Myths and realities of clean technologies
Don’t
be fooled by high-profile setbacks. The cleantech sector is gaining steam—with
less and less regulatory assistance.
The world is on the cusp of a resource revolution. As our colleagues Stefan Heck and
Matt Rogers argue,1 advances in information technology,
nanotechnology, materials science, and biology will radically increase the
productivity of resources. The result will be a new industrial revolution that
will enable strong economic growth, at a much lower environmental cost than in
the past, thanks to the broad deployment of better, cleaner technologies and
the development of more appropriate business models. But how do we reconcile
this bold and heartening prediction with recent challenges experienced by
cleantech, the general term for products and processes that improve
environmental performance in the construction, transport, energy, water, and
waste industries? Over the past couple of years, many cleantech equity indexes
have performed poorly; in January 2014, the American news program 60 Minutes
ran a highly critical segment on the subject. The former chief investment
officer of California’s largest public pension fund complained in 2013 that its
cleantech investments had not experienced the J-curve: losses followed by steep
gains. It’s been “an L-curve, for ‘lose,’” he said.
So, is cleantech failing? In a word,
no. Rather, the sector has experienced a cycle of excitement followed by high
(and often inflated) expectations, disillusionment, consolidation, and then
stability as survivors pick up the pieces. We’ve seen this before with other
once-emerging technologies, such as cars, railroads, elevators, oil, and the
Internet. Much of cleantech is just leaving its disillusionment or
consolidation phase. For example, in transport, Tesla Motors is looking good;
Fisker Automotive went into bankruptcy in 2013. In energy, SunPower is making
healthy margins and SolarCity raised $450 million in 2013, but over a hundred
other solar companies are gone. The shakeout is brutal—and typical. It has
weeded out weaker players, making the industry as a whole more robust. Despite
the rough patch, annual growth is at double-digit rates.
It’s also important to look beyond
financial statements. Global wind installations, for example, have soared about
25 percent a year since 2006 (exhibit). And global commercial investments in
clean energy have more than quadrupled, from nearly $30 billion in 2005 to
about $160 billion in 2012. Even countries with vast reserves of oil and
coal—in the Middle East and Central Asia—recognize that they can’t miss out and
are developing substantial programs for renewables. Meanwhile, the average real
cost per oil well has doubled, and new mining discoveries have been flat,
despite high investment. And, clearly, new ways are needed to meet the needs of
the 1.3 billion people who lack electricity and of the 2.7 billion who rely on
traditional biomass, such as wood and dung, for cooking.
Cleantech
is no passing, unprofitable fad. The sources of underlying demand—a growing
middle class around the world and resource constraints2
—aren’t going away, and cleantech is pivotal in dealing with both. There are
three major myths that undermine confidence in cleantech’s future.
Myth
1: Deployment and influence will be marginal
Not so, and we know this because we
see what is actually happening. According to the International Energy Agency
(IEA), renewables already accounted for 18 percent of global consumption in
2010, and are growing faster than any other form of energy. Given the radically
lower marginal costs of renewables, their position is even more promising over
the long term. In fact, the IEA predicts they will account for more than 60
percent of new power-plant investment by 2035.
The effects of clean technologies
will vary significantly by industry and geography. In some cases, they may
truly transform markets, as light-emitting diode (LED) technology is now doing
in lighting. In cases where penetration rates are lower, they can still have a
dramatic impact on industry structures and market dynamics. Among US electric
utilities, for example, the traditional business model relies on putting
capital in the ground. But the potential of distributed solar generation to
meet the majority of new demand growth can upend that model entirely. As more
people install solar panels on their roofs and add new capacity, demand will
increase more slowly for utilities. Some utilities are responding to this by
trying to get regulators to allow them to include investments in energy
efficiency or renewables in their rate base. In addition, shale gas, which
already makes up about 40 percent of gas production in the United States
(largely at the expense of coal-fired generation), has lowered the wholesale
price of power, cutting into revenues and profit margins for deregulated
utilities.
It’s important to remember, too,
that the cleantech space is diverse; it cannot be painted with a broad brush.
We looked at 16 important clean technologies3
and found that while every single one has made progress over the past decade,
some are moving much faster than others. Just over half of them—advanced
building technologies, advanced agriculture, food life-cycle optimization, grid
analytics, grid-scale storage, intelligent transport, next-generation vehicles,
solar PVs (photovoltaics), unconventional natural gas, and water
treatment—could become truly disruptive to the incumbent industries. The others
have enormous potential and could well succeed, but without disrupting the
status quo.
Myth
2: Technologies have underdelivered
Profit margins have certainly been
squeezed in some areas: for instance, Chinese production of solar panels has
pushed many higher-cost producers in the United States and Europe out of
business. In other cases, limited access to capital and decreasing subsidies
have slowed deployment. And many big incumbents have scaled back their
cleantech investments.
