Hot Off The Presses

OK, so I received a bunch of great feedback on my post called "The New Manhattan Project Needs Greed," which attempted to describe the difference between the risk profiles of a natural gas well and a geothermal power plant. I've taken those comments (especially the one about discount rates), and revised the charts with new data.

I interviewed the Director or Production and Sales at Reykjavik Energy (OR), and he gave me some very helpful information to use in this projection - rules of thumb for construction costs, operating expenses, well sustainability/longevity, and productivity.

I've also been in touch with a good friend at Bentek Energy, which is the gold standard of natural gas data and analysis. Bentek helped me put together some averages for natural gas wells in the Haynesville shale gas play (gulf coast area - TX, LA).

The following charts assume an equal $8.4 million investment in both the unconventional gas (Haynesville) and geothermal energy (Iceland). I applied a 10% discount rate (Value/((1+r)^t)) to all values after year zero (all years after production begins). Basically, I tried to analyze both projects as if they were being developed in mature fields with exploration and resource studies completed by previous operations. I did include a construction period of three years for the geothermal power plant just to show how that buildout and capitol expenditure actually looks (according to OR), but that would be part of the exploration and study that I've assumed out of the equation* for now.

*When I applied the discount rate to the geothermal plant starting in year -3, the project was still in the red in year 40!

CLICK TO ENLARGE
Natural Gas Well Cash Flows ($5.00/mcf):

















CLICK TO ENLARGE
Geothermal Well Cash Flows ($.10/kwh):















I think this really shows how the natural gas well repays its investment so quickly. The revenues lag the costs only by a few months, and the well is profitable within year zero. Admittedly, I did give the gas well a $5.00/mcf value for gas, which is about 80 cents higher than the price today, but that is the forward looking price used by Bentek in their break even analysis for the Haynesville. Actually, that price is easily achievable when companies sell the volatile liquids produced with most Haynesville gas.

These graphs also show the massive appetite for risk that a geothermal investor needs to have. The geothermal project lays out a huge ammount of cash and doesn't break even for almost five years (eight years since construction begins).

We also see the same story of depletion that I described in my earlier post. Haynesvlille wells typically decline by 80% in the first year! This accounts for the massive upfront bump of cash and the long, poorly productive tail. Bentek assumes that the wells are 100% tapped within 20-25 years, but the vast majority of that productivity occurs in the earliest years.

By contrast, the Geothermal well will easily produce for double the time of the gas well, and if managed properly, geothermal wells can produce sustainable outputs for very long times (the fuel source is radioactive decay in the earth or a magma body, which doesn't deplete at anything like the rate of a liquid reservoir).

One element I did not add into this equation is inflation. Geothermal developers generally get an increasing nominal price for their power as inflation builds. Here in Iceland, I heard that OR is lobbying for a power price increase of almost 25%, but that is because the socialized utility is almost bankrupt from overspending (see their fancy office in my last post). In the States, inflation is a big question mark. With everyone raving about double dips and Japan-style economics, I decided to leave that piece out for now. I'd love any insights on inflation though.

A disclaimer, as before: I'm a geologist attempting to become a self-taught economist. A lot of the people reading this know how to do what I'm doing better than I do, and I'd love to hear about any changes I should make.

Cheers,
Cully

Week 6: Marathons, Epic Meetings, and Hunger Explosions

It all happened after a very successful meeting with the International Deep Drilling Project manager at Landsvirkjun Power, Iceland’s largest power producer. Bjarni and I shook hands over an agreement to work together on a project helping Landsvirkjun adapt its geothermal plants to meet potential climate change regulation. I will research sulfur and carbon emissions control technologies, and their effects on plant operation. In exchange I get full access to LVP personnel for my Watson research. I also get office space, a desk and a computer in the LVP headquarters tower in October.

I left the LVP office feeling pretty excited about the string of six meetings I had just completed with some of the top executives and directors in Iceland’s power industry. Since I had no more obligations, I decided to reward myself with a visit to the Reykjavik outdoor museum – a collection of historic buildings that have been moved to a farm inside the city limits.

Suddenly the scent of chocolate and mint penetrated my nostrils. Oh no. I looked ahead at the grinning visage of my doom (featured below). The chef stared down at me from a mint factory exterior. Allow me to explain what I call “the hunger crescendo effect.”





















