Jigar Shah
Creating Climate Wealth
I kept asking myself questions such as these: “What is the best way, strategy, or method for gathering information?” “Where am I going to find it?” “How am I going to evaluate my sources?” And once all the information would be gathered, “How do I objectively evaluate it?”
A related hypothesis about solar was that distributed generation would be successful. To test it, I spent one hundred dollars to post the hypothesis on the website Longbets.com. I did it so people would argue with me and challenge my hypothesis. And they did, proving that it was worth every penny getting that feedback. It demonstrated how important it is to have your hypothesis clear and clean enough so it can be challenged. If it’s ambiguous, you’re not doing yourself any good by avoiding criticism.
When you are a young company, the “right” customers know that you are early and cut you some slack. So many entrepreneurs I meet are intent on closing Wal-Mart as their first client. That is usually impossible. Why? Because when you have no money, they still won’t budge an inch.
It is important in this model to understand the value of reference customers. These are customers whose name has enough clout
It matters who your first customers are because they set an important precedent for the future. Prove your hypothesis in a way that allows you to work to scale. Whole Foods, Staples, and the State of California were marquee names that encouraged Goldman Sachs to finance our first $60-million project fund. It was not until 2006 that we went after Wal-Mart to sign virtually the same contract that Staples signed in 2003.
makers. Those first reference customers are worth waiting for and working for. You will work just as hard to support a customer with no reference value or name recognition. It makes sense to invest your time on the front end to attract business that will lead to more business.
SunEdison is about business model and finance innovation. A lot of people out there really want to believe that technology will save the world. But people who live in the infrastructure world know that technology is rarely the differentiator.
Engineering, finance, operational excellences are all reliable differentiators in the infrastructure space. Technology can’t save the world because decision-makers won’t let it.
SunEdison’s situation was solid. We made money on every project. We had to keep raising money from investors because we were growing rapidly and needed more working capital to sustain our growth. But on a unit-by-unit economics basis, we were making money. That’s what defined our success.
In infrastructure, that means the world can’t be changed without at least $100 billion in investments. And if that’s what it takes, the question is, how do we reach that scale?
Consensus thinking says the first task is testing the deployment of the technology, so pilot projects are all that matter. It doesn’t matter what kind of capital is used, whether it is grant money or concessional loan money that expects just 4-percent interest, as long as we know that the pilot was successful by getting the technology out there with good results.
If you really want to help people at scale then the work that you are doing with your fund, whether it’s $2 million, $20 million, or $200 million, needs to represent a model that has extensive transparent research underlying and supporting its investment decisions, based on maximizing returns in a chosen sector. The research has to garner credibility and value. The research has to be so solid that other entrepreneurs plagiarize it, and mainstream investors are persuaded by it.
In terms of project finance money, we deliberately went after smart, expensive capital, even though we could have increased profit by taking cheaper money. We did it so we can strategically position ourselves in order to attract much more money when the company’s first project was completed.
When they get to a point where they need additional funding to grow, they’re rarely prepared with the critical skills, due diligence, and data necessary to convince mainstream investors that they’re a worthwhile investment. Over time, this greatly limits both their growth and their credibility.
What most people don’t understand is that that same thinking can be applied in seventeen different sectors—from industrial efficiency to commercial-building efficiency. For instance, technology can reduce lighting expenses by 65 or 70 percent. The only glitch is that it costs money upfront and takes eighteen months to pay back the upfront premium.
The thinking is pervasive and applicable to most industries: lighting, agriculture, manufacturing, and shipping, to name a few. It’s amazing how many technologies make financial sense, but no one wants to install them because of their upfront costs. Changing this mindset will unlock the greatest wealth creation opportunity on the planet.
In 2005, President Bush passed the Energy Policy Act of 2005, which increased the tax credit for solar from 10 to 30 percent. This was a huge benefit for us. We had just closed our financing fund with Goldman Sachs in June 2005, and none of us predicted that this could happen. These events weren’t something we lobbied or planned for. They just happened to work in our favor.
If the world is eager for a solution that solves an electricity-pricing problem, for example, we have to be ready to pounce on any opportunity that crops up, whether it is favorable legislation or the right economic factors. If we don’t have our contracts ready, financing in place, in short, all the essential pieces necessary to take advantage of a favorable trend, we’ll miss our chance to capitalize on it. That is not bad luck. That is bad planning.
