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Lessons From the Past Ten Years: Localization

Rob Day: November 27, 2012, 8:41 PM

"Cleantech" being a catch-all term that covers a wide range of mostly disconnected industries and markets and technologies, it's always interesting to note commonalities across subsectors where you can find them.

One such macrotrend which I believe will end up driving a lot of cleantech innovation is the emergence of distributed alternatives to previously centralized processes. 

There are two factors underlying this trend.

First of all, long-range transportation costs appear likely to be higher going forward, simply because they are so dependent upon oil prices. This is not a given. But there are reasons to believe oil prices are likely to rise over the medium to long run, including supply-demand dynamics ("peak oil" and all that), the possibility of climate-related externalities being priced in, or further geopolitical conflicts leading to greater volatility if not outright price increases. There are other reasons to believe oil prices might not rise or may even fall, such as new extraction techniques (fracking, EOR, more efficient tar sands production, etc), or even the emergence of alternative fuels and drivetrains (although this appears more likely to make an impact on short-haul routes in any near-term). But the current outlook appears to signal more risk of price increases than price decreases going forward.

Oil prices appear to be headed upward, and they will likely dictate long-range transportation costs for the foreseeable future. Some industries such as chemicals already see regionalized production trending upward because of transportation costs, for example. 

Secondly, we're getting better at making, distributing and controlling things cheaply in smaller batches.

Economies of scale have traditionally dominated many industries such as manufacturing, chemicals, energy production and distribution. But advanced technologies are disrupting this dynamic. IT innovations make it easier to track small batches of inventory, identify and sell to buyers with smaller appetites, and to better remotely automate and monitor processes. Innovations in flexible robotics and manufacturing (3D printing, etc) make it less costly to make things in small batches. And modularization trends across industries as diverse as power generation, biofuels manufacturing, and housing construction mean that "building blocks" are more readily available to be built into whatever size production facility or end product is desired for any particular circumstance.

What these two trends mean in combination is that we're seeing a shift toward more localized production and distribution of physical products, much of which is directly related to cleantech.

This is, of course, most discussed and visible in electricity. Distributed generation, storage and customer-side load control are challenging the traditional utility model with its natural monopoly based upon the distribution and management of centralized power production, as many have noted.

But we're seeing very similar, albeit perhaps more early-stage, trends toward localized production in biofuels, in food, in wastewater treatment, and even in hardware manufacturing and metals production (via e-waste recycling). For higher-end products, not only transportation cost in dollars but also the time delays are often driving a desire for more localized production -- tomorrow's cleantech hardware may more often be assembled in the U.S. than in southeastern China, for example.

This macrotrend toward smaller-scale, localized production might appear to fly in the face of much of what we've called "cleantech" over the past decade, such as the quest for ever larger "commercial-scale" production of biofuels, of solar panel manufacturing plants, of desalination plants. But even in these areas, modularization techniques are more common now than they used to be. In large part this has been driven out of necessity -- less-available capital for large amounts of steel in the ground leads entrepreneurs and their backers to seek approaches that require less money spent to get to "Dollar One" of revenue. But it's also been driven by new capabilities. And thus not only startups are getting into the trend; I think we'll see more big companies start to embrace the localization vision as well.

But when they do, it may require them to buy the technologies necessary for them to shift in this direction, rather than be able to build them from scratch internally. And because of this, and the deeply entrenched centralized production/distribution networks many are dependent upon, this localization trend remains a highly entrepreneurial one. And that makes it pretty interesting for investors like me.

The Role of the DOE in Obama’s Second Term

Rob Day: November 8, 2012, 10:30 AM

Have been on a run of policy-related columns lately, and am eager to get back to talking about cleantech entrepreneurs and investors.

But I have had a few people request some thoughts on the role of the DOE in Obama's second term, so figured I would tackle that first.

In short, my overall perspective is that the DOE under Secretary Chu has launched some important things, but now needs to transition from a focus on technological innovation (without losing the progress made there) to a focus on commercialization and consensus-building.

First, let's recap what the DOE actually does, because many people don't really know. The DOE is a massive organization, with something like 16,000 employees. It's not just an energy technology organization, not at all. The $27B annual budget is divided up into:

  • $10.5B allocated for nuclear security (i.e., managing the handling and disposal of nuclear material) 
  • $10.6B for "Energy and Environment" (much of this is actually allocated to improvements of incumbent technologies)
  • $4.9B for "Science" (early-stage research)
  • And a billion dollars' worth of management and "Other"


As you can tell, the DOE is not what many cleantech entrepreneurs and analysts might expect. It's not just ARPA-E and a national lab system. It's not some kind of "Cleantech Administration." It oversees FERC, several major public electricity organizations (such as the Bonneville Power Administration), traditional energy technologies, etc.

