Hybrid value analysis: which hybrids worth the price tag?

I’ve been a little luke warm on hybrids. I think it’s my defense mechanism against anything remotely “hippie” (I have the same reaction towards organic foods and vegetarianism). I really shouldn’t have some responses and should give new things a chance. So I wanted to answer some questions about hybrids. In particular, are they really worth the money? The landscape isn’t just Prius’ anymore either. So which of the hybrid options are the best value? I did a back-of-the-napkin analysis and came up with some interesting insights.

Method
This wasn’t a terribly scientific analysis. I got most of the data from Yahoo!Autos. I only considered the lowest entry model MSRP of any car (so no premium packages considered). I also took the EPA-rated mileage which has its own issues associated with it. The only item that has updated data are the mileage ratings on the Prius (EPA: 60/51, I used the 48/45 re-rating).

Models
I took several 2007 models of hybrids and their counterpart standard ICE vehicles:

Saturn Aura	2008 Chevy Tahoe*
Toyota Corolla	Saturn Vue
Toyota Camry	Lexus RX350
Honda Accord	Toyota Highlander
Honda Civic	Ford Escape
Nissan Altima	Toyota Prius

The one item to note is that I compared the 2007 Prius with the 2007 Toyota Corolla. This is because I think the Corolla is the best comparison for size and weight to the Prius.

I also did some some thought exercises with the 2008 Hybrid Tahoe. We’ll look at that a little later.

Analysis
Mostly, I gathered the MSRP and a combined EPA mileage data and divided them. The combined value is a weighted average of the city and highway MPGs (60% HWY, 40% City). This “mileage value index” (MVI) gives some an indication of value on the purchase price. A lower number indicates some combination of a low price tag and/or a high MPG.

I didn’t include lifetime gas consumption because each individual uses the vehicles in different ways. I wanted to look at the intrinsic value that each model gives on this one variable. Having a low MVI isn’t indicative of the overall value of the car. This is just a quick look at which hybrid gives the most value for the price versus itself and maybe against other models included in this analysis. It’s not terribly rigorous. But most people aren’t terribly rigorous in their purchasing methods. But I wanted to show an easy to use metric for evaluating performance.

Model Comparisons
Question: Which model’s hybrid is a good value over its standard competitor?
Look at the data tables below. A “good” value is a short bar. Generally speaking, models that have close hybrid and standard numbers. A great situation is would be where the hybrid MVI is shorter than the standard model showing a real observable value is delivered to consumers.

Sedans:

SUVs & Crossovers:

Observations:
For sedans, the Saturn Aura Hybrid shows that it has the best value position against its Standard model. I wasn’t expecting that. The Aura Hybrid is considered a “mild hybrid” and gives a strong, but not as significant boost in MPG. The real value is delivered by only a $1700 price premium to get 6 MPG better.

The Toyota Prius compares very well against the Corolla and shows why it is the most successful hybrid. However, the Honda Civic Standard and Hybrid have better MVIs then the Prius.

For SUVs/Crossovers, the Lexus 400h also has a a value advantage over the standard RX350. But also remember, while SUV hybrids in general save a lot of gas over their lifetime (around 100 gallons/yr), the amount of gas $ saved isn’t that high with respect to the higher purchase price. So the value of hybrid gas savings doesn’t work out for saving money. So this performance by the 400h is a great showing.

The Honda Accord Hybrid has horrible numbers. It’s MVI is significantly higher than its standard model. It has a much higher price and doesn’t give much improvement in MPG. It’s not surprising, then, that Honda has discontinued it.

Moreover, other than the Accord, all of the Hybrids perform well with respect to their standard counter parts. This, I think, leaves the door open for hybrids to compete head-to-head on overall value on other points. That’s a great place to be for this technology.

The Chevy Tahoe Hybrid Experiment:
Question: At what price point would the Tahoe Hybrid “break even” with its standard counterpart? Refer to the 2008 Tahoe values above.

I couldn’t find any data on the pricing for the 2008 Tahoe Hybrid. I only found speculation on its MPG (19 and 25 hwy I believe). But I did find data for the standard 08 Tahoe.

