Bad Assumptions
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As I have been traveling around New Zealand, I have had a lot of discussions about various renewable energy companies. Inevitably, there is some discussion as to why certain approaches have failed. Occasionally, companies failed simply because they were running a scam and lying about what they were doing. More common, however, are companies that failed due to bad assumptions on their part.
Those discussions have led me to reflect on what some of the bad assumptions – or potentially bad assumptions – companies may be making that will result in failure of their business models. Of course I have to make assumptions as well, and I must constantly evaluate those assumptions in light of new evidence. I would say that there are three primary assumptions that influence the decisions I make. They are:
1). Oil prices will continue to rise over time.
2). Biomass prices will rise over time as competition increases.
3). What the government gives, the government can take away. So government subsidies have no place in my long-term business plans.
I think the assumption around the cost of biomass is going to be one of the worst assumptions some companies are making today. I see many companies claim that they will produce cheap biofuel, but when you take a closer look they are basing that on getting cheap, free, or even negatively valued biomass. Unless one can lock up a long-term supply agreement with someone who has a track record of being able to deliver biomass, I don’t think this assumption will hold up. Further, farmers are going to command the highest price they can get for any purpose-grown biomass. So I think the dreams of cheap switchgrass or miscanthus enabling cheap biofuels will fail to materialize. It won’t cost any less than it costs to buy hay from those same farmers today. In fact, it will probably cost more.
Here are some other assumptions that have doomed, and I believe will continue to doom, prospective renewable energy companies:
Results in the lab can be replicated at a larger scale.
The fact is, the vast majority of energy technologies can’t be scaled at all out of the lab, for a variety of reasons. My own observation has been that most technologies die in the lab, and most that make it to the pilot stage die there. Very few survive all the way to commercialization (but government policies/funding can result in some surviving that shouldn’t have survived).
One or two technical breakthroughs will be achieved.
While they are often taken for granted, even one technical breakthrough is asking a lot. If two are needed, it greatly compounds the difficulty of commercializing a process. If you see a company trying to scale a process out of the lab, and they have more than one technology aspect that has never been run in that particular service or at that particular scale, the odds of success are probably slim.
Reported results are typical.
Reported results are almost always the best results that a technology has ever achieved. When someone says “Up to 100 gallons per ton” I discount that heavily. People who tend to hype their technology don’t report typical results. They report the best results to investors, and present them as typical. But when they build their plant, typical results are what they will get.
Government subsidies will bridge the gap until you “figure it out.”
Government subsidies can go away tomorrow, so if you haven’t figured it out yet, then you should probably go do something else if you are hanging your hopes on government subsidies. The end is likely to be unpleasant for everyone involved.
You will “figure it out.”
There is a very long list of companies who had seemingly promising technologies, but for one sticky technical issue. Those sticky issues don’t always have a happy ending.
As you scale your technology and climb the learning curve, costs will go down.
Sometimes costs go up as you figure out the things you missed. Scale-up can result in additional pollution control requirements, noise control requirements, corrosion mitigation, etc. that just weren’t that much of an issue in the lab.
You have invented the wheel.
Almost every new invention you see is merely a modification on a previous idea. Sometimes, the modifications aren’t even improvements. If the original idea wasn’t commercialized, it is best to have a very good understanding of why that was, as well as a historical perspective on what ideas similar to yours have been tried before – and why they failed.
All biomass is created equally.
When you hear someone claim that their bioenergy process can take “any type of biomass”, you should apply a high degree of skepticism. Different feedstocks behave very differently in different processes. In a gasification process, some high ash or high moisture feedstocks can be problematic. In a cellulosic hydrolysis process, there are certain feedstocks that produce strong enzymatic inhibitors. In general, processes are optimized around specific feedstocks, and they don’t respond favorably to having inconsistent feeds.
In conclusion, all of these assumptions are common among renewable energy companies today. Many of these faulty assumptions have already resulted in bankruptcy for a fair number of companies, and will undoubtedly lead to a few more bankruptcies in the future.
Note: I will be in New Zealand until March 30th, and then my posting and commenting should return to normal. We are still working on optimizing the commenting structure, but are still quite open to what readers would prefer.
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“Just what are you?”
Now, I am an old desk jockey with bad
knees designing new nuke plants. Forty years ago I was going to
college and working in a warehouse when I won a lottery for which I
did not have to buy a ticket. I joined the navy and they made me a
machines mate, made E-6 (MM1) in under 4 years. Always looked for
opportunities to do new things. While I learned to operate a steam
propulsion and make electrical on my first ship, a WWII DD, I also
learned to run oil boilers. Also got to dive on a WWII diesel sub.
