The Long Tailpipe - Shai Agassi's Blog

Davos 2008

I usually come back from WEF events with lots of stories to share and a great new view of the world. This year however I had no time to get to a single session (well, other than 20 minutes in a Gordon Brown impressive presentation on the state of the world - the man is the most cerebral leader I have ever seen).

The general conversation around us buzzed regarding the announcement in Israel, with many participants from around the world asking us how to get the project replicated to their own country. There is a tremendous amount of good will towards project Better Place, and all people wished us the best of success and offered help with whatever we needed. The articles from around the world, in particular the New York Times article (or as most Europeans called it the IHT article, which is the same only under a different name) set the tone for all car, environment and oil discussions at the conference. Towards the end of the event we started getting feedback regarding the amazing BusinessWeek article, written by Steve Hamm, who was at Davos with us this year.

We had a very interesting panel moderated by Peter Schwartz of GBN where he brought together the entire supply chain for a virtual oil field. We started with Mike Splinter, Applied Material's CEO, who talked about solar panels and their very interesting business model of building the tools for the makers, much like they did with silicon used for consumer electronics. He predicted a cost of $0.70/W pre-installation, which in my opinion will tip the power generation market. (I probably need to run a post on that side of our solution framework - the clean generation side). He was followed by Prof. Yet-Ming Chiang, who is the founder of A123 Systems - the leader in LiFePO4 batteries. Prof Chiang is a great inventor who has worked on a number of material science issues - including one that will be key in the future - super conductivity. I followed up with a presentation that tied the generation and batteries together on "how to build a virtual oil field", which got me a few friendly jests from Peter, but I brought some support from my friend Geoff Moore, all members of the great secret tradition of Davos - the Geek dinner.

Interesting twist to the discussion was provided by Craig Venter - of Human Genome sequencing fame. Craig is sequencing thousands of living organisms around the planet which he finds in the oceans, looking for the best energy conversion mechanism. His hope is to find the most optimized way nature converts CO2 and sunlight into chemical bonds, make those chemical leftovers float to the surface as a collectable gas and generate a living refinery that can make liquid/gas energy by use of "living solar collectors". The question that was left unanswered was posed by Peter - whether the physicists or the biologists will solve the energy problem for all of us. I believe the problem is so large that all scientists will have their place in he sun (pun-intended).

Apart from that, I had the most amazing time to be together with my fellow YGLs. What an impressive group of people, so focused on making the world a better place. More important though is the spirit of friendship that this group created and maintains over the years. Whenever two YGLs crossed paths in Davos you could hear the greetings miles away, and if you saw two grown up people hug each other, it must be a couple of YGL men greeting after a few months of not seeing each other. Definitely a very different crew than the usual, serious and business like behavior around Davos. For all of you wanting to learn more about the YGLs and their amazing life stories, there is a bit of good news - one of my friends in the forum, John Hope Bryant is writing a book which will have a lot of these stories in it, but I will not give up the spoiler too early!

5th graders - continued

As you may have seen on this blog, when we announced the launch of Project Better Place in NY back in October, my son told me that I really need to explain the story so that a 5th grader can understand it. That led to a presentation I gave at Hillbrook School in our hometown of Los Gatos, in front of the 4th-8th graders (and another one with the 2nd graders). While, explaining to kids is a challenge for us adults, I find it amazing that kids can explain complex issues to adults in a very simple way...

So, when Google issued a World Economic Forum challenged called "what can you do to make the world a Better Place?" we figured out that we should use kids to explain it the way it is...and thus, from the creative minds of Steven and Michael Addis comes the following 3 minute submission to the "Davos Challenge" on YouTube.

We figured out that if we don't win a competition called Better Place with a project called Better Place, something must be rigged in the voting algorithm...

Synthesizing Transformation

On January 21st 2008 we set the first step towards getting an entire country off its addiction to gasoline. Why is the Israeli announcement so meaningful? Almost a year in the making, and three years in thinking, the transformative power of yesterday’s announcement is not immediately obvious to people. Sure, most people feel in their gut that something big happened but very few could put their finger on the real transformative news of the day. So let’s run a Monday morning quarterback session (for those who are not into football, the reference is to the analysis run by commentator the morning after a football game is over…for those of you from the UK, football is a game played using a strangely shaped ball, using your hands, covered in protection, with lots of TV oriented stoppage time).