“Your best bet for success is to treat all your decisions as empirical tests. Confidence and experimentation are not contradictory. Try anything, measure everything and follow what works, even if that means changing everything. Then you can be lucky, too” (Cohen, 2009).
The patient thinks, the doctor is talking about the future, two to five years down the road. I feel fine now,
Give people solutions that look like pain medications, and they’ll be eager to implement them. Again, it all comes down to market timing.
At the moment, agriculture is a key concern because people are worried about dwindling food supplies and the effects of global warming upon growing seasons. Solutions to the pressing problems are needed right now. The market is screaming for solutions. A decade ago, no one cared about agriculture, so politicians turned a deaf ear.
The answer is disarmingly simple. The market isn’t ready for the solutions, even though logic, principles, and data irrefutably support their assertions. They don’t understand the mysterious workings of market timing, which must be respected. It’s a hard truth for entrepreneurs who have poured their hearts and souls into something they believe in, not to mention put themselves in hock for.
Entrepreneurs in the impact space potentially have seventeen different sectors with which to work.
But in the transportation sector, it’s a different story. People aren’t saying, “What’s wrong with my car? I’m ready for an alternative.” Gasoline prices have dropped, and electric cars are getting better, but they’re far from affordable for the average consumer.
When we’re way ahead of the market, there are always early adopters to whom to sell. But they’re hardly a reliable indicator of future demand. And customers seldom know what they need or how much they’re willing to pay for something.
Don’t Fall into the Technology Trap Whether investor or entrepreneur, we must avoid the technology trap by thinking our technology matters to the customer. It’s a mistake to focus our sales pitch on the technology’s benefits, such as efficiency, aesthetics, and chemistry.
Unquestionably, state-of-the-art technology is important, but in infrastructure customers only want the end service—electricity, clean water, and mobility. More important is understanding all the friction points of our customers and then making an irrefutable case that meets the needs of the organization, from CEO to the energy managers and technicians.
Questions surrounding selling are often very basic: What motivated a customer to buy something? What triggered the sale? What problems were solved? But the answers aren’t always apparent, and the key players may have different answers.
In sum, many levels of understanding have to be considered so infrastructure can be properly sold, implemented, and maintained.
Most of our customers’ stores had more than $5 million in annual sales; $10,000 just didn’t mean that much. What mattered to them was locking in their rate for twenty years because they were fed up with all the volatility in their budgets.
If electricity rates climbed by 7 percent, they would have to figure out where to cut costs to make their budgets work. They simply wanted predictable pricing, the certainty of knowing what their energy costs would be next year and the year after that.
That continuity of pricing, which we were able to offer, was what they valued the most.
This underscores the importance of asking our customers questions—very basic questions—at the outset in order to find out what’s important to them, particularly to identify their most important problems.
Less money leads to more time working the problem; more money leads to more consultants and more conventional thinking.
Keeping things lean and mean is important. High-priced consultants are useful for certain projects but not as a replacement for real strategic thinking.
In fact, almost by definition, clean infrastructure has more upfront costs and less operating expenses. This means that loading up the upfront costs make clean infrastructure less cost-effective compared with dirty infrastructure such as coal plants, where construction costs are small compared with the cost of buying coal and maintaining the plant.
With wind energy, for example, the cost of upfront expenditures is far higher, and the ongoing maintenance costs are much lower because there are no fuel costs. It is the same with solar power: free fuel and low maintenance costs. Imagine tacking on an extra 5 or 10 percent on the investment costs; compounding interest costs really can kill a project.
For regional banks, loan officers love a $3-million or a $5-million project but get cold feet at numbers above $20 million. Their immediate reaction to small infrastructure projects is: “I like it. I’ll invest in it. Let’s get the paperwork done.”
Regardless of the project scope—fuel-saving technologies for heavy trucks, small fertilizer-manufacturing facilities for agriculture, waste-to-energy processes, or septic sewer tanks—most projects are coming in at the sub-$100-million level as opposed to the $100-million-and-up level. In most cases, projects are less than $1 million, making fee management critical to success.
Unquestionably, the “small is beautiful” concept makes sense. But the big question is, “How do we make a trillion-dollar impact at scale by doing small projects?” The answer: we need to have one million million-dollar projects. Yes, a million times a million is a trillion.
