Interpreting Google’s purchase of Nest

Were you surprised to hear of Google’s acquisition of Nest? Probably not; nor was I. Google has long been interested in energy monitoring technologies and the effect that access to energy information can have on individual consumption decisions. In 2009 they introduced Power Meter, which was an energy monitoring and visualization tool; I wrote about it a few times, including it on my list of devices for creating intelligence at the edge of the electric power network. Google discontinued it in 2011 (and I think Martin LaMonica is right that its demise showed the difficulty of competition and innovation in residential retail electricity), but it pointed the way toward transactive energy and what we have come to know as the Internet of things.

In his usual trenchant manner, Alexis Madrigal at the Atlantic gets at what I think is the real value opportunity that Google sees in Nest: automation and machine-to-machine communication to carry out our desires. He couches it in terms of robotics:

Nest always thought of itself as a robotics company; the robot is just hidden inside this sleek Appleish case.

Look at who the company brought in as its VP of technology: Yoky Matsuoka, a roboticist and artificial intelligence expert from the University of Washington.

In an interview I did with her in 2012, Matsuoka explained why that made sense. She saw Nest positioned right in a place where it could help machine and human intelligence work together: “The intersection of neuroscience and robotics is about how the human brain learns to do things and how machine learning comes in to augment that.”

I agree that it is an acquisition to expand their capabilities to do distributed sensing and automation. Thus far Nest’s concept of sensing has been behavioral — when do you use your space and how do you use it — and not transactive. Perhaps that can be a next step.

The Economist also writes this week about the acquisition, and compares Google’s acquisitions and evolution to GE’s in the 20th century. The Economist article touches on the three most important aspects of this acquisition: the robotics that Alexis analyzed, the data generated and accessible to Google for advertising purposes, and the design talent at Nest to contribute to the growing interest in the Internet-of-things technologies that make the connected home increasingly feasible and attractive to consumers (and that some of us have been waiting, and waiting, and waiting to see develop):

Packed with sensors and software that can, say, detect that the house is empty and turn down the heating, Nest’s connected thermostats generate plenty of data, which the firm captures. Tony Fadell, Nest’s boss, has often talked about how Nest is well-positioned to profit from “the internet of things”—a world in which all kinds of devices use a combination of software, sensors and wireless connectivity to talk to their owners and one another.

Other big technology firms are also joining the battle to dominate the connected home. This month Samsung announced a new smart-home computing platform that will let people control washing machines, televisions and other devices it makes from a single app. Microsoft, Apple and Amazon were also tipped to take a lead there, but Google was until now seen as something of a laggard. “I don’t think Google realised how fast the internet of things would develop,” says Tim Bajarin of Creative Strategies, a consultancy.

Buying Nest will allow it to leapfrog much of the opposition. It also brings Google some stellar talent. Mr Fadell, who led the team that created the iPod while at Apple, has a knack for breathing new life into stale products. His skills and those of fellow Apple alumni at Nest could be helpful in other Google hardware businesses, such as Motorola Mobility.

Are we finally about to enter a period of energy consumption automation and transactive energy? This acquisition is a step in that direction.

BP Statistical Review of World Energy 2013

Last week I attended Mark Finley’s presentation in Chicago of BP’s Statistical Review of World Energy for this year. In his role as General Manager of Global Energy Markets at BP, Mark is responsible for this annual analytical survey of world energy production, consumption, and trends. He’s an outstanding economist whose presentations are a master class in public communication of quantitative analyses, so attending his presentation was a real treat for me.

As the press release for the Review indicates,

The US recorded the world’s highest growth in production of both oil and natural gas in 2012, on the back of increasing production of unconventional hydrocarbons such as tight oil, an example of the increasing diversity of energy sources as the global market continues to adapt, innovate and evolve. With rising natural gas output driving prices lower in the US, natural gas displaced coal in power generation, causing the US to experience the largest decline of coal consumption in the world.

Elsewhere, 2012 saw the largest annual decline in world nuclear output. In Japan, where nuclear power generation all but disappeared after 2011’s Fukushima accident, higher imports of fossil fuels including liquefied natural gas (LNG) ‘kept the lights on’. In Europe, where gas prices were higher than in the US, power generators took the opposite course from the US, and substituted coal for gas.

A few of Mark’s insights that aren’t reflected fully in the graphs and data really struck me. Not surprisingly, he talked quite a bit about the increase in oil and natural gas production in the US due to shale, and this change has led to a couple of interesting trade patterns. One is the reduction of US oil imports by one-third in the past five years, and the shift in consumption from the US to China. That’s the “national security-reduce Middle East imports” desired outcome from shale oil, right? Not exactly — oil is not a homogeneous product, and it turns out that North American shale oil is most similar in weight and composition to the oil in Africa, not the Middle East. So the US imports of African oil have fallen, and Chinese imports of African (and other) oil have risen. BP also estimates that China has increased its oil inventories by more than all of the OECD country inventory increases combined.