We had a country, Israel, announcing its intent and actions towards a strategic shift from oil as the main source of transportation energy towards clean electricity (mostly solar) as the source of energy powering cars. The announcement was made at the visionary leadership level – by President Shimon Peres – who has been one of the driving forces behind Project Better Place for the last year. The Prime Minister, Ehud Olmert – who promised and delivered relentless backing across all government branches, and executive power through his own PM office General Manager, Ra’anan Dinur, drove the vision into policy.  The Ministry of Finance, converted the policy into green taxation law, in the making for more than 2 years, by a team in the finance ministry, which made sure there is a great starting run for zero-emission vehicles, but more importantly – long term visibility for the law. It will now convert into working regulatory bodies headed by ministry of energy and infrastructure, with minister Ben-Eliezer present and speaking yesterday; other efforts led by ministry of transportation and of course ministry of environment are all working through a coordinated effort across the entire government. Finally, to convert this transformation into an economic growth The ministry of Trace, headed by minister Eli Ishai, commerce and labor which owns the chief scientist of Israel will start creating economic growth packages, R&D programs and trade incentives that will attract the emerging EV supply chain into Israel. This was demonstrated by a signing ceremony of the first umbrella agreement between Renault and the Chief Scientist of Israel at the President’s house.  That is the kind of comprehensive plan that is required for a country to convert itself off fossil fuels – strong coordinated force that can provide enough momentum to turn away 100+ years of inertia in this industry.

We had a car-maker, the forth largest one in the world, that committed to Pure Electric Vehicles (EV) as a mass-market product. Not only are they committed, they have allocated the funds required to develop such vehicle, for the needs of the country where we will start. In their alliance with Nissan, they are developing the next generation of batteries that can drive the vehicle, and provide significant economics advantage for EV over gasoline, diesel or hybrids. Carlos Ghosn, the legendary CEO, who runs two car companies headquartered in two different continents (who is the only man I personally know that flies more miles than I do), is known for being conservative and always delivers more than he promises. He promised us a great car, a fun car to drive, a good performance full three-box sedan, a better car TCO than internal combustion engine, and he promised it will be delivered in volume within approximately three years. Ghosn, Patrick Pelata and Renault-Nissan alliance do not promise lightly, and when he looked me in the eye, I knew he will deliver.

The third ingredient we had yesterday was funding, as we had some of our investment group present in person - Idan Ofer braved the day with high fever and I was really glad to have his father Sami share the event with us; we also had Mike Granoff, representing our angels (some of them like Sass Somekh were there in person), while others like Alan and Bill and the rest of the VantagePoint team and Morgan Stanley were with us through the webcast. For the first time, a company raises the money required not to make the sexy electric car – for that we have Renault-Nissan committing more Development resources than any startup could in the EV industry. This capital is the money that will be leverage to build the infrastructure so much missing from all the previous attempts at this EV market - $200M in equity, goes a very long way when matched with project financing for long term infrastructure investment. I am glad to share with you that we not only signed the funding agreement, we also passed all due diligence on our plans and closed our financing by all parties (which proves to some people that we did have financial plans after all…not a pipe dream).

As the integrators, Project Better Place were the fourth ingredient. Our job starts now (although I must admit we did play some part in bringing all the other parties together to see this tremendous opportunity). We are building the infrastructure framework; we are sourcing the grid elements; we work with the electric company to connect a virtual grid across the country (think of VPN for electrons, instead of bits); we are securing the installation across the country’s parking lots, homes and curbside parking in every major and minor city in Israel; we are educating the drivers and fleet managers as to how EVs work and feel; we design and redesign the EV experience – in our definition of what a car means to us;  we work with the car makers to define the car requirements and how they work with the grid; we integrate and build the software that manages everything for charging the cars to charging the credit cards; in short – we put it all together – and we turn this concept into a replicable business for Israel and other countries.

What happened yesterday was much like photosynthesis – one of the most intriguing processes in nature, where four electrons make it to the same spot in the leaf at the same time, and convert energy from photons to molecules bonded by chemical bonds. Before photosynthesis happens, all you have is energy. After photosynthesis happens what you get is a physical molecule which can be stored for ever. By putting all four elements together in PBP, we will convert vision (neurons firing in one crazy brain) into reality - physical manifestation of the energy of the entire Project Better Place team manifesting itself forever hopefully.