So knowing at least speculative data on the Tahoe, I wanted to know what price point I should look for to to see if it has improved value over the Standard version. A goal-seek analysis shows that an entry price point of $44,288 (or $6000 above the standard Tahoe). This is a bit expensive for an entry-level Tahoe, but the value is still delivered at that price. Anything cheaper is probably a good deal. But the price mustn’t be more than 1 or 2% difference.

Best Value
Question: In a battle royal, which of these models would win against each other based only on their MVI values?

This data is interesting as it clearly shows a value segmentation between models. I see the strong performers being the Civic, Prius, Camry, Corolla. The mid-tier is a mixture of sedans (Aura, Accord Standard, Altima) and the Crossovers (Escape, Vue). And lastly, the high end crossovers (Lexus RX, Highlander). We’ll ignore the Accord Hybrid altogether.

This spread is a little expected, I think. The smaller cars have the best performance. And the high-end hybrids make sense as well (they have higher price tags with respect to their mileage improvement). But the interesting element to this is that the Vue and Escape (hybrid and standard) are competing well against their heavier sedans. Of course, the hybrids tend to be at the higher-end of this tier. But they’re all in the mix and I think that gives them a strong competitive placement in the marketplace.

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Eastman to build gasification facility

Eastman is going to build a new $1.6 Billion gasification facility in Beaumont, Texas.

Press Release
GreenCarCongress Post

The facility will use petroleum coke as a feedstock – presumingly provided by the many refineries in and around Beaumont. Here’s a quick excerpt:

The gasification facility will produce hydrogen, methanol and ammonia, chemical industry feedstocks that are usually derived from oil or natural gas. These feedstocks frequently serve as the base material for everyday products ranging from plastics, paints, photographic film, and pharmaceuticals.

This is obviously a great opportunity for Eastman and for the people in Beaumont. It will create a lot of jobs and economic opportunities.

But I’m a bit concerned about the number of gasification facilities that are going up. Well, not really concerned, but a bit surprised. Not because of the potential applications and benefits (I’m a proponent of those). But we haven’t really got a lot of experience doing underground CO2 sequestration. It’s good for Eastman to be on the fore-front of that (can’t let the big oil guys have all the fun). But this is still a new technology that still needs to develop a lot of tools and techniques involved with it. It’s also very location-specific. Each location is unique and needs to be carefully evaluated for it suitability. The other potential for this facility is to use the CO2 produced for well injection.

So this is clearly a good move for Eastman, but it also should spark a debate on the state of CO2 sequestration technology and practices. For all its benefits, this process must be done properly to ensure its long-term viability. And while I like the hustle on getting it up-and-running, I don’t think the environmental benefit (not necessarily the economic benefit) could be lost if it’s done wrong the first time.

Good job Eastman.

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Southern states are lagging on RPS

This is an interesting AP article on the resistance of southern lawmakers in passing legislation that curtails pollution.

Here’s an interesting excerpt:

The utilities — among the largest political donors in Washington — vehemently oppose federal mandates. They argue that “one size fits all” standards would drive up Southern utility bills and urge that new technologies be phased in gradually.

Southern Co., which reported profits of $1.6 billion in 2006, questions the existence of global warming even as other utilities acknowledge it must be addressed.

“If we are irrational about it and we cripple our economy or cripple our industry and we realize carbon dioxide wasn’t the source of the problem, then we’ll be real regretful,” said Chris Hobson, senior vice president for research and environmental affairs at Southern Co., which owns Alabama Power Co., Georgia Power Co. and other subsidiaries.

While I try not to talk about politics on this blog, this excerpt provides an interesting case study on the flaw in the debate against global warming. Here’s 7 thoughts:

1) Higher utility bills would increase their profits. In fact, the utilities are looking for any way possible to increase their power prices. So why would they balk at needing to make investments. They would normally pass off the additional costs (plus a little extra) to consumers. If people get mad, blame the government that the utilities paid to elect.

2) The government follows the will of the people even if it is misguided. The utilities need to keep in mind that if the people of this nation want them to not pollute, then you aren’t going to pollute. If you’ll recall, our legal system is also overburdened with lawsuits against companies that are mistreating its citizens (think PG&E and Erin Brockovich). They don’t have enough money to buy off everyone in the south.

