Lawrence Roulston: An Answer Is Blowing in the Wind

In this exclusive Energy Report interview, GreenTech Opportunities editor and publisher Lawrence Roulston talks about how private enterprise has stepped up to the plate, managed to tweak technology and bring the costs of wind-powered energy production down 80% since 1980. It's to the point where wind is on the brink of being able to compete directly with conventional energy. Solar isn't as close, Lawrence says, but the virtuous circle of alternative energy is in motion and gaining momentum. Reduced costs lead to further research and development, improvements in technology, industry expansion and greater economies of scale, which lead again to lower costs, more innovation, more industry growth and cheaper energy, and round and round it goes.

The Energy Report: The Copenhagen Conference disappointed a lot of people because no binding or meaningful agreements came out of it. In your view, Lawrence, how do multinational conferences such as Copenhagen or Kyoto help or hinder real change?

Lawrence Roulston: We have to look at the big picture. While a particular event such as Copenhagen was a bit of a disappointment, the net effect over a period of years has been that governments following up with initiatives based on some of those discussions have led to very substantial change.

We have an alternative energy industry now because governments have been having these dialogs for the past couple of decades. We don't see the effect in North America as much, but in earlier years a lot of action by Europe governments produced very substantial results. Europe has a very significant alternative energy industry and a significant portion of the energy is produced by green technologies because governments there have taken action.

On one level, we can't possibly rely on governments to actually institute the changes that are required. But the fact that the governments make it a topic of discussion puts pressure on private enterprise to get involved.

TER: Help us refresh our memories with some examples.

LR: For one thing, since Germany and Denmark provided feed-in tariffs for wind energy, Denmark now fills 20% of its total electricity needs from wind and Germany overall 8% or 9%. More to the point, they've developed a world-leading industry that's now exporting that expertise around the globe.

Another very important consideration is that back in 1980, the cost of producing electricity from wind ran about 30 cents a kilowatt hour after factoring in capital and operating costs. The cost is now down to about 6 cents a kilowatt hour, which is very close to being competitive with conventional energy forms. That has come about because the governments have put pressure on utilities to begin to generate power from alternative means. The industry has stepped up and, over a period of years, tweaked the technology and brought the costs down to the point where wind is now almost directly competitive with conventional energy.

TER: Is Europe ahead in this regard because the governments are really motivated or put pressure on the utilities while the U.S. just gives it lip service? Or is something else responsible for Europe advancing much further and faster toward cleaner energy?

LR: It's a combination of things. I think Europeans generally are more amenable to making sacrifices that lead to longer-term benefits. The most effective means in Europe has been those feed-in tariffs, whereby consumers end up paying a little bit more in their total electricity bills in return for the utilities using alternative energy to provide a percentage of the power. The additional revenue enables the utilities to pay a higher amount—with the feed-in tariff—to buy wind and solar and other alternative forms of energy.

TER: How much more do consumers pay?

LR: In Germany, the typical German utility customer only pays about 30 Euros a year more on the utility bill. Clearly, that's not been a huge sacrifice, but equally clearly, it's resulting in a meaningful change and the development of a very important industry that now employs more than 100,000 people in Germany alone.

TER: That's a great point about governments keeping pressure on industries to make some changes and keeping environmental issues in the forefront of people's thinking, but why don't these conferences limit the focus to alternative energy? Doesn't the broader umbrella of climate change raise the whole specter of cap and trade and muddy the waters?

LR: It's so incredibly complex and the idea of 150 or so countries sitting down and arriving at any kind of an agreement is mind-boggling. There are so many different ways to approach it, such a multitude of different mechanisms. The challenge of agreeing on one mechanism is insurmountable, but the idea that they have to do something is really important. The best thing in the world is for the governments to encourage private enterprise to just get on with the job. Whatever means they use to accomplish that is secondary, whether it's feed-in tariffs or mandates on utilities to deliver a certain percentage of the power sold from renewable sources.

TER: Are there conferences where governments get together or even private industry gets together and says here's what's working in this space?

