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Home arrow Blog arrow 5/11/08-ON THE RECORD: VINOD KHOSLA

Written by Al Saracevic,   
Sunday, 11 May 2008
Flush with money and determined to save the world, the green-tech industry stands in full flower of its giddy youth.

Flush with money and determined to save the world, the green-tech industry stands in full flower of its giddy youth.

Venture capitalists are pumping billions into startups trying to create new fuels or energy sources. Politicians are looking to the industry for ways to fight climate change without wrecking the world's economy.

It's a heady time. Yet great uncertainty remains about which of the new technologies will work. And biofuels, one of the industry's main obsessions, have come under fierce attack lately as a possible cause of food shortages.

Enter Vinod Khosla, one of green tech's most prominent investors. He has funded entrepreneurs building solar power plants that will dwarf football fields and companies that will make ethanol from wood chips.

Khosla met recently with a group of Chronicle reporters to talk about the future of green tech and discuss which technologies will thrive while others die. The following has been edited for length and clarity.

Q: Some people are concerned that the great boom in green technology and green investing might be creating a bubble of investment, and there might be too much froth. Are we looking at a green-tech bubble?

A: Every strong investment cycle results in a bubble, unfortunately. I hope we can get smarter, but I'm not hopeful.

I always point to the 1830s, when railroads started expanding in England. If you got permission to build a rail link between two towns, you could offer scrips on the market. And people started going public. Doesn't this sound very much like the dot-com bubble? Or the telecom bubble? Or the PC bubble in the '80s?

There was a bubble, there was a crash in the 1830s, and in the following 10 years, more railroads were built after the crash than before the crash. The important message is: We had a dot-com crash, and if you look at actual Internet traffic after 2001, it didn't take a dip. It kept growing and growing and growing.

Hopefully what we are talking about here is a fundamental change in the infrastructure of society. How these companies will be valued will vacillate all over the place. It will hit highs and lows, and hopefully we can avoid the excesses.

Q: Do you feel there's a natural selection process involved in that, too, when you have a possible over-investment in a number of companies in one field? Does that help seed a larger array of products, and then the best rise to the top?

A: That absolutely happens. Lots of experiments get seeded, and most fail. There were hundreds if not thousands of PC companies in the '80s. A few made it big. There were lots of Internet bubble companies, but Google, eBay and Yahoo all did well in the end, even after the crash. So the important thing I like to say is that most investments will fail, but more money will be made than was invested.

The experimentation is very important because without that funding, a Facebook would never have emerged. It would never have shown up on the product plans of a big company, because big companies don't innovate.

I like to take a classic example of a company like Amyris. Instead of doing biodiesel from soybeans, they're trying to go to other feed stocks. They're producing diesel by fermentation, in a completely different process, and the goal is to go to nonfood crops.

Here was a company with a grant from the Gates Foundation to work on malaria drugs. It used the same technology to produce fuels and diesel. No large company would ever allow that kind of a radical shift. But small innovative companies that turn on a dime? Heck, let's do it.

Q: We've seen a lot of stories in the past couple of weeks about food prices going through the roof around the world, to the point where we had riots in Haiti, and demonstrations in Bangladesh and in Egypt. The focus has been placed on biofuel as a possible culprit. Do you think that connection's overblown?

A: The connection is overblown. First, long term, we can't solve our fuel problem by making fuel from food. It doesn't work. Two, we don't need to because there are much better alternatives. Much better in that not only are they more desirable, they're much cheaper. Why would anyone use corn when you can make fuel from forest waste?

I have no question that in 10 years, there's no way oil will be able to compete with biofuels. Even in five years. Now it will take a long time to scale biofuels, but I'm the only one in the world forecasting oil dropping in price to $35 a barrel by 2030. I'll put it on the record: Oil will not be able to compete with cellulosic biofuels. If you do it from food, the food will get so expensive you can't make fuel out of it.

Food prices have been going up. Biofuels are a very minor contributor to that. But there are massive PR campaigns trying to ascribe most of the blame to biofuels. The fact is, by far the largest contributor to food-price inflation is oil prices. Biofuels are less than 15 percent of it.

