Former U.S. Defense Secretary William Perry joins the head of the U.S-China Energy Forum at a recent SPRIE conference to explain why shale gas “has the potential to change everything.”

In a relatively short time, U.S. shale gas production has lowered the price of natural gas in the United States to a quarter of the price in Europe and prompted some utilities to scrap plans to build coal-fired electricity plants. Meanwhile China is gearing up to apply the technology known as hydraulic fracturing, or fracking, to its shale deposits in hopes that its growing energy demand can be met with gas instead of dirtier coal-fired plants.

The energy source was the hot topic at a recent conference on Innovations for Smart Green City: What’s Working, What’s Not and What’s Next, sponsored by the Stanford Graduate School of Business’ Stanford Program on Regions of Innovation and Entrepreneurship. Energy technology and policy experts from Taiwan and the United States said they had not even discussed shale gas at a similar conference held last year, but now found themselves discussing how it could shake up the energy industry and world politics.

Here are edited excerpts from comments made by Dennis Bracy, CEO of the U.S.-China Clean Energy Forum and the Washington State China Relations Council, and Stanford Professor William Perry, the 19th U.S. Secretary of Defense.

Dennis Bracy

Let me give you a little bit of an overview, not because the U.S. and China are everything, but the math is pretty simple. The U.S. and China together consume half the energy on Earth, nearly half the energy and nearly half the greenhouse gases. In coal, we, combined, consume 62% of the coal on Earth. And coal, by the way, represents 40% of global greenhouse gas emissions, so it's something we have to focus on.

Our energy pie in the U.S. is growing at about 1% per year. China's demand is growing at 1% per month. If you heard that China is doing everything possible in renewables, absolutely true. But they're also building a lot of new coal plants and hydro. We work together on these things that are perhaps not as sexy, but really, really important to the whole scheme of things.

This new national gas phenomenon seems to be changing everything. I hope it works out. I hope fracking is everything the industry says and nothing that the opponents say. But it has changed the balance of power in the industry where coal plants are now shifting to natural gas.

China is wildly seeking this, because they don't have any natural gas to speak of. They’ve got pipelines coming into China. But it affects not only our two countries' energy policy, but also worldwide geopolitics. China clearly has a plan. You can see it all over the world, lining up resources, lining up strategic relationships. If gas turns out to be the magic elixir in this, then that will drive a whole set of decisions.

William Perry

If we continue to pursue efficiencies, we should be able to offset increased energy demand with increased efficiency [in the United States]. So I see this as a break-even state. But how can we do better than that so we can actually decrease our use of coal plants? Solar and wind are still too expensive. I think it will take at least 5 years to get the cost down to grid parity. And even with grid parity, it will be 10 to 20 years to increase the contribution of renewables from 1% to 10% of grid electricity. So in sum, alternative fuels are potentially important, but their contribution is still small, and it will take a long time for them to play a significant role.

Shale gas is truly a game changer. It is a huge resource in the United States. Some have called us the Saudi Arabia of gas with more than a century of supply. The technology is mature. It was developed in the United States more than 10 years ago, and its success has already greatly exceeded anyone’s expectations. It’s already at scale—it went from 10% to 20% of the total U.S. [electricity] production in a 10-year period, and we have gone from an importer of natural gas to an exporter. Most interestingly it has been demonstrated to be cost effective. It has already resulted in lower prices for gas, which has had a ripple effect on other sources of energy.

Q: As you mentioned, shale gas could be a game changer for the next 100 years. Do you have any comment on the influence of shale gas on renewable energy development and on carbon dioxide emissions for the next several decades?

Perry: I can’t answer the question fully but here are a couple comments about it: Shale gas is twice as good as coal but it still has emissions, so it is not a panacea. Solar and wind is the more desirable option, but I find it hard to be optimistic soon. Grid parity [for solar and wind] is going to be harder and harder to reach as the cost of natural gas goes down.
Natural gas has three negatives associated with it. It does have carbon dioxide emissions. Secondly, it’s the enemy of alternative energy sources—it makes it harder and slower for them to reach grid parity, and it’s also the enemy of nuclear power because nuclear power used to be the cheap source of electricity.

