The view from the NRG suite at Redskins Park

The Washington Redskins played with enough energy to send Sunday’s game against the Dallas Cowboys into overtime, but by the time the ‘Skins fell to their sixth consecutive loss, my host at Redskins Park  — David Crane, the chief executive of NRG Energy — had left. Actually, he exited before halftime . . . to attend another NFC East showdown, the Giants-Eagles prime time game in New Jersey.

No, Crane is not a football fanatic. But the affable 52-year-old CEO is fanatic about promoting solar power, which is why he’s been spending time lately with NFL owners. NRG installed solar panels last summer at Redskins Park [See my blogpost,  An NFL rivalry...over solar], and he would like the company, which is based in Princeton, N.J.,  to deliver solar energy to the stadiums where the Giants and Jets, Philadelphia Eagles and New England Patriots play.

Why? To show people–particularly the influential, well-to-do types who attend NFL games–that solar energy makes sense, today.

“This is about demonstrating to the public the potential of solar,” David told me, as Dallas jumped to an early lead.  and we made our way up to the front of the suite. “I just want to make sure I see at least one play before I go,” he said, ruefully.

David Crane

Most utility company CEOs are, frankly, dull. Not Crane. He’s straightforward and occasionally outspoken, friendly and open, and ready to think in new ways about an industry that hasn’t changed all that much since Edison’s day. He is passionate about the climate crisis–he was active in USCAP, the failed big biz-big green coalition that lobbied for federal regulation of greenhouse gases, and he pushed hard to build a low-carbon nuclear plant in Texas until the risks grew too high post-Fukushima. He’s a friend of the Clintons, which is one reason why NRG made a $1 million contribution through the Clinton Global Initiative to deliver solar power to Haiti.

Now he is pushing hard for rooftop solar, smart meters and electric cars–a set of technologies that has the potential to transform the way utilities operate.

He believes that distributed energy — that is, energy generated at the place where it’s used — is gradually going to replace some centralized power plants built by regulated utilities over the last century.

“To me, this is the next big thing in the industry,” Crane said. “It’s disruptive in the way that the cell phone was disruptive to telephony. It was severely disruptive over a 20 to 30 year period, not overnight.”

“When we can offer you solar power from your roof, at the same price or lower than grid power, the whole nature of what it means to be retail electricity provider is going to change, and we want to be on the front end of that,” he said.

Rooftop solar photovoltaics don’t have to be cheaper than the wholesale cost of burning coal or natural gas to tip the market. They only have to beat the retail price of electricity to a business or home owner.

Now, before we get ahead of ourselves, a few caveats. NRG is not the Sierra Club. With $8.8 billion in revenues last year, NRG made most of its money by burning coal, natural gas and oil. Unless and until the cost of solar power drops further, that’s unlikely to change.

Crane believes that the cost curve for solar is trending down fast. Subsidies from China as well as technology advances are reducing module costs. As the industry grows, costs of the balance-of-system costs will be driven lower by standardization and economies of scale. Installation costs are also sure to drop, he said. “We should be able to get to the point where installation isn’t three days, it’s three hours,” he said.

Crane told me:

Our basic view is that within two or three years, we’ll be able to offer electricity from your roof for 12 or 13 cents a kilowatt hour. That may not be that exciting in Texas where the price is seven or eight cents. But I think the average price in Connecticut is 17 cents.

An eVgo charging station at Redskins Park

Cheap solar would change the game, in other words.

The CEO isn’t just talking green. He’s investing NRG’s money in a clean-energy future, and betting consumers will follow. In the last couple of years, NRG has bought Green Mountain Energy, a retail provider of clean energy, for $357 million, and Energy Plus, an energy retailer with a loyalty program, and it  launched eVgo, a network of charging stations for electric cars. Today (Nov. 21), NRG announced the acquisition of Solar Power Partners, a San Francisco firm that develops commercial and industrial solar projects.

Don’t read too much into this, but others in the NRG suite on Sunday were Fred Ni, an executive at the Chinese electric car and solar company BYD (it was his first live football game) and entrepreneur Jack Hidary, founder of Samba Energy, which offers a web-based platform the matches solar power installers with commercial and industrial building owners who want rooftop solar. Both are doing business with NRG.

You can expect NRG to move aggressively into the residential solar market soon, Crane indicated.

We’re not really in residential solar the way we should be, the way that Solar City is, but that is an industry that you’ll see us in. In residential solar, you’re going to see a lot of change. We want to offer a seamless product—we want to supply you both with your grid power and with the solar power on your roof—so that for you it’s simple, you get one bill, one price. No one’s really doing that yet.

If I’d had a bit more time with David, I would have asked him whether NRG might be contemplating an acquisition of Solar City, SunRun, or Sungevity, all of which are  fast-growing companies in the home and commercial solar financing business. You can read about NRG’s green energy plans in detail in this excellent interview at Yale Environment 360.

I did ask him whether cheap, abundant natural gas could derail his solar plans. He replied that the two fuel sources are complementary, with natural gas supplementing solar until energy storage (possibly in the form of electric car batteries) becomes ubiquitous.

Said Crane: “Natural gas is going to take business away from coal. Solar is going to take business away from wind. That’s the way the world is going to work.”

BYD's e6 electric car

Great companies have a purpose that goes beyond making money. Google wants to organize the world’s information. Walmart seeks to save people money so they can live better. The Walt Disney Co. tries to make people happy. (Or at least it used to; Disney’s current mission statement is a bunch of gobbledygook.)

Purpose matters. It’s a big reason why people go to work every day.

BYD, the Chinese company that makes electric cars, batteries and solar panels, has a grand purpose: It wants to save us all from climate change, which it calls “slow suicide.”

In a new company video (below), BYD says:

Glaciers are melting. Sea levels are rising. Who can guarantee that the next victims won’t be us?

Where is Noah’s ark to save human beings?

Where, indeed?

