by David L. Levy

Despite the mounting evidence of severe climate change, there is a funding crisis for potential solutions. The Department of Energy released data at the beginning of November showing that global emissions of CO² rose 6% in 2010, despite the ongoing economic recession. This trajectory is higher than the worst case projections from the Intergovernmental Panel on Climate Change (IPCC) in it’s 2007 Fourth Assessement Report. The impacts are already being felt. A new IPCC report concludes that climate change is causing more extreme weather, especially heat waves, heavy precipitation, and coastal flooding (though the super-cautious IPCC hedged on hurricanes).

Yet November also witnessed setbacks for two key clean energy technologies. Beacon Power, a Boston-area developer of flywheel energy storage and power management systems for the grid, filed for bankruptcy the same week that the DoE released the grim emissions data. Just a few days later, the FutureGen 2.0 project, the leading US effort to develop commercial scale Carbon Capture and Storage (CCS) technology, suffered a major setback when the Midwestern power company Ameren announced that it could not provide an old power plant for the project due to financial difficulties. (Update: While Ameren will no longer be financially involved in the project, they are currently negotiating how the power plant may still be utilized for the project).

One important lesson is that public policy must be based on a clear understanding of the challenges facing the clean energy sector and the impact of regulation and programs on investment decisions and corporate business models. In the absence of a global framework for regulating emissions, the future of the planet largely rests on choices by private firms and investors regarding which technologies to pursue and commercialize. The clean energy sector, however, faces a host of risks that make investors wary. The risk is not that climate change is going away as a long-term driver; the problem is that there are large market uncertainties regarding the future of regulation and subsidies, which technologies will emerge as large-scale, low-cost, low-carbon alternatives, how consumers will respond, and how competitors will react.

Despite the woeful underfunding of clean energy research in the US, there is still a plethora of exciting technologies being developed in the laboratories of universities, government centers, and the private sector. For more mature technologies, large subsidies are flowing to commercial installations of solar and wind, perhaps too large, according to a critical New York Times article last week. While these subsidies are reducing costs by accelerating the technologies down the learning and scale curves, they tend to reinforce the dominance of early, low-cost “winners” in the marketplace, and provide little help for less mature but promising emerging technologies, such as Solyndra’s CIGS thin film glass tubes. As a result, these subsidies also tend to suck in a lot of low-cost Chinese imports rather than stimulate US production or research.

A structural problem, as Daniel Goldman wrote in an earlier Climate Inc. post, is the proverbial “valley of death” between lab research and commercial production, where “neither government, venture capital firms nor capital markets have tended to bear the risks associated with providing equity capital, which can amount to hundreds of millions of dollars, for initial deployment of capital intensive new clean energy technologies at commercial scale – described here as “first project commercialization.”  The US venture capital model evolved primarily to support the emergence of the software industry, which has relatively low capital intensity, but there is not currently an adequate private (or public) sector solution for clean energy. It’s far too early to know whether, for example, flywheel technology is better than batteries or compressed gas for power storage – and maybe there is a role for each of them, to meet different needs in different locations. But a market-based system that relies on private sector funding is failing us if it cuts off development of promising technologies before they even reach commercial scale testing.

Beacon Power has not yet closed its doors, and is trying to continue operating under bankruptcy. Since the summer, it has been testing a 20-megawatt flywheel plant in Stephentown, N.Y., which can absorb and supply power from the grid very rapidly, and is therefore valuable in frequency regulation. Another installation is planned for Pennsylvania. The more intermittent wind and solar that is connected to the grid, the greater the need for short-term storage solutions. Flywheels are able to deal with rapid fluctuations and match supply and demand more effectively and reliably than batteries, such as those from A123, or gas-fired plants (while reducing emissions from rapid cycling of gas plants). A few of the the 200 flywheels in Stephentown have experienced problems, but the system has performed well overall.

Until recently, Beacon Power has not been able to monetize the full advantages of flywheel storage. It was only on October 20^th that the Federal Regulatory Energy Commission (FERC) approved a change in regulations that makes grid operators pay, not just for the amount of power in reserve, but also for its effectiveness in grid stabilization. According to Bloomberg, this could double Beacon Power’s revenue and make it easier to find financing. But the ruling, which has been in the works since February, was too late to keep Beacon solvent. If we are to rely on price and market mechanisms, we need to build them to serve the planet.

The lack of a clear regulatory framework has also hurt offshore wind power in the US. Even now that the 450 MW Cape Wind project is most likely moving ahead, the damage from more than a decade of delays and uncertainty, resulting in millions of dollars in costs and legal fees, have probably dampened investors’ enthusiasm. The latest delay stems from a court ruling that the FAA needs to take another look at aviation hazards. With further financing still required for the $2.6 billion project and the company still negotiating to sell half the power output, the future is not yet secure. Meanwhile, the European Wind Energy Association expects annual investments in the European offshore wind industry to triple to reach 10 billion Euros by 2020.

Given the urgency of the situation, public policy needs to shape the market context in order to steer private investment decisions. We are not heading in the right direction, however. In the short term, the ongoing recession appears to be diverting attention from the climate issue and draining government, business, and consumers of resources. A new Ernst and Young report estimates that the recession could lead governments to cut spending on climate change by tens of billions of dollars. It’s more important than ever to focus government resources, and commercialization of carbon-reducing technologies is a critical area. But in addition to financial support, the problems facing Beacon Power, FutureGen and Cape Wind highlight the importance of reducing regulatory uncertainty.

By David L. Levy

The Massachusetts Clean Energy Center released the 2011 Massachusetts Clean Energy Industry Report this month, just a few weeks after the failures of solar firms Solyndra and Evergreen triggered a fierce debate about the prospects for green jobs in the US and the wisdom of government investment in clean energy. The answer to this $64,000 question is 64,000 clean energy jobs in Massachusetts in 4,909 clean energy companies. While the precise jobs number depends on assumptions about definitions and the methodology used, this figure represents a 6.7% increase from July 2010 to July 2011, a period of stagnancy in the national employment situation (and employment growth in Massachusetts was a meager 1%). Moreover, respondents to the survey used for this study were optimistic about future growth, expecting employment to grow by 15.2% by July 2012. About 40% of employers expect to take on more clean energy workers in the coming year, while only 2% expect fewer.