3) What’s the case for crippling the economy? Southern Co. made $1.6 Billion in profits. It doesn’t have a couple million to put in clean-air equipment? I mean there’s no price tag that big for any environmental protection equipment. They don’t have to buy the gold-plated scrubbers – the regular kind work too.

4) How come Illinois can come up with clean coal solutions but Southern Co. can’t?

5) I don’t think most people regret the fraud that Enron committed on customers in 2000/2001. I also don’t think they’ll regret your doing something for the environment.

6) On what grounds to you question global warming? This guy makes an economic argument against a scientific assertion. That’s inappropriate. It’s like showing up to a football game with a baseball uniform. Economics is not an end in itself. And science isn’t wisdom , knowledge, or reflective of a choice – it’s just repeatable results. So this argument against global warming is dismissable because it doesn’t address the science. As for economics…. I’m not much of an economist. But I do know that if you can’t make a dollar off of all of this, then you’re a du…. not a good businessman. That’s all I’m saying.

7) And lastly, this administration hasn’t forced any utility to take any kind of “one-size-fits-all” strategy, and never has. Even “No Child Left Behind” has no federal mandates behind it. It begs the question as to weather their political donations are even really necessary. I mean, if they gave, say, 20% less, could they have gotten the same kind of foot-dragging on an energy bill; or dismember the EPA’s influence any more? I guess maybe they think all that money was wasted. Maybe it was.

I’m not the smartest guy in the world. But I’ll can’t quite understand this type of stance on such an important issue. I’m reminded of another time in U.S. history where southern states vehemently resisted a broader social and political movement also based on the grounds of a moral imperative…. But history gets past people like this. It always have.

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Chicago Area IGCC Project

This is a follow-up news report on a coal gasification project south of Chicago. The hope is to reinvigorate the Illinois coal market by using gasified coal to produce electricity with fewer emissions.

See another part of this series on CO2 sequestration.

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Is there a cleantech bubble?

OK, let’s cut to the chase. Is there a cleantech bubble?

There’s been a lot of chatter on this subject (see this posting from Rob Day’s rigorous post on this topic). I won’t spend a lot of time on this topic other than to officially weigh in on it myself.

The answer is: maybe.

You have to take things in context of course. So let’s look at a few elements:

Before we move forward, let’s define cleantech as the following: biofuels, renewables (solar, wind), batteries, and smart management technologies.

Why Maybe?
The reason its a “maybe” on this question is a bit technical. The notion of a bubble means that there is a comparative over-investment with respect to the economic prospects of the investments themselves. Or another way of looking at it is as a situation where the valuations (expectation of future cash flows) are over stated with respect to the investments.

The question is valid – investors don’t want to repeat the technology bubble of the late 90’s early 00’s. But the problem then was there weren’t very many sustainable business models with real profitability prospects. Lots of money were put into businesses with false expectations of returns (the internet was supposed to provide an almost “free” cost of customer acquisition; the post-mordum showed this was plain wrong).

So it’s “maybe” because it requires that we take a more specific look at the industry. And remember, not all of the companies from the Web 1.0/dot-com era failed (eBay, Yahoo, Google, NetFlix, even Napster).

But it’s also maybe because many of these markets are highly dependent on government incentives for viability. So as there is risk in these incentives, there is risk in the related businesses.

Look at some Segments
I think it’s prudent to segment the clean tech investment landscape between technology investments and capacity investments. I’m defining a capacity investment as businesses that focus on installing capital equipment for use – wind mills, solar cells, biofuels plants. Technology investments refer to small, technology-focused start-ups.

Venture:
From my own experience and perspective, the technology venture segment seems okay. While there are certainly some investments that seem a little more far-out than others, many seem based on sound science and have a clear scope of development. Some good examples appear to be Tesla Motors, Bloom Energy, Live Fuels, Green Fuels, Range Fuels, Nanosolar, etc. (Disclaimer: I don’t purport to know anything more about these companies than what is publically available).

The concern with these investments are really measuring investment with technology milestones. These are all difficult businesses to bring to fruition – closer in nature to a biotech company. So the lifecycle of these ventures and hot it is managed may determine their success. But at the moment, there haven’t been any real disasters.

