For ease of navigation, the discussion is separated into the following parts:

1/ Introductions, Vinod Khosla argues that oil nations and companies have powerful vested interests in preventing the growth of alternative fuels, and discusses the use of ethanol. Click here
2/ Bill Gross discusses solar power, and its increasing cost effectiveness. Click here
3/ Harrison Fraker talks about plans to build energy self-sufficient communities in China, and argues that building design is often neglected. Click here
4/ Martin Roscheisen explains how solar power can often be more competitive than it seems when compared against other energy sources. Click here
5/ How the gradual development of the necessary infrastructure is slowing the growth in use of solar power and similar energies. Click here
6/ Vinod Khosla argues that the secondary costs of traditional fuels such as pollution and waste should be taken into account when comparing prices. Click here
7/ Harrison Fraker argues that much of the technology needed to build highly energy-efficient communities already exists. Click here
8/ The role of big corporations and venture capitalists in encouraging the growth of alternative energies. Click here
9/ What can -- and should -- governments do to promote such alternative fuels? Click here
10/ International cooperation in alternative energies. The panel argues that the use of new technologies will be good for economic growth. Click here

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Part six

ROBERT FRIEDMAN: What is the role here of government policy, whether it is subsidies, carbon trading?

VINOD KHOSLA: I'm glad you brought this up. Both are essential. To Michael's question -- we've been complacent, 10 years ago nobody knew or believed that we had a problem, or that we needed to change away from oil or away from coal.

Now we have focused attention on the issue, I believe that the role of government is to signal the right intent. By and large in the biofuels area I have proposed packages that dramatically reduce subsidies while accelerating the acceptance of these alternatives. Because I believe subsidies get in the way. None of the technologies we invest in are technologies that cannot, unsubsidized, achieve market competitiveness without green considerations and without a carbon tax.

Having said that, if a genie gave me one wish I'd ask for a carbon tax or a carbon cap and trade system, because that would help all the alternative technologies equally and would truly be valuing the pollution that these fossil fuels are putting in our air.

If government signals the right policy, then we will see Wall Street make all the right moves on environmental and entrepreneurial energy. It will happen automatically -- it is happening today. We have focused on the problem and we have gotten results.

I had no doubt 10 years ago the world would look very different. Eighteen months ago I could not have biofuels conversation with anybody. Nobody wanted to talk to me about biofuels. Today, it is taken for granted and I think that interest will accelerate next year, dramatically.

Same thing in coal -- nobody has looked at the issue of whether coal is an economic product to use in power plants. I may have a slightly different view from Martin and possibly Bill on the right approach. But I believe solar can compete, unsubsidized, within five years, and we will see surprisingly different alternatives in the marketplace. I have become much more bullish and have a completely different approach to solar power that we can talk about later.

There is another piece of the problem: I think, by and large, in addition to government and entrepreneurs and technologists and venture capitalists, the environmental community has taken the wrong approach. As much as I respect much of what you (Harrison Fraker) do, the fact is most of this has to work on strictly economic grounds. If it ain't cheaper it's not going to scale. End of story, no matter what the other considerations are.

It will become easier to make it cheaper if you have a carbon tax and the right policy, but it has to be cheaper. So, designing idealized systems, if I might disagree just a bit, doesn't work. Incremental steps have to work, investors have to get a real rate of return in three to five year increments, and we have to get people to buy technology because it is in their economic interests.

My view is: if I'm picking a technology that the average person in Missouri isn't going to adapt to in the next five years, it's not going to scale. So I think the environmental community has to get real about incremental progress as opposed to these idealized solutions. I think they have hurt us the most. If I look at what has helped carbon in the air the most it is the environment community that previously took an approach against nuclear. That has caused many more coal plants to be built than we would have had otherwise.

I'm not supporting nuclear here, I'm just giving an illustration.

Part seven

ROBERT FRIEDMAN: Let's give the idealists on your right a chance to respond.

HARRISON FRAKER: I'll just say right now there's nothing idealistic about the things we're doing in China. We're using off-the-shelf technology. My point is that when you integrate them together and use them wisely as a whole system, they become cheaper and more cost-effective. That's the purpose for operating this way -- it's not to create some idealized community, it's trying to use existing technology in a smarter way.

MICHAEL HOLMES: The almost-self sustaining buildings you are talking about -- how far away is a building like that, on a commercial scale?

