless of the form of government – at the end of the day economics drive these decisions.  To that end, in the United States we have enjoyed essentially a flat price of electricity for over 40 years (inflation adjusted) thanks to economics — gas, coal and nuclear.  But to keep our cars on the road we had to import and pay for oil from non-domestic sources.

The recent WSJ article by Nordhaus and Shellenberger presents a powerful argument making the case that innovation will lead us out of this energy mess we are in and getting deeper.  For an old production guy like me, I loved the notion of changing the discussion from forcing change through emissions controls in law to lowest costs production of energy.  I don’t pay an efficiency bill each month or purchase it at the gas pump.  All that they said is true.  Further, how they compared the old and the new was a really, straight forward and simple case.  Innovation is essential – but it is not sufficient.  A major missing element of their discussion, however, was how the capital markets impact energy innovation.  Venture capitalist and government R&D funding can certainly support new companies developing new sources of energy and take them and take them down the path to success, but only so far.  Energy is big business.  Energy takes capital.  Big capital.  And that means that they need the public capital markets.  So far, only a few have made it.  A123 and Tesla come to mind as recent deals entering the public markets.

Venture capital is a powerful engine for jobs, wealth and quality of life for America and for the world.  There is no dispute that 22% of the GDP today in the United States is from originally venture financed companies.  And, that 12% of all the private sector jobs are also from originally venture financed jobs.  The companies that created innovative products – Intel, Cisco, Apple, Yahoo, Google, Amgen, Genetech, Starbucks, and the list goes on and on and on, were all started by one or two or three people who sought and received venture capital.  At some point in their corporate lives, they went public tapping the greater, capital markets.  This “fuel” for growth was essential for the global success they each achieved.  These businesses did were not born large.  They were born small and used money to grow as the balance sheet demanded, used money to invest in research development and used money to invest in people who made these companies great.

These companies, and any startup, needs capital pretty much all along the way until it is really big and successful.  Even then, many companies continue to tap the capital markets for various forms of debt and equity.  This means that they all need to tap the public markets.  Public markets are the biggest, most liquid, and most disciplined markets on the planet.  Without healthy capital markets, the many energy startup companies innovating today may succeed at invention and may actually come up with energy products and solutions that are indeed lower costs than the current fossil menu we enjoy.  But how do they get to be really big companies and have an impact.

Unfortunately, we have mostly broken our public capital markets in the United States.  Many companies are going abroad seeking capital.  The private capital markets cannot carry these innovative and crucial companies to their fullest potential. The great innovators, energy and otherwise, would be best served if the United States’s capital markets were there.  Without them, the capital hungry energy deals will simply wither, perhaps even succumb to mediocrity, or worse leave the United States seeking growth capital elsewhere.

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