One way to put these numbers in perspective is to compare them to the first effort to measure the clean energy sector in Massachusetts, in which I was a participant. Back in 2004, we arrived at the figure of 11,000 people in approximately 400 firms, and predicted that the sector could reach 20,000 employees by 2010 “if Massachusetts remains at the forefront in terms of both policy and technology in clean energy development”. Despite the deep recession, the clean energy sector has far exceeded these expectations. One thing that has not changed, however, is the political sensitivity of these numbers. Just last week, former Massachusetts governor and presidential candidate Mitt Romney called the promise of green jobs “illusory”. Back in 2004, our report was not published for several years, apparently because of pressure from local business associations who were worried that the numbers might lead to carbon regulation.

In 2004, we identified an incipient clean energy cluster in the state, comprising not just clean energy firms, but geographically concentrated networks of related businesses, such as specialized suppliers, consulting and professional services, and venture capital firms, and other organizations, including industry associations, universities, research centers and supportive government agencies. Clusters are characterized by a concentration of sector-specific skills and a rich network of connections among people and organizations. In the case of Massachusetts, these skills draw from the advanced electronics, IT, and specialized manufacturing sectors in the region. We observed, for example, that a significant number of ex-employees of Polaroid had brought their thin-film engineering expertise to bear in solar and fuel cell technologies. We also noted that the state has substantial expertise in power electronics, which comprises at least 25% of the renewable energy value chains. A hidden asset in the state is a strong network of clean energy enthusiasts spanning business, government and academia that lends coherence and a sense of mission to the cluster.

Aside from the headline numbers, the report highlights the diversity of sectors, activities, and skill levels associated with clean energy. This makes an accurate count difficult, but highlights the many ways that clean energy is affecting the economy and the  broad range of job market opportunities being created. Relatively few of these jobs are in manufacturing, while the vast majority are in sales, distribution, and installation, positions which are location-specific and immune to outsourcing. A substantial number are in highly skilled research and development, which are also likely to be geographically “sticky”.

The 2011 study defined a clean energy firm “as an employer engaged in whole, or in part, in providing goods and services related to renewable energy, energy efficiency, alternative transportation, and carbon management.” Similarly, clean energy workers are defined as “employees which spend at least a portion of their time supporting the clean energy aspects of their businesses”. The study burrowed deep into organizations to reveal clean energy-related activities that earlier reports have missed. While more than half the firms in the study derive at least 50% of their revenues from clean energy products and services, more than one-third of the organizations got less than 25% of their revenues from clean energy. About half the organizations contacted had 5 or fewer clean energy employees. This reflects a large number of small companies in the region, but also a lot of businesses and organizations that would not usually identify themselves with the clean energy sector, but have a few employees working on, for example, energy efficiency or clean energy research.

While solar is by far the largest technology focus of the renewable energy companies, there is a broad range of other technologies in the cluster. Since 2004, biofuels, geothermal, and hydropower have become more prominent, while fuel cell activity has declined, in relative terms. Among energy efficiency firms, the largest number are in HVAC and building controls, but smart grid and demand response have been growing recently.

Back in 2004, we noted that Massachusetts had great potential in power electronics, the hardware and software needed for energy measurement, management, storage, connection, control, and conversion. Aside from a few pure plays, like Beacon Power, it’s still unclear from this report how many companies are active in this part of the clean energy value chain. Some are probably captured in the energy storage, smart grid, and demand response categories under energy efficiency, but there could be more activity here as well as unrecognized potential. The report does mention some of the university community – it reports 326 researchers in the University of Massachusetts system (not including Dartmouth), and even 37 on my own campus, UMass-Boston.

The regional cluster contains a growing number of professional service firms, such as law, accountancy, finance, and consulting companies with staff devoted to clean energy related issues. The region is also home to a large environmental NGO community as well as numerous government agency employees working in the field. The report does not explicitly discuss these workers or organizations. Yet, combined with the administrative, professional, and managerial employees at the firms included in the report, this is an important group of jobs that many surveys have neglected.

The study notes that the clean energy sector demands advanced expertise and education, and that about 60% of firms report great or some difficulty in recruiting workers with adequate experience and technical skills. But employers are not necessarily looking for clean energy experts. Echoing what I’ve been hearing elsewhere, they want people who are highly skilled in their primary field, whether that’s sales, installation, engineering, or accounting, and with some knowledge of (and passion for!) clean energy. Which brings me to a shameless plug – our clean energy education programs at UMass-Boston, including certificates in Clean Energy and Sustainability and an MBA track in Environmental Management, are designed specifically to serve professionals who are strong in their primary field, and want to deepen their clean energy expertise.

Economic development and workforce development must be done together.  That was the primary recommendation of two research reports released last month.  It’s a common sense conclusion that has important implications for the clean energy industry and the education and training community in Massachusetts.

The first report, from the Aspen Institute’s Workforce Strategies Initiative, examined efforts to align economic and workforce development programs in Louisville, Kentucky; Cleveland, Ohio; and Southwestern Pennsylvania.   The resulting report (Where Labor Supply Meets Labor Demand: Connecting Workforce Development to Economic Development in Local Labor Markets) identifies four critical capacities that development programs need to align themselves with the changing requirements of local employers, including:

1. Industry expertise and credibility
2. Deep knowledge about the local labor pool
3. Ability to conduct local labor market research that is informed by both data and industry intelligence
4. Relationship building and maintenance

Although it might seem obvious that employers, economic development professionals and the workforce community would travel in close alignment with one another, the Aspen Institute report suggests that this is often not the case.  In fact, it’s quite common for the three groups to work parallel to, or even at odds with, the goals of those they are trying to support.   By developing and sharing the four capacities Aspen identified, workforce and economic development groups can better serve job-seekers, career changers, students, employers, tax payers and training institutions.