HARRISON FRAKER: You are already seeing some buildings like this. There are some going up in Chicago that don't have quite as aggressive a proportion that I'm talking about. I think you are going to see some of the national laboratories working on trying to make zero carbon buildings.

Again, this is not hard, conceptually. You've got to get the loads down and then you take the resources that fall on that building and you convert them to the energy that that building needs. And can do that -- theoretically, you can do that.

MICHAEL HOLMES: Cost effectively?

HARRISON FRAKER: Well, not yet. But we will get there. It means having different kinds of lighting systems, better appliances, lower energy use computers, all of the things that we know we can do, that just aren't being done at this point. And they can be made cost effectively. I think in 10 or 20 years we're going to be close to that.

My point is you can't do it to building scale now, because you have to get everything down too low. We're not there yet, technologically. At the neighborhood scale we are. We can do it. Right away. Right now.

ROBERT FRIEDMAN: Particularly if you have a government in China who says, 'Do it this way'?

HARRISON FRAKER: Yes. That's exactly right.

Part eight

ROBERT FRIEDMAN: What about the role of big corporations? Are big companies, particularly oil companies, part of the problem or part of the solution here?

VINOD KHOSLA: There's the progressive big companies and there's the regressive big companies. The problem is the following -- the boss at Shell might say and believe something, but does every person in Shell, every person in the divisions agree with him? No. That's natural in a large corporation.

What would make me believe things have changed at Shell? If the compensation of the person doing oil drilling in California that go to goals that the bosses are talking about, if his bonus at Christmas depended on that, I would start to believe that the whole organization will start behaving in a consistent way.

Now, Wal-Mart has done that, Wal-Mart has a sustainability page, many people are skeptical. I'm not, and I'll tell you why -- for the top 30 execs, their bonus depends on achieving sustainability targets. It's money in their pockets at Christmas time.

And so, some organizations are doing that, others are talking about it but not doing it and other are just sort of putting on the brakes, like Exxon.

BILL GROSS: I would say also, the innovations that are required might come from a big company lab and they might come from a guy in a garage. There are some tough challenges to solve to make the economics work. There's 1,000 people trying and there might be 50 answers, so you want as many people trying as possible.

MICHAEL HOLMES: How important then is venture capital?

BILL GROSS: It's hugely important, and venture capital is finally there. It was never really there. Renewable energy investors -- that was an oxymoron a few years ago. Now it's a hot topic and everybody's rushing to get in. There will be a lot of mistakes, like everything when people rush in but we've got to cross a chasm here, like everybody, and that's going to take a lot of experimentation.

It's great, that these renewable energy technologies can actually be built as start-ups, unlike a nuclear power plant or a coal plant, that you can't do a start-up around. So the challenge is matched by the entrepreneurial fervor.

HARRISON FRAKER: Let me give an example about a big company, because there's one project we think will go ahead the fastest. The developer who will win the right on the chance of developing this property (in China) is probably going to be a subsidiary of Haier Corporation (click here for Haier home page), which is the third of fourth largest appliance manufacturer in the world. It's a Chinese company.

They may put in venture capital to set up a small company to operate this neighborhood as a learning experience, and gain Chinese venture capital to try to do this, to test this business opportunity. They also want to roll out their next generation of energy-efficient appliances as part of this whole thing.

So, here's a big company, they see this might be a business opportunity, they may bring in some venture capital to try to do this. The issue is: who is going to stay and be responsible for these systems to work? They realized that could be a huge opportunity for them because of their appliance uses and electricity.

This is advancing so quickly. I'll just give you another example. When you look at this as a whole system, what about the sewage? Usually, when you talk to our 'ideal' environmentalists, they have a natural ponding system that deals with sewage rather than a big sewage treatment plant. Well, we've got some researchers at Berkeley who are thinking, well, this is a pretty interesting thing, we'll take all this sewage, we'll put it in a pot and we'll stick these graphite rods inside of it and we'll turn it into a battery. And we'll take the electrons out of the sewage.

They found out you can make electricity directly from raw sewage. When you then take it to the next stage to make methane, it makes more methane because of the chemistry.

Now this is not commercially ready, but it is another way of thinking about the environment -- suddenly you can have your sewage as your energy source, originally as electricity, you can have it as a source of methane for your cooking or your domestic hot water, and eventually it's sludge that helps grow the biomass on your site that you're putting back into the system.

That's the kind of thinking that has to happen. You need to have an organization that's willing to stick around and try all of these things -- make the mistakes, fix it, make the next step, fix it again. That's what we need.

