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

"The age of cheap oil is over," agrees Andrew Chung, partner at Khosla Ventures, arguably the most knowledgeable venture capital firm spearheading next-generation energy projects.

While perhaps more optimistic than Chris on the odds that the world can transition off fossil energy sources without experiencing some duration of lower overall energy output, Andrew is clear to point out that large and near-term capital investments are essential for such a smooth transition.

The size and scale of the investments necessary to evolve and replace our existing (and increasingly outdated) power infrastructure are enormous, and too big for private companies alone to address the issue on an acceptable timeline.

And as of now, the U.S. is decidedly NOT treating the matter with the urgency it deserves. Of the total U.S. budget, the Department of Energy receives only 8%; and only 0.1% of the total budget is directed to the alternative technologies we hope will one day replace our fossil-based sources. By contrast, China alone is dedicating $800 billion over the next ten years to help support the development and commercialization of alternative technologies and cleantech.

In the coming decades, the efficient and effective use of energy is going to be a real determinant between winners and loser across the global landscape. Affordable, sustainable energy will increasingly determine the prosperity of world powers -- and America is at a growing relative disadvantage until it starts talking honestly with itself about the un-sustainability of its current energy policies and prioritizing its resources (both monetary and human) accordingly.

Despite these concerns, Andrew and Khosla have a lot of optimism for the impact new technological innovations will have in addressing the energy challenge -- a number of which are discussed in this interview. And they encourage companies, capital and workers to enter the sector, as demand for expertise and solutions will be high for a very long time. And the future price of NOT investing ourselves wholeheartedly at this time is unacceptably dear.

On the End of the Age of "Cheap Oil"

I think that the scarcity of oil -- hitting Peak Oil -- and 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 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 and 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.

On the Obsolescence of the U.S. Energy Grid

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, 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. 

On the New Energy Arms Race

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 -- 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. 

When you are talking about the scales that you need to reach in order to make a real difference, again sources 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 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 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.

Click the play button below to listen to Chris' interview with Andrew Chung of Khosla Ventures (runtime 44m:45s).

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Andrew, a Partner at Khosla Ventures, is interested in developing leading companies in cleantech, Internet, mobility, education, and genomics and also leads the firm’s China activities. He is one of six Partners at Khosla and is a director on the boards of Lanzatech (biofuel), LS9 (biofuel), EcoMotors (transportation), Pellion (storage), Biodiscovery (agriculture), and a stealth company (mobile).

Prior to Khosla, Andrew spent five years at Lightspeed Venture Partners and helped to build the firm's cleantech practice. He helped drive and manage Lightspeed's investments in Solazyme (NASDAQ: SZYM, biofuel), Stion (solar), LS9 (biofuel), Coaltek (clean coal), Leyden Energy (energy storage), Orbis Education (nursing), and Personalis (genome interpretation).

In addition to assisting portfolio companies, Andrew was Founding Chair of the Cleantech Board for The Indus Entrepreneurs Group (TiE) and is a long-time advisor to the Cleantech Open (CTO). Andrew delivered the keynote address at the CTO’s 2011 National Finals Gala and will be the opening keynote speaker at Cleantech Investment World Asia 2012, the largest conference of its kind in Asia. Andrew has also advised a number of government officials on cleantech-related policy issues.


Our series of podcast interviews with notable minds includes:

 

This is a companion discussion topic for the original entry at https://peakprosperity.com/khosla-ventures-the-us-is-massively-underfunding-the-innovations-critical-to-its-energy-future-3/

Here’s a podcast on Peak Oil you may all like:
http://petenewton.podbean.com/2012/04/04/ep31-irv-mills-peak-oil/ 

Preety pleese don’t use the term "Energy conservation". It makes the dear bunnies put their furry paws in their ears and stop listening.
I tried to show Kalgoorlie Hospital how they could save 30% of their substantial energy bill by installing phase change materials. (Candle wax with a melting point dependant on it’s carbon molecule length. The longer the molecule the higher the melting point)

More here. and here.