Under Secretary Chu, however, innovation and commercialization of new (and generally, cleaner) energy technologies have been the focus of a lot of attention and effort, as guided mostly by the Energy Policy Act of 2005 and the ARRA of 2009. In my opinion, the wave of management talent that Secretary Chu was able to attract to the DOE starting in 2009 has resulted in several huge wins for the cleantech sector, including some really important work done at the ARPA-E program and the EERE. The National Lab system's operations have been improved, including broadening their scope to better incorporate "innovation hubs" outside of the national labs themselves.

These are significant improvements, and they must not be lost. There's some discussion these days that Secretary Chu may be looking to transition out of the role, and the danger of course is that when a leader comes through and makes changes like this, once that leader leaves the organization reverts back to how things used to be. That's particularly likely in this case, because the DOE is remarkably divided between career DOE workers and the politically-appointed top management that comes and goes with administrations, etc. Front-line DOE workers are quite used to Secretaries of Energy coming and going, and just doing their own thing. Just read Mike Grunwald's book The New New Deal for some great anecdotes about this.

Nevertheless, while I hope the DOE in Obama's second term (and potentially under a new Secretary) doesn't abandon the progress made on the technological innovation side, I think commercialization efforts need a major upgrade. There's been progress made on this score, but it hasn't yet gotten to where it needs to be.

As I've written about before, "demand creation" for energy efficiency and renewable energy technologies has fallen into two major unofficial buckets (very often conflated) at the DOE over the past couple of years.

Demand creation for well-established technologies and services, such as residential energy efficiency improvements and large wind farms, etc., has been done pretty well. The wave of home efficiency improvements has made a big impact, as driven by community block grants, and the much-maligned Loan Guarantee Program has actually done a good job of bringing project finance to large-scale powergen projects that otherwise may not have happened.

But commercialization (I use the term loosely, to also include demand creation and also manufacturing capacity) of emerging technologies hasn't worked out so well, despite a lot of well-meaning efforts to date. The LGP's failures in this part of its program are well recognized, to say the least. But looking across the lab system and other aspects of the "innovation system" Secretary Chu helped put in place, there are other major commercialization gaps that haven't been addressed.

The challenge, of course, is how now to tackle this without much of a budget. I've laid out several ideas before; you can read them here. It includes things like wiki-based buyers' guides, incorporating incentives for new tech adoption into community block grant programs, and setting really aggressive performance bars on green buildings standards, etc. From what I've been told by those in the know, the special challenges of encouraging widespread adoption of emerging technologies in the energy market appears to have flat-footed Secretary Chu and his top team, and that really needs to be given special focus in Obama's second term. What's the use of having a re-energized innovation pipeline if the innovations aren't actually adopted. So figuring out how to do this, in an era when the DOE can't expect big budget increases or new subsidies to be passed by Congress anytime soon, is now a key challenge for the DOE.

I would love to see a special assistant brought in to really spearhead this as a special project, drawing lessons learned from other industries and other sources of innovation (corporate R&D, academic research, etc). It's fine for investors like me to personally spitball some ideas for the DOE commercialization managers who've reached out to us, but this really needs to be done thoroughly and thoughtfully, and with an urgency as highlighted by bringing in a pretty senior person to help drive a process, akin to how Matt Rogers was brought in to coordinate the ARRA effort at the DOE.

The other major priority of the DOE in Obama's second term needs to be consensus-building. The DOE has a key role to play in helping to get rational energy policy passed in the U.S., but frankly has fallen way short of what has been needed. I'm not proposing the DOE develop and lobby for specific energy policies or whatnot. But as I've talked about a few times recently, there's a void right now of rational, inclusive discourse on energy policy. The DOE has a powerful potential role as a convener of the private sector and of other major constituencies, for a couple of purposes that would greatly help the situation.

The first task is simply to help kill the continuing canard that energy improvements are a burden to shareholders and homeowners, rather than the energy cost savings they should represent. This is particularly true for energy-efficiency technologies, of course. There's a massive body of evidence to show that with energy efficiency, there are indeed twenty-dollar bills lying on the sidewalk to be picked up. The DOE could convene a meeting of major-company CFOs, to have them hear from their more successful peers out there that they are failing their shareholders by not making efficiency-driven cost savings a priority. The DOE already puts out case studies and white papers, but someone needs to grab these CFOs by their lapels and force them to recognize that they are pissing away shareholder money on stupid wasted energy that could be addressed with some high-IRR capital allocations, if they just prioritized it. And just as importantly, someone needs to arm those CFOs with concrete examples as to how to go about doing that as effectively and efficiently as possible, and to then send them away with lots of resources (again: a buyer's guide!) to pass along to whatever lieutenant they will then task with executing on the opportunity. It needs to be a peer-driven exercise ultimately, but the DOE needs to convene it.