The need for close collaboration between economic and workforce development has been evident to leaders in the Massachusetts clean energy industry for a long time.  To assure continued alignment, a coalition of organizations sponsored a series of leadership “summit” meetings in 2010 and early 2011.  The summits were held at UMass Lowell, in New Bedford, and at UMass Amherst.

The Summit organizers included Massachusetts Clean Energy Center, New England Clean Energy Council, Skillworks, Garfield Foundation, and the UMass campuses in Lowell, Dartmouth, Amherst and Boston.   In addition to dozens of clean energy company executives, the events attracted representatives from local and state government agencies, colleges and universities, vocational training schools, apprenticeship programs, social justice advocacy groups, workforce investment boards, and labor unions.  Over 300 leaders registered for the summit meetings.

A summary of conclusions from the three Massachusetts summits was released last month under the title Supporting and Growing the Clean Energy Sector in Massachusetts: Clean Energy Industry Economic and Workforce Development Leadership Summits.

The comments and suggestions from the Bay State summit meetings clustered around seven common themes, including:

1. Growing the Demand
2. Policy and Vision
3. Education
4. Training and Workforce Development
5. Research and Development Support
6. Innovation and Finance: Building Businesses
7. Social Justice

Within each of these themes, the detailed recommendations mirrored the central conclusions of the Aspen Institute report.  The Summit participants zeroed in on the need for shared, accurate, and detailed labor market information focused on clearly defined clean energy industry sectors so that workforce programs closely match employer needs at the local level.

The Aspen Institute study and the Massachusetts clean energy summit report were also closely aligned in calling for strong, sustained, personal relationships between employers and the economic and workforce professionals charged with growing the economy and training people to land jobs in a difficult employment market.

The 4^th Clean Energy Connections Conference in Springfield, Mass. on Nov. 2 will give the state’s clean energy economic and workforce development community a chance to review the comments and suggestions made at the original summit meetings, assess progress and pitfalls over the last few months, and discuss plans for staying aligned in 2012 and beyond.

As the Aspen Institute report notes, the recent recession has resulted in austerity policies that will strike hard at public and private budgets.  This harsher environment is reducing the margin of error for economic and workforce development programs. Taxpayers, employers and government officials are shining a bright spotlight on expenditures aimed at job creation and job placement.  They are demanding clear and measurable results.

To produce these results, employers, economic development professionals, and the workforce development community will need to support each other, produce and share high quality information, and work together toward closely aligned goals and objectives.  Working on separate, uncoordinated tracks, is simply not an option.

The American Energy Innovation Council (AEIC) released a new report last week, Catalyzing American Ingenuity: The Role of Government in Energy Innovation, which makes the case that the US government should dramatically increase its investment in energy innovation in order to enhance US competitiveness, energy independence, and create affordable clean-energy alternatives. The AEIC doesn’t represent the clean energy industry; rather, it’s a small but highly influential group of CEOs (and a couple of former CEOs) from Lockheed Martin, Xerox, Kleiner Perkins, Microsoft, Dupont, GE, and Cummins. The AEIC report makes the historical observation that “From gas turbines to smart phones, medical imaging technologies to space flight, GPS to the internet, government funded innovation research has improved lives, created jobs, and supported more than a century of U.S. preeminence.”

The report documents the various market failures that impede private sector investments, such as the risky, long term nature of R&D, a lack of competition, and the difficulty in monetizing all the benefits of clean energy. The report highlights the inadequacy of US investment in relation to global competitors, such as China and Germany, and recommends support for “innovation hubs” that encourage “concentrated talent, the exchange of ideas, and the creation of new technologies and ventures” in regional business clusters.

The report was released the same week that California-based solar firm Solyndra filed for bankruptcy after receiving hundreds of millions of dollars in government assistance and loan guarantees, fueling a fierce debate about the wisdom of government investment in clean energy. This is not the place to discuss the details of the Solyndra case (see here, here and here), but it’s clear that much of the criticism stems from a larger, ideologically-motivated campaign against government support for clean energy, with strong links to the political forces against carbon regulation. While it’s true that Solyndra and Massachusetts-based Evergreen have filed for bankruptcy and many manufacturers have seen their profit margins eroded by intense competition, the industry as a whole is booming. The solar industry is the fastest growing sector in the country, with sales rising 67% in 2010, and the cost of panels has fallen by 80% since 2008.     

Despite efforts by Fox News and the Competitive Enterprise Institute to disparage renewables and even claim that solar “doesn’t work”, the recent bankruptcies are actually a sign of the industry’s success, bringing the typical transition to maturity, commoditization, and a shakeout of higher-cost producers. Commoditization and cost pressures are severe in the power sector where price is the primary driver, while branding and differentiation are relatively unimportant. Unsurprisingly, manufacturing is therefore shifting rapidly to lower cost locations, notably China. Yet employment in the US solar sector has still grown by 6.8% since August 2010 (net, after taking into account the recent failures) and the US enjoyed a $1.9 billion trade surplus in solar products in 2010.

The AEIC report is only the most recent attempt to raise the alarm regarding US prospects in clean energy. Countries are frequently framed as being in a “race” for a dominant position. The Breakthrough Institute, for example, attracted substantial publicity for a 2009 report titled: Rising Tigers, Sleeping Giant: Asian nations set to dominate the clean energy race by out-investing the United States. The Pew Trust followed in 2010 with a report titled Who’s winning the clean energy race?, and the headline conclusion that the US has fallen to “a distant third in the race for clean energy investment” was picked up by a multitude of news sites.

The notion of a clean energy “race” does have valid conceptual grounding in the idea of regional business clusters. Clusters are geographically concentrated networks of businesses and related institutions such as industry associations, universities, training institutes, and research centers. Clusters usually comprise a range of connected value chain activities, including specialized suppliers and engineering firms, venture capital, professional services, as well as sophisticated customers demanding the latest and best features. As a result, clusters are characterized by a concentration of sector-specific skills and a rich network of connections among people and organizations.