The navy sent me back to finish my
degree and become an officer. My first salute was from a 40 year
veteran Master Chief still in the active reserves. He accomplished
surviving being stationed at Pearl Harbor in December 1941, anti-sub
warfare out of Iceland, and the South Pacific. He was the only
survivor of two plan crashes and briefly being taken prisoner by the
Japanese while shuttling wounded marines back to the carrier. Did
not work out very well for 5 Japanese. He was recalled to active
duty for Korea, the Berlin air lift, and VN. Interesting characters
were always showing up.
As an officer, I served on two nuclear
cruisers. I wanted to be on subs but I failed the physical. Up to
that point I had never got caught cheating on the eye test. Aside
from supervising the operations of nuke reactors, I had duties as
safety officer for various things. One of the last things I did
before getting out was grade a missile exercise. Arriving on a ship
by helicopter on the end of cable was not something they mentioned
when I volunteered.
After getting out of the Navy I went to
work for GE supervising power testing of new boiling water reactors.
Senior reactor operator certified on 4 new plants. Anyhow ended up
back in the PNW (Seattle was one of the places I lived as a kid) at
Richand. We loved it there and it is a great place to raise kids.
While working on my masters in environmental engineering, I became
more interested in local environmental problems than Hanford
cleanup. Since my company was doing renewable energy back east, I
got them to come out and look at biomass opportunities in the wast.
So for a few years I got to work on renewable energy business
development. Next our engineering group got sold to my present
company who unfortunately did not do renewable energy at that time.
They were also the second largest employer in the areas so we move
our office inside their facilitates. It did not take me long to find
lots of work even though I worked for a different group.
Unfortunately, those new facilitates are in Ohio, Kentucky,
Tennessee, and South Carolina. If we going to move anyway, we
decided to take a job designing new reactors. Good work if you can
get it.
“The idea is to improve their
operation/life, not compromise it.”
Nice idea, too bad reality is so
different.
Paul N said:
Shortage of resources – the peasant class and poorer, which are most of the country, has nothing to operate with electricity.
Some 10 years back the entire western grid was only 20,000 mW. That covered a very large area and many areas have power cuts daily. Any industry of any size has it’s captive generation plant. We ended up going with DC arc furnaces for the steel mill as the grid was not large enough to support AC. At the time they were the largest DC arc furnaces in the world – 185 mt per heat.
Kit, that is quite a career, I am suitably impressed, and a fellow master in Env. Eng – who knew! I will defer to you on technical questions on nukes – though I retain the right to criticise the Cdn govt on its handling of them. Did you get any of the renewable projects going in PNW, other than the cow manure?
Russ, I do believe the Indian steel companies are now among the world’s biggest. A chemical engineer friend of mine travelled around there a few years ago and his comment was that they were very good at finding low tech ways to get things done on a large scale. Unfortunately that also often meant unsafe working conditions – but that is how it has always been there.
I remember in high school in early 1980’s learning they had 600 million people – now they have 1.2bn – have added 2x US population in three decades! That is an amazing amount of people!
Over the 15 years İ was there the company İ worked for went from 0 to 10 million mtpy – The government plants tend to be low tech but the private mills realize you have to be on the leading edge to make money and survive. They are still expanding.
İt doesn’t hurt the İndian companies that environmental restrictions are very tough but almost never enforced. For a few Rs the inspector remembers that he has to go elsewhere – shameful but that is the way it is. İ always laugh when at Copenhagen, Rio and other locations the İndian minister of the environment is telling the world what they should do – he has no idea as none of this is done at home.
İn steel making today you have to melt quicker, cast faster and roller thinner than the next guy if you want the market. You also have to maintain strict control over specific consumptions and no one does that better than the İndians. They can pinch a penny until you get a dollars worth of change. İt helps that İndia has a lot of high grade iron ore so the new mills end being able to make product that you have trouble making from scrap.
The government companies pile on the employees but the private companies are generally fairly lean and mean.
“a fellow master in Env. Eng”
Would you like to discuss transport of
fission products from spent nuclear fuel in the vadoze zone during
the next period of glaciation in the Great Basin?
“Did you get any of the renewable
projects going in PNW, other than the cow manure?”
No, and the cow manure was was with a
dairy farmer who wanted to work with us but we got out of the
business before I could make it happen. At the time we has half a
billion in dairy farm digester projects lines up with acceptable
ROI. The board canceled our presentation stating that the company
was going to focus on natural gas protects. This was after $35m in
development costs.
I did a root cause of the our business
failure and determined that executive back east that work in a
skyscraper did not care about investing in the environment of the
PNW. I developed a marketing plan (although I did not know what one
was) to target PNW utilities. I would learn what the concerns were
and learn about the their business development people. Then I would
just ‘happen’ to run into them at some conference. My marketing
plant was more of a guide of how to look for opportunities to help
the PUD customers who had environment problems. One PUD was
interested in waste biomass co-generation. Another latched onto
dairy farm digesters.
At the time they were flush with cash
from selling power to California and looking for new generation.
