Transcript for Khosla Ventures: The US is Massively Underfunding the Innovations Critical to Its Energy Future

This is the transcript for the podcast Khosla Ventures: The US is Massively Underfunding the Innovations Critical to Its Energy Future.

Chris Martenson:  Welcome to another podcast. I am your host, of course — Chris Martenson. Today we are going to look at where we are in the energy story. It is clear that the age of cheap and easy oil is over. This represents a monumental change into the operating practices of the world, a predicament, really, that is almost certain to prove disruptive and therefore will require our very best efforts. Yet, when we scan the political priorities and note that the Department of Energy is only 8% of the total budgetary pie, and then within that budget, what we might term alternative energy funding, such as for solar and wind, are each commanding less than 0.1% of total budgetary pie, well, it becomes clear the transitioning to non-fossil fuel future is simply not a federal priority at this time. 

So, if our nation only has one plan, let’s call that Plan A, and that is nothing more exciting than a perpetuation of the status quo. That leaves the job of finding the promising technologies, and funding them through implementation and marketed option, largely up to the private sector. This is an extremely important discussion to have. The good news is that today we are joined by Andrew Chung, partner at Khosla Ventures, one of the best known venture capital firms in the world and arguably the most knowledgeable about next-generation energy projects. Andrew and I will be talking about world energy supply outlook and the role technology will play in meeting our ever-rising global demand for energy. We will talk about which technologies hold the most promise, what we can expect from them, , perhaps more importantly, what we can’t. Andrew, it is a real pleasure to have you as our guest today.       

Andrew Chung:  Thanks for having me, Chris.

Chris Martenson:  Let’s start at a high level. At our site, we look closely at the energy data ,and it seems increasingly clear that the age of cheap oil is over. Does Khosla have the same view?

Andrew Chung:  Yeah. I believe that you are right. I think that the scarcity of oil, hitting Peak Oil, the increasing cost of being able to extract and discover new oil deposits, is making it more and more costly. And importantly, the demand for energy and oil is going up dramatically with a lot of the emerging countries like China and India, just exploding in the demand as the countries develop into more urban economies. If you look at the demand for electricity and energy in China, that has gone up tenfold over a period of about 15-20 years. India has gone up about fivefold, whereas the U.S. has only doubled in that period of time. So, you can see that with these emerging economies being very aggressive in their domestic growth the demand for oil,  the demand for electricity is just going to go up dramatically and that is going to make the cost of oil at a minimum, stable, if not going up over time.

Chris Martenson:  Yeah. I think we can almost stop calling them "emerging" economies. China has certainly in the last ten years come on [like] gangbusters, and is now in either the first or second or third position for a lot of things. First for coal, coming rapidly second on oil, and certainly consuming energy. The numbers you have just mentioned are really startling. A tenfold increase? That is astounding. 

Andrew Chung:  Absolutely.

Chris Martenson:  To even say the U.S. has only doubled in that same period, it is still a doubling. So, let’s talk [about] these big numbers for a minute. The U.S. consumes roughly 18 million barrels per day of petroleum, and that pencils out to about 100 trillion BTUs a day. Obviously a big number. With coal and natural gas included, about 80 quadrillion BTUs of fossil fuels are consumed in the U.S. each year. So, what if we said we wanted double that, even over the next 10, 15, or 20 years, from 80-160 quadrillion BTUs. I want to talk for a second here. What is it really going to take to make meaningful dent in those kinds of numbers? These are extraordinarily huge numbers. I have a very hard time conceptualizing them. Where does alternative energy play a role in here? What does the energy landscape look like to you as you look at it through the investors’ eyes?

Andrew Chung:  Absolutely. Well, I think it is going to be a portfolio solution. I think most people do not realize that alternative energy today is still only a very tiny percentage of the overall energy usage and output. Solar is less than 1% of overall electricity output out there. Even if you add in geothermal or hydroelectric power and so forth, nuclear, you are talking about a 4 or 5% share of the overall energy pie that is made up by alternative energy. So, there is a significant, massive upside opportunity across all of these sectors. When you say alternative energy, it’s a very, very broad umbrella, even though it is still a small piece of the overall pie today. Most people talk about solar and wind, but there are a lot of different techniques and certainly in the biofuel area, in the storage area. Energy efficiency is a very important area that we need to consider. Geothermal. Very broad portfolio solutions will be required in order for us to be able to really leverage alternative energy as the way to double that type of output, or quadruple or even more than that over time.

