Thursday, June 25, 2009

Clean Tech: Call It Like It Is! ............. (part 3 of 3)

This thread started by asking:

1) What's the problem with the term clean tech?

2) Why can't the intelligent, articulate, and passionate people who care about this issue come up with a better term?

3) Should we fix it, and if so, how?

I suggested that the term Clean Tech is confusing since it casually combines into a single "space" three need segments, each entailing distinct approaches, decision makers, and decision criteria:

1) For Efficient Resource Utilization (ERU), the need is likely to be met by the market: Good business rationale, solid ROI, acceptable payback.

2) The need for Lower-Impact Alternatives (LIA) may be met by the market: The switch to renewable sources presumably offers longer-term ROI; for the private sector to pursue it, some intervention through pricing and incentives may be necessary.

3) Finally, the need for Primary Demand Suppression (PDS) is unlikely to be addressed by the market: It entails significant sacrifice and change in behavior, and the payback may be quite distant; as a result, PDS often requires major government intervention, via regulation, taxation, or even shift in property rights.

Each of these three need segments could be met with some combination of solutions/approaches, such as:
  1. products (including software and service)

  2. information and open standards

  3. public policy (including incentives, regulation, education, advocacy, etc.)

The intersection of the need and solution dimensions creates a clear segmentation map, which I show below. To clarify these segments, I reviewed several alternative depictions of the clean tech space--such as the one from Khosla Ventures--and mapped them into my suggested segmentation. This is far from an exhaustive list of applications, but enough to give a sense of the range of possibilities:

Again, the story is quite clear: products and technologies are being funded and developed for ERU and LIA, but PDS won't get the same amount of pull--despite the popularity of "conservation" and "sustainable growth" sentiments.
Therein lies a possible explanation to a point which came up earlier: Why is the term CLEANTECH so confusing? The answer, of course, is that some groups believe that they have something to gain from this confusion. And who has anything to gain? Of course, advocates of Demand Suppression (PDS) may want to try to approach private investors (hoping to ride on the coattails of the ERU and LIA investment opportunities); at the same time, ERU and LIA advocates may want to associate themselves with the PDS crowd when they appeal to policymakers to support their agendas... So an unholy coalition is content with a murky definition of the space.

Is this just a theoretical discussion? Why should we care? Well, if we care about the overall importance of incorporating environmental thinking into our decisions, we should be VERY CAREFUL about such distinctions. As we're frequently reminded, economics and environment issues do collide ; for example, see discussion about real choices between LIA and PDS needs.

Recently the Environmental Business Cluster (where yours truly is a mentor to clean-tech start-ups) put together an excellent panel discussion on what it takes to make it in the clean tech space. I was struck by some insightful comments by Paul Douglas, Supervisor--Renewable Procurement and Resource Planning at the California Public Utilities Commission (CPUC). While all the goals in the cleantech space seem laudable, some are mutually exclusive; there's a need for regulatory clarity—meaning setting priorities, making choices, and deciding what not to do. For example, the CPUC is supposed to drive to high penetration of renewable energy: 33% by 2020 . But, if choices need to be made, which goal is primary: 33%? 2020? Energy costs? Market impact? Risk? "All of the above" is a nice answer, but a bit naive. In reality, regulators, entrepreneurs, and investors need to know: Which of these can be relaxed in order to accomplish a more-critical item on this list?

We'll get back to these questions in a few weeks; but let's get the foundation straight. To deal with these and related issues, we need to be very clear about the interplay of economic and environmental issues--starting with the very basic definitions of the space. And there's no way about it:

  1. CleanTech IS a confusing term

  2. It's not a coincidence!

  3. It can be fixed--and doing so will help to improve decision making in this critical space

Thursday, June 18, 2009

Clean Tech: Call It Like It Is! .................... (part 2 of 3)

This thread started by asking:

1) What's the problem with the term clean tech?

2) Why can't the intelligent, articulate, and passionate people who care about this issue come up with a better term?

3) Should we fix it, and if so, how?