Clusters are attractive as foundations for a dynamic regional economy because they tend to generate high levels of innovation, investment, and incomes. All the firms in the cluster benefit from lower costs, better access to specialized inputs, and the latest information on market trends, production techniques, and technological developments. Importantly, clusters are resilient and enduring, as once they reach a critical mass, their competitive advantages encourage self-sustaining growth. Moreover, business activities are geographically “sticky” and so can resist pressures to outsource to lower cost locations. Clusters therefore enjoy first-mover advantages, as early successes, such as Denmark’s wind industry, become established and enjoy enduring advantages.

A cluster promotion strategy is gaining attention in policy circles. The recent Brookings Institute report on the US clean energy sector found a strong assocation between concentration of business activity in metropolitan areas and rates of growth. The report noted that “Not only are other nations bidding to secure global production and the jobs that come with it but the United States currently risks failing to exploit growing world demand.”. A key recommendation is that the “federal government should increase its investment in new regional innovation and industry cluster programs.”

It’s important to note, however, that the success of the solar industry and its transition to maturity is a result of global investment in R&D and manufacturing, including substantial government support in China and Europe. Rapidly falling solar energy costs create widespread benefits for buyers of solar panels, for energy consumers, and for those employed in the fast-growing industry (not to mention the environmental benefits!). Moreover, national and regional clean energy clusters are not separate racing teams, but are elements of a larger complex global industry with intertwined value chains. Recent academic work has demonstrated how successful business innovators are connected through “global pipelines” to international business networks. In clean energy, many firms operate right from the outset with global customers, suppliers, capital, and technology.

In this dynamic and high-risk environment, the failure of a Solyndra or the shift of some commodity manufacturing to China does not necessarily signal the loss of US competitiveness. As the global clean energy industry grows and matures, firms will reconfigure their global value chains, shifting activities across countries. The US is likely to specialize more in services, finance, and design than manufacturing. It’s still important to invest in creating vibrant clean energy clusters, but the benefits should not be measured in short-term events or narrow national terms. Indeed, it’s critical to understand the competitive basis of high value-added regional clusters in the context of global industries, and to develop collaborative strategies among business, universities, and governments to support their growth.

While public policy and the media tend to focus on technological innovation as the key to addressing climate change and boosting clean energy, business model innovation (BMI) offers a path to rapid deployment of existing technologies. The concept was popularized and given its current acronym by Mark Johnson, Clayton Christensen, and Henning Kagermann in their Dec. 2008 Harvard Business Review article “Reinventing Your Business Model.” They point out that “Low-cost U.S. airlines grew from a blip on the radar screen to 55% of the market value of all carriers. Fully 11 of the 27 companies born in the last quarter century that grew their way into the Fortune 500 in the past 10 years did so through business model innovation.”

The potential for BMI in the development of the cleantech sector is only just beginning to be appreciated. Rob Day, a partner with Black Coral Capital in Boston, recently wrote about a new wave of startups that run lean and require less capital to scale up, so are less likely to founder in the infamous Valley of Death: “Some of this next wave of startups will be hardware, but many will be software and/or services…  Business model innovation will often be stressed over technological innovation.  They will sometimes marry energy-related market opportunities with Web2.0 and social media business models and platforms.”

A closer look reveals that BMI holds particular promise for unlocking the potential of clean energy and promoting economic competitiveness, investment and employment in high-cost regions. In addition to helping keep startups lean and capital efficient, BMI can develop systemic solutions that overcome some of the many market failures and institutional barriers to energy efficiency and clean energy. McKinsey’s famous Marginal Abatement Curve heralds the good news that about one-third of needed emissions reductions appear to have positive ROI with current technologies. The bad news is that about one-third of needed emissions reductions appear to have positive ROI – yet the necessary investments are not happening, due to these many hurdles. As with Zipcar, BMI provides ways to monetize the ancillary benefits of cutting emissions, and create business models that focus on features that people are willing to pay for.

BMI-based cleantech businesses are also more likely to keep jobs in high wage regions such as the US Northeast and California. Clean energy manufacturing jobs have been moving astonishingly quickly to China, even while there is still rapid technological evolution. Evergreen Solar and A123 Batteries, both based here in Massachusetts, are cases in point. Business model innovation often focuses on software and services, developing strong relationships with customers and building on existing capabilities in the region, so jobs are more likely to stay local. These factors also help to create barriers to entry, protecting the business model. Zipcar’s network of parking spots, for example, negotiated over several years with hundreds of companies and local authorities, would not be easy to replicate.   

Better Place is a powerful example of how BMI can overcome systemic barriers to technology deployment. The company is developing a national replaceable battery infrastructure for pure electric vehicles in Israel, Denmark, and elsewhere that transforms the business model for car ownership and fuel supply. Consumers buy a car without the expensive batteries, then contract with Better Place for battery replacement as a service, which is done in just a few minutes at a network of service stations. This model overcomes the physical limitations of batteries, in terms of range and charging time, and dramatically reduces the cost of new cars for consumers. As with Zipcar, governments are willing to subsidize the operation because it contributes toward reducing congestion and greenhouse gas emissions – again, monetizing ancillary benefits.

Energy efficiency and smart grid provide many opportunities for BMI. EnerNOC’s core business model, for example, is demand response and energy management, using sophisticated software and remote monitoring and control. Enernoc links the utilities, who are willing to pay for energy efficiency and for peak-period demand reduction, to a network of customers. Energy service companies like Ameresco are increasingly offering turnkey projects and performance contracts that reduce risks, capital requirements, and uncertainty for customers. Similarly, companies like Nexamp, Tioga Energy and Borrego offer renewable power purchase agreements based on DBOOM services – a complete package where the company designs, builds, owns, operates and manages the renewable energy installation, while the customer only pays for power.

Not surprisingly, then, these BMI-based companies are among the fastest growing businesses in the cleantech sector. Kevin Doyle, a Principal of Green Economy and Co-Chair of the New England Clean Energy Council’s Workforce Development Group, has pointed to the large number employment opportunities at a range of cleantech companies, a number of which are in energy services and software. As a result, they are not just looking for engineers, but also for a range of business and professional skills and expertise – which highlights the purpose of our new clean energy programs at the University of Massachusetts, Boston!

