Forgive a combined post on two different topics today, but between the ARPA-E conference in D.C., the MIT Energy Conference in Boston, and a general flood of activity in the office, it's been a crowded week. Plus, at least in my mind, they're connected.
First, on the ARPA-E conference: one thing that struck me at the conference was how the exhibit hall seemingly was dominated by bugs and carbon-capture techs. Now, I'm glad that ARPA-E funds are going to tackle such difficult technical challenges, and I hope that someday there will be breakthroughs in these areas as a result.
But it did drive home for me just how much I'm bothered by the disconnect between the strong efforts by ARPA-E on the innovation side of things and the much weaker efforts by the DOE in general to create markets for the resulting products -- and for other clean energy products and services as well.
ARPA-E has been, in my opinion, a very well-done effort to focus on using a limited amount of funding for maximum innovation (and, to a lesser extent, commercialization) impact. Anyone who's been part of the ARPA-E selection process knows the program staff have managed to drive an impressive number of projects through a review-driven and analytical-driven process in a short amount of time. It would be impossible for no duds to have gotten through, but I think most people with knowledge of the specific projects and research ARPA-E has backed would agree that on the whole they've done a great job picking projects that could make a difference. And certainly there's a capital gap in the early innovation stage of certain clean energy techs (especially in bugs and clean coal, for example), where if you believe in the promise of the technologies at all, government can and should play a role in fostering early-stage innovation.
But as we've discussed on this site before, the big question for me isn't where will the innovation come from in overall cleantech markets -- it's how those innovations will get into the market and gain wide acceptance. And that's where I see other DOE efforts as having fallen pretty flat.
DOE/EPA Energy Star standards, for example, have been important over the last couple of decades for signaling to utilities and customers which energy-efficient products they should adopt. And it has been good to see the program crack down on offenders who've fraudulently claimed to meet the standards. But on the lighting side of things, the standards have been so delayed that they've forced utilities and others to come up with their own substitute standards, which, of course, has meant serious delays for approving rebates for new products, which has in turn hindered advanced lighting startups' efforts to get market traction.
And the loan guarantee program, while a well-meaning attempt to directly address the commercialization challenge, has fallen very flat -- to the point where it's Exhibit A for the short-sighted partisan politicians in Congress who want to slash government support for energy R&D to the bone. The loan guarantee program staff are doing the best they can, but the process has just been poorly designed, and has been put under too much political pressure. It's been the ultimate example of "the government picking winners," which can work if done at the industry level and done very strategically, but definitely doesn't work at the individual company level. I personally would love to see loan guarantee program funds redirected to more general industry new-tech-adoption efforts, like incentives for customers, and category-based tax credits for project developers. That may not make me many friends in our industry, but it's how I feel.
The biggest challenge preventing adoption of cleantech products and services is, of course, the lack of an appropriate pricing signal, due to the general policy ineptitude in Washington, D.C. But aside from that, the biggest obstacle is, in my opinion, the lack of educated, incentivized and properly structured channels. The IT industry was greatly assisted in its rapid expansion phase by the emergence of "value-added resellers," or VARs. These critical channel partners were (and are) the facilitators who allowed skeptical and overwhelmed customers to figure out which IT products worked, help to manage implementation, etc. Cleantech needs VARs.
Instead, we have 100-year-old channels -- lighting distributors, HVAC service providers, roofers, etc. -- or no channel at all, in many cases. This is why so many residential energy efficiency product developers have attempted (and largely failed) to roll out their products through either the utilities or big-box retail stores, neither of which are effective or timely.
This is exactly where the DOE could be helpful, and in inexpensive ways. They could help end customers simply find whatever VAR analog does exist, for example, and create a vetted directory of such channel partners. Well, my team has done a pretty exhaustive search for such service providers, and no such list exists, at least not in any useful form. There is one EPA Energy Star Partner list, but it is completely unvetted, and the low quality control over who gets included and what they claim to do makes it effectively useless, not to mention that several such VAR-like service providers I happen to know of aren't even on that list. It wouldn't be expensive to set up something like that at the DOE. It wouldn't have to be done in a very bureaucratic way; it could be done in a wiki-type fashion with some limited oversight for quality control. (In fact, consider this an open call to anyone out there who can figure out a great way to make it happen independently.)