The next task is to drive resources to help the incumbents better prepare for the looming energy transition. Some of this is in place. But the DOE must become a powerful advocate for the energy incumbents and utilities, to help make sure they are given good support now and in the energy future. Nothing I'm writing here should be construed as me arguing that the DOE should focus solely on emerging technologies. It's obviously my own focus, but on topics such as coal-fired generation switchover to natgas, responsible fracking practices, grid stabilization, etc., the DOE should emphasize being an advocate for facts and science, and an advocate of congressional support for those industries on their paths forward. I do believe the DOE should continue to help push a transition to a low-carbon, domestically-produced energy industry, but everyone has an important role to play in that future industry, and the cleaner shouldn't be made out to be the enemy of the cleanest, and vice versa.

After helping to address the concerns that energy innovation means higher energy costs through this and other high-level conversations, the DOE can also then help bring together major stakeholders from across the energy industry. Remember, as noted, the DOE is there to help all players in the energy value chain. It should be possible, then, to help set up the kinds of conversations involving incumbent energy producers, utilities, entrepreneurs, innovators, consumers, military leadership, etc., to start to hash out common ground and common goals. 

But so what? This is where the DOE must become a loud advocate for those common goals and simply getting stuff done. The Secretary of Energy should be placing a lot of political pressure on Congress to pass comprehensive energy reform. Armed with even a very broad set of shared energy policy goals, the Secretary of Energy should be advocating progress on behalf of the private sector, the military, the consumer. This requires a very strong public advocate, an effective organizer of fragmented constituencies, and a very strong behind-the-scenes political player. We need the Secretary of Energy to step up to being the nation's most visible and effective champion for energy policy reform. That, it must be admitted, hasn't been the case in Obama's first term.

Besides all of the above, I also believe the DOE really needs to address some of its deeply rooted bureaucratic challenges. Over the decades, it has become a very entrenched and stagnant organization that is by far most powerful in its ability to resist change. That can't continue. I would love to see someone take on a major organizational efficiency project and really fight to drive a new "corporate culture" within the Department. There are probably a lot of resources that could be redeployed toward the above objectives with no additional cost to taxpayers, in fact likely with additional resultant savings. So the Secretary of Energy also must become a powerful organizational change agent, drawing lessons from knowledge of bureaucratic infighting to know how to crush it and really fix things. This will be very difficult, but it's long overdue.

So in Obama's second term, we need to see a DOE that doesn't lose ground on technological innovation, but that does focus a lot more effort on commercializing those innovations. And the DOE will need to be a stronger convener of the entire energy industry around a few commonly held goals, and then champion the resultant priorities with Congress and with the public as a whole. And the DOE will need to fix its organizational culture and tackle a much-needed bureaucratic refurbishment. 

Not much, just a few small things.

Don’t Fail This Time

Rob Day: November 1, 2012, 9:54 AM

We all watched with horror this week as Sandy carved a path of destruction through some of the most populous areas of our country. Please, stop reading this, go find a way to help, and then when you can, come back to the rest of this. Let's focus on helping those in need as a clear first priority.

It's been fascinating to me to watch how quickly the media and some politicians have pivoted this week, post-Sandy, to talking seriously about the dangers of climate change. Whereas just last week I felt the conversation was so pushed to the sidelines that even just forcing a sober discussion would be a step forward.

Let's acknowledge one basic fact: If we ever get to the point where energy and climate security is consistently a high priority for most Americans on every single day, we're already in a terrible place. Day to day, most Americans will care about stuff that has a more immediate impact on their lives. Sadly, we're increasingly getting to that bad place -- as Gov. Cuomo said this week, "We have a 100-year flood every two years now," and the extreme weather the U.S. felt this year is probably now more the norm than the exception.

But if we're going to work to mitigate that outcome, we need to grab the infrequent opportunities to push for change when Americans, their politicians, and journalists are focused on the issue.

So what does that mean? What do we do now (other than helping those in immediate need, of course)?

I think my proposal from last week, for a bipartisan presidentially nominated commission to develop and propose a coherent energy policy, is even more important today. At times like this, it's easy to forget that within a month or less, the conversation will have moved on to something else. And no coherent energy policy will magically transport itself through Congress within a month, nor will politicians remember this so vividly next year when any such policy discussion might come up. Energy policy is increasingly (and uselessly and needlessly) a partisan issue. We must wrest that back to the realm of collaborative thinking and compromise, and codifying that spirit in such a "Simpson-Bowles" effort can help, especially if it is mandated by the President, whoever that is. We need to set the process in motion to develop a consensus energy policy, even if it won't pass in the 113th Congress, because unless we have something like that ready to go, the next big "teaching moment" will be wasted like so many in the past have been. That's, at the very least, what we need to do this time.