Yet cleantech has far exceeded
expectations in many areas; technological innovation and manufacturing
improvements have driven prices down. Costs for onshore wind, solar PV, and
lithium-ion batteries have all fallen faster than many industry watchers
anticipated, for example, and are continuing to drop. The cost of electricity
from onshore wind facilities is half what it was 15 years ago, thanks to
technological innovation and business-model changes. In the lighting market,
LED gained market share as manufacturing costs and prices fell; over the last 5
years, the cost of super-efficient LED lights has fallen by more than 85
percent. And the cost of electrical storage fell by roughly half, from $1,000
per kilowatt hour (kWh) in 2009 to $500 per kWh in 2012. Similar shifts are
taking place in less prominent arenas, such as water reuse, waste separation,
and anaerobic digestion.
Total installed costs that US
residential consumers pay for solar PV have also been falling fast, from nearly
$7 per watt of peak system capacity in 2008 to less than $4 in 2013. We think
that could fall to as little as $1.60 by 2020.4
The bottom line: cleantech is getting more economically competitive.
Myth
3: The sector depends on regulatory support
Four critical elements—cost, access
to capital, the go-to-market approach (broadly defined),5
and regulation—typically must come together to create successful cleantech
businesses.
As the industry matures, the
relative importance of these factors is changing: regulation is becoming
irrelevant in many cases as clean technologies find their competitive footing.
LED lighting is one example: in 2013, LED light sources accounted for the
majority of the sales of several large lighting manufacturers, even in markets
where incandescent bulbs are still widely available. That figure could rise to
more than 80 percent by 2015.
Solar provides evidence both for and
against the need for continued regulation. Given budget concerns, a number of
countries have cancelled or reduced subsidies, and growth has slowed. But the
larger point is that solar is still growing. For example, Germany has cut its
feed-in tariffs to encourage renewables production, and its strategy of Energiewende—a
long-term effort to deploy renewables, move away from fossil fuels, and phase
out nuclear power—has had some troubles. But the use of renewables continues to
grow. Globally, solar installations have risen by 57 percent a year, on
average, since 2006. One lesson is that sudden changes in regulation can create
peaks and valleys in demand, and that isn’t helpful to establish an industry on
a sound footing. But the point is that while regulation can be and has been
helpful to launch clean technologies, it is no longer critical in many sectors.
The reason isn’t only that these
technologies continue to advance, although that is the case. What’s more
interesting is the increased sophistication of business models, financing, and
management practices. There are, for example, significant innovations in how
cleantech companies are getting access to lower-cost sources of capital, such
as cleantech bonds and third-party financing.
And business-model innovations are
all over the cleantech map. Water-treatment companies are creating leasing
options that reduce capital outlays for filtration technology to encourage its
faster deployment. Car-sharing services save millions of tons of carbon in
Europe and the United States by making auto ownership more efficient. There are
initiatives to use waste products from one industry as feedstock for another;
examples range from steam via gypsum to spent grain. So far, every company
involved has reported increased profits and decreased carbon emissions. A whole
new industry has been created around using IT to reduce energy consumption.
Some companies, such as C3 Energy, sell electric utilities software as a
service, which analyzes the data generated across their electrical networks to
help improve grid operations and asset utilization, thereby increasing profits.
Green businesses, in short, are benefiting from better, more creative
management practices.
Partnerships
and progress
The very big guns are taking note.
For example, there are partnerships, like Daimler and Tesla’s, between the
biggest global car giants and small but rapidly growing electric-car companies.
The US Department of Defense is working with renewables producers on off-site
energy production, and the European oil major Total has taken a controlling
investment in SunPower. Such partnerships should help get offerings to market
much faster, while giving the smaller firms access to lower-cost capital.
Advanced building technologies,
having proved their economic worth and utility, are proliferating—and they are
standard for new construction in some markets. So are smart water sensors. The
price and energy requirements of water-treatment technologies have fallen, and
investment is strong. Smart-grid hardware has been deployed widely in the past
decade, and as companies figure out how to use big data and analytic tools, it will
become much more important, as witnessed by Google’s recent acquisition of Nest
Labs for $3.2 billion. For the first time, next-generation vehicles show signs
of becoming this-generation vehicles.
We are witnessing the maturation of
an industry and the adoption of proven management practices. Successful
cleantech companies are making their offerings competitive by focusing on
excellence in operations, marketing, sales, and distribution. The principles
that apply to any manufacturing business, such as reducing procurement costs
and improving productivity through lean manufacturing, are increasingly
important for clean technologies as well. The same can be said for practices
such as customer segmentation, channel access, and pricing. As these businesses
continue to scale up, there will be additional opportunities for improvement.
Trends can accelerate, slow down, or
even reverse. But it’s unlikely that all these technologies will fail, and many
are now at the stage where management practices, and not regulation or
subsidies, are the defining factor for success. Those that do succeed could be
highly disruptive to incumbents, even (or especially) well-entrenched ones. Big
changes in resource use and business models are just around the corner.
To be sure, some cleantech companies
will go bust, and some technologies will not make the cut. But these ups and
downs are simply the nature of business—part of progress. Notwithstanding the
failures of individual companies, cleantech is not going away, either on the ground
or as an investment opportunity. And that’s no myth.
By Sara Hastings-Simon, Dickon
Pinner, and Martin Stuchtey
http://www.mckinsey.com/Insights/Energy_Resources_Materials/Myths_and_realities_of_clean_technologies?cid=resourcerev-eml-alt-mip-mck-oth-1404
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