A Clean DG Market Model

I’ve been lucky enough to spend some time brainstorming recently with Geoffrey Moore, author of technology marketing classics Crossing the Chasm & Inside the Tornado. Geoff is a venture partner at Mohr Davidow Ventures, one of the firms that invested in Energy Innovations. I’m indebted to him for helping me to put a finer point on some of these ideas.

In an earlier post, I explored clean DG technology market development via a conventional technology adoption lifecycle, following the familiar trajectory from innovators to early adopters to early majority to late majority and, finally, to laggards.

The lifecycle model is useful to technology marketers because defines the dominant purchase rationale that drives market penetration during discrete developmental stages—and thereby provides a framework for building a phased market strategy based on the characteristics of who is buying and why at each stage. Indeed, terms like “innovator” or “early adopter” are loaded code words to marketers. They convey entire market strategies implied by the psychological buyer-profiles each term represents.

When applied to the clean DG market, I find it useful to enhance the conventional lifecycle buyer profiles in terms of their relative “greenness” as follows:

·         Innovators / Dark Greens—Clean DG innovators have all the conventional innovator characteristics plus what I call a dark green motivation. Dark greens are aggressive seekers of solutions to what they see as environmental crises. They are passionate believers who go out of their way, even to the point of discomfort, to find a means to reduce waste, eliminate pollution, and conserve energy. As buyers, dark greens feel justified in paying “what it takes” to do “what is right.” Dark greens have been the sustaining force in the solar and small wind DG markets from the 1970’s until just recently as the market has shifted to early adopters.

·         Early Adopters / Light Greens—Early adopters of clean DG share many of the same characteristics of conventional early adopters. They’re imaginative, forward thinkers who pride themselves on being “out of  the box.” Highly individualistic, they are comfortable making a purchase based on their own evaluation of a technology’s benefit without supporting references from other buyers. In the clean DG market, these buyers can be characterized as light greens. Light greens care about the environment, but don’t expect to make big sacrifices of comfort or convenience for it because they see individual values to be at least as important as social values. Because they’re imaginative and forward thinkers, they are comfortable making purchase decisions based on perceived future benefits of a clean technology even if those benefits are not immediately or easily quantifiable. Light greens do care about price, but only to the extent that it meets their subjective sense of what is appropriate in light of a technology’s benefits. Light greens are now the primary drivers of market growth in the US solar DG market and in the rapidly growing REC market.

·         Early Majority / Practical Greens—The clean DG market will enter the mainstream with the early majority when the practical greens start to buy. Early majority buyers are pragmatists, they are not technology-averse, but they typically want to make sure a technology is well-established before committing to it. Practical greens differ greatly from dark and light greens, just as the early majority differ greatly from innovators and early adopters. Whereas dark and light greens share a personal ideological commitment to the environment, practical greens are motivated by the immediate business advantage of an environmental program. To a practical green, the advantage of an environmental program comes from its value to customers, shareholders, partners, employees or other business stakeholders—or, it may be a tactic in a regulatory compliance strategy. In any case, practical greens are not directly concerned with the environmental benefits of a project. They care mainly for how those benefits translate to the bottom line and are thus very price sensitive. The US clean DG market has not hit the early majority stage yet. However, in Germany, the early majority are engaged in the solar DG market due to generous feed-in incentive programs. In a related example, Kyoto implementation in the European Union via CO2 cap-and-trade programs is clear example of a mainstream market driven by practical greens in search of a regulatory solution.

·         Late Majority / Skeptical Greens —In a conventional lifecycle market model, the late majority enters the market because peer or competitive pressure makes it necessary. For the clean DG market, I like to think of this group as the skeptical greens. Unlike practical greens who are personally neutral about environmental issues, skeptical greens are characterized by their doubt about the value or need for environmental programs. They will be dragged to the market by regulatory pressure or competitive pressure from early majority buyers. I can’t think of any clean energy markets (DG or otherwise) that have hit the late majority phase yet. A related example can be found in the markets for low-flow toilets or efficient fluorescents—in both those markets the people buying will often complain that the technologies are unnecessary and express resentment about being forced to buy them.