I’ve been competing in endurance sports for about five years now. I began with mountain biking and marathon running then became very active in Middlebury’s road bicycle racing club. After college I got a sponsorship from Long Trail Brewery to keep racing road and mountain bikes out west in California, Colorado, New Mexico, Utah, and elsewhere. During the training and racing season I am constantly besieged by waves of hunger. Snacks often consume thousands of calories at a time, and I have learned to prepare for the ravenous pangs.

I’ve spent considerable time, effort, and money studying my body. Lactate threshold tests, VO2 max tests, power to weight ratio tracking, etc. One thing I’ve learned is how hunger hits after a workout. Weird as it may sound, I’ve taken some data on my hunger. For me, hunger arrives in a wave pattern, with characteristics similar to the waves we saw in high school physics. The peak of a wave is maximum hunger, the trough is satiation, and the difference is the amplitude. The wave’s frequency is how often I feel the cycles of hunger.

An intense workout creates a high frequency wave. A mild workout creates a low frequency wave. The total calories burned by a workout have some bearing on the amplitude of hunger waves. So, an intense but short workout will result in a few fast but mild waves of hunger – maybe two snacks in the following 12 hours. A long but low-intensity workout (like a slow 100-mile bike ride or a marathon) may create a number of major cravings spread throughout the following days.

After a multi-day stage race like the Tour De Gila or the Green Mountain Stage Race these hunger waves sometimes “stack.” Each stage of racing looks different in terms of intensity and total effort, so the hunger after one stage can sometimes combine with hunger from other stages. During the racing season I’m usually ready for hunger and never find myself far from food. I’m now out of season and absorbed in my Watson Fellowship projects, and as a result I forgot about the hunger wave issue after running the Reykjavik Marathon last weekend.


















Like the full moon for a ware wolf, the mint factory triggered a massive hunger wave 36 hours after my marathon. This feels like a rapid drop in blood sugar, a sense of panic, and the usurping of self-control by the reptilian brain. Imagine handing the controls of your metabolism over to a rabid wolverine.

Fifteen minutes later I regained consciousness. My dress shirt and jacket lay in a rumpled heap nearby the park bench where I lay. I looked about and saw an empty banana peel, a ½ kilo bag of mixed nuts and dried fruits (turned inside out and licked of oil and salt residue), drained liter of water, empty coffee cup, and a plate smeared with the remnants of hearty chocolate cake.

Rebuilding my composure, I burped, dressed, and continued on my journey. The question is no longer IF, but WHEN I will get diabetes. Incidents like this create an insulin profile resembling the Patagonia Outdoor Clothing logo. Such is the life of an endurance athlete with a supercharged metabolism.

OK, enough story telling. Some people are wondering if I’m actually accomplishing anything out here. Unfortunately it’s more fun to write about fish festivals and puffin barbeques than geothermal well logging and remote sensing projects. Still, I’ll take the time to describe what I’m spending the bulk of my effort on.

For the past few weeks I’ve worked with the Icelandic Geosurvey (ISOR) in Akureyri. When they learned that I speak some Spanish, I assumed the reigns of a research project on the geothermal industry in Chile, where ISOR is opening a subsidiary geothermal consulting agency. I spent two weeks compiling information on geology, geochemistry, geothermal exploration, business development history, government regulation and incentives, contacts, and other information required to build an accurate picture of the burgeoning Chilean geothermal opportunity.

With research in hand, I built a digital map to catalogue the info. I synthesized my research into an interactive map that links a spreadsheet of data to a Google Map through a password protected system. It’s basically a prospecting toolkit for geothermal energy in Chile, and the people I’m working with at ISOR seem pretty psyched about it.

Next I started working with some well logging data to learn the science of geothermal exploration. I’m learning new computer programs like Well View and PETREL, and also refreshing my thermodynamics, rig terminology, geophysics, and related technical topics.

I’ve also been traveling to meet with people from all over the Icelandic power industry. I focus on the financial executives because I want to know more about the economics of this business. Some have shown me the models they use to project costs and revenues in a geothermal or hydropower project. One CFO actually mailed me copies of his models after our meeting. I generally prepare a list of questions I want to review, often relating to concepts I've been trying to develop for my writing. I'll sit down with a CFO or CEO, and we spend an hour drawing graphs and talking through aspects of the power business, problems the company is dealing with, the way they structure contracts for power purchase or sale, etc.

The next month probably involves a move to a new town, Husavik, to work directly with a geothermal power plant and a team of American and Chinese engineers. My final month in Iceland looks to be filled with this new emissions control research project at Landsvirkjun in Reykjavik.