Capacity Plays:
Capacity plays are a bit of a double-edged sword. Installing wind turbines and solar panels is low risk from the standpoint of actually producing electricity, but high risk from a financial standpoint. The reality is that the cash flow associated with producing power from these technologies is sufficiently low with respect to the up front capital required. The market is using government incentives to mitigate this difference. But therein lies a risk. Over time, as the technology improves – and hopefully this glut of production and economic activity will drive innovation – then the viability of associated businesses should improve. But in the mean time, this industry is comparable to being an Ice Road Trucker.

Biofuels are in the same situation. But the difference is that they can be upgraded in a (relatively) inexpensive fashion. Changing a corn ethanol plant over to a cellulosic ethanol plant is comparably easy to do. Getting plants built in strategic locations with permits, vendor relationships, and trained employees is a difficult and costly venture. So while the industry is pessimistic on corn ethanol, it should not view the massive build-out of plants as a bad strategic investment. The real test will be in seeing which companies can scale up a cellulosic process. How will existing cellulosic players Verenium, Mascoma, Iogen, and Range Fuels compete with big dawgs like POET, ADM, VeraSun, and Pacific Ethanol (if they can catch up to VeraSun). We’ve already looked at some of the “beta” version of start-up ethanol plants have a fairly high capital cost with respect to their installed capacity (or a measure of the inherent cash flow possible for a given capital investment – similar to what we look at for solar and wind installations). That’s the seductive question. But I don’t think the term “bubble” applies here – just plain old vanilla “risk”.

The challenge comes in to the glut of private equity and hedge fund money that are not really looking to build a long-term business (the best play on this industry) could be a concern. Small, local ethanol co-ops may also not be capable of keeping up with the industry. So there is some “bubble-like symptoms” from these types of players. But, again, it’s not clear that a negative outcome is certain. The demand for this industry to grow may provide for roll-ups to start taking place (AR Fuels and Virgin Fuels are preparing for this type of strategy).

* * *

So is there a cleantech bubble? I stand by my short answer of “maybe”. It’s prudent to look closely at this market’s different dimensions. While there are clearly some risks out there, it doesn’t appear to be any more significant than risk associated with any other developing market.

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China orders Westinghouse Nuclear plants

China has ordered 4, AP1000 Nuclear plants from Westinghouse. Westinghouse concurrently announced its acquisition of Pebble Bed Modular Reactor Ltd, a South African Company.

Read the GreenCarCongress posting.

This is a very interesting event and should be looked at very closely. It shouldn’t surprise anyone that the Chinese have a high interest in nuclear. The AP1000 model has some very interesting elements to it that, if successful, could be of interest to pro-nuclear elements in the U.S. (that’s a different side of this equation that I won’t get into at the moment).

The AP1000 reactor is a 1.1 GWe reactor boasts a few major advantages that address a few concerns about nuclear roll-outs:
1) Simple. It claims it uses fewer pumps, wiring, etc. that creates a huge reduction in price tag as well as a reduction in failure elements. Or in other words, the fewer parts, the fewer failure mode potentials.
2) Modular construction for speed – they claim 36 months from concrete to fuel loading.

The more interesting part of this release is the acquisition of PBMR. A Pebble Bed Reactor is a innovation on the design of a nuclear power plant. Here is a good presentation on it from MIT Professor Andrew Kadak that discusses its functions, pros, and cons. But simply put, the PBR is a smaller capacity plant, around 200MW, that uses billiard-ball sized coated uranium “pebbles”. These pebbles are cycled and activated through the reactor constantly. They are replaced in small quantities (say 10-15% at a time) with fresh pebbles. This provides a more efficient consumption of the uranium meaning notably less waste. The resulting waste has a significantly reduced radiation boundry to it making it feasible to store the fuel on-site. Since the pebbles are managed in relatively small quantities, it reduces the risk of any theft for illicit uses (like trying to steal $1million in pennies – anything practical enough to carry is of little value). The design is also fail-safe. Any disturbance to the plant and the pebbles stop circulating eliminating the risk of any catastrophic failure.

It’s quite an ingenious design. South Africa has a demonstration of this plant design that is providing some valuable data. If any political winds change in the U.S. (they already are in the rest of the world) this plant design could be a nice compromise to many concerns about nuclear.