MARTIN ROSCHEISEN: My view is that I am thankful to Shell for paying some of our best engineers their salaries through the 80s and 90s and I am thankful for BP for full-page advertisements about solar.

Part nine

ROBERT FRIEDMAN: Shall we go out to the floor and start taking questions?

AUDIENCE MEMBER: What is the role of government in providing seed capital and R & D funding to some of these alternative energy companies?

BILL GROSS: I think it would be great, but I just don't know if the government can make the economic decisions about entrepreneurs that investors can. While I would love more money to enter into the area for experimentation, I think the total government budget for R & D in solar last year was something like $65 million, it was so little that it's like one big company being funded.

I think the fact that so many investors are rushing in to fund it is a good thing. No investor knows all, and even when you have a perfect business plan it won't always pan out, but I think the market will take care of it better than government funding could -- that's just my philosophy.

MARTIN ROSCHEISEN: There's plenty of early-stage capital around, there's all kinds of ways to get capital for the early stage, because it doesn't cost a lot, the early stage. And there's so much enthusiasm right now, flowing into it and I think there is going to be a big wake-up call for the amount of capital necessary to take a lot of these companies through to the next phase.

BILL GROSS: I would love the government signaling, so that you know you can build the business, and if the price of the competition was fully priced -- meaning all the externalities were priced in, whether it's the carbon tax or any method -- that would make the market way better than using the political capital to try and get a separate fund to fund early start ups.

MICHAEL HOLMES: Isn't it in a government's interests to be involved in promoting these technologies and reducing the dependence on oil?

VINOD KHOSLA: Absolutely. I can tell you, having talked to the Indian government about foreign policy, they will not take a position against Iran because they are dependent on Iran for 11% of their oil, but they are doing joint ventures with China in Sudan, and they won't talk about Darfur because they are dependent on oil.

Oil constrains lots of geo-political activities that would make a lot of sense from a political point of view but can't be done because of the realities of oil. We all know, about a year ago what Russia did to Europe with respect to natural gas prices (click here for news story on this). They, essentially, shut off the pipeline, signaling, 'We have a say in what happens to your natural gas and we can do this any time.'

So, lots of geo-political considerations. But I want again to be an optimist for a minute. Something has fundamentally changed -- we have realized what the problem is.

Richard Newton, who is the Dean of Engineering at Berkeley (click here for his university page) did an informal survey of all the engineering faculty at Berkeley. Five years ago I asked him how many people were working on energy in the school of engineering -- almost nobody, in terms of professors betting their careers on energy innovation. A few people doing marginal stuff.

He did an informal survey this summer. Fifty percent of all professors were now working on energy. Now that's a dramatic change. When we get the best minds in the country working on a problem it's only a matter of time. And the venture capitalists are starting to be there.

Any amount of increase in research funding will help the process. But I don't think funding is the constraint today, though I do believe we should dramatically increase funding for university research, which was one of the goals of Proposition 87 (click here for a PDF about Proposition 87).

AUDIENCE MEMBER: If you can compete with ethanol if oil is at $40 a barrel, why wouldn't the Saudis just wipe you out by reducing oil to $35 a barrel for a while and then raising it again?

VINOD KHOSLA: You are absolutely right -- we buy the cheapest oil in the world and have it compete against the most expensive ethanol in the world. It's silly. But it's political reality for lots of reasons.

One of my 'favorite' companies in the world is Peabody Corp (click here for company home page). It spends a fraction of 1% of its revenue on R & D and it spends 5% of revenue on lobbying and political costs. Wonderful company. (laughter)

But that is the political reality we look at. So we have got to work within that context and say: where are the vulnerable points? Where are the right politics, what can we leverage?

Now, the Saudis could do that. Many experts believe they can't, but the very fact that Wall Street believes it might be a possibility prevents capital from flowing into the business. It would be illegal to do it if it was in the U.S., but there are no global anti-trust laws, no global laws against manipulating prices -- in fact, OPEC (click here for OPEC home page) by definition does that.

So, that is the role of government. It's very, very important that we realized that. But my bottom line is, all these little points of pressure -- what Martin's doing, what Bill's doing, what all are companies are doing -- will emerge from the bottom in an unmanageable way to attack the problem. I think we need to use all of them, every single one.