So there, I’m not being a bum.

Week 4: Olaf, Man of Iron

The midnight sun enables Icelandic adventures late into the night. See a video below and a midnight photo of my new home town above.



During a recent late-night (mid-day?) hike I met a 47-year-old man named Ingi. Ingi invited me to a workout class at his gym. I arrived at noon the following day, ready for some weights or jumping jacks or whatever an Icelandic exercise class might entail. I found myself the junior participant by at least twenty years, and I assumed myself the fittest. How naïve.

The clock struck 12:05 and our stout instructor bellowed over his microphone,“taka afstöðu þína!” (take your positions). Ingi found me dazed in the center of twenty Icelanders hustling to their numbered exercise machines, free weights, mats, boxes, and ropes organized around our mirrored room's perimeter. Ingi inserted me into something I might describe as a “horse kick” exerciser. He said “this one is hard, it works your gluteous. Just stay with Olaf, the Man of Iron. He will make sure you get the good workout today!” I looked left. Olaf towered over his shoulder press machine, bulging with muscles and veins. He leaned over and inserted my weight pin into the heaviest setting. Grinning, he whispered to me, “þú ættir ekki að gráta í dag,” Which I later learned means, “you should not cry today.”

Suddenly the instructor turned on Michael Jackson’s “Beat It” remixed to throbbing German techno. “Byrjun!” blasted over the music and suddenly Olaf began screaming and crushing out rapid repetitions of shoulder presses at maximum weight. The entire room full of middle aged Vikings erupted in violent screams and enormous physical output. The people frightened me. I felt somehow transported into a scene from Braveheart.

When “skipta stöðvar” blared over the speakers, we rotated. I ended my horse kicking and imagined simply walk to the pushup station next to me. Wrong. Before I could dismount my gluteus machine, Olaf was upon me. He shoved me aside and began pumping out repetitions twice as fast as I had. This man was probably 50 years old. He didn’t stop screaming the whole time we exercised. The middle-aged mothers didn’t stop screaming. Everyone screamed. The music escalated in intensity and volume until “The Final Count Down,” remixed with war sounds, literally shook the mirrors on the walls until I thought they would shatter.

It occurred to me that the Viking gene persists here. Olaf wasn’t exercising with weight machines, but rather besieging them. Instead of tricep extensions Olaf did overhead axe swings. When we ran up stairs holding weights, I envisaged him with a kicking and screaming woman on his shoulder. His abdominal workouts only honed his pelvic thrusts, which he would later direct at fleeing damsels on some flaming countryside. While I toiled with the bench press, Olaf reveled in mauling the skulls of Irishmen. Our most talented film directors could not replicate the bloodbath playing out inside this howling Viking’s mind. Olaf's workout occurred on the ravaged shores of Normandy circa 724 AD.

After our 34-station suffer fest (and my complete emasculation at the hands of superior athletes with C-section scars), we began a session of very aggressive yoga. A core workout followed, then dynamic stretching. When it was all over and the smoke cleared from the battle field, Olaf offered me a sip of his energy drink. I pictured Olaf calmly slitting the throats of several goats and mixing their blood with whey protein and electrolytes. He said something in Icelandic, which I internally translated as, “Drink this for the courage to pillage many settlements and cleave through Germanic Hordesmen. It will give you an amour penetrating phallus and the strength of Thor, God of Thunder!” I declined his generous offer and opted for water.

In other news, my host family took me to a black market fish store. We purchased illegal fish balls (like crab cakes... kindof) and many nefarious kilos of cod. Iceland's fish economy operates through an elaborate quota scheme. Our "fisk" was sold illegally and without an appropriation from that quota. Every Icelander can fish, but cannot sell without a license, which this fish operation lacked. The fisherman's wife dries fish in a converted Pepsi vending machine, stores many filets in a large deep freeze, prepares fish balls, and even bakes delicate cookies, all of which she sells to support her family. I felt very sneaky. When she offered a recipe for fish ball gravy, I though about writing a black market foods review - detailing the illegal capitalist restaurants of Havana, the rhino horn purveyors of Beijing, and the fish balls of Akureyri.

Educating Hank Johnson

I've started writing an introduction for this post several times, but I've failed to adequately express myself each time. There is simply no way to introduce this. Just watch:

U.S. Congressman Hank Johnson

I honestly can't come up with the words to describe how I feel. Disappointed? Outraged? Plain curious about who voted for someone so unqualified...

