I'm not much of a web guy, but I'm terrifically impressed with Twitter these days.
For one thing, after I posted a pretty critical take today on a book I'd just read, it was a new experience to have the author (Vinnie Mirchandani, "The New Polymath") pretty immediately reach out to me to ask why I felt that way. That launched a good online dialog between the two of us. We agreed that cross-disciplinary innovation is huge for cleantech in particular. We agreed on the need for significantly more resources to be put behind it, and to be put into the sector in general. We disagreed on the level of demonstrated effectiveness shown by IT entrepreneurs and investors crossing over into cleantech (at least so far)... In any case, I enjoyed "virtually meeting" Vinnie and appreciated that we had the opportunity to connect.
And today Twitter also delivered to me this message, from Vinod Khosla:
"Lomborg: $100b/yr needed to fight climate change. Wrong before & wrong again! Brute force won't work. Need R&D not huge $."
Which I found very interesting. Vinod is a smart observer and thought-leader in the sector. The above message is illustrative of a line of thinking I've been seeing lately from several such very smart thinkers, which basically makes the argument that what's really needed is bold innovation. That we need to be thinking very much "out of the box" and coming up with new technologies that will out-compete incumbent technologies, even with all the advantages incumbent technologies hold in the marketplace, and even with all of the market inertia to overcome. As Vinod puts it, we "need R&D not huge $."
Certainly I believe we always need more innovation, and the appeal of doing more to promote disruptive technology development is obvious. Yes to R&D spending!
But it's not enough.
Let's look at the evidence:
1. There's a lot of innovation already out there.
At one point last year, Eric Wesoff of Greentech Media had counted up over 200 venture-backed solar startups. Many, perhaps a majority, of these were backed by investors who believed they were potential breakthrough innovations. Just focusing on solar for a second, let me ask one basic question: At this point, is an additional solar R&D effort going to by itself significantly accelerate the pace of adoption of solar technology? As one solar CEO put it to me last week, "it's not about innovation now, we're totally focused on manufacturing."
Solar's an interesting example because it IS growing quickly. But from a climate change perspective, it's not growing nearly quickly enough, its impact remains miniscule as a portion of the overall global power generation mix. And that industry growth that we've seen has been largely NOT from breakthrough innovations at the panel level -- in fact, it remains a challenge for second generation thin film players to gain acceptance from a market that prefers to go it safe with tried-and-true poly-si panels.
Not to mention the fact that the rapid growth of the solar industry has been predominantly a result of the significant incentives being provided by various governments' policies. Significant incentives, which basically means "huge $"... Essentially, an investment being made by these governments to help the industry scale up and drive down the cost curve. I'll return to that point later.
2. In many areas of cleantech, markets have been highly resistant to adopting new technologies even when they make compelling economic sense.
Whether it's efficient lighting, or residential energy efficiency retrofits, or lower-cost solar panels, or recycled materials, or alternative fuels, there's a long history in cleantech of compelling value propositions failing to achieve the market potential that would be expected by looking just at supply and demand curves.
In many cases, it's just the customer's lack of adequate information about the available options. They don't want to purchase the new product, even if it promises compelling paybacks, because they haven't tried it and haven't seen others try it before, and they can't guarantee it will work as promised. Or maybe it's just basic lack of awareness. Or simply the confusing morass of competing and obfuscatory claims made in many of these marketplaces by all the vendors pitching their product or system as the very best one to get.
In many other cases, it's a structural issue that makes it difficult for even "winning technologies" to make strong headway in the market. For example: Anyone attempting to sell energy efficient products into the office building market quickly learns that the owner-tenant relationship is a huge complication that means even compelling cost savings don't necessarily translate into compelling payback periods for the purchaser. Another example is the slow utility adoption cycle driven by multi-year public utility commission rate case cycles.
Or it might be that the customer would find a 4-year payback period attractive but they don't have the capital budget to support making any investment with more than a 2-year payback period. And regulatory incentive programs often push people into sub-optimal purchasing decisions (investment tax credits and cost-based rebates, for example, reduce the delta between an older more expensive solar panel and cheaper, newer options). And project or equipment financing lenders often require going with very proven technologies, not new entrants.
In other words, just having a superior innovation doesn't guarantee market success in cleantech markets. And in fact, the more disruptive the innovation, the more the market will be reticent to adopt it quickly.
3. Incumbent commodity prices are low... and can go lower if necessary.
Even when -- as appears to be happening now -- new solar technologies become cost-competitive, all things being equal, with current grid provided electricity prices, coal-fired power generation remains much more heavily subsidized in aggregate than any subsidies the adopters of solar are getting. Ditto in vehicle fuels. Not only does this mean that nascent clean technologies would have to be INCREDIBLY low-cost in order to provide compelling differentiation versus the status quo... it also means that those incumbent fuels have a lot of margin they could sacrifice to compete at even lower prices versus any new offering.
