Will Higher Costs Aid Clean Energy Tech?

Gasoline prices are at their highest level since the aftermath of Hurricane Katrina. There is unrest in the Middle East that has spread to one oil-producing country (Libya) and there are fears it could spread to the big enchilada, Saudi Arabia. The tsunami disaster in Japan, which has compromised nuclear power plants, may have delivered a fatal blow to the construction of new nuclear plants in the U.S., and Gov. Scott Walker has proposed the sale, with or without competitive bidding, of state power plants, which could negatively impact electric rates.

Add resurgent inflationary fears, and the landscape is giving some a 1970s flashback. Fortunately, there is an ample supply of energy here with the opening of new power plants, but costs remain a central concern for businesses. How concerned should Greater Madison executives be about energy becoming, at least temporarily, a problematic cost driver?

What's a business to do?

Carl Kugler, a partner with Foley & Lardner and a member of the firm's Energy Industry Team, said high energy users, which not only include manufacturers but high-tech and other service businesses, should be concerned, at least in the short term, due to the usual pattern of high-cost volatility, followed by a period of easing.

The other factor driving costs is the global economy. As it picks up, the same strain on energy resources the world saw several years ago is rearing its head again, Kugler noted. "Energy is such a choke point for so many businesses because it comes right out of the bottom line, in a lot of cases, when those prices go up," Kugler said. "There is a lag in the ability to pass those costs onto customers, and oftentimes there are legal disputes related to that. We talked to a lot of people the last time this happened who were poring through their contacts to examine their fuel-charge provisions."

How should businesses respond during those rough patches?

Clean energy alternatives are something that businesses can leverage right now, many of them are made by Wisconsin companies, and they focus on where the real savings can be had – building operations.

Johnson Controls in Milwaukee is known for its HVAC (heating, ventilating, and air conditioning) systems and controls, car electronics and batteries (including hybrid car batteries), and recently acquired a California company, EnergyConnect Group, that helps businesses respond to electricity shortages and spikes in power costs.

Orion Energy Systems, based in Manitowoc, has developed a menu of "smart lighting" products that help businesses save money on energy.

In Madison, Research Products Corp., best known for its Aprilaire indoor air system, produces a number of indoor climate systems. Through acquisitions and product development, it also has created a subsidiary, GeoSystems, LLC, to manufacture geothermal systems. Geothermal energy takes advantage of moderate temperatures underground, in winter and summer, to heat and cool buildings and reduce the operational costs associated with both.

Expect more Wisconsin businesses to be on the efficient energy case due to the combination of technology discoveries at state universities, and a strong manufacturing platform. "As you see fuel prices go up, you will see even more innovation in this area," Kugler said, "with both start-up businesses and established business developing products that fit this need."

Making the investment

Public facilities have been among the most aggressive in implementing clean energy options. Monona Terrace was not only designed to conserve electricity and water, the in-house staff conducts an audit of its HVAC system twice a year to ensure that every component is working the way it's supposed to. It has controls to align HVAC with the actual use of its rooms, saving an estimated $260 per day, it expects more energy-efficient LED lighting to comprise 65 to 70% of its lighting needs within two years, and most of its electricity is purchased on the open market through renewable energy credits.

Jeff Griffith, building maintenance supervisor for Monona Terrace, said up-front cost is what prevents most private companies from investing in enhanced building or equipment efficiency, even though constant technological advances result in impressive return on investment. Monona Terrace replaced a perfectly good dish machine in its kitchen with a new, $75,000 unit that had a four-year payback and a lifespan of more than 20 years. It uses only 40% of the water of the old unit, saving 1.4 million gallons per year and saving on the energy required to heat the water to between 180 and 200 degrees.

"There are a lot of simple solutions out there that can bring significant savings," he said. "It just takes an investment in equipment and in getting your people to understand what you're trying to do."

Holly Hawkins, director of sustainable services for Tri-North Builders, isn't as high on LED lighting right now because it is still fairly expensive, which stretches the ROI timeline. Nevertheless, lighting has changed drastically in the past 10 to 15 years, and Hawkins recommended T5 and T8 lamps and ballasts, which use less energy while providing more light.