I’ve been fascinated by BYD — the letters are the initials of the company’s Chinese name, but they have come to stand for Build Your Dreams — since writing a FORTUNE cover story about the company in 2009. Two years ago, I visited BYD in Shenzhen, met with its founder and chief executive, Wang Chuan-Fu, and spoke about the company with Warren Buffett, Charles Munger and especially David Sokol of Berkshire Hathaway, who sits on the BYD board. Through its MidAmerican Energy subsidiary, Berkshire Hathaway bought 10% of BYD for $230 million in 2008. Despite some recent stumbles at BYD, the company’s market capitalization has grown to about $33 billion, so Berkshire’s stake is now worth about $3.3 billion. Not too shabby.

Lately, I’ve been in contact with  U.S. investors  who are bullish about the firm. One of them, Shai Dardashti, a Buffett admirer who runs a small money management firm, pointed me towards this seven-minute company video. It’s worth watching (although it ends abruptly for reasons that I haven’t been able to determine).

This video is fascinating in light of  BYD’s remarkable but brief history. Since 1995, it has evolved from a manufacturer of cell-phone batteries into one of China’s largest automobile companies and it is now making a major push into clean energy, both with the manufacturing of solar panels and  utility-scale batteries to store energy. (For more on BYD’s energy storage plans and MidAmerican Energy, see Warren Buffett’s Big Battery Play at GreenBiz. Recently, the city of Los Angeles’s Department of Water and Power (LADWP) and BYD said they would work together to develop a grid-scale battery project for renewable energy storage.

In an email this week, Stella Li, a senior vice president of BYD, told me that solar power and utility-scale energy storage are key parts of what she calls “BYD’s 0-emission solution” and “total green solution.” The idea is to generate energy from the sun, store it in batteries until it is needed and then use the electricity to power BYD’s electric cars and buses.

As the company’s video says:  “How to transform the unaffordable [solar, battery, electric car] technology into affordable and high quality products: This is BYD’s responsibility and its mission as well.”

BYD has its skeptics. The company postponed the introduction of its e6 electric car. BYD’s auto sales, earnings and share price fell this fall, according to Reuters. In October, BYD was fined $443,000 by China’s Ministry of Land and Resources and seven of its factories were seized by the government because the company illegally built them on land set aside for agriculture; the factories were for future production, the company told Bloomberg.

Given the companies outsized ambitions, more stumbles surely lie ahead.

But there are good reasons to believe in BYD. Among them:

Low-cost brainpower. Chinese manufacturers  are the low-cost providers of electronics, toys and textiles because factory workers are paid so little.  BYD’s more significant competitive advantage comes because the company  can hire skilled engineers at a fraction of what they would be paid in the U.S. or Japan, probably less than $1,000 a month. The company employs more than 30,000 engineers. They come from top universities and only those that make it through a challenging, competitive probationary period stick with the company. Its R&D operation, as a result, is vast. BYD can afford to make mistakes.

Battery technology: In BYD’s first business, cell phone batteries, the company dislodged entrenched, global leaders like Sony and Sanyo. Batteries remain central to BYD. Much of the due diligence carried out by Berkshire Hathaway’s Sokol focused on batteries. If BYD can continue to improve on battery costs and efficiency–a big if–the company will improve its competitive edge in three different businesses–rechargeable batteries for consumer electronics, electric cars and energy storage.

The China factor: It’s hard to know what the government’s crackdown on BYD over its factories really means; if the company falls out of favor with the authorities, all bets are off.  But Chinese-owned green businesses like BYD are sitting pretty today. While China’s economy isn’t as centrally managed as it once was, the country still produces five-year plans; as my colleague Brian Dumaine recently reported in FORTUNE, the “government recently decreed that 5 million electric cars will be traveling the nation’s roads by 2020 — up from basically none today.” The government provides all kinds of support (cheap land, tax breaks, low cost loans) to favored companies.

Wang Chuan-Fu

The X-factor at BYD is the chairman and founder, Mr. Wang. He’s obviously an accomplished, driven and brilliant leader. As Charlie Munger, Buffett’s partner at Berkshire, told me back in 2008:

This guy is a combination of Thomas Edison and Jack Welch – something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it.

What’s not clear is how deep and strong the management bench is at BYD. Without speaking Chinese, analysts, investors or reporters can’t get much of a read on the senior managers at the company.

BYD is trying to do so much that Mr. Wang can’t possibly manage it all.

But it’s hard not to root for a company that’s pursuing such big dreams.

–

Hat tip  to Shai Dardashti and Scott Rombach for keeping me up to date on BYD. BYD matters because the world desperately needs low cost solar power, battery storage and electric cars.  Given the lack of progress in Washington and, more recently, in Cancun around the climate issue, we’ve got to hope that companies like  BYD deliver the breakthrough clean technologies needed to avert a climate catastrophe. I don’t see any reason why they can’t…

And on that semi-optimistic note, I will close out this blog for 2010. By my unofficial count, I posted 195 times during the year, including guest posts. It’s been fun, but it’s time for week off.

Thanks for reading.

Enjoy the holidays.

See you in 2011.

It’s been a remarkable summer for SunRun, the San Francisco-based startup that’s trying to get solar power onto millions of residential rooftops. SunRun raised $100 million in project financing from utility PG&E. Venture capitalists invested another $55 million in the company. Home Depot agreed to distribute its rooftop solar panels, and Toll Brothers, the big home builder, is using SunRun’s solar leasing program to install PV panels on new homes in a luxury golf-course community in Yorba Linda, CA.

Today, SunRun enters Pennsylvania, its sixth state. You wouldn’t think of Pennsylvania as a solar-friendly state but, as it happens, the Keystone State has all the right ingredients–high and rising electricity prices, generous state subsidies for renewable energy, and a regulatory framework that permits homeowners to sell surplus power back to the electricity grid.

Says Lynn Jurich, the president and co-founder of SunRun: “We want to go to markets where we can save customers money, and where we can make money.”