Naysayers’ immediate reaction is that it can’t be done because it’s impossible to get a million million-dollar projects done at scale. And even for solar, newspapers and magazines are enamored with $1-billion projects, not small, insignificant projects. What they don’t report is that, in 2011, the solar industry deployed more than $90 billion in projects with an average project size of less than 100 kW—or approximately $400,000 each.
To make it happen, we have to attract thousands of entrepreneurs content with annual salaries of $250,000 rather than $5 million a year. This is how projects and goals are accomplished expediently and efficiently. Equally important, $1-million projects aren’t scrutinized by government the same way it scrutinizes $50-million projects.
The approval process can be likened to building a $1-million house as opposed to a $50-million commercial office building. If all the requirements, permits, licenses, and approval layers are satisfied, building the $1-million house will encounter few or minor obstacles. Count on unforeseen zoning roadblocks delaying the construction of the $50-million building.
More specifically to electricity, small entrepreneurs don’t have to submit transmission and distribution studies because smaller projects fit nicely into the existing grid without a lot of necessary changes.
Note: What is the 140 xharaxter limit in my next electric world
Sir Richard Branson conceived of the Carbon War Room (CWR) and realized that what we actually needed was action. New technologies are important, but there are hundreds of discovered technologies that we never implemented at scale. The Carbon War Room, for which I served as CEO from 2009 until I left in March 2012, is a Washington, DC–based nonprofit collaborative that is approaching the challenge of global carbon emissions with the platform of “climate wealth” at its center. As I mentioned in the introduction to this book, it coined the phrase “creating climate wealth.” The
Leaders of the CWR believe the data McKinsey and others have put forth, stating that “approximately 50 percent of the climate change challenge can be addressed profitably by existing technologies—is a business opportunity masked as a crisis.” In other words, the answers already exist to meet the 2020 climate reduction goal cost effectively.
The CWR approach the challenges with climate wealth and seek to set up “markets for entrepreneurs to make money for themselves and investors…[as] the only way to achieve the response we need at sufficient speed and scale.” The CWR targets the movement of institutional capital into a “working marketplace” and targets “the elimination of market inefficiencies (in the form of insufficient information and high transaction costs).”
So with this broad approach, CWR has adopted the “wedges” approach, which was pioneered by Princeton University’s Stephen Pacala and Robert H. Socolow. Using the wedges approach requires a focus on reducing emissions by sector a gigaton at time. With each gigaton, you make steady, planned progress on the goal of saving the climate. You can prioritize gigatons based on policy, markets, capacity, social goals, or any other characteristic. The CWR focuses on markets and cost-effectiveness. Others have also made progress, including the aforementioned McKinsey cost curve, International Energy Agency (IEA), United Nations Environment Program (UNEP), Rocky Mountain Institute (RMI), Accenture, and HSBC, to name a few.
So how did the CWR go about it? It started with creating the roadmap for success with practitioners in the sector, as mentioned above.
So the first step then was to identify what the opportunity set looked like. CWR represented it with the following diagram: With the opportunities identified, functionally the teams had to approach the challenge from three perspectives: the business opportunity, stakeholder engagement, and active operations.
engaging the key stakeholders who have the “scar tissue” and want to share their experiences productively. They have the vital role of linking “friends, founders, and funders” into an active group of engaged individuals using such offline tools as Creating Climate Wealth conferences as well as online collaborative tools CWR has created.
To map the IEA estimates to the Carbon War Room categories, we made further calculated guesses, but some broad themes emerged. Given the need for a rapid ramp-up, it is clear that renewable electricity and building efficiency have to lead the way since many of the other categories simply do not have enough existing momentum.
This does not mean that the investment spread has to be the same after 2020. In fact, renewable electricity and energy efficiency will probably slow in their growth, making way for the other sectors to continue to accelerate to meet the even more difficult 2030 climate change goals.
Bloomberg New Energy Finance Totals
US National Renewable Energy Laboratory (NREL),
Approximately 1.6 billion people, or one in every five people on earth, have no electricity.
Most of the energy-poor live in just eleven countries of the world.
Most people using diesel are paying more than fifty cents per kilowatt-hour, four to five times the average price paid for electricity in urban areas and the rest of the developed world.
