Picking the Winners
By Joseph Lado
In economics, barriers are those things that impede products and services from readily entering the marketplace. This concept can be expanded to help us understanding why some technologies for alternative and renewable energy will be readily adopted by the greater society and others will not.
Barriers to having renewables are those things that make access difficult by degree. Typically the more barriers there are to overcome facing a technology the higher the chance that the product or service will not be adopted. The more barriers to overcome for a technology to enter into wide use, even if they are relatively easy ones to overcome, the lower the probability that that technology will enter into the marketplace.
For this article I am going to substitute “marketplace” with the word “adoption,” since energy markets typically have a lot of non-market variables such as scientific and technological factors, economic factors such as being sanctioned and regulated monopolies, and laws and subsidies that preclude them from being pure market entities. Referring to energy alternatives as entering into the “market” wouldn’t be as accurate as referring to the process as a wide use adoption or implementation. I will be using adoption here mostly.
We understand now that having a preponderance of barriers lowers the probability of widespread adoption of an alternative energy technology. There are other factors to consider as well. Whether a technology has many barriers or only just a few some barriers are very difficult to over come. Let me give you an example of a situation where something is close at hand and yet difficult to exploit. Let’s say that you were snorkeling in the Gulf of Mexico and while underwater you observed in a fissure a glob of crude oil periodically let go. You would now have the knowledge of a specific place with exploitable petroleum, but, would you have the means to exploit that resource for its full value? You may not have the equipment, to extract the oil, to ship it, to refine it and distribute it to customers. The barriers for you personally to compete with established oil companies are the barriers for you of entry. The costs of oil rigs, tankers, personnel etc. are all barriers to entry. They may not be insurmountable for established oil companies, but for you as an individual they probably are.
With alternatives the cost of exploitation may be equal to the barriers you would have faced trying to exploit that oil source on your own. Since alternatives are relatively new technologies they typically don’t have large established businesses with equipment and people with core competencies capable of easily exploiting the new resource. Often because the newness of the technology alternatives have few financial backers even when the technology is pretty sure. These factors make for barriers to entry and, the larger or more costly that these barriers are the more likely that these technologies are not going to be exploited. Their probability, without help, will not reach wide adoption. I want to emphasis “without help” here.
Some barriers are nearly impossible or insurmountable to overcome. Technologies that face these types of barriers are referred to as “dead ends.” No matter how much progress is made on removing or engineering around the other barriers to these technologies they will never be adopted by the greater society because the barriers are insurmountable. In economics cost is the most common insurmountable barrier. Simply put, if a technology cost too much to enter into then the technology will not be adopted. An example of insurmountable or nearly impossible barriers is one that was put forward by an author a few years ago as a solution to our current energy crisis. The article talked about the use of Helium 3 as a powerful new fuel source. He talked about the possible development of a Helium 3 reactor. That much progress had been made in developing ways to extract energy from this substance. A He3 reactor could provide electricity at many times that of a current nuclear power plant. The author continued by saying that He3 was a common molecule found on the Moon and with a mining operation on the moon the Earth could easily find enough He3 to meet all its needs for energy. Unfortunately, creating a mining operation on the moon where a substance could be extracted, containerized and transported by spacecraft back to earth is way beyond a relatively easy barrier to entry to overcome. In fact almost any technology accessible on Earth would be a lower barrier to entry than going to the Moon for supply. While in the author’s imagination pursuing He3 as an energy source may be a worthwhile endeavor to solve the world’s energy problems, the reality is that needing to mine it from the Moon makes it a “dead end” technology, since the likelihood of doing so is so improbable.
To recap there are three main characteristics of barriers to market for alternatives. They are; the number of barriers to overcome, the difficulty of overcoming those barriers and whether any barrier is insurmountable. As we go on from here we will see that there are four types of barriers any combination of which could be either too numerous, difficult or just plain impossible to overcome.
Types of Barriers
- Scientific - Will this substance do what we want it to do?
- Engineering - Can we overcome this scientific barrier with engineering?
- Economic - Will it be affordable? Will it be competitive?
- Business - Is there a margin? Is there something out there with fewer barriers?
In December I sat in on a presentation on plastic solar cells at National Science Foundation (NSF). The scientists began their research using polymers. After a years worth of work they discovered that polymers by their very nature produce a random output of voltages. What they wanted was to start with the highest voltage that they attained in their tests, 3.8 volts and then work upwards from there, but every time they made the polymer it would give them anywhere from 3.8 volts to 1.8 volts randomly. Not salable or usable parameters for a marketable product. They abandoned the use of polymers for another substance that would be more consistent in its voltage output. Plastic solar cells weren’t a scientific dead end, the research for that goes on; however, the use of polymers in the hopes of getting to a usable and saleable product wasn’t going to happen. Polymers for use in plastic solar cells were a scientific “dead end.” If this research had been pursued by a polymer making company in hopes to find new uses for their product, this scientific discovery would have been heartbreaking. It would have meant that all their research was for naught, useful in the greater body of knowledge but useless for their purposes. However, since it was a discovery made by a research grant from NSF to a university seeking to produce plastic solar cells, the fact that polymers have this curious characteristic of randomly producing different voltages, just expands our knowledge of that material. From this point forward investing more money into researching polymers for their use in solar cells may be seen as putting good money after bad and, making investments in polymers so that they can be used in solar cells would not make any sense since polymers don’t display the characteristics necessary to be used in sellable plastic solar cells.