·         Laggards / Anti-Greens—What can we say about laggards except that they are averse to new technology and don’t want to change their ways until there is no other choice? In the clean DG market, it is hard to see these buyers as anything except anti-greens. A key concept that I’ll explore later is that laggards typically can only be brought into the market via a service model that allows them to avoid owning or having to maintain a technology. Again it’s hard to find clean energy market examples of laggard buyers, but a related example might be the California building industry where Title 24 requirements force everyone to engage in energy planning and conservation.

Comments

[Marc Ballandras]

Let me try and contribute a few comments from a European perspective (we operate out of Barcelona, Spain).

These comments pertain mainly to medium-scale solar PV systems.

1. decision-making, beyond money:

As you indicate, Dark Greens will pay more, and more willingly, for a green system than other buyers.
But Dark Greens are few, they may not have loads of cash, and they tend to be quite finicky about what they buy: it has to be the best technology, and their purchasing decision may sometimes "have to wait" until that great new product is released. This is unfortunately quite a problem when dealing with PV systems which are expensive assets with 25+ years useful lives: it is not so easy to rely on early adopters as in the PDA-phone industry for example.

How big a market do we have when we need to find buyers who have:
Dark-Green mindsets
+ substantial financials
+ capabilities for rapid decision-making ?

How can one escape the market tightness brought by these 3 constraints ?

2. Splitting capital from "adoption decisions": is it possible ?

To broaden the base of "buyers", can we package external financing, so that anybody can be a buyer, even if they don't have the cash ?
That sounds possible, and is certainly what SunEdison sems to be doing in the US, by funding and installing PV systems on the rooftops of (sizeable) companies, in exchange for a monthly payment equal or lower to the utility bill for the equivalent amount of electricity produced/consumed.
No cash outlay for the client, no debt. No pain, all gain. Everybody should be interested, right ?
There just remains the technical calculus of establishing if the clean power generated really displaced utility power and thus generated savings, but that can be studied case-by-case.
At the moment, SunEdison says they only make this available to public-listed companies, municipalities and NGOs.

3. One step further in Germany/Spain...

With the feed-in tarrifs in these countries, if one can get the site (land or rooftop), grid-tie and permits to build a solar plant, one will be paid for the electricity. No questions asked on actual power use/displacement: all the solar electricity which is produced is sold to the grid, and paid at a profitable price.
This makes a solid platform for a viable business model:
- cash-flows are predictable and stable for 20-25 years, backed by the government;
- the money for investing in solar equipment can be separated from site ownership, as their economics are indeed unrelated.

A broad pool of financing on one side, a broad pool of rooftops and landplots on the other, the money does not have to come from the person/entity who "benefits" from the clean energy installation. Now the market can truly go into fast-forward.

4. Why it matters ? (a problem with solar plants)

Solar PV systems are cool and good for us. But they come with a substantial challenge, and it is not just the relative high cost of their electricity, but what I call "INVESTMENT BULK":

- a home system of 5kW costs 40 kEUR. This may be an okay gamble for average Californians, but in (Southern) Europe this is not yet the kind of investments people easily make, as individuals.

- a warehouse system of 100kW costs 600kEUR... but, after financing costs, it only juices out a grand or two of profit each month (from electricity sales to the grid) and it has to sit for 25 years on the warehouse rooftop. Not the kind of decision that most bosses feel comfortable taking, here.

As a result, the market has taken off in Germany because there are lots of Dark Greens there, their purchasing power is higher, and the PV paperwork is simpler. 1,300 MW installed.
In Spain, people look into it, they read proposals saying it is a great investment, but they hold back. 43 MW installed so far.

I believe this tells us about an important challenge of Distributed Generation, especially outside markets like Germany (lots of Dark Greens) or the US (fluid culture of financing investments):
POTENTIAL ADOPTERS WILL BALK:
they will find it difficult to muster the internal funding, expert technical review and paper-pushing motivation to make projects happen.

Unless they are speculators, or wealthy shoot-from-the-hip Dark Greens...

... or unless third-parties come up with simplified offers which package the financing, technical expertise and paper-pushing, so that the "buyer" just has to sign "no money down" and enjoy the feeling of using clean power without the hassles, perceived technical complexities and financial burden/risks.

Marc Ballandras
Director Spain
Blue Green Capital Limited
www.bg-capital.net
marc.ballandras@bg-capital.net
+34 627 970 718