One reason for the increase in Asian oil imports is the increase in automobile ownership in China and India. The majority of new car sales in 2012 occurred in emerging economies, with much of that activity occurring in China and India.

There were other fascinating insights in Mark’s analysis, but I’ll leave it there for a Friday afternoon!

I also recommend the interactive energy charting tool accompanying the Review — it uses the historical data and generates comparative regional charts elegantly and effectively. You can also export a particular graph, the data underlying the graph, and/or a spreadsheet with all of the data in the Review. I had fun playing around with the natural gas price history graph, which you can scroll through by year and see year-by-year how the price changes, as well as seeing in 2012 the large price difference between US/Canada and Europe/Japan.

Large shale gas potential in the UK

Interesting news — according to this BBC article, the most recent British Geological Survey indicates that there may be twice the shale gas deposits in the UK that were previously anticipated. Such a large potential source of natural gas has substantial implications: “If the estimates are proved correct, that would still suggest recoverable reserves of shale gas far in excess of the three trillion cubic feet of gas currently consumed in the UK each year.”

One of the recent conversations in energy economics and policy has been around whether or not liquified natural gas (LNG) exports from the US would raise natural gas prices in the US. A big driver of the profit opportunity in LNG exports is the relative lack of exploitation of shale gas deposits in Europe, and the natural gas price differential between the US and Europe.

If UK energy companies can bring their shale gas to market, that changes the complexion of global LNG shipments.

UPDATE: I then go do my morning reading and find Tim Worstall commenting on the issue. He links to a Telegraph story that contextualizes the magnitude further by pointing out that even just extracting 10 percent could meet Britain’s anticipated natural gas demand for 40 years.

NYT Energy For Tomorrow Closing Plenary video

Lynne Kiesling

Last week the New York Times hosted a conference called “Energy For Tomorrow”, and they have made video from all of the sessions available; there are several sessions discussing energy efficiency, natural gas, renewables, etc. I watched the closing plenary on Friday, for which the topic was subsidies in any or all energy industries (sorry, WordPress and the embed code aren’t playing well together). Among the speakers it features Rice economist Amy Myers Jaffe  (to whom we have linked here before), as well as friend-of-Knowledge Problem Branko Terzic from Deloitte Consulting.

The discussion was good and very informative, raising many of the aspects of the pros and cons of subsidies depending on their form and how they are implemented. Naturally, much of the discussion addressed solar and the unintended (but easily anticipated) costs illustrated by Solyndra and by Spain, whether subsidies generate more overall net benefits than a carbon tax would, and whether subsidies should focus on driving down costs and getting to grid parity or on R&D. I’ll let you form your own conclusions on those topics.

I found that Amy Myers Jaffe’s comments were the closest to what I would have said if I were on the panel. She critiques the use of subsidies very effectively, and encourages an energy policy focus on “targeting the externality” and pricing it in the market. Branko’s comments highlight the political economy of subsidies and whether subsidies are hidden or in plain sight.

Recommended for easing into your Monday.

Waterless fracking?

Lynne Kiesling

Pale Rider is one of my favorite Clint Eastwood movies. One of its central themes revolves around classic property rights concepts in a community of miners that includes a number of small pan miners and a family that has built a larger, hydraulic mining operation that essentially uses pressurized water to blast rock hillsides apart and release the valuable gold therein. This hydraulic mining harms the mining potential of the downstream pan miners, reducing the value of their property. It’s a vivid example of property rights and Coase’s point about the reciprocal nature of costs when the actions of community members are interdependent. Of course, as director Eastwood heightened the dramatic conflict by making the hydraulic mining family greedy and mendacious, but that’s not necessary for there to be an underlying property rights conflict.

Pale Rider came to my mind yesterday afternoon, when I happened on an interview with Daniel Yergin on Fox Business. The interviewer asked him about fracking as a “new” technology and the US prospects for energy independence (oh, how I wish people would just get over that), and he pointed out that fracking is being used both for natural gas and for “tight oil” (which all KP readers know thanks to Mike, but I think a lot of people don’t). But Yergin also corrected her assertion that fracking is a new technology, mentioning very briefly that this technique in one form or another has existed for a long time. Fracking as we know it has been around for decades, but almost as soon as Evangelista Torricelli discovered atmospheric pressure and the vacuum in 1643, people started exploring using pressurized fluids to do work that they and their animals could not. In the 19th century that included hydraulic mining to get at subsurface mineral deposits.