This guy makes critical decisions for our nation. Congress, what the hell? You deserve that 12% approval rating.

Hank couldn't distinguish a watt from a joule, yet I'm sure he's voted for or against important legislation on energy policy. Just watch him throw out buzz words like "environmental" and "global warming" without even the faintest sense of their relevance to the situation. When pressed, he could tell you that global warming is "very serious," but could not tell you about the research that informs that seriousness, or the debate circulating around that research.

Congress has five engineers and 225 lawyers. Good luck. I've come to believe that some of our leaders (mirrored by parts of our population) lack the information fundamental to considering complex technical issues like reforming an energy system. Should we reform it? If so, how? I sit here imagining the a long string of baseless buzz words that might flood some senator's mind.

Hank's firm grasp of geology suggests that he could not possibly understand an issue like fossil fuel resource scarcity. Guam capsizing? Are you serious? I have to do something about this. People need to understand some fundamentals before they start arguing about policy...

Of course I could be misreading this whole thing. Hank could have the driest sense of humor ever, and Guam tipping could be his hilarious joke. Does this Georgian Democrat command hyperbole and sarcasm so deftly that I completely missed the punch line? Is my reaction a misunderstanding? Which is more dangerous, a powerful idiot or a powerful misunderstanding?

YouTube Hank a little more and his amazing sense of humor (and grasp of reality) begin to materialize:
Hank Discusses a Peer

The Discovery of a Corpse

My jocular hockey-playing friends from last weekend took me to the Great Fish Festival in Dalvik this weekend. Dalvik lies 30 minutes north of Akureyri in the same fjord – a stunning waterside drive.

I’ve gotten close with Hinrick, a 20 year old guy from an island called Grimsey. Hinrick invited me to Fish Fest 2010 and introduced me to his mother in law, who happens to be the friendly mayor of Dalvik. She allowed me to camp on her lawn with Hinrik and eat her fish stew, which I found delicious and creamy.

The festival began as most do in Iceland, with redneck activities in a field full of camper vans and tents. We drank beers and told stories as the crowd swelled. By 10:00 I found myself sitting with fifteen friendly Vikings, and I could see hundreds of similar groups spread across the hillside. At 11:00 fireworks signaled the end of fish feasting and the start of aggressive partying. What ensued scandalized me. I report the following as a bewildered observer.

















Icelanders party harder than anyone I’ve ever known. More alcoholic than Kiwis, harder than New Yorkers, and more committed to the festivities even than the Dutch. Nothing compares. One man was stabbed deeply in the back last night, and after fighting off his assailant the man went back to a bar for more dancing and Nordic screaming.

An unknown number of obese blondes invaded Hinrik’s camper van and proceeded with an orgy only inches from poor Hinrik’s unconscious head. Hinrik’s girlfriend, also present, shouted. Her protests yielded only a slightly quieter orgy, but not its cessation.


















When I awoke in my tent the following morning I made my way across the street to brush my teeth and wash my face at a gas station. Behind the station I discovered what I believed to be the corpse of a dwarf. I hurried back to my friends for help. They came, and upon seeing the body lying next to a dumpster remarked, “Ye found a focking dead midget mon!” and howled with laughter for about forty five seconds.

I asked, “How do you know he is dead?” and they replied, “Well he ain’t moving much and ye don’t just choose to sleep on a dumpster do ya?” I said, “But why are you laughing? This is terrible!”

I thought, “these people are real bastards to laugh at a dead person. Why aren’t they calling the police?” I said, “shouldn’t we get the cops?” and they calmly told me, “nay nay, he will sort himself out.”

How the hell does a dead midget “sort himself out,” I wondered. I then discovered the Icelandic colloquialism of saying that someone “dies” or “is dead” when they pass out from booze. Quite a funny misunderstanding in retrospect. I checked to make sure that the small man was breathing, and he was.















After this I went to a local fish leather store at Hinrick’s behest. I found colorful arrays of scaly leather, but was generally unsure of what to think of the store. Why would I need colorful strips of fish skin? Apparently the shop supplies clothing designers, and the outlet serves as some form of advertising. Somewhere a clothing designer is making clothes from purple fish leather….

