Tag Archives: economics

The Challenge of Efficiency Investments

One question I often get is why companies don’t make efficiency update to their datacenters more regularly. Part of the answer is the complexity and associated fear of modifying an operating IT infrastructure, which is especially challenging in 24×7 environments. However, there’s another set of issues.

Here’s a typical scenario:

  • A company buys energy efficient capital equipment now, which has a certain tax/accounting treatment
  • The resulting savings come down the road in the form of reduced operating expenses, which have a different tax/accounting treatment

There are three natural problems with this inside companies:

  1. The most basic issue is that the company needs to be in a position to be able to spend money today in order to save it in future years. Company cash flow challenges and investor pressure frequently lead to arguments against doing this, so it often comes down to a leadership decision.

  2. The second issue is the split incentive, where the investment in efficiency is spent in group A’s budget, and the savings come to group B’s budget. Clearly, Group A needs an additional incentive to do this project, either a mandate from above, or an accounting kickback of some kind. This is even trickier when Groups A and B aren’t part of the same company, as is often the case in today’s complex real estate ownership and management structures.

  3. Given the differences in accounting between capital and expenses, organizations frequently manage these through separate and distinct budget mechanisms. For example, a corporate group typically gets an annual budget for capital and separate one for expenses, and you can’t move money back and forth between them. Getting exceptions to this often involves the finance leadership of the organization, so is not something that is casually pursued. This is not just a corporate problem, but also frequently found in governments and projects that they fund. For example, a university IT leader complained to me a few years back about how the federal grants they were operating under prohibited making efficiency tradeoffs because of the different categories of funds and restrictions on how they could be used.

Each of these cases can be overcome by someone who sits high up in the organization deciding to make an exception, or changing a policy to simplify certain classes of efficiency investments. But that requires a combination of motivated and enlightened leadership coupled with empowered change agents in the organization, and personally I haven’t seen that combination occur in many places. And as mentioned above, this is especially tricky when multiple organizations are involved (e.g. the government and a university) and there is no shared, common leadership.

In the case of datacenters, we see companies in very different situations. In the case of a Google or Facebook, the datacenter and the company’s business are tightly coupled. In contrast many organizations see IT as an auxiliary service within their company that supports their main business, but is separate. This typically manifests itself in a CIO and IT organization reporting to the CEO, separate of the “business functions”. It’s not hard to imagine that the former organizations would be able to bridge common efficiency funding challenges more easily than the latter organizations.

Paper: Analyzing the DOE Loan Program

The Solyndra bankruptcy has, not unexpectedly, resulted in a wide range of reactions. On one end we have “This was a horrible investment and waste of taxpayers’ money. We should shut down the whole program,” and on the other end “Every investment has risks, and if you want success on a big problem there will be some minor setbacks. This is totally healthy and expected.”

I found myself having conflicting reactions, with my rational side understanding the portfolio perspective, my business instinct telling me that Solyndra was a really bad investment, and my energy innovation advocate persona saying “That money could have doubled or tripled the size of ARPA-E for this year!”.

All of these reactions lead us to a set of important questions that no one seems to have addressed. Is Solyndra representative of the other investments in the portfolio? Can I feel bad about Solyndra but still be positive about the rest of the portfolio? Are loan guarantees really a useful tool in the federal energy innovation arsenal? These are important questions, as the program continues to be a topic of discussion in ongoing budget negotiations.

In the spirit of the Energy Innovation Tracker I have used publicly available information to analyze the DOE loan guarantee portfolio, and to get a handle on whether it is money well spent or not. I have captured this in a paper that is available in a number of forms: web page, Word file, and PDF.

It’s Just Another Tax, Folks

On 3/18 the WSJ reported that Energy Secretary Steven Chu “advocated adjusting trade duties as a ‘weapon’ to protect U.S. manufacturing”. Basically, the threat is that we’ll increase tariffs to protect energy-intensive industries where they compete with products coming from countries that don’t apply a tax on CO2.

What interests me in this article and many others lately is that somehow a carbon tax (or cap and trade, there’s little difference for most people in the economy other than how the price is set) is somehow different than just another tax. The WSJ would not bother with an oped titled “Major, New Economy Wide Tax May Hurt US Industry”, but its news when it relates to CO2.

Recently I noted that the increase in gas prices from the CO2 tax levels that the Obama administration is signaling would be less than most states existing gas tax. China, on the other hand, currently has no gas tax. Where’s the tariff discussion about that tax imbalance? Again, CO2 taxes are somehow different.

Maybe its the moral angle: “We’re not taxing just to bring in money for the government, we’re taxing because its our moral duty to do so to save the earth. So everyone else should have to as well.” But of course that doesn’t make it not a tax, and doesn’t mean you get to avoid all of the other implications of a tax. And the fact that the Obama administration has built the revenue into their budget suggests that they’re not going to balk at the revenue stream either.