I’ve written about SunRun before (See SunRun: A New Deal for Solar and Solar’s Strange Bedfellows) but the company is growing so fast, albeit off a small base, that it makes a lot of news. The PG&E, Home Depot and Toll Brothers agreements, along with its geographic expansion, all seem to  further validate the company’s business model.

As Jurich put it:

The top utility, the top home improvement company, and one of the top 5 builders in the country are all working with SunRun…Residential solar is finally going mainstream.

Well, not quite yet–SunRun has about 5,000 customers, just a few more than the little village where I grew up. Solar panels, while coming down in cost, remain a much more expensive way than coal or natural gas to generate electricity, so they are dependent upon a variety of government subsidies. Some homeowners don’t like the way panels on the roof look.

But SunRun has removed two big obstacles to the mainstreaming of solar–the upfront costs and the hassle factor. Purchasing a solar system outright can cost $25,000 to $45,000, but because SunRun owns and maintains its systems, homeowners frequently don’t have to pay any money down. The company works with reputable local installers, and makes technology decisions that could confound newbies to the field.

“If you can remove all the hassles, we think solar can be a very mainstream product,” Jurich says. “Our biggest barrier, really, still, is education. People don’t know that they have an alternative to the utility company. You can get some of your power from your rooftop and we will manage the whole thing for you.”

In essence, SunRun is a service, financing and marketing operation–it doesn’t actually make anything. The company raises the money to buy the systems, arranges the installations, takes advantage of a 30% federal tax credit that’s available to home owners who install solar energy, monetizes the Renewable Energy Credits or RECs available in many states, and collects monthly electricity payments from homeowners. If the business model works, those revenue streams, taken together, are sufficient to repay its lenders (like PG&E), pay its own costs and generate a profit.

Jurich told me that SunRun has, so far, raised enough money to pay for about $300 million worth of solar installations. She expects that figure to climb past $1 billion in the next year or two. That’s impressive for a company that got its start less than four years ago when Jurich and Ed Fenster, SunRun’s CEO, were MBA students at Stanford.

Of course, SunRun isn’t the only solar home financing company. It’s got competition from, among others, Solar City, which is backed by celebrity entrepreneur Elon Musk. BYD, the Chinese electric car and battery company, last spring struck a deal with KB Home, to install solar panels in a new development of modestly priced homes in Lancaster, CA. (See Warren Buffett’s BYD: Revving up Fast) I’m sure there are other solar financing firms out there that haven’t gotten my attention.

But the competition should be good for everyone involved, not least the customers.

As Jurich told me: “If residential solar works—residential electricity is a $150 billion market—there’s plenty of business to go around.”

Photo credit: Gray Watson User:E090 Wikimedia Commons

BYD's e6 electric car

Warren Buffett is a busy man, and never more so than during Berkshire Hathaway’s annual meetings, sometimes called the Woodstock of capitalism, which attract thousands of people each year to Omaha, Nebraska.

But Buffett found time during this year’s gathering to sit down for an hour with Chuanfu Wang, the chairman and CEO of BYD, the Chinese company that makes cars, batteries, electronics and solar power equipment.

And why not? Berkshire’s MidAmerican Energy Holdings unit bought a 10% stake in BYD for about $230 million in September, 2008. Today, it’s worth nearly $2 billion.

That’s a nifty return, even by Buffett’s standards.

“BYD is really running on all cylinders,” says Li Lu, a BYD investor and money manager who brought the company to the attention of Berkshire vice chairman Charles Munger several years ago. Munger took the idea to Buffett and to MidAmerican chairman David Sokol, who now sits on BYD’s board.

I wrote a FORTUNE cover story about BYD in 2009, met with Mr. Wang in Shenzhen and late had the pleasure of meeting Li Lu. He’s a fascinating guy—participated in the Tiananmen Square uprising in 1989, then fled China, earned business and law degrees at Columbia University and for the past 13 has run an investment firm called Himalaya Capital. He’s been an informal adviser to BYD and traveled to Omaha with Mr. Wang. Li Lu now lives and works in Pasadena, Ca., where we met last week.

The most important thing to know about BYD—the letters are the initials of the company’s Chinese name, but they have come to stand for Build Your Dreams–is that the company has enormous ambitions. It aims to be not only the world’s biggest carmaker, but a leader in cheap solar power and utility-scale battery storage as well. Mr. Wang, the founder and chairmen, has said that he believes that the automobile and energy industries are on the verge of a major transformation. Buffett, Munger and Sokol all told me that they were really impressed with Mr. Wang–not a bad trio of endorsements.

BYD’s been in the news lately for three reasons. In March,  the company announced a joint venture to develop electric cars in China with Mercedes. The idea is to combine Mercedes’ design excellence with BYD’s technological savvy, particularly with respect to batteries, and the Chinese firm’s access to its home market. “Daimler’s know-how in electric vehicle architecture and BYD’s excellence in battery technology and e-drive systems are a perfect match,” Mercedes chief Dieter Zetsche said at the time.

Last month, BYD announced that it will open its North American headquarters in a downtown neighborhood of Los Angeles. Mr. Wang was joined by California Gov. Schwarzenegger and LA Mayor Villaraigosa at the ceremony and, interestingly, the company said it would put more than its electric cars on display—it will showcase “solar panels, energy storage systems and advanced LED lighting products” as well.

To lure BYD, the city of Los Angeles promised to buy some of the company’s electric vehicles, including buses; to  streamline the approval process for installing charging stations in garages; to make it easier for people to install charging stations in their homes and to display a BYD car at LAX, according to the Wall Street Journal.

Third, BYD and KB Homes, the big homebuilder, announced that they would build homes together that not only include solar panels on the roof but batteries in the garage–so that the owners can enjoy solar-powered electricity even when the sun’s not shining. This is a big deal, as the Sunpluggers blog reported:

Off-grid solar owners for many years have used battery banks to store their generated electricity for later use, but the plan for the KB Home development – smack in the middle of a grid-tied suburban subdivision – could help alter the trajectory for adoption of both solar electricity and plug-in vehicles.

