Most of us usually don’t use wealth and climate change in the same sentence. Jigar Shah and the Carbon War Room’s Ann Davlin were at SXSWECO yesterday to convince us things are changing. Their session,”Creating Climate Wealth,” showcased how individuals and businesses can capitalize on the climate chaos.
Davlin, who worked with Al Gore and at The Pentagon, started the discussion by reminding the audience that our society, even business, has had climate opportunities teed up before.
“This really isn’t all uncharted territory,” said Davlin. “A lot of today’s climate wealth environment was established by the success of the Carter administration.”
Most of us can associate the administration with solar panels on the White House, but Davlin highlighted the other policy and infrastructure decisions which helped set up many of the standards still used today.
“Everything from energy efficiency and vehicle emissions to power purchase agreements (PPAs) and the adoption of the Renewable Portfolio Standard (RPS), has some connectivity to the efforts of lawmakers decades ago,” said Davlin.
“All the pieces are coming together, and we’re at a point where we can move forward. Carter won bi-partisan support for favorable policies and it lead to job creation and clean energy momentum.”
Davlin cited the residential PACE market, aimed at funding energy improvements, as another engine of growth and carbon reduction. She urged the group to think about the balance between an economic and ecologic argument.
“The capital is there, it’s more about how do we go in and approach a particular investor segment,” said Davlin. “We need to think about describing the impact in either financial terms or climate terms,” she added.
Shah opened up with a dig at our obsession with technology, questioning the value of the next new app.
“We have this weird fascination about technology,” said Shah. “The reality is that new technology is not fascinating in our industry.”
Instead, it’s about “infrastructure.” Shah noted that even with a seemingly unending technology cycle, energy costs for the average American family have increased about $4000 per year per family.
“Nobody tells they’re mom that I work in infrastructure,” he joked. But it’s easier to understand the notion of infrastructure when he describes it in the context of how the solar industry built out its own processes and practices. He mentioned how early power purchase agreements (PPAs) drove demand and led to more stable and innovative financing models that have continued to spur along the solar industry.
The conversation also addressed the opportunities in the electric vehicle (EV) industry and more broadly, the transportation industry.
“So what’s the climate wealth strategy for getting people in EVs,” asked Shah.
He mentioned recent data from Triple AAA that shows U.S car owners spend about $900 per month to own a vehicle. Besides more predictable maintenance costs for EVs, Shah thinks transportation companies and manufacturers will continue to move towards a cost per mile model.
“What you’ll see is an increase in “cost-per-mile” entrepreneurs as more time transfers to that model,” he said. “Then the question is what do you do with all the wasted space, like unused parking spots and emptier garages.”
The parking spot problem is in the industry’s headlights, sometimes referred to as one of the last mile problems in transportation. He was asked about what cities can do address it and some of the other planning challenges.
“Basically, 1000 entrepreneurs need to be knocking on doors and getting contracts, and then those need to get financed” he said.
Once autonomous vehicles are factored in, things get more interesting. Both panelists said the insurance industry is already adapting to that, preparing for the increasing loads of data from vehicle-based systems. They imagined a scenario that’s not so different from what healthcare providers might glean from health trackers to adjust our premiums.
Davlin also mentioned how microgrids, small-scale stations that can operate independently, are getting pushback from municipalities. Drawing from her pitches to Wall Street and private equity firms, Davlin reinforced how assumptions can’t be made that stakeholders understand the bigger picture. She described some scenarios where energy efficiency funding had to be reframed around a more resilient and risk-based approach.
Shah was then asked about the value proposition for solar, and how it plays into more climate opportunities.
“Solar is now an $80 billion a year industry with rooftop systems being added about every three to four minutes,” said Shah. “The industry needs to take responsibility for creating the next model for utilities.”
The panelists were also asked what city officials could do to spark more business-driven climate strategies.
Shah singled out transportation and waste management as two of the biggest pieces looming for cities. To magnify the cost reduction opportunity, he said the the average U.S. city transports its waste roughly 350 miles for disposal.
He also used the recent food waste ban in Massachusetts to show how waste reduction can create growth. Because of that policy, says Shah, 1200 anaerobic digesters will be built over the next five years, which will create jobs and reduce transportation costs..
Waste water management is also a part of the portfolio, especially with many treatment facilities across the U.S. nearing capacity. Things like pre-treatment, desalination, and other filtering applications are spurring the water management sector.
“A lot of these solutions have two year payback periods,” said Shah. “At that point, you’re basically forcing people to save money.”
As the session closed, a Nike representative in the audience asked the panelists to share specifics on the top things corporations could do to impact these climate wealth strategies. Davlin cited what Nike itself was doing as a member of the Sustainable Leather Working Group.
“Nike is actually dictating how the life of an animal is managed, everything from how it is fed, to how it is slaughtered,” said Davlin.
“What that means is more job creation, and a more visible and sustainable supply chain, ” she added,
Shah jumped in on the supply chain piece, saying the “greening of supply chains” is the toughest challenge for multinational corporations.
“You have to change the contracts and configure them to reward your best suppliers,” he said. Part of the challenge is that adjustments to supplier agreements can impact short-term profits. But Shah urged companies to look past contracts and get more creative to drive growth, saying a company’s strategic partners can be rewarded in many ways.
“There’s still constraints to being driven through the Chief Sustainability Officer (CSO). But you have to make some financial commitments before any long-term strategy can really materialize,”said Shah
The main point is that subsidies like the PTC are in place to help the industry continue to innovate. Eventually, they’ll phase out and the sector can stand on its own legs.