January 21st changes the balance in this industry – if we are right about the business model of PBP, and given the cars will be insanely great (as Renault promised us), there is a possibility of market tipping first in the test markets but very rapidly in the entire car industry worldwide. The industry, and other countries can no longer sit on the fence and wait to see what happens – the first mover advantage here is just too big to overcome – see what happened to Toyota with the Prius. Countries that depend on oil today are hurting at $100/bbl (and $88/bbl is not helping much…but let’s hope the price stays lower as long as possible). Waiting for the economy to break before investing in an alternative is like running a “Thelma and Louise” on your economy – you all know the scene, where you see a canyon approaching and you don’t stop, just pres the gas peddle harder and fly off the cliff. While a memorable ending to a movie, it is an unpleasant jump when 6 billion people are in the car with you.

Let me make a bold prediction – Israel will not be alone on the road to electric transportation. By the end of this year there will be at least 5 countries supporting the same policies and on the same framework. As to the car industry – In the words of Lee Iaccoca - It is time to lead, follow or get out of the way.

My speech at the Israel announcement event

Today the government of Israel and Renault-Nissan announced their collaboration along the Better Place framework - creating the first three way partnership for an oil-independent country. I attach the speech I gave today, in English (the original version was in Hebrew),and will attach the other speeches as soon as I get them.

It is a great day! One that many people at Project Better Place worked on diligently for the last few months. It is a great day for our kids, and if we get replicated to many other contries, a great day for a cleaner, safer world.

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Mr. Prime Minister; Mr. Ghosn; honorable guests.  It is an honor to be here with you today.

It is not typical and a rather humbling moment for a founder of a small startup to share a stage with the prime minister of his own country - Ehud Olmert, and one of the legendary CEOs of our times – Carlos Ghosn.

It is not a typical for a government take a bold strategic decision and challenge the private sector to help it solve a problem of global magnitude as the prime minister and its President of Israel did.

But these are not typical times.

These are times where we are running out of oil in the ground and we are running out of  air,  The oil we burn harms the atmosphere that controls the climate of our the planet. We have reached times where in some parts of our world children cannot see the sky.

Finally, we are running out of our most precious commodity of all – we are running out of time.

A few years ago I started thinking about this problem: How can you run an entire country without depending on oil?

The problem, at first, seems too big, almost insurmountable. But the more you think about it, the more you understand – our way of living, our freedoms, our kids’ future depend on solving this problem using only science and technology we have in our hands today, because we don’t have time for a science experiment.

The future of transportation depends on our ability to find another source of energy, one that is sustainable, abundant and not polluting.

For hundreds of millions of years our planet was powered with energy coming from one source - the sun, in all of its energy forms - heat, wind, and waves. What the planet and its inhabitant did not consume got stored in a planetary battery made of “concentrated sun power” – oil, coal and gas. Our planet’s battery got charged over hundreds of millions of years, and yet we have consumed half of the world’s oil in only one century. In the process we got addicted to oil, polluted our cities and altered our planet’s climate.

Project Better Place solution framework looks to convert an entire country into electric cars, powered by batteries, that get their energy from green sustainable electricity sources, through a smart electric recharge grid that covers the entire country. If we can provide the drivers an enjoyable car, that costs less but drives better, a country can build a virtual oil field – one that works forever, but leaves no footprint on the environment. Such virtual oil field is more natural than the holes we have been digging into the earth to fuel our addiction to oil.

Mr Prime Minister, a year ago, when I shared this vision with you, you set ground rules that were very clear:
-    Find the money to fund this vision, outside the government – as the state is not a venture capitalist and cannot fund such projects
-    Find one of the world’s greatest car companies that will build this great electric car, and can build it in mass market scale.

You said if I could do those two things, than I would have your support and I could  spend the money in Israel. I thank you for challenging me.  Your have brought us all to this moment and in fact have created a model of public-private partnership that I believe the rest of world will follow.

I also now know that I need to be more careful what I ask for. I am not sure if I am wiser, but I am definitely older after this year.