Q: Could you comment about water pollution potential with fracking?

Perry: I can comment, but not authoritatively. I’ve read on both sides of the argument. One side says it is causing water pollution. This is particularly [true] in Western Pennsylvania where people are saying it is getting into their water supply, and the drilling companies say that can’t happen, we have this pipe totally encased so the water can’t get out. I don’t know what the truth is. I suspect the truth is that if drilling is done properly the water can’t get out. If, indeed, fracking is going to damage the water supply, that is a huge barrier to moving forward. Everything I’ve been able to read from engineers says that does not have to be the case.

There are other environmental issues that are almost fundamental, such as people who live in the area being annoyed by all the trucks and activity that comes with the operation. That’s a fact of life. But I think the water issue can be dealt with.

Q: With the development of shale gas, will the U.S. become more supportive of international targets on greenhouse emissions reduction set for 2025?

Perry: I would like to see us become more supportive of that in any case, but any such international agreement meets automatic resistance in some circles. It’s part of the political deadlock we have right now. International agreements are right up there with carbon tax as an issue that is politically volatile. I’m not optimistic about our ability to make political decisions, but I do think technically our ability to achieve those goals could be much enhanced by shale gas. But again, shale gas is only a halfway house in terms of the environment. It has about half the carbon emissions of coal but it still has emissions, and in the strategy that I have laid out, I started with a fallback position until zero or low carbon emissions can become a reality. It’s here and now, and we can move very quickly to replace coal-fired plants with gas-fired plants, and we should do that. 

Scarborough Shoal, a small lagoon in the South China Sea, remains the center of a months-long standoff between China and the Philippines. Donald K. Emmerson discusses Indonesia's role in leading ASEAN, after a week of silence, to announce a consensus that avoids the issue.

The Stanford Program on Regions of Innovation and Entrepreneurship (SPRIE) at the Stanford Graduate School of Business hosted the 4th annual Stanford Project on Japanese Entrepreneurship (STAJE) Conference on April 26-27. STAJE is an academic project that contributes to the understanding of entrepreneurship, firm growth, and institutions by studying the new entrepreneurial dynamic in Japan. Faculty from over 20 universities, government officials including the U.S. ambassador to APEC, and business leaders presented their research and papers over the two-day conference.

When one mentions the word “entrepreneurship,” Japan does not immediately come to mind. Although Japan has as many startups each year as the United States – adjusting for the size of the economy - in many ways entrepreneurship is misunderstood in Japan. This makes it an ideal laboratory for researching and observing entrepreneurial behavior because it is an economy similar to the United States in many ways. So, if there are differences – and there is a popular perception that the differences are great – the study of Japan will sharpen our understanding of Silicon Valley and the world economy.

Background

In the 1980s, large companies that were entrepreneurial when they started, like Sony, Honda, Toyota, and Mitsubishi, became successful large companies and were envied around the world. There was a great pride in Japanese electronics and manufacturing as Walkman and Camry became household names in Japan and abroad. The Walkman was an innovative mobile music device, the first of its kind on the market long before the iPod launched in 2001. The goal for many, if not all, college graduates was to get a job with a Japanese company or government that offered the security of lifetime employment.

Along with the growth of the Japanese economy, personal incomes were growing as companies continued to expand. The hallmark signs of Japanese wealth were lavishly displayed with the acquisition of second homes in Hawaii, impressionist art from renowned auction houses, the purchase of land and buildings around the world, and popular stories of luxurious travel and dining experiences. Meanwhile, real estate and stock prices in Japan soared setting the stage for an asset bubble collapse similar to the U.S. experience in 2007. The Nikkei 225 stock price average peaked at over 30,000 in December of 1989. It remains less than 9,000 over 20 years later.