BYD is already growing fast, as Li Lu reminded me. It has about 160,000 employees, most in Shenzhen and Xian in  China, but others at offices in the Netherlands, Denmark, Hungary, Romania, Japan, South Korea, India, Taiwan and Hong Kong. (There’s even an office in Shaumburg, Illinois, where Motorola is a big customer for BYD’s batteries and handsets.)

BYD sold about 450,000 vehicles in 2009, up 170 percent from a year earlier, and it intends to sell about 800,000 this year, nearly all of them gasoline powered. The company’s all-electric car, called the e6,  is currently running as taxi in Shengzhen in small volumes. Rollout is slightly behind schedule, but more are expected to be produced this year.  Unlike the U.S., China has yet to lay out a policy for subsidizing electric cars, which has slowed things down. The car will cost about $40,000, the company has said. It hasn’t talked about a timetable to bring the car to the U.S. or Europe, which could be a big export market because prices there are high.

Li Lu

“The big challenge now is to bring down the initial cost,” Li Lu told me. Eventually, BYD would like  to sell the car for about the same price as conventional vehicles, and win over auto buyers by offering them lower operating costs and higher performance. “The only way to conquer this market is to provide a product that is comparable at the beginning and superior in the end,” he said.

BYD’s greatest strength is in battery technology, the company’s first business. Manufacturing a safe, reliable, long-lasting, and fast-charging battery for a car at an affordable price is a complex and costly undertaking. The Chinese firm believes that it has an edge over its rivals.

“There are not many in the world that have comparable experience and expertise,” Li Lu says. “They seem to have  a commanding lead right now.” The BYD technology is super safe, its batteries will last a long time and they will cost less than competitors, he said.

All that remains to be seen, of course. But BYD has not one but three opportunities to change the world–with its electric cars, its rooftop solar panels with battery storage and with large-scale batteries that could be used by electric utilities to store solar or wind power.

If BYD succeeds in even one of those businesses—let alone all three—it will become one of the most important clean tech companies in the world.

No offense to those working hard to bring wind, solar or geothermal energy to scale, or to people who are jazzed about energy efficiency, but I’m going to end my blogging for 2009 by saying that I am really excited about electric cars. It’s my favorite green technology, and one that’s on the verge of a breakthrough.

Recently, I’ve had a chance to ride (briefly) in the Coda and in the Renault Fluence EV, part of Better Place‘s Denmark rollout. I’ve written at length about BYD, the Chinese electric-car company owned in part by Warren Buffett’s Berkshire Hathaway. And next year I am hoping to check out the Chevy Volt and the Nissan Leaf, as well as the Aptera from entrepreneur Bill Gross and the Tesla if the price comes down.

The electric car could bring about the biggest transformation of the auto industry since its invention. If  all goes well, we will be seeing many more of them on the roads in 2010 and especially 2011.

With thanks to Plug In America, a nonprofit group that promotes plug-in vehicles, which put this list together, here are12 myths about electric cars that, just in time for the 12 days of Christmas. Plug In America began as a group of electric vehicle (EV) drivers, so its members are speaking from experience.

I’m now going to do my best to slow down and stay away from my laptop between Christmas and New Year’s Day–so enjoy your holidays, happy new year and I’ll be back in 2010.

Aptera

1. MYTH: EVs don’t have enough range. You’ll be stranded when you run out of electricity

FACT: Americans drive an average of 40 miles per day, according to the U.S. Dept. of Transportation. Most new BEVs have a range of at least double that and can be charged at any ordinary electrical outlet (120V) or publicly accessible station with a faster charger. The latter, already in use, will proliferate as the plug-in infrastructure is built out. At present, all it takes is planning for EV owners, who can travel up to 120 miles on a single charge, to use their cars on heavy travel days. Alternatively, a PHEV goes at least 300 miles on a combination of electricity and gasoline.

2. Myth: EVs are good for short city trips only

FACT: Consumers have owned and driven EVs for seven years or more and regularly use them for trips of up to 120 miles.

3. MYTH: EVs just replace the tailpipe with a smokestack

FACT: Even today, with 52% of U.S. electricity generated by coal-fired power plants, plug-in cars reduce emissions of greenhouse gases and most other pollutants compared with conventional gas or hybrid vehicles. Plug-ins can run on renewable electricity from sources such as the sun or wind. PHEVs will reduce greenhouse gases and other emissions, even if the source of electricity is mostly coal, a 2007 study by the Electric Power Research Institute (EPRI) and NRDC showed. Read the summary of some 30 studies, analyses and presentations on this topic.

4. MYTH: The charging infrastructure must be built before people will adopt EVs

Renault Fluence ZE

FACT: Most charging will be done at home, so a public charging infrastructure isn’t a prerequisite. Still, a robust infrastructure will help, especially for apartment dwellers and those regularly driving long distances. But at least seven companies are competing to dominate the public-charging-station market and a trade group representing the nation’s electric utilities has pledged to “aggressively” create the infrastructure to support “full-scale commercialization and deployment” of plug-ins.

5. MYTH: The grid will crash if millions of plug-ins charge at once

FACT: Off-peak electricity production and transmission capacity could fuel the daily commutes of 73% percent of all cars, light trucks, SUVs and vans on the road today if they were PHEVs, a 2007 study by Pacific Northwest National Laboratory found. Also, utilities are upgrading some local distribution systems to accommodate plug-ins, just as they do when residents add more air conditioners and TVs. Plug-ins, which can be seen as energy storage devices on wheels, can actually benefit the grid, making green energies like solar and wind power even more viable.

6. MYTH: Battery chemicals are bad for the environment and can’t be recycled

FACT: Ninety-nine percent of batteries in conventional cars are recycled, according to the U.S. Environmental Protection Agency. The metals in newer batteries are more valuable and recycling programs are already being developed for them. Utilities plan to use batteries for energy storage once they are no longer viable in a vehicle.