Q: Oil for transportation?

A: Transportation and fertilizer. Fertilizer comes from the petrochemical industry. Oil would be 15 percent higher if there were no biofuels and food would cost more.

The second piece is this: There is a dramatic increase in the worldwide demand for food. In places like India and China, when you get 9 or 10 percent economic growth, among poor people the biggest increase in the allocation of the family budget goes to food. We (also) have seen in the last year or two dramatic droughts.

If corn ethanol was a large part of the worldwide food crisis, we would have seen corn exports from this country decline. Not so. In 2006, 2007, they have actually increased.

Q: You mentioned a PR campaign to blame corn for the food problems. Who's behind the campaign?

A: Well, lots of people. Clearly, the American Petroleum Institute has been very, very concerned about food prices, and you wonder why.

I'll mention another thing. For the last 10 years, poor countries like India and Brazil have been trying to get higher food prices. In fact, the subsidies to food in this country reduce the price of food to the point where their farmers can't stay in business.

I'm concerned about the people making less than a dollar a day, three-quarters of them live in rural areas, make their income off of subsistence farming or farm-related labor in villages. And they would benefit dramatically from higher food prices, because their incomes would go up.

Now, there's one-quarter of the population which lives in urban slums in developing countries whose food prices will go up without their income going up. That's why this issue is so complex.

Q: It sounds like you're critical of the food-based biofuels, while there are other kinds of biofuels that you're supporting and investing in. Could you give us a sense of the different directions that that research is going in?

A: Calling everything biofuels and asking "Are they good or bad?" is like asking me "Are drugs good or bad?" I have to ask you whether you're talking about cocaine or aspirin.

Certain food-based biofuels like biodiesel have always been a bad idea. Others like corn ethanol have served a useful purpose and essentially are obsoleting themselves. We have eight or nine companies producing alternatives to corn ethanol that will be dramatically cheaper. And I just don't see how corn ethanol producers stay in business. So why worry about it?

Let's focus our energy on the research and development and innovation that allows us to produce a $1-a-gallon fuel. There's no question about it, we can produce it for $1 a gallon and retail it at Wal-Mart for $1.99 a gallon and create a competitor for oil. Oil is a monopoly. It leads to an energy crisis, it leads to a terrorism crisis and it leads to an environmental crisis. So we have to replace it.

Others talk about things like electric cars. Nice cars. In fact, we can make money on them and are investing in electric hybrid batteries and things like that. But they will not make a dent in either worldwide oil consumption or carbon reduction in the next 20 years. And that's why we have to be clear about nice, (patchwork) solutions that make people feel good.

People say, "Priuses are selling a lot, people want them." Yeah, but so are Gucci bags. You know, they make people feel good, they're great fashion statements. Do they reduce carbon emissions enough? If you do a critical analysis, a hybrid reduces carbon emissions about the same as corn ethanol, and costs 100 times more. So what's the point?

I drive a hybrid, and I can afford it. But in the next 15 years, we're going to ship a billion cars. Unless a technology can reduce carbon emissions dramatically for 50 to 80 percent of those cars, we haven't made a dent in the climate change problem. And too many politicians are focused on silly ideas like that, because politically it sounds good.

Take San Francisco, for instance. Putting solar cells on anybody's roof is absolutely silly, in a foggy city like San Francisco. If somebody wants to do it with their own money, that' s great. Do it. But don't do it with other people's money.

Q: When you talk about price and market penetration, you're really getting to one of the most basic questions I think everybody has about climate change and the energy problem. Namely, can we solve this without significantly changing our lifestyle, the way we live?

A: This is where the environmental community goes wrong. They say, "No matter what the cost, we've got to do this." Or, even worse, "Let's get people out of their SUVs. Or let's not have them drive."

Anything that requires people to change their habits has a low probability of success. It's been proven over and over again that people don't inconvenience themselves. You know, it's not like GM just wants to make big cars. People want to buy big cars, so GM makes them. And some people have genuine reasons. I've got four kids and two dogs, and wherever I go on a weekend, I need a car to take all of them.

