Karl Moore: This is Karl Moore of the Desautels Faculty of Management at McGill University, Talking Management for The Globe and Mail. With the Talking Management series I interview thinking CEOs and speak to some of the top business professors from the world’s leading universities.Today I’m delighted to speak to Russell Read, who’s the former chief investment officer for Calpers, the largest public pension fund in the United States.
We have some firms here in Canada that are focused on wind power. What is your view in terms of the potential for success? Is that where you are quite interested in investing or is coal and other sources more where the investments are today?
Russell Read: We think the key to success with either alternatives - alternative technologies like solar and wind or geothermal or fossil fuels-based technologies - lies in fundamental changes in efficiencies. Now, this is an interesting point because, when I make the argument and talk about the inefficiencies associated with fossil fuels, where, generally, you have efficiencies on the order of 15 to 20 per cent conversion of the energy content of the fuel to what you are getting in the application – power - power at the outlet or power into your car – people intuitively sort of know about those inefficiencies. They don’t think about the inefficiencies associated with solar and wind but they exist also.
So, one of the important things – success is not about bringing about an inefficient technology from the past. In the U.S., of course, we dove into corn-based ethanol, a hundred year-old fermentation technology in which the amount of liquid fuel that’s produced at the end is about as much as is required to produce it in the first place – not a great technology. It’s not about bringing back technologies that didn’t make sense 30 or 40 years ago. It’s about bringing in new technologies that are much more efficient.
For instance, I’m not a big fan of silicon-based solar because the prevailing efficiencies are generally between 10 and 15 per cent and that is a fundamental limitation. We see some applications of solar that, if you can use hot water as well, if you can extract heat, operate at between 50 and 75 per cent efficiency. That’s is a game changer.
We think we see the same inefficiencies associated with wind power. Wind power has certainly been around for a long time. It’s used for pumping water and other things in Holland and Spain but the success associated with wind is associated with some changes. For instance, the gearbox issues are proving very daunting. There are approximately 1,000 commercial windmills in Europe which are non-functional – which aren’t producing electricity into the grid because of gearbox issues, maintenance issues. The gearbox – changing that mechanism – is likely one of the biggest things to correct in the next generation of wind technology. So, I’m very bullish on wind and solar, but for the next generation.
KM: How long until the next generation?
RR: This is the exciting part of this. Next generations now are occurring very quickly. When we look at – not just fossil fuel-based technologies but at alternatives – every two or three years there’s a different landscape. And we see other areas that are important. The energy storage, of course, ends up being very important – the extent (to which) we can store energy well, transport energy well – this gives life to alternatives in a way that didn’t exist before.
But there’s another piece to this – which is, likely, given the dominance of fossil fuel-based – energy efficiency associated with fossil fuels is our biggest story over the next 10 years. After the next 10 years, alternatives can play an increasingly important role. Not that alternatives aren’t important – they are important now – they’ll be important for the next 10 years but they won’t be dominant in the next 10 years. Fossil fuels will remain dominant but that can change through time.
KM: This has been Karl Moore of the Desautels Faculty of Management at McGill University, Talking Management for The Globe and Mail.