Carbon Coolers!
The so-called green fuels could control global warming, but what about shareholder wealth? Can they perform this delicate balancing act?

Lacking the punch to scare us Indians out of our skins are terms like ‘pollution’, ‘greenhouse effect’ & ‘global warming’. Meanwhile, the developed world, alarmed by consequences of its actions, is groping for concrete, practicable solutions. Is it all in vain? Are alternative fuels nothing beyond political rhetoric & piece meal measures? B&E presents a green world view...

While flying over the US Postal Service’s processing headquarters located in West Sacramento, California, the dazzling aerial view gets your heart thumping... what else would you expect when you look a few miles below and the sun’s glare is reflected at our tiny chopper by an ultra-gargantuan 28,000 square feet of solar plates! A magnify cent view, holding even bigger promises, the photo voltic installation by global oil giant Chevron reportedly produces 403 kilowatts of electricity that could serve as a source of power to 200 ‘big’ homes sans pollution! So what do you think was the best part about the whole set-up? Sans pollution, of course!

Let’s go twenty tiresome years back – in the wake of the 1970s ‘oil-shock’, Texasbased oil-giant Exxon (now Exxon Mobil) had invested a mountain-load of free cash totalling $500 million for development of ‘alternative fuel’ technology. The only returns they received were in the form of unbelievably high costs and poor forecasted returns. The mission was abandoned within a couple of years of its initiation and the whole world sniggered, pointing their fingers at Exxon’s fanaticism (or so they thought) to harness solar energy and develop it as a viable alternative to fossil-fuels. Cut to the present – the very same ‘resounding laughter’ has turned into a ‘global war-cry’ – a war by, for and of the oil world, against the devil called ‘pollution’!

And the critics today are for sure cursing themselves hoarse for having jeered at all oil and auto majors who ever dared to imagine that alternative fuels must be sought after. Now here we are – neck to neck and running the race for survival against time... winning would mean victory and ‘life’, while losing out... extinction!

So what are the various oil behemoths doing when it comes to discovering alternatives? Exxon Mobil CEO Rex Tillerson, with previous imbroglios weighing on his mind, doesn’t like to ‘sound’ too green savvy anymore, “We’re only going to invest our shareholders’ money where we think they can get the kind of returns they expected when they invested their money with Exxon Mobil.” Nevertheless, the $475.5 billion Exxon Mobil (who critics call a ‘laggard’ in the whole revolution), which during 2006, amassed an imposing $39.5 billion in net profits from fossil fuels, is currently financing a $100 million decade- long Stanford’s Global Climate and Energy project, which is exploring avenues to generate alternative fuels including the muchdebated cellulosic ethanol. Exxon also has tied-up with various agencies and companies to work on green-fuel technology. For example, with the EU, it is working on a carbon capture project.

There are other oil behemoths too, which have initiated the much desired step towards accelerating the time-limit set for potential usage of bio-fuels and replacing the dreaded, polluting fossil-fuels with renewables like hydro, wind, solar energies et al. Chief of the lot being the $233.3 billion British oil giant BP, which is now popular as Beyond Petroleum! BP has announced a walloping $8 billion in investments evenly spread over a decade till 2015 to its alternative energy division, which currently has wind, solar & hydrogen power on its list. Most encouragingly, the Briton expects its revenues from solar business to touch a rollicking $1 billion in 2007, perhaps only proving why Exxon ‘should have carried-on’ its quest for alternatives twenty years back!

Then there is the $175.1 billion oil-mammoth Chevron, which too, has earmarked a budgeted investment of a staggering $5 billion in renewable energy during the seven year period ending 2009. Also, since 1999, Chevron Technology Ventures (CTV), a unit of Chevron, which takes critical decisions on commercialisation of new technologies has signed 29 deals. Currently, CTV has a five-year project partnership with Hyundai Motors, UTC Fuel Cells and the US Department of Energy (DOE) to unravel greater facts about the usage of hydrogen fuels. They are clearly betting big on renewable hydrogen-based technology today.

Joining the hunt for alternatives are giants like the $137.1 billion Royal Dutch Shell – which has invested in excess of a heft y $1 billion on bio-fuels in the past seven years (it has also sold approximately 100 million gallons of bio-fuels during 2006 alone) & the $125.6 billion ConocoPhillips which is investing a substantial sum of $100 million for the processing of animal fat into renewable diesel. Even the French oil giant Total, has devoted a staggering $673 million in the past two years on renewable initiatives.