Chris Martenson:  So, really broad portfolio meaning there are going to be lots of different technologies. Are these going to have to compete with each other? Are they going to have to interact? I mean, are we waiting for a VHS Betamax sort of award to settle out before we can figure out which system we are going to go with? How does this portfolio come together?     

Andrew Chung:  Yeah. I think that is the beauty of this sector, that even if you look at one very specific sector like solar or biofield, there is room for many, many winners in the area. Khosla Ventures in the biofield area has invested in over ten different companies that are all trying to tackle the problem of replacing existing oil and hydrocarbon infrastructure with an alternative and sustainable one. It is our fundamental belief that all of them could be wildly successful and still be scratching the surface on the overall market. The same could be said for solar, wind, storage, other types of generation, energy efficiency, and so forth. So I think in each of these sectors, there is room for multiple winners. Then, as you look at solar versus wind or wind versus nuclear versus geothermal, there are different geographies, different situations, different political systems where one might be more interesting than the other, but certainly all can live in harmony and contribute to the overall solution. 

Chris Martenson:  So, in this overall solution, this is something I guess that you just mentioned, some of the complexities involved. So obviously, solar is a little bit site dependent; so is wind. There are geographical differences, political differences. So, we are really looking at an energy future that in many ways sounds more complex to me than the one we are currently inhabiting.

Andrew Chung:  Yes and no. I think it is complex in the sense that there might be many more sources of generation, but many of the technologies that we are looking at today are trying to help simplify that. So, whereas, today’s energy infrastructure in the U.S. is probably 40 or 50 years old and is used to a very select viewed sources of energy. Coal-fired plants being one of the most obvious; nuclear and other natural gas plants and so forth. In the new world that we are trying to invest in and aspire towards, different smart-grid technologies, grid-scale energy storage. Other types of techniques on a software side will make all of these different sources of energy look the same. It will be a matter of software and storage appliances that will regulate when these sources of generation are going to come onto the grid and when consumers like us are going to take it and actually utilize it. So, I think depending on how some of that infrastructure develops over time, you might find that in a 10 or 15-year period, it is actually much simpler to dispatch and utilize energy than the kludgy way that we do it today.   

Chris Martenson:  Interesting. So, could you summarize a big trend in that for us? Is there going to be more centralization or more decentralization of power as we go forward?

Andrew Chung:  I think there is going to be increasing decentralization. So these are rough numbers. But if you looked at the energy infrastructure, say, 20 years ago, there might have been tens of thousands of generation points around the country. As you look at it today, it is probably maybe a couple of hundred thousand points of generation. But with every solar panel that goes up, every small-scale wind turbine that goes up, and every farm that is launched, you are increasing that number of generation points by orders of magnitude. Such that in a ten-year period, you might have tens of millions of different generation points that are all above the nominal scale that are all trying to contribute energy to the grid. So, that rationalization that I was talking about over the next ten years is going to be in some sense a software and storage layer that goes in between the generation sources and consumers like you and me that will be able to manage this type of decentralization and hopefully make the grid much more efficient and much more effective in delivering energy to each of us.

Chris Martenson:  Interesting. So can you help tease apart for us the difference between efficiency, then, and conservation? They sometimes get a little bit conflated, I see, in some of the things I read. If we just get a efficiency alone, I think somebody way back in 1800s, named Jevons, pointed out that there is a paradox in just becoming efficient. Sometimes efficiency leads to greater energy use, paradoxically, and there it is. So, Khosla is working on both things that can promote this efficiency, the efficient use of existing resources, and as well in conservation? 

Andrew Chung:  Yes. So, I would say that conservation is more of a behavioral change. That is convincing whether it is an individual or a local government to compel people to reduce the usage of energy. Right. So, instead of turning on the heat at night, I am going to have my kids put blankets on and save that energy. Right, so it is a saving mechanism. It is a behavioral change. Efficiency, I think, is a super-set of that. Efficiency can include different techniques, like what the OPower folks are doing to compel folks to compete with one another to reduce their electricity bill and drive towards conservation. It can also be something that does not require any behavioral change at all. If you look at the existing infrastructure for generating energy, there are a lot of inefficiencies in place. 

If you are talking about a coal-fired plant, an efficiency technology could be something that makes a coal fire plant run more efficiently such that for every unit of coal that comes in, you are either releasing less carbon dioxide or other types of greenhouse gases, or you are able to generate more energy per unit asset that you have. Another source of efficiency can be the redirection of power. So, for example, right now in this aged infrastructure that we have, we often don’t do a great job of matching supply with demand. So, some customers in certain areas might be using more electricity. Because we do not have house-to-house level of granularity and understanding realtime what is happening on the grid, we do not necessarily dispatch energy to the right places at exactly the right time. So, there is electricity, if you will, that is left on the table. 