So far I suggested that the term CLEANTECH is intentionally confusing. Now let's see what we can do about it.

The Solution

To properly frame and tackle the so-called clean tech space, we have to recognize that it consists of distinct segments.

Let's go to first principles. Say we use a product which requires a lot of some natural resource. This raises concerns for near-term and long-term sustainability. In principle, there can be only three ways to fix the situation (in order of difficulty):
  1. Continue to use the product, but find ways to reduce the waste and loss involved in our consumption, so that fewer resources would be needed. Let's call this Efficient Resource Utilization.

  2. Continue to use the product, but develop methods to utilize other resources, which have a lesser effect on the environment (for example, renewable sources). Let's call this Lower-Impact Alternatives.

  3. Finally, we could somehow reduce our rate of demand for the product, so less resources would be required. Let's call this Primary Demand Suppression.

For example, let's look at transportation's need for fossil fuel:

  1. Efficient Resource Utilization (ERU) approach would suggest hybrid cars, smaller vehicles, and other high-MpG solutions.
  2. Lower-Impact Alternatives (LIA) approach would promote biofuels, electric vehicles, and fuel cells.
  3. Primary Demand Suppression (PDS) approach would prefer reduced travel and may promote that via gas taxes, high-occupancy-vehicles lanes, subsidies for public transportation, congestion pricing, high parking and vehicle license fees, car sales tax, etc.

Did you notice something? While ERU and LIA approaches were generally market-based (and technology-driven), PDS resorted to taxation and incentives. In general (without taking you through all the examples), the pattern is:

  1. ERU (efficiency) solutions are likely to be market-based: good business rationale, solid ROI, acceptable payback.

  2. LIA (alternatives) solutions may be market-based: They presumably offer longer-term ROI; for the private sector to pursue them, some intervention through pricing and incentives may be necessary.

  3. PDS (demand suppression) solutions are unlikely to be market-based: They entail significant sacrifice and change in behavior, and the payback may be quite distant; as a result, they often require major government intervention, via regulation, taxation, or even shift in property rights.

I tried to capture the distinctions in this nifty PAIN-GAIN matrix. The farther one is up and to the left in this matrix, the higher the likelihood is for market-based solutions; conversely, the farther one is down and to the right, the lower the likelihood.

So you're beginning to see the problem: When the term Clean Tech casually combines these three segments into a single "space," it does a major disservice to their distinct needs. The mix of approaches, decision makers, and decision criteria should be quite different across these segments.


Thursday, June 11, 2009

And now for something a bit different...

Sorry, but I'll have to interrupt the flow of my posts. Something has come up...
Earlier this week I attended the high-octane "Launch Silicon Valley" event. The keynote speaker was Dan Roam, the author of "The Back of the Napkin" (recommended reading!). Dan recommends to try and describe our apparently most-complex problems as simple drawings. To make his point, he challenged the audience to develop a simple picture to describe the Administration's Stimulus Plan--the $787-billion (see also here) American Recovery and Reinvestment Act of 2009 (or ARRA).
Well, I promised Dan that I would take on this challenge; and, of course, I'd like to deliver on it as soon as possible. So today I'd like to share with you my first pass.

In political economics, there have to be multiple representations for the same idea; ARRA is no exception. So let's provide two perspectives--let's just pick some random names, and call them the RED view and the BLUE view.

In this view, the essence of of the plan is the creation of unprecedented budget deficits, which we will finance through huge borrowing--from China and ultimately from the next generations of Americans.

With lots of $$$ in the hands of politicians, the stimulus plan becomes a magnet for lobbying and special-interest groups, which drive the stimulus plan to spend the money on pet projects with little economic rationale; that is, except for the rationale of benefiting the special interest groups and generally advancing the re-election potential of the various politicians.



In this view, the stimulus plan still calls for major public investment--but that investment serves as a magnet for creative project ideas and attracts otherwise-frozen private funds (required to match and benefit from stimulus funds).

