Green Technology Home

by Carl Smith

Elton B. Sherwin, Jr. is the senior managing director at Ridgewood Capital, where he invests in energy technology and clean tech companies. His first book, “The Silicon Valley Way,” has been translated into Chinese, Japanese, Spanish and Korean and is used by entrepreneurs and university programs around the world. His most recent book is “Addicted to Energy – A Venture Capitalist’s Perspective on How to Save our Economy and Our Climate,” written as a letter to a fictional governor describing how to protect the environment and simultaneously grow employment and the economy. He will be addressing these topics as keynote speaker at the upcoming Green California Summit.

As the Summit approaches, he took time to speak with Green Technology magazine about some of the concepts in his book. Along the way, he observes that California may have lost its position at the leading edge of America’s energy efficiency programs.

How does your professional life as a venture capitalist affect your perspective on energy and climate?

Our firm, Ridgewood Capital, invests in clean tech and energy-related projects. I look at hundreds of business plans and business pitches for clean tech and energy-related businesses every year.

It's a very unique way in which to see the market because I see what people are buying, what they're developing, what technologies they think are going to be needed. One of the striking things is the challenges with the technology that we already have that’s not being deployed or used very much. As an investor, that makes me cautious - and as a citizen, somewhat troubled.

I felt we needed something from a business person’s voice. There were other people who could speak more clearly to the environmental problem. But there really weren’t very many voices talking from a business person’s point of view about what we actually need to do.

What spurred you to spend as much time as you did researching and writing your book?

It was really originally driven not by business reasons, but a real fear for my grandchildren. CO2 is really an insidious thing. It's invisible. It's non-toxic. It has very little effect in the short term, but it lasts for many lifetimes. So it sneaks up on you, and by the time you see the effects it's very late in the cycle.

It's a little bit like a supertanker in the fog suddenly seeing the coastline dead ahead. By the time you actually see it, changing course is difficult. CO2 snuck up on us, and it's going to get worse over the next couple of decades. As I saw that unfold, I got converted from an armchair environmentalist to someone who became much more active.

If CO2 wasn’t a concern, would there still be compelling reasons to change our energy behavior?

Yes, particularly with the high level of unemployment. CO2 is a marker of inefficiency. It’s what gets dumped into the atmosphere when you burn oil, coal, or wood. When you're releasing CO2 at the levels that we are, it's a marker of an enormous amount of waste.

Independent of the environmental impact, when you look at many systems, buildings and cars in particular, what you see is that over 80 percent of the energy that’s put into the system is wasted. When you are a wasteful producer of anything on a world scale, you end up losing wealth and losing jobs.

The Chinese have just marched down the efficiency curve, trying to squeeze ever more work and production out of the same amount of energy. We’re now in the unfortunate situation where we use one and a half or two times as much energy as our world competitors. We've begun to see the effects of that in employment. We have got to reverse this. With our level of technology and experience and wealth we should be the most efficient producer, not one of the least efficient.

One of the reasons to make a city or a state energy-efficient is to provide a buffer against fluctuating energy prices. The efficiency improvements we make today protect us if we’re hit by another big energy shock where prices go up.

You write that inefficiency is the biggest cause of emissions. What are some examples of that?

In typical automobile or truck, more than 80 percent of the fuel is used to produce waste heat. If you could wave a magic wand and get rid of all that, you could eliminate all oil imports.

More than 80 percent of the energy that we use in buildings is wasted. That’s lighting empty rooms. That’s air conditioning offices where people are on vacation and the like. It's a sad and sorry story that we've let waste take over so much of our environment.

Are there any other areas that are especially important to address?

One is electric motors. In all of their incarnations, in pumps and fans and air conditioners, they consume about half the electricity in America. We now can build motors that use 80 percent less energy than the typical motors that are being used, as result of the motors being more efficient and microprocessors controlling their speed. They're just not widely used. So we have to figure this out, on a really massive scale. Maybe a couple hundred million motors need to be replaced in America. I think that's worth focusing on.

Another issue that’s a really hard one, and is often not grappled with, is the issue of “low hanging fruit.” Often you'll hear, “Let’s just go do the low hanging fruit.” What that usually means is, “Let’s do the things that are very cost effective.” Of course we should do things that are cost effective, but interestingly, the lowest hanging fruit can be counterproductive.