“So where’s the problem?” Well... while it’s one thing for us to smile satisfactorily while on that flight above the US Postal Service centre, a disturbing question playing in our minds is about its sustainability and impact on profits? Our aircraft was plunged in silence thereafter. Everyone knew that generation, sale and implementation of alternative fuels was highly costintensive and those huge profit churning oil machines and auto majors are not social groups, which would willingly part with their earnings for saving the planet!

And talking about the future of renewable energy, the picture painted for the immediate future or even for the mediumterm does not seem encouraging for investments either. Even nuclear energy, which accounts for 20% of energy needs of the US (and where giants like GE & Alstom are present), won’t come close. According to a report issued by the US Climate Change Science Program, which cites three most widely recognized models to analyse climatic change – one from Massachusetts Institute of Technology, one jointly framed by the Pacific Northwest National Laboratory and the University of Maryland, and the third designed by Stanford University and the Electric Power Research Institute – fossil fuels are forecasted to contribute upto a thumping 80% of the planet’s energy needs even in 2100! Reason enough to substantiate Exxon Mobil’s hard stand against bio-fuels & alternatives and its plans to invest a further $60 billion in oil over the next three years!

To numerically illustrate the economic non-viability of alternatives, let us consider ‘ethanol’, which is clearly the current darling among renewable & alternative agents. According to an analysis by Michael B. McElroy of Harvard Business School, if the 51- cents per gallon of subsidy given by the Federal government is removed, the total cost of just producing ethanol in US would touch $6 per barrel of petroleum energy equivalent. Considering the current price of petrol in the US of about $2.5, it boils down to a loss of $3.5 per barrel on sale of energy equivalent to one barrel of petroleum!

The case for solar energy runs along similar lines. Electricity generated through solar energy is costlier than electricity generated from coal, gas or water! And how about imagining solar plates on your car roof? Urghhh...! So you could ask yourself yet again, “Unviable?” Our answer remains just that – “Yes, unviable!”

Someone has to pay to avert the impending doom. Question is who will? Th e two most hated on environmentalists’ list – automakers and oil companies, are mulling hard over the question, attempting ostrichlike, to look-away from the situation. So, the spotlight is clearly shining on the policy- makers.

The US Supreme Court in April 2007, directed US Environmental Protection Agency to regulate greenhouse gas emissions from vehicles. This was preceded by the Bush Administration’s ‘Twenty in Ten’ plan, launched in January 2007, to cut gasoline consumption by 20% over the next decade. The EU, too, in February 2007, came down heavily on CO2 emissions and has proposed a legislation to limit CO2 emissions to 120 grams per kilogram (g/km) by 2012, from the current average 160 g/km. In Japan, the world’s third-largest auto market, the government is considering tightening fuel efficiency standards by nearly 30% as of 2015.

To attain these ambitious goals, the axe is likely to eventually fall on auto companies. More importantly, it also depends on how will customer preferences shape up. Will the huge investments in eco-friendly technology be viable? Leading automakers (especially from US) are already reeling under the pressure of saturated demand in key markets, intense global competition & staggering pension liabilities. Now they also face another scourge – stringent environmental legislation to reduce emissions. The Senate committee recently approved 40% increase in fuel effi ciency over the next decade, a move that auto companies were quick to deem unrealistic. Dave McCurdy, Head, Alliance of Automobile Manufacturers (trade group representing GM, Ford, erstwhile DaimlerChrysler, Toyota Motors et al) called the bill ‘unrealistic & unattainable.’

What’s more, even companies like Ford & GM, which have invested in developing technologies that run on alternate sources of energy, are aware of the challenges they face in terms of cost & fuel efficiency. According to a preliminary calculation made by US National Highway Transportation Safety Administration, the new standards would raise manufacturing cost per car by a spine-chilling $1,300 by 2017. In Europe, industry estimates alarmingly put the costs between $807 and $4,036 per vehicle based purely on vehicle efficiency improvements. Bob Lutz, Vice-Chairman, GM, however dropped the bomb through his estimate that “meeting a mandated increase in fuel economy of 4% per year” could add a brobdingnagian $5,000 to $6,000 to a vehicle’s cost. He further accepted, “You tell me what happens to the market if these cars come out and everybody looks at the one they own and the new one is six or seven thousand dollars more expensive. This technology doesn’t come for free!” So while not impossible, switching to alternate fuels coupled with mandated fuel efficiency is a Herculean mission.