Changes to regulations

The persistent decline in Japanese asset values during the 1990s caused much policy, legal, and corporate strategic change. As the Japanese economy reached its nadir after the collapse of its asset bubble, a broad business and policy criticism arose that the legal and informal institutional architecture of Japan was no longer relevant to a new economic age in a globalized setting. Moreover, the old banks were illiquid and had to be reorganized. New laws were passed affecting the formation, financing, and exit or dissolution of firms.

One example of the change was the reform of bankruptcy laws in Japan. During the 1980s bankruptcy was used to recollect debt and to punish irresponsible managers. There was a belief that bad decisions were not only a corporate responsibility, but also a personal one as well and therefore it was acceptable that a manager’s personal assets be seized in order to satisfy a corporate debt. This type of regulation may be partially responsible for perceptions of the risk adverse nature of the Japanese firms. Conversely, especially in Silicon Valley, failure is often seen as an opportunity to grow and learn from mistakes. Japanese policy-makers sought to emulate Silicon Valley where bankruptcy is viewed more as a normal and necessary element of the startup environment. Understanding this, in 2001 - 2003 reforms were enacted in Japan’s laws. These changes included lowering the maximum liability exposure that directors and CEOs were subjected to from unlimited personal exposure in many cases to limited assets at risk.

In a

recent paper, presented by STAJE researcher Robert Eberhart, they discover that “lowering failure barriers increases new firm performance and generates exceptional growth firms.” Eberhart says, “using Japan as a laboratory, we were able to show that laws that make it easier to start firms determine whether one can be an entrepreneur. But easing the laws that punish bankruptcy determine whether one wants to be an entrepreneur. In this way, studying Japan helps us understand entrepreneurship everywhere.”

New attitudes

Nowadays Japan is dynamic and changing. High growth new firms like GREE, DeNA, and Rakuten are not well known outside of Japan but are profitable, large, and acquiring firms around the world as well as being responsible for employment of thousands. Japanese firms are acquiring manufacturing capacity in China and Korea as they focus on high profit components instead of name brands. Data from STAJE’s research shows that new firms that start in Japan in the last ten years now employ millions. In contrast, Sony recently terminated 10,000 employees in Japan. Mitsubishi, Mitsui, and Sumitomo have scaled back in many business units and Toyota lost market share over quality concerns. There has been a breakdown in the social contract system of job security through lifetime employment. Job security in a large company, once a mainstay of working for a Japanese company, is no longer as available and undergraduates coming out of college are now more willing to work for foreign companies or to try something on their own. Students are beginning to show interest in entrepreneurship and there is a feeling of doing something for oneself is more important than relying on the “salary man” job. Venture capital firms and incubators are starting to sprout in Japan. Open Network Lab (Onlab) is Japan’s version of Silicon Valley based Y Combinator, an incubator that provides technology startups with mentorship, office space, and an introductory investment of approximately US$12,000 in exchange for equity. Even large Japanese giants are getting into the game; NTT Investments, the investment division of Japan’s largest telecommunications company, NTT DoCoMo, has invested in B Dash Ventures, a venture capital fund started by Hiroyuki Watanabe, a veteran venture capitalist in Japan.

The research at Stanford is helping to make the dynamic situation in Japan understandable. SPRIE-STAJE recently hosted an event in Tokyo with the US Embassy with over 500 attendees listening to research and views. Last year, SPRIE-STAJE hosted the US undersecretary of State, Robert Hormats, Japan’s ambassador to the US, Ichiro Fujisaki, the US ambassador to Japan, John Roos and dozens of representatives from industry and universities in both countries. STAJE facilitated the new joint work between the National Venture Capital Association and the Japanese Venture Capital Association. Research from STAJE is being used by joint U.S.-Japan government commissions on innovation and entrepreneurship – of which both Eberhart and SPRIE faculty co-director Professor William Miller are delegates - and the effort was recently featured in a joint communiqué of the White House and the Japanese Prime Minister’s office. STAJE has over 50 papers written and presented under its auspices and cooperated closely with the University of Tokyo.

