If only U.S. energy policy were judged by the same economic criteria we use for startups. While most of the time, I use my blog Infinite to Venture to write about startups in energy and cleantech, I felt the need to address a pet peeve of mine in the energy policy arena: the lack of return on investment (ROI) metric or other meaningful measure of success.
When Becky Quick, host of CNBC’s Squawk Box, recently tweeted that oilman T. Boone Pickens was accepting questions for an interview with her on Aug. 25 through Twitter, I jumped at the opportunity. Incidentally, I didn’t get a question in, but @nelderini did! However, after watching T. Boone promote his Pickens Plan (which has cost $62 million in lobbying dollars to date) I wondered, if we were to somehow pass one of the several energy bills floating around Congress this year, how would we know it was effective ten years down the road?
My fear is we will have no idea what worked and what didn’t, simply because we don’t measure the right things.
Most startups track the results of marketing dollars rigorously, so they know that spending $1 on Google AdWords, for instance, gets them $3 in revenue as a result. Similarly, if a big company spends $1 million on a capital investment, it does so with the expectation of, say, $200,000 of annual savings. If these don’t materialize for some reason, strategies and resources are shifted. Someone might even get fired if the results are way off.
Unfortunately, there’s no analogy in political discourse on energy because almost every politician in favor of a policy focuses on the benefits, while every politician against a policy focuses on the costs. Neither has any relevance on its own, of course.
You’d think that T. Boone, a man who’s experienced financial success beyond the wildest dreams of most, would understand an ROI calculation. Even Pickens, however, made this specious style of argument in favor of converting fleet vehicles to run on natural gas instead of diesel fuel:
If we can move our 8 million 18-wheelers to natural gas, that will cut OPEC in half. We have to move to our own resources.
Really? Even if each 18-wheeler retrofit to natural gas costs tax payers $64,000 in subsidies to cover 80 percent of the cost of conversion? If 1 million of those vehicles are converted each year, it would cost $80 billion for the conversion (most of which is borne by tax payers), which is equivalent to about 3 months of domestic spending on oil imports. OPEC comprises about 53 percent of our net imports, so “cutting OPEC in half” reduces imports by about 25 percent, or about 3 million barrels (bbl)/day.
If oil is at the price of $75 per barrel, those 3 million barrels per day represent $82 billion in curtailed spending per year, but we’d only get there after all 8 million trucks are retrofitted — after 8 years. So, $80 billion of up-front spending on retrofits saves $10 billion in annual OPEC oil spend for 1 million trucks. These trucks run on natural gas, which also isn’t free. Pickens says natural gas costs about one-fifth of the equivalent of diesel, so we need to reduce that $10 billion in savings by 20 percent to pay for natural gas as fuel.
In short, each year tax payers and truck companies together would spend $80 billion for only $8 billion of annual savings: a 10-year simple payback period. Note that, while tax payers bear 80 percent of this cost (or $64 billion), they receive none of the $8 billion of fuel savings, which instead accrues to the truckers. Consequently, the truckers, who only put up 20 percent of the cost (or $16 billion) get an attractive, 2-year simple payback on their invested capital.
That’s a low ROI for everyone but the truck companies, but it’s exactly what these types of arguments tend to hide. When the CNBC guest host pressed on this issue, Pickens went on in the same vein:
You have a model for this. Southern California did it on trash trucks. The trash trucks 7 years ago moved from natural gas away from diesel….You now have 70 percent of the trash trucks [in Southern California] on natural gas. Long Island has gone from no natural gas trash trucks to over 200, so it will happen because [natural gas is] a better fuel.
Why should it surprise anyone that, when you throw money at the adoption of a technology, it actually gets adopted? Especially when private companies stand to gain so much while riding on the back of the tax payer? Yet, this adoption is often what’s heralded in Washington as successful. You got the benefit you wanted. Forget about the cost.
I propose a new definition of success, one that takes into account the tremendous debt levels we’ve taken on as a country and the financial precipice we continue to teeter over. The cost of capital isn’t 0 percent, especially when the government coffers have already been so depleted. If the goal is to cut OPEC in half, fine. Let’s figure out how to do it with the best ROI overall and go from there.
My recommendation: U.S. government should treat its bank account like a startup does. It should spend money to create the maximal value, and define and measure success.
Alex is a Principal at Highland Capital Partners and invests in startups at the intersection of energy and technology. For his professional background, you can view his bio; or follow him on Twitter. And read his blog at Infinite to Venture.
Image courtesy of CNBC creative commons.