Mr. Prime Minister, I am glad to tell you that I found the capital required to fund this vision into reality. The money will be invested by an international collection of investors, led aptly by a company called Israel Corporation – these are all investors that share the vision and understand the opportunity.  Where other saw a problem too big to solve they see an opportunity to move forward one of this century’s most significant economic opportunities.  We do not ask for money from the state, we are investing in this country. I am also glad to tell you that I found a great car company – Renault-Nissan – which is willing to build great electric cars for our people. I found out over the last year in that Renault truly believes in this shared vision, and its people, in particular Carlos Ghosn and Patrick Pelata will work to deliver on their promise to us.

I also want to tell everyone that your leadership and the support of your government has been unwavering -  your government, starting with your own office’s general manager, Ra’anan Dinur, the ministry of finance, trade, infrastructure, transportation, environment, every branch of government took cue from your personal leadership working endless hours to make sure we have the right policy in Israel to make this vision into reality.

I was inspired to take on this mission by two presidents, standing for the two countries where I am a citizen. First, President Kennedy who declared in 1961, despite overwhelming skepticism among the public and the experts, that the US would put a man on the moon within the decade, “not because it is easy but because it hard.” 

A year ago, I started this journey in the office of Israel’s current President, Shimon Peres, who asked me after only two weeks of working with me on this framework “What could be more important than solving this for your country and the world?”. His simple question inspired me to leave my job, my career and take on this mission. He has been an ongoing mentor in this project throughout the entire last year, and is my personal inspiration for what the will of one man can do for this country of ours.

He is an inspiration to me, to Israel and to the world because he has shown that one individual can make possible what few think is possible.

But most importantly, I am inspired in this by my two boys.  I think about the world that they will inherit from us.  And I worry.  If we pass to them our addiction to oil, we will make them pay for our sins. If we pass to them an unlivable planet, we have sinned them. The Prophet Jeremiah says that “The fathers have eaten sour grapes, And the children's teeth are set on edge.” let this proverb not happen in our generation.

Today I stand encouraged.  I am encouraged by the leadership of a government that would stare challenge in the face and see opportunity.  Mr. Prime Minister, you have encouraged me in this from the beginning, and your government has acted wisely by setting the right policies.

Mr. Ghosn, you have shown great leadership in industry, and you and your organization have recognized from the outset that we as a global village are facing problems which cannot be swept under the rug, but that need to be confronted.  As sure as we stand here today, we know that other automakers and infrastructure companies that will follow your lead.  It will be a lasting tribute to you and your company that you were the ones to show the way.

Ladies and gentlemen, Project Better Place is now ready to invest the money and start the journey towards a new transportation system for Israel. You have set the challenge and we are willing and ready to respond together with many companies in Israel, such as the Israel Electric Company and many industrial companies that will enjoy the benefits of this nascent industry starting in this country.

Finally, Mr Prime Minister. Let me promise you that the vision I shared with you one year ago is no longer an unachievable dream.  There are no big scientific breakthroughs that need to occur.  All we need is the will to integrate the systems we have and drive this national project to success.  And the leadership that you witness here today – government leadership, corporate leadership – that indicates that the will of which I speak is abundantly present.  And so starts the defining project for the fourth generation of Israel, we will turn the dream of independence from oil into a reality, and create a brighter future for all of our children.

Thank you.

Oil at $100 a barrel – the halfway point

When I started developing Project Better Place as a white paper for the World Economic Forum, oil was hovering around $50 a barrel. I predicted in my calculations that by the end of the decade we will reach $100 a barrel. That point was very contentious at the time, as most people predicted that we are in a cyclical industry. One of the industry experts even told me that I do not understand oil (a correct statement at the time), and that “…Oil is cheap and abundant…whenever an alternative solution will show up the price will go down till the alternative is not viable”. On the flip side, sometime early this year, I had made a bet with my friend and co-conspirator Andrey Zarur, who claimed that Oil will reach $100 before the end of the year – I won that bet by a narrow margin of 3 days.

“…Oil is cheap and abundant.." - oil expert

At any price under $30, oil is practically not a factor in governmental decisions. During the Clinton days we had oil at $10 bbl and the total daily import cost of oil to the American trade balance added up to roughly $100M. Even when we add it up across an entire year the cost is $30B, not easy to swallow for most country budgets, but negligible for a super power. On Jan 3rd 2008 the cost of importing oil to the US was $1.3B a day – roughly 2 weeks worth of oil in 1999 – and if the price point stays where it is the US will see another $500B disappearing from its trade balance in 2008. Adding in the cost of subsidies for the domestic oil industry, the delivery and refining costs of gasoline, the healthcare cost of using it, and the cost of securing oil sources around the world and we are looking at probably the same amount in “externalities” of oil which the US budget loses every year. The combined sum is a staggering ANNUAL Trillion US dollars – roughly the Chinese federal cash reserve.