The dear nurses whould not have a bar of it. They just knew that I was a Energy Nazi and they had to protect their patients from me. They refused to even allow me to speak. If I could have spoken I would have said that PCM’s would have been invisable to them, and they would not have even known that great things had been achieved.

The general public is only aware of energy when they see a light come on. Therefore they think that energy conservation is all about turning the lights off. Lighting energy accounted for 5% of Kalgoorlie Hospital’s budget. In otherwords, if I had turned every light off in the establishment I would have made a 5% saving.

Did you notice how good I was and not mention, even once, The disruptive energy technology? I’ll bet the Chinese wont have forgotten. How good am I?

I am not even going to listen to this podcast.   How about the FED inflated the cost of large scale projects (along with the lawyering) since 1913 so that they ARE DEPENDENT on the warm hand of government.   Bring the reset.  Default globally.  No other way.   The promises are jsut that.  Never materialized.  Systemic Psychopathy.   Have to have a reset/rebot globally.  Or as Jim Morrisson portended: "No one here gets out alive."

Cost /benefit analysis?  Or will take 100 years to break even?

the mistake most folk make is assuming that the energy pictuer is too big for private enterprise. If and when the Giv. intervenes they always pick winners and loosers and skew the answer to wha they want. The market though works because it is set to pick what works and what will be purchased. To big/ no way, just get the Gov. out of the way, let the mkt. wark without subsidies, encourqgement, or gov. interference. Nothing is to big if the mkt is allowed to really work. Do we need a 100 Solyndras? that is the Gov. picking!!

It’s always astounding to hear the financial wiz-kids pointing to alternative energy as the solution to world energy demands.  It’s simply not possible without changing the laws of physics.  Get a truly knowledgeable energy engineer to review your articles before you publish them, or explain how we will import our energy needs from another universe.

dieseldawg - well said.
There are no alternatives to meet current our energy demands, much less growing need. We, as an industrial society, face the inevitable and slow decline of energy supply.

Cost /benefit analysis?  Or will take 100 years to break even?
Cost benifit analysis nothing. I was not allowed to raise the subject. I was not allowed to present the subject to anyone for perusal. I was not allowed to spend time on it. What material I found went into the engineer's waste paper bin without comment. Trying to present the material to upper management resulted in it being sent back to the engineer. My figures showed a 30% reduction in the $1 Million per annum that we spent on energy. They still do not know that because they would not look. $300 000 buys an awful lot of candle wax. I have a big "Never to be re-employed by the health service" on my file. Was I rude? Never. I was the epitome of decorum. The engineer wanted a position in the big city, Perth. He figured that if he just warmed the seat in Kalgoorlie for the required time his ambitions were guaranteed success. He was right. Engineer 10, Planet 0

…I was trying to get to the point in this interview that there is an enormous BTU gap between what fossil fuels currently provide and what alternative energy provides. That was part one of what I wanted to communicate…the scale of the gap implies decades of transitioning.But more importantly I wanted to get to the net energy of the new projects - I really have no interest in whether they are profitable because this may or may not be relevant due to subsidies (both of the government monetary and hidden energy forms) - because that is what really matters.
Running a society on 100:1 returns is a very different place than running one on 5:1 returns.
While I have not yet run a full-scale analysis on any alternative energy project, I remain deeply skeptical that any of them can even remotely approach fossil fuels in terms of the rate of energy delivery, inherent energy density, and possibly total energy delivery (notwithstanding all the cute observations about how the sun dumps a year’s worth of energy every few minutes…).
The reason I am so skeptical, even after reading studies that purport 20:1 returns for wind or solar, is because not one of these studies has drawn the boundaries far enough out. That is, they just measure the energy in the steel and composites and for the erection of the devices and then compare that against the energy that will be returned over the life of the project.
However, the workers and their lunches just magically appear and disappear from the work site, as do their personal cars, the roads that they drive upon, and the embedded complexity implied by the far-flung manufacturing and distribution networks required to keep these complex devices properly maintained and running.
As soon as we have a "closed loop" system, where everything - and I mean everything from start to finish - that got to or was involved in the fabrication of these alternative systems was built with the energy from that same system (typically meaning electricity, but it could be an alternative liquid fuel), then I will be a convert. I need to see this first.
The number of hidden subsidies in our currently 75% fossil fueled society are just too numerous and pervasive for me to overlook.
Perhaps we can find a way to build awesome 20:1 return energy systems using wind or solar or geothermal and then fashion all of society around the output from these devices in such a way that we can maintain the industrial complexity necessary to continue to build and maintain more and more of these same devices…then we’ll truly be sustainable in terms of energy…perhaps.
But I’d really like to see this in action first.
Does this desire to see something come off of paper and into the real world make me a pessimist as some claim? Hardly.
Just note that the Biosphere project, a closed system where every parameter was thought through and controlled, using natural systems that already are known to work, with extraordinary levels of planning and expenditure was a flop. It failed. It turns out that what were thought to be relatively minor feedback loops - ones outside of the consideration of the bright minds running the project - turned out to be rather important.
Is it possible that we’ll discover that the amount of net energy required to keep an exquisitely complex just-in-time economic delivery system is a rather important concept? As a betting man I have more of my chips stacked on "yes" than "no."
So, yes, it really would be good to have more engineering minds peering at our national efforts at energy production and delivery, especially ones that get the EROEI story on a very deep level.