If the triple catastrophe in Japan has any silver lining, it’s the boost to non-nuclear renewables such as wind and solar energy. Japan faces immediate power shortages in the wake of the earthquake, tsunami, and nuclear meltdown, and as Geoffrey Styles observes:

As of the end of 2009 Japan already had the world’s third-largest installed solar power capacity at 2,600 MW, to which another 1,000 MW or so was apparently added last year. For Japanese businesses suffering from rolling brownouts, solar power is one of their few options other than diesel generators for becoming more self-sufficient fairly quickly.

The Japanese nuclear disaster is already having global repercussions, as other countries review their nuclear energy strategies. “The industry could enter another two-decade global freeze like the one that followed the Chernobyl disaster in 1986”, according to the Financial Times. In the US, concerns about safety could rekindle the anti-nuclear movement and slow down development of new projects. The Swiss reacted first, suspending approvals for three new reactors. The German government announced a nuclear moratorium and that it is indefinitely shutting the oldest seven of the country’s seventeen plants. China announced that it was suspending new approvals for nuclear reactors, though Russia and France have declared their continued commitment to nuclear technology.

It’s possible that memories will fade and the world will get back to business as normal, putting the nuclear revival back on track. But the severity of this crisis in an industrialized country with an advanced nuclear industry and strong safety culture suggests that there could be a long term impact. Charles Perrow, Professor Emeritus of Sociology at Yale University, and author of the classic book Normal Accidents about Three Mile Island (and guest blogger on Climate Inc.), has argued that even with the best safeguards, occasional accidents are inevitable, or “normal”, given the extreme complexity of some technological systems combined with human fallibility, pressures for profits, lax governmental oversight, bureaucratic inertia and organizational hierarchy. For nuclear reactors, the outcome can be catastrophic. The prospect of even one Fukushima-style meltdown every few decades, or the cost of even more elaborate safety features, is likely to severely curtail new nuclear investment.

In the short term, closing nuclear capacity will raise CO2 emissions as utilities restart gas, coal, and even oil and diesel fired generation capacity. These old mothballed plants tend to be inefficient and expensive, however, and capacity is limited. The need for a short-term fix will also increase demand for fossil fuels, raising prices and further spurring interest in renewables and efficiency. Not everyone is sanguine about the impact on renewable energy, however. John Peterson, writing for AltEnergyStocks.com, notes that:

The nuclear reactors that have recently gone off-line in Japan and Germany accounted for roughly 125 TWh of electricity production last year. In comparison, global electricity production from wind and solar power in 2009 was 269 TWh and 21 TWh, respectively. In other words, we just lost base-load power that represents 43% of the world’s renewable electricity output. The gap cannot possibly be filled by new wind and solar power facilities.

While it’s true that wind and solar are still in their infancy and cannot completely fill the gap, they can be deployed far more quickly than conventional power plants due to their flexible scale. Of course, there are constraints on total production capacity, and large scale installations can be delayed by siting and permitting issues, but the prospects for renewables are suddenly a lot brighter, after a year in which the momentum toward carbon regulation and pricing appeared to have stalled and the clean energy train was in danger of being derailed.

The reaction in the markets to events last week supports this view. While nuclear stocks and ETFs plummeted, clean energy investments reacted positively even as the overall market declined. The chart below shows the jump in price (blue line) of PBD, a global clean energy ETF from PowerShares since the disaster hit Japan March 11.

It’s interesting to note that PBW, an ETF with greater focus on US-based firms and less exposure to a broader array of cleantech technologies such as energy storage and controls, has not performed nearly as well. This is perhaps unsurprising in light of the challenges faced by the US clean energy sector, particularly solar energy. In January, Evergreen Solar, Inc. announced that it would be shutting its doors on its Devens, Massachusetts plant despite receiving $58 million in grants and tax incentives to open the facility, according to the Boston Globe. Now, the company is shifting production to a facility in China by the end of the first quarter of 2011. If the disaster in Japan has a silver lining for the clean energy sector, it’s important that the US not let the opportunity slip away.

by Joshua Rinaldi and David Levy

Joshua Rinaldi is a first year doctoral student in the McCormack School of Public Policy and Global Studies at the University of Massachusetts, Boston.

A recent Clean Tech Jobs Outlook Report estimated that in 2009 there were more than 3 million jobs in the renewable energy field globally. The report indicates, however, that the US is falling further behind in this field; the bulk of these jobs are now in China and Brazil.

The CleanEdge report points to several trends that suggest that, while the world is moving toward a green economy, the United States may be lagging. Solar panel production is expanding in Mexico where some U.S. companies have outsourced manufacturing for the lower wages. In the automobile and other sectors, Mexico has been a very attractive destination for outsourcing because its proximity to the U.S. enables logistical integration of supply chains, and because of the NAFTA free trade area.

About 70 percent of hardware and technology used in U.S. clean-energy installations are constructed overseas, according to the report. “Essentially, clean-tech manufacturing has run up against the same economic realities as countless industries that came before, from clothing to computer chips to cell phones: it’s very hard for the U.S. to compete with overseas labor costs, particularly in the developing world.” For example, BP Solar closed its Frederick, Maryland, PV plant in March 2010 and moved most of the 320 jobs abroad. This is also a sign of the surprisingly rapid maturation of the industry, as solar panels rapidly become low-value added commodities.

If this trend holds true, then the main non-exportable jobs in renewables will be related to project  planning, finance, permitting, installation and the maintenance of solar panels and wind turbines. While that is encouraging, the report cites the Renewable Energy Project, a think tank in Washington D.C., as saying that maintenance and installation makes up only 30 percent of the total labor involved with these projects. Of course, numerous early-stage clean tech firms are conducting their R&D and initial manufacturing in the U.S., but many of these look to manufacture overseas as soon as products enter large-scale commercial production.

Based on the report, China is the most likely destination for the roughly 60 percent of jobs related to manufacturing in clean tech supply chain: “No other country comes close to matching the active role being taken by China to supercharge its clean-tech initiatives.” China, the world’s second largest economy behind the United States, now outspends both the U.S. and the European Union in terms of clean tech research dollars. Its $34.6 billion in clean energy investment in 2009 was just shy of double the $18.6 billion in investments in the United States.  