Finally, the statements by Secretary Chu signal one more thing: the administration is waking up to the scale of impact that their proposed tax will have. As Roger Pielke, Jr noted, “One point seems clear: regardless of the reasoning a trade war means higher prices for the American consumer”.

US Innovation Talk Outline

Outline for Talk at US Innovation Panel

Washington, DC 12/1/08

Today I want to talk about enabling “national scale” innovation, or how to create innovation with thousands, or even millions of people, spanning public and private investment.

Why national scale innovation?

Simple. Many of our problems are national (and global) in scale and are so complicated that, as much as we’d like to believe it, a researcher in some lab somewhere is not going to invent or discover the magic silver bullet that makes our problems go away.

Sustainable, reliable and cost-effective energy tops my personal list of innovation targets, but there are others:

  • diseases
  • sustainable manufacturing and consuming
  • homeland security

I would argue that national scale innovation is not possible without an innovation platform of the same scale.

What is an innovation platform: The core infrastructure and specifications that enable a wide array of innovation.

For example, the Internet is probably our greatest innovation platform.

  • It’s really just a set of specifications and the core network connections that are run by service providers.
  • Spawned an unthinkable amount of innovation, who would have understood all of the ways it is being used?
  • Touches pretty much every part of our lives and national economy.

Another example is the Human Genome Project. Started in 1990, it set out to the map the genomes of humans and other interesting organisms.

  • The project itself has been a wealth of innovation
  • gene sequencing systems
  • data storage and processing
  • The project has produced assets including massive public databases of genomic information, such as GenBank, and a wide range of open tools to operate on this data.
  • Researchers throughout the world rely on these assets, and more importantly, regularly contribute back to them.

Finally, an example that’s less far along, is NEON, or the National Ecological Observatory Network

  • Disclosure: I’m on the board
  • NEON is building out a continental scale observation system for environmental data, and setting the standards for how data is collected, tagged, etc.
  • Like the Human Genome Project, the platform itself is a hotbed of innovation, involving researchers and engineers across the country.
  • But what excites me are the platform aspects, which have the potential to unleash a wave of innovation in measurement, data analysis and prediction

Lets turn our attention now to what makes these work.

  1. Ability to build on the platform.
    • Any of us could go make a new service for the Internet or write a new algorithm against the data in GenBank. How cool is that?
    • This is why I didn’t include the Manhattan Project or the Space Race – although they were massively innovative, they aren’t platforms for further innovation. Closed systems.
  2. (Mostly) Free of intellectual property constraints
    • When we use the Internet we don’t have to pay a licensing fee to anyone, go sign a contract or an NDA
    • Software to attach is available from multiple sources, most of them totally free
    • Between 1 and 2 there’s almost no barriers to entry – this is incredibly powerful
  3. Interesting mix of public and private
    • Not purely public projects
    • Internet pipes are owned by network service providers
    • Governments and businesses all innovate on the Internet
  4. National (and international) consistency
    • Rules are the same where ever you go
    • GenBank isn’t managed separately in CA v. PA.
    • Or a better example: there’s no state firewall of Michigan, such as the Chinese have done
    • Why do I bring this up? Because there are areas where it is a serious issue.
    • Stepping back, we have an interesting legal system
      • In many areas states take the lead in new areas of legislation
      • Sometimes when areas get “mature”, they are rolled into national legislation which represents the best of the ideas from the states, but with the “ease of use” that comes from national consistency
      • When this works well it can be a powerful system
    • But it can also backfire. For example, chemical content in electronic products
      • currently done at state level
      • EU has RoHS directive, which is EU wide
      • patchwork of laws which often require reporting, disposal
      • I defy anyone to startup a small electronics company that wants to sell nationally
      • We’re at that point where we need national standards

Lets return to one of our motivating challenges: achieving a secure, clean, cost-effective energy system.

  • Truly a national scale problem
  • Need to deal with multiple issues
  • How to create clean energy
  • Distribution
  • Efficiency/energy management
  • Huge variety of use cases
  • No simple answer, no silver bullet. Seriously, we don’t know how to do this.
  • Need: national innovation platform that lets public and private groups work independently on various parts of the problem
  • But, we aren’t close today:
  • Our electricity system is totally governed at a state level
  • Legislative successes such as CA’s efficiency push are not replicated
  • Interfaces aren’t controlled or open
  • how much GHG are you emitting? Common question, hard to get an answer to
  • Lots of vested interests in control v. open innovation
  • What I’d like to see happen
  • We approach our energy problem with an innovation platform mindset
  • Establish a strong national leadership, including people who have been involved in other innovation platforms

Conclusion:

  • National scale challenges are best addressed by national innovation platforms that enable widespread public and private innovation. Let 1,000 flowers bloom.
  • We’ve had some amazing examples – we should be trying to learn from them.
  • Our energy challenge is a great target for a new national innovation platform, but it we don’t have a great platform for innovation today – lets build an innovation platform initiative around it!