The Trifecta That Opens a $10 Trillion Opportunity Into The Next Economy

August 8, 2012

The famed horse, “I’ll Have Another” just did not achieve the near impossible: the ultimate trifecta of winning the elusive Triple Crown.

Yet, to win a Triple Crown, everything has to go right. The track.The horse. The jockey. The weather. In fact, the stars have to align. To win the Triple Crown, one cannot miss a beat.

Unfortunately, we are at a point where we all know we have pushed the Earth past its limits. We are now using 1.5x the resources that the Earth can safely replenish on an annual basis. In short, we have pushed our water, air, and food systems over the limit. 

Yet, we are viewing this as a depressing problem instead of the opportunity it is – the largest economic opportunity of our lifetime. By fixing our environmental issues we can create a new economy. One based on infrastructure for all, not just consumption for the few.

The key is that to do so, we cannot miss a beat. We must hit the ultimate trifecta of our lifetime. First we must create efficiency in the capital markets to spur investment in infrastructure deployments using the solutions just sitting on the shelf ready to be deployed.

Second, we must prioritize these deployments to maximize the ones that will deliver the highest financial returns to the capital markets.  

And third, we must have a comprehensive plan to diversify ourselves away from volatility-prone energy fuels such as oil, gas and coal.

Of course, we must conquer them all simultaneously. In doing so, we will create jobs. But more importantly, we will unleash a sustainable new economy driven by $10 trillion in available investment opportunities. This one, two, three punch has been waiting for us to seize the moment since we started the R&D in the late 1970s.

In April of 2012, the International Energy Agency pointed out that we needed to invest in $5 Trillion of cost effective investment opportunities in the clean energy space by 2020 – $3 trillion of which were already on track through renewable electricity investments. 

And, in my estimation, the $5 trillion of opportunities in energy total over $10 trillion once you include energy access, water, waste, agriculture, and other profitable infrastructure opportunities. There are so many technologies that we have simply not deployed that are not accounted for in most reports. The largest one is waste, so much embedded energy and valuable materials just allowed to be buried underground or burned. 

The reality is that we have already piloted all of these technologies – but in fits and starts. In late 2011, Bloomberg New Energy Finance reported that cumulative investments in renewable energy, energy efficiency and smart energy technologies have exceeded the $1 trillion mark since its records started in 2004.

While these investments have been led by the “private investor” sector, they have come about because in electricity we have an explicit and coherent policy including renewable portfolio standards and feed-in-tariffs. This is one barrier to realizing $10 trillion, or even $5 trillion in opportunity. Goldman Sachs recently blessed renewable electricity investments as one of their major investment areas with a $40 billion announcement in May of 2012. More such announcements by trusted names are needed in waste, water, and other infrastructure areas. 

Another key to these investments is that they replace imported commodities with good paying jobs. We are already seeing that the renewable sector will be a major factor in our economic recovery. Solar PV, for example, attracted $93 billion globally last year and that number continues to grow creating thousands of permanent jobs. Solar PV offsets expensive coal and diesel imports in many parts of the world. In fact, there are over 100,000 American jobs in the solar PV industry according to the 2011 National Solar Jobs Census published by the Solar Foundation. And, the industry grew 6.8 percent between 2010 and 2011 -- nearly 10 times higher than the growth in national employment of 0.7 percent.

Plus, we have uncovered opportunities like the Carbon War Room’s PACE program to unlock a building retrofit program to lower energy costs and increase efficiency. This PACE program unlocked a market opportunity in clean tech funding for the cities in Miami-Dade County, Florida and the city of Sacramento, CA. It will stimulate $2.3 billion and more than 17,000 jobs in the combined markets. 

While these are great projects, finding enough of them to add up to the $5 trillion to $10 trillion in real projects is not easy. The good thing is that thousands of people have already self-identified themselves as willing to help us in each local jurisdiction to find the projects. But we need a coordinated plan from local, state, and federal government and reassurances by the private sector.

According to Bloomberg, $52 billion was invested in clean energy in 2004 and $243 billion was invested in 2011.At a 29 percent compound growth rate, the next trillion could be achieved in just three years.  

But, right now, we do not have a comprehensive infrastructure plan. We approach solutions in a piecemeal fashion.  For example, while renewable electricity incentives like the Production Tax Credit (PTC) for Wind Energy is set to expire on December 31, 2012, permanent subsidies for mature technologies for other energy technologies live on in perpetuity. 

A comprehensive plan would address the way we will deploy American invented technologies.  It would also help us create a level playing field for investments.  For example, why do we have subsidies for highly profitable, mature industries like oil, gas and coal?  When the government stops choosing winners amongst mature technologies, we can determine what we really want to invest in to meet our energy needs while giving the planet a respite.