For example, in an office tower you can install an inexpensive Chinese lighting system that will pay for itself and save you a little bit of electricity. Or you can install a state-of-the-art computer- controlled lighting system that has dimmers and occupancy sensors. It doesn’t pay for itself quite as quickly. It's not quite as low hanging, so to speak, but it saves twice as much energy. Over the life of the building, the amount of energy that’s saved is just enormous

This disparity between mediocrity and excellence has been lost in this dialogue. It's been lost in our American culture, but it's really important. You may think the difference between something good and something great is a couple of percentage points. Not the case. Sometimes it's a truly dramatic difference. The difference between a mediocre motor and a great motor can often be threefold.

This, of course, creates a real challenge for policymakers and for business owners and utilities. How do we encourage great behavior as opposed to mediocre behavior?

We’re struggling with this as a culture. I think one of the ways that we’ll get around it is if we grade buildings and industries based on their actual energy use. Americans are very competitive and will work hard to move a score of 89 to 95, or work hard to move a C minus up to an A minus.

To inspire greatness as opposed to adequacy, I think a piece of the puzzle - and perhaps the critical piece of the puzzle - is to do a better job of grading ourselves and making those grades public.

What would you say to those who suggest that AB 32 will hurt businesses or the economy?

First of all, we just had a vote on this and decided not to delay implementation. If we had decided to dismantle this [AB 32] it really would have been like a lead actor walking off stage halfway through the first act. We claimed our stake as the world’s leader in the green economy. To then abandon it would have done many businesses in California a great deal of damage in terms of their reputations and their roles on the world stage.

Most of the objections to AB 32 have to do with the cap and trade components. There are some other areas that are controversial, but I think it's fair to say that the cap and trade component is the most controversial. One of the important things about this is to have a price ceiling and a price floor. I think the experience of the Europeans and logic dictate that, as businesses plan for the future, they have to have a target price in mind.

If you allow CO2 prices in a cap and trade system to fluctuate, every time you have economic growth the prices go astronomically high. Then when you have a downturn, the prices drop to zero. Everyone in the ecosystem gets hurt when that happens. The people who are trying to produce remediation technology never know from year to year whether they're going to have a market. Utilities can't plan.

What one would envision is that one would have a cap and a floor that would gradually move up over time until we hit our targets. That’s probably the single suggestion I would make to Sacramento to alleviate the fears that we’re going to create something that’s unwieldy.

If we already have technology that could improve efficiency far beyond existing levels, why isn’t it being implemented?

This is really one of the biggest dilemmas and the biggest challenges. If you ask most environmentalists, “If you could do one thing, what problem would you fix?,” most of them would say, “Let’s put some kind of price on carbon - free air pollution is the thing that is at the core of our problem.”

That’s what AB 32 is trying to fix. In the short term, the problem is that we have lots of technology – insulation, better windows, more efficient pumps and fans, better air conditioners, furnaces, the list goes on and on – and, for the most part, it’s not being installed or used.

Why is that? The core of the reason is that most building owners want to make investments that will pay for themselves in four to eight months. As a society, we need to make investments in our building infrastructure, up to the seven- or the eight-year break even point. That just won't happen unless there are some rule changes that encourage people to do it. We have to fix that problem if we’re going to get our economy back on track and get ourselves energy efficient.

Do you think that the proposed shift of power and services from state to local is going to create any opportunities for accelerated change?

It is definitely an opportunity for accelerated change. In my mind, the most important thing is to measure the actual energy consumption of cities and the counties and then start comparing rankings and running contests.

The critical items to measure are the energy per square foot of local government buildings and the energy per capita. Those are the two gold standard measurements. You don’t want go with some special “green points,” or something that's made up. You want look at the amount of energy that's being consumed in a town or a city, and divide it by the number of square feet and the number of people and compare schools to schools, hospitals to hospitals, sewer treatment plants to sewer treatment plants and the like.