Oil, we found out, is neither cheap nor abundant. It is dwindling and hard to extract. The issue at hand is not whether we have enough reserves, but rather whether we have enough of a pipe out of the current reserves to feed the global addiction. We have moved from supply side constraints to demand based pricing. As another oil expert explained to me we are at the mid point of oil prices as they move from an equilibrium at $50/bbl to a new level at $150/bbl. He had a chilling analysis for the two sides of the oil price spectrum. “…At $50/bbl governments invest in demand; At $150/bbl they secure supply…”. I see that statement as one of the most profound statements I had heard about the oil market and the role government plays in it.

“…At $50/bbl governments invest in demand; At $150/bbl they secure supply…” -Another Oil Expert

What he meant is that governments at $50 bbl have enough time to invest in finding alternatives that will reduce their demand for oil. Dependence on a scarce and expensive substance is called an addiction. We are all addicts. We value our freedom to drive more than many other freedoms that have a specific amendment in the constitution. We wasted the good years, when we could take the time and research alternatives. We wasted them on hydrogen research and ethanol subsidies. Don’t take me the wrong way, it wasn’t all waste – fuel cells will give us solid electric drive trains (only no need for hydrogen), and ethanol might buy us some precious time until we get completely off the need to burn something in an inefficient engine. But hydrogen is never going to be an efficient way to distribute electric energy (wrong package for an electron), and ethanol will never scale to provide us enough liquid fuel without destroying the food markets (oh, and run out of water). We were enamored with ideas that solved a technical solution but didn’t scale.

"We will not reduce our use of oil until it is significantly more expensive. Hence oil is bound to become very expensive" - Smart man about oil

The other side of the spectrum is best demonstrated by a scenario-planning event run by SAFE in DC two months ago. During the event staffed by former cabinet members advised a president (not present, nor identified by gender) what to do whenever the price of oil reached a new high (increased by $10/bbl through external events). To make a long story short, at $150 bbl the president was left with two alternatives – (a) instruct all Americans not to drive on Sunday or (b) take over the Persian gulf. You guessed it right, Football games were not suspended. At the same time, The US is not the only country which cannot afford the implications of $150 bbl, China’s economy depends on cheaper Diesel, and at $150 bbl, they have no choice but to raise Diesel prices to roughly $4.50 a gallon – implying a significant inflationary pressure on all basic commodities. Will we have a timeshare agreement with China and the US over oil sources?

"Given the choice between driving on Sundays and our military securing oil sources we will prefer our freedom over others" - Unfortunate reality

The question that remains open in many people’s mind is which statement to believe regarding state of oil in the world – “cheap and abundant” or “apocalyptic scenario”. The hidden factor in all of this assessment is the negative feedback loop the oil market has entered over the last two years. Countries that sit on reserves are smarting up – and had become very reluctant to extract and sell it at any price. If you are a leader of a country that is lucky to have extracted oil for the last few years, your reserves do not require a cash infusion any more. What you do is the same as any driver does in times of shortage - you store some oil for rainy days. Countries on the verge of running out of their reserves in the next decade or so, decided to stop exporting oil (smart planning). On the other hand, countries that are importing oil, but have fields are shifting the ownership on the new fields to the national oil companies. Some of those companies (not Saudi Aramco or Petrobras), do not have the same technology that global-oil is using, so their pipes move oil a bit slower than the big guys can – hence the constraint is now on the width of the pipe, not the size of reserves (although that will be an issue soon enough).

What do we have to do – we have to put our money into easing demand before it is too late. Addicts who wait for the crisis do not recover in the same shape as they were before a stroke or heart attack hit them. In the world of oil a heart attack is a global recession, and a stroke is probably global war. We can’t afford either. Only solution to addiction is drying up on the substance. We may be too late, but we still need to try – putting more money into oil without putting any money into oil independence will make us dream of days when oil was cheap and abundant – at only $100 a barrel.