Some will be more successful than others, but that's the nature of things. I couldn't tell you today whether we will have the battery breakthroughs that will make ethanol uncompetitive. It might happen. The way I position it is that today we get 99% of our power from liquid fuels -- that's oil. We can replace it and over time will get more and more hybrid cars and plug-in hybrids, and if one technology moves faster than the other then the ratio of total automotive power that comes from electric power versus liquid fuels will change over time.

And it's almost unpredictable what the ratio will look like in 2030. We might have 90% batteries, we might have 10% batteries. It depends on the technologies.

HARRISON FRAKER: The role of government in all of this is very, very complicated when you think about it. I'm not a politician and I'm not a public policy person, but it seems to me that a couple of changes equivalent to this standard for refrigerators, if applied to the automotive industry, if applied to the oil industry, could signal a change.

All of these companies would have plenty of time to make the adjustments, where they could continue to make money, but they would see a very different future for what they see as their gold mine right now. That's what we need to do -- find a set of policies that will really make a difference in the direction that we take.

I have a public policy student who's working with me on the project in China, because she's interested in the public policy framework in China that is going to enable this to happen.

We have lots of good ideas for what the United States government could do. We need to have a set of politicians who feel like doing the job, rather than only responding to the interest groups.

AUDIENCE MEMBER: What will be the impact when the next government arrives in the United States?

VINOD KHOSLA: I think you'll be pleasantly surprised. Washington is very tuned to this issue, very well informed and quite interested. So I suspect that this will be one of the few areas where the Bush administration and the Democrats agree on what we have to do. Now, they may do it for different reasons -- the Democrats may do it for environmental reasons and getting Midwest votes, and the Republicans may do it for getting Midwest votes and for energy security reasons -- but my bet is we'll see the right action happen.

MARTIN ROSCHEISEN: I think that's true, but the question is on the predictability. In the early 80s we saw a large amount of interest in alternate forms of energy. But the on and off funding at the research level harmed this country a lot. If you look today at the qualified people, they can be found in Europe because there was a continuation of funding happening there.

We now see in Washington a two-year tax credit for insulation -- what do we do with this?

VINOD KHOSLA: Martin, I would tell you that that point has gotten across. Whether they'll do something about it or not....

This notion of signaling the right set of policies, having the long-term stable policy that investors can rely on, is something that is coming across. I am confident that we will see long tem policy in fuels, in solar. It has helped a lot in California that we know we have to generate 20% of our electricity from renewable sources by 2010, I believe, and 33% by 2020.

Part ten

MICHAEL HOLMES: What is the level of international cooperation among those doing the research, doing the inventing?

VINOD KHOSLA: Different countries have different priorities. When I'm walking the halls of government in India, I can't talk about carbon emissions -- they're worrying about mortality rates for infants, about water, about basic energy needs.

At another level, I think the most cooperation is happening at the venture capital level. One of the most exciting solar investments we have made is from Australia. There's a fair amount of international prospecting for technology. Those kinds of things are happening, but at the grassroots level.

ROBERT FRIEDMAN: What about, say, manufacturing solar panels in China, where you can cut your labor costs and become more competitive?

BILL GROSS: Our angle on reducing the costs of solar is to use less of the full photovoltaic material. We're building exclusively in China -- our manufacturing plant is in Shenzhen and we're absolutely taking advantage of that.

HARRISON FRAKER: Across my career I've watched a lot of things happen. I was part of the early interest in alternatives and renewables in the 70s and 80s and then when government funding dried up, a lot of the folks who were doing this went into the universities and continued to do it.

One of the biggest things that happened in the 80s when Reagan came in was that we went to Europe and basically did a technology dump, to the universities. Because of the price of energy there and the politics of energy there, and the taxes, they picked it up. A lot of the innovation occurred in Europe, at least in relation to buildings.

I'd just like to say one thing about buildings: we should look at this problem. Transportation is 27% of the energy consumption in this country, roughly. Cars, out of that, are about 15% to 16%. If you total the energy consumption in residential, commercial and the industrial area of buildings, it's somewhere around 45% of the energy. Seventy-six percent of all the electricity goes to run buildings.

So, we have to solve the building problem -- it's not going to be just the transportation solution. We have to deal with this and it's a very interesting challenge, if you think of it this way. There are a lot of initiatives to try to look at the buildings, and neighborhoods of buildings, and communities of buildings, to bring those numbers way, way down.

And the first move is to make the policy changes that make conservation the first thing. Because it's the most cost effective by far.

AUDIENCE MEMBER: How do you see changes in policy developing? Do you need some kind of economic slump to help the alternative technologies develop?