China also topped the U.S. in presence on the global top 10 publicly traded pure-play clean tech companies list, which represent just short of 100,000 employees. China has six of the top 10 (when the Hong Kong facility is included) and the United States has only two.

A comparison with the 2009 Clean Edge report shows the growth of China in the field. China’s presence on the list doubled in one year while the U.S. actually has one less company listed in 2010. (The 2009 report quoted a Pew Charitable Trust report that gave an estimate of 770,000 clean tech jobs in the United States, but the 2010 report did not cite a comparable figure for 2010).

The report does offer a few nuggets of hope for particular regions in the United States, as some cities are developing thriving clean tech clusters. The good news is mostly local. The Boston metropolitan area is ranked as the best place for clean tech jobs east of California based on job presence, job postings, investment activity and patent activity.

The report ranks the Boston metropolitan area third for clean tech job activity, behind only San Francisco and Los Angeles. Boston moved up one spot from its 2009 ranking to overtake New York City in the standings. In addition to the top spots, California claims two other cities in the top 15 metro areas for green job growth. A good portion of California’s job growth stems from aggressive smart grid expansion from high-powered companies like Google, Cisco and Intel. This is testament to the fact that clean tech jobs are not limited to traditional renewables, but are  increasingly at the intersection of  IT, telecoms, and energy efficiency.

About 6 percent of the federal stimulus money, around $50 billion, is aimed at green jobs. This amount includes loans and grants for direct investment in manufacturing, electric grid improvements and public transportation as well as loans for green improvements. Substantial U.S. Department of Energy (DOE) loan guarantees encouraged Spanish wind-turbine generator company Ingeteam to employ about 270 workers at a new plant announced in March outside Milwaukee, while Spain-based Talgo plans to hire 125 employees to build high-speed rail cars at a former auto parts factory in North Milwaukee,” according to the report.

If the United States is to conquer large sections of this market, the report recommends the country continues to invest in green infrastructure, raise fuel efficiency standards and make its renewable portfolio standards (RPS) stronger. The Obama administration has made a very targeted commitment of around $2.4 billion for alternative fuel vehicles, electric drive chains, and high-density batteries, with Michigan receiving the lion’s share. For instance, the report indicates the Department of Energy made a $465 million loan to electric-car maker Tesla Motors in April. Nine advanced electric-vehicle battery plants have opened in the U.S., with support from these funds. Yet these highly automated new plants employ far fewer people than the old auto factories they replace. Moreover, this is a very risky bet, because it could be many years before a mass market emerges for purely electric vehicles. Not only do they still face substantial hurdles relating to cost, range, and recharging infrastructure, but pure electrics can have very poor carbon emissions profiles if they rely on a coal-intense grid for recharging.

While some parts of global green value chains are highly mobile, some manufacturing is always attracted to locations close to large markets. Labor is an increasingly small proportion of manufacturing costs in highly-automated production systems, and large multinational corporations prefer some operations close to markets to reduce supply disruptions and to learn about consumer demand. They also prefer to spread operations around major regions in order to diversify political and economic risks, and reduce protectionist pressures. Even the Chinese are now playing this game. As the report notes, “In August, Chinese wind-turbine maker A-Power Energy Generation Systems and wind developer partner Shenyang Power Group said they will work with the United Steelworkers, America’s largest industrial union, to supply the steel for components at a 615 MW Shenyang wind farm in west Texas.”

The overall trend is not positive, however, for the U.S.  According to the report, “The U.S. trade deficit in renewable-energy products soared 1,400 percent to almost $5.7 billion between 2004 and 2009, according to a January 2010 report from the office of U.S. Sen. Ron Wyden (D-Oregon).” Trade and employment go hand in hand, so this points to a major challenge if the U.S. is to secure its position in this sector.

The SJF Institute, the not-for-profit arm of SJF Ventures, released the annual Clean Tech Job Trends in October.

Yet I was skeptical regarding the business model. I know that intense competition and large scale production have been driving down solar prices in the last couple of years, but I’ve still been reading total installation costs of about $6-8 per peak watt (pW). Yet it seems that prices are now even lower than that. Solarbuzz, a solar consultancy, reports that average retail module prices in May 2010 have fallen to around $4/pW, but that the lowest cost multi-crystalline modules are now $1.74/pW retail, while mono-crystalline is $2.07/pW. Inverters, balance of system, and installation add another $2.50 to $3/pW. Installation on parking canopies rather than rooftops adds another $1/pW or so.

Even with total installed costs as low as $4.50 to $5, and a 30% credit on capital costs thanks to the generosity of US taxpayers, the numbers still didn’t add up. What makes Apogee’s business model possible is the value of solar renewable energy credits (SRECs). US states that enact renewable portfolio standards (RPS) have created local markets for renewable energy credits, allowing utilities to meet their requirements by buying RECs. In order to stimulate solar, a number of states have created “solar carve outs”, i.e. a separate standard for solar energy with its own SRECs, which have initial market prices in the 30-60c/kWh range – Massachusetts has set a floor price of 30c/kWh (astute readers will observe that SREC is an anagram of SERC, our very own center for Center for Sustainable Enterprise and Regional Competitiveness here at UMass-Boston).  

This is a massive subsidy indeed, and raises significant policy issues. Even for those who are fervent advocates of renewable energy, does it make sense to provide such huge subsidies to solar, when modest subsidies for land-based wind power of around 2-3c/kWh serve to make it grid competitive in many regions? Would the money be better spent on research and development, and the development of local workforce skills and business clusters? Subsidizing installation at the retail level will generate a few local jobs for developers, electricians and installers, but the panels will mostly be imported. There is a serious risk of consumer backlash when people realize the extent of the subsidies and the impact on their utility bills – just as the proposed cost of offshore wind power from Cape Wind has shocked even some of its supporters. Perhaps these subsidies are needed to jump start commercial scale installations and overcome industry inertia and perceived risks, but in themselves they also constitute a barrier to scaling up new renewables beyond a few percent of grid supply.