What we can't do is to let the opportunity fragment into the usual million pieces of individual and NGO-specific policy advocacy. I continue to talk with many people who care deeply about this issue, and yet who each have their own strongly held perspective about the policy ideas that they feel can be passed, and then who set upon each other with rhetorical knives fighting over which specific policies make the most sense. That's dumb. If we can't collaborate and compromise amongst ourselves, how can we expect collaboration and compromise across a wider political spectrum? We need to find a vehicle to come up with a plausible, coherent, and centrist set of policy proposals that we can all agree upon supporting, even if we all don't 100% agree with all of it. Stop with the constant "what if we relabeled it as the following" policy proposals. Start being a constituency, not just a smart individual or attention-seeking NGO.

What we can't do is to let this just be a cleantech industry issue. The cleantech industry is a terrible spokesperson for addressing climate change. When we as a fledgling industry narrowly focus the argument on ourselves, we look selfish and therefore are ineffective.

But climate change is not a cleantech issue. It's not a green issue. It's a security issue, an economic issue, a food issue, an energy issue, a military issue, a safety issue for all Americans. The fight to mitigate climate change needs to be led by large insurance companies, by major manufacturers, by farmers, by soldiers, by homeowners, NOT by a handful of cleantech entrepreneurs and their increasingly scarce financial backers. Not that we don't have our own role to play. But we need to stop making it all about ourselves.

For example, anytime I see a policy proposal from the cleantech community to address the externalities of climate change (via carbon tax or cap and trade, etc), it's coupled to a proposal to recycle the resultant government revenues into subsidies for cleantech deployment, or cleantech R&D. Yes, we need all of this -- to price carbon, to support early deployment, and to support R&D. But when we bundle them all together, we appear to be looking to make others pay taxes just for our own benefit. It's easily cast that way, at least. Let's be smarter about keeping those conversations and proposals separate. And let's be smarter about making sure we're clearly looking for benefits for other important constituencies (i.e., manufacturers, etc.), not just ourselves.

What we can't do is to just throw up our hands and blame a partisan Congress and be fatalistic. If you've given up on even the slightest chance of bipartisanship in the face of a crisis, you've given up on America. Certainly President Obama and Governor Christie get this. But so far this morning I've already been pinged several times by people in our industry who just seem ready to declare nothing will be done and it's all the Republicans' fault. That's just useless thinking. Stop it. First of all, there's been arguably more environmental policy progress done in this country over the past half-century under Republican presidents and congresses than under Democrats. This isn't historically a red-versus-blue issue, even if it has been recently, and many of even today's politicians remember that. Secondly, if you're just going to throw up your hands and say nothing can be done, then kindly be quiet and move out of the way; others are willing to keep fighting.

What we can't do is let the perfect be the enemy of the good. Already I'm seeing fired-up climate advocates venting in tones that suggest any kind of compromise and any kind of sequential movement toward policy progress is useless. As one person tweeted me this morning: "commissions are sideshows w no teeth NOT PATH TO LONG TERM EFFECTIVE POLICIES" [sic].

The more I hear the above kinds of things from people in our industry, and the more I then speak with people outside of our industry and hear their perspectives on this issue, the more I'm convinced that the real problem is a lack of a coherent consensus policy agenda, and a lack of determination. Americans agree that climate change is real and should be addressed. But the eventual policy proposal that breaks through won't come from just one industry, or from just one smart individual, or from just one party. We need to set the table for a grand compromise that helps us move forward. We need to acknowledge that a consensus-building exercise is a necessary first step.

We need to break this stupid cycle of getting angry and impatient every time a disaster like this happens, not putting in place the mechanisms for a long-term consensus to be reached, and then throwing up our hands and giving up, blaming others for it.

Because every time we end up missing the opportunity. No one wanted to work on the "sideshow w no teeth," and then when the teaching moment happened and there was an opportunity for real change, there was no go-to solution ready to be voted on by a temporarily cowed set of partisans in Congress.

You want to vent? Fine, we're all angry and frustrated at our impotence to provide more help for the victims of Sandy, and to prevent future Sandy-type events from happening; vent away. You want to push more aggressively than simply setting up a longer-term conversation with a presidential mandate? Fine, do that too, I'll be there alongside you. But let's at least lay the "boring" groundwork this time. The stakes are too high. The danger is too real. The waste of life and livelihood and economic damages are too much. Tell the President-elect, whichever one it is, that at VERY LEAST we need to start having a coherent conversation with the right people in the room.

Because without even that? You're just shouting into the wind.


Again: Please help those affected by Sandy. Give generously to your neighbors; next time it could well be you.