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 / Winter 2011 / Issue 65(originally published by Booz & Company)


A Moore’s Law for Renewable Energy

There are many reasons to be skeptical about generating a similar dynamic with energy. Power generation and oil and gas are old industries, laden with legacy infrastructure. Many energy technologies, including photovoltaics, date back to the 19th century or earlier. Innovation involves such diverse fields as hydraulic mechanics, geologic monitoring and sensing, and wind energy design. The companies involved are scattered and diffuse, and their interests often conflict.

Most daunting, the expectations that drive the majority of energy investment today — including the assumptions of all-important institutional investors — focus not on technological progress, but on such external factors as the price fluctuations of oil, reserve replacement ratios, and government regulations such as carbon taxes or NIMBY (“not in my backyard”) restrictions. Although some investors promote clean energy, their sense of urgency is easily dissipated. High-tech companies see Moore’s Law as an existential imperative; if they fail to keep up, they lose much of their relevance. By contrast, there is little perceived punishment in the energy industry for failing to innovate. Indeed, in the past, energy companies tended to support only the kind of innovation that would improve the margins of their current business models. Thus, in 2009, when it looked as though the U.S. might pass a climate bill, both coal and oil companies were squarely behind the technology called CCS (carbon capture and sequestration), largely because it supported their embedded investments in oil and coal plants.

Yet changes in economic, environmental, and demographic trends could lend credibility to the idea of a Moore’s Law equivalent in energy. The first major trend is global demand. Over the next 40 years, according to Jim O’Neill, the chairman of Goldman Sachs Asset Management and the economist known for coining the acronym BRICs, worldwide annual productive economic growth will triple. As billions of people enter the consumer economy, annual global energy use will rise sharply — according to some estimates, from about three cubic miles of oil (CMO) in 2009 to between six and nine. (CMO is a measure of usage developed by SRI International engineer Hewitt Crane to enable comparisons of diverse energy sources.) At the same time, the use of fossil fuels will be increasingly restricted because of greenhouse gas emissions, and nuclear energy, especially after the Fukushima disaster, will continue to face regulatory and cost hurdles. Renewables are not yet technologically advanced enough to provide more than a tiny fraction of the global energy used today — in 2009, wind and solar together accounted for less than 1 percent of global energy production. Without a continuous cycle of innovation, driven by a model such as Moore’s Law, all the forms of energy supply put together may not be able to meet demand.

Another trend is the increasing reliance on technological innovation by the energy industry. Conventional oil reserves, which are estimated to be as low as 35 CMO, will likely be exhausted by mid-century, whereas unconventional reserves from shale and tar sands are estimated to be as much as 300 CMO. Hence the continuing huge investments in coal, natural gas, and unconventional oil production technologies. And as several observers have noted, the technologies of solar and wind generation are not yet risk free for investors, but they have become diverse and sophisticated enough to create new markets for energy generation. (See, for example, “Renewable Energy at a Crossroads,” by Christopher Dann, Sartaz Ahmed, and Owen Ward, s+b, Autumn 2011.) That itself is sparking new interest in investment.

There are even signs of Moore’s Law–style cost decreases in several energy sectors, though the pace is not as fast as it is in high tech. One example is natural gas turbines, used to generate electricity in power plants. Between 1955 and 1980, 10 consecutive doublings of gas turbine capacity occurred, reducing the cost 10 to 20 percent each time. During those years, the cost of a natural gas–based kilowatt dropped to about one-fifth its original price, adjusted for inflation. The researchers who charted this — Arnulf Grübler, Nebojša Nakićenović, and David Victor of the International Institute for Applied Systems Analysis — also looked at data on Japanese photovoltaics, and found more than a 90 percent decrease in the cost of a kilowatt between 1973 and 1995. Another example can be found in the economics of solar installation business models. Over the years, the owners and managers of many commercial buildings have put off installing solar energy systems because of their cost expectations: huge up-front capital expenditures and ongoing operation and maintenance expenses. In 2003, however, a U.S. photovoltaic company called Sun-Edison removed those barriers by providing solar energy as a service. Customers could sign up for long-term electricity contracts at guaranteed pricing per kilowatt-hour with no capital investment (other than roof space) required. These successful economics brought new investment from capital markets, which allowed SunEdison to offer more types of franchised installations.

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