So who will take the hit? Will consumers accept comparatively expensive cars? Or will auto companies have to absorb the increase in manufacturing costs? After all, when Toyota launched its eco-friendly off erring Prius, in 2001, it absorbed some of the cost price to off set higher manufacturing costs, as Ford did for the Escape hybrid. But today, when the same Prius sells like hot cakes in the US market, Toyota no longer has to take the brunt. It sold a record 19,156 units in March 2007. But a few high-priced hybrid cars (the current scenario) seen only at globally renowned metropolitan areas are not the answer.

Coming back to oil companies, another reason why they are hesitant to invest is the colossal money already involved in exploration of fossil fuels, which, since 2004, has escalated by over 50% according to Cambridge Energy Research. Surely, working to save the globe makes a lot of sense but auto & oil majors have to remain in the profitable zone to be able to invest in alternative fuels.

Moreover, sundry reports point out that even if alternatives come into play overwhelmingly, the impact on future CO2 levels will be negligible. According to IEA, which simulated the consequences of 1,400 policies to reduce fossil fuel usage in the US, concluded that annual CO2 emissions would still not fall! On the contrary, the rise would still be a jaw-dropping 31% (instead of 55%, if the policies are not enforced by regulators).

What’s ‘made in india’?
So while the world is shouting-out-loud about alternatives, what’s the state of aff airs concerning the perils from conventional fuels in the Indian sub-continent? Oil companies in India have only just started giving their public image a shade of bright, beautiful, fluorescent green.

ONGC CMD R. S. Sharma, at the ONGC analyst meeting stated on the issue, “We are moving towards integration of energy business... Talking about alternate sources of energy, we have wind power, clean coal opportunities. CBM (coal bed methane) & UCG (underground coal gasification) have added new dimension to our business.” ONGC is setting up a 50 MW wind energy plant in Gujarat for their own use, with investments of Rs.2.5 billion. Simultaneously, BPCL is also investing Rs.5 billion for a 100 MW plant in phases. IOCL too is making significant investments in bio-diesel, procuring it from UP farmers at Rs.25 per litre. Today, India finds itself at the forefront of alternate fuel deployment movement spearheaded by companies like OSRAM, Wipro, Suzlon, Tata group, Maini Auto (of Reva electric car fame) et al, which are working towards moving away from conventional pollutants and becoming ‘green companies’. With carbon credits getting lucrative, it is beginning to make business sense as well.

For now, emission norms will make the bigger diff erence since fossil fuels won’t go away in a hurry. As explained to B&E by Virender Singh Saini, Scientist ‘F’ & Head, Technical Directorate, IIP, “In Euro norms, these (fuel) specifi cations are tightened to reduce pollution. In India we call them Bharat Stage. For example as per Bharat II, the maximum permissible limit of sulphur in diesel is 500 ppm while in Bharat III; this has been reduced to 350 ppm!” Sure enough, great oration we thought... but how far would this Bharat Stage go in saving Bharat? Surely, it is argued that even these stringent norms cannot on their own reduce pollution levels, and there has to be means through which the industry is encouraged to reduce its dependence on fossil fuels. Even hybrids are economically unviable currently as Rajeev Chaba, President & MD, GM India, tells B&E, “Customers have to give the push and all stakeholders must work together. Hybrid cars would otherwise become very expensive.” So the Indian government has taken certain initiatives as an attempt to bring about the needed change – a change in the petroleum consuming habits of Indians. For starters, fuel blending has been fixed at 5%, implying that every litre of petrol will comprise 5% of ethanol, while for diesel, it would be Jatropha bio-diesel, which is still under preview right now.

India’s tertiary sector is overwhelmingly dependent on high polluting diesel fuel and a myopic alternative looks far fetched at present. As per a national consensus a naturally occurring resource has been identified in the name of the Jatropha crop. Th e vast Jatropha plantations and enthusiasm over ‘ethanol’ do look positive. As a more liberal exercise to contain emissions and be economically viable, the government has also brought about measures to significantly curtail pollution levels, while not having to resort to drastic & economical non-viable steps through enforcement of Bharat stage norms.