LR: Meetings at the G-20 level probably would be far more effective than bringing most of the countries of the world together. The G-20 nations are the biggest contributors to the problem and, therefore, should be the ones focusing on solutions. Part of the difficulty is that every government sees up-front costs but benefits that may not materialize until the next administration has been elected. It's therefore very, very hard for incumbent politicians to take strong action to mandate. Everybody's hoping that all the other players are going to be the ones to fix the problem.

Even for governments to simply mandate producing a certain percentage of power from renewable sources is a bit dangerous politically, because the cost differential is pretty significant. Still, some states are doing that, and the ongoing process of pushing the industry in that direction, even though it may not be as strong and sustained and widespread as we'd like, is leading to improvements to the technology and greater economies of scale as the industry expands. It all contributes to further innovation, more research and development, and bringing the costs down.

As a result, wind and solar energy are certainly within reach of becoming directly competitive with conventional energy. It's not going to happen in one or two years, but we're close enough that it's well worth the effort to keep moving the industry in that direction.

TER: As I understand it, though, wind and solar can't compete without being subsidized.

LR: That's right. Focusing on wind for a moment, a typical wind location right now would need a subsidy. Most of the U.S. wind energy produced in the last couple of years has relied on the production tax credit, which amounts to about 1.5 cents per kilowatt hour. That's been enough that the wind industry in the United States grew at a phenomenal pace last year and it's still growing rapidly.

TER: But we wouldn't have seen that kind of growth without subsidies.

LR: No, no. Certainly not. But that small tax credit has been enough to make it economically viable. It becomes kind of a circular thing that as the pace of construction increases and economies of scale improve, the costs come down further. That's why I'm optimistic that within a couple of years, wind probably will be able to stand on its own in the locations that are most favorable. Overall many other locations will continue to need some form of subsidy for some time yet until the technology evolves.

TER: So this won't be a long-term viable solution without further technological advances.

LR: That's right, but the process is underway and the end point is in sight.

TER: Do you worry about the government pulling subsidies as budgets are cut?

LR: Yes. We look at that very carefully, but just to clarify, our biggest focus in GreenTech Opportunities is on the companies in the space of contributing to the technological advances and making the technological enhancements. From that perspective, the fact that the subsidies are likely to be reduced and ultimately eliminated is actually good news because that puts more pressure on the industry to continue to evolve and to improve the technology. If the subsidies were fixed for a long time, industry wouldn't have the incentive.

TER: Are we far enough down the subsidy timeline that there's enough solar and wind out there that we can begin to see economies of scale?

LR: Wind is much further along than solar. It is much closer to having the appropriate technology and the appropriate efficiencies to stand on its own. Solar technology needs a lot more development to get to the point where it would be directly competitive without subsidies. But really exciting work on improving the technologies is taking place in both fields. Who knows if particular technologies ultimately work out, but if some of the developments that have been demonstrated at a laboratory level or on a prototype scale work their way into commercial production, it could have a very, very substantial impact on the cost structure of wind and solar.

TER: I can't tell you how many residences are putting up solar panels here in California, but we aren't really seeing businesses do this. Is it a matter of the technology hasn't evolved enough? Or motivation tax breaks for homeowners that aren't significant enough for commercial installations?

LR: Without a very substantial tax credit or other form of assistance, I don't think those residential solar installations would be economically viable. I think the government may have targeted the residential sector with fairly significant subsidies. The other element, of course, is that it's cool to have a solar-powered home.

But at least at the small end of utility scale, there is solar-generating capacity in California and a significant amount in Europe. Those commercial applications use photovoltaic cells that convert sunlight directly to electricity. There is also another approach, a solar-thermal process, used by utilities to produce electricity. In this technology, mirrors basically concentrate the sunlight to boil water, which then goes into conventional steam turbines. California has at least one of those solar thermal applications right now and Spain has several.

TER: And is one more viable for a commercial application versus residential?

LR: The solar thermal works only on a very large scale.

TER: Going back to the photovoltaic, one of the companies you told us about when we interviewed you last summer Natcore Technology Inc. (TSX.V:NXT). Could give us an update on Natcore?