7. MYTH: EVs take too long to charge

FACT: The most convenient place and time to charge is at home while you sleep. Even using the slowest 120-volt outlet, the car can be left to charge overnight, producing about 40 miles of range. Most new BEVs and PHEVs will charge from 240-volt outlets providing double or triple the charge in the same amount of time. Charging stations that reduce charging time even more are beginning to appear.

8.MYTH: Plug-ins are too expensive for market penetration

FACT: New technologies are typically costly. Remember when cell phones and DVDs were introduced? Also, the government stimulus package includes a $2,500 to $7,500 tax credit for EVs and PHEVs. Some states are considering additional incentives ($5,000 in California and Texas). And, the purchase and lifetime operating cost of an EV is on par with or less than its gas-powered equivalent because EVs require almost no maintenance or repair: no oil or filter changes, no tune ups, no smog checks.

9. MYTH: Batteries will cost $15,000 to replace after only a few years

FACT: The battery is the priciest part of a plug-in, but costs will drop as production increases and the auto industry is expected to be purchasing up to $25 billion in advanced batteries annually by 2015. Some car makers plan to lease their batteries, so replacement won’t be an issue. The Chevy Volt PHEV will have a 10-year battery warranty that would cover battery replacement.

10. MYTH: There isn’t enough lithium in the world to make all the new batteries

FACT: Even in a worst-case scenario of zero battery recycling, aggressive EV sales, no new mining methods or sites, existing lithium stores will be sufficient for projected EV production for the next 75 years. See an analysis at PlugInAmerica.org. Also, lithium comes from many countries (24% is found in the United States), so we won’t be dependent on any one global region.

11. MYTH: Lithium batteries are dangerous and can explode

FACT: Among the many kinds of lithium-ion batteries, lithium-cobalt batteries found in consumer electronics can pose a fire risk in certain circumstances. These risks can be mitigated by the use of advanced-battery management systems and careful design that prevents “thermal runaway.” Most plug-in vehicle makers are working with other battery types (such as lithium-iron-phosphate and lithium-manganese) which have inherent safety advantages and provide more years of service.

12. MYTH: Most of us will still be driving gas cars through 2050

FACT: Several irrefutable factors are driving the shift from gasoline to plug-in vehicles: ever-toughening federal fuel economy standards and state caps on greenhouse gas emissions; projected price hikes for petroleum products as demand increases and supply flattens or drops; broad agreement over the need for America to reduce its reliance on petroleum for economic and national security reasons; and climate change, which is occurring faster than previously thought, according to the journal Science and many other sources.

A lot of smart people—Warren Buffett, Andrew Grove, Nissan’s Carlos Ghosn—believe that electric cars will be a big answer to our climate and energy problems. GM and Ford have apparently come around to that view as well, and even Chrysler recently released a cool little neighborhood vehicle called the Peapod. (See below.) I’m impressed by BYD, the Chinese battery and electric car company, and by Better Place, Shai Agassi’s bold electric-car startup aimed at transforming the global automobile industry. Batteries are the key to making electric cars affordable. So why did this Wall Street Journal headline make me cringe?

Obama Administration Sparks Battery Gold Rush

Companies, States Vie for $2.4 Billion in Funding Aimed at Turning U.S. Into Top Maker of Fuel Cells for Electric Cars

The story went on to say that the Department of Energy has received 165 applications from companies seeking some of that $2.4 billion. which is “aimed at turning the U.S. into a battery-manufacturing powerhouse.” The Journal’s William M. Bulkeley reports:

Companies vying for the federal money include General Motors Corp., Dow Chemical Co., Johnson Controls Inc. and A123 Systems, a closely held battery maker backed by General Electric Co. and others. States including Michigan, Kentucky and Massachusetts are also weighing in with applications, usually in alliance with their favored battery makers.

When the winners are decided, as soon as the end of July, the Energy Department may anoint Livonia, Mich., or Indianapolis or Glendale, Ky., as the future U.S. hub of car batteries.

Reading carefully, it’s clear that The Journal (“free people, free markets”) is not happy about this news. Note the use of the word “anoint,” hinting that the government is assuming divine powers. The article characterizes the DOE grants as “one of the government’s biggest efforts at shaping industrial policy”—fighting words in Journal-speak.

They’ve got a point, though, don’t they? One unhappy result of all the bank bailouts of the fall is that $2.4 billion doesn’t seem like much—hey, Citi alone has collected north of $45 billion, last time I checked—but a billion here, a billion there, and you’re starting to talk real money. And if electric cars are going to be as big a business as a lot of people think, then why government investment should be needed at all? Particularly since we have a climate change bill making its way through Congress that will, at long last, if all goes well, put a price on carbon emissions—thereby giving low-carbon energy sources what they desperately need, which is a fighting chance to compete with fossil fuels on something resembling a level playing field. I thought the whole idea behind cap-and-trade (which I strongly favor) is  to capture the externalized cost of global warming pollutants, and then let the market figure out how best to reduce greenhouse gas emissions: regulation that would have a light touch but a profound impact.

But no—with Waxman-Markey, CAFE standards, biofuels mandates, subsidies for “green jobs” and the like—the administration is giving us a belt and a couple of pairs of suspenders, too. Much as I admire Steven Chu, the energy secretary, do we really want to entrust him and his staff to decide which battery technologies are likely to succeed and which companies can most wisely spend that $2.4 billion? What’s more, since the states and their legislatures are competing as well, you can be sure that the likes of John Murtha and Robert Byrd will weigh in on these investment decisions. Indeed, the states themselves are already competing to subsidize battery makers, as The Journal notes:

“If you’re the place where the batteries are made, there’s an opportunity to spin it into other things as well,” said D. Gregory Main, president of the Michigan Economic Development Corp., a state agency that has committed up to $400 million in incentives for battery manufacturers.

Kentucky is promising $110 million in aid and a 1,550-acre site, in Glendale, that it assembled in an unsuccessful effort to land a Hyundai plant several years ago.