The projects funded by ARRA aim to meet the economy's near-term needs (creating jobs through "shovel-ready" projects); but they also are tailored to
meet our long-term needs, by advancing Clean Technology, Health Care, and Innovation. These initiatives ultimately result in

  • a more productive, faster-growing U.S. economy--which will be able to generate high tax revenues and pay down our National Debt, and
  • a healthier, more environmentally-sound world for the next generations

Which View Is Right?

Both have some merit.

As an economist, I would always be skeptical about approaches which place unprecedented levels of funding and decision-making power in the hands of politicians and government officials (as well-meaning as they may be). And the bond market is telling us that it's getting harder to finance our national debt.

But, as someone very close to a lot of cleantech innovation, I can clearly see that ARRA is doing a great job of attracting creativity and some private funding. Even if some of the resource-allocation decisions of the various government agencies may be off, there's great potential to jump-start excellent initiatives in the cleantech and health-case spaces. Those, in turn, would create terrific infrastructure for future productivity and growth.

So there you have it. There IS a way to depict the stimulus plan in simple pictures (not just in narrative and tables). And then there's another way... and another... and another...

Wednesday, June 3, 2009

Clean Tech: Call It Like It Is! ............. (part 1 of 3)

Ever since I decided to slap the label "clean tech" on my consulting and advisory practice, I find myself having to explain what ON EARTH I mean by that. And apparently it's not just the people in my immediate circle who find the term confusing. Recently I had the opportunity to attend a panel discussion with several very sharp Silicon Valley investors with (naturally) strong opinions on technology trends. Some of their comments about clean tech truly resonated with me, questioning whether it was the right term to describe what's really going on. So I figured I may as well launch my blog with some basic definitions.

So let's get started:

1) What's the problem with the term clean tech?

2) Why can't the intelligent, articulate, and passionate people who care about this issue come up with a better term?

3) Should we fix it, and if so, how?

The Problem

The term clean tech--or cleantech, or greentech--may sound cute, but, upon reflection, is very confusing. Typically one would expect, when talking about a huge business "space" like cleantech--which calls for dramatic investments--to see

  • a market, defined by a common customer need (e.g., "entertainment"), or
  • an industry, defined by a common technology (e.g., "electronics").

Which one is clean tech?

Evidently, neither. "Clean" suggests a desire to have a clean environment (a need)--but are CUSTOMERS really willing to pay multiple billions of dollars for "clean" or "green" vs. other solutions? "Tech" sounds like a product--but is this space really defined by common technology products? Actually, the technologies involved are extremely varied, and many of the solutions are very low-tech (and have more to do with econonomics, business models, etc.).

In effct, it seems that "cleantech" was designed as a hybrid (pun intended):

  • It's "clean"--so environmentalists and everyone who watched "Inconvenient Truth" (myself included) should be happy
  • It's "tech" (ostensibly high tech)--so investors should fund it and politicans should like it.

So, unfortunately, "clean tech" is a highly confusing term. It's neither a need, nor a solution; it provides little clarity (for example, what would be EXCLUDED from this space). Why are we using it then?

The Root Cause

The overall intent of "cleantech" seems intuitively obvious: The desire to provide a healthy, safe, productive place for us (and generations to come) by making the most efficient use of our shared natural resources (like air, water, and land). But at this level, this sounds like a political campaign or a social movement for sustainability--not like an industry or a market; more important, not like something where VCs should invest.

Indeed, the term "sutainability" seems to not be in vogue anymore, for exactly this reason. Terms like "climate change" or "global warming" were supposed to somehow fix that, but people seem to have grasped that these are just euphemisms for the good ol' "sustainability." So what is one to do? Enter CLEAN TECH.

The confusion surrounding this term is not a coincidence. Many years of consulting and strategy work have taught me that confusing terms tend to stick around when someone has something to gain--economically or politically--from the confusion. As I'll show next, the loose terminology of "cleantech" bundles segments which are very different in their attractiveness to business and public policy; this bundling raises the desirability of the less-viable propositions in the mix.

The Solution?