A diesel engine for a telecom tower, for example, costs less than $5,000. A solar system capable of powering a telecom tower is $25,000. But the diesel engine could easily be using about three thousand gallons of diesel per year, which translates to a $12,000-annual fuel cost. You can’t argue with numbers. Over a ten-year period, solar comes in at roughly $6,000 per year with battery replacement, compared to $12,000 annually for just the subsidized diesel fuel. If you remove the $25,000-capital expense by allowing the customer to pay for solar over time, the numbers are still undeniably appealing. Even with 18-percent interest charges in many emerging markets, the numbers prove that it is a viable long-term solution.
There are two overriding problems. One is facing these entrepreneurs who are trying to figure out how to attract mainstream capital at scale. The other is: how do we get potential customers to think beyond the moment? A service approach might work like this: “You are paying fifty cents per kilowatt-hour now. We can charge you twenty-five cents per kilowatt-hour, but you will have to sign a seven-year contract for the telecom tower.”
There is no lack of money in the system. Poor people already pay $37 billion annually for energy services—the same amount of total investment to provide basic energy to the poor. This doesn’t even include the government subsidies to the tune of about $88 billion, most of which is stolen or simply mismanaged by those in a position to regulate.
Said Pope, “The money is on the table. It’s just on the wrong plates.” Here are data he presented on the “Two Flawed Ideas That Prevent Progress”: • The Grid Fallacy • We must electrify the last villages and households by building out the grid from the top down—won’t work. • The Aid Trap • Solar and other renewables are expensive, so we must “give them away” to the end users so that they can afford them. • Poor nations spend $80-plus billion per year subsidizing fossil fuels—more than 80 percent is “diverted” before reaching the bottom of the pyramid.
Yergin dubbed energy conservation the “fifth fuel.” He said efficient use of energy is an important piece of the energy-security puzzle. His solution for achieving a better energy future: taking advantage of technological innovation, regulation, and cost-effective methods.
Fundamentally, there simply isn’t enough money. Most building retrofit programs have to over subsidize efficiency because consumers simply don’t make it a priority to spend money improving their homes and businesses. In short, we have not been able to attract mainstream capital in a meaningful way.
The Property Assessed Clean Energy (PACE) program is one such approach. Originally created as a Special Energy Financing District or “on-tax bill solar and efficiency financing” in 2005, the program was designed to overcome the biggest barrier to solar and energy-efficiency retrofits: upfront costs.
Most importantly, unlike insulation or windows, air-conditioning savings can be calculated exactly—important for potential investors. This is why investors love solar; savings are easily calculated because a meter tracks production in kilowatt-hours.
Blogger, entrepreneur, and programmer Derek Sivers has said: “Ideas are just a multiplier of execution. Execution is worth millions.” Sivers was low-balling execution’s importance. From my perspective, it could be worth trillions.
In building efficiency, this has been the Achilles’ heel over and over. The technology works, but the sales and marketing model continues to fail.
Every industrial customer I have ever talked to has a fervent belief that their factory is just full of “proprietary processes” and that if I owned something that resided inside the same facility,
CEMEX’s cement factory remains as much as 20 percent less efficient than the worst in China, and yet, rather than deploy a solution for that critical issue, they built a wind turbine in California to offset some of their consumption. Why? Because it is off-balance-sheet, and it is easier to build a wind project than to deal with the efficiency issues. I am not trying to sound cynical; it is the truth. Dealing with a project that involved thirty-five temporary jobs and installing the wind turbine is much easier for them to implement than process assessment and improvement in a company of their size.
Empower Energies originates, develops, designs, builds, and finances solar projects for commercial/industrial clients, institutions, and governmental entities. They target projects in the 500 kW –10 MW range. What is so interesting about them? They are sponsored by, none other than, General Motors.
Finally, we see success with the company MPC Energy (www.mpcenergyllc.com). Based near Saint Louis, MPC Energy may be the standard-bearer in energy management systems.
The industry has the economic resources to make fuel efficiency a priority but has done little to achieve fuel-efficiency goals because ship owners don’t pay for fuel. Fuel is a pass-through to cargo owners, and they have no way to distinguish fuel-efficient from non-fuel-efficient ships. If they did, they’d certainly choose the most fuel-efficient vessels.