The DOE could also help educate the channel, aggregating knowledge of all of the fast-emerging products in these markets, and regularly informing existing channels about what's being offered, what's been installed and where. Again, it wouldn't have to be comprehensive or bureaucratically programmed to be quite valuable. And don't tell me it would be hard for the DOE to know about everything going on -- if they were to establish an effective program for identifying new products and sharing that knowledge with downstream channels and customers, then product developers would rush to make sure the DOE knew about their new offerings. The challenge comes not in aggregating the product info but in vetting it, weeding out the fanciful and the fraudulent. But a little bit of dedicated resources put to work in organizing and screening the inbound info would go a long way, and something would certainly be better than nothing. Occasionally, a useful report is put out on a particular tech topic by a DOE-run lab, and that's a great start. We just need more such efforts, more often updated.
Most valuable would be for the DOE to dive into exactly why channel partners in these sectors are not incentivized or structured to be effective VARs. It would also be helpful to fund some basic academic research, and perhaps to fund some pilot programs to test new models. It's not difficult to invent new service models and other market structures. It doesn't require laws to dictate market structures. How commercial property landlords in California pass through their tenants' energy bills, for example, is very different from how it's done in Dallas, and both are different from how it's done in Houston. And that's all just because the market standards in each place have evolved that way. But those differences are huge in terms of how the property owners are incented to adopt new energy-efficient technologies, and thus in terms of how service providers can be effective at pushing new tech. There are also existing efforts out there among major property developers, etc., to identify and test new technologies. The DOE could easily help facilitate, provide information to, and highlight the information gleaned from such efforts.
All of the above, in aggregate, could be tackled at significantly less than the cost of a single DOE Loan Guarantee award.
These kinds of efforts could help launch a wave of VARs and customer adoption in cleantech markets, thus accelerating the commercialization and adoption of some of the technologies being developed through ARPA-E and elsewhere.
Not coincidentally, rumors that I'm hearing suggest that the White House is increasingly frustrated with the slow pace of market implementation of energy tech -- and that there's pressure to think about a new Secretary of Energy to replace Secretary Chu, whose background lends itself much more to the innovation side of things than the commercialization side of things. In fact, I'm hearing rumors that Arnold Schwarzenegger is being groomed to be the next Secretary of Energy. Certainly he gave a great speech at the ARPA-E conference, by all accounts, and also participated in some other meetings alongside Chu. I can't tell you whether these rumors are true... but that would be interesting.
I wanted to mention it because it's a prime example (at least to this biased writer!) of one principle I was writing about recently, namely, that competitive advantage is not just about proprietary technology.
I've known about Powerit for a while and have been fascinated to watch as they've established a pretty unique position in the industrial side of demand response. There are multiple vendors out there who have developed technologies to automatically adjust HVAC and lighting systems in commercial and residential buildings to participate in demand response and other load-shifting programs. Controlling an office building's HVAC system for load control purposes isn't hard technically, and while the market is somewhat skeptical, they're not petrified of what happens if the tech fails; people are uncomfortable and complain, the system is disengaged, and life goes on. In the industrial market, however, it's much more difficult to get customer buy-in. If you're controlling the major electricity loads in a factory or plant, you're potentially disrupting production.
What I've always liked about Powerit is that they've already established a strong level of credibility in the marketplace with hundreds of installations -- and that's very difficult for any new startup to establish. I don't care how whiz-bang and proprietary a new industrial controls technology is that might be introduced to the market -- if you're going to go sell to managers of foundries or food processing plants, they're not going to adopt that new technology unless it's been tried a lot of times in someone else's plants. Of course, if there were effective VARs that the customers could trust to stand behind the new innovations, and they were themselves confident enough to rapidly vet and adopt new innovations, it might be easier for a new entrant into that market. But lacking that, customers have to be skeptical about any technology that doesn't already have a long track record, which can be a big challenge for any new startup in that sector. Besides the fact that it's also just generally harder to build a smart tech for that segment, this probably explains why Powerit remains so uniquely positioned in the one-third of the electricity consumption pie that is the industrial sector. A single Powerit-enabled industrial plant can free up demand capacity worth 10 times the capacity of a commercial office building -- at lower cost, too.
There are a lot of other things I like about Powerit, obviously (bringing on board a proven CEO, Matt Shiltz, to help take the company to the next level; plus, there is more news to come out soon that will illustrate how valuable the system's flexibility is, so stay tuned), and that get me excited about their potential to grow quickly. But my point isn't just to self-interestedly talk them up (sorry!), but really to point to them as a concrete example of a principle I'd recently written up.
Powerit is a great demonstration of the fact that it's very often more important to think about sustainable competitive advantage in cleantech in ways other than proprietary technology. Social media venture investors, of course, already know this principle well, but many cleantech venture investors are just waking up to it. We need to learn to treat skeptical, conservative markets and channels as not a regrettable obstacle, but as a potential opportunity to build an advantage.
In other words, to take advantage of that very market gap that, on the whole, I wish the DOE would do a better job of addressing.