Wednesday, November 28, 2007

Google's Energy Ventures - Can Computer/Programming Companies Tackle the Commanding Heights?

The "Commanding Heights" of the economy were what Vladimir Lenin referred to as the segments and industries in an economy that effectively control and support the others: energy, banking, and transportation/shipping. Google and other so-called 'tech' companies (note: it is a misnomer to call technology only concepts that involved computers and programming) are aiming at solving both their own and others' energy cost problems.

In all likelihood, companies venturing in this space see their future growth limited if energy does not stay cheap and abundant. Venture capitalists see the large amount of dollars possible for finding the next major contributor to the energy mix. But tackling the Commanding Heights takes a lot of physical capital - the steel, silicon, wires, etc. that actually exist on the ground somewhere - and the paybacks times are historically slower than what Google and others are used to.

In the case of Google, their servers have grown at such a rate that they likely see limitations in their ability to continually increase their offers for free hosting services. Since providing the energy to power servers is critical to many of Google's business aspects, they Google executives have decided it is worth their while to try to solve the problem for themselves. They likely can do that, but making a new renewable energy technology (besides wind power) go mainstream will be tough, but I'm glad they are taking this challenge.

The fact is, that for almost any building in the United States, putting photovoltaic panels (for example) at the facility to offset electricity purchases will provide a payback on the investment within the lifetime of the building, and likely in less than 15 years, and possibly in less than 10 years depending upon location and incentives. The reason why this is typically not done (except on government buildings) is that there are other investments to be made with the same money that have higher paybacks in shorter time frames: this is the crux of the issue.

As long as the paybacks in energy investments take longer than other investments, companies will fulfill their fiduciary duty to make the non-energy investments. Energy simply does not cost enough to change the economics. Making renewable energy generation cost less than coal can be done by two ways: (1) cheaper renewable energy and/or (2) more expensive coal energy. The latter is not likely to happen anytime soon, even with a possible future carbon, or carbon dioxide, price. One way for the former to occur is to allocate semiconductor factories toward building solar cells instead of microchips. But then this means more expensive servers (because of less supply of chips and processors) for Google ... a catch 22.

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