Some of these batteries, by the way, could well find their way into cars like the Tesla (sticker price:$109,000) and those made by Fisker Automotive, a California firm that plans to sell $88,000 luxury-hybrids next year. So tax dollars collected from working people and the middle class go to subsidize rich boys and their toys.

Please don’t get me wrong. I think electric cars are a great idea. The faster they arrive, the better. But judgments about which battery-makers to finance should best be left to venture capitalists, investors like Buffett (who bought 10% of BYD), big investment banks and the like. They may be no smarter than the people at the DOE but at least they are putting their own (or their investors’) money on the line. If they’re wrong, they’ll be held accountable, or at least they should be. You can be sure that some of them will be wrong, and that’s fine.

This is why I respectfully take issue with Jesse “Watthead” Jenkins of The Breakthrough Collaborative, who with me is a lead blogger at The Energy Collective, a website that aggregates blogs about energy and the environment. Jesse’s a smart guy and a good guy, but he has more faith in government than I do and so he favors substantially more federal investment in clean energy research and development. If we’re talking basic research, that’s fine, I suppose—the private sector can’t be asked to underwritethat, because the potential payoffs are so uncertain and long-term.

But this battery program is explicitly about picking winners and losers in one industry sector, which may or may not turn out to be a real business. It reflects, I’m sorry to say, the Obama administration’s faith that the best and the brightest Ivy-educated government executives can figure out what needs to be done, and just how to do it. I have no doubt that the people around Obama are smart, well-intentioned and hard-working. I dearly hope that they can, in fact, figure out just what needs to be done. But if we learned anything from Bush II, it is to worry about people in Washington who think they have all the answers.

As Washington debates climate change, a lot of utility company CEOs have assumed high-profile roles: Jim Rogers of Duke Energy is appearing in commercials with the Environmental Defense Fund, David Crane of NRG Energy has emerged as a leading advocate for nuclear power and Michael Morris of American Electric Power, the nation’s biggest coal-burning utility, naturally talks up clean coal.

David Sokol, the chairman of an Iowa-based utility holding company called MidAmerican Energy Holdings, which is 80%-owned by Warren Buffett’s Berkshire Hathaway, has for the most part been quieter. But Sokol and MidAmerican Energy have been positioning their business for a low-carbon future. MidAmerican’s investments in wind power mean that it generates more power from renewable source than any other regulated utility, as best as I can tell. It was Sokol, at Buffett’s request, who engineered MidAmerican’s investment in BYD, the Chinese battery-maker and auto company that is building low-cost electric cars. (See Warren Buffett Takes Charge, my story about BYD that ran last month in FORTUNE.) And now there’s more news from MidAmerican, and you heard it here first: The company will soon begin testing batteries from BYD that, if all goes well, could store electricity on a large scale at a reasonable cost.

That’s a big deal.

“We’ve never really had storage capability on utility systems,” Sokol told me recently, by phone. “Given the progress BYD has made on the technology of batteries for electric vehicles, the question is, how do we ramp that technology up so that we can use it for multiple purposes in the utility world?

“Probably the most obvious is the ability to store intermittent renewable resources, such as wind or solar,” Sokol said.

Put simply, cheap battery storage at scale would address one of the biggest drawbacks to wind and solar energy, which is that, unlike coal or nuclear power, they are unpredictable—you can only make electricity when the wind is blowing or the sun is shining.

“If you can store electricity when the wind blows, and have it available when you need it, that argument goes away,” Sokol says. But he cautions: “There’s a fair bit of distance between here and there.”

Just a few details: This fall, MidAmerican will build a 2 megawatt storage facility using BYD batteries at an existing substation in Portland, Oregon, where it operates the local utility, Pacific Power. BYD, meanwhile, is building a bigger storage facility in China, and plans to build a third one in a still-undisclosed location on in southern California. That’s about all I can tell you because BYD is reluctant to talk about its research.

The 2 megawatts of battery storage in Portland will allow MidAmerican to test BYD batteries to see how well they charge, what control systems are needed to discharge the electricity and to analyze their reliability and cost. “It will let us do a fair amount of testing to understand the economics of a 100 or 200 megawatt storage facility to back up wind,” Sokol says.

Currently, electricity can’t be stored economically on a large scale except in systems that pump water uphill, then release it to generate hydropower. So-called pumped-storage systems, however, often consume more energy than they generate; they make sense only because water can be pumped uphill using cheap off-peak power, then released so the electricity can be sold during periods of peak demand when prices are higher.

Low-cost battery storage would be a dramatic improvement over pumped storage for many reasons, not the least of which is that the batteries could be located in urban areas where electricity demand is high.

Sokol has credibility when he talks about energy and environmental issues, in part because of his association with the plain-spoken Buffett but mostly because of MidAmerican’s own track record. “For the last six years, we have been very focused on trying to move our overall portfolio to the lowest carbon footprint possible,” he says. “We’re building every wind and geothermal project that we are able to.” A thoughtful and unpretentious Omaha native, Sokol is a student of business and author of a slim and insightful volume of management advice called Pleased But Not Satisfied. MidAmerican, whose subsidiaries provide electricity and natural gas to nearly 7 million customers in the Midwest, Pacific Northwest, Rocky Mountain states and the UK, had about $12.7 billion in revenue last year.

About 24 percent of MidAmerican’s generating capacity now comes from renewable or noncarbon fuel sources, including wind, geothermal, hydroelectric and biomass. About 50% comes from burning coal, which is about the same as the U.S. average, but its PacifiCorp subsidiary caused a stir back at the end of 2007 when it said it would scrap plans for new coal-fired power plants in Wyoming and Utah, in part because of concerns about climate change.

When we met last December in New York, Sokol explained to me that he is a big believer in electric cars because electric engines are far more efficient than those that burn gasoline. An all-electric vehicle–even one powered by today’s U.S. mix of electricity generation—produces about 20% of the greenhouse gas emissions of a gasoline-powered car that gets 20 miles per gallon. As battery prices come down, electric cars will be both cheaper to drive and cleaner than today’s fleet. Just this week, BYD and Volkswagen agreed to work together on electric cars.