LR: On a laboratory scale, Natcore has demonstrated a technology known as tandem cells, which effectively convert twice as much of the sunlight to electricity as conventional commercial photovoltaic cells. They are still some ways from commercializing that. Research and development toward commercializing the tandem cell is under way. This technology relies on a completely new approach to creating the silicon thin films that are the basis of most solar cells and they're right now very close to a deal that will see a commercial application of their Liquid Phase Deposition process in kind of a subsidiary application to the solar cells.

That's going to be a very exciting development because it will see their basic process being commercialized and at the same time they're continuing with the research and development on the tandem cells. It's likely to be a couple of years before the tandem cell work gets into the commercial development stage. But by then their Liquid Phase Deposition process will have been tested in a commercial application and they should be in a good position to move forward fairly quickly. At this stage it's a research and development project, but if it works—and I have a fair level of confidence that it will work—it could have a huge impact on solar photovoltaics.

TER: Because a lot of this is new technology that's bubbling up, how does one know if any competitors are doing something similar to Natcore?

LR: That's a very important point. A lot of work is being done in developing photovoltaics and a number of different approaches being taken. Other companies besides Natcore are absolutely working on tandem cells, but as far as we can tell, it's in the application of nanotechnology where Natcore has a lead at this time, via the Liquid Phase Deposition process.

TER: An option to alternative energy that you've written about in your GreenTech Opportunities newsletters is conservation. I recall you saying that few people seem to realize that reducing energy consumption is vastly cheaper than producing more of it. There must be an unbelievable number of opportunities to invest in companies that focus on conservation technologies that we don't really hear about because we're concentrating so hard on alternative energy production.

LR: Sure. A very, very significant point is that at one level, the cost of conservation is zero if you think about just turning off light switches. The next level involves reducing consumption by retrofitting systems with various products that reduce consumption. That's where you'll find some investment potential on the conservation side.

For example, Smartcool Systems Inc. (TSX.V:SSC) has a device that goes into the circuit of an air conditioning or refrigeration unit and it can save 10% or more of the electricity cost without having any measurable impact on the performance of the unit. They talk about a payback period of one to two years on the cost of buying and installing this device.

Smartcool spent a couple of years in development and beta testing, and another year or so setting up a worldwide marketing effort, a distribution channel. It's not the sort of thing you put on the shelves and people buy it. It needs a professional installer, so they're working with electrical contractors and electrical parts distribution organizations. What's happening is that a big chain will install it in a few locations to see if it really works. Recently, those big chains have been coming back to roll it out through the whole organization. So they're just on the beginning of a big ramp-up in revenues.

TER: So is Smartcool meant for commercial rather than residential use?

LR: Yes. It's designed for commercial, industrial, retail and cold storage warehouses, for example. When I learned about this and I was chatting with the president of the company, I asked him if I could buy one and put it on my refrigerator at home, but he pointed out that it probably wouldn't be cost effective. But in a commercial application, especially one with a number of air conditioning and/or refrigeration units, it becomes very cost effective.

Over time add-on products such as Smartcool's will be integrated into the design and manufacture of the host units, but in the meantime, it's an exciting area for us to focus on.

It's exciting to see a Natcore kind of company that could revolutionize solar power generation, or Catch the Wind that can have a big impact on production. But these little companies that are just grinding away with products that can bring down the costs aren't getting anywhere near the attention. I think that's going to change. With companies such as Wal-Mart trumpeting their energy savings, there's pressure on the industry to search out products that can actually help companies achieve their energy reduction targets.

TER: You mentioned Catch the Wind, Ltd. (TSX.V:CTW.S). What's the story there?

LR: Catch the Wind has a remote laser-based sensing device that can measure wind speed and direction about 300 meters out in front of the sensor. Installed on a wind turbine, it allows the turbine to reorient itself and adjust the pitch of the blades in anticipation of changes in wind speed and direction. Field tests indicate 12% to 15% improvements in output from wind turbines using those devices.

TER: Wow! That's an amazing increase in efficiency, and with the turbines already up and running, I can't imagine a big cost to install these devices. How big is this?