So it's really important that we find solutions that have a high probability of effecting change and making a difference at scale. I don't think hybrids make a difference at scale. Hydrogen has very little chance of making a difference in the next 20 years. We should stop spending public money on it.

Having said that, the other assumption that we have to pay more for green or change our lifestyles is also wrong. And the answer lies in innovation.

The other big area is coal and natural gas for power generation. People have assumed coal is cheapest. Coal is no longer the cheapest. Coal was the cheapest when we ignored the environmental damage it caused.

For large-scale, utility grade power, you need a different technology called solar thermal. We're building a 175 megawatt power plant for PG&E in the Carrizo Plain in Central California. It will not be more expensive than a natural gas plant, which is their alternative.

Q: You're talking a lot about cost-competitiveness. What is your reaction to $4 gasoline? I mean, that sounds like great news for you.

A: The old green investing was about producing green stuff without regard to cost. And that's why it has not been scalable. Unless we produce stuff that is cheaper than fossil and also happens to be greener, we're not going to get widespread adoption or scalability. Having said that, $4 gas clearly helps alternatives get started.

Q: You're talking about price points for different fuels, but you haven't talked about infrastructure at all. What about the capital investment, the gas stations for example? How is that going to play out? That's going to be a massive investment.

A: The answer is it's not that massive. The annual investment in billions of dollars is probably no different from what we did in telecom already, to switch the telecom infrastructure to Internet IP, optical. The same thing will happen in energy. In Brazil it happened in three years. Now Brazil's a much smaller scale, but it had a lot less money, too.

Q: Can you explain what happened there?

A: Brazil adopted flex-fuel cars in the space of three years. In January of 2003, flex-fuel cars had 3 percent market share of new car sales, in January of '06, it had 75 percent market share of new car sales. Why? Because the fuel there, ethanol, was cheaper.

That's how it happens. People started buying those cars, every pump owner started putting in the pumps. We need selective mandates, technology-neutral to the extent we can make them. For example, instead of mandating electric cars in California, which we've just backpedaled on, we should have said, "Every car should have two sources of fuel." There's gasoline and a second. Let people decide whether that second is electric, whether it's biofuel, whether it's natural gas.

Q: Do you see the U.S. in general and California in particular getting a lot of jobs from the emerging clean tech industries? Or is it just going to be a few research and development and investment jobs?

A: California's clearly well positioned to get the R &D and investment jobs, which are the best, high-paying jobs. On the average, green investments probably create twice the number of jobs, or more, compared with the same investment in fossil technology, whether you're talking about a coal power plant for electric power generation or oil exploration and refining jobs. Whether California can get those jobs or not depends on California regulation.

Today, the bureaucracy in California for permitting is so large that whenever we can, our companies for production move out of state. They'd rather be in Nevada, they'd rather be in Arizona, they'd rather be in Florida, in Georgia - every place except California.

During the 2001 energy crisis, we put in emergency cycles to approve power plants in 90 days. We need to do that for renewable technologies. We can't eliminate the environmental constraints, but we need to have clear, simple checklists. Once you meet them, you're in, you're permitted, you can go.

Q: Will the new green jobs be in the United States at all, or will the manufacturing jobs that come out of this be in China or Asia?

A: You know, one of the great things about most renewable technologies - not every technology, but many of them - is the jobs have to be local. When you're talking about a power plant and power generation using solar thermal technology, the jobs will be where the plant is. They may be in Nevada or Arizona, but you can't move them to China and ship power here from China. And by the way, the biggest beneficiary of these will be the rural economies, because whether it's power plants or biofuel plants, you're going to build them in agricultural areas.

Q: Whenever we write stories touching on this revolution that's getting under way, we often get e-mail from readers saying, "You know, this is fascinating, how do I invest in it?" And usually what we end up typing back in response is, "Well, most of these companies are private startups just getting going. You can't invest yet." For a typical investor out there who really thinks this is going to be the future, is there a way for them to get into this?