[quote=gmome]the mistake most folk make is assuming that the energy pictuer is too big for private enterprise. If and when the Giv. intervenes they always pick winners and loosers and skew the answer to wha they want. The market though works because it is set to pick what works and what will be purchased. To big/ no way, just get the Gov. out of the way, let the mkt. wark without subsidies, encourqgement, or gov. interference. Nothing is to big if the mkt is allowed to really work. Do we need a 100 Solyndras? that is the Gov. picking!!
[/quote]
Tesla didn’t need government handouts to invent A/C and all the equipment, and the buidling was done with Westinghouse funding.  The best won out against a vested competitior in Edison and his non-steppable D/C system.   Today the bankers know the research and building risk can be pushed on the taxpayer so that they can go rig the markets for better returns in a print-your-future money system.

The point is often made that we will face a liquid fuels crunch long before an electricity crunch. So I bought a Nissan Leaf which, as everyone knows, runs on electricity. Voila! Problem solved. I drive about 30 miles a day average and it costs around $20 a month to charge. It cost $40,000 to buy and over the lifetime of the batteries, say 10 years before needing replacement, I am fairly certain that the savings from the rising gasoline prices over that time, plus the higher resale value it will achieve because of that, will pay for the increased capital cost, especially considering it could then be retrofitted with another set of (better, longer lasting) batteries and be on its merry way for another 20 years since because EV’s have so few moving parts to break down, they will last significantly longer than regular ICE’s. Take advantage of low interest rates while they last!
We don’t really need disruptive technology IMO, we already have most of our "solutions", it’s just a matter of changing mindsets and behavior. There’s no fundamental reason why every household could not have $10,000 of solar panels on their roof, an EV, a wood stove, and a heat pump. Bam, right there, problem basically solved. The problem of course, is time. I think the only disruptive technologies that would be helpful on a massive scale would be some artificial photosynthesis, and as mentioned in the article, when solar panels and LED light bulbs become cheaper than the alternatives on a direct purchase price basis.

That’s why I don’t buy into these arguments that because we don’t have a workable plan for how alternatives are going to be able to scale up in time to meet the oil crunch, that we shouldn’t move forward. I can’t help but ask in response, "Well what else are we going to do???" Every year we waste humming and hawing about not having a perfectly laid out EROEI schedule for alternatives (as if we had one for fossil fuels), burns more precious fossil fuels that could otherwise be put to use building EV’s so that people would still have the ability to haul bushels of corn to market when the US is forced to operate on 1/10th the oil it currently does.

As soon as we have a "closed loop" system, where everything - and I mean everything from start to finish - that got to or was involved in the fabrication of these alternative systems was built with the energy from that same system (typically meaning electricity, but it could be an alternative liquid fuel), then I will be a convert.
I think this can be fairly easily accommodated by deriving a simple cutoff "energy cliff" EROEI which the energy "production" mechanisms powering a society must remain above, and this then envelopes everything else incuding every librarian's lunch salami. Obviosly an EROEI of 1:1 is useless, since this merely powers the machines to extract more energy and leaves no excess. 3:1 is generally thought to be the energy cliff, but I think we'd need something higher than that really to incorporate all of the social and economic supporting mechanisms for energy extraction. So let's say 8:1 is the realistic overall energy cliff for oil, and for a society powered by electricity, make it higher because electricity isn't as useful.