Modern HVAC systems come with sensors for temperature, humidity, occupancy, and even carbon dioxide, but when a business or building management wants to renovate an existing facility, Hawkins said it's possible if HVAC, MEP (mechanical, electrical, and plumbing) systems, and duct work have been well maintained.

Much of the emphasis in green building is on materials, where they come from, and how far they have to be transported, but one school of thought holds that the source of building materials is much less important than the cost of future building operations, especially energy costs. But Hawkins said the material factor takes on added importance as fuel costs rise.

"The closer you get products, that not only benefits the green side, but it also saves transportation costs," she noted. "In this area of the country, it's easy to get things like drywall studs and glass door frames within a 500-mile radius, or even in Wisconsin.

"The tougher one is the flooring because it's typically produced in the southern part of the country."

Not so crude

Part of the fuel answer is being developed in Madison, where venture-funded Virent Energy Systems is demonstrating that a new biofuel technology can be produced at commercial scales. The technology converts a variety of soluble plant sugars from biomass feedstocks into renewable hydrocarbon molecules that can be used to make environmentally superior gasoline for cars, and it could also be used to make jet fuel for planes, and diesel fuel for trains, long-haul trucks, and light-duty vehicles.

To demonstrate the ability to scale its technology to commercial production levels, Virent is partnering with Royal Dutch Shell to fast-track the production at a new biogasoline demonstration plant in Madison. Lee Edwards, CEO of Virent Energy Systems, said the demonstration plant has produced significant volumes of high-octane gasoline over a number of runs for two purposes: to validate its quality and performance across a wide range of engine types, and to prove that its biofuels have molecules that are identical to the ones found in crude oil.

Within its partnerships, Virent has completed a 10-vehicle fleet test, and has gained notoriety because its biogasoline has been used by the Formula One Ferrari racing team. "We're making a high-energy content, direct replacement for gasoline from crude oil, but we're using biomass feedstocks," Edwards noted. "Our product is identical to that which comes from crude oil, and the fact it's used in Ferraris helps bring some credibility and authenticity to that claim."

Virent's investors also include the likes of Venture Investors LLC, Stark Investments, Cargill Ventures, Honda Strategic Ventures, Advantage Capital, and several angel investors. Armed with a great deal of confidence that it can scale up to full deployment, Virent and its partners are planning its first industrial-scale petroleum chemical complex that will generate 1 million gallons of gasoline per year, possibly by 2014-2015.

The partners are taking more time and care with this first plant – two years to produce detailed engineering and design plans, and two years to build – because once the first is proven, several others could come in rapid succession. While locations of the plants are still to be determined – agricultural regions are a good bet – Virent is targeting the construction of 10 plants by 2021-2022.

Asked what share of the gasoline market Virent products could realistically capture, Edwards did not provide a percentage, but noted the product is part of the solution to making the U.S. less vulnerable to oil price spikes and to enhancing energy and environmental security. "We need to find solutions to our energy paradoxes that will be renewable and sustainable with lower carbon intensity," he said.

State support

Attorney Phil Bower of Whyte Hirschboeck Dudek has written about the impact of uncertainty in environmental and energy regulation, especially now that the Environmental Protection Agency intends to regulate carbon administratively in the absence of a Cap & Trade bill. The cost of compliance, he notes, will come in changes to air permitting, wastewater permitting, and hazardous waste regulations that could impact the operation and capital budgets in the regulated community.

Bower agrees that companies that act on energy efficiency will have a competitive advantage, but he cited one disadvantage to doing it in the current fiscal environment. To a greater extent, businesses interested in energy efficiency could be on their own. "I think we're seeing different concerns based on the energy our clients are using, but a few years ago we saw that gas prices and electricity prices were higher and demand was high," he recalled. "We had a lot of clients interested in energy efficiency projects and reducing waste, but there was more money available for grants and loans for those projects. You recently saw in the proposed state budget that some of those programs would be cut."

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