I see startups all the time in the fuels space who make the argument that "we're cost-competitive with oil at $x per barrel market price, and everyone expects oil prices to remain up at $y per barrel for some time to come." Which is fair enough. But to truly make an impact on climate change will require such alternative fuels to achieve a strong enough market penetration rate that they start affecting market pricing, they're not just price-takers anymore. And as the chart in this column shows, major oil production areas have a lot of room between current market prices and current production costs. Not to say we won't see costs increase as the lower-cost resources get tapped out. But alleviating supply challenges by introducing significant new supplies of alternatives would also likely somewhat mitigate those effects. In the long run, fossil fuel prices must rise, unless demand for them goes down significantly. But of course, "in the long run we are all dead."
An appropriate price for carbon, of course, would address this point well. But the other two points would still stand.
So what exactly is being talked about when a luminary like a Vinod or a Bill Gates declares that what's needed first and foremost is truly disruptive additional innovation, as a higher priority than putting significant resources into other activities? I suppose the hope is that we can uncover something so TRULY disruptive that it sells itself. That, even in the face of all of the above obstacles, the customer value proposition is so stupendously compelling that everything kind of sorts itself out. That would be wonderful.
But it ain't gonna happen anytime soon. I would be quite pleased to be wrong about this, but from what I've seen the cleantech R&D deus ex machina is largely a myth.
If I've learned anything from investing in this sector for the past six years, and having worked with large companies on these issues well before that, it's that even "no-brainer" innovations and customer value propositions are still hard sells into these markets. The obstacles I describe above create so much market inertia that I've seen it feel like pulling teeth to get some customers to agree to buy things that provide 1 year paybacks and less. And the ever-increasing number of technology options, thanks in part to so much increased R&D in the sector over the past decade, only further slows down market adoption as customers have even more trouble figuring out their choices, and become even more wary of purchasing a 20-year product only to discover it's obsolete in a year.
So let's go back to that solar market. What has that taught us? That if you provide the money to drive implementation, people will indeed implement.
There are deep, deep needs for capital elsewhere in cleantech than just in the R&D lab. So-called "first projects", the first production facilities for a new product, are infamously difficult to finance. Elsewhere, customers may balk at a 3-year payback period but would gladly take on the cost-saving product if it was offered as a lease (thus saving money from day one), but that requires the vendor to provide the financing. Services -- the businesses that would actually be doing the installation of the hoped-for disruptive innovations -- remain very difficult to raise capital for.
And because of these gaps... because of the challenges in the marketplace... no matter how compelling an innovation you can create, it will have very little real-world impact without additional impetus on the implementation side of things.
It can be government-provided demand creation via subsidies for installations. It can be additional project financing for clean energy and energy efficiency, in a format that perhaps we haven't seen yet. Or it can even be venture capital financing into the innovating companies at very expensive prices, with such corporate equity being then directed into implementation activities (cleantech VCs tried that; it hasn't worked out so well so far).
I understand the PR and political calculus: Saying governments need to spend a hundred billion dollars per year on anything, no matter how important, is politically unpalatable right now. So there's a need to provide an alternative. And if that alternative ends up being more directly supportive of the advocate's day job, well, so much the better.
But sooner or later it comes down to this: Especially in the absence of an appropriate pricing for carbon, in order for cleantech to make a significant impact on climate change, we will need to see significantly more dollars being put into implementation than into R&D (and in fact, we already are). At very least it would be good to put significant implementation dollars into the existing technology innovations we already have that would make compelling economic sense at scale. "Brute force" or not, implementation is just as critical as innovation, and takes significantly more capital to do. It just doesn't fit very well with venture capital as currently structured. Which, perhaps, is why some VCs in the sector make a point of putting R&D on a pedestal. Tech development is what VCs do. Implementation, generally speaking, isn't.
It's worth re-emphasizing that I'm definitely in favor of more resources devoted to innovation, and that I'm constantly energized by the entrepreneurs and inventors I meet who are striving hard to make "crazy dreams" become a reality. The above thoughts are intended to drive pragmatic attempts at disruption, not an abandonment of big thinking. The need for big, massive change is why I chose this area we now call "cleantech" as my career way back when. I'm excited whenever I see thought leaders like Bill Gates and Vinod and others turn their attentions to these really big problems and conclude that something really big can be done. But it has to be done right, or it won't be done at all. I just think it's a mistake to take a faith in the power of innovation so far as to imply that implementation will take care of itself. I suspect there are very few people making such statements who would truly profess, if pressed, that energy and water are markets where "Build It And They Will Come" holds true.
But hey, comments and flames welcomed at @cleantechvc! After all, Twitter is proof that SOME big market shifts really can happen pretty quickly...