Sokol nevertheless opposes the Waxman-Markey climate change bill approved last week by the House energy committee. In an opinion piece in The Washington Post, he wrote that the legislation will place an undue burden on consumers because it requires utilities to pay for allowances to emit CO2 and creates a complex and unnecessary trading scheme:

The real hidden catch of the cap-and-trade system, though, is that it will require consumers to pay twice: first for emission allowances and then for the construction of new low- and zero-carbon power plants.

Sokol did say, however, that the electricity sector can achieve the 83% reduction in greenhouse gas emissions by 2050 mandated by the bill. Getting there will require advanced technologies like the electric cars, large-scale batteries and solar photovoltaic panels being developed by BYD.

Founded in 1995, BYD now employs 130,000 people in 11 factories, eight in China and one each in India, Hungary, and Romania. If nothing else, the company has demonstrated that it can move fast. “Working with them,” Sokol says, “is sort of like watching bamboo grow.”

If you think the American auto industry is in trouble now, just wait until the Chinese learn how to make great cars. And if you doubt that they will learn, check out my cover story about BYD in the new issue of FORTUNE, headed to subscribers and newsstands this week.

BYD is an amazing company. It was started by a chemist and government researcher named Wang Chuan-Fu in 1995 (same year as Yahoo) to make rechargeable batteries, which it learned to do very well. Within a few years, BYD’s batteries were cheaper and just as reliable as those made by industry giants ony and Sanyo. Then Mr. Wang, as he’s known, got into the automobile business by buying a failing state-owned carmaker. BYD’s conventional gas-powered cars are selling well these days in China, and his electric plug-in electric model looks like it will come to market with a longer range and a lower sticker price than the new Toyota Prius much-hyped Chevy Volt. As if that were not enough, I’m hearing now that BYD is on the verge of a breakthrough in the solar power business and that the company has big plans to make rechargeable batteries at a utility scale to store energy from intermittent, renewable sources like wind and solar. Today, BYD employes 130,000 people in 11 factories, either in China and one each in India, Hungary and Rumania.

That track record—and that potential—is what persuaded Warren Buffett’s company, Berkshire Hathaway, to buy 10% of BYD last fall for $230 million. This could turn out to be one of Buffett’s very best deals. Here’s what Charlie Munger, Buffett’s longtime friend and the vice chairman of Berkshire, told me about Mr. Wang:

This guy is a com-bination of Thomas Edison and Jack Welch—something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I’ve never seen anything like it.

Munger, by the way, is a famous curmudgeon, who usually comes up with all kinds of reasons why Buffett’s latest investment idea won’t pan out. Not so this time around.

The other key player in the Berkshire-BYD deal is David Sokol, the chairman of MidAmerican Energy, a utility company owned by Berkshire and an interesting guy in his own right. (I’m going to blog about Sokol later this week—he is a big believer in renewable energy.) Sokol did most of the due diligence on BYD for Berkshire, and he now sits on the BYD board. He, too, was very impressed with Mr. Wang.

Here are three reasons why I think BYD will become an important company in the not too distant future.

1. BYD’s engineering prowess. Depending on whether or not you count trainees, BYD employs between 10,000 and 17,000 engineers and it’s constantly recruiting the best graduates from China’s engineering and technical schools. The Shenzhen manufacturing region, where the company is headquartered, is known for cheap unskilled labor, but BYD’s competitive advantage derives from its cheap skilled labor. “They are the top of the top,” Mr. Wang told me, when I visited BYD last year. This is a company that has already invented new processes (the way it makes batteries) and products (the battery in its electric car) and it is focused on innovation. Innovation appears to be Mr. Wang’s personal passion.

2. BYD’s forward-thinking management. David Sokol is a student of management—he wrote a little book on the subject called “Pleased But Not Satisfied”—and he was impressed with Mr. Wang’s thoughtful and purposeful approach to building his company. So was I. Not many entrepreneurs evolve into effective leaders of global companies with 100,000 or more employees. This fact didn’t make the story, but I was interested to learn that BYD is working with the Hong Kong outpost of Business for Social Responsibility. Unlike some of its domestic competitors, BYD wants to adopt best practices in health and safety as well as find ways to empower its people to improve the company. Jeremy Prepscius, the Asia director for BSR, told me: “What makes them unique is that you have a Chinese company, a big one, that recognizes the value of continuing to evolve its internal culture, and recognizes that it is not just a top-down command-and-control culture…They are somewhere between an old state-owned Chinese enterprise and a modern Japanese company like Toyota.” Sokol told me that Mr. Wang seeks his ideas and criticism whenever they meet. Perhaps surprisingly, many CEOs have the confidence to act that way. On the downside, it’s hard to know whether BYD has a strong bench of managers behind Mr. Wang.

3. China’s commitment to clean energy. Much as I admire the Obama administration’s energy and environment team, there’s no way that the U.S. government is going to help U.S. car companies and battery makers as much as the Chinese government is going to help BYD. As Keith Bradsher of The New York Times reported in a page-one story earlier this month:

Chinese leaders have adopted a plan aimed at turning the country into one of the leading producers of hybrid and all-electric vehicles within three years, and making it the world leader in electric cars and buses after that.

The government will make direct grants to automakers (as we do, of course) and also provide “subsidies of up to $8,800 are being offered to taxi fleets and local government agencies in 13 Chinese cities for each hybrid or all-electric vehicle they purchase.”

Finally, there’s a fascinating footnote to this story, and it involves a man named Li Lu, who was born in China in 1966, the same year as Mr. Wang. When I began reporting the story, I wondered how Buffett and Charlie Munger had become aware of BYD. That question led me to Li Lu, who runs an investment firm, in which Munger is an investor, based in Pasadena that owns about 2.5% of BYD. He was the link between Berkshire and BYD.