The current calculations for fossil fuel EROEI’s don’t account for all these salami sandwich lunches, but they manage to "produce" energy regardless. The Alberta oil sands get 5:1 and that only includes the natural gas in versus crude oil out. None of the necessary infrastructure (upgrading facilities, gigantic trucks, pipes, workers’ lunches, schools for their kids, etc. etc.) is incorporated into that calculation, whereas with solar panels getting 10:1, I believe that this is indeed factored into the calculation to a greater extent. So let’s say the natural gas used to extract oil sands gets an EROEI of 40:1, then the overall EROEI for Alberta oil sands on a purely energy in/out basis is 200:1. But this is only economical when natural gas is cheap and plentiful, which likely won’t be the case for long when it starts to substitute more for oil, and it will run out before Alberta oil sand does. Then the Alberta oil sands will be in trouble because their overall EROEI will begin to drop towards 5:1, below my hypothetical overall social energy cliff of 8:1. They could start burning the oil sand itself as a source of external energy but only if the extraction phase (versus the subsequent upgrading phase) has positive overall EROEI.

BUT, if electricity could be produced indefinitely from, say, solar panels (with a genuine 10:1 EROEI, including manufacturing costs), then that electricity could be used to power oil sands extraction and maintain it above its 8:1 overall energy cliff, and we’d have hydrocarbons to build more EV’s for a long time. Sure, there’s lots of complications regarding getting that electricity to where it’s needed, etc, but who said the transition isn’t going to be complicated? Again, what else are we going to do?

Since about 0.5% of global GDP is allocated solely to direct government subsidies for fossil fuel consumption, not including more systemic hidden subsidies, I think alternatives definitely are getting the raw end of the deal right now.

[quote=gmome]the mistake most folk make is assuming that the energy pictuer is too big for private enterprise. If and when the Giv. intervenes they always pick winners and loosers and skew the answer to wha they want. The market though works because it is set to pick what works and what will be purchased. To big/ no way, just get the Gov. out of the way, let the mkt. wark without subsidies, encourqgement, or gov. interference. Nothing is to big if the mkt is allowed to really work. Do we need a 100 Solyndras? that is the Gov. picking!!
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Yeah, I’ve noticed how well the markets work…  when oil is cheap, waste it like there’s no tomorrow!
Mike

Chris, your comment here embodies entirely the reason why I read and recommend your site. Thank you. We see so many articles espousing all sorts of "we should do this and that" alternative energy ideas that never fully extrapolate out all the externalities. For years I have commented on Energy Bulletin articles and other websites (usually jumping into pie-in-the-sky discussions about "smart grids") - hardly anyone ever seems to understand what is truly involved in implementing ideas such as these, even before bringing up the sustainable closed system concept. As a former computer network engineer I spent years wrestling with putting into practice projects that were born in the marketing department of a major MSO. It just never, ever, ever pans out the way they think it will - if it pans out at all - and that was just speaking mostly in financial terms. Magical thinking appears to be rampant everywhere these days, and most people seem to incapable of recognizing where the rubber literally meets the road.

I wouldn’t be so sure…  most first gen Priuses were simply abandoned when their battery pack died, the replacement cost more than the car was worth!
Have you read the enrgy trap yet…?  http://physics.ucsd.edu/do-the-math/2011/10/the-energy-trap/
Mike

[quote=Damnthematrix]I wouldn’t be so sure…  most first gen Priuses were simply abandoned when their battery pack died, the replacement cost more than the car was worth!
Mike
[/quote]
In contrast to what you say about the Prius, I read a report that the batteries on 10 year old Priuses were just as efficient as new ones based upon a research study.  Maybe Toyota has fixed the problem following first generation cars.