Conclusion

Japan is a critical and exemplary part of the world’s cultural matrix that earned the respect of all around the world as Japanese people cooperated and showed its strength in the face of their disasters last year. As a famous researcher on Japan observed, Japan – a relatively small country – could not have become the 2nd largest economy in the world if it were not innovative and entrepreneurial. Its differences with the U.S. and other nations give researchers of entrepreneurship a powerful tool and laboratory. According to Professor William Miller, “culture is defined by the system in the environment, and when the system changes, the culture changes.” In Japan, research has shown that lowering failure barriers, such as reducing personal asset risk, increases new firm performance and contributes to an entrepreneur-friendly environment. SPRIE’s Stanford Project on Japanese Entrepreneurship is leading timely and relevant research to help us understand not only Japan, but ourselves.

In 2008, the world passed an invisible but momentous milestone: for the first time, more than half of the human population lived in cities, with urbanization projected to intensify to more than 5 billion people by 2030. During the past handful of years, billions of dollars have been invested by governments and the private sector, from building whole new smart green cities of Songdo and Masdar to creating new services on mobile devices in New York City and Barcelona. What have we learned to date? What is on the horizon?

On June 26-27, the Stanford Program on Regions of Innovation and Entrepreneurship (SPRIE) hosted a circle of experts from six countries to examine “Innovations for Smart Green City: What’s Working, What’s Not and What’s Next”. Professor William J. Perry - Chair, US Secretary of Energy Advisory Board and former US Secretary of Defense delivered the opening keynote on potential game changers on the energy landscape. Subsequent speakers from leading universities, research institutes and firms shared insights gleaned from their direct involvement in smart city projects in Amsterdam, Barcelona, Busan, Chengdu, Chicago, Chongqing, Dalian, Guangzhou, Masdar, New York City, San Francisco, Seoul, Singapore and more.

Leaders from university research labs shared pioneering deployment and analysis of information technologies in sensors, from autonomous car research at Stanford to the work at MIT’s Senseable City Lab on whole city intelligent traffic monitoring in Singapore. The Roundtable closed with a look at emerging technologies, new research partnerships, and the pipeline for relevant clean-tech startups. The 1 1/2 day event ended with a keynote by Rex Northen, executive director of CleanTech Open which has been involved with finding, fostering and funding around 600 start-ups with $660 million in funds over the past six years.

Next steps include concrete actions to support the call for presenters and discussants, representing experience from architecture to IT, to better integrate research and action across disciplines, organizational boundaries and national borders. With generous support from the Industrial Technology Research Institute (ITRI) and others, SPRIE will continue to collaborate and work in this area.

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Roundtable Videos

William J. Perry, Chairman, US Secretary of Energy Advisory Board; Former US Secretary of Defense; Michael and Barbara Berberian Professor (emeritus), and Senior Fellow, Freeman Spogli Institute for International Studies, Stanford University
"Energy...The Good News"

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Cliff Thomas, Managing Director, Smart + Connected Communities, Cisco
"Digital Urban Transformation"

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Jung-Hoon Lee, Associate Professor, Graduate School of Information, Yonsei University; SPRIE Visiting Scholar, Stanford Graduate School of Business
"Toward a Framework for Smart Cities: A Comparison of Seoul, San Francisco and Amsterdam"

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Ko-Yang Wang, Chief Technology Officer, Institute for Information Industry (III)
"Smart System Services in Smart Green Cities"

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James Sweeney, Director, Precourt Energy Efficiency Center, Stanford University
"Green" Cities and Energy Efficiency"

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Sven Beiker, Executive Director, Center for Automotive Research (CARS), Stanford University
"New Research on Autonomous Driving"

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Kung Wang, Professor, China University of Technology
"Cross-strait Partnering on Smart Energy Management and Innovation in the Post-Economic Cooperation Framework Agreement Era"