With an industry tax credit in jeopardy and new projects at a virtual standstill in the U.S., you might have expected the wind industry to come limping into RETECH2012. Instead, the audience heard from a sector that’s honing in on what it can control — namely cost reductions and innovation.
“We haven’t placed any orders for turbines for 2013,” said First Wind’s Julia Bovey in the opening remarks. That’s been the norm in 2012 for wind developers and turbine manufacturers as utilities and power purchasers have adopted a wait-and-see approach when it comes to the Production Tax Credit (PTC).
As a result, she added, three primary drivers have taken hold: reducing costs, improving turbine technology, and accessing capital in different ways.
Life Beyond The PTC
While the PTC has taken up much of the industry’s focus, wind proponents like Bovey and other green advocates are pushing for other ways to access capital. Two that have captured the discussion recently are master limited partnerships (MLPs) and real estate investment trusts (REITs). Both are used by oil and gas companies and have driven more than $300 billion in private investment. Here’s the way it was described in a NYT Op-Ed piece.
“Some economists and green tech entrepreneurs have advocated a change in federal tax law to allow renewable energy companies to use a tax-advantaged investment device known as a master limited partnership, which has attracted $350 billion in private investment but is limited to oil and gas extraction and pipeline projects. Another proposal is to allow real estate investment trusts, which are like mutual funds for real estate, to cover energy transmission networks and renewable energy generation.”
The wind industry says the subsidy discussion is really about equal footing. An LA Times report showed how lopsided it can seem depending on the data being analyzed.
“Fossil-fuel producers reap tax accounting breaks such as the depletion allowance, which is worth an estimated $1 billion a year, according to the Environmental and Energy Study Institute, a Washington think tank created to advise Congress on energy policy. Tax-expensing options for drillers bring them $1.9 billion a year. Relief on royalty payments due to drillers on government property: $53 billion over the lifetime of the leases.”
However the subsidies play out, panelists agreed something similar to the current renewable portfolio standard should be a goal. As much of a hot potato that it might be politically, more than thirty states are already enrolled to spark renewable growth. As one of the speakers mentioned, RPS is the closest thing we have to a national clean energy standard.
Innovation Brings Multiple Benefits
The pace of innovation in the wind business was certainly one of the bright spots. Taylor Geer, with energy consultancy Garrad Hassan, said turbine efficiency and reliability have improved dramatically over the last five years, something he attributes to better manufacturing processes and more R&D earmarked for things like forecasting and storage.
“We definitely have a better idea of what we need to look like within three-to-five years,” said Geer. “Not to mention we’re getting a better sense of what our cost of energy will be, and that’s a big lift.” Like other panelists, Greer emphasized the impact that energy storage would have on levelizing electricity costs. As the storage infrastructure improves, most agreed wind farms would likely resemble a generation model closer to conventional power plants.
To get a sense of how fast turbine technology is evolving, you can look at “repowering” efforts, which replace older turbines with new ones. According to Jeff Schlichting at wind developer Sustainable Legacy, one turbine can now replace up to five others as wind farms are upgraded.
Taking Costs Out Of The System
Cost reduction was another area where technology improvements are having an impact. But it’s not just better rotor technology or lighter materials that are helping, it’s supply chain efficiencies and the way wind farms are commissioned. “As the industry has matured, we’ve gotten better at everything from construction to logistics,” said Schlichting. “
And perhaps a sign of that maturity was the fact that IBM was on hand to address the operations and management (O&M) market for wind. According to Biren Gandhi of IBM Global Business Services, O&M costs can approach one-third of the total capital expenditures for a wind farm.
The company was pitching its IT-driven approach to managing large-scale wind operations, experience that it’s gained from running big servers and cloud applications for customers in the automotive industry and other manufacturing-intensive operations. IBM projects the O&M market could grow by as much as $6 billion over the next decade.
At last week’s RETECH 2012 session on Renewable Energy in Mexico, Miguel Vazquez from the U.S. Commercial Service in Mexico City presented a detailed look at the challenges and opportunities for U.S. businesses wanting to market renewable solutions in Mexico. With its own presidential election looming, Vazquez says that Mexico’s renewable energy policies would likely get a boost, but warned its regulatory framework would continue to be a challenge as American businesses expand across the border.
He said things will likely be compounded by the fact that Mexico ‘s largest utility, CFE, has a mandate to buy the cheapest energy available. That’s a policy decision that helps zero out solar all the way into the year 2026. U.S. companies are also limited in terms of how they can work with CFE, said Vazquez. Today, only power generation projects are considered, not distribution or transmission.
But all that aside, the market for exports to Mexico can’t be ignored, especially in wind and biofuels, where Mexico ranks in the top three globally, according to Dept. of Commerce data. And from a U.S. perspective, Mexico ranks ninth for potential renewable energy exports.
Vazquez also touched on some of the current renewable incentives in Mexico . One is aimed at taxpayers, and provides a 100% deduction incentive for investing in renewable energy equipment as long as the equipment is operational for at least five years. And in 2009, the Fund for Energy Transition and Sustainable Exploit of Energy was established. In less than two years, it had a capitalization of $260 million that could be spent on sustainability projects.
Mexico is also bringing its educational institutions into the mix, making funds available for renewable R&D from the Ministry of Energy and CFE. Lastly, U.S. business could also get some help from Mexico ‘s “Green Mortgage” program, which provides a lower APR if homeowners purchase renewable energy equipment.
Even with all the incentives, Mexico ‘s renewable portfolio will still only approach 25% by 2026. Because of that, Vazquez said U.S. companies really need to do their “homework” and streamline the way they approach the market. Legal challenges, permitting and land ownership were cited as some of the biggest obstacles. He mentioned it can still take a few years for permits related to power generation projects.