However, things got ugly because of ENRON. If you are being
litigated your cash gets tied up and decision making becomes very
conservative. Then 9/11 happened. Having a forest health hat and
manure handling hat just was not an immediate concern.
the vadose zone – haven’t heard that for a while. In Australia we used the far less sexy term of unsaturated zone. But since you bring it up, my background is in hydrogeology, and contaminant transport. I worked on investigating and cleanup of contaminated soil and groundwater at mine and smelter sites when I worked for Rio Tinto – most interesting one was cyanide contaminated groundwater at their smelter (sitting on glacial till) in southern NZ . Fortunately, in Australia, there are no fission products in the soils, (only one small research reactor and now power nukes there) and I would hope that they aren’t getting into the soils here either – but I am not a nuke expert so I wouldn’t know.
You were obviously on the right track with the dairy farmers, as there a quite a few such projects now – I saw one in Bakersfield last year, and they are putting them in on most cattle and pig feedlots in Alberta – they finally realised it was cheaper than doing sewage treatment on the stuff before it went in to the local creeks
I can sympathise with you about the man in the skyscraper, that was why I “left” Rio Tinto, when they came to the conclusion that they did not need an environmental engineering group. Our existence implied that they had environmental problems, which of course they did and still do, but getting rid of the group was easier than solving the problems, so that is what they did.
“Fortunately, in Australia, there are
no fission products in the soils”
Well you are wrong about that too.
Thanks to the Russian and above ground testing of fission products in
the soils are ubiquitous. However, exposure is insignificant unless
you happened to be a child in the Ukraine in 1987.
PualN would have been correct if he had
said there are no fission products in the soils from commercial nukes
in Australia. The same is true for commercial nukes in the US.
There never should be either. When
spent nuke fuel is put in Yucca Mountain (a legal requirement that
Obama and Reid do not want to follow), the fission products will
decay before reaching the environment. If you at what might show up
several hundred thousand years from now, it is the stuff that the
French, Germans, GB, Russia, and Japan reprocess out and reuse. In
the US we recycle harmless plastic but not fissionable material.
“my background is in hydrogeology,
and contaminant transport”
Then you may find reading about Yucca
Mountain interesting. If you go back 12 years, you will find my
signature on several documents.
“conclusion that they did not need an
environmental engineering group”
Guess what? My old company decided to
stop trying to be like ENRON. Got out of California. Got out of NG
(including Canada). Got out of energy trading. My present company
is about to start construction of a biomass power plant in Washington
State partner with two of my old companies. I have old pictures of
me and other dorky engineers in shirt sleeve shirts signing a
contract between the companies. This time it is top tier executives
in suits signing the contracts.
Paul N said:
Paul, Kit does not have a master’s in Env. Eng. Trust me. He likes to leave implications like that. “Working on my masters” in his case could mean he took some freshman courses with the intention of some day getting a masters. He desperately wants people to think he is an engineer, but you can take it to the bank that he is not a degreed engineer. Degreed engineers who I know and who have engaged him are pretty unanimous in their view that his grasp of engineering is superficial.
RR
A good article. It is a tough stretch to get manufactured biofuels to production. My pet is algal oil, and I have a very good mechanism to perform the task with very little infrastructure. It took a little while to discover that the fundamental problem is the very small amount of CO2 in the atmosphere. Just under 0.4%. Nature does a phenomenal job producing the vegetation that we take for granted. So there is the real challenge, to find a CO2 concentration process that uses very little energy. After that the rest is relatively easy. But the above article is a very good reality check list.
“So there is the real challenge, to
find a CO2 concentration process that uses very little energy. After
that the rest is relatively easy.”
Every fossil fired power plant produces
huge amount of concentrated CO2. Many have lagoons, cooling lakes
and other small bodies of water.
Good point, Kit, but the idea is to come up with a process that is site independent. The intention is that fossil fuel powered industry will not be common in the future. The process can require energy as long as that energy is solar created within the footprint of the total process. My main algal growth process uses very little water and is not pond or tank based.
Biomass electricity generating stations
also produce CO2. Some have exhausted some to the CO2 to green
houses to promote plant growth. Plenty of those around.
Robert Rapier said:
The problem is not necessarily bad assumptions but rather lack of experience. We can take an example of companies solely relying on cellulosic technologies. Regardless of their perceived success, they are all research companies. They are trying admirably on many cases to create a technology that will advance us to the future.
I am being a bit bold but if you class these companies and others (e.g. hydrogen, fuel cells, fusion…) as a research entity the reason for bad assumptions becomes clear. Mostly one is so close to the technology that when a positive challenge comes across, it is rejected despite the possible advances it may make to the technology or to their career. The fact being that because one is so close, one cannot make such a challenge.
And thus you have the paradox. If you do not pick a winner, you pick nothing at all. The true value of a company is one that is
willing to make assumptions (bad or good) and then realistically (or pessimistically) describe the issues you mention above. However we have to remember that no man or company can be all things; but then again if they do not listen and still get supported, that is another issue.