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Toyota to make PHEV

I’m officially a maverick. I’ve spent one or two blogs discussing the drawbacks of PHEVs. But in the last few weeks and months, several companies are building PHEVs or straight plug-in electric cars. Toyota announced today it will produce a plug-in electric hybrid vehicle for Japan (meaning they’ve probably already done it and are getting it ready for the U.S. market).

From the press release:

TMC plans to conduct public-road tests in Japan with eight units of the TOYOTA Plug-in HV to verify electric-motor-only cruising ranges and optimal battery capacity. While doing so, it plans to provide the government with data for formulating testing methods for emissions and fuel efficiency and to consider TMC’s measures for promoting plug-in hybrids and the use of electricity. There are also plans to conduct public-road tests of the TOYOTA Plug-in HV in the United States and in Europe.

Add this to Ford and GM’s Volt announcements. I’ve got a lot of heat on my arguments. But I’ll wait for the American public to speak to concede defeat.

So, I’ll put it up here. I will concede defeat on this point if one million PHEVs can be sold in the first 5 years of launch (cumulative) between all of the auto companies in the U.S. In other words, 1 Million PHEVs on the road in the first four years after the first models are launched.

To date there haven’t been that many hybrids sold in any single year and they’re considered a “success” (which I would debate). So that’s a tall order. If PHEVs are as good as people say they are, then they should sell quickly and broadly. If not, it’s a niche for the rich like hybrids (which is also perfectly fine by the way).

Let’s see if they have legs. It’ll be worth the effort, I think, even if they don’t pan out widely. In spite of my skepticism, I do think PHEVs have a distinct value proposition and can prove to be a good business opportunity. But we’re in the fight for the planet here and need some big winners. I’m looking for points, not yards (or in soccer terms, we need goals, not shots-on-goal).

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Verasun to buy 3 plants for $725 Million

Verasun announced today its intention to purchase three ethanol plant facilities currently owned by ASAlliances Biofuels for $725 Million (note it at around $2.20/gallon of installed capacity). None of the facilities are currently in operation and purportedly have a capacity of 110 Million gallons each. Here’s some from the press release:

The facilities will provide VeraSun with immediate production capacity and revenue. The Linden facility will begin startup operations this month, followed by Albion in the fourth quarter and Bloomingburg by the end of first quarter 2008. The acquisition will increase VeraSun’s production capacity to approximately one billion gallons by the end of 2008.

“This is a unique opportunity to acquire immediate production and revenue at a cost similar to that of building new facilities,” said Don Endres, VeraSun Chairman and CEO. “The capacity gained through this acquisition underscores a commitment to our long-term growth strategy while maintaining our focus on being an efficient, low-cost ethanol producer.”

The deal is being funded by $200 Million in equity (I’m assuming this is a stock purchase), $250 Million in Cash and $275 Million in project financing (debt).

This is a big move by Verasun that needed to happen for them to remain a strong market player. Given the timing of this acquisition (right before the plants were ready to go online), I wonder if Verasun hadn’t had some kind of deal with ASAlliances to build the plants for them with the prospect of purchasing them later (This is done in many industries and shouldn’t be thought of as illicit – it would just be juicy info beforehand). It begs the question that if we look at what plants are being built right now who could end up purchasing them (i.e. get some insight into any company’s capacity expansion plan.

Becoming a market player
This move is also a part of Verasun’s goal of getting to 1 Billion gallons of installed capacity by 2008. That’s a bold move to make them one of the top players of the fuel ethanol market (ADM and POET being the top two). This might give us another U.S. Big Three to talk about.

It’s important to note here, that these investments still come with some strategic versatility. Fuel ethanol is continuing to take fire from critics (and rightly so). It’s an inferior product that is only begrudgingly being supported by the big oil companies. Meanwhile, research is being conducted to produce alternative… alternative fuels. So why spend so much money on building out so much corn ethanol capacity?

The Real Long-term value
These facilities should be looked at as strategic investments in location and infrastructure. Making chemicals is relatively easy. From an asset standpoint, it’s only tanks and pumps. All the magic happens with the chemicals and these aren’t hard to come by. Getting cheap land with railcar access and environmental permits on-file is harder and has significant long-term value. That is what is of long-term value in developing a plant install base, not corn ethanol equipment. Switching to cellulosic ethanol could be done very easily if the enzymes, etc are available. Installing a new process requires buying “off the shelf” equipment and lots of coordination. Those are in ample supply these days.