India also holds special advantages when it comes to large-scale production of bio-fuels for the simple reason that the country has a proven cheap manpower cost and an authentic agrarian sector. Taking the case of ethanol; its production depends on molasses obtained from sugar cane (a primary cash crop in the country). Large industries engaged in sugar production such as Balrampur Chinni, Bajaj Hindusthan & Dhampur Sugar have been busy romping up their production capacities for molasses derivation. However, the ‘ethanol’ comfort factor ends there, and you can blame the myopic government policies for the same. A spokesperson of a large western UP-based company (who requested for anonymity) flatly put it across to B&E, “We do not want to increase the production share of molasses as we hardly save anything on that at the present rates, A quintal of sugarcane yields Rs.18 for each kg of sugar, but it only gives Rs.2 for each kg of molasses obtained!” The considerable gap is demotivating for producers even though molasses is a multi-purpose ingredient in a lot of production activity. Then there is jathropha derived bio-diesel which can be successfully supplemented with diesel. Being extracted from a process that is surprisingly on the basis of sugar production, jathropa which, being among the cheapest sources has attracted large fi rms like the erstwhile DaimlerChrysler, D1 Oils (which claims 1 million hectares of plantations), and now Reliance (which is set to enter the fray with plantations in the South).

The sad part remains – there are no clear-cut policies outlined to encourage and streamline their activities in a uniform manner. For instance, wind energy contributes just 1% and solar contributes just 4-5%, primarily due to low numbers of trained manpower. As revealed by P. P. Bhojvaid, Senior Fellow, TERI, “The future of alternate fuels is uncertain because of ambiguous government policies. When it comes to bio-diesel derived from jathropha; even at 5% blending ratio, we need at least 11 million hectares of jathropa plantations. Furthermore, an investment of Rs.150-200 million is required for one plant, which has a capacity of 30 tonnes of bio-diesel, which needs 100-105 tonnes of seed for sustainability alone!”

Being capital rich, the developed world would find it comparatively easier to change its outlook, which cannot be said for the developing economies. And India being an ‘A’ listed, high potential developing country, is reeling under massive developmental activities & is constantly ridiculed by climate change advocates. Direction is a must as to what needs to be done. But above all, “profitable or not?” is the most critical question. And no capitalistic corporation, in its senses, would continue to make a desired difference without a satisfactory answer!

Solar Truths

According to American energy independence, every square metre of Earth’s surface receives 1000 watts of energy from direct sunlight. The website estimates that even with an average efficiency of 15%, a square yard of solar photovoltaic cell can produce nearly 0.75 kilowatt hour of electric energy. India alone receives more than 4800 trillion KWH equivalent of solar energy annually, sufficient to meet all its energy requirements. The nation’s solar energy consumption has been consistently growing at 20% annually. Seeking out the opportunity large companies like Tata, BHEL and Moser Baer have entered the fray. Growing at 30%, Tata BP Solar has recently established its 38 MW plant, making it one of the largest solar energy players in the world. However, one shortcoming prevails. Photovoltaic cells are only 10% efficient and thus may not prove to be viable in the long run. Secondly a compact design for the equipment is still a distant dream.

‘eth’ ical anomaly

Ethanol has been a highly touted new age alternative. Ethanol is a bi-product of molasses extracted from sugar cane and large sugar companies are already engaged in its production. When ethanol is added to the normal fuel as a set percentage, it improves the combustion of the fuel and lowers emissions. According to the Energy Information Administration report, US, the cost of producing this fuel could be reduced by as much as 60 cents per gallon by 2015 using cellulosic conversion technology. Brazil is the leader in ethanol production, producing 15-16 billion litres of ethanol. It is investing $9 billion in new processing plants. The world’s largest company, US-based Archer Daniels Midlands boasts net sales of $11.4 billion (growth of 25% yoy) and net earnings of $362.9 million (growth of 4% yoy) for the nine months ended March 2007. Chairman & CEO Patricia A. Woertz stated that the company’s outlook on future opportunities remains quite strong. Equally strong, though, is the dilemma that if cars run on corn, what will people eat? Does it then remain resourceful enough?

