Clean Energy's Future Hinges on New Business Models

In his first Oval Office speech last week, President Obama said "the time to embrace a clean energy future is now." Indeed, clean energy has untapped potential to drive the economy and create thousands of new jobs throughout the United States. But in order to realize a goal that has been endorsed by eight consecutive U.S. presidents there is a need to reinvent the private energy market. We must reward innovation, encourage investments and uncover and eliminate current policies that incentivize inefficient energy practices. That calls for an integrated strategy focused on reforming regulation, which will have the added benefit of helping to unleash the kind of new business models needed to foster further development of the clean-energy industry.

Business models
One of the common misconceptions about clean energy is that it's handicapped by a lack of innovation. In reality, breakthrough technologies exist in the United States and throughout the world. The real obstacle to further development of clean energy is not a paucity of innovation but a thicket of regulations that stifle development of new business models. As my Kauffman Foundation colleague Andrew Hargadon has written, "History teaches us a little-known lesson about innovation: Ideas don't matter. Good ideas languish all the time. What matters? Execution." [1]

Consider the example of Henry Ford. He is often thought of as the inventor of the automobile. In fact, cars had already existed for about two decades when the Model T came onto the market, and there was nothing new about it. Ford's breakthrough was a system of mass production that drew on existing technologies and America's rapidly modernizing infrastructure, such as roads, as well as access to gasoline.

The situation with clean energy is similar today. There are countless examples of clean-energy technology innovations being successfully developed and demonstrated, only to see their deployment slowed down, if not blocked altogether. Innovations often fall victim to the so-called "Valley of Death" caused by outdated and capital-intensive business models and a supply chain that is not friendly to new technology.

This underscores the need for business models that reflect the everyday realities--and obstacles--found in the clean energy market. In the absence of these new business models, emerging technologies in the energy sector simply end up in competition with old ones--as commodities. That means competing on the basis of old metrics like cost per kilowatt-hour, and ignoring new means of measuring how energy can be generated in a manner that's cleaner and more efficient than many current practices.

The good news is that new business models are beginning to emerge that enable clean technologies to take advantage of their distinct differences. And companies like Silverspring, IBM, Google, and Cisco are contributing to the growing use of smart meters and serving as first customers to new energy start-ups. But most business models reflect the realities of the past, not the future. Until the barriers to new business models break down even more, too many science breakthroughs will be consigned to press releases and demonstration projects.

One of the most effective means of fostering progress in developing new business models, and in clean energy, will be overhauling the cumbersome U.S. regulatory environment--at both the state and federal levels. Many of the problems revolve around complex pricing, expansive approval processes and lack of incentives to use low carbon energy sources. Leading economists have identified six of the most significant regulatory barriers, which can be found here.

One example is the need for a simplified, standardized, and interconnection-wide approach to transmission pricing, as this will facilitate the siting and construction of transmission projects to support the large-scale deployment of renewable energy. There are large differences across states in how transmission projects are paid for. Some assign the legal liability to loads, others split it between generation unit owners and loads, and others assign it to generation unit owners.

Until there's some resolution of this regulatory bottleneck, and others like it, investors will be constrained in putting forward the kind of ambitious business models that are a hallmark of dynamic, expanding industries.

But progress on reforming regulations is being held back by disagreement among experts about which of the six obstacles are the most important--or even if all of them should be considered regulatory obstacles. There also are no moves forward in setting more rigorous efficiency standards on the consumer side--which is low-hanging fruit. What's important is for innovators, thought leaders, and policy makers operating in and around the clean energy space to work through which obstacles matter most and then move forward with a plan for overcoming them.

In conjunction with efforts to reform regulation and develop new business models, clean-energy advocates also should be pressing for standards. There are many examples of developing standards and identifying pre-competitive--and therefore broadly cross-licensed--technologies in both the semi-conductor and the wireless industries. Standards in those industries are widely credited with accelerating the pace of deployment. They will promote the cooperation and efficiencies that are essential to the widespread dissemination of innovative technologies.

In order to see change on the scale needed to seriously address much-needed energy security or climate change, clean technology innovation must be able to scale rapidly and without stumbling. History teaches us that this can only happen when it becomes possible to connect existing and well-developed ideas, people and technologies in new ways. Therein lies an important lesson to remember: Innovation--whether in clean energy or other sector--isn't always about creating something new; often it is about enabling entrepreneurs and innovators to seamlessly connect what already exists.

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