In return for discussing the business and economics of SRECs, I promised to give David Weinberg a chance to explain Apogee’s business pitch, so here it is:

Imagine that you’re a business owner or a University president in the Northeastern United States.  Over the past 10 years you’ve watched your cost of electricity soar 69%, and it could double in the next ten years.  Compete with China?  You can’t even compete with most states here at home.  Those high prices will crimp your growth and extinguish your profits.  In fact, if you stay in the northeast, you probably won’t survive another 10 years.

What if you could use solar energy to cut your energy bill 30-40%?  “No way”, you’d respond.  “Not enough sun” or “too expensive to install upfront”. New England averages 4.3 hours of sun per day, almost double that of Germany, the world leader in solar power. As to the upfront cost, what if it didn’t exist? If there is no upfront cost and the solar power costs 30-40% less than what you are currently paying, would that be attractive?

Apogee Solar is a solar energy developer in New Jersey, Massachusetts or Pennsylvania, who harnesses the power of Solar Renewable Energy Credits (SRECs) to lower your energy bill. An SREC is an energy tariff that is amortized over everyone’s bill, so it is a tiny part of the rate base.  Every megawatt of energy that your installed system produces earns me one credit.  I can then take that credit and sell it into the marketplace.  The sale of the credit is what allows me to finance your system with no upfront costs.

How much are SRECs worth?  That depends on where you are located.  New Jersey has a current price of around $650 per credit.  Massachusetts has set a yearly floor of $300 per credit.  Energy systems are designed so the credits depreciate over time.  A system that is 10 years old will generate SRECs that are less valuable than a system that is two years old.  What does that mean to energy prices?  In Massachusetts and New Jersey I can negotiate a starting electricity price of 9 cents/kWh, and in 15 years your price will still be below 13c/kWh. At the end of 15 years you own the system, so for the next 15 years your cost of power is free.

Solar installations are financed with what are called ‘Power Purchase Agreements’ (PPAs).  I like to call them solar mortgages, except that your property and assets remain free and clear.  The collateral for the financing are the generated SRECS.  Like any mortgage, only businesses or universities that are in good health will qualify. You might be wondering if you can finance an installation on your own to save even more money.  That depends on how much time and effort you want to spend.  Because of the variability of SREC prices, most commercial banks won’t finance them. Assuming that you could find financing, you would then have to identify the right solar modules, the right inverters, hire the right design firm, hire a really good union electrical installation firm, and then take your system through the local planning and zoning board for approval. After you have your system installed, you’d have to maintain it. Apogee brings together the whole package: finance, design, installation and maintenance. We save you money and help the planet.

Yet there are substantial behavioral, institutional, and financial barriers. As I’ve discussed in this blog post, there may well be free lunches available, but they are hidden away behind misaligned incentives, inertia, and market barriers. Consumers are often unaware of the potential cost savings, cannot afford the upfront costs, or fear that home efficiency upgrades will not add much to the market value of a home. For renters, new construction, and commercial property, the people who pay energy bills are often not the same people as those who design buildings or invest in efficiency. At our university, capital budgets for buildings and operating costs come from two separate pockets that don’t necessarily communicate. In the corporate world, few have traditionally paid much attention to potential energy savings because nobody was paid to do so.

Demand response systems raise some particular issues relating to fears regarding privacy and corporate intrusiveness. The Economist article highlights a survey by Parks Associates, a Texas-based market-research company, that indicates that only 15-20% of US consumers would be willing to sign up for DR programs that enable utilities to control their thermostats. Yet the survey also shows that over 80% of households would pay up to $100 for cost-saving equipment if it chopped at least 10% off their monthly electricity bills. Utilities, however, are still in the business of selling electrons, and incentives for energy efficiency, such as California-style rate decoupling, is only making slow progress toward adoption in other states.

Real-time feedback to customers on the price and quantity of electricity they are using can help cut consumption, and new devices can give an analysis by appliance, illustrating the savings from cutting usage or running appliances on lower-cost night-time power. Google announced last year that it’s developing software package called Powermeter to provide real time information about home energy usage by communicating with household devices. But few appliances are ready for smart meters, standards don’t yet exist for Google or other smart meter devices (Google just released the API in early March 2010), and systems will cost several hundred dollars per home. Moreover, as The Economist points out, trying to run a home using this information could become a complex and time-consuming job.         

The next stage in smart buildings is to move from real time information to direct control of power consumption, from devices to heating, and cooling. Companies such as PassivSystems are developing intelligent home controls using multiple sensors, but they are expensive and would still require a lot more programming regarding preferences and trade-offs between cost, convenience, and comfort than your average consumer might be willing to take on. And as the surveys indicate, consumers are wary about ceding control of their homes to computer algorithms. Commercial and industrial buildings are likely to be more lucrative markets than residential in the early stages of this new market, because of the larger scale of opportunities for saving energy, not just in HVAC and lighting but in industrial processes that have some flexibility in load and timing, such as water treatment. Nevertheless, target markets are fragmented by sector and solutions frequently need to be customized.

In my MBA class on Business and Climate Change, several student groups are working with regional companies interested in demand response and smart grid. From my conversations with firms active in the area, a major problem is finding the right channel to potential customers. Facilities managers tend toward a conservative outlook and generally lack the funding and also the authority to implement systemic controls that affect operations. As with other areas of clean energy, the gadgets are cool but the implementation requires overcoming a host of organizational hurdles.

The country faces a serious long-term strategic threat from climate change. The largest population centers are along the coastal plain, just a few meters above sea level, and regional projections point to a decline in winter precipitation of 10-20%, increasing the likelihood of severe droughts. Although more than half the population considers climate change to be a serious threat, there has been little governmental attention to emissions until recently, and even the McKinsey report neglects the potential physical impacts of climate change.