The press release also states the following projected plant profile:

Operating Facilities
VeraSun Aurora (SD) – 120MMGY (2003 Startup)
VeraSun Fort Dodge (IA) – 110MMGY (2005 Startup)
VeraSun Charles City (IA) – 110MMGY (2007 Startup)
Current Operating Capacity – 340MMGY

Facilities Under Construction or Development
VeraSun Hartley (IA) – 110MMGY (Q1 2008 Startup)
VeraSun Welcome (MN) – 110MMGY (Q1 2008 Startup)
VeraSun Reynolds (IN) – 110MMGY (Q4 2008 Startup)
Capacity Under Construction and Development – 330MMGY

Facilities From Acquisition
Linden (IN) – 110MMGY (Q3 2007 Startup)
Albion (NE) – 110MMGY (Q4 2007 Startup)
Bloomingburg (OH) – 110MMGY (Q1 2008 Startup)
Capacity Under Acquisition – 330MMGY

Totals
5 Plants, 560MMGY by end of 2007
8 Plants, 890MMGY by end of Q1 2008
9 Plants, One Billion Gallons of Annual Production Capacity by end of 2008

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Governors meet to set environmental standards

Governors from thirteen states met to solicit the EPA to set their own emissions standards in the absence of federal standards.

A note from the Detroit News article:

Led by California, the 13 states have applied to the Environmental Protection Agency for authority to set their own greenhouse-gas standards in the absence of federal rules. On Sunday, EPA Administrator Stephen Johnson told governors the agency will deliver a decision by year’s end.

This begs the question as to why there are no Federal policies. There are a variety of reasons why – the most obvious being a republican white house. But it doesn’t make sense that there aren’t at least some guidelines for economic development from the Feds. “No Child Left Behind” serves as a federal guideline (weather its good or not is debatable). But there’s been no guidance on the climate issue, even those that are focused on economic development. This could be costly during the upcoming election.

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Good Technology / Cool Stuff

Latent energy generators
Technology Review has an article about tiny devices that can hardness ambient vibrations to be used to power wireless sensors. This is a pretty neat invention as it can have many applications for distributed devices. One could also think of a number of wearable products that could generate latent power from human movement. Or perhaps the lights on the highway signs powered by the vibrations from trucks going by. Most likely, however, they could be used to power very remote and ubiquitous sensors that collect real time data. Traffic data and environmental data might be good starts.

Technology Review Article

Quantum Wire
The quantum wire is a theoretical device that has improved electrical transmission qualities, but at a fraction of the weight. Over the last 15 years or so, engineers have been attempting to construct a wire of this sort out of carbon nanotubes. Experimentation has provided insights into the properties of a carbon nanotube wire finding the “arm chair” nanowires have 10X the conductivity of copper at 1/6 the weight. In 2005, NASA invested $11 Million at Rice University to develop a 1 Meter nanowire. Their interest in this device is to use on space missions to get improved performance at lower weight. However, such a device could mean a revolution in the power generation and electronics industry. Think of ultra efficient and low-heat generating microprocessors. Dr. Richard Smalley, founder of CNI Inc., had a vision of a distributed power generation scheme where each home could produce its own power and buy/sell it in an open market for electricity. The impacts are tremendous.

The difficult is actually making it. Carbon nanotubes are a deceptively difficult device to build. Research is being conducted to develop methods for making these devices reliably.

Wired Article in 2005

CNN U.S. Energy Production Map
CNN.com is featuring an interactive map of energy production in the U.S. Users can see how much energy is produced from a given source sortable by state.
CNN Feature.

Wave Power
Ocean Power Technologies is producing and testing a wave-power generation system. The system is in the form of a large buoy that utilizes the up and down motion of ocean waves to drive a lever arm that can generate electricity. These devices are being deployed in the Atlantic and Pacific Ocean and have great scalability implications.

Here’s a Discovery Channel video of this project.

Follow-up to the Interactive data presentation
This is a follow-up to Hans Rosling’s interactive, animated economic data presentation (see previous presentation). Note the portion on environmental data and the impacts it has in creating policies for developing nations. And wait for the surprising ending!

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