Despite having no comprehensive plan, entrepreneurs are still chipping away and hiring more people. The question is that in our race to meet our energy needs – are we moving fast enough?

Most certainly not, but to increase the velocity and commitment of investments in the new economy, we must 1) think about investments at trillion $ scale; 2) market low-risk investment value of renewable energy investments; and 3) implement financing standards and aggregation for smaller scale opportunities.

Here is how to think on a broader scale to increase investments. Today, annual investments, at $243 billion, are dominated by renewable electricity projects. But to eliminate the over $400 billion in oil imports into the United States we are going to have to invest in much more than renewable electricity. We will need to continue improvements in vehicle efficiency, better local oil and gas drilling, information and communications technologies, alternative fuels, and a new mobility paradigm.  

Next, we need to market the value of renewable energy investments versus other investment choices. There is over $125 trillion in the world today and much of that money is earning less than 4% in Government Bonds. At the same time the world’s pension funds, sovereign wealth funds, and insurance companies need to maintain an average return of over 8% to meet the needs of their stakeholders. The only place where they can make up the difference in the short term are clean energy technologies, traditional technologies such as oil and gas simply can’t find a home for an additional $10 trillion in investment by 2020.

Also to increase the speed of investment for deployment, we need to implement finance standards and bundle the thousands of $1 million projects that exist. Right now, most investors want larger $1 billion projects, but those projects are slow and generally less profitable. In the last century, bigger projects were the norm but with today’s technologies thousands of entrepreneurs armed with a computer and a mobile phone can become a project developer.  

Yet, most small businesses simply don’t have the balance sheet to aggregate this many projects together without help.  This is where creating standards and bundling “would be competitor” companies together to share services and create economies-of-scale can work.  From expensive legal contracts, to attracting large capital sources, it is important to spread these costs over a large base of projects.

In the aforementioned PACE example of energy efficiency for buildings, the Carbon War Room worked with Ygrene, Lockheed Martin, and Energi to put together a program using Property Assessed Clean Energy (PACE) bonds.  However, to attract (in this case) Barclay’s, it had to demonstrate that $650 million in projects could be bundled together – no small feat.  Since the entire US ESCO industry is less than $3 billion per year, it would take a 20% growth in the entire industry to meet Barclay’s goal. The only way to reach that goal is for the entire industry to work together – with projects that will average just $500,000 in size we will need over 1,300 projects. As described above, if companies can aggregate deal flow, investors are ready to lend. 

Another challenge is that most developers don’t know how to present, or market, their projects to investors. Many are simply not equipped to put together financial models suitable for investors. For example, there are three publicly traded renewable fuels companies with another six looking to go public this year. With aviation fuel trading at all-time highs and innovation keeping pace, the aviation industry is trying to figure out how to hedge oil-based fuel with renewable energy fuel. Delta Airlines just bought their own refinery because they are so worried about fuel costs.

Hedging fuel like this is not easy, because most renewable fuel refineries are too large for any single end customer to buy all of the output. At the same time only a small number of large companies have good credit on the fuel buying side. This presents an opportunity for smaller buyers of jet fuel to partner with larger, more credit-worthy buyers to form a buying group. Together they can share legal contracts, best practices, and even negotiate better prices.

I do believe we are at the “Tipping Point” as Malcolm Gladwell has coined. However, this is a tipping point that put us on a road to recovery of the earth and recovery of the economy. Or, it can be the tipping point where it is too late to recover our air, water and food systems. Which way do we want to tip?

And, we are in a race where everything needs to go right. We need to hit our trifecta of 1) creating efficient capital markets, 2) uncovering all the clean energy deployments that will deliver compelling returns to the capital markets, and 3) having a comprehensive plan to wean ourselves off of carbon producing energy fuels such as oil, gas and coal.

And to get this going, first we must think on a broader scale and expand solutions beyond energy efficiency to vehicle efficiency, next generation information and communications technologies, and more.

Next, we need to market the value of renewable energy investments within the context of all investments and show that they do have compelling returns.  And, finally to deploy what exists, we need to implement finance standards and bundle the thousands of sub-$1 million projects.

So, do we need to hit the Trifecta, or win the Triple Crown? Yes we do. In horse racing, you can’t afford a near miss.  In leveraging the next $10 trillion into a new economy, we cannot afford to miss a beat.

The crowning jewel will be that if we do this right, after their first investments in clean energy solutions that create jobs and compelling financial returns – investors will say one thing: “I’ll Have Another.”

[Editor's note: This article is part of The Role of Business in Environmental Innovation.]