I ate breakfast with the mayor of Dalvik, Hinrick, and his girlfriend, and then drove my slurring hockey buddies back to Akureyri. They put me behind the wheel because the police breathalyzed every car on the way out of town. “I’ve got no chance mon, no chance at all. Can you drive a manual?” I said, “It’s 2:30PM, how can you still be drunk from last night?” and Orri replied, “because last night didn’t end until 10:00 this morning when Ole had a barbeque thrown at his head.” I said, “wow, is that why his face is bleeding?” and Orri replied, “Nay, he dodged the barbeque, but then they threw a bag of beer bottles and he couldn’t move fast enough!” Ole "died" shortly after this incident...

I drove, they slept.

This week I begin working on the International Deep Drilling Project. The goal is to tap supercritical fluids at pressures hundreds of times greater than the atmosphere’s and temperatures over 400C. I have finished a crash course in thermodynamics, geochemistry, power plant engineering, and local geology. I will soon begin working with geophysical data to assess the geothermal potential of an area and validate a previous study with new techniques. This project exposes me to the absolute frontier of geothermal drilling technology and many leaders in the industry.

I also interviewed the Chief Financial Officer of an Icelandic utility, and was pleased when he offered to email me copies of his financial models. I should be able to generate the graphs from my previous post (August 5th) with much more accuracy now.

I other news, I will run the Reykjavik marathon on August 21st when my family comes to visit me. I’m shooting for a time under three hours, which would be a personal best by almost 20 minutes. I completed a 17.5 mile run on Friday, and my times seem to be good enough to accomplish my goal.

Also, a power plant developer from the United States will be coming to Iceland in the next few weeks, and has offered to let me work with his team of engineers on a cutting edge new geothermal power plant northeast of Akureyri. It is the first of its kind, and looks to be the future of the industry for low temperature applications (which are ubiquitous in the American southwest). More to come…

Week 3: Fresh Lava, Puffin Barbeques, and Sparkling Disk Jockeys

I ended last Saturday afternoon a bit lonely and a bit disappointed with my social progress. Sibbi and Disa had left me home alone for the weekend, and I glumly thought, “I’ve been in this country for two weeks and I haven’t met anyone my age.” I had ventured downtown to check out a concert, but just ended up eating a ton of ice cream. It was of low quality, and I considered making a post on www.cryingwhileeating.com, but decided against it. Disenchanted and cold (from the inside out) I wandered back up the 30-minute walk to my house.

I rounded a corner and noticed a trickle of water flowing down the side of the road. The trickle became a thin stream as I ascended, and the stream thickened with every step I took uphill. The stream followed me home, or rather, it led me home. The water coming downhill matched every turn I took uphill.

I made my last turn and saw the water’s source. A group of 20-something people had filled an inflatable pool with hot (geothermal) water. Geothermal water is pumped to every house in Akureyri, not heated in boilers, so filling this pool cost about 50 cents. The bathers sipped beers and chatted in the steam. This pool literally sat in front of my house – the son of the man who shares my duplex took the liberty of filling and overflowing the pool, hence the street’s new river emanated from my front door.

















For some still mysterious reason I figured that the best way to get invited into the pool was to seem really American. Don’t ask me why. I just figured that blatant Americanism would start a conversation. I said, “howdy yall.” They all looked up. I thought, "I have made a grave mistake. I have triggered some deeply rooted Viking atavism. These Vikings view me as an intruder, and now I will die at the hands of bucksome blonde Viking women and their stout Viking men, drowned in the very waters I came here to study. I will be clubbed like a seal, speared like a whale. I know how these people operate...savages!"

Psyche. One of the Icelanders asked me to join. I felt like a freshman in high school again. The popular kids want to hang out with me! I ran inside and got changed. These “stout Vikings” turned out to be players on the Icelandic National Hockey Team. After an hour or so in the pool (and lots of questioning about my American heritage) they invited me inside, then to a house party in another part of town. Later we went to a nightclub where I think the average age was 19. My new friends Orri and Andri informed me that, “The most famous gay DJ in all of Iceland is playing tonight.” Yes, THE Paul Oscar presided.

Paul Oscar, decked in sequins, sweated and vibrated his way across the stage for six hours. After his last set, he pointed at me (the hockey players got us to the front row) and gestured me to the stage. Paul personally and singularly gave me a signed copy of his best-of album that says, “I heart U.” The party ended at 6:00 AM with sandwiches of cheese, beef, and French fries between béarnaise coated bread slices. I imagined translating the restaurant's name as, "Aggressively Seeking Heart Attacks."