Another inefficiency is related during the times of peak power. We have these generators that sit on standby and wait for the days where there is a major heat wave, everyone has their air conditioner tuned on, and this big monolithic plant spins up for three days in a year to supply the energy for the households during that day. It is a very inefficient use of a plant. It is also a very inefficient use of energy that might be created at night three days before that you could have stored and dispatched at the times where there was that type of heat. So, I think efficiency if a very broad term that comprises many things that include conservation. But there is just a lot of different ways to redirect the electrons that are being created by today’s infrastructure in a more efficient way and reduce the waste. 

Chris Martenson:  So, I am going to assume that we can peer into our system and say there is some bloat – there is some low-hanging fruit for us to capture here. Noting the difference in energy consumption patterns between the U.S. per capita and other nations, it feels like there is a little wiggle room in there, maybe, too; no behavioral changes required, I would suggest, and we can still find some pretty substantial gains there?

Andrew Chung:  Absolutely. Absolutely. Again, we are looking at an energy infrastructure that is 40-50 years old. If you have ever been to an actual power plant or looked at the inside of a transformer substation, it is a spaghetti of wires that was designed in an era where we don’t have the computing capability and the circuitry and so forth that we have today. So, a lot of the initiatives right now are really around making the software on the backside much more up to date. The sensing capability, like the smart grid and smart meters that you would have at your home up to date, and then adding additional infrastructure like storage capability that did not exist in a cost-effective form 10 or 15 years ago, or even, frankly, two years ago. So, there is a lot of opportunity over time to upgrade that infrastructure in a massive way to make more efficient use of the energy generation that we have right now.

Chris Martenson:  Excellent. So, let me focus this down just a little bit. I want to talk about transportation because when we talk about Peak Oil, we are actually talking about a liquid fuels emergency, not an energy emergency of any form. I think there is still lots of energy out there, but liquid fuels, another story. I think we have enough experience under our belts to look at corn-based ethanol and say, well, that was a boondoggle. Let’s toss that one out. But there would certainly have to be other ways of coming up with liquid fuels we need. Right now, we know that 95% of everything that goes from point A to point B does so because of petroleum-based liquid fuels. Where is Khosla playing in this field? How do we make a meaningful dent in that 95% figure of transporting things because of petroleum?

Andrew Chung:  Absolutely. One of the hallmarks of our portfolio is a very broad investment across a number of different technologies that can be replacement fuels and chemicals for today’s market and, importantly, ones that can be done in a cost effective fashion. So, one of the companies that I am on the board of is a company called LanzaTech. This was a technology that was developed in New Zealand a number of years ago by a group of scientists. Essentially, it is a synthetic biology platform that enables once-convert waste gas into fuel and chemical alternatives. So, if you can, imagine any plant that has a smoke stack on it. So, if I am at a steel mill and I am manufacturing steel, I am producing a significant amount of carbon monoxide that comes out of the smoke stacks of the plant. Today, that gas is just released into the atmosphere. Tomorrow, with LanzaTech’s technology, what we believe we will be able to do is to take that waste gas, take that carbon monoxide, and use that as food for microorganisms that we have discovered that can take that waste gas and in their biology convert that into different types of chemicals and fuel output. So, if you can imagine, not only are you addressing a major waste issue in terms of greenhouse gases that are being spewed into the air, but you are creating a sustainable, reproducible way and a very cost-effective way to produce high-value chemicals and fuel alternatives on the backside. So, that is an example of a type of technology that we are investing it. We are leveraging synthetic biology and other types of chemical techniques to create a replaceable fuel and a replaceable chemical that can be used across other types of markets.

Chris Martenson:  Now this technology you are talking about, is this at the pilot or demonstration phase yet? 

Andrew Chung:  It is, actually. They have a pilot that has been running for a number of years in New Zealand, which was the basis for the next phase of commercialization. They have eight Fortune 500 companies that are in various stages of agreements with them to commercialize the technology, one of the examples being the largest steel manufacturer in China, Baosteel, which has entered into a joint venture with them to commercialize the technology. So, if you think about it from there prospective, it is a very difficult process for them to continue growing as number one, when the Chinese government is giving them pressure on the amount of waste gas that they are releasing into the atmosphere. With LanzaTech’s technology, what they are able to do now is to address that waste problem. 