Betting On Bio - Fuels

DuPont is one of the world’s largest alternate energy solutions providers for quite some time now, and has relentlessly worked towards providing industry with the best economically viable energy alternatives. Along with long term ties with energy behemoths like BP, DuPont subsidiaries like Hi-Bred International today are providing upto 180 types of hybrid seeds in order to increase the efficiency and practicality of ethanol based fuels. According to John Ranieri, Vice President, DuPont Bio fuels, “From our strong seeds and crop protection products offering for bio fuels today to significant transformative opportunities in new bio fuel technologies, I am confident in DuPont’s capabilities to meaningfully increase the use of renewable feedstock with smaller environmental footprints in place of petroleum.” DuPont’s bio fuels division spends a substantial part of its $300 million profits on research and development on alternative fuels and leads the way for the industry to adapt comfortably without going out of the way. Quite ahead of its time indeed.

Hydro - Mania

This is perhaps one of the cleanest alternatives at present. The end result of this alternative is clean water (H2O). However, availability of hydrogen is a problem as several energy intensive procedures such as electrolysis are required for hydrogen extraction from water. Rajinder Saini of IIP told B&E “Availability of Hydrogen is a problem as several energy intensive procedures such as electrolysis are required for hydrogen extraction from water.” Other problems such as transportation, safety and containment issues pose as threats to feasibility. Apart from being used in fuel cells, hydrogen can also be mixed with CNG. Even though hydrogen fuel cell technology is still in early stages of evolution, major automotive manufacturers like Honda and GM have taken visionary steps in insuring a hydrogen future. Honda’s FCV concept and GM’s HyWire-Volt500 concept duo, have demonstrated that a hydrogen fuel cell works, but they are bogged by poor operability. In India however hydrogen fuel cell technology is still nascent and not much work has been done in the field.

California calling . . .

One would wonder what is a link between muscles & environment, well there is. Ask the governor of California, Arnold Schwarzenegger. Without a doubt, California is leading the way in tackling the problems of energy conservation, environmental science & global warming. California has developed innovative & substantial programs for environmental preservation. For starters, California is the only state in the entire US with a flattening per capita electricity usage. They passed AB32 with a commitment to roll back greenhouse gases to 1990 levels by 2020 and a whopping 80% below by 2050. For this the state has initiated new carbon emissions standards, green building initiative, ocean action plan, hydrogen highway et al. They have more coming on board such as Arizona, New Mexico, Oregon & Washington. A few more schemes’ include “Green Building Initiative,” and the accompanying Green Building Action Plan, wherein the governor calls for public buildings to be 20% more energy efficient by 2015 and encourages the private sector to do the same. Welcome to the new age California!

Diesel gets a green push

For the project pertaining to jatropha plantations, the government has made provisions of 98 million acres of arid land. Unlike other cash crops the leaves of the jatropha plants are unfit for animal consumption; therefore the yield is safe from animal grazing. Dr. Reena Singh (Area convenor & associate fellow), Centre of Mycorrhiza, TERI “As per our research, the Jatropha plantation requires at least one irrigation annually and bio-fertilizers like Mycorrhiza. The plantation should be sustainable however” The process of oil extraction is based on jatropha seed crushing in an oil expeller rendering oil. This oil in turn is then mixed with alcohol along with a catalyst with bio-diesel and glycerine as bi-products. Extracted bio-diesel can be mixed with normal diesel bringing about oil conservation and better combustibility which results in lower emission levels. Scientists believe that bio-diesels have sustainable Cetane (equivalent of Octane) levels and thus they can be used up to 30% under normal operating conditions without evident engine damage. Furthermore, being a ‘low care’ crop, jatropha requires very little maintenance. Once the plantation is secured, it is sustainable even without the usual hoopla of proper irrigation and fertile soil. It’s not without a reason that jatropha is known as the ‘shameless plant’! Companies like DaimlerChrysler, D1 Oils & IOCL are taking active interest in this new age technology. As a matter of policy though, the government is reportedly not very keen on large scale jatropha plantations as that may lead to a cash crop status for jatropha. Critics are with the view that in an event of increased dependence on the crop as a fuel alternative, farmers could be encouraged to produce less food crops.