Yergin’s remark triggered my Pale Rider memory, and the economic parallels between the issues in using hydraulic mining in Pale Rider and hydraulic fracturing today are strong — conflicts over the use of resources with ill-defined property rights, environmental impact, changes in potential profitability of using resources in different ways, etc. In particular, conflicts arise about the quantity of water used and water quality post-fracking. Again, thanks to Mike I think we understand those issues well.

I’ve been wondering about the next step in the chain of Coasian logic: if property rights and legal liability are defined so that energy companies are liable for harms they create (water scarcity or contamination), does that induce harm-reducing innovation? In the abstract, theory suggests that such innovations would fall into the two categories, waterless fracking and water remediation and purification.

And it is happening, although in its infancy and still more expensive than using water. Consider this Forbes article from Erica Gies about innovations in waterless fracking. The relative value of such innovations is going to be highest in places like Texas, as she observes:

Water shortages and conflicts are on the rise due to increasing population and climate change–caused fluctuations in precipitation that are making drought more frequent and severe in some places.

One of those places is Texas, where this summer’s mega-drought invoked comparisons with the 1930s Dust Bowl, as ranchers sold their emaciated animals for a song and agricultural losses soared to more than $5 billion.

As a result, gas industry projects in Texas had to scale back, as energy producers scrambled to find sufficient water.

She then points to a couple of different approaches being developed — liquified (again note the role of atmospheric pressure!) propane gel injected instead of water and which may be reusable, and a vapor “foam” that may reduce water use by 95 percent. I think her conclusion accurately captures the tradeoffs involved, and the role that innovation can play in reducing harms from fracking:

These technologies are in their infancy, and many questions about efficacy, impacts, and cost remain to be answered before they could move into widespread use. And of course, reducing water consumption does not mitigate concerns about prolonging our reliance on fossil fuels or the inherently ugly nature of extractive industry, especially for local neighbors.

But for the gas companies, although such technologies are currently more expensive than water, they offer the promise of reducing myriad headaches and expenses, including costs for hauling water and sand, repairing roads damaged by heavy truck use, and managing water pollution, including “produced” water disposal.

Gies wrote earlier in the year about innovations in water cleaning and business opportunities for wastewater treatment companies, providing concise background on the use of water in fracking. I also read an article last week (that I can’t locate now) about the potential to use technologies developed for oil spill cleanup to clean fracking water. Innovation changes some of the tradeoffs involved in fracking.

An SEA meetings coda

Lynne Kiesling

John Whitehead already mentioned our joint AERE/USAEE session at the SEA meetings last week. It turned out well, a combination of carbon offsets analysis and electricity market design experiments. Rim Baltaduonis from Gettysburg College presented two different, interesting experimental papers, one on designing rules for enabling contracts for carbon sequestration in soil (which is a tricky and difficult problem), and one on the individual and system effects in an electric power network of different retail contracts (fixed, TOU, RTP with and without real-time information). The latter paper is very interesting and has some results that I’ll definitely want to discuss here, but he’s not distributing it yet, so I’ll bide my time. The third paper was a very elegant and informative model of different aspects of carbon offsets from Heather Klemick at the EPA. The cross-pollination of the environmental/resource economists and the energy economists made for a wide-ranging and interesting discussion. Thanks to John for letting us co-sponsor a session with AERE!

There were several other highlights, including the panel I chaired on research funding in economics, the panel on which I presented a paper that I’ll discuss here after I revise it (the punch line across all of the papers on that panel was “one size does not fit all!”), the Institute for Humane Studies cocktail reception, and the sessions and banquet for the Society for the Development of Austrian Economics. A very enjoyable conference.

Things that caught my eye: subsidies, wine, LEDs, dismal economists

Lynne Kiesling

As a coda to Mike’s post yesterday regarding the CRS study of the effects of removing oil subsidies on gasoline prices, here’s Ron Bailey at Reason reminding us that ethanol subsidies are almost triple those to the oil companies, and with little to show either environmentally, economically, or energetically.

Courtesy of Dr. Vino, an Australian winery using a new German technology rather than a screw cap for its cellar-destined (at $500/bottle!) wines. Called Vino-Lok, the company touts its glass stopper/elastic ring technology’s wine-aging capabilities.

This week Philips is releasing a mass-market LED light bulb with a physical and lumens-delivering profile to mimic incandescents at a fraction of the energy use. But they’ll still be priced at $40-45, which is a bit steep for customers who are accustomed to cheap, short-lived bulbs, so their market success will require some education and adaptation of expectations. They will also have to overcome the hurdles of the failed expectations of compact fluorescent bulbs, which have not demonstrated the required longevity/price tradeoff to make them economical (in addition to their other shortcomings). I may buy one to test, but I don’t plan on fitting out my whole house in these LEDs any time soon, based on my CFL experience.

David Zetland reminds us of the provenance of the economist moniker “dismal scientist”, and claims that he likes to “take pride in calling attention to the unpleasant problems that impede human progress and happiness.” Me too, my friend, me too.