A: The first caution I would give is we are likely to see a bubble at some point. I don't think we're in a bubble now, but we are likely to see a bubble, so I tell people to be very, very cautious. And if you've learned from dot-com, remember it. The second thing I would say is most of the investments, or the best, most attractive investments, are private. Most people are not qualified to make those investments, because it requires a fairly deep knowledge of technology.

Q: Deep pockets, too, I believe.

A: And deep pockets. Having said that, there is a way to play in the public markets. Solar photovoltaics have been a great return, and it's a market that will probably still keep growing 30 percent a year. But most of that is reflected in the current stock prices.

The safest way to play in this market is to take traditional industries, take cars and engines and airlines or public power utilities. Most people invest in public utilities. If you pick the utilities that have lower carbon emissions as a basic part of their strategy, you're much better off. If you're going to do airlines, pick the more efficient fleets. If you're going to do industrials, pick the companies that have lower energy costs because of higher energy efficiency.

Now you can't ignore the other things, like how their business is doing. So add carbon footprint to the five other things you use in evaluating a company in making traditional investments. You don't have to make an investment in a green technology company to be part of the trend.

Q: To what extent do you try to influence the political process to advance clean tech?

A: You know, for lack of time, I haven't spent much time in Sacramento. For relatively unplanned reasons, I have gotten very involved in Washington. Mostly because I get a lot of calls asking for help and opinions. I'm not a political person. I'm a techie nerd, and I enjoy the techie part. I mean, all my life, I've loved great technology.

I get very deeply technical in each of these areas, I try to understand the technology. That's why I write a lot, so other people understand what I'm thinking. And it's valuable. I like good criticism. I recently wrote a blog on on why the Prius was more greenwash than green. And I got thousands of comments.

Q: It's a hot-button issue.

A: It really was like insulting the pope. But of the thousands of comments, there were probably 10 or 15 really important questions I had forgotten to answer. So I went back, did research on those 10 or 15 questions, revised my paper and the final version is on my Web site.

Q: So if you were going to pick three technologies that you think will be successful 20 years from now, what would those be?

A: There's four major areas we invest in. We call one the war on oil - to eliminate fossil oil. We have eight or nine investments in that area. The second area is our war on coal, which is about power generation. The third is efficiency. And the fourth area is new materials.

We're doing new cement. I do believe cement is the third-largest emitter of carbon, after coal for power generation and oil for transportation. Instead of producing a ton of carbon dioxide per ton of cement, we want to reduce a ton of carbon dioxide per ton of cement.

We're doing new kinds of glass, up in Petaluma, that turns dark, so it saves you a lot of heat gain or heat loss. We're doing solar power you can deliver at night, because you can store it. Not just, "Hey if it's cloudy today, I can't ship you power."

Q: Some people might not understand how cement is an emitter. Can you explain?

A: Cement is made at 1,600 degrees centigrade. You basically burn up limestone, and you're talking about billions of tons of limestone heated up to 1,600 degrees. Very energy intensive, lots of carbon emissions.

Frankly, if we just did oil, coal and cement, we would eliminate completely the carbon problem on this planet. If you just did those three things. And so we shouldn't be talking about 29 things. We should focus on the three that are 75 percent or more of carbon emissions on this planet. And if we can make them cheaper than fossil, then fossil is history, and the carbon problem's solved, simple.

Q: Can I close it up with one question about the valley in general? What is the future of Silicon Valley and its competitive state versus the rest of the world?

A: I think the most powerful social force we have when it comes to solving our problems and multiplying our resources is the entrepreneurs and technologists and scientists. And the culture of Silicon Valley. It is the solution and may be the only solution. Policy can help. But policy doesn't work without technology innovation.

Look, cement's a classic example. We're trying to do cement that would be cheap enough to give away for free if carbon had a price. That could change the world's carbon picture, with one technology. If solar thermal is cheaper than coal, which is possible over the next five to 10 years, then coal would be in a very different place. Those ideas come from technologists and scientists and serious entrepreneurs. And that's why I'm actually hopeful that we can change the picture.

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