The solution is to create a rating system similar to the ENERGY STAR program developed by the US Environmental Protection Agency and the US Department of Energy in 1975 to save consumers and businesses money by buying energy-efficient products and encouraging energy-saving practices.
website, http://shippingefficiency.org, that provides efficiency ratings for more than sixty thousand of the world’s container ships, tankers, bulk carriers, cargo ships, cruise ships, and ferries.
That means that just twenty of these ships produce as much negative health effects as the world’s one billion cars. Other noteworthy findings included the fact that the cheap bunker fuel used by the world’s ninety thousand cargo ships contains close to two thousand times the amount of sulfur compared to diesel fuel used in automobiles.
Because only a handful of ship builders are investing in pollution-curbing technology, ship emissions, especially in international waters, is one of the least-regulated parts of our global transportation system. Shipping remains the world’s biggest transport polluter.
One key point that is important to make is that for all of the innovation being done for alternative engine solutions, there is a ridiculously high barrier to entry in the automotive industry. Unless one of the major car companies buys into the idea, there is little chance to get these types of innovations to market.
When I look at business model innovation for this segment of the market, I can count at least seventeen revenue streams for which you could be paid significant revenues with an electric battery on top of the expected car payment.
We need to change the way we view the electric batteries in cars for what they really are—distributed sources of energy storage for the grid that just happen to be on four wheels. We need to think of mobility service contracts and not just vehicle purchases;
On the efficiency side, the Carbon War Room issued a report that looked at a subset of proven technologies—five physical technologies and two information and communications technologies (ICT). These technologies would cost about $30,000 per Class-8 truck, reduce fuel consumption by about 30 percent, and save about $26,400 per year. The math adds up to about an eighteen-month payback including a high interest rate. The physical technologies include aerodynamic improvements, anti-idling devices, traction and rolling resistance upgrades, transmission alternations, and automatic cruise control devices.
So let’s go through and figure out the prize for caring about this sector. Assuming that about $155 billion in fuel was used in 2012 in the United States alone, and 30 percent could be saved through efficiency, the prize is about $50 billion in investment.
Further, the third party could be the local gas utility. They already own the local gas infrastructure and have the lobbyists to get the deal signed. These companies are generally sleepy, 2-percent growth companies. This is a way for them to double that growth rate while helping the city they care about.
Good ideas matter, but action matters more. The reason the Pickens Plan didn’t get implemented at speed and scale is that we need an army of entrepreneurs that does the selling work locally. This is where the solar industry has really done a much better job than other sectors.
Gigaton scale often seems daunting, but when a billionaire such as Pickens is pushing on the messaging side, governments are pulling on the moral side, business is pulling on the customer side, and entrepreneurs are pushing on the solutions side, it is possible
Few people realize that 70 percent of the cost of the produce they buy is from transportation costs—that’s nearly three-quarters.
BrightFarms is growing it in urban areas near grocery retailers. They partner with the grocers who sign product purchase agreements (PPAs), or in this case “produce” purchase agreements, for up to ten years using a fixed formula.
The key to success here is, like with SunEdison’s “solar as a service” model, the grocers are signing extended produce purchase agreements. The “value” created comes from lower transportation costs, leaving room to build in profit margin and still keep prices lower than what would come in from a distant grower.
The astounding thing about clean energy is that Fortune 500 companies do not dominate this sector.
In practical terms, the solar industry has started a local revolution—one project at a time, one community at a time, one rooftop at a time. Even now, most of the traditional energy providers have a hard time thinking that these small projects will ever amount to anything at scale, but at $269 billion in 2012, the politicians are open to looking at solar solutions as a source of local economic development.
To solve climate change and reach ten trillion dollars in investments by 2020, we have to increase the number of projects and dollars by about thirty five percent per year. At this scale, we need every successful stay-at-home parent, school board member, former city council official, commercial real estate broker, Realtor, Rotary Club member, and others in this field.
The solar industry grew from one thousand MW of deployment in 2003 to more than thirty thousand MW in 2012—a growth rate of forty-plus percent annually. As Ray Kurzwell has said, exponential growth rates have a way of surprising you. If the solar industry maintains this kind of growth rate, as is predicted, solar will reach two hundred thousand MWs per year by 2020 and four hundred billion dollars in annual investments.