LR: It's huge and as you say, it can have a major impact if you can get another 10% or 15% revenue out of the capital you've already invested, especially with the industry within reach of commercial viability on a standalone basis. To put this in perspective, there are 220,000 wind turbines operating at this time and it's the fastest-growing alternative energy form out there, so the market potential is enormous.

TER: What will this remote sensing device cost? Hundreds of dollars, thousands of dollars, tens of thousands?

LR: Catch the Wind hasn't announced its marketing plans yet, but they're anticipating the payback period would be less than two years, including the installation costs.

TER: That's great.

LR: Yeah. It makes it almost a no-brainer.

TER: If the cost is amortized in a year or thereabouts, it's like, oh, man, how fast can you make them?

LR: That's it. They're working toward commercial designs and contracts with manufacturers right now.

TER: Thinking about conservation versus alternative production as an investor, something like a Smartcool retrofit seems to me to be less risky than developing a new technology. Do you have any perspectives on how an investor should look at conservation versus production?

LR: You bring up a very important point and that is there's a lot less risk in a Smartcool kind of application, which is tried and true and now they're just into the marketing phase. But then the flip side of that is there's a lot more upside potential in Natcore. If its technology does ultimately work, the payoff for investors could be enormous. So it's certainly a trade-off. It's not a universal truth, but generally speaking, companies focused on commercializing technologies for energy conservation are less risky, but may offer less upside potential than those that have breakthrough technologies that would apply to energy production.

TER: Getting back to the discussion about government mandates and such, I believe Japan is requiring businesses there to prove some amount of reduction in energy usage each year.

LR: I think every nation around the world is delivering such message in one form or another. Some use really big sticks and some use carrots. But absolutely around the world governments are leaning on industries to do whatever they can to improve their energy efficiency.

LR: Alternative energy production in China is going to become a massive industry. China has mandated 15% of its energy to come from alternative sources by 2020. When you consider that the economy is going to more than double in that period of time, you realize what a really, really huge investment will be required. Because of that, one of the areas we're focusing on is companies that are participating in the exponential growth of alternative energy in China.

TER: As I understand it, access to inexpensive energy is a fundamental need for a growing economy. Since alternative energies aren't yet as cost effective as fossil fuel sources, how can China's huge population live with that?

LR: China's economy is growing so fast and is becoming so wealthy that it doesn't have to be inexpensive energy as long as there's enough energy to supply their growth. China's economy is growing at 10% right now. Internal consumption is kicking off in a big way and that has a huge multiplier effect. I'm very confident from first-hand observations and from everything I read and see and hear from other people I talk to that this is a long-term process that will require more and more energy.

Right now China produces most of its electricity by burning coal, and anyone who's been there can attest to the fact that the costs of burning coal go way beyond monetary. Between the global pressure to reduce CO2 emissions and the very real near-term local problems of emissions from coal plants, China has made it an essential component of their growth strategy to have 15% of their total energy coming from alternative energy forms by 2020.

TER: Thank you, Lawrence. You always offer such interesting information and good insights.

Lawrence Roulston's passion for the environment and strong affinity for emerging companies led to initiating GreenTech Opportunities, in part to help make a better world for his three children. Lawrence understands that the world is embarking on a period of massive change. The coming transition will impact every aspect of our lives— and present investment opportunities greater than any that have ever come before. After studies in science, engineering and business at the University of British Columbia, Lawrence worked for nearly 20 years as an analyst and manager in the resource industry. In 1998, he founded Resource Opportunities, an investment newsletter focused on the mining industry. He has established an impressive track record, with a particular knack for picking emerging companies that delivered ten-fold or better returns. He is supported by a group of professionals based in Vancouver, Canada.

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DISCLOSURE:
1) Karen Roche of The Energy Report conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) None of the companies mentioned in the interview are sponsors of The Energy Report or The Gold Report.
3) Lawrence Roulston —I personally and/or my family own shares of the following companies mentioned in this interview: Smartcool, Natcore. Neither I personally nor my family nor any business associates are paid by any companies mentioned in this interview.