EIA releases Annual Energy Outlook 2011

Lynne Kiesling

Today the Energy Information Administration released the 2011 Annual Energy Outlook (link is to executive summary). This year’s outlook explores scenarios that include updated forecasts of shale gas production, which have changed considerably since last year’s outlook, as KP readers know due to Mike’s excellent analyses.

Another aspect of the analysis that will be of interest to KP readers is their modeling of expected production of renewable energy:

Electricity generation from renewable sources grows by 72 percent in the Reference case, raising its share of total generation from 11 percent in 2009 to 14 percent in 2035. Most of the growth in renewable electricity generation in the power sector consists of generation from wind and biomass facilities (Figure 3). The growth in generation from wind plants is driven primarily by State renewable portfolio standard (RPS) requirements and Federal tax credits. Generation from biomass comes from both dedicated biomass plants and co-firing in coal plants. Its growth is driven by State RPS programs, the availability of low-cost feedstocks, and the Federal renewable fuels standard, which results in significant cogeneration of electricity at plants producing biofuels.

As usual, though, I wouldn’t take those forecasts to the bank, or to your venture capitalist for financing; quite a bit of clean tech investment that is subsidy-dependent has not been getting funding, even with the subsidies and the RPS carrots/sticks … and then there’s the implosion of the Spanish renewables venture capital market with the reduction in subsidies.

Our next fear: peak rocks?

Lynne Kiesling

Economist and teacher extraordinaire Steve Horwitz has done a great video for Learn Liberty on the question “are we running out of resources?”

We’ve done our share of “peak oil” debunking here over the years, so it won’t surprise you that I find The Onion’s take on the question of running out of resources highly amusing:

Geologists: We may be slowly running out of rocks

An economic analysis of comparative fuel economy?

Lynne Kiesling

Thursday’s Wall Street Journal had an article on airline fuel economy, “A Prius With Wings vs. a Guzzler in the Clouds“, and it presents an analysis that is a good starting point for thinking about an economic comparison of the fuel efficiency of different modes of transportation. The analysis compares the fuel economy of different U.S. airlines, measured in miles per gallon to facilitate comparisons with other modes of transportation: “With airlines, it’s how far one seat (occupied or not) can travel on one gallon of jet fuel.”.

One technical caveat: the measure of m.p.g. uses the number of seats in the airline’s fleet, not the number of occupied seats. Thus if the airline has a low load factor (i.e., flies planes with lots of empty seats), then this measure will overstate their fuel economy relative to what it would be if you measured actual passenger miles flown. Motivated by competition, costs, and narrowing profit margins, though, airlines have had pretty high load factors since deregulation in 1978, so I wouldn’t throw out this analysis based on that caveat.

Two interesting results come out of the analysis. First,

The three worst major U.S. carriers for fuel efficiency happen to be the three biggest: Delta, American and United airlines. They fly the biggest planes, which aren’t always more fuel efficient, and they have the oldest fleets.

Best in fuel economy: Alaska Airlines, jetBlue Airways and Continental Airlines, which all have fleets that average nine years of age or younger. Regardless of an airline’s ranking, your particular flight mpg will vary greatly.

So newer planes are more fuel efficient, and even though larger planes can carry many more passengers, the incremental fuel burned per additional passenger is higher. I’d be interested in seeing an econometric analysis that decomposed the magnitudes of the age effect and the size effect.

Second, note that the average fuel economy for the entire U.S. air fleet is 64 m.p.g. That’s high! Even if you take into account the load factor caveat, that’s an impressive number, as is the improvement in fuel economy that the airlines have generated since 2000 (motivated, certainly, by increases in jet fuel prices and jet fuel price volatility that they can’t hedge fully).

Comparing the fuel efficiency of different modes of passenger transportation is difficult, but this recent post at truecostblog makes a thorough stab at an apples-to-apples comparison of actual passenger miles per gallon, a measure that takes into account average vehicle occupancy and actual vehicle miles traveled, not just passenger capacity. This measure will disfavor the personal car, which for most of us most of the time operates with a load factor of 25% (single drivers). Truecostblog’s results:

Source: truecostblog, May 27, 2010

Each of the calculation is supported by notes, so please check the original post to get further details on the calculations.

Note here that the estimate of the airplane mpg is 42.6, with the decrease relative to the WSJ analysis reflecting the load factor of 79.6%. Passenger trains compare favorably, despite the poor utilization/load factor of Amtrak in the US. But what’s really striking here is how poorly the bus, the car, and the SUV/minivan compare to the airplane and train.

As an aside, note also that these data support all of those CSX commercials we’ve been seeing where CSX trumpets how green it is to ship freight by train rather than truck — the freight train 190.5 PMPG vs. the 18-wheeler 32.2 PMPG.