Then, as an interesting byproduct of it, also create an economically valuable product on the backside. So, they were the first company to really get excited about what LanzaTech was doing. If you think about a large multi-billion-dollar corporation, the largest steel manufacturer in China, taking a bet on a mid-stage startup based in New Zealand. You can see why the technology is very important to them and why they think that it is very economically profitable for them to invest in technology like this. So, down the road, what is going to happen with them is they will essentially fund the development of various plants that we would come up on this and we would snap onto their existing steel manufacturing facilities. The groundbreaking for the first commercial pilot was several months back and we are hoping to produce a product for them over the course of 2012. 

Chris Martenson:  So, in some part of this story, then the Chinese government is supporting or propelling the adoption of this technology?

Andrew Chung:  Well, that is separate conversation altogether. We should spend some time talking about that. In this case, without revealing too much because it is a private company, the Chinese government has in many of these types of joint ventures, they definitely have a hand in approving and supporting the development of these types of technologies. In this specific case, Baosteel, which is a large, obviously a large enterprise within, they would be funding a significant portion of this from their balance sheet.

Chris Martenson:  What I am really sort of sideways getting myself into in this conversation is that through the lens I look at, where I see energy, and particularly the efficient and effective use of energy, is going to be a real determinant between winners and losers across the globe landscape. I noted that China made, at the national level, made the decision that they were going to become number one in green energy technologies, alternative energy technologies. They have been obviously scouring the globe with their magic checkbook for oil supplies. They seem to be, I am getting at, very focused on the energy story in ways that both promote access to resources, technology, whatever they need to do; they are on the game. I am contrasting that with what appears to me to be a slightly less energetic response on the part of the U.S. government in that front, where I think we are taking a more hands-off, let-the-market-figure-it-out approach.Do you think that "the market" – I am putting air quotes around "the market" – can "the market" respond in time to the challenges of more expensive oil, noting that, and historically speaking, all energy transitions have taken, through market forces, have taken 40-60 years? Do we have 40-60 years in this story?  

Andrew Chung:  I think with the market by itself, it is going to be difficult for the market to solve the problem alone without government intervention and capital dollars, just because of the massive scale of the problem. If you look at manufacturing, whether it is solar panels, or producing biofuel, manufacturing LEDs, I mean, these are all large manufacturing businesses that if you want to even scratch the surface on the amount of energy that we need, fuel that we need, it requires substantial, substantial investments. 

One of the issues with relying solely on private capital to fund these exercises is that you have multiple values of gas, if you will, for these companies. We are talking about fundamental science here. LanzaTech is a company that is developing some interesting science such that they are going to be the only ones in the world to do what they do. It is not a commodity process. It is a commodity product, ultimately, but not a commodity scientific process. So, for them, they have required significant funding to be able to get to this stage. Over time, luckily, they have been able to do it with relatively low reliance on public capital. Many of their counterparts, however, have not been able to say the same thing. There are companies that will reach a certain stage where they need to get a loan guaranty or a subsidy or some sort of support in order to build their first pilot plant. In other cases, once they get to a full pilot plant, if they are not able to get the funding from the private sources, a loan guaranty or other type of full-commercialization planned support just could make a major difference in whether or not a company could prove whether their technology is going to work at scale or not, before they tap into say the public markets to go IPO or to get strategically involved as well. So, I think the government can play a very important role in the commercialization of these very complicated, very difficult technologies. 

When you are talking about the scales that you need to reach in order to make a real difference, again, source of capital can really help here. I think the government needs to really help support and foster these types of technologies so that promising entrepreneurs and promising startups don’t get lost in a capital, private-capital-unfriendly environment today. China, as you mentioned, is really trying to lead the way here, in a very aggressive way. They already are number one today in terms of the amount of capital that they are committing to alternative energy sources, electricity production, and fuels production. In their most recent announcement on their next five-year plan, they are essentially pledging 80 billion every year for the next ten years to help support the development and commercialization of alternative technologies and cleantech. That is a massive number, 800 billion, that is being committed over a period of a decade to do this. 

If you kind of look back at what we were doing in Washington just several years ago with the stimulus package, there was a lot of excitement and strain and stress about putting several tens of billions into the stimulus package for various types of renewable energy, energy infrastructure improvement. Today, some of that money has gone out; some of it may not get fully deployed. Then with a lot of negativity in the press today, a lot of the folks in Washington are actually pulling back a bit in terms of their support of the clean technology ecosystem. So, if you think about us putting the brakes on a relatively modest level of investment in clean technology and you compare that to what China is doing and other countries are doing, there are a number of countries in Europe, for example, that are investing a significant amount per capita in clean technology, it just puts us at a disadvantage relative to the long-term viability of scaling up alternative technologies in the U.S.