During my visit to Israel in December 2009, I gave a talk at the Hebrew University, Jerusalem, on climate governance (drawing from A Tale of Two Meltdowns), and my Israeli colleague from the university organized a meeting with the Minister of Environmental Protection, Gilad Erdan, and several of his staff, to talk about Israel’s plans for reducing GHG emissions and ways of engaging Israeli industry. Historically, environmental protection has been a relatively low priority in Israel, in light of more pressing security and economic development concerns. Israel has a standard of living approaching European levels, yet because it’s still classified as a developing country in the climate regime, it did not have binding obligations under the Kyoto process. Nevertheless, Erdan has been pushing for the country to adopt aggressive emissions targets, and is seeking ways to get the government as well as industry on board.

The key to advancing the climate agenda in this particular environment is to link it to other national priorities, in order to elevate its strategic significance and build the political coalition needed for action and investment. The Environment ministry recognizes this, and the McKinsey report notes four benefits that would accompany climate action:

An important motive for Israel’s ambitious GHG goals is to graduate from developing to developed country status, with a view to joining the OECD. This would offer broader economic benefits through trade and investment as well as improved international legitimacy. Israel’s active engagement in promoting clean development regionally and supplying critical technologies for global emissions reductions would also bolster its international status, enhance exports, and potentially provide a source of carbon credits.            

Energy security is clearly an important goal, as Israel is almost completely dependent on imported fossil fuels, including natural gas from Egypt. Yet current thinking is that energy security means independence through greater reliance on local renewables, primarily solar. My own view is that energy security can be linked to national security and pursued through regional energy collaboration, primarily with Egypt and Jordan. Though the McKinsey report lists solar power, both CST (concentrating solar thermal) and PV as the single largest contributor to Israel’s GHG reduction potential, the reality is that suitable land is quite limited, even in the southern Negev desert. Collaboration with Egypt and Jordan would open up the possibility of developing a regional grid drawing from large-scale CST in the Sinai desert, southern Jordan, even perhaps northern Saudi Arabia. Moreover, the intermittency of solar can be somewhat offset when complemented with wind power, which has very limited potential in Israel (McKinsey estimates at around 600MW), but is far more abundant in neighboring countries.

Of course, Israel does not want to be dependent on its Arab neighbors for energy. A regional grid would provide security through interdependence. Israel could be a key supplier of technology, as well as a conduit of power between Egypt and Jordan. Economic and technological collaboration on the scale required would also, one hopes, improve political relations. During the 1950s and 1960s, Israel made considerable diplomatic gains in Africa and parts of Asia from its contributions to international economic development. More ambitiously, if a Mideast regional grid were tied into the proposed Desertec supergrid, European participation would provide a strong political guarantee of supply security, as well as smoothing out supply intermittency issues (update: PWC released a report in April 2010 with a roadmap to 100% renewable power based on an integrated Europe-N. Africa supergrid).

Israel has a strong clean tech sector as part of the larger high-tech cluster and entrepreneurial culture in the country (see Start-up Nation: The Story of Israel’s Economic Miracle). The solar thermal and PV clusters are particularly well developed, and the country is home to major firms in water purification and desalination, geothermal energy, and other areas (see here and here, and Jonathan Shapira’s excellent blog on Israeli clean tech). The internal market, however, is far too small to benefit very much from Israel’s own emissions reductions efforts. The large economic payoff will come from exports, technology licensing, and international joint ventures in which Israel is the source for R&D, software, and high value components. BrightSource Industries Israel, for example, a descendent of the CST pioneer Luz, is now a subsidiary of California-based Brightsource Energy, and supplies R&D, engineering services, and key components for the company’s global markets. In fact, the Israeli tech sector is remarkable for its success despite the absence of advanced local markets – during my MBA at Tel Aviv University, I wrote some case studies on how Israeli companies operated within virtual clusters, with their major markets and sources of capital in Europe and the US.

Israel’s Greenhouse Gas Reduction Potential

Though Israel’s total emissions are tiny in global terms, at 71 MtCO2e in 2005, they are growing rapidly, and expected to double by 2030 in a “business as usual” scenario. Emissions per head are already 10.2 tons, about the European average, and expected to rise to more than 14 tons by 2030. The structural reasons for this relatively high and growing carbon footprint are the country’s dependence on coal for power, under investment in public transportation, weak building standards, and high rates of economic and population growth. The country is also committed to energy gobbling large-scale water desalination projects.

The McKinsey report estimates that implementation of abatement measures could reduce emissions by about 45 MtCO2e, corresponding to 2/3 of the expected GHG emissions growth and about 1/3 of total expected BAU emissions in 2030. Behavioral changes, such as reduced air conditioning and greater use of bikes and public transportation, could reduce emissions by a further 7 MtCO2e. With characteristic optimism, McKinsey suggests that the net cost would be zero, with negative cost activities such as efficient lighting and car engines offsetting more expensive measures such as solar power. McKinsey’s estimates for large quantities of solar PV at a cost of under €10/tCO2e seems unduly sanguine.

Ten measures account for about 2/3 of the reduction potential:

As always, the core question is how to implement these measures. Just because more than half the abatement potential can be achieved at negative cost does not mean that it will occur spontaneously, due to the multitude of market failures and institutional hurdles (see McKinsey’s Expanding Free Lunch Program). McKinsey recommends four rather uninspiring steps for the Israeli government to consider:

1. Establish ambitious national GHG abatement goals as government policy.
2. Formulate Israel’s Low Carbon Growth Plan (LCGP) defining the mechanisms and timing of implementation.
3. Translate the national abatement plan into detailed operational measures including ways to finance the upfront investment.
4. Establish a central body to monitor progress in implementation.

What is really needed, in Israel and elsewhere, is a much broader mobilization of the public, government agencies, and business to position climate change at the top of the agenda as the critical strategic threat of the century. At the same time, it offers unprecedented potential for innovation, economic transformation, and regional collaborations. Outside the clean tech sector, Israeli business does not yet take climate seriously – my own research shows that the best way to shift perspectives is to engage people with leaders in the field. In addition to the targets and implementation plans, the Israeli government could partner with charismatic climate champions such as Shai Agassi and local clean tech companies to promote the issue and organize a high profile conference of international businesspeople, policymakers, and experts to jumpstart the process and generate local commitment.