I woke up at 2:00 PM the following day and rented a sail boat to explore my fjord. After sailing I got a text from Orri. He invited me over to his house with some other friends to barbeque puffin. Orri had hunted the semi-penguin-looking birds with a giant lacrosse stick. He plucked them from the air while perching on the edge of a massive cliff in northern Iceland. I got to see videos. We spent the evening cleaving dark puffin meat from breast bones, marinading, and finger licking. The bird is delicious! The night ended with vague plans for kayaking, rock climbing, and motorcycle riding next week.

The following day Sibbi and Disa returned, and we drove out to a region of fresh lava flows (photo at top of post, Sibbi featured) and geothermal power plants to learn the local geology and get a tour of a generating facility. We also checked out an awesome water fall (below).

















Sibbi and Disa were very proud of my weekend exploits and social integration. I cooked a big meal of fish, risotto and salad to celebrate, and everyone went to bed burping happily. The End.

The New Manhattan Project Needs Greed

Every time I visit a geothermal power plant I can’t stop thinking of the price tags associated with all the machinery inside. The wells alone cost millions, not to mention the turbines, cooling towers, piping, heat exchangers, regenerators, etc. Then you have to pay workers, insurance, and all kinds of other costs. Where does the capital come from? Who foots the bill if it doesn’t work? How do you convince someone to invest in an idea as absurd as, “I want to drill a hole several kilometers deep, then pump extremely corrosive and mineral saturated water to the surface, use it to boil another fluid, spin turbines, and sell electricity.”

I’ve been thinking about risk lately, in part because a banking crisis just hammered Iceland, so risk is a big topic here. Risk constitutes a major tenet of any investment consideration. Below are some pictures I drew; they illustrate concepts I feel are very important to (and very absent from) the current dialogue on energy. Namely, why do we have the energy mix we currently have?

1: Capital Flows in a Renewable Energy Project












2: Capital flows in a Non-Renewable Energy Project













These graphs (absurdly simplified) compare the costs and revenues of two types of projects. The first describes a renewable energy project like a wind farm. The second describes a non-renewable project like a natural gas well. In this example, both projects start with a $5,000,000 initial investment then fall to a lower level of constant operation and maintenance costs. The main difference is in the shape of the return curves (the operating cost for the renewable plant is also higher, but still flat in this example). These graphs attempt to show the consistent, enduring returns of a renewable resource and the declining returns of a non-renewable resource.

Notice that the bulk of total returns are tipped to the earliest years of the non-renewable project, whereas returns from the renewable project spread evenly throughout time. Gas wells have the highest productivity when they are initially tapped – gas pressures below ground are highest before any gas is removed, then the pressures (and productivity) decline with more extraction until the well is no longer economic to produce. Conversely, the wind will not decline with additional use, so returns remain steady through time. Obviously these curves would wobble and wiggle in real life - this is a theoretical model. Also keep in mind that these graphs do not apply a discount rate to either curve.

So, which picture looks more risky?

Investing is as much about not losing money as it is about making more money. Especially today, investors fear risk. A huge metric is the payback period of an investment – “How long until I get my money back?” The payback period often trumps long-term profits because the fear of loss outweighs the greed of gain. This dynamic often magnifies in a recession.

Your first impression might be that the consistent returns are less risky than the fast bump of cash followed by precipitous decline. However, from a payback period perspective, PPP, (am I an economist now that I’ve coined an acronym?) the natural gas well is less risky because your initial investment is returned more quickly. A lot of the people I interview talk about their investments in this way. They focus on payback periods.

Is this the right way to assess our investments in energy? Obviously the answer is yes for a short-term investor who doesn’t want to lose his or her cash. The risk averse energy investor (read: all energy investors) will generally choose the fastest payback period, which, according to the energy mix of the USA, happens to be a non-renewable resource over 90% of the time. But what is the right choice for a government? How about a government that is concerned by energy security, climate change, and sustainability? A dependable, non-depleting, domestic energy supply probably sounds great to most governments.

Click for video: The New Manhattan Project

Indeed the American government and many other governments incentivize renewable energy prolifically. Their schemes often defy logic and science. A critical difference between the original Manhattan Project/Apollo Mission and our current energy challenge is that government agencies spearheaded the Manhattan (US Army) and Apollo (NASA) efforts whereas our energy supply is almost entirely produced and controlled by the private sector. Some of my friends at Middlebury may have forgotten this, but we live in a capitalism. The private sector responds to one thing: $$$$. If we want to change the way the private sector invests in energy, we have to change the way they profit from that energy.