VINOD KHOSLA: First, I would challenge the notion that you have to have an economic slowdown to move to these renewable technologies. There are two aspects to it: the Stern report which came out in the UK (click here for Stern report home page) said we can invest 1% of global GDP and save ourselves 20% damage. It doesn't matter whether it's 20% or 10% or 30%, the fact is that we, at a global level, can get a positive rate of return.

When we talk about California, I have no question in my mind that the top five new companies that become leaders in this field will create far more jobs than will be lost because the price of fuel went up or the price of electricity went up. First, I don't even believe that will happen. I believe it is an un-level playing field and that is why we are not seeing the penetration of competitors. We can produce liquid fuels cheaper, we can produce electricity cheaper or the same price as coal with a lot less damage to health. If you price in the cost damage from health costs related to coal and those kinds of things, we will in fact have a better economy.

Create a Google and a Yahoo and an eBay in this business and you are going to see, at the state level, economic growth that far exceeds any econometric calculation. I wrote a course in graduate school on econometric modeling, so I can tell you how uncertain that science is.

BILL GROSS: I totally agree with that. I think there's going to be unbelievable job creation and wealth creation in this area. We have to make it economic, and then it won't hurt the economics.

To take an example of a refrigerator that costs $800, and has its electricity use each year. The upfront cost is a minority of the cost after many years. Then a regulation comes in that makes that refrigerator cost $900 to have a higher efficiency, but it has a $50 payback each year in electricity savings. So it has a two-year payback to save the $100 extra you paid.

The marketing department of that company doesn't make that refrigerator because they're trying to sell the most refrigerators on up-front costs, because consumers aren't really looking, or multiplying that energy cost. But then a regulation comes in and forces all the makes to make the $900 refrigerator -- customers win. There's no net loss, customers save money, there's more economic wealth created. But someone had to step in and do the math to make that law.

So there's many, many cases where the government can signal things that are actually win-win all the way around, and the only reason aren't doing them now is because there are hidden costs all over, people aren't looking at the full picture.

VINOD KHOSLA: If the U.S. economy, per dollar of GDP, worked at the same energy efficiency we had in the early 70s, as a country we would be spending $750 billion more per year on energy alone.

So, because of efficiency, the U.S. economy is saving $750 billion a year -- this dwarfs any tax cut that's ever been discussed in Washington. That's 7 trillion dollars over 10 years.

AUDIENCE MEMBER: Does the panel agree that we don't properly price in the other externalities that come with traditional energy methods, like nuclear fuels. If these were priced in, would it make it easier for alternative energies to compete? And how do you do this?

VINOD KHOSLA: No question, it's hard to do. I don't believe nuclear will happen in this country for lots of reasons, including the fact that the earliest we could finish a new nuclear power plant would be 2017, if we started today with no regulatory hassles or legal challenges. That's too long for our first plant, and we would need hundreds of these plants.

Do we price externalities? No, we can't, and we don't. We don't do a very good job. That's why I said, if I could get one wish from the genie, I'd wish it that we priced carbon right. It's a pollutant and we should price it right.

Having said that, there's lots of other practical ways to tackle the problem. Brazil is an example. They harvest manually, and they burn the fields so these big crops of cane (for ethanol) don't cut the workers. It is cheaper to do it mechanically without burning. Why don't they do it? Because the politicians want to protect manual labor.

A law has been passed in Brazil that says all harvesting will be mechanical by 2018. But the politicians have pushed it out far enough that it's past their electoral horizon. Those are the realities we live in.

ROBERT FRIEDMAN: Anyone want to sum up?

BILL GROSS: I would say I'm pretty optimistic in general. I think I've become more optimistic today. Just seeing all the passion and thoughtful questions from the audience makes me very exhilarated to get back to work and try to achieve the costs we're looking for.

MARTIN ROSCHEISEN: It's very encouraging to see the broad based support we have these days. In our daily business we look at utilities who say, 'Well, the guys in Texas are building more coal fired power plants' and they quote the brown rate, which is the dirtiest electricity rate. But it's pretty rock bottom in terms of price points.

We're leveling the playing field in terms of competing at a clean level -- it's clearly a public policy issue. So I second these things that Vinod and others brought up in terms of a carbon tax. We are working very hard to do our part in terms of cost efficient solar electricity systems.

CLOSING REMARKS AND THANKS BY ROBERT FRIEDMAN AND MICHAEL HOLMES