Last week, Lockheed Martin announced their development of a small-scale fusion reactor that could be deployable in five years. While fusion has been hailed by many as a panacea for climate change and energy scarcity, like hydrogen fuel cell cars, it has always been “at least five years away.” Lockheed has yet to release any data on their fusion prototype making many in the fusion community skeptical.
Instead of chasing rainbows, if we truly seek to stave off the worst impacts of climate change, business model innovation is more essential today than developing new technology.
Business model innovation is more essential today than developing new technology. Tweet This Quote
The International Energy Agency, McKinsey & Company, the Carbon War Room, among others, have established that we have cost-effective technologies to stave off the worst impacts of climate change. Yet, instead of focusing on deployment, many people are fixated on technology innovation while proven climate change solutions are gathering dust.
Under existing policies, proven technologies that save money can be scaled up in cogeneration, small hydro, energy efficiency, natural gas vehicle conversion, livestock intensification, and energy access through renewable energy. To make substantial progress on thwarting climate change, returning to full employment for blue collar workers, reducing health care impacts, and protecting water resources, we need more business model innovation and less of an obsession with technology innovation.
This is reminiscent of the situation in 2003 when solar technology was more than three decades old and costs had plummeted. Still, solar costs were not cheap enough to convince businesses to pay for ten years of electricity upfront.
Under existing policies, proven technologies that save money can be scaled Tweet This Quote
To increase the accessibility to solar, I founded SunEdison, which popularized “no money down solar” using an adapted business model—the power purchase agreement (PPA)—that attracted large mainstream capital providers. The PPA allowed customers to pay for solar power on a “pay-as-you-save” basis instead of paying thousands of dollars upfront to buy solar panels. Due to its breakthrough success, the PPA model in solar has been replicated globally and validated by governments, retailers like Wal-Mart, school systems, and others.
Through business model innovation and incremental technology innovation, the solar industry has grown from 1,000 megawatts per year to 45,000 megawatts expected in 2014 supporting millions of jobs around the world and reducing electricity costs.
Yet today, some present the irrational argument that the proven technologies to meet climate change goals are not good enough to deploy at scale. The argument goes, “If they were good enough, they would have scaled already.” But I see the problem differently: continued technology innovation is critical, but with oil persistently above $75 per barrel, existing technologies are ready to scale through business model innovation.
While business models can capture value from climate change technologies, corporations, governments, and now some nonprofits often deliberately shun business model innovation. According to Henry Chesbrough, executive director of the Center for Open Innovation and adjunct professor at UC Berkeley’s Haas School of Business, new business model innovation, “conflicts with existing assets and business models, as well as cognition in understanding these barriers.” When we first introduced our business model innovation at SunEdison, governments, corporations, and even most nonprofits said that our model was illegal or just would not work. The model conflicted with the status quo.
Many businesses struggle to see beyond the status quo and simply dismiss the deployment of proven technologies Tweet This Quote
Many businesses struggle to see beyond the status quo and simply dismiss the deployment of proven technologies, blaming it on high cost or inability to scale. After the 1970s Arab oil crisis, there was a boom in funding tech innovations to protect the United States from future oil price shocks. From this, we invented low-weight carbon fiber, a multitude of alternative fuels, fuel-sipping hybrids, and solar photovoltaics. Yet with global consumers paying $2.5 trillion more every year for gasoline and diesel today (as compared with 1999), almost everyone lacks confidence that we can deploy these technologies to reduce oil prices—and our misery.
This pessimism comes from not understanding business model innovation. Alex Osterwalder, author of Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, noted, “A business model describes the rationale of how an organization creates, delivers, and captures value.” Historically, business model innovation has paid off. Henry Ford’s assembly line, Apple’s iTunes store, and microfinance for the poor are just a few of the many breakthrough business model innovations in the last century.
Fuel-efficient technologies are ripe with opportunities for an innovative business model. They cost more upfront, even though they save money over time. For example, hybrid technologies add to the upfront price of a car, but save on fuel costs. New companies are driving business model innovation to move past early adopters to mainstream consumers. Enter Uber, SideCar, Car2Go, ZipCar, and others. These companies appeal to consumers because they eliminate the upfront cost of buying a car. ZipCar, for example, assumes the vehicle, insurance, and fuel costs so that consumers pay just one, simple-to-understand, all-inclusive price. The new businesses make profits based on lowest lifecycle costs, and that often means using hybrid cars.
The pay-as-you-save business model that SunEdison pioneered in solar power has also been replicated in many industries to deploy sustainable infrastructure. Seven Seas Water is using a similar service contract to deploy water desalination technology. Using their business model, many islands in the Caribbean are able to pay only for the treated water they use instead of paying for the entire upfront cost of the treatment plant. Like with solar, business model innovation has eliminated the high upfront cost to advanced water treatment and is driving the uptake of the technology.
Businesses, non-profits, and governments must believe in entrepreneurs driving business model innovation Tweet This Quote
In the end, our inability to promote business model innovation at scale holds back the deployment of climate change solutions and the largest economic opportunity of our lifetimes.
Last year, Citibank analysts measured this opportunity and reported that we could cost-effectively deploy $5.7 trillion of renewable electricity without raising electricity rates. It is confident in existing business model innovation led by companies like SunEdison. This alone is enough investment to help us stave off the worst impacts of climate change, according to the International Energy Agency (IEA). In total, the IEA predicts that resource efficiency and climate change solutions can be deployed at a scale of $10 trillion in new investments by 2020.
It is time to capture that $10 trillion in value. Businesses, nonprofits, and governments must believe in entrepreneurs driving business model innovation to deploy proven, cost-effective technologies to stave off the worst impacts of climate change. In doing so, they will also create millions of new jobs, reduce health impacts, and protect our global water supply.