 I think the market right now is telling us oil is still the best performing lowest cost energy source.  Alternatives may not really take off until we feel enough pain from very high oil prices or limited supply.  Yes we have a lot of available known ways today to mitigate, though not solve, the peak oil dilema, and some day we will, but it’s the transition that will be tough and we haven’t really decided yet as a society to commit to that.  
Alternative energy sources typically have higher up front costs which is an obstacle too.  I got a quote for a grid tied solar system that clearly will save me money in the long run, but the up front cost and additional borrowing I would have to do for installation is a huge risk also.  And while the solar PV system might be cost effective for me with the government tax credit, does it benefit society as a whole? - I’m not sure. 

[quote=gmome]the mistake most folk make is assuming that the energy pictuer is too big for private enterprise. If and when the Giv. intervenes they always pick winners and loosers and skew the answer to wha they want. The market though works because it is set to pick what works and what will be purchased. To big/ no way, just get the Gov. out of the way, let the mkt. wark without subsidies, encourqgement, or gov. interference. Nothing is to big if the mkt is allowed to really work. Do we need a 100 Solyndras? that is the Gov. picking!!
[/quote]
How long has DOE been in existence?  How much usable energy have they produced?  And how much money have they cost the taxpayer?

dieseldawg, Mark-bc, Robey and Chris…YES, YES, YES, and YES!!! These are my daily thoughts as I walk my 6 miles with my pooch, a Rottweiler named B-ASS. It comes down to this really: Preparations (it clears the mind and stressors), Professionals looking at the issue, and forming a Plan, convincing the public (or hospitals to take a look see), changing the things we can like purchasing an electric car, and then prove it up. After that…TIME, and lots of it.We are late folks, haven’t even started really. Boy!!! wait until Gregor reads this (just playing Gregor, and not married to any ideas…sort of), and for the record I sit firmly behind what Chris wrote today (this is my sort of, for sure feelings). To many variables to contemplate right now, and reality is facing us squarely in the face, and pocket books. That’s my street level view anyways. Geez, I wonder if we can barrow more money just to look into these issues? I know this, we go to war with Iran, it will be unfunded, and that money could be useful here at home building what would be useful for our long term electrical infrastructure. Hell, use the money and buy electric cars for all the soldiers who fought in Afghanistan and Iraq. That would put a dent in demand destruction.
Chris, your points were well established in the podcast, and I for one appreciated your realities. A pessimist!!!, yeah, I get that too, Just wait a month though, you may soften your views, then again, maybe not. I know I won’t but my mind is open. Show me first, please.
An aside: Has anyone continued their studies on Fukishima? I am just amazed from a numbers or statistical point of view at the calamity known as housing unit number 4. The opinions coming from the risks of that building and a nightmare earthquake of a 7 would do is tragic, and humanities near term problem. That building falls, and it appears that Peak Oil may be the least of our problems. Chris, you spent some time on this, are more qualified the most of us, and IMHO you need to do a follow up. Politely of course.
http://www.zerohedge.com/contributed/2012-14-07/largest-short-term-threat-humanity-fuel-pools-fukushima
 
BOB

Woodson, I totally agree that higher oil prices will get every one’s attention, will cause another serious recession too in my opinion. The problem is we will have to use high oil prices to correct high oil prices, and that will cause high oil prices, and the end result will be the spacing between the last recession, and the next, will be shorter. Add infinitesimally unless we have a Plan, we don’t, and have a Trillion or so to do the work. Geez, I think I read that the wars in Afghanistan and Iraq has cost our treasury 1 and perhaps 2 Trillion to fight. Not to mention the cost of our treasury to protect the free flow of oil past, present, and in the future. Plus the tax subsidies on the books to the oil companies, plus corn to ethanol (that was smart). We are managing things terribly, we are, and until we get some serious common sense leadership nothing will change. Unfortunately, I expect no changes until we have another crisis, banks fail this time, and the truth is finally known. You can’t grow the economy without oil, paying debt of with more debt is illogical, no growth, no debt reduction the responsible way, and we have to have an expert driven energy Plan. Instead we use theory, and keep our figures crossed, that’s a great plan. NOT! BOB