Chris Martenson: ,Well, if this energy predicament at the scale we are talking about is truly as monumental as most people think, incremental efforts are probably not going to win the day. It is not just public money that I am talking about. I was at a conference recently where this gentleman had this big long map; it took a whole table to unroll it. He was showing where his company was working hard to try and string a new power line from a power source to the markets. He had two lines on that map. One was a very direct line. He said, “That is our preferred route.” Then, here was the one that they had to come up with given all the nimbyism and the re-routes they had to do to avoid this and that. The other line was this big long sort of spaghetti. It was 150 miles longer than it needed to be and it has transmission losses. When I asked him about it, he said, “That is just the reality. It is going to take years to get this thing sited.” He said, “Just thank goodness we don’t have to cross state lines with this thing, because then we have a whole other state that we have to work with.” So, I hear people say, well we will just cover a portion of Arizona with solar panels and there you go. Like well, not unless you can string a line from Arizona to New York City, you are going to have trouble with that idea. So, there is also the idea that the regulations involved need to be sort of re-examined in light of where we are in this story, I would think. But as far as I can tell, we are having incremental efforts at those discussions so far. 

Andrew Chung:  Right. Right. I would agree with that. 

Chris Martenson:  So, do you see a period, then, for which it is possible that we might actually have less energy production than we want to grow in the way that we have been accustomed to growing? Is there a possibility of a shortfall in this story?   

Andrew Chung:  Well, I think that it is possible, although there is a fair bit of idle capacity, again, sitting out there in the form of peaker plants and other types of capacity out there that might not be fully utilized. I think that at least in the short-term, we should be okay there. There is a lot of investment into traditional forms of energy production in the U.S. So, I am not sure that that would be the issue that I am worried about. I think it is more around the balance of how quickly we are scaling up alternative energy options, and if we were reliant on that to meet the type of demand that we are looking at, then we probably would have a shortfall relative to the demand over time. So, one of the things that I think is very important for policy makers and everyone to realize is that with a lot of the more experimental or earlier-stage technologies, those need to get the right type of funding to continue to develop. If the ones that are ready for primetime, again from a policy and investment prospective, the more that the government and other large corporations and strategics can help in the development and commercialization process, the better.

Chris Martenson:  So, let me ask this: I know that in Europe they have had some experience with a lot of alternative energy platforms. They have decided that, particularly in the UK, they came to the conclusion that it is a lot more expensive. I believe that electricity rates in the UK are going to have to go up a lot to fund their prior alternative, particularly wind investments. Is that the case that, on a pure dollar basis, alternative energy right now is more expensive than fossil fuels? I know there are other reasons that we would invest for national security. It gives it us extra resiliency because we have additional nodes of generation. There are a lot of other high-value reasons. But on a pure dollar basis, is there still a barrier here?

Andrew Chung:  I think that there is – that answer is that it depends. It really depends on the geography you are talking about. It depends on the local energy production capability in the geographies you are talking about and the different rates and usage and so forth. So, for example, for all of the discussion around solar being the most expensive renewable alternative, there are a number of locations in the U.S. today where solar is at grid parity or better and is already a good option. It is more of an issue of whether you can get enough panels or enough developers to meet the demand there. I think on the wind side, of course, the low price of natural gas, of course, affects wind deployment, besides the NIMBY piece. Right? But, there are definitely locations in the U.S., again, where wind makes a lot of economic sense, and it should be deployed more aggressively. I think what is more important to look at is what the cost change over time will be. So, for example, a solar cell cost 100 times more to make 30 years ago than it does now. 

It has been following a very predictable cost-reduction curve over the last three decades. So, the folks who are listening from Silicon Valley, you know about Moore’s law, which talks about how the performance of semiconductors and transistor chips and so forth have been improving dramatically in a very predictable form over time. There is a similar type of law in solar. There is a similar type of law in LED manufacturing and a lot of these other sectors that we have invested in clean technology. So we are very close to a point where over the next three to five years the cost of the solar panel and actually installing it is going to reach grid parity, which I think is a very exciting notion for a lot of folks who are both investing in the market and staring companies in this face. So, that I think is a very important point that this is a very predictable technology-based improvement in cost over time. 

LEDs are another great example he