Engineering is usually employed to overcome a scientific barrier. Henry Ford figured out through engineering how to reduce the vibration put out by the internal combustion engine with a varied turn crankshaft. Prior to Henry Ford’s introduction of these things internal combustion cars people reported incidents of chipped teeth from the vibration of the vehicles. The use of science created the development of the first internal combustion engine however; engineering reduced the barrier of vibration so that that discovery could enter the marketplace. Prior to Ford’s solution electric vehicles were preferred and had outsold gasoline vehicles. If Henry Ford were unable to engineer a solution to the vibration of the internal combustion engine, perhaps our roads would be largely traveled by electric vehicles, or good dental plans would be a prerequisite of owning an internal combustion car.
Economic barriers are divided into two areas, the cost of entry into production and the cost of the product itself. We can go back to the cost of extracting oil from the Gulf of Mexico example where it was too expensive for the ordinary person to extract petroleum from the ocean floor. Another example would be trying to get into the automobile market in a significant way. The cost of building a factory, keeping employees paid, establishing a distribution network, etc., would all be very expensive though not impossible for us to enter. As for the cost of the product itself, let me give you an example again. We all have heard the expression, “build a better mousetrap and the whole world will lead a path to your door.” This expression made a lot more sense when humans were in constant battle with mice to keep them from eating the foods that they had saved in their cupboards. Today, we have largely won the war against mice infestation and the occasional mouse that finds its way into a home can be gotten rid of with a very inexpensive devise called a spring trap that sells for about a dollar at the local hardware store. Even if you were to create the world’s greatest mousetrap, unless the cost of your mousetrap was comparable to the inexpensive spring trap, you will have few if any buyers. So, the saying today should read, “build a superior mousetrap that costs less than or the same as the common spring trap and the few people who have mouse problems will lead a path to your door.” The $10,000 Mousetrap 3000 that finds mice where they live and vaporizes them with lasers leaving nothing to clean up, may indeed be a better mousetrap but, wide spread adoption just isn’t going to happen since a trap that sells for under a buck will do.
Steven R. Covey says “no margin, no mission” as a rule of thumb when negotiating. Business is a negotiation between the customer and the product seller where the seller is trying to make a profit and the purchaser is trying to get a good value for their money. When looking at renewable fuels, margins often escape notice. During a presentation at NSF on “Green Gasoline,” gasoline made from corn stalks and other plant waste, I noticed that the cost of producing the “green gasoline” was some where just over $2 per gallon. At $4 a gallon for petroleum based gasoline Green Gasoline can find a margin, so no problem, but what about now that gasoline is under $2 per gallon? The margin is lost as green gasoline is now too expensive to even produce. There is no margin and therefore no mission to produce it. This leads us to looking at renewables in a competitive light.
What alternative fuels and sources of energy is out there that can compete with energy sources that are commonly used today? When we look at all renewable and alternatives and think about them with the barriers above in mind, a pecking order of sorts starts to develop. That pecking order puts those energies that have the fewest number of barriers where none are difficult or insurmountable closest to coming to fruition and those with the most barriers and the most difficult or insurmountable the farthest away to coming to fruition. The order for the list can be organized around a single sentence.
The alternative energy technology that has the fewest number of barriers scientific, engineering, economic and business, whose barriers are not that difficult to overcome and are not insurmountable, whose cost is competitive with a reasonable price for today's energy, will be the alternative that has the highest probability for wide spread adoption. Let me break the sentence down so that it is easier to use.
The alternative energy technology with:
- The fewest number of barriers
- Barriers that are not that difficult to overcome
- No barriers that are insurmountable
- No end product where the cost is too high compared to other energy and alternatives will be the alternative that has the highest probability for wide adoption.
If we keep this sentence above in mind when surveying the choices of alternative energy and fuels presented before us, we will have a measuring stick to use as a device to measure what energies and fuels would be the most likely to be seen first, given that there isn’t undo government involvement in pushing one technology over another? I have been using this “sentence” measuring stick for looking at alternatives and renewables for a number of years. I plan to use the sentence in what I hope will be a series of future articles exploring alternative and renewables.
It is important to note that government involvement plays a very large role in all aspects of energy in the United States. We do not have a free market in energy, nor do we have an overly regulated market. Energy in the United States is largely supplier controlled and subsidized by the government. The words “undo government involvement” is there to describe government action that reaches to the level of forcing a particular technology onto the populace or subsidizing the particular technology is such a way that it gives the technology a superior economic advantage. On the other hand, if small gestures or reasonable subsidies can balance the competitiveness of an alternative over a non-alternative that wouldn’t be considered “undo government involvement” since the government gives substantial tax breaks, subsidies and regulates traditional energy sources.
There is also another factor to think about when looking at alternatives and renewables and that is that if they don’t solve the problems of pollution we currently are facing it doesn’t make sense to pursue them since we already have inexpensive polluting sources of energy. Keep that in mind as well.
Now that I have given you a tool to use so you can compare technologies to each other, you can use the “measuring stick” to figure out for yourself which alternatives you think will be next, coming in a few years and which technologies you think will never get here.
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