Listen to the intro of this podcast: Our last six presidents have failed to deal with the energy crisis despite acknowledging its import.

An effective incentive needs to deal with investors' fear of risk and their desire for quick paybacks - an issue I've never heard addressed by any politician. We've heard of many incentivization schemes. If Obama wants his new Manhattan Project to work then he will need to understand exactly what kinds of incentives the private sector will respond to. Just offering cash rewards like Senator Forbes proposes (above) may not be the ticket. The profit motive might be squashed by the risk fear. One solution is to reduce the payback period on investments in renewables. Here's my idea (and I'd love to know what you think):

1) The government stops taxing renewable energy investment and renewable energy power sales until a project's payback period is reached. 2) The government stops taxing salaries of people employed by renewable energy projects until payback is reached.

Absurd, reckless, outrageous! Ya, but I'm just a kid with a blog, so I get to think big. Even if only 20% of you agree with me, I'm still doing better than congress. Besides, is this any more absurd that a $24 billion dollar bill proposed by Senator Forbes? It's the same idea, just instead of handing you money at the end, the government stops taking your money at the beginning. Timing is everything... Obama and Chu seem like a reasonable team, but they are hardly Oppenheimer and Einstein. I'd rather not have bureaucrats choosing which projects to fund - leave it to the engineers and the capitalists to succeed and fail as they may, then tax the ones that survive after they begin profitably producing renewable energy for the long term.

The first piece of my idea should mean that payback happens up to 40% faster. The second piece should mean that renewable energy projects can pay their employees 30% less, but still offer them the same "after tax" salaries, further decreasing payback periods. I think this is a way to address the payback period preference without the messy business of handing out loans, grants, or cash. This tax break would essentially bump up the early revenue streams on renewable energy projects by the tax rate (actually it would lower the cost curve, but the amount is calculated off the revenue curve), thus decreasing the payback period substantially. The attractive long term profits in renewables might also become greater incentives once payback periods shorten to tolerability.

I argue that payback periods matter less to the government than to a private investor because the government has a longer investment horizon, and that this tax break can be viewed as an investment. The private investor wants his money back soon so that he can use it in another project. Theoretically, governments have infinite lifetimes, and they can wait for their money to come back as long as it does come back eventually (with due interest of course). Governments are in the position to make choices on the basis of long-term profits, not payback periods. The tax break is like a loan, which eventually repays, just on a longer time scale. This loan has the added benefit of reducing emissions, "domesticizing" the energy supply, and increasing sustainability - things that matter to government but remain absent in most economic models coming out of private investors' offices.

Obviously this reduced tax income for Uncle Sam means one of two things: less public services or higher taxes on the rest of America. I'd prefer just paying for it with cuts to Barney Frank's salary. But seriously, if the country actually wants to change the energy supply, then it's going to need to pay for it one way or another. At least this way the incentives are felt by both investors and the working man at the plant. When wind turbine techs stop paying taxes, eyebrows get raised. Hopefully the conclusion is that "these guys are doing a really important job for the country, and I'm happy to pick up the slack." Of course the other conclusion could be, "Let's kill this lucky bastard," but I have more faith than that.

Still not buying it? Well I'm not much for handouts either. Here is the real reason why the government might want to incentivize renewables with short term tax breaks. When we combine revenue and cost into one curve we get profit. Long term profits are where the government can make its money (after payback period, government starts taxing again, and continues taxing through the long term):

3: Long Term Profits in a Non-Renewable Energy Project













4: Long Term Profits in a Renewable Energy Project












If you are a government with the long term in mind, then it's clear which projects offer you the most blood to leach. These projects happen to be the ones that don’t emit much greenhouse gas. They also happen to be the ones that don’t deplete unsustainably. Give 'em a tax break now, and you can ride the wave forever.

This idea came from trying to think about how to leverage the strengths (and preferences) of government and private investors: long term and short term investments, respectively. Now, I admit that my handle on business tax code is pretty limited. If what I'm proposing makes no sense, then please leave me some scathing commentary so that I can retreat into the Icelandic hills. I'm working now to get real data from energy companies here in Iceland and back home in the States. I want to reproduce these charts to reflect reality. The only way to find out if I am right is by comparing my ideas to real numbers...