Li Lu, it turns out, also was a leader of the pro-democracy movement that organized the mass student protests in Tiananmen Square in 1989—20 years ago next month. He fled China after hundreds of demonstrators were killed and appeared on China’s “Twenty-one Most Wanted List.”

Escaping to New York, Li Lu was embraced by the human rights community and wrote a memoir called Moving the Mountain that reads like a movie. His well-educated parents were forced into labor camps during the Cultural Revolution and, as a 10-year-old-boy, he barely survived an earthquake that killed 250,000 in the city of Tangshin.

During the 1990s, Li Lu earned three degrees in six years from Columbia—a B.A. in economics, a law degree and an M.B.A. He worked for Allen & Co. and at Donaldson, Lufkin & Jenrette before starting his investment fund. When David Sokol first flew to China to visit BYD, he stopped at LAX to have dinner with Li Lu, after which they traveled together to Hong Kong. Li Lu is still not permitted to travel freely to China.

Li Lu politely declined to speak with me for my story, telling me that some people in China are still unhappy about his role in the Tianenmen protests. Mr. Wang is not among them. “That’s past history,” he said. “Today, Mr Li and I share the belief that the best way to help China move forward is to make BYD a world-class company.”

Li Lu has agreed to come to FORTUNE’s Brainstorm Green conference next week to talk about BYD. I’m eager to meet him and learn more about this remarkable company. You can read my BYD story here.

As the electric car is business gets more and more crowded, it feels like we are approaching a breakthrough. It could come from a U.S. automaker like GM with its Volt, from a European company like Renault (and its partner Nissan) which are committed to electric cars through an alliance with Better Place, from a Japanese firm like Toyota which has led the way with hybrid cars like the Prius, from a Chinese or Indian carmaker, or from one of the many startups—Tesla, Think, Fisker, ZENN—that are hurrying to market.

I’m fascinated by electric cars, so I went to a panel on “Bringing Electric Cars to the Mass Market” at the Net Impact conference at Wharton. They had great people—Michael Granoff of Better Place who has the title, “head of oil independence policies;” Charles Gassenheimer who is CEO of Ener1, a startup company that makes lithium-ion batteries for electric cars; Vicki Northrup, an industry veteran who has worked for Think, Zen and is back at Think, and moderator Bill Moore, who runs a terrific website, EV World, and knows the business inside and out.

Of course, it’s not much of a business yet. Sure, Toyota has sold more than 1 million hybrids, but most everyone agrees that today’s hybrids (which recharge their batteries from the braking power of the car) are an interim technology, a bridge to the future. They are likely to give way, first, to plug-in electric hybrids (where the battery can be recharged by plugging in the car) and then to pure electrics. After all, it doesn’t make a lot of sense of build a car with both an internal combustion engine and an electric engine—that’s one reason the Prius and other hybrids are pricey. Besides that, the Prius battery technology will soon be surpassed by lithium-ion batteries, the kind used in laptops and cell phones, most experts think. They are more efficient, lighter weight and more powerful. Gassenheimer said a government energy lab tested a Prius with one of his company’s lithium-ion batteries and found that it delivered 77 miles per gallon, even before the software was optimized for the new battery.

Batteries are the key to the electric car business. The trouble is, lithium ion batteries that are powerful enough to provide a reasonable range—say, 60 to 100 miles on a single charge—and long-lasting enough so that they can be charged and discharged year after year are frightfully expensive. They can easily cost $15,000 to $20,000, the panelists said, accounting for as much as 50% of the cost of a plug-in electric hybrid or an all electric car.

So how do you get costs to come down? Several ways, it turns out.

First, obviously, is by improving the technology. Lots of big and small companies are working on that—Panasonic, Toyota, Sanyo, BYD, startups Ener1 and A123 and a venture-backed firm called eeStor.

Economies of scale will surely help. “Getting the battery into volume production is the best way to drive down costs,” Gassenheimer said. Ener1 has a deal to make batteries for the Think cars, which should ramp down their costs; they are building a production line now in Indianapolis.

Another approach: Radically transform the automobile business model, as Better Place wants to do. Their plan is to own the batteries and charging stations, and recharge and replace them when needed. This should assure wary buyers, if they believe in Better Place. “You subscribe to Better Place for your energy,” Granoff says. “You pay for the miles that you drive.” Better Place has struck deals to build out electric-car infrastructure in Israel, Denmark and Australia, with more to come, I’m told. You can watch this video of Shai Agassi, Better Place’s charismatic CEO, at the EV World website.

Still another approach is to lease the batteries. Think is thinking about this idea, according to Northrup, but is wary of trying to introduce a new technology and a new business model at the same time. “We’re not sure Americans will go for it,” she says.

One thing I learned from the panel: Batteries, when they are no longer powerful enough to drive a car motor, can still hold enough charge so that they could be resold to electric utilities that want to store intermittent renewable energy from the wind or the sun.

Finally, the government can and probably will play a role in driving the adoption of electric cars. The $700-billion financial rescue bill included $7,500 tax credits for the first 250,000 buyers of plug-in electrics, which could help the Chevy Volt and the Prius plug-in if they come to market, as expected, by 2010.

Gassenheimer says: “The only way to encourage penetration at this early stage ,when the prices are higher than consumers are willing to pay, is government intervention.”

I’ve come to believe that plug-in hybrids and then all-electric cars will reach the mass market in the next three to five years, although I can’t tell you how we will get from here to there. The fundamental reason is that electric car engines are more efficient than gasoline engines, although there’s debate about how big the efficiency advantage turns out to be. Besides that, electric cars are cleaner, they will help wean us from imported oil and they are quieter than gas-powered cars.

As Carlos Ghosn, CEO of Nissan and Renault, said last month, when Nissan and France’s biggest utility announced plans to roll out an electric-car network in France:

We have decided to introduce zero-emission vehicles as quickly as possible in order to ensure individual mobility against the background of high oil prices and better environmental protection.