Stimulating a new economy

January 19, 2009

Feldstein and Stiglitz both warn ‘what after the stimulus money is gone?’.  We have been propped up by two bubbles the last decade.  What will prop us up after we’ve used our borrowed money in two years?

Friedman puts it nicely: “If we spend $1 trillion on a stimulus and just get better highways and bridges — and not a new Google, Apple, Intel or Microsoft — your kids will thank you for making it so much easier for them to commute to the unemployment office or mediocre jobs.”

Fortunately I do see the foundation for a new economy in two specific elements of the emerging package:

A third element of the package is a wildcard: Healthcare reform.  Universal healthcare is a moral imperative, but the real value of reform is in increasing efficiency.  The current system is so expensive it is a real drag on the economy.  We must reduce costs and optimize delivery using technology, standardization, regulation and reorganization to a point where cost per insured is cut in half, otherwise we will still be at a disadvantage.  Most of this change will depend on Obama and Dashle’s reform skills, and not on how much we spend via stimulus package.

A fourth one is necessary for a world-wide recovery: Chinese people must start spending and enjoying the fruits of their labor.  The China-lends-us-money-so-we-can-buy-their-products dynamic is over.  This is obviously beyond our control, but well within the command of the central party committee.  Credit cards anyone?

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Dirt cheap energy

January 19, 2009

A massive investment in solar and wind energy will reduce harmful emissions as well as our dependence in foreign oil.

More importantly however, it will usher in a new era of increasingly cheap energy, in two phases:

Stage One – First five years

Wind and light from the sun are free, therefore the raw materials for solar and wind energy have zero cost.  The only variable costs of these facilities are insurance, maintenance, minimal payroll and maybe land lease.

However the initial capital investment, and servicing the debt that goes with it, is higher than traditional plants.  So if the cost of a kw/h from wind or solar is higher than one from coal or gas it is due to the higher initial capital investment.

When the government spends 32 billion in solar/wind production and transmission infrastructure these capital costs will be nationalized as part of the stimulus package, and there will also be no direct interest expense to be paid by each project.  Perhaps the government will retain part of the profits, or have some other mechanism of recapturing some of the taxpayers’ investment.  But even so the wholesale price is likely to be much lower than coal’s.

Stage Two – Beyond 2014

The explosive investment in solar and wind technologies will radically increase their efficiencies.

Between 1980 and 2000 wind cost per kw fell from $2,600 to $790, mostly via increase in blade size and more efficient design.

Photovoltaic cell efficiency is still less than 20%.  They are also expensive due to their exotic materials and complex build processes.  This means there’s another 80% worth of energy to obtain from the same area via optimizations, as well as lower capital costs from streamlined construction.  In other words, there is a lot of room for improvement.

Thanks to a recent wave of venture capital investment, government programs, and academic interest, there are hundreds of new startups, labs and individuals doing promising research in this area where only a handful were just three years ago.  These actors will only speed up their research as the market for their products explodes overnight.  Each one is attacking the problem in a different way, and as is common with high-risk ventures, most will fail, some will succeed, and one will find a technology that is truly radical.

It is that one company that finds a new material or process which doubles the PV or turbine efficiency that will change the game entirely.  I have little doubt there will be one or two such disruptive players.

Let’s do the math: If we manage to increase efficiency of PV cells to 50%, and lower production costs to one third, that would reduce the cost of solar energy (non-subsidized) to one eighth what it is today!