Revolutionary Road: The Path to a Bright, Green Tech Future

by Benjamin Abram | July 7th, 2010
posted by Erica Rowell (Editor)

Permalink | 2 comments

Bill Chameides is on vacation. He’ll be back the week of July 12th.

In green technology, what a difference a year and a half makes.

Eighteen months ago, the big issue in green tech was that start-ups were having trouble getting the capital they needed to turn their one-off production lines into commercial-scale manufacturing operations.

When deciding whether to embrace new green technologies, companies like eBay, which recently decided to go with some cutting-edge green tech for its corporate headquarters, have to weigh such things as up-front capital expenditures with ongoing operating expenditures.

Federal agencies such as the energy and interior departments and the Environmental Protection Agency stepped in and offered a combination of grants and loans.

Alongside these incentives private investors stepped up their funding (see here and here), and voila!, companies like Tesla Motors were able to plan production lines for American-made green-tech products like the all-electric Model S sedan.

Today, the landscape has changed. Where green technology companies once had trouble raising sufficient equity to support their operations, today a new reality has surfaced: buying these products makes economic sense, but many potential customers still aren’t able to make the switch for structural reasons.

A Quandary: CAPEX vs. OPEX

Imagine for a moment that you’re in charge of facilities for a large corporate campus in your town. You are exactly the kind of person with the ability to welcome in the green revolution. Every year you buy millions of dollars worth of stuff, and with each of your choices you have a decision whether to go green or not.

Imagine now that I approach you with new lighting fixtures that use a third less energy than your old, ugly fluorescent lights. These new lights would not only immediately enliven your workplace with a much more pleasant hue; they would “pay for themselves” in three years, based on the energy and maintenance savings you would accumulate by switching to our LEDs. I dare say you might want to make the switch!

However, even though the fixtures pay for themselves from reduced operating expenditures in a relatively short time, the fact of the matter is that they’re three times as expensive to purchase as your old fixtures. So you might salivate over the potential savings in your OPEX budget horizon, but your CAPEX budget for this year would make you gulp, since you likely don’t have the cash to make the purchase today in order to reap those future savings.

Indeed, imagine now that, instead of being the head of facilities for a large corporation that owns its own headquarters, you’re the office manager of a company that leases its building. Even though you have a ten-year lease, and would love to have the nice LED lights that could slash your energy bill, your landlord is unlikely to want to invest in the new lights, the savings from which would accumulate to you and not to her.

New Business Models

Problems facing green-tech products abound in the current marketplace. From the CAPEX-vs.-OPEX problem noted above to issues with securing bank financing for projects with considerable technical risk, it’s hard for green products to compete.

I see at least three ways that these hurdles can be overcome:

  1. Price carbon and internalize the cost of pollution to the current way of doing business. This will serve to make the status quo more expensive, and would therefore give green products the headroom to compete. Particularly in this economy, this method is a tough sell.
  2. Find a way to reward early adopters of green tech. Many of the problems green-product companies face today will be mitigated by producing at scale and demonstrating a track record of successful operation over time. Early adopters serve to drive both of those points forward; in many cases, early adopters (such as eBay and Stanford University in the not-so-hypothetical example above with Lunera Lighting, a company my venture capital firm has invested in [pdf]) see a boost in employee satisfaction and green PR when they adopt these new technologies early. Latecomers won’t see those advantages. Subsidies and discounts can help, too, but are only sustainable if they actually help the technologies get over this adoption hump.
  3. Develop smarter business models. We are working on this at The Westly Group, and I would be happy to talk with anyone else who is thinking about it. Please drop me a note.

The Future Is Bright — We Just Need to Get There

Like the institutional credit question that plagued the green tech world, nay, the whole world at the end of 2008, these questions can be addressed. It’s going to take a bit of ingenuity, dedication, and leadership — but I’m confident that we will get there.

Benjamin Abram (Duke 2007) is an associate for The Westly Group. He leads the firm’s practice in infrastructure investments with an eye towards energy savings through efficient systems management.

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  1. Jim
    Jul 8, 2010

    If you just ended the fossil fuel subsidies, wouldn’t that increase the price of carbon polluting technologies? Would it be an easier sell then cap & trade or a carbon tax? As to the business models, I think a part of the puzzle is that the focus on performance pay is how good does the bottom line look in the short term, therefore the upper management in corporations are unwilling to invest in more expensive technologies now even if it means more savings down the road. Performance pay should be tied more to the long term, how is the company doing five years from now, rather than next quarter. The short term thinking also prevents the company from having a comprehensive vision. The share holders and boards of companies need to realize that sometimes some short term pain is necessary for long term vision/infrastructure/sustainability. Also, there should be other measures for performance pay, if a company has a goal to reduce energy consumption by 10%, then there should be performance pay associated with that goal. Are there examples of companies that have achieved this? How did they do it?

    • Ben Abram
      Jul 19, 2010

      Jim: You’re right: reducing subsidies should have a similar effect. I’ve heard of solutions that reduce focus on quarterly earnings and instead take measure — as best possible — of long-term performance building.  In VC, we have the advantage of investing in our companies over longer term durations, i.e., up to ten years — this helps us focus on the horizon and takes some pressure off short-term decisions. This could certainly be one of the reasons that the venture capital industry has taken a jockey position in clean tech, but there are a number of large corporations that — for one reason or another — have found it in their interest to adopt these kinds of technologies… whether for energy/cost savings (WalMart) or because their customer base demands it (Patagonia).  I’ll be as interested as you to see how this question evolves over time. Thanks for your comment.  //Ben

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