Then challenge people to be in the upper half of the class. Ask the people in the bottom half of the class, “Why it is that 60, 70, or 80 percent of the hospital beds in the state use less energy than your hospital does?” The bottom forty percent in any category are often twice as energy intense, sometimes five times as energy intense, as the best in class. That holds at a city level, it holds at a business level and it holds at a building level.

Today all that data is shrouded in secrecy. Probably the biggest thing we can do is get that data public and then, without regulating them, just start asking some of the cities, “Why are you in the bottom of the pack?” Without a lot of onerous regulation, that would motivate a lot of change.

You write that many American politicians are unaware of China’s commitment to energy efficiency. What have you seen that suggests we could be left behind ?

China has a very high percentage of leaders that have an engineering background. Over the last five years they have woken up to the fact that production efficiency, energy efficiency and building efficiency are going to be the defining events of how competitive an economy is on a world scale. They have moved relentlessly to become more energy efficient while we have, in recent years, not really moved all that quickly to get our buildings and our infrastructure more energy efficient.

The measures of energy efficiency per dollar of GDP and how quickly are you improving your energy efficiency are often overlooked. I think that is one of the most disturbing trends from an American point of view.

From a world point of view, it's good that the Chinese have figured that out, because it slows the growth of their emissions - but we need to really pay attention. They're investing money and skill and talent and mindshare on this issue on a scale that just dwarfs what we are doing.

It would seem that California is uniquely positioned to set the pace for energy reform. How much of an impact could our actions have nationally or internationally?

We can have a huge impact - although the guy who's taken the lead is Mayor Bloomberg in New York City. If you were an American government, whether a state or a city, and you were looking to mimic someone’s regulations in terms of which was likely to cause the most energy efficiency and create the most jobs, I think Bloomberg has leap-frogged the state of California. New York has enacted an energy plan one can only characterize as the most savvy in America and, certainly, one of the most savvy in the world.

They stood up and said, “We’re going to release the energy consumption and the Energy Star scores of every building that the city owns. We’re going to give all the rest of the buildings in the city a year of grace, and then we’re going to release the Energy Star scores and the energy consumption per square foot of virtually every building.”

That simple metric - “How much energy am I using per square foot and why on earth is my office building or my restaurant using seven times as much energy as a building down the street that, for all the world, looks the same as mine?” - immediately creates work for talented auditors. It immediately creates work for HVAC professionals. It focuses everyone on the only measure that really matters - how much energy we’re really using - as opposed to earning green points, or some other scheme.

Washington D.C. has followed them. But other than Washington, they're the only city and the only jurisdiction in America that has been willing to do it. I predict that what we’ll discover is that New York City’s regulation will be phenomenally effective.

I've talked to a lot of jurisdictions and looked at a lot of business plans. What New York is doing really just caught me completely off guard; I had not seen how much progress Bloomberg has made there in the last 18 months.

I probably would put California in third place. Seattle has gone to a middle-of-the-road place, not as aggressive as New York but slightly more aggressive than California. It is easier sometimes for a city to do something as opposed to a whole state but, nevertheless, it's the same set of problems whether you're looking at them in Manhattan or in San Francisco.

Governor Schwarzenegger and Governor Brown have both said that environmental protection and economic development go hand in hand. Is this viewpoint becoming more common among investors and corporate leaders?

It’s by no means universal, but it is much more widespread than you might believe if you just watched Fox News.

A number of really heavy hitters have taken very public stands on this. I think of Mike Morris at American Electric Power and Jim Rogers at Duke Energy. These are two of the world’s largest users of coal. They're not people that you would normally think of as raising their hand early in the cycle, and saying, “We have an environmental problem and we have a coal problem, and we have got a pollution problem,” but they have been very outspoken about what needs to be done and what they're going to do.

In addition to that, a number of consumer brands, Nike and Coke, for example, have moved aggressively to do things far beyond what they were required to do from a regulatory point of view. They want to claim the green space. They realized that with young consumers, this is increasingly important - the last thing you want to do is have your competitor claim the green square on the board and leave you floundering around.

There's also a spiritual component. I know because I've talked with these leaders. They're very troubled by what they're leaving to their children and grandchildren. They're moving their companies because their employees want a green economy. They want to work for a green company and they want to leave a safe planet to their children.

Thank you.

Copyright © 2008, Green Technology. All rights reserved.